<PAGE>
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
  (Mark
  One)
   [X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
 
                  For the fiscal year ended December 31, 1997
 
                                      OR
 
   [_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
            For the Transition period from            to
 
                        COMMISSION FILE NUMBER 0-19058
 
                               ----------------
 
                           PLATINUM TECHNOLOGY, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
               DELAWARE                              36-3509662
     (STATE OR OTHER JURISDICTION                 (I.R.S. EMPLOYER
   OF INCORPORATION OR ORGANIZATION)             IDENTIFICATION NO.)
 
           1815 SOUTH MEYERS ROAD, OAKBROOK TERRACE, ILLINOIS 60181
             (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
 
      Registrant's telephone number, including area code: (630) 620-5000
       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 $.001 per share
                               (Title of Class)
                        Preferred Stock Purchase Rights
                               (Title of Class)
                6 3/4% Convertible Subordinated Notes due 2001
                               (Title of Class)
 
                               ----------------
 
  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. [_]
 
  As of March 10, 1998, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant (based upon the per share
closing sale price of $26 7/8 on March 10, 1998, and for the purpose of this
calculation only, the assumption that the registrant's directors and executive
officers are affiliates) was approximately $1,668,067,476.
 
 
  The number of shares outstanding of the registrant's Common Stock as of
March 10, 1998 was 64,763,801.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant's definitive Proxy Statement in connection with its
                              1998 Annual Meeting
      of Stockholders are incorporated by reference into Part III hereof.
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
  The discussion below contains certain forward-looking statements (as such
term is defined in Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) that are based on the beliefs of the management
of PLATINUM technology, inc. and its subsidiaries (collectively, the "Company"
or "PLATINUM"), as well as assumptions made by, and information currently
available to, the Company's management. The Company's actual growth, results,
performance and business prospects and opportunities in 1998 and beyond could
differ materially from those expressed in, or implied by, such forward-looking
statements. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Special Note Regarding Forward-Looking
Statements" on page 25 for a discussion of risks, uncertainties and other
factors that could cause or contribute to such material differences.
 
OVERVIEW
 
  The Company develops, markets and supports software products, and provides
related professional services, that help organizations manage and improve
their information technology ("IT") infrastructures, which consist of data,
systems and applications. The Company's products and services help IT
departments, primarily in large and data intensive organizations, minimize
risk, improve service levels, and leverage information to make better business
decisions. The Company's products typically perform fundamental functions,
such as automating operations, maintaining the operating efficiency of systems
and applications, and ensuring data access and integrity. The Company
currently develops software products through its four business units: database
management, systems management, application infrastructure management and data
warehousing and decision support. Addressing businesses' increasing demand for
simplified vendor relationships and complete solutions to IT problems, the
Company's goal is to become the leading provider of IT infrastructure
management solutions by offering a comprehensive set of "best in class" point
products, product bundles and integrated product suites. The Company also
offers a wide array of professional services, including consulting, systems
integration and educational programs, both in conjunction with and independent
of software product sales.
 
  To achieve its goal, the Company identified key technologies and skill sets
required to better manage the IT infrastructure. Through a combination of an
aggressive acquisition program and vigorous internal product development
efforts, the Company assembled the competencies to create complete
infrastructure management solutions. Devoting substantial resources to
integrating its products and technologies, the Company is now leveraging the
breadth of its product lines and its professional services capabilities to
provide complete, customized solutions for IT infrastructure problems. These
solutions include single products; product suites, which are sets of
integrated products drawn together from multiple business units of the
Company; and product bundles, which are sets of software applications that are
packaged together but do not necessarily have the level of integration that
defines a suite; as well as design and implementation services provided by the
Company's professional services staff. These solutions also include ongoing
product upgrades, maintenance and support, sometimes pursuant to multi-year
contracts. Evidencing the increasing demand from the Company's customers for
comprehensive solutions, the Company completed 102 transactions of over $1
million during 1997, as compared to 55 such transactions during 1996 and only
two such transactions during 1995. Each of these large transactions included
licenses for software product bundles or suites, along with future upgrades
and maintenance; software consulting services; or both product licenses and
related consulting services.
 
  The Company is focusing on the development of products and services that
offer its customers maximum flexibility and functionality. The Company's
products are designed to permit a customer to either purchase prepackaged
integrated suites or to choose individual products and later add other
products as needed. The cornerstone of the Company's integration efforts is
POEMS (PLATINUM Open Enterprise Management Services), an internally developed
set of shared components that give the Company's products a common look and
feel, common installation and distribution, and common communication, data and
events handling. POEMS integration is built into individual products so that,
as customers purchase additional PLATINUM products, the
<PAGE>
 
newly acquired and previously installed products can begin working together
immediately. In February 1998, the Company released for general availability
its ProVision suite of integrated systems and database management tools, which
is the Company's most significant POEMS-enabled integrated offering of
products to date. ProVision initially includes nine tools within the following
key IT management disciplines: job management, performance management and
analysis, software distribution, problem resolution, security, database
utilities and database administration.
 
  The Company is also creating solutions for the needs of specific industries,
as well as general business needs. For example, during 1996, the Company
released PLATINUM RiskAdvisor, a data warehouse decision support application
developed specifically for the insurance industry. The Company also is
enabling its products and suites for application with intranets, the internet
and the web and offers a broad set of solutions for the Year 2000 problem.
Additionally, in late 1996, the Company formed specialty consulting practice
groups within its professional services business unit, including groups
dedicated to Year 2000 solutions and internet/intranet technologies.
 
MARKET OVERVIEW
 
  Companies today rely on their IT infrastructures to keep their businesses
operating efficiently. As organizations have moved from host-based computing
systems to open systems environments, the deployment, management, maintenance
and productive use of IT has become increasingly complex. These open computing
environments service numerous end-users spread across various locations and
consist of a diverse set of applications, computing platforms (including
mainframes, minicomputers, workstations and desktop PCs/LANs), relational
database management systems ("RDBMS"), operating systems (including UNIX,
Windows, Windows NT, OS/400, OS/2, MVS and VMS) and media, including intranets
and the internet. These open environments are also dynamic; users, as well as
hardware and software resources, are frequently added, removed or changed; and
new, mission-critical applications are continually being developed and
deployed. The Company believes that, due to the complexities of these new
computing environments, organizations are increasingly seeking to purchase IT
management products and services from a smaller number of vendors that can
provide complete, flexible and integrated solutions for managing and improving
the IT infrastructures that run their businesses.
 
PRODUCTS
 
  The Company provides software solutions that help organizations efficiently
operate and manage their complex IT infrastructures and related environments,
which contain multiple computing platforms, database management systems,
applications and operating systems. These tools increase the efficiency and
interoperability of these systems and applications in distributed environments
of any size. The Company's solutions support platforms and operating systems
that span mainframe, midrange and PC/LAN computing environments, including
MVS, UNIX, OS/2, OS/400, Windows and Windows NT. They also support multiple
database management systems, such as the DB2 family, Oracle, Sybase, Microsoft
SQL Service and Informix. In addition, the Company's solutions provide support
for packaged applications such as SAP, PeopleSoft and Oracle Financials.
 
  The Company now offers over 160 robust and adaptable point products. While
point products are initially developed and supported through one of the
Company's four business units described below, the Company continues to build
integrated suites of products drawn from different business units, such as
ProVision, in order to provide comprehensive solutions to organizations' IT
needs.
 
  Database Management Products -- The Company provides a leading set of tools
and utilities for centralized or distributed database administration,
performance analysis and monitoring and database backup and recovery for
heterogeneous database management systems. By automating administrative and
maintenance tasks, these software solutions enable users to achieve the
highest performance levels possible, increase data availability,
 
                                       2
<PAGE>
 
automate arduous administrative tasks, and deliver new products or
enhancements to end-users faster and with more flexibility. Principal database
management products include the following:
 
  .  Database Analyzer -- a DB2 direct access storage device and database
     monitoring, analysis, validation, forecasting and tuning tool. It
     provides extensive statistical reporting capabilities, automated
     maintenance and auditing of internal structures, as well as a DB2 page
     editor.
 
  .  RC/Migrator -- a tool that automates DB2 object and data migrations and
     alterations, while maintaining object dependencies and preserving data
     security. Migrations may be performed on a one-to-one or one-to-many
     basis.
 
  .  TSreorg -- a tablespace reorganization tool for heterogeneous databases
     of any size. Tsreorg delivers fast reorganizations of entire
     tablespaces, individual tables and indexes. It also provides efficient
     fragmentation of used and free space and automatic data partitioning.
     Tsreorg can run on UNIX, VMS or Windows NT-based server systems.
 
  Systems Management Products -- The Company offers products that enable
organizations to automate routine systems maintenance tasks and processes,
thereby streamlining enterprise management, enhancing system reliability and
reducing costs. These products also simplify the management of disparate
systems and enterprise-wide applications, and increase end-user productivity.
Systems management product offerings span many disciplines, including job and
process management, enterprise automation, desktop management, output
management, problem resolution, security management, distribution management,
performance management, enterprise-wide resource management, storage
management, and networking and connectivity. The Company offers over 20
products that provide the functionality required by businesses, while scaling
across multiple platforms that include UNIX, Windows, Windows NT, OS/400,
OS/2, MVS and VMS. Principal systems management products include the
following:
 
  .  AutoSys -- a job scheduling and management tool that simplifies the task
     of managing and monitoring multiple jobs in distributed environments. It
     provides centralized control of job execution across heterogeneous
     platforms and offers flexible features, such as self-correcting job
     control and automated restart and recovery capabilities.
 
  .  DBVision -- a scaleable tool for continuous monitoring and centralized
     management of heterogeneous databases in any size network. DBVision
     collects and displays performance measurements in real time or
     retrospect. It automatically detects and corrects performance problems
     and predicts space shortages.
 
  .  AutoSecure -- a tool set that enables organizations to secure and manage
     large, heterogeneous computing environments. It protects information by
     preventing unauthorized access to data and system resources in
     distributed environments; provides single sign-on for users to
     applications and services they are authorized to use, whether they are
     on mainframes, distributed systems or Pcs; and provides a single point
     for user registration in other security systems.
 
  Application Infrastructure Management Products -- The Company offers
products that enable organizations to establish an application development
process that is systematic, error-resistant and flexible to adapt to changing
business needs. These products include tools for integrated project and
process management, component modeling, construction, testing, application
deployment and software distribution, integrated change and configuration
management, help desk support and decision support. These products facilitate
the development of sophisticated, high-performance applications and improve
the overall productivity and quality of development efforts. Principal
application lifestyle management products include the following:
 
  .  ADvantage -- an integrated set of tools for managing the application
     development infrastructure. ADvantage helps organizations automate and
     improve the processes for building, managing and delivering applications
     through solutions for component modeling (Paradigm Plus), integrated
     project and process management (Process Continuum), integrated change
     and configuration management (CCC/Harvest), rule-based application
     development (AionDS) and decision support (ADvisor).
 
                                       3
<PAGE>
 
  .  ADvisor -- a decision-support tool, and key component of ADvantage, that
     helps IT executives and development managers minimize the risks and
     costs associated with the applications that run their businesses by
     providing the information needed to ensure on-time, on-budget delivery
     of applications. ADvisor delivers the critical project information
     organizations need to manage application development as a core business
     process.
 
  Data Warehousing and Decision Support Products -- The Company offers an
integrated set of solutions for all major data warehousing functions,
including data transformation and movement, data warehouse management,
metadata management and repository, and decision support. These comprehensive
solutions help organizations build, manage and maintain data warehouses. A
data warehouse is a data store that gives end-users full access to
periodically consolidated, historical data for making business decisions and
analyzing trends without jeopardizing the performance of mission-critical
operations. Warehousing tools can capture data in many forms on numerous
platforms, transfer it to multiple database platforms and provide users with
the means to access and manage such information. Repository tools play a key
role in data warehouses as places for centralized control and as collection
points for status information concerning the warehouses and their activities.
 
  The Company's products enable organizations to better leverage their
corporate data investments by allowing end-users to derive maximum value and
insight from information. These products ensure enterprise-wide data access
and enable complex data analysis and reporting so that users can effectively
identify business trends and make informed decisions. Principal data warehouse
products include the following:
 
  .  InfoPump -- a bi-directional data movement tool, InfoPump automates the
     process of replicating, transferring and integrating data in
     heterogeneous environments on a scheduled or event-driven basis.
 
  .  Repository -- serves as a central point of control, enabling
     organizations to easily manage, maintain and access vast amounts of
     corporate data, applications, and systems in a heterogeneous
     environment. Repository provides information such as where data is
     located, who created and who maintains data, what application processes
     the data drives, and what relationship the data has with other data.
 
  .  Forest & Trees -- a rapid decision-support system development tool which
     enables IT departments to deliver customized desktop applications that
     provide the necessary components for intuitive navigation and data
     investigation. Forest & Trees applications can simultaneously access
     multiple data sources and combine data into information that makes sense
     to the knowledge worker. Forest & Trees applications can monitor key
     strategic, tactical and operational indicators for the business and
     automatically alert users to specific conditions via the corporate
     network or via the web.
 
  .  InfoBeacon -- a decision support tool that provides advanced online
     analytical processing (OLAP) capabilities for data warehouse
     environments. This product creates a virtual, multidimensional view on
     top of the relational database. It provides end-users with advanced
     analysis capabilities -- such as drill down, pivoting, ranking, ratios,
     and exception- and date-handling -- without requiring the organization
     to redundantly store and manage data in a proprietary multidimensional
     database.
 
  .  Perspectives -- an environment for rapidly developing custom, server-
     centric, OLAP-enabled decision-support systems. Combining the power of
     tools with the speed of packaged applications, Perspectives provides the
     benefits of rapid time to market without sacrificing flexibility for
     future growth. Perspectives for Market Analysis helps profit/loss
     managers (such as brand managers, product managers, VPs of marketing)
     view and analyze complex relationships between multiple product
     dimensions and measures so that they can understand and respond to
     emerging trends.
 
  New Product Suites -- In the past, businesses licensed products on a stand-
alone basis to address each of their needs as they arose. By combining tools
and technologies within and across its business units, the Company now
provides product suites that are complete solutions to businesses' IT
infrastructure problems. These integrated product offerings allow businesses
to experience comprehensive benefits without having to deal with multiple
products or multiple vendors. The Company has designed product suites that
address IT infrastructure
 
                                       4
<PAGE>
 
problems that are shared by businesses from various industries, as well as
product suites that target IT infrastructure problems that are unique to
specific industries. The following provides a brief description of some of the
Company's recent product suite offerings:
 
  .  ProVision -- this integrated product suite, a combination of database
     management and systems management tools, enables companies to reduce the
     costs and risks associated with managing their IT infrastructures, while
     improving service levels, availability, and productivity. ProVision
     initially includes nine tools within the following key IT management
     disciplines: job management, performance management and analysis,
     software distribution, problem resolution, security, database utilities
     and database administration. Because integration is built into each
     ProVision tool, organizations can implement one or more tools, and add
     more tools as needed, to solve their most immediate IT problems.
     ProVision became generally available in February 1998.
 
  .  TransCentury -- this product suite, developed through a combination of
     tools and technologies made available through internal development,
     acquisitions and marketing agreements, provides an end-to-end solution
     to the problem created by the century date change, commonly known as the
     Year 2000 problem. TransCentury applies a "find-it, fix-it, test-it"
     approach that enables businesses to analyze, plan, implement and test
     century date changes in an integrated manner. It helps organizations
     ensure business continuity and compliance by minimizing exposure,
     helping them more effectively plan resources, and reducing costs and
     time associated with the Year 2000 problem.
 
PRODUCT LICENSES
 
  The Company provides its software products to customers under non-exclusive,
non-transferable license agreements (including standard shrink-wrap licenses
for certain products). As is customary in the software industry, in order to
protect its intellectual property rights, the Company does not sell or
transfer title to its software products to customers. Under the Company's
current standard form license agreement, licensed software may be used solely
for the customers' internal operations and only on designated hardware at
specified sites, which may be comprised of a stand-alone computer, a single
network server with multiple terminals or multiple network servers with
multiple terminals.
 
  Licenses for the Company's software are almost exclusively perpetual,
although annual and monthly licenses are also offered. License fees may be due
upon execution by the customer of the applicable product agreement or may be
payable over time for contracts involving multi-year commitments for
maintenance and product upgrades. List prices are based upon the size of the
processor, number of servers and/or number of users, depending upon the type
of license and product being licensed. The Company's published list prices
include discounts for suite, enterprise and multi-site licenses. Licenses
generally include more than one product. Under the Company's current standard
form license agreement, maintenance is renewed on an annual basis by the
customer paying the current maintenance fee. See "--Technical Support and
Maintenance."
 
PRODUCT DEVELOPMENT
 
  The Company is pursuing its strategy by continuing its emphasis on
internally developing new software products and product enhancements,
acquiring products, technologies and businesses complementary to the Company's
existing product lines; and forming alliances with leading technology
companies. The Company has formed separate in-house development teams to
efficiently integrate acquired products and technologies into existing product
lines. During 1995, 1996 and 1997, product development and support expenses of
the Company were $94,027,000, $155,277,000 and $187,383,000, respectively. As
of February 28, 1998, the Company employed approximately 1,660 persons in
product development and support.
 
  Internal Development. The Company will continue to rely on the internal
development of products to expand its product lines. The Company believes its
RDBMS expertise and experience give it a competitive advantage in developing
products that address increasingly complex environments and that meet evolving
customer needs. In order to fully exploit acquired software development
personnel, and to access new sources of
 
                                       5
<PAGE>
 
talent, the Company has established approximately 36 independent development
laboratories, generally at the locations of newly-acquired companies. These
development laboratories are interconnected via video conferencing, e-mail,
Lotus Notes and other communication technologies, and use various hardware,
operating systems and database systems which give the Company the ability to
simulate the environments of its customers. Laboratories have responsibility
for their product lines and receive guidance from POEMS teams to foster
interoperability.
 
  Acquisitions. The Company continually reviews acquisition candidates with
leading-edge products and technologies that could enhance the Company's
product portfolio. The technologies associated with the products of the
acquired businesses are being incorporated into the Company's existing
internally developed products and are being used in developing new products.
In addition to providing the Company with new products and technologies, these
acquisitions have provided the Company with experienced teams of product
developers who now staff the Company's independent development laboratories.
The Company plans to continue to pursue acquisition opportunities because it
believes that acquisitions are an essential part of the Company's strategy to
compete effectively in its rapidly evolving marketplace. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Costs and Expenses--Merger Costs" and "--Recent
Developments."
 
  Technology Relationships. To reinforce its commitment to providing
interoperable solutions for managing IT infrastructures, the Company has
implemented its PLATINUM Partners Program, whereby the Company has established
strategic and technology relationships with other leading IT vendors. The
Company believes that in order to provide solutions for heterogeneous
computing environments, it will need to continue to establish and maintain key
relationships with leading technology companies. PLATINUM's current partners
include Intel, IBM, Hewlett-Packard, Oracle, Microsoft, SAP and Lucent
Technologies. These technical and marketing alliances provide the Company
early access to product information and pre-release software.
 
PROFESSIONAL SERVICES
 
  As part of its strategy to provide complete solutions for Global 10,000 IT
organizations, the Company offers a range of professional services, including
consulting services, systems integration, and educational programs, in support
of and independent of its products. These services help businesses plan,
construct and manage infrastructures in which complex software products can be
used. These services can improve and accelerate customization, implementation
and deployment of the Company's software products. The Company believes that
more rapid and effective implementation of its software products will lead to
increased customer satisfaction and greater follow-on sales. For these
reasons, the Company is now packaging professional services as a standard
feature of its product sales. As of February 28, 1998, the Company employed
approximately 1,100 persons in professional services.
 
  Consulting Services. The Company is focusing significant effort on
developing and expanding its consulting services group. Primarily developed
through recent acquisitions of consulting services companies, this group
provides consulting services that help Global 10,000 companies manage risks,
manage the implementation of new technologies and products, and optimize their
current computing environments. Areas of expertise span systems and database
management, information management, security, Year 2000 reengineering,
application lifecycle management, internet/intranet development, and
electronic commerce. The Company's consultants provide flexible, customizable
solutions as well as prepackaged solutions. They can save all of an
organization's software consulting needs, from strategy and organization to
implementation.
 
  Educational Programs. The Company believes that its training and education
services play an important role in increasing market awareness of its software
products among IT personnel, including application developers, database
administrators and end-users. Offering a comprehensive curriculum that
supports leading technologies, the Company conducts a set of training courses
designed to deal with the critical issue of skills management. These courses
cover several key technology areas of IT infrastructure management and are
held at various training centers in the United States and throughout the
Company's international operations. The
 
                                       6
<PAGE>
 
Company also offers on-site computer-based training courses and self-led
internet-based training courses that users may complete in their own offices
or homes.
 
  The Company continually reviews acquisition candidates that are leading-edge
IT education service providers. Most recently, the Company entered into an
agreement to acquire Mastering, Inc., a leading provider of IT technology
training to Fortune 1000 companies, universities and large governmental
agencies. The Company believes that, upon consummation, this acquisition will
significantly enhance the Company's educational service offerings. The Company
is also expanding its professional services through internal growth. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments."
 
SALES AND MARKETING
 
  The Company employs a multi-faceted sales strategy. For software products,
the Company utilizes telemarketers, an inside sales force, an outside sales
force, product seminars, user group participation, direct mail, print and web-
based advertising, and web promotions. The Company also utilizes certain
indirect sales channels, such as distributors, VAR and OEM relationships for
selected products.
 
  Domestic (U.S.) Software Sales. Since January 1, 1997, the Company has
organized its domestic direct sales force by regions throughout the United
States. The Company formerly combined the domestic and Canadian sales forces
to represent the North American sales force. As of February 28, 1998, the
Company had approximately 450 domestic direct sales representatives.
 
  Generally, for domestic software product licenses, the Company's
telemarketing specialists call prospective customers to identify and qualify
leads. Once a lead has been qualified, the prospective client is turned over
to the inside sales force, which predominantly supports the direct sales force
by developing sales leads and arranging product evaluations. Established sales
leads are then typically forwarded to the direct sales force, which visits
customer sites to assist with trials, demonstrate product features and close
sales transactions. For certain sales to smaller customers, as well as the
licensing of standard shrink-wrap products, the inside sales force may handle
the full sales cycle for completing such transactions.
 
  International Software Sales. The Company generally markets its products
overseas through a network of wholly-owned subsidiaries. Generally, these
subsidiaries use an approach similar to that used by the Company domestically.
As of February 28, 1998, the Company had approximately 220 international (non-
U.S.) direct sales representatives and had subsidiaries in Australia, Austria,
Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Hong Kong,
Indonesia, Italy, Japan, Korea, Malaysia, the Netherlands, Norway, Singapore,
South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand and the United
Kingdom. The Company expects that it will establish other foreign subsidiaries
in the future to meet its strategic objectives. In a few countries, primarily
in South America and the Middle East, the Company markets its products through
independent distributors.
 
  Global Accounts. The Company now designates certain large, geographically
dispersed entities as "global accounts." Each of these accounts is managed, on
a worldwide basis, by a single executive who focuses his or her attention on
the diverse needs of the enterprise.
 
  Professional Services. The Company's consulting services and educational
programs are marketed by a specialized direct sales force.
 
  User Group Leadership. The Company believes that its sales and marketing
efforts have also been greatly enhanced by participation in domestic and
international user groups. The Company plays a major role in the activities of
the International DB2 Users Group, the International Oracle Users Group, the
International Sybase Users Group and other smaller user groups, and expects to
continue to do so in the future.
 
                                       7
<PAGE>
 
TECHNICAL SUPPORT AND MAINTENANCE
 
  The Company's in-house technical support group, situated at various sites
throughout the U.S., provides pre-sale, installation and post-sale support,
including toll-free telephone support during regular business hours, to
current users and potential customers evaluating the Company's products. The
technical support group also offers seven-day, 24-hour toll-free telephone
service for an additional fee. The Company believes that effective technical
support during product evaluation substantially contributes to product
acceptance and that post-sale support has been, and will continue to be, a
substantial factor in customer satisfaction.
 
  The Company offers a maintenance program for its software products, which
consists of product enhancements, updated products and technical support.
Maintenance is typically provided without additional charge during the
warranty period defined in the Company's license agreements. Under the
Company's standard license agreement, customers renew maintenance support on
an annual basis by paying the current maintenance fee. Customers may also
commit for maintenance and product support over extended periods of time.
Maintenance revenue implicit in new product sales and recurring maintenance
charges are recognized ratably over the period the maintenance and support
services are to be provided.
 
COMPETITION
 
  The Company operates in highly competitive markets and expects competition
to increase. The Company encountered substantially intensified competition as
it moved from the relational database tools market to the much larger IT
infrastructure products market and as it entered the consulting services
business. The Company also experienced many new competitors, including
relational database vendors and systems software companies. Many of the
Company's current and prospective competitors have significantly greater
financial, technical and marketing resources than the Company. In addition,
many prospective customers may have the internal capability to implement
solutions to their IT infrastructure problems.
 
  The competitive factors affecting the market for the Company's software
products include the following: product functionality, integration,
performance and reliability; demonstrable economic benefits for users relative
to cost; quality of customer support and user documentation and ease of
installation; vendor reputation, experience and financial stability; and
price.
 
  The Company believes that it has competed effectively to date and that its
ability to remain competitive will depend, to a great extent, upon its ongoing
performance in the areas of product development and customer support. To be
successful in the future, the Company must respond promptly and effectively to
the challenges of technological change and its competitors' innovations by
continually enhancing its own product offerings. Performance in these areas
will, in turn, depend upon the Company's ability to attract and retain highly
qualified technical personnel in a competitive market for experienced and
talented software developers. The Company also expects to continue its
strategy of identifying and acquiring IT infrastructure products and
technologies and businesses which have developed such products and
technologies.
 
  In addition, the Company encounters competition from a broader range of
firms in the market for professional services. Many of the Company's current
and prospective competitors in the professional services business have
significantly greater financial, technical and marketing resources than the
Company. The competitive factors affecting the market for the Company's
professional services include the following: breadth and quality of services
offered, vendor reputation and the ability to retain qualified technical
personnel.
 
INTELLECTUAL PROPERTY RIGHTS
 
  The Company has historically relied upon a combination of contractual
rights, trademarks, trade secrets and copyright laws to establish and protect
its proprietary rights in its products. The Company also holds some patents
and believes that patents are becoming increasingly important to the software
industry. Consequently, the Company is taking actions to further protect its
proprietary rights through software patents. The Company's
 
                                       8
<PAGE>
 
license agreements restrict a customer's use of the Company's software and
prohibit disclosure to third persons. Notwithstanding those restrictions, it
may be possible for unauthorized persons to obtain copies of the Company's
software products. The Company believes that because of the rapid pace of
technological change in the computer software industry, the legal protections
for its products are less significant factors in the Company's success than
the knowledge, ability and experience of the Company's employees, the
frequency of product enhancements, and the timeliness and quality of support
services provided by the Company. The Company registers its product names and
other trademarks in the United States and certain foreign countries.
 
EMPLOYEES
 
  As of February 28, 1998, the Company employed approximately 4,330 persons,
including 1,280 in sales, marketing and related activities, 1,660 in product
development and support, 1,100 in professional services, and 290 in
management, administration and finance. The Company's success is highly
dependent on its ability to attract and retain qualified employees.
Competition for employees is intense in the software industry. None of the
Company's employees is represented by a labor union or is the subject of a
collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its employee relations are good.
 
ITEM 2. PROPERTIES
 
  The Company's principal administrative, marketing, training, and product
development and support facilities are located in Oakbrook Terrace, Illinois,
where the Company leases approximately 334,000 square feet under leases
terminating in April 2003, with plans to lease additional space in the near
future. The Company also leases approximately 164,000 square feet of
administrative, marketing, sales and product development space in Lisle,
Illinois, near the Company's headquarters, under leases terminating in January
and October 2003. In addition, the Company leases space for approximately 75
sales offices and product development laboratories throughout the United
States, ranging in size from approximately 1,000 to 45,000 square feet. In
conjunction with the restructuring plan executed during the second quarter of
1997, the Company closed certain sales offices and product development
laboratories in the United States and certain foreign countries. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations-- Restructuring Charges."
 
ITEM 3. LEGAL PROCEEDINGS
 
  Computer Associates' International, Inc., and L'Agence pour la Protection
des Programmes v. La Societe Faster, S.A.R.L. (Commercial Court of Bobigny,
Paris, France). Altai, a wholly-owned subsidiary of the Company, is involved
in a suit in France which concerns copyright infringement claims identical to
those on which Altai previously prevailed against Computer Associates
International, Inc. ("CAI") in the United States. The French appellate court
granted Altai's request that the U.S. appellate court's copyright ruling
should bind the Commercial Court of Bobigny as a matter of law. In January
1995, the French appellate court issued a decision rejecting CAI's claim of
copyright infringement. CAI's subsequent appeal in the French appellate court
is still pending, as are motions from Altai that the U.S. court decisions are
binding with respect to the French case.
 
  The Company is also subject to certain other legal proceedings and claims
which have arisen in the ordinary course of business and which have not been
fully adjudicated. Management currently believes the ultimate outcome of such
matters and those described above will not have a material adverse effect on
the Company's results of operations or financial position.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
 
                                       9
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The Company's Common Stock, $.001 par value (the "Common Stock"), is traded
on the Nasdaq National Market under the symbol "PLAT." The following table
sets forth, for the quarters indicated, the range of high and low sales prices
for the Common Stock on the Nasdaq National Market.
 
<TABLE>
<CAPTION>
                                                                 HIGH      LOW
                                                               --------- -------
      <S>                                                      <C>       <C>
      Year Ended December 31, 1996:
        First Quarter......................................... $18 3/4   $11 1/4
        Second Quarter........................................  18 3/4    12 3/4
        Third Quarter.........................................  15 7/8     9 1/4
        Fourth Quarter........................................  15 1/2    10 5/8
      Year Ended December 31, 1997:
        First Quarter......................................... $17 7/8   $10 7/8
        Second Quarter........................................  14 13/16  10 1/2
        Third Quarter.........................................  25        12 5/8
        Fourth Quarter........................................  30 13/16  20 1/8
</TABLE>
 
  As of March 10, 1998, the Company's stock was held by approximately 927
holders of record.
 
  The Company has never declared any cash dividends or distributions on its
capital stock. The Company currently intends to retain its earnings to finance
future growth and therefore does not anticipate paying any cash dividends in
the foreseeable future.
 
  On December 16, 1997, the Company issued $150,000,000 principal amount of
convertible subordinated notes (the "1997 Notes") due December 15, 2002,
bearing interest at 6.25% annually. The holders of the 1997 Notes have the
option to convert them into shares of Common Stock, at any time prior to
maturity, at a conversion price of $36.05 per share. The 1997 Notes are
redeemable at the option of the Company, in whole or in part, at any time
during the twelve-month period commencing December 15, 2000 at 102.5% of their
principal amount and during the twelve-month period commencing December 15,
2001 at 101.25% of their principal amount. The Company sold the 1997 Notes to
Deutsche Morgan Grenfell Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation (the "Initial Purchasers") at a price equal to the principal
amount of the 1997 Notes less a discount of 3% of such principal amount,
pursuant to an agreement between the Company and the Initial Purchasers dated
December 11, 1997. The 1997 Notes were issued to the Initial Purchasers in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended (the "Act"), in a transaction not involving
any public offering. The Notes were then resold by the Initial Purchasers to
"qualified institutional buyers" (as defined in Rule 144A under the Act) in
compliance with Rule 144A and to persons outside the United States, other than
United States persons, pursuant to Regulation S under the Act.
 
  On December 23, 1997, the Company agreed to issue to Intel Corporation
("Intel") 1,768,421 shares of its Class II Series B Preferred Stock
("Preferred Stock"), which had a fair market value of approximately
$42,000,000 on such date, in exchange for certain product technologies and
other intangible assets. The holders of the Preferred Stock have the option to
convert, at any time, each share of Preferred Stock into one share of Common
Stock. Each share of Preferred Stock will automatically convert into one share
of Common Stock (subject to certain adjustments) upon the transfer by any
holder of Preferred Stock in a non-permitted transfer. In the event of a
liquidation of the Company, the holders of the Preferred Stock are entitled to
receive $23.75 per share plus the amount of any declared but unpaid dividends.
The conversion and liquidation terms are subject to adjustment based upon
subsequent changes in equity interests. The shares of Preferred Stock were
subscribed for as of December 31, 1997 and subsequently issued on January 14,
1998. The shares of Preferred Stock were issued to Intel in reliance upon the
exemption from registration provided by Section 4(2) of the Act.
 
                                      10
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The selected consolidated financial data set forth below has been derived
from the historical financial statements of the Company. The selected
consolidated financial data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes
thereto contained elsewhere herein.
 
<TABLE>
<CAPTION>
                                    YEARS ENDED DECEMBER 31,
                         ---------------------------------------------------------------------
                           1997           1996(1)         1995(1)        1994(1)      1993(1)
                         ---------        --------       ---------       --------     --------
                            (IN THOUSANDS, EXCEPT PER SHARE DATA AND
                                            RATIOS)
<S>                      <C>              <C>            <C>             <C>          <C>
Statement of Operations
 Data:
  Total revenues........ $ 623,503        $468,065       $ 326,411       $243,607     $190,623
  Operating income
   (loss)...............  (115,792)(2)     (79,404)(3)    (127,377)(4)       (517)(5)    3,062(6)
  Net income (loss).....  (117,784)(2)     (64,922)(3)    (111,567)(4)     (1,562)(5)      126(6)
  Net income (loss) per
   share................ $   (1.90)(2)    $  (1.14)(3)   $   (2.50)(4)   $  (0.04)(5) $    -- (6)
  Shares used in per
   share calculation....    62,042          56,968          44,671         41,294       39,375
Other Operating Data:
  Ratio of Earnings to
   Fixed Charges(7).....       --  (2)(8)      -- (3)(8)       -- (4)(8)     7.49(5)     10.47(6)
<CAPTION>
                                       AS OF DECEMBER 31,
                         ---------------------------------------------------------------------
                           1997           1996(1)         1995(1)        1994(1)      1993(1)
                         ---------        --------       ---------       --------     --------
                                         (IN THOUSANDS)
<S>                      <C>              <C>            <C>             <C>          <C>
Balance Sheet Data:
  Cash, cash equivalents
   and investments...... $ 261,288        $185,673       $ 136,737       $126,215     $ 71,148
  Working capital.......   288,349         217,157         127,990         90,500       43,672
  Total assets..........   834,177         618,572         452,267        273,333      176,064
  Long-term obligations
   and acquisition-
   related payables,
   less current portion.   285,144         118,305          11,389          9,080        3,465
  Total stockholders'
   equity............... $ 243,560        $295,760       $ 290,213       $160,126     $ 93,350
</TABLE>
--------
(1) The selected consolidated financial data give retroactive effect to the
    acquisitions of Australian Technology Resources Pty Limited ("ATR") as of
    January 31, 1997 and I&S Informationstechnik and Services GmbH ("I&S") as
    of February 28, 1997, each of which has been accounted for as a pooling of
    interests for financial reporting purposes. As a result, the financial
    position and results of operations are presented as if the combining
    companies had been consolidated for all periods presented.
(2) Reflects a pre-tax charge for acquired in-process technology of
    $67,904,000 relating to the Company's acquisitions of GEJAC, Inc.
    ("GEJAC") and ProMetrics Group Limited ("ProMetrics"), the purchase of
    certain product technologies and other intangible assets from Intel and
    the purchase of certain other product technologies. Also reflects a pre-
    tax charge for merger costs of $8,927,000 relating to the Company's
    acquisitions of ATR, I&S and Vayda Consulting, Inc. ("Vayda") and a pre-
    tax charge of $57,319,000 for restructuring costs.
(3) Reflects a pre-tax charge for acquired in-process technology of
    $48,456,000 relating to the Company's acquisitions of Advanced Systems
    Technologies, Inc. ("AST"), Software Alternatives, Inc. (d/b/a System
    Software Alternatives) ("Software Alternatives"), Grateful Data, Inc.
    (d/b/a TransCentury Data Systems) ("Grateful Data") and VREAM, Inc.
    ("VREAM"); substantially all of the assets of the Access Manager business
    unit of the High Performance Systems division of International Computers
    Limited ("Access Manager"); and certain product technologies. Also
    reflects a pre-tax charge for merger costs of $5,782,000 relating
    primarily to the Company's acquisitions of Prodea Software Corporation
    ("Prodea"), Paradigm Systems Corporation ("Paradigm") and Axis Systems
    International, Inc. ("Axis").
(4) Reflects a pre-tax charge for acquired in-process technology of
    $88,493,000 relating primarily to the Company's acquisitions of Advanced
    Software Concepts, Inc. ("ASC"), SQL Software Corporation
 
                                      11
<PAGE>
 
   ("SQL"), RELTECH Group, Inc. ("Reltech"), Protellicess Software, Inc.
   ("Protellicess"), AIB Software Corporation ("AIB") and BMS Computer, Inc.
   ("BMS") and the net assets of ViaTech Development, Inc. ("ViaTech"),
   BrownStone Solutions, Inc. ("BrownStone") and ProtoSoft, Inc. ("ProtoSoft")
   and to certain product acquisitions. Also reflects a pre-tax charge for
   merger costs of $30,819,000 relating to the Company's acquisitions of
   Software Interfaces, Inc. ("SII"), Answer Systems, Inc. ("Answer"), Locus
   Computing Corporation ("Locus"), Altai, Inc. ("Altai"), Trinzic Corporation
   ("Trinzic") and Softool Corporation ("Softool").
(5) Reflects a pre-tax charge for acquired in-process technology of
    $24,594,000 relating primarily to the Company's acquisitions of Dimeric
    Development, Inc. ("Dimeric") and the net assets of Aston Brooke Software,
    Inc. ("Aston Brooke") and AutoSystems Corporation ("AutoSystems").
(6) Reflects a pre-tax charge for acquired in-process technology of $8,735,000
    relating primarily to the Company's acquisition of Datura Corporation
    ("Datura") and a pre-tax charge of $4,659,000 relating to Trinzic and
    Locus restructuring costs.
(7) The ratio of earnings to fixed charges has been computed by dividing
    earnings available for fixed charges (earnings before income taxes plus
    fixed charges less capitalized interest) by fixed charges (interest
    expense plus capitalized interest and the portion of rental expense which
    represents interest).
(8) Earnings available for fixed charges of $(89,933,000), $(72,342,000) and
    $(122,465,000) were inadequate to cover fixed charges of $9,130,000,
    $1,825,000 and $782,000 for the years ended December 31, 1997, 1996 and
    1995, respectively.
 
                                      12
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  The discussion and analysis below contains certain forward-looking
statements (as such term is defined in Section 21E of the Exchange Act) that
are based on the beliefs of the management of the Company, as well as
assumptions made by, and information currently available to, the Company's
management. The Company's actual growth, results, performance and business
prospects and opportunities in 1998 and beyond could differ materially from
those expressed in, or implied by, such forward-looking statements. See "--
Special Note Regarding Forward-Looking Statements" on page 25 for a discussion
of risks, uncertainties and other factors that could cause or contribute to
such material differences.
 
GENERAL
 
  The Company develops, markets and supports software products, and provides
related professional services, that help organizations manage and improve
their IT infrastructures, which consist of data, systems and applications. The
Company's products and services help IT infrastructure departments, primarily
in large and data-intensive organizations, minimize risk, improve service
levels and leverage information to make better business decisions. As an
integral part of the Company's growth strategy, it has consummated a number of
significant business combinations, including acquisitions of SII, Answer,
Locus, Altai, Trinzic, Softool, Prodea, Paradigm, Axis, ATR and I&S, each of
which has been accounted for using the pooling-of-interests method. As a
result, the Company's consolidated financial statements are presented as if
the Company and such acquired companies had been consolidated for all periods
presented. Information regarding the Company in this Management's Discussion
and Analysis of Financial Condition and Results of Operations gives
retroactive effect to these acquisitions. In addition, the Company has
consummated a number of acquisitions accounted for as purchases, in which
cases the acquired businesses have been included in the Company's results of
operations beginning with the effective dates of the acquisitions.
 
                                      13
<PAGE>
 
RESULTS OF OPERATIONS
 
  The table below sets forth for the periods indicated: (1) line items from
the Company's consolidated statements of operations expressed as a percentage
of revenues, and (2) the percentage changes in these line items from the prior
period.
 
<TABLE>
<CAPTION>
                                          PERCENTAGE OF          YEAR-TO-YEAR
                                          TOTAL REVENUES       PERCENTAGE CHANGE
                                          ------------------   -----------------
                                           YEARS ENDED
                                           DECEMBER 31,          1997     1996
                                          ------------------   COMPARED COMPARED
                                          1997   1996   1995   TO 1996  TO 1995
                                          ----   ----   ----   -------- --------
<S>                                       <C>    <C>    <C>    <C>      <C>
Statement of Operations Data:
  Revenues:
    Software products....................  57%    52%    49%      46%      54%
    Maintenance..........................  20     22     23       22       34
    Professional services................  23     26     28       16       33
                                          ---    ---    ---
      Total revenues..................... 100    100    100       33       43
                                          ---    ---    ---
  Costs and expenses:
    Professional services................  20     25     28       10       26
    Product development and support......  30     33     29       21       65
    Sales and marketing..................  37     39     35       25       60
    General and administrative...........  10      9     11       58       15
    Restructuring charges................   9    --     --         *      --
    Merger costs.........................   2      1      9       54      (81)
    Acquired in-process technology.......  11     10     27       40      (45)
                                          ---    ---    ---
      Total costs and expenses........... 119    117    139       35       21
                                          ---    ---    ---
  Operating loss......................... (19)   (17)   (39)       *        *
  Other income, net......................   3      1      1      219       27
                                          ---    ---    ---
  Loss before income taxes............... (16)   (16)   (38)       *        *
  Income taxes...........................   3     (2)    (4)       *        *
                                          ---    ---    ---
  Net loss............................... (19)%  (14)%  (34)%      *%       *%
                                          ===    ===    ===
</TABLE>
--------
  *Not meaningful.
 
 REVENUES
 
  The Company's revenues are derived from three sources: (1) license and
upgrade fees for licensing the Company's proprietary and other parties'
software products and providing additional processing capacity on already-
licensed products, (2) maintenance fees for maintaining, supporting and
providing updates and enhancements to software products, and (3) revenues from
the Company's professional services business. Total revenues for 1997 were
$623,503,000, an increase of $155,438,000, or 33%, over 1996 total revenues of
$468,065,000. Total revenues in 1996 increased $141,654,000, or 43%, over 1995
revenues of $326,411,000.
 
  The Company has a diversified customer base, with no single customer
representing greater than 10% of its total revenues generated in 1997, 1996 or
1995. The Company estimates that sales to repeat customers represented over
90% of its revenues generated in 1997.
 
  Revenues from domestic (U.S.) customers represented 71%, 70% and 68% of the
Company's total revenues in 1997, 1996 and 1995, respectively. Domestic
revenues are generated primarily by the Company's direct sales force (which
visits customer sites to assist with trials, demonstrate product features and
close sales transactions) and inside sales force (which predominantly supports
the direct sales force by developing sales leads and arranging product
evaluations), as well as a telemarketing organization. Since January 1, 1997,
the Company has
 
                                      14
<PAGE>
 
organized its domestic direct sales force by regions throughout the United
States. The Company formerly combined the domestic and Canadian sales forces
to represent the North American sales force. The Canadian sales team is now
part of the Company's international sales force.
 
  Revenues from international customers, principally in Western Europe,
represented 29%, 30% and 32% of the Company's total revenues in 1997, 1996 and
1995, respectively. The Company generates the majority of its international
revenues through a network of wholly-owned subsidiaries, primarily utilizing a
direct sales force. Over the past two years, the Company has invested
significantly in the global marketplace, increasing its focus on international
sales efforts and expanding its international operations.
 
  The table below sets forth, for the periods indicated, the Company's primary
sources of revenues expressed as a percentage of total revenues.
 
<TABLE>
<CAPTION>
                                             PERCENTAGE OF TOTAL REVENUES
                                             ---------------------------------
                                               YEARS ENDED DECEMBER 31,
                                             ---------------------------------
                                               1997        1996        1995
                                             ---------   ---------   ---------
<S>                                          <C>         <C>         <C>
Revenues:
 Software products:
  Licenses..................................        41%         39%         46%
  Upgrades..................................        16          13           3
                                             ---------   ---------   ---------
    Total software products.................        57          52          49
                                             ---------   ---------   ---------
 Maintenance................................        20          22          23
 Professional services......................        23          26          28
                                             ---------   ---------   ---------
    Total revenues..........................       100%        100%        100%
                                             =========   =========   =========
</TABLE>
 
  Software Products. Software products revenues represented 57%, 52% and 49%
of total revenues in 1997, 1996 and 1995, respectively. In 1997, software
products revenues increased 46% to $357,223,000 from $243,938,000 in 1996, as
a result of increases of 48%, 56%, 25% and 48%, respectively, experienced by
the Company's database management, systems management, application
infrastructure management, and data warehousing and decision support business
units. From 1995 to 1996, software product revenues increased 54% from
$158,597,000. The Company believes the growth in software products revenues
over the past three years has resulted from the continued marketplace
acceptance of the Company's products across all business units and the
Company's aggressive expansion of its sales and marketing efforts. The Company
has continuously increased its product offerings over the past three years, in
part through the acquisitions of businesses and technologies, which also
contributed to the growth in software products revenues. The substantial
majority of the increases in software products revenues in 1997 and 1996
resulted from increases in the volume of sales of existing products. A
smaller, but still significant, portion of the increases related to sales of
newly introduced products, while only a small percentage was attributable to
price increases. During 1996 and 1997, the Company expanded its customer base,
increased sales of product bundles and integrated product suites, and executed
increasingly larger sales transactions. Additionally, TransCentury, the
Company's Year 2000 product suite, which was first introduced in the third
quarter of 1996, contributed significantly to the growth in revenues of the
data warehousing and decision support business unit during 1997. The Company's
database management (principally products relating to IBM's DB2 relational
database management software), systems management, application infrastructure
management and data warehousing and decision support business units
represented 40%, 30%, 10% and 20%, respectively, of total software products
revenues in 1997; 40%, 29%, 11% and 20%, respectively, of total software
products revenues in 1996; and 38%, 29%, 11% and 22%, respectively, of total
software products revenues in 1995.
 
  Maintenance. Maintenance revenues in 1997 increased 22% over 1996 to
$125,245,000, and 1996 maintenance revenues of $102,364,000 represented an
increase of 34% over 1995 maintenance revenues of $76,498,000. Maintenance
revenues are derived from recurring fees charged to perpetual license
customers and the implicit first-year maintenance fees bundled in certain
software product sales. The Company provides
 
                                      15
<PAGE>
 
maintenance customers with technical support and product enhancements.
Maintenance revenues are deferred and recognized ratably over the term of the
agreement. The increases during 1997 and 1996 were primarily attributable to
the expansion of the Company's installed customer base, from which maintenance
fees are derived. Because maintenance fees are implicit in certain new
software product licenses, the increase in software licensing transactions
also contributed to the increase in maintenance revenues. In 1997, the
Company's database management, systems management, application infrastructure
management, and data warehousing and decision support business units
represented 45%, 23%, 13% and 19%, respectively, of total maintenance
revenues.
 
  Professional Services. Professional services revenues are associated with
the Company's consulting services business and educational programs. In 1997,
professional services revenues increased 16% over 1996 to $141,035,000 from
$121,763,000 in 1996. From 1995 to 1996, professional services revenues
increased 33% from $91,316,000. The growth in professional services revenues
during 1997 was primarily attributable to an increase in billable consultants,
as well as a higher ratio of billable hours to total hours worked. To a much
lesser extent, increases in rates charged per billable hour contributed to
this growth. Additionally, the revenues generated by the Company's new
specialty consulting services practices, established near the end of 1996,
contributed to the increase in professional services revenues during 1997. The
increase in professional services revenues during 1996 was primarily due to
the addition of established consulting practices through various acquisitions,
as well as the growth experienced within these acquired businesses.
 
 COSTS AND EXPENSES
 
  Total expenses for 1997 were $739,295,000, an increase of 35% over 1996
expenses of $547,469,000, which represented an increase of 21% over 1995
expenses of $453,788,000. Total expenses increased in 1997 due to greater
variable expenses related to higher revenue results, as well as increased
costs, including training and system-support expenses, associated with the
integration of recently acquired companies. Additionally, a restructuring
charge recorded in the second quarter of 1997 (as discussed below under "--
Restructuring Charges") contributed to the increase in total expenses.
Excluding restructuring charges, merger costs, acquired in-process technology
charges and the integration-related charges in 1997 discussed under "--General
and Administrative" below, total expenses for 1997 were $591,632,000 an
increase of $98,401,000, or 20%, compared to $493,231,000 for 1996. Total
expenses, excluding merger costs and acquired in-process technology charges,
increased 47% in 1996 as compared to $334,476,000 in 1995. Total expenses,
excluding restructuring charges (in 1997 only), merger costs, acquired in-
process technology charges and the integration-related charges, represented
95%, 105% and 102% of total revenues for 1997, 1996 and 1995, respectively. As
a percentage of total revenues, total expenses, excluding restructuring
charges, merger costs, acquired in-process technology charges and the
integration-related charges, decreased in 1997, as compared to 1996, primarily
due to overall cost containment efforts and the savings realized from the
restructuring plan.
 
  During 1996 and 1995, the Company incurred significant costs in supporting
its development laboratories and in building the infrastructure to support the
significantly larger combined company that resulted from the Company's
acquisitions in those years. These costs were primarily associated with the
expansion of the inside and outside sales forces, hiring of product developers
and support technicians plus key management personnel, training all personnel
in IT infrastructure systems issues and new products, providing additional
financial and technical support to the international subsidiaries established
in those years, translating product materials into numerous foreign languages,
and augmenting internal support systems. Greater commission and bonus expenses
associated with the increase in revenues during 1996, as compared to 1995,
also contributed to the increase in total expenses in 1996.
 
  Professional Services. Costs of professional services increased to
$127,499,000 in 1997, from $116,133,000 in 1996 and $92,374,000 in 1995. The
increases in these expenses during 1997 and 1996 were related to salaries and
other direct employment expenses resulting from the Company's continued hiring
to support this business, as well as the costs incurred to integrate the
numerous consulting practices acquired over the past three years. Greater
commission and bonus expenses associated with higher professional services
revenues in each year also contributed to the increases. Costs of professional
services represented 90%, 95% and 101% of professional
 
                                      16
<PAGE>
 
services revenues in 1997, 1996 and 1995, respectively. During 1997, as part of
the Company's overall restructuring plan, the Company realigned its
professional services business through the consolidation of redundant
functions. The savings realized from the restructuring plan, as well as the
increased productivity of the consulting staff, contributed to the decrease in
professional services expenses as a percentage of professional services
revenues in 1997.
 
  Product Development and Support. Product development and support expenses
increased to $187,383,000 in 1997, from $155,277,000 in 1996 and $94,027,000 in
1995. The increases in these expenses in 1997 and 1996 were primarily
attributable to an increase in the number of product development and support
personnel, from approximately 1,215 at December 31, 1995 to approximately 1,400
at December 31, 1996 and approximately 1,625 at December 31, 1997, and to other
higher employee-related expenses associated with expanded product offerings in
each year, as well as continued product integration and internationalization
efforts in 1997 and, to a lesser extent, 1996; increased allocated charges for
office space and overhead; an increase in information technology costs to
support the expanded development efforts and product offerings; higher bonuses
and royalty expenses related to greater revenues; and higher travel expenses in
1997 and 1996 associated with the Company's product integration efforts and
expanded product offerings. Product development and support expenses
represented 30%, 33% and 29%, of total revenues in 1997, 1996 and 1995,
respectively. During 1997, the Company began consolidating certain product
development and support efforts to coincide with its product integration focus.
As a result of these consolidation efforts, the Company reduced product
development and support expenses as a percentage of total revenues during 1997.
 
  In 1997, 1996 and 1995, the Company capitalized $41,143,000, $27,246,000 and
$13,591,000, respectively, of internal software development costs, net of
related amortization expense, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed." Product development and
support expenses plus capitalized internal software development costs, net of
related amortization expense, were $228,526,000 in 1997, $182,523,000 in 1996
and $107,618,000 in 1995, which amounted to 47%, 53% and 46%, respectively, of
software product and maintenance revenues for these years.
 
  Sales and Marketing. Sales and marketing expenses increased to $228,387,000
in 1997, from $182,597,000 in 1996 and $113,978,000 in 1995. The increase in
sales and marketing expenses during 1997 was primarily attributable to the
significant expansion of the domestic and international outside sales force and
higher commission expenses relating to the increase in software products
revenues. During 1996, as compared to 1995, the Company incurred higher
commission expenses associated with the increase in software products revenues
and greater marketing costs associated with the Company's expanded product
line. Sales and marketing expenses represented 37%, 39% and 35% of total
revenues in 1997, 1996 and 1995, respectively. During the second quarter of
1997, the Company realigned its inside sales force to be more compatible with
its strategy of providing complete IT infrastructure solutions and to
correspond with the restructuring plan. This realignment resulted in a
significant reduction in the inside sales force. The Company also consolidated
certain remote sales facilities. Consequently, sales and marketing expenses as
a percentage of total revenues decreased during 1997. The increase in sales and
marketing expenses as a percentage of total revenues in 1996, as compared to
1995, was primarily attributable to costs associated with the significant
expansion of the domestic and international outside and inside sales forces and
the telemarketing organization.
 
  General and Administrative. General and administrative expenses increased to
$61,876,000 in 1997, from $39,224,000 in 1996 and $34,097,000 in 1995. General
and administrative expenses represented 10%, 9% and 11% of total revenues in
1997, 1996 and 1995, respectively. The increase in general and administrative
expenses during 1997 was primarily due to total charges of $13,513,000 recorded
during the second quarter of 1997 for write-offs of certain assets, as well as
severance and other employee-related expenses, related to the integration
procedures discussed below. In conjunction with the restructuring plan executed
during the second quarter of 1997, the Company performed additional integration
procedures related to past acquisition activity. The Company evaluated the fair
value of assets recorded through prior acquisitions and identified certain
trade receivables, prepaid expenses and intangible assets that had no future
value. The respective balances of these
 
                                       17
<PAGE>
 
assets were written-off during the second quarter of 1997. Additionally, the
Company expensed severance and other employee benefits, including guaranteed
bonuses, for certain employees of acquired companies who were terminated as a
result of the integration efforts, but not specifically as part of the
restructuring plan. The increase in general and administrative expenses in
1997 was also attributable to the costs associated with integrating recently
acquired businesses and maintaining the infrastructure to support the
restructured company, including administrative system upgrade expenses and
associated consulting fees, as well as the amortization of intangible assets
relating to the Company's convertible debt offerings (see "--Liquidity and
Capital Resources"). Total general and administrative expenses in 1997,
excluding the charges related to the integration efforts, were $48,363,000,
representing 8% of total revenues. The Company believes the decrease in
general and administrative expenses as a percentage of total revenues,
excluding the integration charges, was the result of the Company's overall
cost containment efforts, as well as the savings realized by the restructuring
plan.
 
  The increase in general and administrative expenses in 1996 was primarily
related to salaries and other direct employment expenses attributable to an
expanded administrative staff both in the U.S. and in international
subsidiaries, amortization of excess of cost over net assets acquired related
to the Company's acquisitions accounted for as purchases, and increased
professional fees. During 1996, a concerted effort to consolidate redundant
administrative functions at the Company's various domestic locations resulted
in a reduction in these expenses as a percentage of total revenues.
 
  Restructuring Charges. During the second quarter of 1997, the Company
executed a restructuring plan to consolidate its sales, marketing, business
development and product development operations to achieve cost efficiencies
through the elimination of redundant functions. These redundancies resulted
primarily from businesses acquired over the last three years. The Company also
realigned its business units and inside sales force to redirect focus on its
strongest product lines and better integrate the efforts of certain product
development teams. As part of the plan, the Company reduced its worldwide work
force by approximately 10%, eliminating approximately 400 positions, primarily
in the areas of product development and support, marketing and inside sales
and, to a lesser extent, professional services and administration.
 
  The Company recorded a one-time charge of $57,319,000 during the second
quarter of 1997 related to the restructuring plan. The restructuring charge
included the following expenses: $24,032,000 for facility-related costs,
including a reserve for estimated lease obligations associated with the
closing of office facilities; $3,510,000 for write-offs of excess equipment,
furniture and fixtures; $19,413,000 for write-offs of capitalized software
costs and other intangible assets related to the termination of development
efforts for certain discontinued products, as well as penalties for the
cancellation of distributorship agreements for such products; and $10,364,000
for severance and other employee-related costs of the terminated staff. Of the
$57,319,000 restructuring charge, the Company paid out approximately
$15,322,000 and wrote off $19,687,000 of non-cash charges during 1997.
Consequently, the Company had $22,310,000 of accrued restructuring costs
recorded as of December 31, 1997. The Company anticipates that approximately
$6,300,000 of these costs will be paid out during 1998. The Company estimates
that annual restructuring payments will be approximately $3,300,000 to
$4,000,000 for the years 1999 through 2002 and that the remaining
approximately $1,300,000 of cash disbursements related to the restructuring
plan will be paid out in 2003.
 
  The Company currently expects to realize a reduction in annual operating
expenses of approximately $40,000,000 in 1998 and subsequent years as a result
of the restructuring, without an adverse impact on revenues. However, there
can be no assurance as to the ultimate effects of the restructuring on the
Company's operating results.
 
  Merger Costs. Merger costs were $8,927,000, $5,782,000 and $30,819,000 in
1997, 1996 and 1995, respectively. Merger costs relate to acquisitions
accounted for as poolings of interests and include investment banking and
other professional fees, employee severance payments, costs of closing excess
office facilities and various other expenses. The Company from time to time
engages in, and is currently engaged in, discussions relating to acquisitions
that may be material in size and/or scope and may involve issuances by the
Company of a significant number of shares of Common Stock. The Company
continues to pursue merger and acquisition
 
                                      18
<PAGE>
 
opportunities, because it believes that acquisitions are an essential part of
the Company's strategy to compete effectively in its rapidly evolving
marketplace. The Company expects to incur merger costs in connection with
future acquisitions accounted for as poolings of interests. These costs will
be expensed in the periods in which the transactions are consummated. See "--
Recent Developments" for a description of certain pending acquisitions.
 
  Acquired In-Process Technology. Acquired in-process technology charges were
$67,904,000, $48,456,000 and $88,493,000 in 1997, 1996 and 1995, respectively.
Acquired in-process technology charges relate to acquisitions of software
companies and product technologies accounted for under the purchase method. In
these cases, portions of the purchase prices were allocated to acquired in-
process technology.
 
  Prior to completing these acquisitions, the Company conducted reviews in
order to determine the fair market value of the organizations and technologies
to be acquired. These reviews consisted of an evaluation of existing products,
research and development in process (projects that had not reached
technological feasibility and had no alternative future use), customers,
financial position and other matters. The acquired in-process research and
development represents unique and emerging technologies, the application of
which is limited to the Company's IT infrastructure strategy. Accordingly,
these acquired technologies have no alternative future use. The Company
believes it has budgeted adequate research and development resources to
complete the contemplated projects over time periods generally ranging from
six to 18 months from the dates of acquisition.
 
  The Company has already devoted substantial resources to the development of
products from research and development purchased in 1997. The Company
estimates that up to an additional 12 months and approximately $9,000,000 in
cash expenditures will be required to develop commercially viable products
from this acquired research and development. With respect to research and
development acquired prior to 1997, the Company has either completed the
development of commercially viable products or discontinued the product
development efforts.
 
  The Company expects to continue to incur charges for acquired in-process
technology in connection with future acquisitions, which will reduce operating
and net income for the periods in which the acquisitions are consummated.
 
 OPERATING LOSS
 
  For the reasons discussed above, the Company incurred an operating loss of
$115,792,000 in 1997, as compared to an operating loss of $79,404,000 in 1996
and an operating loss of $127,377,000 in 1995. The Company had operating
margins of (19)%, (17)% and (39)% in 1997, 1996 and 1995, respectively. The
significant restructuring charges, merger costs, acquired in-process
technology charges and integration-related charges incurred in these years
contributed significantly to the operating losses and negative operating
margins experienced by the Company. Excluding restructuring charges, merger
costs, acquired in-process technology charges and the integration-related
charges in 1997 discussed under "--General and Administrative" below, the
Company would have reported operating income of $31,871,000 in 1997, an
operating loss of $25,166,000 in 1996 and an operating loss of $8,065,000 in
1995. Excluding such charges, the Company would have reported operating
margins of 5%, (5)% and (2)% in 1997, 1996 and 1995, respectively. During
1997, the Company improved its operating margin, excluding restructuring
charges, merger costs, acquired in-process technology charges and the
integration-related charges, through cost containment efforts and the savings
realized from the restructuring plan. The Company's operating margin,
excluding merger costs and acquired in-process technology charges, decreased
in 1996, as compared to 1995, due primarily to the significant costs incurred
to integrate the numerous acquisitions consummated during 1996 and 1995.
Because acquisitions remain an important part of the Company's growth
strategy, the Company expects to continue to incur acquisition-related
charges, as well as expenses related to the integration of acquired
businesses, which could materially adversely affect operating results in the
periods in which such acquisitions are consummated and in subsequent periods.
 
                                      19
<PAGE>
 
 OTHER INCOME
 
  Other income was $16,729,000 in 1997 as compared to $5,237,000 in 1996 and
$4,130,000 in 1995. The increase in other income in 1997, as compared to 1996,
was primarily attributable to unrealized holding gains that resulted from the
reclassification of certain available-for-sale securities into the trading
classification; unrealized holding gains on trading securities, the market
values of which increased during 1997; and realized gains on the sales of
investment securities. The increase in other income during 1996, as compared to
1995, was primarily attributable to realized gains on the sales of investment
securities and unrealized holding gains on trading securities. Because
unrealized holding gains and losses for trading securities are reflected in
pre-tax earnings, fluctuations in the market value of these securities are
continuously recorded as additions to, or deductions from, other income until
the securities are sold. The increase in other income during 1997, as compared
to 1996, was partially offset by interest expense on the Company's convertible
subordinated notes issued in November 1996 and December 1997. To a lesser
extent, the interest expense on the convertible subordinated notes issued in
November 1996 reduced the increase in other income in 1996, as compared to
1995. See "--Liquidity and Capital Resources."
 
 INCOME TAXES
 
  The Company recognized income tax expense of $18,721,000 in 1997, and income
tax benefits of $9,245,000 in 1996 and $11,680,000 in 1995. The income tax
expense recorded in 1997 included an amount of $13,651,000 based on the
Company's 28% effective tax rate, plus an additional $5,070,000 recorded in the
second quarter of 1997 to reduce the Company's deferred tax asset balance. The
Company reduced its deferred tax asset balance so that it would reflect an
asset amount that will, more likely than not, be realized in future periods.
 
  The Company has available approximately $294,715,000 of net operating loss
carryforwards and $14,000,000 of tax credit carryforwards, which are available
to reduce future Federal income taxes, if any, through the year 2012. Some of
the Company's tax carryforwards are subject to limitations as to the amounts
that may be used in any particular future year.
 
 NET LOSS
 
  For the reasons discussed above, the Company incurred a net loss of
$117,784,000 in 1997, as compared to $64,922,000 in 1996 and $111,567,000 in
1995. The significant restructuring charges, merger costs and acquired in-
process technology charges incurred in these years contributed significantly to
the net losses experienced by the Company. See "--Operating Loss" above.
 
RECENT DEVELOPMENTS
 
  On January 2, 1998, the Company entered into an agreement and plan of merger,
pursuant to which the Company has agreed to acquire Learmonth and Burchett
Management Systems PLC ("LBMS"), a leading provider of process management
solutions. Under the terms of this acquisition, LBMS will become a wholly-owned
subsidiary of the Company. The Company has agreed to exchange approximately
2,745,000 shares of Common Stock for all of the outstanding common shares of
LBMS and has offered to exchange options to purchase approximately 468,000
shares of Common Stock for the outstanding LBMS options. This acquisition,
which is expected to be consummated in the second quarter of 1998, is subject
to the sanction of the English High Court, the approval of the shareholders of
LBMS and customary legal and regulatory conditions.
 
  On February 18, 1998, the Company entered into an agreement and plan of
merger, pursuant to which the Company has agreed to acquire Mastering, Inc.
("Mastering"), a leading provider of information technology training. Under the
terms of this acquisition, Mastering will become a wholly-owned subsidiary of
the Company. The Company has agreed to exchange approximately 6,165,000 shares
of Common Stock for all of the outstanding common shares of Mastering and to
assume stock options which will convert into options to purchase approximately
2,143,000 shares of Common Stock. This acquisition, which is expected to be
consummated in the second quarter of 1998, is subject to the filing of a
registration statement with the Securities
 
                                       20
<PAGE>
 
and Exchange Commission, the approval of the stockholders of Mastering and
customary legal and regulatory conditions.
 
  On March 14, 1998, the Company entered into an agreement and plan of merger,
pursuant to which the Company has agreed to acquire Logic Works, Inc.
("Logic"), a leading provider of data modeling tools. Under the terms of this
acquisition, Logic will become a wholly-owned subsidiary of the Company. The
Company has agreed to exchange approximately 7,240,095 shares of Common Stock
for all of the outstanding common stock of Logic and to assume stock options
which will convert into options to purchase approximately 1,325,716 shares of
Common Stock. This acquisition, which is expected to be consummated in mid-
1998, is subject to the filing of a registration statement with the Securities
and Exchange Commission, the approval of the stockholders of Logic and
customary legal and regulatory conditions.
 
  The acquisitions of LBMS, Mastering and Logic are expected to be accounted
for as poolings of interests. Costs incurred in connection with these
transactions will be expensed in the periods in which the acquisitions are
consummated.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's cash, cash equivalents and investments were $261,288,000 and
$185,673,000 as of December 31, 1997 and 1996, respectively. For the year
ended December 31, 1997, cash and cash equivalents increased $37,355,000, from
$140,783,000 at the beginning of the year to $178,138,000 at the end of the
year. This increase was attributable primarily to net proceeds of $144,967,000
from the sale of $150,000,000 principal amount of 6.25% convertible
subordinated notes due 2002 (the "1997 Notes") and net cash provided by
operating activities of $32,586,000. The positive cash flow from operating
activities was reduced by an increase in trade and installment receivables,
net of proceeds from the sale of installment receivables. Previously, the
Company reported trade and installment receivables on a gross basis and the
sale of installment receivables as a financing activity. Of the $191,266,000
of cash provided by financing and operating activities, $153,911,000 was used
in investing activities. The principal components of investing activities were
purchases of marketable securities and the investment of resources in
purchased and developed software. For 1996, cash and cash equivalents
increased from $115,809,000 at the beginning of the year to $140,783,000 at
the end of the year, with the primary sources of cash being sales of
installment receivables and the net proceeds from the sale of $115,000,000
principal amount of 6.75% convertible subordinated notes due 2001 (the "1996
Notes"). For 1995, cash and cash equivalents increased from $80,110,000 at the
beginning of the year to $115,809,000 at the end of the year, with the
principal source of cash being the net proceeds from a public offering of
Common Stock.
 
  In recent years, the Company's sources of liquidity have primarily been
funds from capital markets and sales of installment receivables. The Company
believes the funding available to it from these sources, as well as cash flows
from operations, will be sufficient to satisfy its working capital and debt
service requirements for the foreseeable future. The Company's capital
requirements are primarily dependent on management's business plans regarding
the levels and timing of investments in existing and newly acquired businesses
and technologies. These plans and the related capital requirements may change
based upon various factors, such as the Company's strategic opportunities,
developments in the Company's markets, the timing of closing and integrating
acquisitions and the conditions of financial markets.
 
  The Company had trade and installment accounts receivable, net of
allowances, of $264,686,000 and $200,399,000 as of December 31, 1997 and 1996,
respectively. The Company sells software products and services to customers in
diversified industries and geographic regions and, therefore, has no
significant concentration of credit risk. Historically, a substantial amount
of the Company's revenues have been recorded in the third month of any given
quarter, with a concentration of such revenues in the last week of the third
month. This trend results in a high balance of accounts receivable relative to
reported revenues at the end of any quarterly reporting period.
 
 
                                      21
<PAGE>
 
  The Company sells a significant portion of its installment receivables to
third parties. Installment receivables represent amounts collectible on long-
term financing arrangements and include fees for product licenses, upgrades
and maintenance, sometimes also bundled with professional services contracts.
Installment receivables are generally financed over three to five years, with
interest payable on the license and upgrade portions only. Over the past two
years, the Company executed an increasingly greater number and higher dollar
value of sales transactions having long-term financing arrangements, primarily
attributable to sales of product bundles and integrated product suites.
Consequently, the Company's volume of installment receivable sales increased
significantly over the past two years. However, the Company expects to reduce
the volume of installment receivable sales, as a percentage of total revenues,
in 1998 as compared to 1997.
 
  The Company receives proceeds equal to the entire installment receivable
balance sold to a third party finance company, net of an amount representing
the interest to be earned by the finance company. The finance company collects
customer remittances over the term of the agreement. Proceeds from the sale of
receivables were $206,916,000, $129,328,000 and $2,903,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Accounts receivable sold with
recourse were $19,373,000 and $2,993,000 for the years ended December 31, 1996
and 1995, respectively, and as of December 31, 1996 and 1995, potential
obligations for accounts receivable sold with recourse were $16,817,000 and
$5,177,000, respectively. There were no accounts receivable sold with recourse
for the year ended December 31, 1997, and as of December 31, 1997, there were
no remaining potential recourse obligations for accounts receivable sold with
recourse. The Company has an agreement with a third party that provides for
potential recourse obligations in the form of a loss pool based on the
performance of the related accounts receivable portfolio. Under the terms of
that agreement, potential recourse obligations at December 31, 1997 and 1996
were $14,600,000 and $9,300,000, respectively. There were no potential
recourse obligations in the form of a loss pool as of December 31, 1995. Based
on the credit ratings of the underlying obligors to the accounts receivable
and the performance history of the accounts receivable portfolio, the Company
has assessed the exposure related to these recourse obligations and determined
the potential liability to be minimal.
 
  The Company's installment receivables are recorded net of unamortized
discounts and deferred maintenance fees. When these receivables are sold, the
Company reduces the gross installment receivable balance. Additionally, the
Company reclassifies the deferred maintenance, which was previously reflected
as a reduction of the related installment receivable balance, to an
obligation. The deferred maintenance is recognized into income ratably over
the term of the maintenance agreement.
 
  The Company had long-term acquisition-related payables of $18,320,000 and
$2,502,000 and other long-term obligations of $266,824,000 and $115,803,000 as
of December 31, 1997 and 1996, respectively. The significant increase in long-
term obligations from December 31, 1996 to December 31, 1997 was attributable
to the 1997 Notes issued by the Company in December 1997. The 1997 Notes bear
interest at 6.25% annually and mature on December 15, 2002. The holders of the
1997 Notes have the option to convert them into shares of Common Stock, at any
time prior to maturity, at a conversion price of $36.05 per share. The Company
received proceeds, net of issuance costs, of $144,967,000 from the offering of
the 1997 Notes. The Company completed an offering of convertible subordinated
notes due November 15, 2001 in November 1996 (the "1996 Notes"). The 1996
Notes bear interest at 6.75% annually and the holders of the 1996 Notes have
the option to convert them into shares of Common Stock, at any time prior to
maturity, at a conversion price of $13.95 per share. The Company received
proceeds, net of issuance costs, of $110,783,000 from the offering of the 1996
Notes. The Company currently has total debt service obligations of
approximately $35,000,000 for 1998, consisting primarily of obligations to pay
interest on the 1996 Notes and the 1997 Notes, as well as acquisition-related
payables. Based on current outstanding indebtedness, the Company estimates its
debt service requirements to be approximately $36,000,000, $18,000,000,
$132,000,000 and $160,000,000 for 1999, 2000, 2001 and 2002, respectively,
which amounts include the outstanding principal balance of the 1996 Notes in
2001 and the outstanding principal balance of the 1997 Notes in 2002.
 
  The Company currently has an unsecured bank line of credit of $55,000,000,
under which borrowings bear interest at rates ranging from approximately LIBOR
plus 1% to the bank's prime rate. As of March 10, 1998, the
 
                                      22
<PAGE>
 
Company had no outstanding borrowings under this line of credit, but had
aggregate letters of credit outstanding for approximately $2,598,000, with
expiration dates ranging from April 1998 to May 1999. These letters of credit
reduce the available line of credit balance. Under this credit agreement, the
Company has agreed: (i) to maintain a ratio of current assets to current
liabilities of at least 1.0 to 1.0; (ii) to maintain a tangible net worth of
not less than $100,000,000; and (iii) not to permit its ratio of total
liabilities to tangible net worth to at any time exceed 1.0 to 1.0.
 
FOREIGN CURRENCY EXCHANGE RATES
 
  To date, fluctuations in foreign currency exchange rates have not had a
material effect on the Company's results of operations or liquidity. However,
the Company closely monitors its foreign operations and net asset position to
ascertain the need for hedging foreign currency exchange risk. Since 1997, the
only exposure related to foreign currency exchange for which the Company has
considered hedging appropriate has been related to short-term intercompany
balances. These non-functional currency balances are hedged by purchases and
sales of forward exchange contracts to reduce this exchange rate exposure. At
December 31, 1997, the Company held an aggregate of approximately $26,800,000
in notional amount of forward exchange contracts. As the Company's operations
expand in international regions outside Western Europe, where the Company's
international operations are currently concentrated, the Company may
increasingly hedge foreign currency exchange risk.
 
YEAR 2000 CONSIDERATIONS
 
  During 1997, the Company substantially completed the implementation of an
enterprise-wide financial accounting system which is Year 2000 compliant.
Further, the Company has evaluated its internal software and computer systems
and believes its potential liability relating to the Year 2000 problem is
minimal.
 
  The Company believes that certain of its customers may allocate a substantial
portion of their 1998 and 1999 IT budgets to products and services addressing
the Year 2000 problem. The Company is unable to determine whether this trend
will negatively impact sales of its traditional product offerings, but believes
that it may lead to increased sales of its Year 2000 products and services. The
Company believes that, in 1997, sales of its Year 2000 products and services
were favorably affected by this trend. All of the Company's current software
product offerings are Year 2000 compliant.
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
  In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The Company is required to adopt SFAS No. 130
for periods beginning after December 15, 1997. This statement establishes
standards for reporting comprehensive income and its components in a full set
of general-purpose financial statements. The standard requires all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed in
equal prominence with the other financial statements. The standard is not
expected to have a material impact on the Company's current presentation of
income.
 
  In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Company is required to adopt the disclosures of SFAS No. 131 beginning with its
December 31, 1998 annual financial statements. This statement establishes
standards for the way companies are to report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The Company is currently
evaluating the impact of this standard on its financial statements.
 
  In November 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." The
Company is required to adopt SOP 97-2 on January 1, 1998. SOP 97-2 is intended
to reduce diversity in current revenue recognition practices within the
software industry. The Company is currently evaluating the effects of SOP 97-2
on its operations.
 
                                       23
<PAGE>
 
QUARTERLY COMPARISONS
 
  The following tables set forth an unaudited summary of quarterly financial
data. This quarterly information has been prepared on the same basis as the
annual consolidated financial statements and, in management's opinion,
reflects all adjustments necessary for a fair presentation of the information
for the periods presented. The operating results for any quarter are not
necessarily indicative of results for any future period.
 
  The Company has experienced a seasonal pattern in its operating results,
with the fourth quarter typically having the highest total revenues and
operating income in a given year. For example, 34% and 32% of the Company's
total revenues in 1997 and 1996, respectively, were generated in the fourth
quarter. Further, revenues for the fourth quarter of 1996 were higher than
revenues for the first quarter of 1997. The Company believes the seasonality
of its revenue results primarily from the budgeting cycles of its software
product customers and the structure of the Company's sales commission and
bonus programs. In addition, the Company's software products revenues may vary
significantly from quarter to quarter depending upon other factors, such as
the timing of new product announcements and releases by the Company and its
competitors. The Company operates with relatively little backlog, and
substantially all of its software products revenues in each quarter result
from sales made in that quarter.
 
<TABLE>
<CAPTION>
                                           1997
                            -----------------------------------------------
                             FIRST        SECOND       THIRD        FOURTH
                            QUARTER      QUARTER      QUARTER      QUARTER
                            --------     --------     --------     --------
                              (IN THOUSANDS, EXCEPT PER SHARE
                                         AMOUNTS)
                                        (UNAUDITED)
<S>                         <C>          <C>          <C>          <C>
Total revenues............. $115,623     $136,438     $160,201     $211,241
Operating income (loss)....  (33,086)(1)  (77,336)(2)   10,553      (15,923)(3)
Net income (loss)..........  (25,269)(1)  (78,933)(2)   10,160      (23,742)(3)
Net income (loss) per
 share..................... $  (0.41)(1) $  (1.28)(2) $   0.16     $  (0.37)(3)
Shares used in computing
 net income (loss) per
 share.....................   60,947       61,477       65,328       63,615
<CAPTION>
                                           1996
                            -----------------------------------------------
                             FIRST        SECOND       THIRD        FOURTH
                            QUARTER      QUARTER      QUARTER      QUARTER
                            --------     --------     --------     --------
                              (IN THOUSANDS, EXCEPT PER SHARE
                                         AMOUNTS)
                                        (UNAUDITED)
<S>                         <C>          <C>          <C>          <C>
Total revenues, as
 previously reported(4).... $ 82,471     $100,485     $113,430     $142,804
Adjustments(5).............    6,588        6,712        6,884        8,691
  Total revenues...........   89,059      107,197      120,314      151,495
Operating loss, as
 previously reported(4)....  (32,374)(6)  (10,072)     (10,636)(7)  (29,411)(8)
Adjustments(5).............      293          271          209        2,316
  Operating loss...........  (32,081)(6)   (9,801)     (10,427)(7)  (27,095)(8)
Net loss, as previously
 reported(4)...............  (24,504)(6)   (5,791)      (7,693)(7)  (29,974)(8)
Adjustments(5).............      283          235          208        2,314
  Net loss.................  (24,221)(6)   (5,556)      (7,485)(7)  (27,660)(8)
Net loss per share, as
 previously reported(4).... $  (0.45)(6) $  (0.10)    $  (0.14)(7) $  (0.53)(8)
  Net loss per share.......    (0.43)(6)    (0.10)       (0.13)(7)    (0.48)(8)
Shares used in computing
 net loss per share, as
 previously reported.......   54,915       55,214       55,678       56,419
  Shares used in computing
   net loss per share......   56,341       56,625       57,070       57,823
</TABLE>
--------
(1) Reflects a pre-tax charge for acquired in-process technology of
    $10,417,000 relating to the Company's acquisition of GEJAC and the
    purchase of certain product technologies. Also reflects a pre-tax charge
    for merger costs of $3,706,000 relating to the Company's acquisitions of
    ATR and I&S.
(2) Reflects a pre-tax charge for acquired in-process technology of $6,747,000
    relating to the Company's acquisition of certain product technologies.
    Also reflects a pre-tax charge of $57,319,000 for restructuring costs.
 
                                      24
<PAGE>
 
(3) Reflects a pre-tax charge for acquired in-process technology of $50,740,000
    relating to the Company's acquisition of ProMetrics, the purchase of
    certain product technologies and other intangible assets from Intel and the
    purchase of certain other product technologies. Also reflects a pre-tax
    charge for merger costs of $5,221,000 relating primarily to the Company's
    acquisition of Vayda.
(4) As reported under "Item 7. Management's Discussion and Analysis of
    Financial Condition and Results of Operations--Quarterly Comparisons" in
    the Company's Annual Report on Form 10-K for the year ended December 31,
    1996.
(5) Adjustments reflect the effects of the acquisitions of ATR and I&S, each of
    which has been accounted for using the pooling-of-interests method. See
    Note 2 of the notes to the Company's consolidated financial statements
    included elsewhere herein for a more detailed discussion of these
    transactions.
(6) Reflects a pre-tax charge for acquired in-process technology of $7,005,000
    relating to the Company's acquisition of AST and the purchase of certain
    product technologies. Also reflects a pre-tax charge for merger costs of
    $5,782,000 relating primarily to the Company's acquisitions of Prodea,
    Paradigm and Axis.
(7) Reflects a pre-tax charge for acquired in-process technology of $4,090,000
    relating to the Company's acquisitions of Software Alternatives and
    Grateful Data.
(8) Reflects a pre-tax charge for acquired in-process technology of $37,361,000
    relating to the Company's acquisitions of VREAM and substantially all of
    the assets of Access Manager.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
  This Form 10-K contains certain "forward-looking statements" (as defined in
Section 21E of the Exchange Act) that reflect the Company's expectations
regarding its future growth, results of operations, performance and business
prospects and opportunities. Words such as "anticipates," "believes," "plans,"
"expects," "estimates" and similar expressions have been used to identify these
forward-looking statements, but are not the exclusive means of identifying
these statements. These statements reflect the Company's current beliefs and
are based on information currently available to the Company. Accordingly, these
statements are subject to known and unknown risks, uncertainties and other
factors that could cause the Company's actual growth, results, performance and
business prospects and opportunities to differ from those expressed in, or
implied by, these statements. These risks, uncertainties and other factors
include the Company's ability to develop and market existing and acquired
products for the IT infrastructure market; the Company's ability to
successfully integrate its acquired products, services and businesses and
continue its acquisition strategy; the Company's ability to adjust to changes
in technology, customer preferences, enhanced competition and new competitors
in the IT infrastructure and professional services markets; currency exchange
rate fluctuations, collection of receivables, compliance with foreign laws and
other risks inherent in conducting international business; risks associated
with conducting a consulting services business; general economic and business
conditions, which may reduce or delay customers' purchases of the Company's
products and services; charges and costs related to acquisitions; and the
Company's ability to protect its proprietary software rights from infringement
or misappropriation, to maintain or enhance its relationships with relational
database vendors, and to attract and retain key employees. The Company is not
obligated to update or revise these forward-looking statements to reflect new
events or circumstances.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The information in response to this item is included in the Company's
consolidated financial statements, together with the report thereon of KPMG
Peat Marwick LLP, appearing on pages F-1 through F-26 of this Form 10-K, and in
Item 7 under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Comparisons."
 
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE
 
  None.
 
                                       25
<PAGE>
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information in response to this item is incorporated by reference from
the sections captioned "PROPOSAL NO. 1--ELECTION OF DIRECTORS" and "EXECUTIVE
OFFICERS" of the definitive Proxy Statement to be filed in connection with the
Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement").
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information in response to this item is incorporated by reference from
the section of the 1998 Proxy Statement captioned "EXECUTIVE COMPENSATION."
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information in response to this item is incorporated by reference from
the section of the 1998 Proxy Statement captioned "SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information in response to this item is incorporated by reference from
the sections of the 1998 Proxy Statement captioned "EXECUTIVE COMPENSATION--
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" and "CERTAIN
TRANSACTIONS."
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  (a) 1. The following consolidated financial statements and notes thereto,
and the related independent auditors' report, are included on pages F-1
through F-26 of this Form 10-K:
 
    Consolidated Balance Sheets as of December 31, 1997 and 1996
 
    Consolidated Statements of Operations for the Years Ended December 31,
    1997, 1996 and 1995
 
    Consolidated Statements of Stockholders' Equity for the Years Ended
    December 31, 1997, 1996 and 1995
 
    Consolidated Statements of Cash Flows for the Years Ended December 31,
    1997, 1996 and 1995
 
    Notes to Consolidated Financial Statements
 
    Independent Auditors' Report
 
  2. The following financial statement schedule of the Company and the related
report of independent auditors are included on pages S-1 and S-2 of this Form
10-K:
 
    Report of Independent Auditors
 
    Schedule II--Valuation and Qualifying Accounts
 
  All other financial statement schedules are omitted because such schedules
are not required or the information required has been presented in the
aforementioned financial statements.
 
 
                                      26
<PAGE>
 
  3. The following exhibits are filed with this Form 10-K or incorporated by
reference as set forth below:
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
  EXHIBIT
    NO.                           DESCRIPTION
  -------                         -----------
 <C>       <S>                                                         <C>
   3.1     Restated Certificate of Incorporation of the Company, as
           amended, incorporated by reference to Exhibit 3.1(d) to
           the Company's Registration Statement on Form S-1, Regis-
           tration No. 333-07783.
   3.2     Bylaws of the Company, incorporated by reference to Ex-
           hibit 3.2 to the Company's Registration Statement on Form
           S-1, Registration No. 33-39233 (the "IPO S-1 Registration
           Statement").
   4.1     Specimen stock certificate representing Common Stock, in-
           corporated by reference to Exhibit 4.1 to the IPO S-1
           Registration Statement.
   4.2     Rights Agreement dated as of December 21, 1995 between
           the Company and Harris Trust and Savings Bank, incorpo-
           rated by reference to Exhibit 1 to the Company's Regis-
           tration Statement on Form 8-A, filed December 26, 1995
           (the "1995 8-A").
   4.3     Certificate of Designations of the Class II Series A Ju-
           nior Participating Preferred Stock, incorporated by ref-
           erence to Exhibit 4.3 to the Company's Annual Report on
           Form 10-K for the year ended December 31, 1995 (the "1995
           10-K").
   4.4     Indenture between the Company and American National Bank
           and Trust Company, as Trustee, dated as of November 18,
           1996.
   4.5     Form of Note for the Company's convertible subordinated
           notes due 2001 (included in Exhibit 4.4).
   4.6     Indenture between the Company and American National Bank
           and Trust Company, as Trustee, dated as of December 15,
           1997.
   4.7     Form of Note for the Company's convertible subordinated
           notes due 2002 (included in Exhibit 4.6).
  10.1     1989 Stock Option Plan, incorporated by reference to Ex-
           hibit 10.1 to the IPO S-1 Registration Statement.*
  10.2     Forms of Stock Option Agreements, incorporated by refer-
           ence to Exhibit 10.2 to the IPO S-1 Registration State-
           ment.*
  10.3     Chief Executive Stock Option Plan, incorporated by refer-
           ence to Exhibit 10.3 to the IPO S-1 Registration State-
           ment.*
  10.4     Chief Executive Stock Option Agreement, incorporated by
           reference to Exhibit 10.4 to the IPO S-1 Registration
           Statement.*
  10.5     1991 Stock Option Plan, incorporated by reference to Ex-
           hibit 10.5 to the IPO S-1 Registration Statement.*
  10.6     Amended and Restated Employment Agreement between Andrew
           J. Filipowski and the Company, dated as of January 1,
           1996.*
  10.7     Amended and Restated Employment Agreement between Michael
           P. Cullinane and the Company, dated as of January 1,
           1996.*
  10.8     Amended and Restated Employment Agreement between Paul L.
           Humenansky and the Company, dated as of October 28,
           1997.*
</TABLE>
 
                                       27
<PAGE>
 
<TABLE>
<CAPTION>
  EXHIBIT
    NO.                           DESCRIPTION
  -------                         -----------
 <C>       <S>                                                         <C>
  10.9     Form of Indemnification Agreement between the Company and
           each of Andrew J. Filipowski, Michael P. Cullinane, Paul
           L. Humenansky, Casey G. Cowell, James E. Cowie, Steven D.
           Devick and Gian Fulgoni, incorporated by reference to Ex-
           hibit 10.10 to the IPO S-1 Registration Statement.*
 10.10     Forms of Affiliate Agreements, incorporated by reference
           to Exhibit 10.11 to the IPO S-1 Registration Statement.
 10.11     Form of Master Product License Agreement, incorporated by
           reference to Exhibit 10.11 to the 1995 10-K.
 10.12     Office Lease, dated May 6, 1992, between the Company and
           LaSalle National Trust N.A. as Trustee (the "Oakbrook
           Terrace Lease"), incorporated by reference to Exhibit
           10.20 to the Company's Annual Report on Form 10-K for the
           year ended December 31, 1992.
 10.13     PLATINUM technology, inc. 1993 Directors' Stock Option
           Plan, incorporated by reference to Exhibit 10.18 to the
           Company's Quarterly Report on Form 10-Q for the quarter
           ended June 30, 1994 (the "June 1994 10-Q").*
 10.14     PLATINUM technology, inc. 1994 Stock Incentive Plan, in-
           corporated by reference to Exhibit 10.19 to the June 1994
           10-Q.*
 10.15     Amendments to the PLATINUM technology, inc. 1994 Stock
           Incentive Plan, incorporated by reference to Exhibit 4.3
           to the Company's Registration Statement on Form S-8, Reg-
           istration No. 33-85798 (the "1994 S-8").*
 10.16     Form of Option Agreement under the PLATINUM technology,
           inc. 1993 Director's Stock Option Plan, incorporated by
           reference to Exhibit 4.4 to the 1994 S-8.*
 10.17     Form of Option Agreement under the PLATINUM technology,
           inc. 1994 Stock Incentive Plan, incorporated by reference
           to Exhibit 4.5 to the 1994 S-8.*
 10.18     Amendment Number One, dated as of May 3, 1993, to the
           Oakbrook Terrace Lease, incorporated by reference to Ex-
           hibit 10.19 to the 1994 10-K.
 10.19     Amendment Number Two, dated as of October 26, 1993, to
           the Oakbrook Terrace Lease, incorporated by reference to
           Exhibit 10.20 to the 1994 10-K.
 10.20     Amendment Number Three, dated as of December 22, 1994, to
           the Oakbrook Terrace Lease, incorporated by reference to
           Exhibit 10.21 to the 1994 10-K.
 10.21     Office Lease, dated August 8, 1994, between the Company
           and L.J. Sheridan & Co. as court appointed receiver, in-
           corporated by reference to Exhibit 10.22 to the 1994 10-
           K.
 10.22     PLATINUM technology, inc. Employee Incentive Compensation
           Plan, incorporated by reference to Exhibit 10.23 to the
           Company's Registration Statement on Form S-4, Registra-
           tion No. 33-94410 (the "1995 S-4").*
 10.23     Lease Agreement, dated as of March 30, 1995, between the
           Company and Lisle Property Venture, Inc. (the "March 1995
           Lisle Lease"), incorporated by reference to Exhibit 10.24
           to the 1995 S-4.
 10.24     First Amendment, dated as of September 15, 1995, to the
           March 1995 Lisle Lease, incorporated by reference to Ex-
           hibit 10.25 to the 1995 10-K.
 10.25     Second Amendment, dated as of September 15, 1995, to the
           March 1995 Lisle Lease, incorporated by reference to Ex-
           hibit 10.26 to the 1995 10-K.
 10.26     Third Amendment, dated as of January 3, 1996, to the
           March 1995 Lisle Lease, incorporated by reference to Ex-
           hibit 10.27 to the 1995 10-K.
</TABLE>
 
 
                                       28
<PAGE>
 
<TABLE>
<CAPTION>
  EXHIBIT
    NO.                           DESCRIPTION
  -------                         -----------
 <C>       <S>                                                         <C>
 10.27     Lease Agreement, dated as of October 31, 1995, between
           Lisle Property Venture, Inc. and the Company (the "Octo-
           ber 1995 Lisle Lease"), incorporated by reference to Ex-
           hibit 10.28 to the 1995 10-K.
 10.28     Amendment Number Four, dated as of March 9, 1995, to the
           Oakbrook Terrace Lease, incorporated by reference to Ex-
           hibit 10.29 to the 1995 10-K.
 10.29     Loan Agreement, dated as of December 31, 1995, between
           the Company and American National Bank and Trust Company
           of Chicago (the "Loan Agreement"), incorporated by refer-
           ence to Exhibit 10.30 to the 1995 10-K.
 10.30     First Amendment, dated as of December 31, 1996, to the
           Loan Agreement, incorporated by reference to Exhibit
           10.30 to the Company's Annual Report on Form 10-K for the
           year ended December 31, 1996 (the "1996 10-K").
 10.31     First Amendment, dated as of May 23, 1996, to the October
           31, 1995 Lisle Lease, incorporated by reference to Ex-
           hibit 10.31 to the 1996 10-K.
 10.32     Second Amendment, dated as of May 24, 1996, to the Octo-
           ber 31, 1995 Lisle Lease, incorporated by reference to
           Exhibit 10.32 to the 1996 10-K.
 10.33     Lease Agreement, dated as of July 17, 1996, between the
           Company and Oakbrook Tower Limited Partnership, incorpo-
           rated by reference to Exhibit 10.33 to the 1996 10-K.
 10.34     PLATINUM technology, inc. 1996 Stock Purchase Plan, in-
           corporated by reference to Exhibit 4.1 to the Company's
           Registration Statement on Form S-8, Registration No. 333-
           03284 (the "April 1996 S-8").*
 10.35     PLATINUM technology, inc. Amended and Restated 1993 Di-
           rectors' Stock Option Plan, incorporated by reference to
           Exhibit 4.2 to the April 1996 S-8.*
 10.36     Amendment to the PLATINUM technology, inc. 1994 Stock In-
           centive Plan, incorporated by reference to the Company's
           Quarterly Report on Form 10-Q for the quarter ended June
           30, 1996 (the "June 1996 10-Q").*
 10.37     First Amendment to the PLATINUM technology, inc. Employee
           Incentive Compensation Plan, incorporated by reference to
           the June 1996 10-Q.*
 10.38     Second Amendment to the PLATINUM technology, inc. Em-
           ployee Incentive Compensation Plan, incorporated by ref-
           erence to Exhibit 10.1 to the Company's Quarterly Report
           on Form 10-Q for the quarter ended June 30, 1997 (the
           "June 1997 10-Q").*
 10.39     Amendment Number Five, dated as of December 1, 1996, to
           the Oakbrook Terrace Lease, incorporated by reference to
           Exhibit 10.2 to the June 1997 10-Q.
 10.40     Amendment Number Six, dated as of April 30, 1997, to the
           Oakbrook Terrace Lease, incorporated by reference to Ex-
           hibit 10.3 to the June 1997 10-Q.
 10.41     Amendment Number Seven, dated as of September 16, 1997,
           to the Oakbrook Terrace Lease, incorporated by reference
           to Exhibit 10.42 to the Company's Registration Statement
           on Form S-1, Registration No. 333-40075.
 10.42     Credit Agreement, dated as of December 22, 1997, between
           the Company and American National Bank and Trust Company
           of Chicago, as Agent.
 12        Computation of Ratios of Earnings to Fixed Charges.
 21        Subsidiaries of the Company.
 23        Consent of KPMG Peat Marwick LLP with respect to the
           Company's financial statements and financial statement
           schedule.
</TABLE>
 
 
                                       29
<PAGE>
 
<TABLE>
<CAPTION>
  EXHIBIT
    NO.           DESCRIPTION
  -------         -----------
 <C>       <S>                        <C>
    27     Financial Data Schedule.
</TABLE>
--------
*  Management contract or compensatory plan or arrangement required to be
   included as an exhibit to this Annual Report on Form 10-K.
 
  (b) Reports on Form 8-K:
 
  The Company filed a Current Report on Form 8-K, dated October 17, 1997, to
report the Company's issuance of 364,396 shares of Common Stock pursuant to
its acquisition of ProMetrics. Such shares were issued pursuant to Regulation
S under the Act.
 
  The Company filed a Current Report on Form 8-K, dated December 11, 1997, to
report the Company's issuance of the 1997 Notes and the Company's issuance of
a press release relating thereto. The 1997 Notes were issued pursuant to the
exemption from registration provided by Section 4(2) of the Act, in a
transaction not involving any public offering. The Notes were then resold to
"qualified institutional buyers" (as defined in Rule 144A under the Act) in
compliance with Rule 144A and to persons outside the United States, other than
United States persons, pursuant to Regulation S under the Act.
 
                                      30
<PAGE>
 
                   PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                           AS OF DECEMBER 31,
                                                           --------------------
                         ASSETS                              1997       1996
   -----------------------------------------------------   ---------  ---------
<S>                                                        <C>        <C>
Current assets:
  Cash and cash equivalents..............................  $ 178,138  $ 140,783
  Short-term investment securities.......................     57,597     42,755
  Trade accounts receivable, net of allowances of $1,613
   and $2,503............................................    212,731    165,131
  Installment accounts receivable, net of allowances of
   $878 and $395.........................................     30,043     13,603
  Accrued interest and other current assets..............     32,132     11,729
  Refundable income taxes................................        547        629
                                                           ---------  ---------
    Total current assets.................................    511,188    374,630
                                                           ---------  ---------
Non-current investment securities........................     25,553      2,135
Property and equipment, net..............................     77,842     72,750
Purchased and developed software, net....................    116,717     82,438
Excess of cost over net assets acquired, net of
 accumulated amortization of $15,975 and $10,610.........     52,759     37,382
Non-current installment receivables, net of allowances of
 $1,616 and $816.........................................     21,912     21,665
Other assets.............................................     28,206     27,572
                                                           ---------  ---------
    Total assets.........................................  $ 834,177  $ 618,572
                                                           =========  =========
<CAPTION>
          LIABILITIES AND STOCKHOLDERS' EQUITY
   -----------------------------------------------------
<S>                                                        <C>        <C>
Current liabilities:
  Acquisition-related payables...........................  $  15,717  $   7,872
  Income taxes payable...................................      3,698      2,420
  Accounts payable.......................................     16,091     15,436
  Accrued commissions and bonuses........................     13,357     10,622
  Accrued royalties......................................      7,070      3,913
  Accrued restructuring costs............................      6,308         --
  Other accrued liabilities..............................     42,905     29,798
  Current maturities of long-term obligations............      1,319      3,246
  Deferred revenue.......................................    116,374     84,166
                                                           ---------  ---------
    Total current liabilities............................    222,839    157,473
                                                           ---------  ---------
Acquisition-related payables.............................     18,320      2,502
Deferred revenue.........................................     60,435     38,674
Deferred rent............................................      6,197      8,360
Accrued restructuring costs..............................     16,002        --
Long-term obligations, net of current maturities.........    266,824    115,803
                                                           ---------  ---------
    Total liabilities....................................    590,617    322,812
                                                           ---------  ---------
Stockholders' equity:
  Class II preferred stock, $.01 par value; authorized
   10,000, none issued and outstanding...................         --         --
  Subscribed Class II preferred stock, $.01 par value;
   1,768 shares subscribed in 1997.......................         18         --
  Common stock, $.001 par value; authorized 180,000,
   issued and outstanding 63,860 and 60,577..............         64         61
  Paid-in capital........................................    565,371    487,417
  Accumulated deficit....................................   (325,558)  (208,788)
  Unrealized holding gains on marketable securities......      8,262     17,805
  Foreign currency translation adjustment................     (4,597)      (735)
                                                           ---------  ---------
    Total stockholders' equity...........................    243,560    295,760
                                                           ---------  ---------
    Total liabilities and stockholders' equity...........  $ 834,177  $ 618,572
                                                           =========  =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-1
<PAGE>
 
                   PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                                 ------------------------------
                                                   1997       1996      1995
                                                 ---------  --------  ---------
<S>                                              <C>        <C>       <C>
Revenues:
  Software products............................. $ 357,223  $243,938  $ 158,597
  Maintenance...................................   125,245   102,364     76,498
  Professional services.........................   141,035   121,763     91,316
                                                 ---------  --------  ---------
    Total revenues..............................   623,503   468,065    326,411
                                                 ---------  --------  ---------
Costs and expenses:
  Professional services.........................   127,499   116,133     92,374
  Product development and support...............   187,383   155,277     94,027
  Sales and marketing...........................   228,387   182,597    113,978
  General and administrative....................    61,876    39,224     34,097
  Restructuring charges.........................    57,319       --         --
  Merger costs..................................     8,927     5,782     30,819
  Acquired in-process technology................    67,904    48,456     88,493
                                                 ---------  --------  ---------
    Total costs and expenses....................   739,295   547,469    453,788
                                                 ---------  --------  ---------
Operating loss..................................  (115,792)  (79,404)  (127,377)
Other income, net...............................    16,729     5,237      4,130
                                                 ---------  --------  ---------
Loss before income taxes........................   (99,063)  (74,167)  (123,247)
Income taxes....................................    18,721    (9,245)   (11,680)
                                                 ---------  --------  ---------
Net loss........................................ $(117,784) $(64,922) $(111,567)
                                                 =========  ========  =========
Net loss per share.............................. $   (1.90) $  (1.14) $   (2.50)
                                                 =========  ========  =========
Shares used in computing per share amounts......    62,042    56,968     44,671
</TABLE>
 
 
          See accompanying notes to consolidated financial statements.
 
                                      F-2
<PAGE>
 
                   PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                       YEARS ENDED DECEMBER 31,
                          ----------------------------------------------------
                                1997              1996              1995
                          ----------------  ----------------  ----------------
                          SHARES  AMOUNT    SHARES  AMOUNT    SHARES  AMOUNT
                          ------ ---------  ------ ---------  ------ ---------
<S>                       <C>    <C>        <C>    <C>        <C>    <C>
Preferred stock:
 Balance at beginning of
  year...................    --  $     --      --  $     --      --  $     --
 Stock subscribed........  1,768        18     --        --      --        --
                          ------ ---------  ------ ---------  ------ ---------
 Balance at end of year..  1,768 $      18     --  $     --      --  $     --
                          ====== =========  ====== =========  ====== =========
Common stock:
 Balance at beginning of
  year................... 60,577 $      61  54,598 $      55  39,670 $      40
 Exercise of stock
  options................    939         1     517         1     803         1
 Issuance of common
  stock under Stock
  Purchase Plan..........    882         1     197       --      --        --
 Issuance of common
  stock..................  1,461         1   5,265         5  14,125        14
 Conversion of
  subordinated notes.....      1       --      --        --      --        --
                          ------ ---------  ------ ---------  ------ ---------
 Balance at end of year.. 63,860 $      64  60,577 $      61  54,598 $      55
                          ====== =========  ====== =========  ====== =========
Paid-in capital:
 Balance at beginning of
  year...................        $ 487,417         $ 433,856         $ 191,194
 Exercise of stock
  options................            7,067             2,380             4,754
 Issuance of common
  stock under Stock
  Purchase Plan..........           11,540             1,801               --
 Issuance of common
  stock..................           17,514            49,515           237,907
 Preferred stock
  subscribed.............           41,848               --                --
 Amortization of shelf
  registration costs.....              (25)             (135)              --
 Conversion of
  subordinated notes.....               10               --                --
 Adjustment to conform
  fiscal years of pooled
  businesses.............              --                --                  1
                                 ---------         ---------         ---------
 Balance at end of year..        $ 565,371         $ 487,417         $ 433,856
                                 =========         =========         =========
Notes receivable:
 Balance at beginning of
  year...................        $     --          $    (515)        $    (333)
 Issuance of notes
  receivable.............              --                --               (200)
 Repayment of notes
  receivable.............              --                --                 18
 Reclassification to
  other assets...........              --                515               --
                                 ---------         ---------         ---------
 Balance at end of year..        $     --          $     --          $    (515)
                                 =========         =========         =========
Accumulated deficit:
 Balance at beginning of
  year...................        $(208,788)        $(143,771)        $ (30,958)
 Net loss................         (117,784)          (64,922)         (111,567)
 Adjustment for
  immaterial pooled
  businesses.............            1,014                45               --
 Other...................              --                --                (22)
 Adjustment to conform
  fiscal years of pooled
  businesses.............              --               (140)           (1,224)
                                 ---------         ---------         ---------
 Balance at end of year..        $(325,558)        $(208,788)        $(143,771)
                                 =========         =========         =========
Unrealized appreciation
 in marketable
 securities:
 Balance at beginning of
  year...................        $  17,805         $     --          $     --
 Change in unrealized
  holding gains, net of
  tax....................           (9,543)           17,805               --
                                 ---------         ---------         ---------
 Balance at end of year..        $   8,262         $  17,805         $     --
                                 =========         =========         =========
Foreign currency
 translation adjustment:
 Balance at beginning of
  year...................        $    (735)        $     588         $     183
 Translation adjustment..           (3,862)           (1,323)              405
                                 ---------         ---------         ---------
 Balance at end of year..        $  (4,597)        $    (735)        $     588
                                 =========         =========         =========
   Total stockholders'
    equity...............        $ 243,560         $ 295,760         $ 290,213
                                 =========         =========         =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-3
<PAGE>
 
                   PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                   YEARS ENDED DECEMBER 31,
                                                 ------------------------------
                                                   1997       1996      1995
                                                 ---------  --------  ---------
<S>                                              <C>        <C>       <C>
Cash flows from operating activities:
  Net loss.....................................  $(117,784) $(64,922) $(111,567)
  Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
    Depreciation and amortization..............     57,191    38,824     24,140
    Acquired in-process technology.............     67,904    48,456     88,493
    Write-off of fixed assets, capitalized
     software and other intangible assets in
     conjunction with the restructuring plan...     19,687       --         --
    Unrealized holding gains on marketable
     equity securities.........................    (12,581)     (920)       --
    Realized net gain on sales of investment
     securities................................     (7,566)   (1,032)      (332)
    Write-off of capitalized software in
     connection with product stabilization and
     mergers...................................        --        654        942
    Noncash compensation.......................        --        --          78
  Sales of trading securities..................      9,489       --         --
Changes in assets and liabilities, net of
 acquisitions:
  Trade and installment receivables............    (62,316)  (67,219)   (53,845)
  Deferred income taxes........................     14,580   (16,337)   (13,000)
  Accrued interest and other current assets ...    (10,394)   (1,170)    (3,134)
  Accounts payable and accrued liabilities.....     32,547    (7,080)     6,888
  Deferred revenue.............................     53,969    59,196     20,325
  Income taxes payable.........................      1,092       993      2,615
  Other........................................    (13,232)    6,657     16,073
                                                 ---------  --------  ---------
      Net cash provided by (used in) operating
       activities..............................     32,586    (3,900)   (22,324)
                                                 ---------  --------  ---------
Cash flows from investing activities:
  Purchases of investment securities...........    (66,957)  (18,797)   (61,484)
  Sales of investment securities...............         87    30,223     75,519
  Maturities of investment securities..........     24,383     5,846     10,753
  Purchases of property and equipment..........    (26,940)  (35,542)   (39,435)
  Purchased and developed software.............    (63,781)  (41,279)   (20,742)
  Payments for acquisitions....................    (19,338)  (17,853)  (103,085)
  Other assets.................................     (1,365)   (3,749)      (482)
                                                 ---------  --------  ---------
      Net cash used in investing activities....   (153,911)  (81,151)  (138,956)
                                                 ---------  --------  ---------
Cash flows from financing activities:
  Proceeds from issuance of common stock, net
   of issuance costs...........................        --        --     194,420
  Proceeds from issuance of convertible notes,
   net of issuance costs.......................    144,967   110,783        --
  Proceeds from exercise of stock options and
   Stock Purchase Plan.........................     18,609     4,182      4,144
  Short-term borrowings........................        --      1,115      8,205
  Payments on borrowings.......................     (4,896)   (5,915)    (7,331)
  Other........................................        --        --        (256)
                                                 ---------  --------  ---------
      Net cash provided by financing
       activities..............................    158,680   110,165    199,182
                                                 ---------  --------  ---------
Adjustment to conform fiscal years of pooled
 businesses....................................        --       (140)    (2,203)
                                                 ---------  --------  ---------
Net increase in cash and cash equivalents......     37,355    24,974     35,699
Cash and cash equivalents at beginning of year.    140,783   115,809     80,110
                                                 ---------  --------  ---------
Cash and cash equivalents at end of year.......  $ 178,138  $140,783  $ 115,809
                                                 =========  ========  =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                      F-4
<PAGE>
 
                  PLATINUM TECHNOLOGY, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Nature of Operations
 
  PLATINUM technology, inc. and its subsidiaries (collectively, the "Company"
or "PLATINUM") develop, market and support software products, and provide
related professional services, that help organizations manage and improve
their information technology ("IT") infrastructures, which consist of data,
systems and applications. The Company's products and services help IT
departments, primarily in large and data-intensive organizations, minimize
risk, improve service levels and leverage information to make better business
decisions. The Company's products typically perform fundamental functions such
as automating operations, maintaining the operating efficiency of systems and
applications and ensuring data access and integrity. The Company currently
develops software products through its four business units: database
management, systems management, application infrastructure management and data
warehousing and decision support. The Company markets and supports its
products and services principally through its own sales organization,
including an international network of wholly-owned subsidiaries.
 
 Use of Estimates
 
  In preparing the consolidated financial statements in conformity with
generally accepted accounting principles, the Company's management makes
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 revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
 
 Principles of Consolidation
 
  The consolidated financial statements include the accounts of PLATINUM
technology, inc. and its subsidiaries. All intercompany accounts and
transactions are eliminated in consolidation.
 
 Revenue Recognition
 
  Revenues from software product sales of perpetual and fixed-term license
agreements are recognized upon product delivery and customer acceptance, when
all significant contractual obligations are satisfied and the collection of
the resulting receivables is reasonably assured. Software product sales under
extended payment terms are discounted to present value. Revenues from
maintenance fees implicit in software product sales or separately priced
maintenance agreements are recognized on a straight-line basis over the
maintenance period.
 
  Professional service revenues are derived from the Company's consulting
services business and educational programs. These revenues are comprised of
both time and material contracts and fixed-price contracts. Time and material
contract revenues are recognized as services are performed. Fixed-price
contract revenues are recognized based on the percentage-of-completion method.
 
 Cash Equivalents and Investment Securities
 
  Cash equivalents are comprised of highly liquid investments with original
maturities of three months or less. Investment securities consist primarily of
state and municipal bonds with original maturities generally ranging from four
to thirty years, corporate bonds with original maturities of less than one
year and marketable equity securities. The Company classifies its investment
securities as either available-for-sale or trading and reports them at fair
value.
 
  Available-for-sale securities represent those securities that do not meet
the classification of held-to-maturity and are not actively traded. Trading
securities represent those securities which the Company intends to buy or
 
                                      F-5
<PAGE>
 
sell in the near term for the purpose of generating profits on increases in
market values. For available-for-sale securities, unrealized holding gains and
losses, net of income taxes, are reported as a separate component of
stockholders' equity. For trading securities, unrealized holding gains and
losses are reflected in pre-tax earnings. For securities transferred from
available-for-sale to the trading classification, any unrealized holding gains
or losses at the date of transfer are recognized in pre-tax earnings
immediately.
 
 Property and Equipment
 
  Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives, generally three
to seven years, of the various classes of property and equipment. Amortization
of leasehold improvements is computed over the shorter of the lease term or
the estimated useful life of the asset.
 
 Purchased and Developed Software
 
  Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed." Costs associated
with the planning and designing phase of software development, including
coding and testing activities necessary to establish technological
feasibility, are classified as product development and expensed as incurred.
Once technological feasibility has been determined, additional costs incurred
in development, including coding, testing and documentation, are capitalized.
 
  Amortization of purchased and developed software is provided on a product-
by-product basis over the estimated economic life of the software, generally
four years, using the straight-line method. This method generally results in
greater amortization expense per year than the method based on the ratio of
current year gross product revenue to current and anticipated future gross
product revenue. Amortization commences when a product is available for
general release to customers. Unamortized capitalized costs determined to be
in excess of the net realizable value of a product are expensed at the date of
such determination.
 
 Excess of Cost Over Net Assets Acquired
 
  Excess of cost over net assets acquired is amortized on a straight-line
basis over the expected period to be benefited, generally seven to 10 years.
Adjustments to the carrying value of excess of cost over net assets acquired
are made if the sum of expected future net cash flows from the business
acquired is less than book value.
 
 Income Taxes
 
  Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the period
of enactment.
 
 Fair Value of Financial Instruments and Long-Lived Assets
 
  The Company has reviewed the following financial instruments and determined
that their fair values approximated their carrying values as of December 31,
1997: cash and cash equivalents; trade and installment receivables; accrued
interest and other current assets; refundable income taxes; acquisition-
related payables; accounts payable and other accrued liabilities; and long-
term obligations, excluding convertible subordinated notes. Investment
securities are discussed in Note 3, and convertible subordinated notes are
discussed in Note 12.
 
  On January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
under which the Company has reviewed long-lived assets
 
                                      F-6
<PAGE>
 
and certain intangible assets and determined that their carrying values as of
December 31, 1997 are recoverable in future periods.
 
 Earnings Per Share
 
  In the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
Per Share," which established new methods for computing and presenting
earnings per share ("EPS") and replaced the presentation of primary and fully-
diluted EPS with basic ("Basic") and diluted EPS. Basic earnings per share is
based on the weighted average number of shares outstanding and excludes the
dilutive effect of unexercised common stock equivalents. Diluted earnings per
share is based on the weighted average number of shares outstanding and
includes the dilutive effect of unexercised common stock equivalents. Because
the Company reported a net loss for the years ended December 31, 1997, 1996
and 1995, per share amounts have been presented under the Basic method only.
 
  Had the Company reported net earnings for the years ended December 31, 1997,
1996 and 1995, the weighted average number of shares outstanding would have
potentially been diluted by the following common equivalent securities (not
assuming the effects of applying the treasury stock method to outstanding
stock options or the if-converted method to convertible securities):
 
<TABLE>
<CAPTION>
                                                   1997       1996      1995
                                                ---------- ---------- ---------
      <S>                                       <C>        <C>        <C>
      Stock options............................ 11,861,865 10,143,622 8,404,911
      Convertible subordinated notes (November
       1996)...................................  8,243,010  8,243,727       --
      Convertible subordinated notes (December
       1997)...................................  4,160,600        --        --
                                                ---------- ---------- ---------
                                                24,265,475 18,387,349 8,404,911
                                                ========== ========== =========
</TABLE>
 
  Additionally, net earnings applicable to common stockholders for the years
ended December 31, 1997 and 1996 would have been increased by interest
expense, net of income taxes, related to the convertible subordinated notes of
$5,870,000 and $501,000, respectively.
 
 Foreign Currency Translation and Transactions
 
  The financial position and results of operations of the Company's foreign
subsidiaries are measured using the local currency as the functional currency.
Accordingly, assets and liabilities are translated into U.S. dollars using
current exchange rates as of the balance sheet date. Revenues and expenses are
translated at average exchange rates prevailing during the year. Translation
adjustments arising from differences in exchange rates are included as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statement of
operations.
 
 Derivative Financial Instruments
 
  In the ordinary course of business, the Company enters into forward exchange
contracts to minimize the short-term impact of foreign currency fluctuations
on assets and liabilities denominated in currencies other than the functional
currency of the reporting entity. All foreign exchange forward contracts
designated and effective as hedges of firm commitments are treated as hedges,
as required by generally accepted accounting principles.
 
  Forward exchange contracts are reported at fair value within short-term
investment securities. Fair values of forward exchange contracts are
determined using published rates. Gains and losses on the forward exchange
contracts are included in other income and expense and offset foreign exchange
gains and losses from the revaluation of intercompany balances denominated in
currencies other than the functional currency of the reporting entity.
Realized and unrealized holding gains and losses on the forward exchange
contracts are reported within operating activities in the statement of cash
flows.
 
                                      F-7
<PAGE>
 
 Stock-Based Compensation
 
  On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-
Based Compensation," which permits entities to recognize the compensation
expense associated with the fair value of all stock-based awards on the date
of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and provide pro forma net income and earnings
per share disclosures as if the fair value method defined in SFAS No. 123 had
been applied. The Company has elected to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosures of SFAS No. 123.
 
 Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
 
  On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings. The Company sells installment
receivables to third party finance companies in the normal course of business.
During 1997, all such transactions were accounted for as sales in accordance
with SFAS No. 125.
 
 Supplemental Cash Flow Disclosure
 
  Income tax refunds received by the Company amounted to $524,000, $307,000
and $933,000 in 1997, 1996 and 1995, respectively. Cash paid for income taxes
in 1997, 1996 and 1995 was $1,173,000, $2,179,000 and $987,000, respectively.
Cash paid for interest in 1997, 1996 and 1995 was $8,419,000, $787,000 and
$824,000, respectively.
 
 Reclassifications
 
  Certain prior year amounts have been reclassified to conform to the 1997
presentation.
 
2. ACQUISITIONS
 
 Poolings of Interests
 
  On June 15, 1995, the Company acquired all of the outstanding capital stock
of Software Interfaces, Inc. ("SII"), a leading provider of data access,
reporting and data conversion utilities for relational and non-relational
database management systems, in exchange for 1,085,450 shares of the Company's
Common Stock, $.001 par value (the "Common Stock"), which had a market value,
based upon the trading price of the Common Stock on the Nasdaq National Market
("Market Value"), of approximately $20,000,000 at the time of the acquisition.
In addition, the Company assumed stock options which converted into options to
purchase 14,377 shares of Common Stock.
 
  On August 9, 1995, the Company acquired all of the outstanding capital stock
and warrants of Answer Systems, Inc. ("Answer"), a pioneer in client/server
help desk solutions, in exchange for 1,567,946 shares of Common Stock, which
had a Market Value of approximately $38,000,000 at the time of the
acquisition. In addition, the Company assumed stock options which converted
into options to purchase 42,176 shares of Common Stock.
 
  On August 16, 1995, the Company acquired all of the outstanding capital
stock of Locus Computing Corporation ("Locus"), a leading provider of
consulting services for information technology users and suppliers, in
exchange for 1,452,445 shares of Common Stock, which had a Market Value of
approximately $33,000,000 at the time of the acquisition. In addition, the
Company assumed stock options which converted into options to purchase 231,905
shares of Common Stock.
 
  On August 23, 1995, the Company acquired all of the outstanding capital
stock of Altai, Inc. ("Altai"), a vendor of integrated automated operations
software for open computing, in exchange for 1,098,295 shares of
 
                                      F-8
<PAGE>
 
Common Stock, which had a Market Value of approximately $23,000,000 at the
time of the acquisition. In addition, the Company assumed stock options which
converted into options to purchase 52,696 shares of Common Stock.
 
  On August 25, 1995, the Company acquired all of the outstanding capital
stock of Trinzic Corporation ("Trinzic"), a major provider of data warehousing
and open systems tools and services, in exchange for 6,654,484 shares of
Common Stock, which had a Market Value of approximately $150,000,000 at the
time of the acquisition. In addition, the Company assumed stock options which
converted into options to purchase 620,948 shares of Common Stock.
 
  On November 17, 1995, the Company acquired all of the outstanding capital
stock of Softool Corporation ("Softool"), a leading provider of software
change and configuration management technology, in exchange for 1,452,708
shares of Common Stock, which had a Market Value of approximately $25,000,000
at the time of the acquisition.
 
  On February 8, 1996, the Company acquired all of the outstanding capital
stock of Prodea Software Corporation ("Prodea"), a leading provider of data
warehousing and business intelligence tools, in exchange for 2,126,913 shares
of Common Stock, which had a Market Value of approximately $36,000,000 at the
time of the acquisition. In addition, the Company assumed stock options which
converted into options to purchase 212,427 shares of Common Stock.
 
  On March 26, 1996, the Company acquired all of the outstanding capital stock
of Paradigm Systems Corporation ("Paradigm"), a leading provider of
information technology consulting services, in exchange for 762,503 shares of
Common Stock, which had a Market Value of approximately $12,800,000 at the
time of the acquisition. In addition, the Company assumed stock options which
converted into options to purchase 87,912 shares of Common Stock.
 
  On March 29, 1996, the Company acquired all of the outstanding capital stock
of Axis Systems International, Inc. ("Axis"), a leading provider of
information technology consulting services, in exchange for 319,926 shares of
Common Stock, which had a Market Value of approximately $6,300,000 at the time
of the acquisition. In addition, the Company assumed stock options which
converted into options to purchase 59,986 shares of Common Stock.
 
  On January 31, 1997, the Company acquired all of the outstanding capital
stock of Australian Technology Resources Pty Limited ("ATR"), a leading
provider of information technology consulting services, in exchange for
313,784 shares of Common Stock, which had a Market Value of approximately
$5,000,000 at the time of the acquisition.
 
  On February 28, 1997, the Company acquired all of the outstanding capital
stock of I&S Informationstechnik and Services GmbH ("I&S"), a leading provider
of information technology consulting services, in exchange for 1,089,867
shares of Common Stock, which had a Market Value of approximately $17,200,000
at the time of the acquisition.
 
  Each of the aforementioned transactions was accounted for as a pooling of
interests and, accordingly, the consolidated financial statements have been
restated as if the combining companies had been combined for all periods
presented. Merger costs relating to the acquisitions consummated in 1997, 1996
and 1995 amounted to $8,927,000, $5,782,000 and $30,819,000, respectively, of
which $3,155,000, $353,000 and $1,942,000, were included in other accrued
liabilities at December 31, 1997, 1996 and 1995, respectively. These costs
included investment banking and other professional fees, write-downs of
certain assets, employee severance payments, costs of closing excess office
facilities and various other expenses.
 
  The following information reconciles total revenues and net loss of PLATINUM
technology, inc. as previously reported in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 with
 
                                      F-9
<PAGE>
 
the amounts presented in the accompanying consolidated statements of
operations for the years ended December 31, 1996 and 1995, as well as separate
results of operations for 1997 of ATR and I&S during the periods preceding
their acquisition. The 1997 results presented for ATR represent the one-month
period ended January 31, 1997. The 1997 results for I&S represent the two-
month period ended February 28, 1997.
 
<TABLE>
<CAPTION>
                           1997                1996                1995
                    ------------------- ------------------- ------------------
                                                                        NET
                             NET INCOME          NET INCOME           INCOME
                    REVENUES   (LOSS)   REVENUES   (LOSS)   REVENUES  (LOSS)
                    -------- ---------- -------- ---------- -------- ---------
   <S>              <C>      <C>        <C>      <C>        <C>      <C>
   PLATINUM(1).....                     $439,190  $(67,962) $304,676 $(111,933)
   ATR.............  $  511    $ (56)      9,132       142     9,492       301
   I&S.............   2,627      109      19,743     2,898    12,243        65
                                        --------  --------  -------- ---------
       Total.......                     $468,065  $(64,922) $326,411 $(111,567)
                                        ========  ========  ======== =========
</TABLE>
--------
(1) Represents the historical results of PLATINUM technology, inc. without
    considering the effect of the poolings of interests consummated during
    1997. All merger costs and acquired in-process technology charges are
    reflected in the historical results of PLATINUM.
 
  The consolidated statement of operations for the year ended December 31,
1996 reflects the impact of ATR's operating results for the six months ended
June 30, 1996, which are also included in the year ended December 31, 1995
statement of operations due to differences in reporting periods relative to
PLATINUM. The revenues and net income of ATR included more than once were
$5,061,000 and $140,000, respectively.
 
  The consolidated statement of operations for the year ended December 31,
1995 reflects the impact of Trinzic's operating results for the quarter ended
March 31, 1995, which are also included in the year ended December 31, 1994
statement of operations due to differences in reporting periods relative to
PLATINUM. The revenues and net income of Trinzic included more than once were
$12,553,000 and $215,000, respectively.
 
  The consolidated statement of operations for the year ended December 31,
1995 reflects the impact of certain operating results included more than once,
due to the differences in reporting periods of Altai and Locus relative to
that of PLATINUM. The revenues and net income of Altai included more than once
were $2,514,000 and $441,100, respectively. The revenue and net income of
Locus included more than once were $3,197,000 and $568,000, respectively.
 
  During 1996, the Company consummated an immaterial acquisition accounted for
as a pooling of interests. The Company did not restate the consolidated
financial statements to reflect the results of this entity for the periods
preceding the acquisition. As a result, the retained earnings of this entity
were recorded as of the acquisition date, causing a $45,000 adjustment to the
Company's accumulated deficit in 1996. This adjustment is reflected in the
consolidated statement of stockholders' equity.
 
  On November 26, 1997, the Company consummated an immaterial acquisition
accounted for as a pooling of interests. The Company acquired all of the
outstanding capital stock of Vayda Consulting, Inc. ("Vayda"), a leading
provider of information technology consulting services, in exchange for
580,231 shares of Common Stock, which had a Market Value of approximately
$15,300,000 at the time of the acquisition. In addition, the Company assumed
stock options which converted into options to purchase 67,937 shares of Common
Stock. The Company did not restate the consolidated financial statements to
reflect the results of Vayda for the periods preceding the acquisition. As a
result, the retained earnings of Vayda were recorded as of the acquisition
date, causing an adjustment of $1,014,000 to the Company's accumulated deficit
in 1997. This adjustment is reflected in the consolidated statement of
stockholders' equity.
 
 Purchase Transactions
 
  The Company has also made a number of acquisitions that have been accounted
for under the purchase method. Accordingly, purchase prices have been
allocated to identifiable tangible and intangible assets acquired
 
                                     F-10
<PAGE>
 
and liabilities assumed based on their estimated fair values. Amounts
allocated to acquired in-process technology have been expensed at the time of
acquisition. Excess of cost over net assets acquired is amortized on a
straight-line basis over the expected period to be benefited, generally seven
to ten years. The consolidated statements of operations reflect the results of
operations of the purchased companies since the effective dates of the
acquisitions.
 
  To determine the fair market value of the acquired in-process technology,
the Company considered the three traditional approaches of value: the cost
approach, the market approach and the income approach. The Company relied
primarily on the income approach, whereupon fair market value is a function of
the future revenues expected to be generated by an asset, net of all allocable
expenses and charges for the use of contributory assets. The future net
revenue stream is discounted to present value based upon the specific level of
risk associated with achieving the forecasted asset earnings. The income
approach focuses on the income producing capability of the acquired assets and
best represents the present value of the future economic benefits expected to
be derived from these assets.
 
  The Company determined that the acquired in-process technologies had not
reached technological feasibility based on the status of design and
development activities that required further refinement and testing. The
development activities required to complete the acquired in-process
technologies included additional coding, cross-platform porting and
validation, quality assurance procedures and customer beta testing.
 
  The acquired technologies represent unique and emerging technologies, the
application of which is limited to the Company's IT infrastructure strategy.
Accordingly, these acquired technologies have no alternative future use.
 
  Effective March 1995, the Company acquired all of the outstanding capital
stock of SQL Software Corporation ("SQL"), a provider of Windows-based
development tools for managing multiple relational databases, for
approximately $2,000,000; the assets of Viatech Development, Inc. ("Viatech"),
a provider of electronic distribution tools, for approximately $5,300,000; and
the assets of BrownStone Solutions, Inc. ("BrownStone"), a vendor of
repository technology, for approximately $6,300,000. Also effective March
1995, the Company acquired all of the outstanding capital stock of RELTECH
Group, Inc. ("Reltech"), a vendor of repository technology, for approximately
$9,800,000 in cash plus 318,453 shares of Common Stock, which had a Market
Value of approximately $7,500,000 at the time of the acquisition.
 
  Effective July 1995, the Company acquired all of the outstanding capital
stock of Advanced Software Concepts, Inc. ("ASC"), a leading provider of
distributed storage network management solutions for heterogeneous
environments, for approximately $7,000,000.
 
  Effective November 1995, the Company acquired substantially all of the
assets of ProtoSoft, Inc. ("ProtoSoft"), a pioneer in portable, object-
oriented analysis and design software for building enterprise-wide
applications and the developer of Paradigm Plus, for approximately $30,000,000
in cash plus 582,121 shares of Common Stock, which had a Market Value of
approximately $10,000,000 at the time of the acquisition.
 
  Effective December 1995, the Company purchased all of the outstanding
capital stock of AIB Software Corporation ("AIB"), a leader in multi-platform
application development and testing tools, for approximately $2,200,000 in
cash plus 478,045 shares of Common Stock, which had a Market Value of
approximately $9,000,000 at the time of the acquisition; Protellicess
Software, Inc. ("Protellicess"), a leader in enterprise project and process
management software, in exchange for 822,077 shares of Common Stock, which had
a Market Value of approximately $15,000,000 at the time of the acquisition;
and BMS Computer, Inc. ("BMS"), a leader in integrated chargeback systems that
provide job accounting, chargeback, cost analysis and resource reporting for
heterogeneous environments, for approximately $6,900,000. In conjunction with
the acquisitions of AIB and Protellicess, the Company assumed stock options
which converted into options to purchase 116,144 and 128,320 shares of Common
Stock, respectively.
 
                                     F-11
<PAGE>
 
  During 1995, the Company also acquired certain software technologies with an
aggregate purchase price of approximately $10,227,000.
 
  Internationally, during 1995, the Company acquired Echo-Soft Technologies
Sarl, a software sales and consulting firm located in France, Krystal Software
SA, an international affiliate of the Company in France, and Sequel UK Ltd.,
an international affiliate of the Company in the United Kingdom. The Company
also terminated its agreements with four other international affiliates and
established wholly-owned subsidiaries for these operations. The aggregate
price for these transactions was approximately $11,563,000.
 
  Effective January 1996, the Company acquired all of the outstanding capital
stock of Advanced Systems Technologies, Inc. ("AST"), a leading developer of
performance management tools, in exchange for approximately $445,000 in cash
plus 344,640 shares of Common Stock, which had a Market Value of approximately
$5,800,000 at the time of the acquisition.
 
  Effective July 1996, the Company acquired all of the outstanding capital
stock of Software Alternatives, Inc. (d/b/a System Software Alternatives)
("Software Alternatives"), a leading provider of production scheduling
software, for approximately $1,900,000. Also effective July 1996, the Company
acquired all of the outstanding capital stock of Grateful Data, Inc. (d/b/a
TransCentury Data Systems) ("Grateful Data"), a Year 2000 solution provider,
for $100,000 in cash plus 333,333 shares of Common Stock, which had a Market
Value of approximately $4,000,000 at the time of the acquisition.
 
  Effective December 1996, the Company acquired all of the outstanding capital
stock of VREAM, Inc. ("VREAM"), a leading provider of virtual reality software
for the World Wide Web and other interactive environments, in exchange for
760,383 shares of Common Stock, which had a Market Value of approximately
$10,300,000 at the time of the acquisition. In addition, the Company assumed
stock options which converted into options to purchase 70,257 shares of Common
Stock.
 
  During 1996, the Company also acquired certain software technologies for an
aggregate purchase price of approximately $3,513,000.
 
  Internationally, effective December 1996, the Company acquired substantially
all of the assets of the Access Manager business unit of the High Performance
Systems division of International Computers Limited ("Access Manager"), a
leading provider of single-sign-on security computer software for enterprise
computing technology, in exchange for 2,286,222 shares of Common Stock, which
had a Market Value of approximately $30,000,000 at the time of the
acquisition.
 
  Effective February 1997, the Company acquired all of the outstanding capital
stock of GEJAC, Inc. ("GEJAC"), a leading provider of UNIX and NT charge-back
software, in exchange for 412,801 shares of Common Stock, which had a Market
Value of approximately $6,800,000 at the time of the acquisition.
 
  Internationally, effective October 1997, the Company acquired all of the
outstanding capital stock of ProMetrics Group Limited ("ProMetrics"), a
leading provider of productivity management software, in exchange for
approximately $8,000,000 in cash plus 364,396 shares of Common Stock, which
had a Market Value of approximately $9,500,000 at the time of the acquisition,
plus contingent consideration of approximately $11,000,000, as specified in
the acquisition agreement. The Company's issuance of Common Stock was
substantially used to retire approximately $7,000,000 of assumed debt under
the acquisition agreement.
 
  On December 23, 1997, the Company and Intel Corporation ("Intel") entered
into certain agreements providing for the sale and license to the Company by
Intel of certain product technologies and the payment to the Company by Intel
of certain cash consideration. In exchange, the Company agreed to issue to
Intel 1,768,421 shares of the Company's Class II Series B Preferred Stock
("Preferred Stock"), which had a Market Value of
 
                                     F-12
<PAGE>
 
approximately $42,000,000 on the date of the agreement, and to distribute
certain products manufactured by Intel. Additionally, the Company licensed
certain product technologies to Intel.
 
  During 1997, the Company also acquired certain other software technologies
for an aggregate purchase price of approximately $6,800,000.
 
  The following unaudited pro forma summary presents the Company's results of
operations as if the acquisitions accounted for as purchases had occurred at
the beginning of each period. This summary is provided for informational
purposes only. It does not necessarily reflect the actual results that would
have occurred had the acquisitions been made as of those dates or of results
that may occur in the future.
 
<TABLE>
<CAPTION>
                                                              1997       1996
                                                            ---------  --------
                                                              (IN THOUSANDS,
                                                                  EXCEPT
                                                             PER SHARE DATA)
      <S>                                                   <C>        <C>
      Revenues............................................. $ 632,150  $485,456
      Net loss.............................................  (120,431)  (73,853)
      Net loss per share...................................     (1.92)    (1.27)
</TABLE>
 
  The Company estimates aggregate payments for acquisition-related payables in
connection with the acquisitions described above to be $15,717,000,
$17,682,000 and $638,000 for the years ended December 31, 1998, 1999 and 2000,
respectively.
 
  The Company may be required to make additional payments in future years to
various former owners of acquired businesses based upon the attainment of
certain operating results by such businesses. The amount of these payments was
not determinable at December 31, 1997. Additional payments will be charged to
compensation expense or recorded as an adjustment to the respective purchase
price in the periods in which such payments are determinable.
 
3. INVESTMENT SECURITIES
 
  At December 31, 1997, the Company classified its marketable debt and equity
securities as either available-for-sale or trading. Available-for-sale
securities represent those securities that do not meet the classification of
held-to-maturity and are not actively traded. Trading securities represent
those securities which the Company intends to buy or sell in the near term for
the purpose of generating profits on increases in market values. At December
31, 1997, net unrealized holding gains from available-for-sale securities of
$13,770,000, reduced by income taxes of approximately $5,508,000, were
included as a separate component of stockholders' equity. For the year ended
December 31, 1997, available-for-sale securities amounting to $24,972,000 were
reclassified to trading securities. The Company reclassified its available-
for-sale securities to trading securities during 1997, because the Company
intended to sell the securities at various dates in the near future to benefit
from increases in the market price of those securities. Unrealized holding
gains from reclassified securities of approximately $19,829,000, previously
reported as a separate component of stockholders' equity in the amount of
$11,897,000 (net of income taxes), were recognized in pre-tax earnings for the
year ended December 31, 1997. The Company sold a portion of its trading
securities during 1997 and consequently reclassified the corresponding
unrealized gains to realized gains. For the year ended December 31, 1997, the
Company reported unrealized holding gains of approximately $12,581,000 in pre-
tax earnings.
 
  During 1996, certain cost-basis equity investments became marketable equity
securities and were reclassified as either available-for-sale or trading. The
Company owns equity interests in certain technology companies that executed
initial public offerings during 1996. As a result, the Company reclassified
these investments based upon future trading intentions. The cost and
unrealized gain, net of income taxes, on the investment transferred to the
available-for-sale classification were approximately $8,383,000 and
$17,805,000, respectively. The cost and unrealized gain on the investment
transferred to the trading classification were approximately $1,125,000 and
$920,000, respectively.
 
                                     F-13
<PAGE>
 
  The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and aggregate fair value of investment securities at December 31, 1997
were as follows:
 
<TABLE>
<CAPTION>
                                               DECEMBER 31, 1997
                               -------------------------------------------------
                                             GROSS         GROSS
                               AMORTIZED  UNREALIZED     UNREALIZED
                                 COST    HOLDING GAINS HOLDING LOSSES FAIR VALUE
                               --------- ------------- -------------- ----------
                                                (IN THOUSANDS)
      <S>                      <C>       <C>           <C>            <C>
      Current:
        Available-for-sale--
          U.S. Government
           securities.........  $ 7,571     $     2        $ --        $ 7,573
          State and municipal
           bonds..............    1,356           4          (36)        1,324
          Corporate bonds.....   13,812          26           (2)       13,836
          Marketable equity
           securities.........    3,240      13,770          --         17,010
                                -------     -------        -----       -------
                                 25,979      13,802          (38)       39,743
                                -------     -------        -----       -------
        Trading securities--
          Marketable equity
           securities.........    4,338      13,867         (351)       17,854
                                -------     -------        -----       -------
                               $30,317      $27,669        $(389)      $57,597
                                =======     =======        =====       =======
      Non-current:
        Available-for-sale--
          State and municipal
           bonds..............  $25,498     $    55        $ --        $25,553
                                =======     =======        =====       =======
</TABLE>
 
  The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and aggregate fair value of investment securities at December 31, 1996
were as follows:
 
<TABLE>
<CAPTION>
                                               DECEMBER 31, 1996
                               -------------------------------------------------
                                             GROSS         GROSS
                               AMORTIZED  UNREALIZED     UNREALIZED
                                 COST    HOLDING GAINS HOLDING LOSSES FAIR VALUE
                               --------- ------------- -------------- ----------
                                                (IN THOUSANDS)
      <S>                      <C>       <C>           <C>            <C>
      Current:
        Available-for-sale--
          State and municipal
           bonds..............  $   402     $     1         $--        $   403
          Corporate bonds.....    2,002         --            (1)        2,001
          Marketable equity
           securities.........    8,383      29,923          --         38,306
                                -------     -------         ----       -------
                                 10,787      29,924           (1)       40,710
                                -------     -------         ----       -------
        Trading securities--
          Marketable equity
           securities.........    1,125         920          --          2,045
                                -------     -------         ----       -------
                                $11,912     $30,844         $ (1)      $42,755
                                =======     =======         ====       =======
      Non-current:
        Available-for-sale--
          State and municipal
           bonds..............  $ 2,122     $    51         $(38)      $ 2,135
                                =======     =======         ====       =======
</TABLE>
 
                                     F-14
<PAGE>
 
  The contractual maturities of debt securities at December 31, 1997 were as
follows:
 
<TABLE>
<CAPTION>
                                                                    FAIR VALUE
                                                                  --------------
                                                                  (IN THOUSANDS)
      <S>                                                         <C>
      Due within one year........................................    $22,733
      Due after one year through five years......................        416
      Due after five years.......................................     25,137
                                                                     -------
                                                                     $48,286
                                                                     =======
</TABLE>
 
  Using the specific identification method, the gross realized gains and gross
realized losses on the sale of available-for-sale securities were
approximately $44,000 and $0, respectively, for the year ended December 31,
1997, $1,032,000 and $0, respectively, for the year ended December 31, 1996
and $467,000 and $(135,000), respectively, for the year ended December 31,
1995. For the year ended December 31, 1997, the Company also sold investments
classified as trading securities. Gross realized gains and gross realized
losses related to these sales were $7,522,000 and $0, respectively.
 
4. PROPERTY AND EQUIPMENT
 
  Property and equipment are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                                1997     1996
                                                              -------- --------
                                                               (IN THOUSANDS)
      <S>                                                     <C>      <C>
      Furniture and fixtures................................. $ 28,070 $ 26,568
      Computers and software.................................   65,717   62,338
      Transportation.........................................   11,445    8,117
      Leasehold improvements.................................   26,498   20,780
                                                              -------- --------
                                                               131,730  117,803
      Less accumulated depreciation and amortization.........   53,888   45,053
                                                              -------- --------
                                                              $ 77,842 $ 72,750
                                                              ======== ========
</TABLE>
 
5. PURCHASED AND DEVELOPED SOFTWARE
 
  Purchased and developed software consists of the following:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                                1997     1996
                                                              -------- --------
                                                               (IN THOUSANDS)
      <S>                                                     <C>      <C>
      Purchased software..................................... $ 47,238 $ 34,618
      Software development costs.............................  141,690   89,400
                                                              -------- --------
                                                               188,928  124,018
      Less accumulated amortization..........................   72,211   41,580
                                                              -------- --------
                                                              $116,717 $ 82,438
                                                              ======== ========
</TABLE>
 
  During the years ended December 31, 1997, 1996 and 1995, $62,504,000,
$38,555,000 and $19,867,000, respectively, of software development costs were
capitalized. The Company recognized amortization expense applicable to
internally developed capitalized software of $21,361,000, $11,309,000 and
$6,276,000 during 1997, 1996 and 1995, respectively. The Company recognized
amortization expense applicable to purchased software of $9,270,000,
$6,237,000 and $3,084,000 during 1997, 1996 and 1995, respectively. During
1997, the Company wrote-off $10,214,000 of capitalized software development
costs and $1,450,000 of purchased software related to the restructuring plan
executed in May 1997. During 1996, the Company wrote off $654,000 of
capitalized software development costs related to certain AIB, SII and other
product technologies.
 
                                     F-15
<PAGE>
 
6. INSTALLMENT ACCOUNTS RECEIVABLE
 
  Installment accounts receivable consist of the following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
                                                              (IN THOUSANDS)
      <S>                                                    <C>       <C>
      Current installment receivables....................... $ 42,753  $ 19,763
      Allowance for uncollectible amounts...................     (878)     (395)
      Deferred maintenance fees.............................  (10,124)   (5,058)
      Unamortized discounts.................................   (1,708)     (707)
                                                             --------  --------
                                                             $ 30,043  $ 13,603
                                                             ========  ========
      Non-current installment receivables................... $ 58,889  $ 40,827
      Allowance for uncollectible amounts...................   (1,616)     (816)
      Deferred maintenance fees.............................  (27,603)  (16,347)
      Unamortized discounts.................................   (7,758)   (1,999)
                                                             --------  --------
                                                             $ 21,912  $ 21,665
                                                             ========  ========
</TABLE>
 
  Installment accounts receivable represent amounts collectible on long-term
financing arrangements and include fees for product licenses, upgrades and
maintenance, sometimes also bundled with professional services contracts.
Installment receivables are generally financed over three to five years and
are recorded net of unamortized discounts, deferred maintenance fees and
allowances for uncollectible amounts.
 
  The Company sells a significant portion of its installment receivables to
third parties. When these receivables are sold, the Company reduces the gross
installment receivable balance. Additionally, the Company reclassifies the
deferred maintenance to an obligation, which was previously reflected as a
reduction of the related installment receivable balance. The deferred
maintenance is recognized ratably into income over the term of the maintenance
agreement.
 
  Proceeds from the sale of installment receivables for 1997 and 1996 were
approximately $206,916,000 and $129,328,000, respectively. There were no
accounts receivable sold with recourse for the year ended December 31, 1997.
Accounts receivable sold with recourse were $19,373,000 and $2,993,000 for the
years ended December 31, 1996 and 1995, respectively. As of December 31, 1997,
there were no potential recourse obligations for accounts receivable sold with
recourse. As of December 31, 1996 and 1995, potential obligations for accounts
receivable sold with recourse were $16,817,000 and $5,177,000, respectively.
In addition to accounts receivable sold with recourse, the Company has an
agreement with a third party that provides for potential recourse obligations
in the form of a loss pool based on the performance of the related accounts
receivable portfolio. Based on the terms of that agreement, potential recourse
obligations at December 31, 1997 and 1996 were $14,632,000 and $9,300,000,
respectively. Based on the credit ratings of the underlying obligors to the
accounts receivable and the performance history of the accounts receivable
portfolio, the Company has assessed the exposure related to these recourse
obligations and determined the potential liability to be minimal. The fair
market value of the recourse obligations at December 31, 1997 was not
determinable.
 
7. EMPLOYEE BENEFIT PLANS
 
  The Company has various defined contribution retirement plans (401(k) and
profit sharing) for qualified employees. Employer contributions made under the
plans totaled $1,511,000, $1,071,000 and $406,000 in 1997, 1996 and 1995,
respectively.
 
                                     F-16
<PAGE>
 
8. LINE OF CREDIT
 
  At December 31, 1997, the Company had an unsecured bank line of credit for
$55,000,000, under which borrowings bear interest at rates ranging from
approximately LIBOR plus 1% to the bank's prime rate. This line of credit is
subject to limitations based upon certain financial covenants. At December 31,
1997, there were no borrowings outstanding under this line of credit.
 
  At December 31, 1997, the Company had aggregate letters of credit
outstanding for approximately $2,623,000, with expiration dates ranging from
March 1998 to December 1998. These letters of credit reduce the available line
of credit balance.
 
9. STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
 
  As of December 31, 1997, the Company and its subsidiaries had seven stock
option plans, which are described below, as well as several plans that have
been assumed pursuant to acquisitions. The Company applies APB Opinion No. 25
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans and its employee stock purchase
plan (the "Stock Purchase Plan").
 
  Had compensation cost for the Company's stock option plans and the Stock
Purchase Plan been determined consistent with SFAS No. 123, the Company's net
loss and net loss per share would have been the pro forma amounts indicated
below for the years ended December 31, 1997, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                   1997       1996      1995
                                                 ---------  --------  ---------
                                                  (IN THOUSANDS, EXCEPT PER
                                                         SHARE DATA)
      <S>                                        <C>        <C>       <C>
      Net loss:
        As reported............................. $(117,784) $(64,922) $(111,567)
        Pro forma...............................  (127,972)  (70,866)  (117,114)
      Net loss per share:
        As reported............................. $   (1.90) $  (1.14) $   (2.50)
        Pro forma...............................     (2.06)    (1.24)     (2.62)
</TABLE>
 
  Under SFAS No. 123, the pro forma compensation expense related to the
Company's stock option plans and Stock Purchase Plan, before effects for
income taxes, was approximately $17,130,000, $9,940,000 and $9,326,000 in
1997, 1996 and 1995, respectively.
 
  Excluding stock option plans assumed pursuant to acquisitions, the Company
has six stock option plans ("Company Plans"). The Employee Incentive
Compensation Plan, 1994 Stock Incentive Plan, 1991 Option Plan and 1989 Option
Plan provide for the granting of options to employees and non-employee
directors for up to an aggregate of 16,160,000 shares. Under the Chief
Executive Option Plan, the Company has authority to grant options for up to
1,600,000 shares to its Chief Executive Officer and President. Under the
Directors' Option Plan, the Company may grant options for up to 500,000 shares
to non-employee directors.
 
  In general, the options granted under the Company Plans, excluding the
Directors' Option Plan, during 1997, 1996 and 1995 have similar provisions.
Under these plans, the Company has granted both non-qualified and incentive
stock options. These options have an exercise price equal to the closing
market price of the Company's stock on the date of grant, have a legal life of
ten years and typically vest in equal annual installments over a four-year
period beginning one year from the date of grant. Certain options granted
prior to 1995 have a legal life of fifteen years. The specific provisions of
any grant are determined by the Compensation Committee of the Board of
Directors or another designated committee.
 
  Under the Directors' Option Plan, only non-qualified options have been
granted. These options have an exercise price equal to the closing market
price of the Company's stock on the date of grant and have a legal life of ten
years. The options granted in 1995 under this plan vested immediately, while
those granted in 1996 and 1997 vest annually over a three-year period
beginning one year from the date of grant.
 
                                     F-17
<PAGE>
 
  As discussed in Note 2, the Company has assumed various option grants
related to certain acquisitions. The assumption of these option grants
resulted in the deemed issuance by the Company of options for 67,937, 430,582
and 1,206,566 shares in 1997, 1996 and 1995, respectively. The options assumed
reflect outstanding options at the time of acquisition. The provisions of the
assumed options are generally the same as those provided for in the original
option agreements.
 
  In 1996, the Company began offering the Stock Purchase Plan to its employees
who work more than 20 hours per week. Under this Plan, the Company is
authorized to issue up to 5,000,000 shares of Common Stock. Under terms of the
Stock Purchase Plan and current policies of the administrative committee,
employees may elect each year to withhold between one and 50 percent of their
cash compensation through regular payroll deductions to purchase Common Stock,
subject to Internal Revenue Service limitations. The purchase price of the
stock is 85 percent of the lower of the price at the grant date, which is the
beginning of the plan year (March 1 or September 1 for employees with a start
date between March 1 and August 31) or the exercise date, which is the end of
each plan quarter (February 28, May 31, August 31 and November 30). As of
December 31, 1997, approximately 50% of eligible employees were participating
in the Stock Purchase Plan. Under the Stock Purchase Plan, the Company sold
882,229 and 197,165 shares to employees in 1997 and 1996, respectively.
 
  The fair value of stock option grants is estimated using the Black-Scholes
option-pricing model, with the following weighted-average assumptions used for
stock option grants in 1997, 1996 and 1995, respectively: weighted-average
option price, which equals the fair market value at date of grant, of $14.61,
$12.03 and $16.56; expected dividend yields of 0% for all years; expected
volatility of 61%, 55% and 55%; risk-free interest rates of 5.66%, 6.37% and
6.12%; and an expected life of five years for all years. The fair value of the
employees' purchase rights pursuant to the Stock Purchase Plan are estimated
using the Black-Scholes option-pricing model, with the following weighted-
average assumptions used for purchase rights granted in 1997 and 1996,
respectively: average fair market value of $13.75 and $10.75; average option
price of $11.69 and $9.14; expected dividend yield of 0% for both years;
expected volatility of 61% and 51%; average risk-free interest rate of 5.52%
and 5.42%; and expected life of three months for both years.
 
  Stock option plan activity during the years ended December 31, 1997, 1996
and 1995 was as follows:
 
<TABLE>
<CAPTION>
                                    1997                       1996                       1995
                          -------------------------- -------------------------- -------------------------
                                         WEIGHTED                   WEIGHTED                  WEIGHTED
                                         AVERAGE                    AVERAGE                   AVERAGE
     FIXED OPTIONS          SHARES    EXERCISE PRICE   SHARES    EXERCISE PRICE  SHARES    EXERCISE PRICE
     -------------        ----------  -------------- ----------  -------------- ---------  --------------
<S>                       <C>         <C>            <C>         <C>            <C>        <C>
Outstanding at beginning
 of year................  10,143,622      $12.18      8,404,911      $11.87     6,813,468      $ 9.66
Granted.................   3,590,727       14.61      2,781,172       12.03     2,683,058       16.56
Exercised...............    (938,817)       8.91       (517,219)       4.60      (738,030)       6.27
Canceled................    (933,667)      13.49       (525,242)      13.80      (353,585)      14.02
                          ----------                 ----------                 ---------
Outstanding at end of
 year...................  11,861,865       13.08     10,143,622       12.18     8,404,911       11.87
                          ==========                 ==========                 =========
Options exercisable at
 end of year............   5,797,724                  5,488,725                 5,211,103
                          ==========                 ==========                 =========
Weighted-average grant-
 date fair value of op-
 tions granted during
 the year...............  $     8.35                 $     6.96                 $   11.36
</TABLE>
 
  The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
 
<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
              ------------------------------------------ ------------------------
   RANGE OF               WEIGHTED-AVG.
   EXERCISE   NUMBER OF     REMAINING     WEIGHTED-AVG.  NUMBER OF WEIGHTED-AVG.
    PRICES      SHARES   CONTRACTUAL LIFE EXERCISE PRICE  SHARES   EXERCISE PRICE
   --------   ---------- ---------------- -------------- --------- --------------
   <S>        <C>        <C>              <C>            <C>       <C>
   $.0025-
      9.75     1,419,229     3.87 years       $ 3.52     1,330,587     $ 3.39
    10.13-
     12.00     2,062,375     7.00              10.74     1,092,745      10.41
    12.38-
     14.00     4,174,778     7.75              13.08     1,462,639      12.95
    14.06-
     18.13     2,165,479     7.56              15.14     1,030,550      14.99
   $18.25-
     33.73     2,040,004     7.91              19.92       881,203      19.18
              ----------                                 ---------
              11,861,865     7.15              13.08     5,797,724      11.59
              ==========                                 =========
</TABLE>
 
                                     F-18
<PAGE>
 
  During 1997, a wholly-owned subsidiary of the Company adopted a fixed stock
option plan (the "1997 Option Plan"). The 1997 Option Plan provides for the
granting of options to employees for up to an aggregate of 7,500,000 shares of
the subsidiary's common stock. Under this plan, the subsidiary has granted
non-qualified stock options. These options have an exercise price equal to the
fair market value of the subsidiary's stock on the date of grant, have a legal
life of ten years and vest on the sixth anniversary of the grant date. Options
granted under the 1997 Option Plan are exercisable in shares of the
subsidiary's common stock and are not convertible to the Company's Common
Stock. During 1997, the subsidiary granted 5,170,000 options at a fair market
value of $0.92. For the year ended December 31, 1997, 247,500 options were
canceled. The weighted-average grant-date fair value of these options was
$0.33 using the Minimum Value option-pricing method and a risk-free interest
rate of 5.80%.
 
10. PREFERRED STOCK
 
  On December 23, 1997, the Company agreed, pursuant to a stock purchase
agreement, to issue to Intel 1,768,421 shares of its Preferred Stock, which
had a fair market value of approximately $42,000,000 on the date of
subscription, in exchange for certain product technologies and other
intangible assets. The shares of Preferred Stock were subscribed for as of
December 31, 1997 and subsequently issued on January 14, 1998.
 
  The holders of the Preferred Stock have the option to convert, at any time,
each share of Preferred Stock into one share of Common Stock. Each share of
Preferred Stock will automatically convert into one share of Common Stock upon
the transfer by any holder of Preferred Stock in a non-permitted transfer. In
the event of a liquidation of the Company, the holders of the Preferred Stock
are entitled to receive $23.75 per share plus the amount of any declared but
unpaid dividends. The conversion and liquidation terms are subject to
adjustment based upon subsequent changes in equity interests.
 
  As of December 31, 1997, the Company had reserved 1,768,421 shares of its
authorized Common Stock to be issued upon conversion of the Preferred Stock.
 
11. INCOME TAXES
 
  Income (loss) before income taxes for the years ended December 31, 1997,
1996 and 1995 consisted of the following:
 
<TABLE>
<CAPTION>
                                                   1997       1996      1995
                                                 ---------  --------  ---------
                                                        (IN THOUSANDS)
      <S>                                        <C>        <C>       <C>
      U.S....................................... $(113,313) $(68,911) $(137,724)
      Non-U.S...................................    14,250    (5,256)    14,477
                                                 ---------  --------  ---------
          Total................................. $ (99,063) $(74,167) $(123,247)
                                                 =========  ========  =========
</TABLE>
 
  Income tax expense (benefit) for the years ended December 31, 1997, 1996 and
1995 consisted of the following:
 
<TABLE>
<CAPTION>
                                                      1997     1996      1995
                                                     -------  -------  --------
                                                          (IN THOUSANDS)
      <S>                                            <C>      <C>      <C>
      Current:
        Federal..................................... $   --    $  --   $    315
        State.......................................     241      175       133
        Foreign.....................................   2,309    2,035       740
      Deferred:
        Federal.....................................  22,096   (7,838)   (7,899)
        State.......................................  (3,295)  (3,617)   (4,969)
        Foreign.....................................  (2,630)     --        --
                                                     -------  -------  --------
                                                     $18,721  $(9,245) $(11,680)
                                                     =======  =======  ========
</TABLE>
 
                                     F-19
<PAGE>
 
  The reconciliation of income taxes computed using the Federal statutory rate
of 35% to the income tax provision is as follows for the years ended December
31, 1997, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                    1997      1996      1995
                                                  --------  --------  --------
                                                        (IN THOUSANDS)
      <S>                                         <C>       <C>       <C>
      Income tax computed at statutory rate...... $(34,672) $(25,959) $(43,137)
      State income tax, net of Federal tax
       benefit...................................   (3,053)   (3,442)   (4,836)
      Research and experimentation credits.......   (3,514)   (1,491)   (1,213)
      Foreign tax credit.........................     (117)      (59)     (239)
      Foreign taxes..............................    1,271       751       240
      Foreign sales corporation..................     (557)   (1,036)     (294)
      Municipal interest.........................      (80)     (289)     (554)
      Stock acquisitions.........................    9,953     6,281    11,450
      Nondeductible merger costs.................      443     1,440     4,625
      Change in valuation allowance..............   45,064    12,608    22,856
      Other......................................    3,983     1,951      (578)
                                                  --------  --------  --------
      Effective tax.............................. $ 18,721  $ (9,245) $(11,680)
                                                  ========  ========  ========
</TABLE>
 
  The tax effects of temporary differences and carryforwards that give rise to
deferred tax assets and liabilities at December 31, 1997 and 1996 were as
follows:
 
<TABLE>
<CAPTION>
                                                              1997       1996
                                                            ---------  --------
                                                              (IN THOUSANDS)
      <S>                                                   <C>        <C>
      Deferred tax assets:
        Deferred revenue................................... $   6,419  $  1,152
        Allowance for doubtful accounts....................       561       749
        Net operating loss carryforwards...................   118,475    95,190
        Foreign net operating losses.......................     2,630       --
        General business, AMT and state tax credits........    12,907     9,544
        Foreign tax credits................................       952     1,138
        Accrued expenses and reserves......................     9,097       157
        Rent abatement.....................................     2,471     1,957
        Other..............................................     5,856     5,128
                                                            ---------  --------
          Total gross deferred tax assets..................   159,368   115,015
        Less valuation allowance...........................  (105,000)  (59,936)
                                                            ---------  --------
          Net deferred tax assets..........................    54,368    55,079
                                                            ---------  --------
      Deferred tax liabilities:
        Capitalized software, net..........................    36,420    23,908
        Installment sales..................................       819       826
        Acquired technology................................     1,000     3,124
        Unrealized gain on marketable equity securities....    11,161    12,499
                                                            ---------  --------
          Total gross deferred tax liabilities.............    49,400    40,357
                                                            ---------  --------
          Net deferred tax asset........................... $   4,968  $ 14,722
                                                            =========  ========
</TABLE>
 
  The net change in the valuation allowance during 1997, 1996 and 1995 was an
increase of $45,064,000, $12,608,000 and $22,856,000, respectively.
 
  The Company has reduced gross deferred tax assets by a valuation allowance
to reflect the estimated amount of deferred tax assets which will, more likely
than not, be realized. The net deferred tax asset at December 31, 1997
reflects management's estimate of the amount that will be realized as a result
of future profitability. The amount of the deferred tax asset considered
realizable could be reduced if estimates of future taxable income are reduced.
 
                                     F-20
<PAGE>
 
  At December 31, 1997, the Company had approximately $294,715,000 of net
operating loss carryforwards and $14,000,000 of tax credit carryforwards,
which are available to reduce future Federal income taxes, if any, through the
year 2012. The Company's ability to utilize the net operating loss
carryforwards and available tax credits may be limited due to changes in
ownership as a result of business combinations.
 
12. CONVERTIBLE SUBORDINATED NOTES
 
  In November 1996, the Company issued $115,000,000 of convertible
subordinated notes (the "1996 Notes") due November 15, 2001, bearing interest
at 6.75% annually. Interest is payable semi-annually on May 15 and November
15. The holders of the Notes have the option to convert them into shares of
Common Stock, at any time prior to maturity, at a conversion price of $13.95
per share. The Notes are redeemable at the option of the Company, in whole or
in part, at any time during the twelve-month period commencing November 15,
1999 at 102.7% of their principal amount and during the twelve-month period
commencing November 15, 2000 at 101.35% of their principal amount. During
1997, $10,000 of the 1996 Notes were converted to Common Stock. As of December
31, 1997, $114,990,000 of the 1996 Notes were outstanding.
 
  The Company estimated the fair value of the 1996 Notes as of December 31,
1997 at approximately $236,879,000, based upon their trading price on the
Nasdaq SmallCap Market on that date.
 
  In December 1997, the Company issued $150,000,000 of convertible
subordinated notes (the "1997 Notes") due December 15, 2002, bearing interest
at 6.25% annually. Interest is payable semi-annually on June 15 and December
15, commencing June 15, 1998. The holders of the 1997 Notes have the option to
convert them into shares of Common Stock, at any time prior to maturity, at a
conversion price of $36.05 per share. The 1997 Notes are redeemable at the
option of the Company, in whole or in part, at any time during the twelve-
month period commencing December 15, 2000 at 102.5% of their principal amount
and during the twelve-month period commencing December 15, 2001 at 101.25% of
their principal amount. As of December 31, 1997, $150,000,000 of the 1997
Notes were outstanding.
 
  The Company estimated the fair value of the 1997 Notes as of December 31,
1997 at approximately $159,375,000, based upon their bid price in the
convertible debentures market on that date.
 
  For the years ended December 31, 1998, 1999, 2000, 2001 and 2002, aggregate
annual maturities of the 1996 Notes and the 1997 Notes are $0, $0, $0,
$114,990,000 and $150,000,000, respectively.
 
13. RESTRUCTURING
 
  In May 1997, the Company executed a restructuring plan to consolidate its
sales, marketing, business development and product development operations to
achieve cost efficiencies through the elimination of redundant functions.
These redundancies resulted primarily from businesses acquired over the last
three years. The Company also realigned its business units and inside sales
force to redirect focus on its strongest product lines and better integrate
the efforts of certain product development teams. As part of the plan, the
Company reduced its worldwide work force by approximately 10%, eliminating
approximately 400 positions primarily in the areas of product development and
support, marketing and inside sales and, to a lesser extent, professional
services and administration.
 
  The Company recorded a restructuring charge of $57,319,000 during the second
quarter of 1997 related to the restructuring plan. The restructuring charge
included the following expenses: facility-related costs, including a reserve
for estimated lease obligations associated with the closing of office
facilities; write-offs of excess equipment, furniture and fixtures; write-offs
of capitalized software costs and other intangible assets related to the
termination of development efforts for certain discontinued products, as well
as penalties for the cancellation of distributorship agreements for such
products; and severance and other employee-related costs of the terminated
staff.
 
                                     F-21
<PAGE>
 
  The following table summarizes the Company's restructuring activity for the
year ended December 31, 1997:
 
<TABLE>
<CAPTION>
                                                      INTANGIBLE ASSETS AND  PROPERTY
                              EXCESS   SEVERANCE AND PENALTIES FOR CANCELLED    AND
                            FACILITIES   BENEFITS          AGREEMENTS        EQUIPMENT  TOTAL
                            ---------- ------------- ----------------------- --------- --------
                                                      (IN THOUSANDS)
   <S>                      <C>        <C>           <C>                     <C>       <C>
   1997 restructuring
    charges:
     Cash-related charges..  $24,032      $10,364            $ 3,236          $  --    $ 37,632
     Non-cash charges......      --           --              16,177           3,510     19,687
                             -------      -------            -------          ------   --------
                             $24,032      $10,364            $19,413          $3,510     57,319
                             =======      =======            =======          ======
   Payments made in 1997..............................................................  (15,322)
   Write-offs taken in 1997...........................................................  (19,687)
                                                                                       --------
   Total accrued restructuring costs at December 31, 1997.............................   22,310
   Less current portion...............................................................    6,308
                                                                                       --------
   Long-term accrued restructuring costs ............................................. $ 16,002
                                                                                       ========
</TABLE>
 
14. DERIVATIVE FINANCIAL INSTRUMENTS
 
  The Company conducts business on a global basis in numerous major
international currencies and is, therefore, exposed to adverse movements in
foreign currency exchange rates. The Company has established a foreign
currency hedging program utilizing forward foreign exchange contracts to
reduce certain currency exposures. These contracts hedge exposures associated
with nonfunctional currency assets and liabilities denominated in Japanese,
Australian, numerous Asian and various European currencies. At the present
time, the Company hedges only those currency exposures associated with certain
nonfunctional currency assets and liabilities resulting from intercompany
balances and does not generally hedge anticipated foreign currency cash flows.
The Company does not enter into forward exchange contracts for trading
purposes.
 
  Gains and losses on the foreign currency forward exchange contracts are
included in other income and offset foreign exchange gains and losses from the
revaluation of intercompany balances denominated in currencies other than the
functional currency of the reporting entity. The Company's forward contracts
generally have original maturities of one month.
 
  The table below provides information as of December 31, 1997 about the
Company's foreign currency forward exchange contracts, including notional
values of outstanding forward contracts purchased and sold and the unrealized
gains or losses recorded for each contract.
 
<TABLE>
<CAPTION>
                                              NOTIONAL  NOTIONAL
                                                VALUE    VALUE      UNREALIZED
                                              PURCHASED   SOLD    GAINS (LOSSES)
                                              --------- --------  --------------
                                                       (IN THOUSANDS)
      <S>                                     <C>       <C>       <C>
      European currencies...................   $4,407   $(20,649)     $(173)
      Asian currencies......................      --        (412)         4
      Japanese Yen..........................      --        (972)         4
      Australian Dollar.....................      --        (338)        11
                                                  --
                                               ------   --------      -----
          Total.............................   $4,407   $(22,371)     $(154)
                                               ======   ========      =====
</TABLE>
 
  While the notional or contract amounts of the Company's forward exchange
contracts provide one measure of the volume of these transactions, they do not
represent the Company's full exposure to credit risk. The Company faces
additional risks if the banking counterparties are unable to meet the terms of
the agreements. The Company has established policies to minimize such risks
and will only execute forward exchange contracts with major financial
institutions. The Company has assessed the potential exposure related to
default by such institutions to be minimal.
 
                                     F-22
<PAGE>
 
15. COMMITMENTS AND CONTINGENCIES
 
 Operating Leases
 
  The Company leases office space and certain computer and telecommunications
equipment under long-term lease agreements expiring through the year 2016.
Total future minimum lease payments under noncancelable leases are as follows:
 
<TABLE>
<CAPTION>
                                            AMOUNT
                                        --------------
                                        (IN THOUSANDS)
             <S>                        <C>
             1998......................    $ 40,980
             1999......................      33,133
             2000......................      24,727
             2001......................      20,067
             2002 and thereafter.......      35,226
                                           --------
                 Total.................    $154,133
                                           ========
</TABLE>
 
  Future minimum lease payments have not been reduced by minimum sublease
rentals of $603,000 due in the future under noncancelable subleases. Total
rent expense under all operating leases, net of insignificant sublease rental
income, amounted to $32,021,000, $22,510,000 and $15,659,000 in 1997, 1996 and
1995, respectively.
 
 Litigation
 
  The Company is subject to certain legal proceedings and claims that have
arisen in the ordinary course of business and have not been fully adjudicated.
Management currently believes the ultimate outcome of these matters will not
have a material adverse effect on the Company's results of operations or
financial position.
 
16. OTHER INCOME, NET
 
  Other income (expense), net, for the years ended December 31, 1997, 1996 and
1995 is comprised of the following:
 
<TABLE>
<CAPTION>
                                                       1997     1996     1995
                                                     --------  -------  ------
                                                         (IN THOUSANDS)
      <S>                                            <C>       <C>      <C>
      Interest income............................... $  5,365  $ 5,163  $4,637
      Interest expense..............................   (9,130)  (1,825)   (782)
      Foreign exchange gains (losses)...............      469      (35)     64
      Net realized gains on sales of investments....    7,566    1,032     332
      Unrealized gains on marketable equity
       securities...................................   12,581      920     --
      Other.........................................     (122)     (18)   (121)
                                                     --------  -------  ------
                                                     $ 16,729  $ 5,237  $4,130
                                                     ========  =======  ======
</TABLE>
 
                                     F-23
<PAGE>
 
17. SEGMENT AND GEOGRAPHIC INFORMATION
 
  The Company operates in one industry segment. The Company markets and
services its products in the United States and in foreign countries through
its direct sales organization and affiliates (which are non-controlled product
representatives).
 
  The following table presents information about the Company by geographic
area for the years ended December 31, 1997, 1996 and 1995. Export sales and
certain income and expense items are reported in the geographic area where the
final sale is made rather than where the transaction originates.
 
<TABLE>
<CAPTION>
                                        DOMESTIC    EUROPE    OTHER     TOTAL
                                        ---------  --------  -------  ---------
                                                   (IN THOUSANDS)
      <S>                               <C>        <C>       <C>      <C>
      1997
        Revenues....................... $ 444,577  $119,919  $59,007  $ 623,503
        Operating income (loss)........  (122,573)    4,135    2,646   (115,792)
        Identifiable assets............   690,127    89,958   54,092    834,177
      1996
        Revenues....................... $ 326,673  $ 97,708  $43,684  $ 468,065
        Operating loss.................   (74,742)   (1,892)  (2,770)   (79,404)
        Identifiable assets............   498,500    84,201   35,871    618,572
      1995
        Revenues....................... $ 222,568  $ 67,906  $35,937  $ 326,411
        Operating income (loss)........  (137,672)    9,885      410   (127,377)
        Identifiable assets............   365,799    59,465   27,003    452,267
</TABLE>
 
  The revenues and operating income (loss) amounts above exclude the effect of
intercompany royalties. The domestic operating losses in 1997, 1996 and 1995
include all merger costs, restructuring costs and acquired in-process
technology charges.
 
  No single customer accounted for 10% or more of total revenues in 1997, 1996
or 1995.
 
18. SUBSEQUENT EVENTS
 
  On January 2, 1998, the Company entered into an agreement and plan of
merger, pursuant to which the Company has agreed to acquire Learmonth and
Burchett Management Systems PLC ("LBMS"), a leading provider of process
management solutions. Under the terms of this acquisition, LBMS will become a
wholly-owned subsidiary of the Company. The Company has agreed to exchange
approximately 2,745,000 shares of Common Stock for all of the outstanding
common shares of LBMS and has offered to exchange options to purchase
approximately 468,000 shares of Common Stock for the outstanding LBMS options.
This acquisition, which is expected to be consummated in the second quarter of
1998, is subject to the sanction of the English High Court, the approval of
the shareholders of LBMS and customary legal and regulatory conditions.
 
  On February 18, 1998, the Company entered into an agreement and plan of
merger, pursuant to which the Company has agreed to acquire Mastering, Inc.
("Mastering"), a leading provider of information technology training. Under
the terms of this acquisition, Mastering will become a wholly-owned subsidiary
of the Company. The Company has agreed to exchange approximately 6,165,000
shares of Common Stock for all of the outstanding common shares of Mastering
and to assume stock options which will convert into options to purchase
approximately 2,143,000 shares of Common Stock. This acquisition, which is
expected to be consummated in the second quarter of 1998, is subject to the
filing of a registration statement with the Securities and Exchange
Commission, the approval of the stockholders of Mastering and customary legal
and regulatory conditions.
 
  On March 14, 1998, the Company entered into an agreement and plan of merger,
pursuant to which the Company has agreed to acquire Logic Works, Inc.
("Logic"), a leading provider of data modeling tools. Under
 
                                     F-24
<PAGE>
 
the terms of this acquisition, Logic will become a wholly-owned subsidiary of
the Company. The Company has agreed to exchange approximately 7,240,095 shares
of Common Stock for all of the outstanding common stock of Logic and to assume
stock options which will convert into options to purchase approximately
1,325,716 shares of Common Stock. This acquisition, which is expected to be
consummated in mid-1998, is subject to the filing of a registration statement
with the Securities and Exchange Commission, the approval of the stockholders
of Logic and customary legal and regulatory conditions.
 
  The acquisitions of LBMS, Mastering and Logic are expected to be accounted
for as poolings of interests. Costs incurred in connection with these
transactions will be expensed in the periods in which the acquisitions are
consummated.
 
  The following unaudited pro forma information shows total revenues and net
income (loss) of PLATINUM, LBMS, Mastering and Logic during the three years
ended December 31, 1997, 1996 and 1995, as if the transactions had been
consummated as of the earliest period presented. This summary is provided for
informational purposes only. It does not necessarily reflect the actual
results that would have occurred had the acquisitions been made as of those
dates or of results that may occur in the future.
 
<TABLE>
<CAPTION>
                                   1997               1996                1995
                            ------------------  -----------------  ------------------
                                        NET                                    NET
                                      INCOME                                 INCOME
                            REVENUES  (LOSS)    REVENUES NET LOSS  REVENUES  (LOSS)
                            -------- ---------  -------- --------  -------- ---------
                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
   <S>                      <C>      <C>        <C>      <C>       <C>      <C>
   PLATINUM................ $623,503 $(117,784) $468,065 $(64,922) $326,411 $(111,567)
   LBMS....................   23,897     4,469    21,861  (16,318)   41,158      (784)
   Mastering...............   40,966     2,581    21,018   (2,892)   10,168       518
   Logic...................   50,513     4,605    42,540   (3,062)   30,688     1,407
                            -------- ---------  -------- --------  -------- ---------
       Total............... $738,879 $(106,129) $553,484 $(87,194) $408,425 $(110,426)
                            ======== =========  ======== ========  ======== =========
       Net loss per share..          $   (1.36)          $  (1.22)          $   (2.04)
                                     =========           ========           =========
</TABLE>
 
                                     F-25
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Stockholders and Board of Directors
PLATINUM technology, inc.:
 
  We have audited the accompanying consolidated balance sheets of PLATINUM
technology, inc. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of PLATINUM technology, inc. and subsidiaries as of December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
 
                                          /s/ KPMG Peat Marwick LLP
 
Chicago, Illinois
February 9, 1998, except for
Note 18,   which is as of
March 14, 1998.
 
                                     F-26
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
The Stockholders and Board of Directors of
PLATINUM technology, inc.:
 
  Under date of February 9, 1998 (except as to Note 18, which is as of March
14, 1998), we reported on the consolidated balance sheets of PLATINUM
technology, inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
as contained in the 1997 annual report to stockholders. These consolidated
financial statements and our report thereon are included in the annual report
on Form 10-K for the year ended December 31, 1997. In connection with our
audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule. The financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.
 
  In our opinion, based on our audits, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
 
                                          /s/ KPMG Peat Marwick LLP
 
Chicago, Illinois
February 9, 1998, except for
 Note 18, which is as of March
 14, 1998
 
                                      S-1
<PAGE>
 
                                  SCHEDULE II
 
                           PLATINUM TECHNOLOGY, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
  ALLOWANCE FOR DOUBTFUL
         ACCOUNTS
FOR TRADE AND INSTALLMENT         BEGINNING   BAD DEBT                 ENDING
       RECEIVABLES                 BALANCE    EXPENSE   WRITE-OFFS    BALANCE
-------------------------         ---------- ---------- -----------  ----------
<S>                               <C>        <C>        <C>          <C>
Year ended December 31, 1997..... $3,714,000 $9,146,000 $(8,753,000) $4,107,000
Year ended December 31, 1996.....  2,809,000    905,000         --    3,714,000
Year ended December 31, 1995.....  1,522,000  1,287,000         --    2,809,000
</TABLE>
 
                                      S-2
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, ON THE 16TH DAY
OF MARCH, 1998.
 
                                          Platinum technology, inc.
 
                                               /s/ Andrew J. Filipowski
                                          By: _________________________________
                                                   Andrew J. Filipowski
                                              President and Chief Executive
                                                         Officer
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----
 
 
<S>                                  <C>                           <C>
    /s/ Andrew J. Filipowski         President, Chief Executive      March 16, 1998
____________________________________  Officer (principal
        Andrew J. Filipowski          executive officer) and
                                      Chairman of the Board of
                                      Directors
 
     /s/ Paul L. Humenansky          Executive Vice President,       March 16, 1998
____________________________________  Chief Operations Officer
         Paul L. Humenansky           and Director
 
    /s/ Michael P. Cullinane         Executive Vice President,       March 16, 1998
____________________________________  Chief Financial Officer
        Michael P. Cullinane          (principal financial and
                                      accounting officer),
                                      Treasurer and Director
 
       /s/ James E. Cowie            Director                        March 16, 1998
____________________________________
           James E. Cowie
 
      /s/ Steven D. Devick           Director                        March 16, 1998
____________________________________
          Steven D. Devick
 
                                     Director
____________________________________
          Gian M. Fulgoni
 
                                     Director
____________________________________
          Arthur P. Frigo
 
</TABLE>
<PAGE>

                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
  EXHIBIT
    NO.                           DESCRIPTION
  -------                         -----------
 <C>       <S>                                                         <C>
   4.4     Indenture between the Company and American National Bank
           and Trust Company, as Trustee, dated as of November 18,
           1996.
   4.5     Form of Note for the Company's convertible subordinated
           notes due 2001 (included in Exhibit 4.4).
   4.6     Indenture between the Company and American National Bank
           and Trust Company, as Trustee, dated as of December 15,
           1997.
   4.7     Form of Note for the Company's convertible subordinated
           notes due 2002 (included in Exhibit 4.6).
  10.6     Amended and Restated Employment Agreement between Andrew
           J. Filipowski and the Company, dated as of January 1,
           1996.*
  10.7     Amended and Restated Employment Agreement between Michael
           P. Cullinane and the Company, dated as of January 1,
           1996.*
  10.8     Amended and Restated Employment Agreement between Paul L.
           Humenansky and the Company, dated as of October 28,
           1997.*
  10.42    Credit Agreement, dated as of December 22, 1997, between
           the Company and American National Bank and Trust Company
           of Chicago, as Agent.
  12       Computation of Ratios of Earnings to Fixed Charges.
  21       Subsidiaries of the Company.
  23       Consent of KPMG Peat Marwick LLP with respect to the
           Company's financial statements and financial statement
           schedule.
  27       Financial Data Schedule
</TABLE>