<PAGE>   1

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

                                    FORM 10-Q

(Mark one)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO
        _________________.

                         Commission File Number 0-26814

                              DATAWORKS CORPORATION
             (Exact name of registrant as specified in its charter)


               CALIFORNIA                                       33-0209937
     (State or other jurisdiction of                         (I.R.S. Employer
     incorporation or organization)                       Identification Number)

      5910 PACIFIC CENTER BOULEVARD                               92121
                SUITE 300                                       (Zip Code)
          SAN DIEGO, CALIFORNIA
(Address of principal executive offices)

                                 (619) 546-9600
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No

As of July 31, 1998, there were 14,391,169 shares of the Registrant's Common
Stock outstanding.

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<PAGE>   2


                              DATAWORKS CORPORATION
                                 FORM 10-Q INDEX

<TABLE>
<CAPTION>
                                                                              Page
                                                                              ----
<S>        <C>                                                                <C>

PART I.    FINANCIAL INFORMATION


Item 1.    Financial Statements

           Consolidated Balance Sheets as of June 30, 1998
           (unaudited) and December 31, 1997                                    3

           Consolidated Statements of Income (unaudited)
           for the Three Months and Six Months Ended
           June 30, 1998 and 1997                                               4

           Consolidated Statements of Cash Flows (unaudited)
           for the Six Months Ended June 30, 1998 and 1997                      5

           Notes to Consolidated Financial Statements (unaudited)               6

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                            8

Item 3.    Quantitative and Qualitative Disclosure About Market Risk           11

PART II.   OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds                           12

Item 4.    Submission of Matters to Vote of Security Holders                   12

Item 5.    Other Information                                                   13

Item 6.    Exhibits and Reports on Form 8-K                                    13

</TABLE>

                                       2

<PAGE>   3


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                              DATAWORKS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                          JUNE 30,          DECEMBER 31,
                                                                            1998              1997
                                                                          --------          --------
                                                                         (Unaudited)
<S>                                                                      <C>               <C>     
ASSETS
Current assets:
  Cash and cash equivalents                                               $ 29,261          $ 17,418
  Short-term investments, available-for-sale                                11,613            30,503
  Accounts receivable, net of allowance for doubtful accounts of
   $2,602 and $2,360 at June 30, 1998 and December 31, 1997,
   respectively                                                             53,164            53,617
  Deferred income taxes                                                      3,361             3,377
  Other current assets                                                       8,823             6,354
                                                                          --------          --------
Total current assets                                                       106,222           111,269

Equipment, furniture and fixtures, net                                      10,494             8,184
Capitalized software costs, net                                              8,072             4,807
Intangible assets, net                                                      10,460             6,083
Advances to related parties                                                    667                97
Other assets                                                                   781               696
                                                                          --------          --------
Total assets                                                              $136,696          $131,136
                                                                          ========          ========

LIABILITIES AND SHAREHOLDERS' EQUITY 
Current liabilities:
  Accounts payable                                                        $ 11,792          $ 11,802
  Accrued compensation                                                       7,247            10,476
  Income taxes payable                                                       3,037             1,732
  Deferred revenue                                                          15,368            14,271
  Current portion of long-term obligations                                     575               721
  Other accrued liabilities                                                  2,394             5,611
                                                                          --------          --------
Total current liabilities                                                   40,413            44,613

Deferred income taxes                                                        1,030               964
Long-term obligations, less current portion                                  1,088             1,493

Commitments
Shareholders' equity:
  Common shares, no stated par value:
     Authorized shares - 25,000
     Issued and outstanding shares - 14,383 and 13,967 at
      June 30, 1998 and December 31, 1997, respectively                     87,653            81,458
  Retained earnings                                                          6,367             2,445
  Cumulative foreign currency translation adjustments                          145               163
                                                                          --------          --------
Total shareholders' equity                                                  94,165            84,066
                                                                          --------          --------
Total liabilities and shareholders' equity                                $136,696          $131,136
                                                                          ========          ========
</TABLE>

                             See accompanying notes


                                       3
<PAGE>   4

                              DATAWORKS CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                  (in thousands, except per share information)

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED               SIX MONTHS ENDED
                                                     JUNE 30,                          JUNE 30,
                                             ------------------------          ------------------------
                                              1998             1997             1998             1997
                                             -------          -------          -------          -------
<S>                                          <C>              <C>              <C>              <C>    
Revenues:
   Software licenses                         $19,612          $14,410          $38,021          $28,107
   Maintenance and other services             19,755           15,309           38,506           29,041
   Hardware                                    1,660            2,788            5,083            5,296
                                             -------          -------          -------          -------
Total revenues                                41,027           32,507           81,610           62,444

Cost of revenues:
   Software licenses                           2,456            1,839            4,294            3,331
   Maintenance and other services             15,785           10,589           29,004           20,340
   Hardware                                    1,229            2,161            3,928            4,007
                                             -------          -------          -------          -------
Total cost of revenues                        19,470           14,589           37,226           27,678
                                             -------          -------          -------          -------

Gross profit                                  21,557           17,918           44,384           34,766

Operating expenses:
   Sales and marketing                        11,444            9,478           22,253           17,545
   General and administrative                  5,374            3,992            9,739            7,774
   Research and development                    3,743            2,648            6,859            5,074
                                             -------          -------          -------          -------
Total operating expenses                      20,561           16,118           38,851           30,393
                                             -------          -------          -------          -------

Income from operations                           996            1,800            5,533            4,373
Other income, net                                311              434              644              816
                                             -------          -------          -------          -------

Income before income taxes                     1,307            2,234            6,177            5,189
Provision for income taxes                       477              793            2,255            1,859
                                             -------          -------          -------          -------

Net income                                   $   830          $ 1,441          $ 3,922          $ 3,330
                                             =======          =======          =======          =======

Net income per share - basic                 $  0.06          $  0.10          $  0.28          $  0.24
                                             =======          =======          =======          =======
Net income per share - diluted               $  0.06          $  0.10          $  0.26          $  0.23
                                             =======          =======          =======          =======

Common shares outstanding - basic             14,306           13,787           14,209           13,713
                                             =======          =======          =======          =======
Common shares outstanding - diluted           15,013           14,437           15,015           14,368
                                             =======          =======          =======          =======

</TABLE>

                             See accompanying notes


                                       4
<PAGE>   5


                              DATAWORKS CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                           SIX MONTHS ENDED
                                                                               JUNE 30,
                                                                     ---------------------------
                                                                       1998               1997
                                                                     --------           --------
<S>                                                                  <C>                <C>     
OPERATING ACTIVITIES
Net income                                                           $  3,922           $  3,330
Adjustments to reconcile net income to net
   cash provided by operating activities:
  Depreciation and amortization of intangible assets                    3,195              2,289
  Compensation regarding granting of stock options                         35                 46
  Deferred income taxes                                                    82               (212)
  Provision for doubtful accounts                                         447                454
  Changes in operating assets and liabilities:
     Accounts receivable                                                    6              1,759
     Other current assets                                              (2,469)             1,008
     Accounts payable                                                     (10)            (1,229)
     Accrued compensation                                              (3,229)              (539)
     Deferred revenue                                                   1,097              3,861
     Other accrued liabilities and income taxes payable                (1,912)            (1,832)
                                                                     --------           --------
Net cash provided by operating activities                               1,164              8,935

INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures                         (3,991)            (1,866)
Purchases of short-term investments                                   (18,527)                --
Sale of short-term investments                                         37,417                 --
Additions to capitalized software costs                                (3,450)            (1,893)
Increase in intangible assets                                          (1,350)              (150)
Advances to related parties, net                                         (570)                58
Other assets                                                              (85)              (103)
                                                                     --------           --------
Net cash provided by (used in) investing activities                     9,444             (3,954)

FINANCING ACTIVITIES
Net increase (decrease) in obligations under line of credit              (468)             1,800
Proceeds from notes payable                                                --                500
Repayments of notes payable and capital lease obligations                (774)              (680)
Issuance of common stock, net                                           2,495              1,067
                                                                     --------           --------
Net cash provided by financing activities                               1,253              2,687

Effect of exchange rate on cash                                           (18)               (32)
                                                                     --------           --------
Net increase in cash and cash equivalents                              11,843              7,636
Cash and cash equivalents at beginning of period                       17,418             50,825
                                                                     --------           --------
Cash and cash equivalents at end of period                           $ 29,261           $ 58,461
                                                                     ========           ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest                             $     80           $    200
                                                                     ========           ========
Cash paid during the period for income taxes                         $  1,020           $  1,433
                                                                     ========           ========

NON-CASH TRANSACTIONS
Common stock issued for business acquisitions                        $  3,665           $     --
                                                                     ========           ========
Equipment acquired through capital leases                            $    560           $    321
                                                                     ========           ========
Earnouts payable for business acquisitions                           $    131           $    139
                                                                     ========           ========

</TABLE>

                             See accompanying notes


                                       5
<PAGE>   6

                              DATAWORKS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.    BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements included herein
have been prepared by DataWorks Corporation (the "Company" or "DataWorks")
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. The unaudited
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1997 included in the Company's Annual Report on Form 10-K. The results of
operations for the three and six months ended June 30, 1998 are not necessarily
indicative of the results which may be reported for any other interim period or
for the year ending December 31, 1998.

2.    EARNINGS PER SHARE

Basic earnings per share was computed by dividing net income by the weighted
average shares of common stock outstanding during the periods. Diluted earnings
per share was computed by dividing net income by the weighted average shares of
common stock and common stock equivalents outstanding during the periods. The
dilutive effect of the potential exercise of outstanding options and warrants to
purchase shares of common stock was calculated using the treasury stock method.

3.    RECEIVABLES FROM RELATED PARTIES

At June 30, 1998 and December 31, 1997, the receivables from related parties
consist of balances due from one of DataWorks' principal officers and
shareholders representing net advances totaling $97,000 and advances totaling
$570,000 at June 30, 1998, to a minority owned unconsolidated foreign
subsidiary.

4.    COMPREHENSIVE INCOME

As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). This statement
requires the Company to report in the financial statements, in addition to net
income, comprehensive income and its components including foreign currency
translation adjustments and unrealized gains and losses on its
available-for-sale securities. SFAS 130 also requires the Company to reclassify
financial statements for earlier periods provided for comparative purposes. For
the three and six months ended June 30, 1998 and 1997 comprehensive income was
not significantly different than net income.

5.    SOFTWARE REVENUE RECOGNITION

As of January 1, 1998, the Company adopted Statement of Position No. 97-2,
Software Revenue Recognition ("SOP 97-2"), which provides guidance for
recognizing revenue related to sales by software vendors. The adoption of SOP
97-2 did not have a significant impact on the Company's financial statements for
the three and six months ended June 30, 1998.

6.    ACQUISITIONS

On April 22, 1998, the Company acquired the assets of C-WAY Systems, Inc., a
Delaware Corporation, ("C-WAY") in exchange for 106,315 shares of DataWorks'
common stock valued at approximately $2.6 million and a possible earnout of up
to an additional approximately $2.6 million. The earnout is payable over four
years based upon satisfaction of certain product development goals and a
percentage of future revenues generated. Prior to the transaction, C-WAY
developed, sold and supported advanced planning and scheduling software for
manufacturers. The transaction was accounted for as a purchase, and the results
of operations of C-WAY are included with the results of the Company's operations
subsequent to the date of acquisition. The excess costs over fair market value



                                       6
<PAGE>   7

of the net assets purchased has been allocated to developed technology, customer
base and assembled workforce and is being amortized over five years.

Effective June 1, 1998, the Company acquired the assets of CTi Software BV
("CTi") in exchange for $1.25 million cash and 65,689 shares of DataWorks'
common stock, at the time valued at approximately $1.25 million. Prior to the
acquisition, CTi, located in Hague, Netherlands, developed, marketed, and
maintained mid-range manufacturing software. The transaction was accounted for
as a purchase, and the results of operations of CTi are included with the
results of the Company's operations subsequent to the date of acquisition. The
excess costs over fair market value of the net assets purchased has been
allocated to customer base and assembled workforce and is being amortized over
five years.


7.    SUBSEQUENT EVENT

On July 3, 1998 the Company acquired the assets of 7+7 Software AB ("7+7") in
exchange for cash payments over three years in the aggregate amount of $0.35
million. 7+7 was an enterprise software consulting group to mid-range
manufacturers. The transaction will be accounted for as a purchase, and the
results of operations of 7+7 will be included with the results of the Company's
operations subsequent to the date of acquisition.



                                       7
<PAGE>   8


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
DataWorks' future results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, fluctuations in the Company's operating results, continued new
product introductions by the Company, market acceptance of the Company's new
product introductions, new product introductions by competitors and the other
factors referred to herein and in the Company's Form 10-K for the year ended
December 31, 1997.

The Company develops, markets, implements and supports open systems,
client/server based Enterprise Resource Planning ("ERP") software for mid-sized
discrete manufacturing companies with annual revenues between $3 million and $1
billion. The Company's products and services facilitate enterprise-wide
management of resources and information and are designed to allow mid-range
manufacturers to reduce order fulfillment cycle times, improve operating
efficiencies and measure critical company performance against defined plan
objectives. DataWorks' principal products include Avante, Impresa for MRO, Vista
and Vantage.

The Company derives a significant portion of its revenues from its international
business, which is subject to various risks common to international activities,
including currency fluctuations. Revenues and expenses of the Company's
international operations are translated at the average exchange rate in effect
during the period. Translation adjustments are reported as a separate component
of shareholders' equity.

Fluctuations in quarterly and annual results may occur as a result of factors
affecting demand for the Company's products, such as the timing of the Company's
and competitors' new product introductions and product enhancements. Due to such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the operating results for any future period.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain consolidated statement of operations data:

<TABLE>
<CAPTION>
                                           Three Months Ended           Six Months Ended
                                                 June 30,                   June 30,
                                           ------------------          ------------------
                                           1998          1997          1998          1997
                                           ----          ----          ----          ----
<S>                                        <C>           <C>           <C>           <C>
Revenues:
    Software licenses                        48%           44%           47%           45%
    Maintenance and other services           48            47            47            47
    Hardware                                  4             9             6             8
                                            ---           ---           ---           ---
       Total revenues                       100           100           100           100
Cost of revenues:
    Software licenses                         6             6             5             5
    Maintenance and other services           38            33            36            33
    Hardware                                  3             6             5             6
                                            ---           ---           ---           ---
       Total cost of revenues                47            45            46            44
                                            ---           ---           ---           ---
Gross profit                                 53            55            54            56
Operating expenses:
    Sales and marketing                      28            29            27            28
    General and administrative               13            12            12            12
    Research and development                  9             8             8             8
                                            ---           ---           ---           ---
       Total operating expenses              50            49            47            48
                                            ---           ---           ---           ---
Income from operations                        3%            6%            7%            8%
                                            ===           ===           ===           ===
</TABLE>



                                       8
<PAGE>   9


COMPARISON OF THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997

Revenues - Total revenues increased $8.5 million or 26% to $41.0 million for the
quarter ended June 30, 1998 from $32.5 million for the same period in the prior
year, and increased $19.2 million or 31% to $81.6 million for the first six
months of 1998 from $62.4 million for the same period in 1997. The second
quarter revenue growth rate, although slower than the first quarter, reflected
the continued growth of software licenses and maintenance and other service
revenues. Software sales increased 36% for the second quarter of 1998 compared
to the same period in 1997 and increased 35% for the first six months of 1998
compared to the same period in 1997. The growth in software license revenue was
attributable to sales of the Company's lower tier products, Vista and Vantage,
and to a lesser extent, Avante international sales, partially offset by lower
domestic Avante sales. The Company believes that increased competition, which
impacted second quarter domestic Avante sales, will continue to exert pressure
on revenues for the remainder of 1998. Maintenance and service revenues
increased 29% and 33% for the three and six months ended June 30, 1998,
respectively, from the corresponding periods in 1997. The growth in maintenance
and other services revenues was a result of the increase in software license
agreements, which provide for initial maintenance, training, installation and
support services. Hardware sales declined from 9% to 4% and 8% to 6% for the
three and six months ended June 30, 1998, respectively, from the corresponding
periods in 1997. The revenue mix between software licenses, maintenance and
other services, and hardware shifted primarily due to the decreased hardware
sales.

As a percentage of the Company's total revenues, international revenues
represented 23% in the second quarter of 1998 as compared with 15% in the 1997
second quarter. For the six months ended June 30, 1998, international revenues
represented 21% as compared to 15% during the corresponding period in 1997. The
increase in international revenues consisted primarily of sales from the
Company's UK subsidiary and its French subsidiary, which was purchased July
1997. Although DataWorks has experienced solid international growth in recent
quarters, European operations generally experience lower revenues in the summer
months and the Company anticipates this may affect third quarter results.

Cost of Revenues - Total cost of revenues increased $4.9 million or 34% to $19.5
million for the quarter ended June 30, 1998 from $14.6 million in the same prior
year period, and increased $9.5 million or 34% to $37.2 million for the first
six months of 1998 from $27.7 million for the same period in 1997. Cost of
software licenses as a percentage of software revenue remained a constant 13%
for the second quarter of 1998 and 1997. For the six months ended June 30, 1998,
and 1997, software license cost as a percentage of software revenue were 11% and
12%, respectively. The fluctuations were attributable to the change in software
product mix as previously discussed. Cost of maintenance and other services as a
percentage of related revenues increased to 80% from 69% for the second quarter
of 1998 as compared to 1997. For the six months ended June 30, 1998 and 1997,
the cost of maintenance and other services as a percentage of related revenues
was 75% and 70%, respectively. These expenses were impacted by the 1998 shift
toward relatively higher service revenue, which bear a higher cost than
maintenance revenue. The Company has made a significant investment in its
professional consulting service organization, which has experienced increased
growth during 1998. In addition to the downtime associated with orienting new
staff, numerous existing staff were cross-trained on the Company's various
software offerings in response to customer demand. As a result, the Company
experienced a temporary reduction in the overall utilization rate of its
professional service staff during the second quarter of 1998.

Gross Profit - Gross profit increased $3.7 million or 21% to $21.6 million from
$17.9 million for the second quarter of 1998 compared to the same period last
year representing 53% and 55% of total revenues in those quarters, respectively.
Gross profit increased $9.6 million or 28% to $44.4 million from $34.8 million
for the six months ended June 30, 1998 compared to the same period last year
representing 54% and 56% of total revenues, respectively. The increase in
absolute dollars was directly related to the increase in total revenues. Gross
profit, as percentage of revenues, for both the three and six month periods in
fiscal year 1998 were unfavorably impacted by the change in product mix and
reduction of professional services utilization.

Sales and Marketing Expenses - Sales and marketing expenses increased $1.9
million or 20% to $11.4 million in the three months ended June 30, 1998 from
$9.5 million for the same period in 1997, representing 28% and 29% of total
revenues, respectively. These expenses increased $4.8 million or 27% to $22.3
million in the six months ended June 30, 1998 from $17.5 million for the same
period in 1997, representing 27% and 28% of total revenues, respectively. The
absolute dollar increase was primarily attributable to increased commission
expense associated with the higher revenues.



                                       9
<PAGE>   10

General and Administrative Expenses - General and administrative expenses
increased $1.4 million or 35% to $5.4 million for the three months ended June
30, 1998 from $4.0 million for the same period in 1997, representing 13% and 12%
of the total revenues, respectively. These expenses increased $1.9 million or
24% from $7.8 million in the six months ended June 30, 1997 to $9.7 million for
the same period in 1998, representing 12% of total revenues in each period. The
increase, in absolute terms, resulted primarily from increases in staffing and
information systems infrastructure to support the Company's growth as well as
increases in expenses associated with the expanding operations of its foreign
subsidiaries.

Research and Development Expenses - DataWorks continues to invest heavily in the
future by funding research and development projects. Research and development
expenses are comprised primarily of salaries and a portion of the Company's
overhead for its in-house staff and amounts paid to outside consultants hired by
the Company, as appropriate, to supplement the product development efforts of
its in-house staff. Research and development expenses are charged to operations
as incurred. However, certain software production costs related to the Company's
Impresa for Backoffice product, are capitalized pursuant to Statement of
Financial Accounting Standards No. 86, Accounting for Software Costs.
Amortization of these costs will begin when the product is initially released,
which is expected in late 1998. As of June 30, 1998, the amount capitalized for
Impresa for Backoffice was $6.6 million. In addition to in-house software
development costs, the Company purchased certain capitalized software, which has
already reached technological feasibility, from third-party software providers
totaling $1.2 million for the six months ended June 30, 1998.

Gross research and development expenses increased $1.5 million or 42% to $5.0
million in the quarter ended June 30, 1998 from $3.5 million for the same period
in 1997, representing 12% and 11% of total revenues in each quarter,
respectively. These expenses increased $2.4 million or 36% to $9.2 million in
the six months ended June 30, 1998 from $6.7 million for the same period in 1997
representing 11% of total revenues, in each period. Gross research and
development expenditures included capitalized software costs related to Impresa
for Backoffice of $1.3 million and $0.9 million for the second quarters of 1998
and 1997, respectively; and $2.3 million and $1.6 million for the six months
ended June 30, 1998 and 1997, respectively.

Other Income, Net - Other income consists primarily of interest and dividend
income offset slightly by interest expense. Other income for both the three and
six months ended June 30, 1998 was impacted by the decreased balance of cash,
cash equivalents and short term investments as compared to the same 1997
periods.

Provision for Income Taxes - During 1998, the Company's effective income tax
rate has remained a constant 37%. For the three and six months ended June 30,
1997, the effective income tax rate was 36%. The estimated annual effective tax
rate is relatively sensitive to the results of operations in various foreign
subsidiaries. Consequently, such projections may change in future periods and
the actual effective tax rate could differ from the current estimate.

LIQUIDITY AND CAPITAL RESOURCES

The Company finances its operations primarily through cash generated from
operations and its current cash and short-term investment balances. During the
first six months of 1998, the Company generated $1.2 million of cash from its
operating activities. This included $3.9 million net income and $3.8 million of
non-cash expenses that resulted in a cash increase of $7.7 million offset by
$6.5 million of cash used for working capital purposes. The use of working
capital was attributable to the payment of year-end commissions and bonuses,
accrued merger-related integration costs, and prepaid third-party database and
maintenance costs.

Cash provided by investing activities amounted to $9.4 million for the first six
months of 1998. The increase was primarily due to the maturity of short-term
investments that totaled $19.0 million, net. Cash used in investing activities
included $3.5 million of capitalized software costs primarily related to the
Impresa for Backoffice development, $4.0 million of capital equipment purchases,
and the $1.4 million increase of intangible assets associated with the purchase
of CTi and C-WAY.

Financing activities provided $1.3 million during the six months ended June 30,
1998. Proceeds from the exercise of stock options and from stock purchased by
employees through the Company's Employee Stock Purchase Plan provided cash of
$2.5 million. Capital lease obligations, repayment of the Company's line of
credit obligation and the payment of non-interest bearing earnout payables
during the first two quarters of 1998 reduced cash provided by financing
activities by $1.2 million.



                                       10
<PAGE>   11

As of June 30, 1998 DataWorks had $65.8 million working capital including $29.3
million in cash and cash equivalents and $11.6 million in short-term investments
consisting of high-quality municipal bonds, U. S. government debt securities and
commercial paper and auction securities. DataWorks' principal commitments as of
June 30, 1998 consisted primarily of facilities and equipment leases. In
addition, the Company is obligated under certain software reseller agreements
with third-party providers to render quarterly or annual minimum royalty and
maintenance support payments.

DataWorks' capital resources may be used to support working capital
requirements, product development, capital equipment requirements and possible
acquisitions of businesses, products or technologies complementary to the
Company's current business. The Company believes that its current cash and
short-term investment balances, available lines of credit and cash flows from
operations are sufficient to fund its operations for at least the next 12
months. However, during this period or thereafter, the Company may require
additional financing. There can be no assurance that such additional financing
will be available on terms favorable to the Company, or at all.

CERTAIN RISKS

Software Revenue Recognition - Prior to 1998, the Company recognized revenue in
accordance with the provisions of the American Institute of Certified Public
Accountants ("AICPA") Statement of Position No. 91-1, Software Revenue
Recognition ("SOP 91-1"). The AICPA has recently adopted Statement of Position
No. 97-2, Software Revenue Recognition ("SOP 97-2"), that supersedes SOP 91-1.
The Company adopted SOP 97-2 effective January 1, 1998. The adoption of SOP 97-2
did not have a significant impact on the Company's financial statements for the
three and six months ended June 30, 1998. However, there can be no assurance
that subsequent interpretations of this pronouncement by the Company's
independent auditors or the Securities and Exchange Commission will not modify
the Company's revenue recognition policies, or that such modifications will not
have a material adverse effect on the operating results reported in any
particular quarter. There can be no assurance that the Company will not be
required to adopt changes in its software licensing or services practices to
conform to SOP 97-2.

Year 2000 Compliance - Significant uncertainty exists in the software industry
concerning the potential effects from the Year 2000 issue associated with the
date codes used in computer software and hardware systems. The Company believes
that all of its existing products are Year 2000 compliant and new products are
being designed to be Year 2000 compliant. Although products have undergone the
Company's normal quality testing procedures, there can be no assurance that the
Company's software products contain all necessary date code changes. Any failure
of the Company's products to perform, including system malfunctions due to the
onset of the calendar year 2000, could have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company is also currently in the process of evaluating its information
technology infrastructure for Year 2000 compliance, including reviewing what
actions are required to make all software systems used internally Year 2000
compliant as well as actions needed to mitigate vulnerability to problems with
suppliers and other third-parties' systems. The Company is assessing the extent
of the necessary modifications to its computer software, and management does not
anticipate that the Company will incur significant operating expenses or be
required to invest heavily in computer system improvements to be Year 2000
compliant. There can be no assurance that such measures will alleviate the Year
2000 problems which could have a material adverse effect upon the Company's
business, operating results and financial condition.

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

                Not applicable.




                                       11
<PAGE>   12
PART II.        OTHER INFORMATION

ITEM 2.         CHANGES IN SECURITIES AND USE OF PROCEEDS

                On April 22, 1998, the Company acquired the assets of C-WAY
                Systems, Inc., a Delaware corporation, ("C-WAY") in exchange for
                106,315 shares of DataWorks' Common Stock valued at
                approximately $2.6 million, which were issued to the former
                stockholders of C-WAY, and a possible earnout of up to an
                additional approximately $2.6 million. The issuance of such
                Common Stock was exempted from registration with the Securities
                and Exchange Commission in accordance with Section 3(b) of the
                Securities Act of 1933, as amended. The earnout is payable over
                four years based upon satisfaction of certain product
                development goals and a percentage of future revenues generated.
                Prior to the transaction, C-WAY developed, sold and supported
                advanced planning and scheduling software for manufacturers. The
                transaction was accounted for as a purchase, and the results of
                operations of C-WAY are included with the results of the
                Company's operations subsequent to the date of acquisition.

                Effective June 1, 1998, the Company acquired the assets of CTi
                Software BV ("CTi") in exchange for $1.25 million cash and
                65,689 shares of DataWorks' common stock, at the time valued at
                approximately $1.25 million. The issuance of such Common Stock
                was exempted from registration with the Securities and Exchange
                Commission in accordance with Section 4(2) of the Securities Act
                of 1933, as amended. Prior to the acquisition, CTi, located in
                Hague, Netherlands, developed, marketed, and maintained
                mid-range manufacturing software. The transaction was accounted
                for as a purchase, and the results of operations of CTi are
                included with the results of the Company's operations subsequent
                to the date of acquisition.

ITEM 4.         SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

<TABLE>
<CAPTION>
                                                                                                                         BROKER
                                                                          FOR             AGAINST         ABSTAIN       NON-VOTES
<S>              <C>                                                   <C>              <C>               <C>            <C>      
PROPOSAL 1:      To elect the following directors to serve for the
                 ensuing year and until their successors are elected:
                      Stu Clifton                                      12,604,326         189,710
                      Norman Farquhar                                  12,602,440         191,596
                      Nathan W. Bell                                   12,603,886         190,150
                      Tony N. Domit                                    12,604,536         189,500
                      William P. Foley II                              12,604,536         189,500
                      Ronald S. Parker                                 12,604,536         189,500
                      Roy Thiele-Sardina                               12,603,711         190,325

PROPOSAL 2:      To approve a change in the Company's state of          7,355,237       3,425,846           20,691       1,992,262
                 incorporation from California to Delaware

PROPOSAL 3:      To approve an amendment to the Company's              12,436,041         309,862           21,133               -
                 Articles of Incorporation to increase the
                 number of authorized Common Stock to
                 50,000,000 shares

PROPOSAL 4:      To approve the Company's Equity Incentive              6,948,435       3,739,167           74,258       2,032,176
                 Plan, as amended, to increase the aggregate
                 number of shares authorized for issuance under
                 such plan by 1,250,000 shares

PROPOSAL 5:      To approve the Company's Employee Stock               10,448,884         273,078           23,198       2,048,876
                 Purchase Plan, as amended, to increase the
                 aggregate number of  shares authorized for
                 issuance under such plan by 750,000 shares

</TABLE>


                                       12
<PAGE>   13

<TABLE>
<CAPTION>
                                                                                                                           BROKER
                                                                          FOR             AGAINST           ABSTAIN      NON-VOTES

<S>              <C>                                                   <C>              <C>               <C>            <C>      
PROPOSAL 6:      To approve the Company's 1995 Non-Employee             9,998,982         729,623            7,169       1,992,262
                 Director's Stock Option Plan, as amended

PROPOSAL 7:      To ratify the selection of Ernst & Young LLP          12,765,440           8,530           20,066               -
                 as the Company's independent auditors for its
                 fiscal year ending December 31, 1998

</TABLE>


ITEM 5.         OTHER INFORMATION

                Pursuant to recent proxy rule changes, unless a shareholder who
                wishes to bring a matter before the shareholders at the
                Company's 1999 Annual Meeting of Shareholders notifies the
                Company of such matter prior to March 27, 1999, management will
                have discretionary authority to vote all shares for which it has
                proxies in opposition to such matter.

ITEM 6.         EXHIBITS AND REPORTS ON FORM 8-K

                (a)   Exhibits

                Exhibit 10.1 - Separation Agreement dated April 23, 1998, 
                between the Company and Robert C. Vernon.

                Exhibit 11 - Statements of Consolidated Computation of Earnings 
                Per Share

                Exhibit 27.1 - Financial Data Schedule

                (b) Reports on Form 8-K.

                None.



                                       13
<PAGE>   14


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



                              DATAWORKS CORPORATION
                                  (Registrant)



Date:      August 13, 1998                     /s/ Stuart W. Clifton
                                          --------------------------------------
                                                    Stuart W. Clifton
                                                Chairman of the Board and
                                                 Chief Executive Officer
                                              (Principal Executive Officer)



Date:      August 13, 1998                      /s/ Norman R. Farquhar
                                          --------------------------------------
                                                   Norman R. Farquhar
                                               Chief Financial Officer and
                                                        Director
                                              (Principal Financial Officer)



                                       14