<PAGE>   1
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549




                                    FORM 10-Q


     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934


                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997


                                       OR
     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934


                         Commission file number 0-26934

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


              DELAWARE                                  77-0277772
          (State or other                            (I.R.S. Employer
          jurisdiction of                         Identification Number)
          incorporation or
           organization)


                              1344 CROSSMAN AVENUE
                           SUNNYVALE, CALIFORNIA 94089
                    (Address of principal executive offices)


                                 (408) 744-9500
              (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. Yes [X] No [ ] 


        As of January 31, 1998 there were 11,376,670 shares of the Registrant's
common stock outstanding.

================================================================================


<PAGE>   2
                           ARBOR SOFTWARE CORPORATION

                                    FORM 10-Q

                                      INDEX


<TABLE>
<CAPTION>
PART I.     FINANCIAL INFORMATION                                                          PAGE
                                                                                           ----
<S>                                                                                        <C>


Item 1.     Financial Statements

            Condensed Consolidated Balance Sheets
            at December 31, 1997 and March 31, 1997....................................      3

            Condensed Consolidated Statements of Income
            for the three months and nine months ended December 31, 1997 and 1996......      4

            Condensed Consolidated Statements of Cash Flows
            for the nine months ended December 31, 1997 and 1996.......................      5

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

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


PART II.    OTHER INFORMATION

Item 1.     Legal Proceedings..........................................................     20

Item 6.     Exhibits and Reports on Form 8-K...........................................     22

SIGNATURES  ...........................................................................     23
</TABLE>




                                       2
<PAGE>   3


PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


                           ARBOR SOFTWARE CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,    MARCH 31,
                                                                                         1997          1997
                                                                                        -------       -------
                                                                                      (UNAUDITED)
<S>                                                                                  <C>             <C>    
                                            ASSETS

    Current assets:
      Cash and cash equivalents .................................................       $ 7,933       $ 5,647
      Short-term investments ....................................................        24,622        23,204
      Accounts receivable, net of allowances of $1,263 and $783 .................        22,397        12,877
      Deferred tax assets .......................................................         4,203         4,203
      Prepaid expenses and other current assets .................................         2,416         1,051
                                                                                        -------       -------
         Total current assets ...................................................        61,571        46,982

    Property and equipment, net .................................................        12,224        11,424
    Goodwill and intangible assets, net .........................................         3,000            --
    Other assets ................................................................           945         1,183
                                                                                        -------       -------
                                                                                        $77,740       $59,589
                                                                                        =======       =======

                      LIABILITIES AND STOCKHOLDERS' EQUITY

    Current liabilities:
      Accounts payable ..........................................................       $   979       $ 2,183
      Accrued expenses and other current liabilities ............................        13,955         7,840
      Deferred revenue ..........................................................        10,700         5,954
      Current portion of lease obligations ......................................           474           761
                                                                                        -------       -------
         Total current liabilities ..............................................        26,108        16,738
                                                                                        -------       -------

    Lease obligations, long-term ................................................            43           279
                                                                                        -------       -------

    Stockholders' equity:
       Preferred stock, $0.001 par value; 5,000,000 shares authorized; none
         issued and outstanding .................................................            --            --
       Common stock, $0.001 par value; 50,000,000 shares
         authorized;  11,368,000 and 11,126,000 shares issued and outstanding....            11            11
       Additional paid-in capital ...............................................        44,550        39,223
       Retained earnings ........................................................         6,959         3,307
       Cumulative translation adjustment ........................................            69            31
                                                                                        -------       -------
         Total stockholders' equity .............................................        51,589        42,572
                                                                                        -------       -------
                                                                                        $77,740       $59,589
                                                                                        =======       =======
</TABLE>


     See accompanying notes to Condensed Consolidated Financial Statements.


                                       3


<PAGE>   4
                           ARBOR SOFTWARE CORPORATION
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                (IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)



<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED                NINE MONTHS ENDED
                                                 DECEMBER 31,                      DECEMBER 31,
                                           ------------------------        ------------------------
                                             1997            1996            1997            1996
                                           --------        --------        --------        --------
<S>                                        <C>             <C>             <C>             <C>     
 Revenues:
    License ........................       $ 17,482        $ 10,230        $ 44,951        $ 26,914
    Maintenance, support and other..          3,895           2,244          10,545           5,625
                                           --------        --------        --------        --------
       Total revenues ..............         21,377          12,474          55,496          32,539
                                           --------        --------        --------        --------
Cost of revenues:
    License ........................            342             130             938             553
    Maintenance, support and other..          1,685           1,078           4,557           2,642
                                           --------        --------        --------        --------
       Total cost of revenues ......          2,027           1,208           5,495           3,195
                                           --------        --------        --------        --------
 Gross profit ......................         19,350          11,266          50,001          29,344
                                           --------        --------        --------        --------
 Operating expenses:
    Sales and marketing ............         10,233           6,166          27,516          15,990
    Research and development .......          2,918           2,041           7,332           4,994
    General and administrative .....          2,241           1,161           5,658           3,165
    Acquired in-process technology..          3,000              --           3,000              --
                                           --------        --------        --------        --------
       Total operating expenses ....         18,392           9,368          43,506          24,149
                                           --------        --------        --------        --------
 Income from operations ............            958           1,898           6,495           5,195
 Interest and other income .........            441             471           1,158           1,329
 Interest expense ..................            (23)            (57)            (94)           (195)
                                           --------        --------        --------        --------
 Income before income taxes ........          1,376           2,312           7,559           6,329
 Provision for income taxes ........         (1,619)           (809)         (3,907)         (2,215)
                                           --------        --------        --------        --------
 Net income (loss) .................       $   (243)       $  1,503        $  3,652        $  4,114
                                           ========        ========        ========        ========
 Basic earnings (loss) per share....       $  (0.02)       $   0.14        $   0.33        $   0.38
                                           ========        ========        ========        ========
 Diluted earnings (loss) per share..       $  (0.02)       $   0.13        $   0.31        $   0.35
                                           ========        ========        ========        ========
 Shares used to compute basic
   earnings (loss) per share .......         11,245          11,022          11,201          10,957
                                           ========        ========        ========        ========

 Shares used to compute diluted
   earnings (loss) per share .......         11,245          11,713          11,929          11,715
                                           ========        ========        ========        ========
</TABLE>


     See accompanying notes to Condensed Consolidated Financial Statements.


                                       4


<PAGE>   5
                           ARBOR SOFTWARE CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (IN THOUSANDS; UNAUDITED)


<TABLE>
<CAPTION>
                                                                                NINE MONTHS ENDED
                                                                                  DECEMBER 31,
                                                                            ------------------------
                                                                              1997           1996
                                                                            --------        --------
<S>                                                                         <C>             <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income ........................................................       $  3,652        $  4,114
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization .................................          3,360           1,457
      Provision for doubtful accounts ...............................            480             262
      Acquired in-process technology ................................          3,000              --
      Changes in assets and liabilities (net of effect of AppSource
        acquisition):
         Accounts receivable ........................................         (9,710)         (5,333)
         Prepaid expenses and other current assets ..................         (1,205)           (463)
         Other assets ...............................................            238            (204)
         Accounts payable ...........................................         (1,244)            245
         Accrued expenses and other current liabilities .............          5,840           1,578
         Deferred revenue ...........................................          4,746           1,095
                                                                            --------        --------
             Net cash provided by operating activities ..............          9,157           2,751
                                                                            --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of short-term investments, net ..........................         (1,418)           (778)
  Purchase of AppSource, net of cash received .......................         (2,965)             --
  Purchases of property and equipment ...............................         (4,088)         (6,008)
                                                                            --------        --------
             Net cash used in investing activities ..................         (8,471)         (6,786)
                                                                            --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock, net .......................          2,085           1,109
  Repayment of capital lease obligations ............................           (523)           (545)
                                                                            --------        --------
             Net cash provided by financing activities ..............          1,562             564
                                                                            --------        --------

Effect of exchange rate changes on cash and cash equivalents ........             38              49
                                                                            --------        --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................          2,286          (3,422)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................          5,647          10,698
                                                                            --------        --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..........................       $  7,933        $  7,276
                                                                            ========        ========

SUPPLEMENTAL DISCLOSURES:
  Cash paid for interest ............................................       $     95        $    194
  Cash paid for income taxes ........................................       $  2,675        $  2,557

SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
  Common stock issued in connection with purchase of AppSource ......       $  3,200        $     --
</TABLE>


     See accompanying notes to Condensed Consolidated Financial Statements.


                                       5


<PAGE>   6
                           ARBOR SOFTWARE CORPORATION
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.      Basis of Presentation

        The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring adjustments,
which in the opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations and cash flows for the
periods presented. These financial statements should be read in conjunction with
the Company's audited consolidated financial statements as included in the
Company's fiscal year 1997 Annual Report on Form 10-K. The condensed
consolidated results of operations for the period ended December 31, 1997 are
not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year ending March 31, 1998. The March 31, 1997
balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.

2.      Acquisition of AppSource Corporation

        On December 24, 1997, the Company acquired all of the outstanding shares
of AppSource Corporation (hereafter referred to as "AppSource"), a Florida
corporation. AppSource is a developer of OLAP-centric software for sales,
marketing and executive information system ("EIS") applications. Consideration
for this purchase was $3,200,000 in cash and 96,032 shares of the Company's
common stock. The total value attributed to the common stock issued by the
Company was $3,200,000. The Company also incurred $250,000 in transaction costs.

        The acquisition was recorded under the purchase method of accounting;
and accordingly, the results of operations of AppSource are included in the
consolidated financial statements from the date of acquisition. The purchase
price has been allocated to the assets acquired and liabilities assumed based
upon the fair market values at the date of acquisition, as summarized below (in
thousands):


<TABLE>
<S>                                  <C>    
Cash .............................       $   235
Other current assets .............           480
In-process technology ............         3,000
Goodwill and intangible assets....         3,000
Current liabilities assumed ......           (65)
                                         -------
                                         $ 6,650
                                         =======
</TABLE>


        The total purchase price was derived as follows (in thousands):

        Cash payment..........................        $  3,200
        Issuance of common stock..............           3,200
        Accrued transaction expenses..........             250
                                                      --------
                                                      $  6,650
                                                      ========

        The amounts allocated to technology were estimated using a risk adjusted
income approach applied to specifically identified technologies. In-process
technology was expensed upon acquisition because technological feasibility had
not been established and no alternative future uses existed. Amounts allocated
to goodwill and other intangible assets are being amortized on a straight-line
basis over four years.


                                       6


<PAGE>   7
3.       Earnings Per Share

        During the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (FAS
128). FAS 128 requires presentation of both basic and diluted earnings per
share (EPS) on the face of the income statement. Basic EPS, which replaces
primary EPS, is computed by dividing net income (numerator) by the weighted
average number of common shares outstanding (denominator) during the period.
Unlike the computation of primary EPS, basic EPS excludes the dilutive effect of
stock options. Diluted EPS replaces fully diluted EPS and gives effect to all
dilutive potential common shares outstanding during a period. In computing
diluted EPS, the average price for the period is used in determining the number
of shares assumed to be purchased from exercise of stock options rather than the
higher of the average or ending price as used in the computation of fully
diluted EPS. Earnings per share for all prior periods have been restated to
conform to the provisions of FAS 128.

        Following is a reconciliation of the denominators of the basic and
diluted EPS computations for the periods presented below:


<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED         NINE MONTHS ENDED
                                                  DECEMBER 31,              DECEMBER 31,
                                           -----------------------       ---------------------
                                             1997           1996          1997          1996
                                           --------        -------       -------       -------
                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                        <C>             <C>           <C>           <C>    
Net income (loss) ....................     $   (243)       $ 1,503       $ 3,652       $ 4,114
                                           ========        =======       =======       =======

Shares Calculation:

Average basic shares outstanding .....       11,245         11,022        11,201        10,957

Effect of Dilutive Securities:

Options ..............................           --            691           707           752
                                           --------        -------       -------       -------

   Total shares used to compute
   diluted earnings (loss) per share..       11,245         11,713        11,908        11,709
                                           ========        =======       =======       =======

Earnings (loss) per basic share ......     $  (0.02)       $  0.14       $  0.33       $  0.38
                                           ========        =======       =======       =======

Earnings (loss) per diluted share ....     $  (0.02)       $  0.13       $  0.31       $  0.35
                                           ========        =======       =======       =======
</TABLE>


        Options to purchase 736,435 shares of common stock at prices ranging
from $0.07 to $39.50 per share were outstanding at December 31, 1997 but were
not included in the computation of diluted EPS because either the options'
exercise price was greater than the average market price of the common shares or
inclusion of such options would have been antidilutive.


                                       7


<PAGE>   8
4.      Accrued Expenses and Other Current Liablities

        Accrued expenses and other current liabilities consist of the following
        (in thousands):


<TABLE>
<CAPTION>
                         DECEMBER 31,   MARCH 31,
                            1997           1997
                           -------       -------
                         (UNAUDITED)
<S>                      <C>            <C>    
Income taxes payable.      $ 2,986       $ 1,754
Accrued commissions..        2,996         1,290
Accrued benefits ....        2,028         1,758
Other ...............        5,945         3,038
                           -------       -------
                           $13,955       $ 7,840
                           =======       =======
</TABLE>


5.      Recent Accounting Pronouncements

        In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income as defined includes all changes in equity (net assets) during a period
from nonowner sources. Examples of items to be included in comprehensive income,
which are excluded from net income, include foreign currency translation
adjustments and unrealized gain/loss on available-for-sale securities. The
disclosure prescribed by FAS 130 must be made beginning with the first quarter
of fiscal 1999.


                                       8


<PAGE>   9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        The discussion in this Report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors" in this Part I, Item 2 as well as those discussed in this
section and elsewhere in this Report, and the risks discussed in "Risk Factors"
in Part I, Item 1 -- Business included in the Company's fiscal year 1997 Annual
Report on Form 10-K.

BUSINESS ACQUISITION

        On December 24, 1997, the Company acquired AppSource Corporation, a
Florida corporation. AppSource is a developer of OLAP-centric software for
sales, marketing and EIS applications. The total acquisition price of
approximately $6.7 million was funded from a combination of the Company's
existing working capital and newly issued common stock. Approximately $3.0
million of the total purchase price represented the value of in-process
technology that had not yet reached technological feasibility, had no
alternative future uses and was charged to the Company's operations in the third
quarter ended December 31, 1997. The charge resulting from in-process technology
is not deductible for income tax purposes. The acquisition was accounted for
under the purchase method of accounting; and accordingly, the results of
operations of AppSource are included in the consolidated financial statements
from the date of acquisition. See Note 2 of Notes to Condensed Consolidated
Financial Statements.

RESULTS OF OPERATIONS

        The following table sets forth certain items in the Company's Condensed
Consolidated Statements of Income as a percentage of total revenues for the
periods indicated:


<TABLE>
<CAPTION>
                                             THREE MONTHS                NINE MONTHS
                                          ENDED DECEMBER 31,          ENDED DECEMBER 31,
                                         -------------------         -------------------
                                         1997          1996          1997          1996
                                         -----         -----         -----         -----
<S>                                      <C>           <C>           <C>           <C>  
Revenues:
  License ........................        81.8%         82.0%         81.0%         82.7%
  Maintenance, support and other..        18.2          18.0          19.0          17.3
                                         -----         -----         -----         -----
     Total revenues ..............       100.0         100.0         100.0         100.0
                                         -----         -----         -----         -----
Cost of revenues:
  License ........................         1.6           1.1           1.7           1.7
  Maintenance, support and other..         7.9                       8.68.2          8.1
                                         -----         -----         -----         -----
     Total cost of revenues ......         9.5           9.7           9.9           9.8
                                         -----         -----         -----         -----
Gross profit .....................        90.5          90.3          90.1          90.2
                                         -----         -----         -----         -----
Operating expenses:
  Sales and marketing ............        47.9          49.4          49.6          49.2
  Research and development .......        13.6          16.4          13.2          15.3
  General and administrative .....        10.5           9.3          10.2           9.7
  Acquired in-process technology..        14.0            --           5.4            --
                                         -----         -----         -----         -----
Total operating expenses .........        86.0          75.1          78.4          74.2
                                         -----         -----         -----         -----
Income from operations ...........         4.5          15.2          11.7          16.0
Interest and other income ........         2.1           3.8           2.1           4.0
Interest expense .................        (0.1)         (0.5)         (0.2)         (0.6)
                                          -----         -----         -----         -----
Income before income taxes .......         6.5          18.5          13.6          19.4
Provision for income taxes .......        (7.6)         (6.5)         (7.0)         (6.8)
                                         -----         -----         -----         -----
Net income .......................        (1.1)%        12.0%          6.6%         12.6%
                                         =====         =====         =====         =====
</TABLE>


                                       9


<PAGE>   10
REVENUES

        The Company's total revenues are derived from license revenues for its
Arbor Essbase on-line analytical processing ("OLAP") server software ("Essbase")
and related products as well as software maintenance and support, training and
consulting revenues from Essbase licensees. Revenues for maintenance and support
services, training and consulting are charged separately from the license of
Essbase. License revenues are recognized upon shipment of the product if no
significant vendor obligations remain and collection of the resulting receivable
is probable. In instances where a significant vendor obligation exists, revenue
recognition is delayed until such obligation has been satisfied. Allowances for
estimated future returns, which to date have been immaterial, are estimated and
provided for at the time of shipment and are applied as a reduction of gross
revenues. Maintenance and support revenues consist of ongoing support and
product updates and are recognized ratably over the term of the contract, which
is typically twelve months. Revenues from training and consulting are recognized
when the services are performed. The Company has recognized revenue, for all
periods presented, in accordance with Statement of Position 91-1 entitled
"Software Revenue Recognition."

        The Company's total revenues for the three months ended December 31,
1997 increased 71% to $21.4 million from $12.5 million for the three months
ended December 31, 1996, and for the nine months ended December 31, 1997
increased 71% to $55.5 million from $32.5 million for the nine months ended
December 31, 1996. License revenues for the three months ended December 31, 1997
increased 71% to $17.5 million from $10.2 million for the three months ended
December 31, 1996, and for the nine months ended December 31, 1997 increased 67%
to $45.0 million from $26.9 million for the nine months ended December 31, 1996.
The increases are attributable to an increase in the number of licenses sold due
in part to the expansion of the direct and indirect sales forces. Direct and
indirect license revenues for the three months ended December 31, 1997 increased
by 86% and 31%, respectively, when compared to the three months ended December
31, 1996, and for the nine months ended December 31, 1997 increased by 82% and
32%, respectively, when compared to the nine months ended December 31, 1996.
Maintenance, support and other revenues for the three months ended December 31,
1997 increased 74% to $3.9 million from $2.2 million for the three months ended
December 31, 1996, and for the nine months ended December 31, 1997 increased 87%
to $10.5 million from $5.6 million for the nine months ended December 31, 1996.
The increase is attributable to a larger installed base providing incremental
maintenance and support. The percentage of the Company's total revenues
attributable to software licenses was 82% for each of the three months ended
December 31, 1997 and 1996, and for the nine months ended December 31, 1997
decreased to 81% from 83% for the nine months ended December 31, 1996.

        Revenues derived through indirect channel partners accounted for
approximately 17%, 22%, 19% and 25% of the Company's total revenues for the
three months ended December 31, 1997 and 1996, and the nine months ended
December 31, 1997 and 1996, respectively. The percentage decrease is due
primarily to a decline in revenues attributable to Comshare Incorporated
("Comshare"). The Company continues its strategy of signing up new indirect
channel partners to expand the market presence of Essbase worldwide. The Company
reports revenues derived from indirect channel partners in the period in which
the revenues are reported to the Company by the channel partner or at the time
of shipment in those instances when the Company is able to identify the end
users.

        Total international revenues (which exclude revenues from the U.S. and
Canada) from the Company's direct sales accounted for approximately 14%, 10%,
15% and 10% of the Company's total revenues for the three months ended December
31, 1997 and 1996, and the nine months ended December 31, 1997 and 1996,
respectively. International license and service revenues increased to $3.0
million for the three months ended December 31, 1997 from $1.2 million for the
three months ended December 31, 1996, and increased to $8.2 million for the nine
months ended December 31, 1997 from $3.3 million for the nine months ended
December 31, 1996, primarily due to expansion of the international direct and
indirect sales forces. The Company records revenues from its United States-based
indirect channel partners as domestic revenues, although certain of such
partners sell the Company's products both domestically and internationally.


                                       10


<PAGE>   11
COST OF REVENUES

        Cost of License Revenues. Cost of license revenues consists primarily of
product packaging, documentation, production costs and royalties paid for
licensed technologies. Cost of license revenues for the three months ended
December 31, 1997 increased as a percentage of license revenues to 2% from 1%
for the three months ended December 31, 1996 and accounted for 2% of total
license revenues for each of the nine months ended December 31, 1997 and 1996.

        Cost of Maintenance, Support and Other. Cost of maintenance, support and
other revenues consists primarily of customer support costs and direct costs
associated with providing other services. Customer support includes telephone
question and answer services, newsletters, on-site visits and other support.
Cost of maintenance, support and other revenues decreased as a percentage of
maintenance, support and other revenues to 43% for the three months ended
December 31, 1997 from 48% for the three months ended December 31, 1996 and
decreased to 43% for the nine months ended December 31, 1997 from 47% for the
nine months ended December 31, 1996. The decrease as a percentage of
maintenance, support and other revenues was primarily due to increased
maintenance revenues, which have a lower cost structure than support and
training.

OPERATING EXPENSES

        Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs, including sales commissions of all personnel involved in the
sales process, as well as costs of advertising, public relations, seminars and
trade shows. Sales and marketing expenses increased to $10.2 million for the
three months ended December 31, 1997 from $6.2 million for the three months
ended December 31, 1996, and increased to $27.5 million for the nine months
ended December 31, 1997 from $16.0 million for the nine months ended December
31, 1996, approximating 48%, 49%, 50% and 49% of total revenues for the three
months ended December 31, 1997 and 1996, and the nine months ended December 31,
1997 and 1996, respectively. The increase in dollar amount was primarily due to
costs associated with the expansion of the direct sales force in North America,
Europe and Australia, including new offices in Canada, France, Germany, and
Australia. Other factors included personnel increases in the marketing group,
and increased costs associated with advertising, public relations, seminars and
trade shows. The Company expects to continue hiring additional sales and
marketing personnel and to increase promotion and advertising expenditures for
the remainder of fiscal 1998.

        Research and Development. Research and development expenses consist
primarily of salaries and related expenses, consultants and depreciation of
development equipment. Research and development expenses increased to $2.9
million for the three months ended December 31, 1997 from $2.0 million for the
three months ended December 31, 1996, and increased to $7.3 million for the nine
months ended December 31, 1997 from $5.0 million for the nine months ended
December 31, 1996, approximating 14%, 16%, 13% and 15% of total revenues,
respectively. The increase in dollar amount was primarily due to an increase in
the number of software engineers and an increase in consulting fees relating to
applications, joint development projects and associated support required to
develop Essbase enhancements. The Company believes that a significant level of
investment for product research and development is required to remain
competitive. Accordingly, the Company anticipates that it will continue to
devote substantial resources to product research and development and that
research and development expenses will increase in absolute dollars for the
remainder of fiscal 1998.

        General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, investor relations, legal, MIS, human
resources and general management, as well as bad debt, insurance and
professional fees. General and administrative expenses increased to $2.2 million
for the three months ended December 31, 1997 from $1.2 million for the three
months ended December 31, 1996 and increased to $5.7 million for the nine months
ended December 31, 1997 from $3.2 million for the nine months ended December 31,
1996, approximating 11%, 9%, 10% and 10% of total revenues, respectively. The
increase in dollar amount was


                                       11


<PAGE>   12
primarily due to increased staffing necessary to manage and support the
Company's expansion as well as increased professional fees, including legal fees
related to the Comshare and the Gentia Software plc ("Gentia Software")
(formerly known as Planning Sciences International plc and Planning Sciences,
Inc.) litigation. The Company believes that its general and administrative
expenses will increase in absolute dollar amounts for the remainder of fiscal
1998 as the Company expands its administrative staff and adds infrastructure.
The Company also expects general and administrative expenses to increase for the
remainder of fiscal 1998 as a result of legal fees resulting from the Gentia
Software litigation. During the quarter, the Company and Comshare settled all
claims and counterclaims between the parties in the action previously filed by
the Company. See "Legal Proceedings" in Part II, Item 1 below. See also "Risk
Factors -- Risks Associated with Litigation and Related Costs" in this Part I,
Item 2 below. See also the Company's recent report on Form 8-K, dated December
12, 1997, filed with the Securities and Exchange Commission on December 24,
1997.


INTEREST AND OTHER INCOME AND INTEREST EXPENSE

        Interest and other income primarily represents interest income earned on
the Company's cash, cash equivalents and short-term investments, and foreign
exchange transaction gains and losses. Interest and other income decreased to
$441,000 for the three months ended December 31, 1997 from $471,000 for the
three months ended December 31, 1996, primarily due to lower cash and investment
balances, and decreased to $1.2 million for the nine months ended December 31,
1997 from $1.3 million for the nine months ended December 31, 1996, primarily
due to lower cash and investment balances and foreign exchange losses in the
first quarter of fiscal 1998. Interest expense results from the Company's
capital leases and decreased to $23,000 for the three months ended December 31,
1997 from $57,000 for the three months ended December 31, 1996, and decreased to
$94,000 for the nine months ended December 31, 1997 from $195,000 for the nine
months ended December 31, 1996. The decreases are due to a decline in the
outstanding balance of capital lease obligations.

PROVISION FOR INCOME TAXES

        The provision for income taxes increased to $1.6 million for the three
months ended December 31, 1997 from $809,000 for the three months ended December
31, 1996, and increased to $3.9 million for the nine months ended December 31,
1997 from $2.2 million for the nine months ended December 31, 1996. The
Company's effective tax rate was 118% and 52% for the three and nine months
ended December 31, 1997, respectively. The Company's effective tax rate was 35%
for each of the three and nine month periods ended December 31, 1996. The
increased effective tax rate for the three and nine month periods ended December
31, 1997, respectively, is due to the $3.0 million of in-process technology
acquired in connection with the Appsource acquisition. The charge resulting from
in-process technology is not deductible for income tax purposes. Excluding the
write-off of the acquired in-process technology from Appsource the effective tax
rate for the three and nine month periods ended December 31, 1997 would have
been 37%. The Company expects that its effective tax rate will be 37% for the
remainder of fiscal 1998.

LIQUIDITY AND CAPITAL RESOURCES

        As of December 31, 1997, the Company had $32.6 million in cash, cash
equivalents and short-term investments. Cash and cash equivalents are highly
liquid investments with original maturities of ninety days or less when
purchased. Net cash provided by operating activities was $9.2 million for the
nine months ended December 31, 1997, and was primarily attributable to net
income of $3.7 million, increases in accrued expenses and other current
liabilities of $5.8 million, and deferred revenue of $4.7 million, as well as
depreciation and amortization 


                                       12


<PAGE>   13
expense of $3.4 million and acquired in-process technology of $3.0 million,
offset by increases in accounts receivable of $9.7 million, prepaid expenses and
other current assets of $1.2 million and a decrease in accounts payable of $1.2
million.

        The Company has a line of credit which provides for borrowings of up to
$5.0 million at the bank's prime rate and expires in December 1998. As of
December 31, 1997, the Company had no outstanding borrowings under its credit
facility.

        As of December 31, 1997, the Company's principal commitments consisted
of obligations under operating and capital leases. As of December 31, 1997, the
Company had $517,000 in outstanding borrowings under capital leases which are
payable through calendar year 1998.

        The Company believes its current cash and short-term investment
balances, its credit facility and the cash flows generated from operations, if
any, will be sufficient to meet its anticipated cash needs for working capital
and capital expenditures for at least the next 12 months.

RISK FACTORS

        The Company's business involves a number of risks, some of which are
beyond the Company's control. The following discussion highlights some of these
risks and should be read in conjunction with "Risk Factors" in Part I, Item 1 --
Business included in the Company's fiscal year 1997 Annual Report on Form 10-K.

        Fluctuations in Quarterly Results; Future Operating Results Uncertain.
The Company's quarterly operating results have in the past varied significantly
and likely will continue to vary significantly in the future depending on
factors, including (i) demand for the Company's Essbase software and related
products; (ii) the Company's relationships with and the consistency of sales
generated by its indirect channel partners;(iii) the level of price and product
competition; changes in pricing policies by the Company or its competitors; (iv)
changes in the mix of indirect channels through which Essbase is offered; (v)
the number, timing and significance of product enhancements and new product
announcements by the Company and its competitors; (vi) the ability of the
Company to develop, introduce and market new and enhanced versions of Essbase on
a timely basis; (vii) the size, timing and structure of significant licenses;
(viii) changes in the Company's sales incentive strategy; (ix) the timing of
revenue recognition under the Company's agreements; (x) customer order deferrals
in anticipation of enhancements to Essbase or enhancements of new products of
competitors; (xi) the impact of acquisitions by competitors and indirect channel
partners; (xii) the level of the Company's international revenues; (xiii)
foreign currency exchange rates; (xv) the renewal of maintenance and support
agreements; (xvi) product life cycles; (xvii) software defects and other product
quality problems; (xviii) personnel changes; (ixx) changes in Company strategy;
and (xx) changes in the level of operating expenses and general domestic and
international economic and political conditions. The operating results of many
software companies reflect seasonal trends, and the Company's business,
operating results and financial condition may experience comparatively slower
growth in its first fiscal quarter and summer months, which overlap into its
second fiscal quarter. The Company sells substantially more product towards the
end of each quarter, due in part to established buying patterns within the
software industry. As a result, the magnitude of any quarterly fluctuations may
not become evident until late in the quarter. Essbase orders are typically
shipped shortly after receipt, and consequently in the past, order backlog at
the beginning of any quarter has represented only a small portion of that
quarter's expected revenues. As a result, license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter.

        Due to all of the foregoing, revenues for any future quarter are not
predictable with any significant degree of accuracy. Quarterly revenues are also
difficult to forecast because the Company's sales cycle, from initial evaluation
to license and maintenance and support purchases, varies substantially from
customer to customer. Accordingly, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as indications of future performance. Although the Company
has


                                       13


<PAGE>   14
experienced significant growth in total revenues in recent years, the Company
does not believe that historical growth rates are sustainable. Accordingly, the
rate at which the Company has grown in the past should not be considered
indicative of future revenue growth, if any, or future operating results. There
can be no assurance that the Company will remain profitable on a quarterly or
annual basis. The Company's limited operating history makes the prediction of
future operating results difficult, if not impossible.

        The Company's expense levels are based in significant part on the
Company's expectations of future revenues and therefore are higher than past
expense levels, and are relatively fixed in the short run. If revenue levels are
below expectations, net income is likely to be disproportionately affected.
There can be no assurance that the Company will be able to achieve or maintain
profitability on a quarterly or annual basis in the future. In addition, it is
possible that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
or in the event that adverse conditions prevail or are perceived to prevail
generally or with respect to the Company's business, the price of the Company's
Common Stock would likely be materially adversely affected.

        Dependence Upon Indirect Channel Partners. In addition to its direct
sales force, the Company relies on indirect channel partners such as OEMs, VARs
and distributors for licensing and support of Essbase in the United States and
internationally. The Company's indirect channel partners generally offer
products of several different companies, including, in some cases, products that
compete with Essbase. There can be no assurance that the Company's current
indirect channel partners will elect, or be able, to market or support Essbase
effectively or be able to release their Essbase embedded products in a timely
manner, that the Company will be able to effectively manage channel conflicts,
that economic conditions or industry demand will not adversely affect these or
other indirect channel partners or that these indirect channel partners will not
devote greater resources to marketing and supporting the products of other
companies. No assurance can be given that revenues derived from indirect channel
partners will not fluctuate significantly in subsequent periods or will not
terminate entirely.

        Product Concentration; Dependence upon the Market for OLAP Server
Software. All of the Company's revenues to date have been derived from licenses
for Essbase and related products and services. The Company currently expects
that Essbase-related revenues, including maintenance and support contracts, will
continue to account for all or substantially all of the Company's revenues for
the foreseeable future. As a result, the Company's future operating results are
dependent upon continued market acceptance of Essbase and enhancements thereto.
There can be no assurance that Essbase will achieve continued market acceptance
or that the Company will be successful in marketing Essbase or enhancements
thereto. A decline in demand for, or market acceptance of, Essbase as a result
of competition, technological change or other factors would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company intends to continue its efforts to improve and enhance
Essbase by maintaining its commitment to an open architecture, extending its
partnerships, integrating third party technologies, enhancing its linkage with
leading general-purpose database management systems, continuing to evolve the
Essbase OLAP server, and developing new application development products and
middleware tools. No assurance can be given that such efforts will enhance the
value of the Company's product offerings to customers.

        Although sales of Essbase have increased in recent years, the market in
which the Company competes is undergoing rapid change and there can be no
assurance that sales of Essbase will continue to increase or potential customers
will purchase Essbase. The Company has spent, and intends to continue to spend,
considerable resources educating potential customers about Essbase and its
functions and the market for OLAP. However, there can be no assurance that such
expenditures will enable Essbase to achieve any additional degree of market
acceptance, and if the market for Essbase fails to grow or grows more slowly
than the Company currently anticipates, the Company's business, operating
results and financial condition would be materially adversely affected.
Historically, the software industry has experienced significant periodic
downturns, often in connection with, or in anticipation of, declines in general
economic conditions during which MIS budgets often decrease. As a result, the
Company's business, operating results and financial condition may in the future
reflect substantial 


                                       14


<PAGE>   15
fluctuations from period to period as a consequence of patterns and general
economic conditions in the software industry.

        Management of Growth; Risks related to and Integration of Acquisitions.
The Company's rapid growth has placed, and is expected to continue to place, a
significant strain on the Company's managerial, operational, financial and other
resources. As of December 31, 1997, the Company had grown to 348 employees since
its inception in April 1991, and the Company expects that continued hiring of
new personnel will be required to support its business. The Company's future
success will depend, in part, upon its ability to manage its growth effectively,
which will require that the Company continue to implement and improve its
operational, administrative and financial and accounting systems and controls
and to expand, train and manage its employee base. There can be no assurance
that the Company's systems, procedures or controls will be adequate to support
the Company's operations or that the Company's management will be able to
achieve the rapid execution necessary to exploit the market for the Company's
business model.

        A key component of the Company's growth strategy is the acquisition of
OLAP-centric firms that meet the Company's criteria for revenues, profitability,
growth potential and operating strategy. The successful implementation of this
strategy depends on the Company's ability to identify suitable acquisition
candidates, acquire such companies on acceptable terms and integrate their
operations successfully with those of the Company. There can be no assurance
that the Company will be able to identify suitable acquisition candidates or
that the Company will be able to acquire such candidates on acceptable terms.
Moreover, in pursuing acquisition opportunities the Company may compete with
other companies with similar growth strategies, certain of which competitors may
be larger and have greater financial and other resources than the Company.
Competition for these acquisition targets likely could also result in increased
prices of acquisition targets and a diminished pool of companies available for
acquisition. Acquisitions also involve a number of other risks, including
adverse effects on the Company's reported operating results from increases in
goodwill amortization, acquired in-process technology, stock compensation
expense and increased compensation expense resulting from newly hired employees,
the diversion of management attention, potential disputes with the sellers of
acquired entities and the possible failure to retain key acquired personnel.
Client satisfaction or performance problems with an acquired firm could also
have a material adverse impact on the reputation of the Company as a whole, and
any acquired subsidiary could significantly underperform relative to the
Company's expectations. Due to the foregoing, the Company's pursuit of an
overall acquisition strategy or any individual completed or future acquisition
may have a material adverse effect on the Company's business, results of
operations, financial condition and cash flows.

        The Company's future performance will depend on the Company's ability to
integrate the organizations acquired by the Company, which, even if successful,
may take a significant period of time, will place a significant strain on the
Company's resources, and could subject the Company to additional expenses during
the integration process. As a result, there can be no assurance that the Company
will be able to integrate acquired businesses successfully or in a timely manner
in accordance with its strategic objectives. If the Company is unable to manage
internal or acquisition-based growth effectively, the Company's business,
results of operations and financial condition will be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Competition," and "Personnel."

        Potential Volatility of Stock Price. The market price of the Company's
Common Stock is highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's operating results,
relationships with indirect channel partners, announcements relating to the
Company's current litigation with Gentia Software, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, developments with respect to patents, copyrights or proprietary
rights, conditions and trends in the software and other technology industries,
adoption of new accounting standards affecting the software 


                                       15


<PAGE>   16
industry, general market conditions and other factors. In addition, the stock
market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the capital
stocks of technology companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. In the past, following
periods of volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that company.
There can be no assurance that such litigation will not occur in the future with
respect to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.

        Risks Associated with International Operations. The Company's future
financial performance will depend in large part on the growth and performance of
the Company's international operations. The Company believes that in order to
increase sales opportunities and profitability it will be required to expand its
international operations. The Company maintains offices in Vancouver, British
Columbia, Canada; Paris, France; Frankfurt, Hamburg and Munich, Germany; and
Sydney, Australia and is currently investing significant time, financial
resources and management attention to developing its international operations,
including the development of certain third party distributor relationships and
the hiring of additional sales representatives. However, there can be no
assurance that the Company will be successful in expanding its international
operations or that the Company will be able to maintain or increase
international market demand for Essbase. To the extent that the Company is
unable to do so in a timely manner, the Company's international sales will be
limited, and the Company's business, operating results and financial condition
would be materially adversely affected.

        International sales are subject to inherent risks, including the impact
of possible recessionary environments in economies outside the United States,
higher costs of doing business, costs of localizing products for different
languages, longer receivables collection periods and greater difficulty in
accounts receivable collection, unexpected changes in regulatory requirements,
difficulties and costs of staffing and managing foreign operations, reduced
protection for intellectual property rights in some countries, potentially
adverse tax consequences and political and economic instability. There can be no
assurance that the Company or its indirect channel partners will be able to
sustain or increase international revenues from international licenses and
maintenance, support and other services, or that the foregoing factors will not
have a material adverse effect on the Company's future international revenues
and, consequently, on the Company's business, operating results and financial
condition. The Company's direct international sales are currently denominated in
either United States dollars, British pounds sterling, German deutsche marks or
French francs. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in the currency
exchange rates in the future will not have a material adverse impact on revenues
from direct international sales and thus the Company's business, operating
results or financial condition. Sales generated by the Company's indirect
channel partners are currently paid to the Company in United States dollars. If,
in the future, international indirect sales are denominated in local currencies,
foreign currency translations may contribute to significant fluctuations in, and
could have a material adverse effect upon, the Company's business, operating
results and financial condition.

        Competition. The market in which the Company competes is intensely
competitive, highly fragmented and characterized by rapidly changing technology
and evolving standards. The Company's current and potential competitors offer a
variety of planning and analysis software solutions and generally fall within
three categories: (i) vendors of multidimensional database and analysis software
such as Oracle Corporation (Express), Pilot Software, Inc., a division of
Platinum Equity Holdings (Pilot Analysis Server); Gentia Software (Gentia);
Applix, Inc. (TM1); Holistic Systems, a division of Seagate Technology, Inc.
(Holos) and Microsoft Corporation ("Microsoft"), Microsoft OLAP Server,
currently in beta, through its acquisition of OLAP technology from Panorama
Software of Tel Aviv, Israel; (ii) vendors of dedicated software applications
for budgeting and financial consolidation such as Hyperion Software Corporation
(Pillar and Enterprise); and (iii) vendors of OLAP/relational database software
(ROLAP) such as Information Advantage, Inc. (Decision Suite); Informix
Corporation (Metacube); and Microstrategy, Inc. (DSS Agent). See Part II, Item
1. Legal Proceedings. See also "Risk Factors -- Risks Associated with Litigation
and Related Costs."


                                       16


<PAGE>   17
        The Company has experienced and expects to continue to experience
increased competition from current and potential competitors, many of whom have
significantly greater financial, technical, marketing and other resources than
the Company. Such competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than the
Company. Also, certain current and potential competitors have greater name
recognition or more extensive customer bases that could be leveraged, thereby
gaining market share to the Company's detriment. The Company expects additional
competition as other established and emerging companies enter into the OLAP
software market and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any of which would materially adversely
affect the Company's business, operating results and financial condition.

        Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of the
Company's prospective customers. Further, competitive pressures, such as those
resulting from competitors discounting of their products, may require the
Company to reduce the price of Essbase, which would materially adversely affect
the Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to compete successfully against
current and future competitors, and the failure to do so would have a material
adverse effect upon the Company's business, operating results and financial
condition.

        Personnel. The effective management of the Company's business will
depend, in large part, upon the Company's ability to retain its highly skilled
technical, managerial, sales and marketing personnel as well as its ability to
attract and maintain additions to such personnel in the future. If the Company
is unable to retain its key technical, managerial, sales and marketing
personnel, or attract, assimilate and retain additional qualified personnel,
particularly those in key positions, the Company's business, operating results
and financial condition would be materially adversely affected. Competition for
personnel in the computer software industry is intense and the Company has
experienced some difficulties recruiting qualified personnel.

        Risks Associated with Litigation and Related Costs. The Company's
ongoing litigation with Gentia Software has and will lead to increased legal
costs to the Company. No assurance can be given as to when this litigation
proceeding will be resolved or that management will not be distracted from their
normal duties as a result of this proceeding. The Company believes that it has
meritorious claims against Gentia Software and that it has meritorious defenses
against Gentia Software's claims that the U.S. Patent No. 5,359,724 is invalid,
and intends to vigorously pursue its claims and defend itself against Gentia
Software's claims. The outcome of the Gentia Software litigation is uncertain at
this time and no assurance can be given as to the outcome of the litigation.
However, management does not believe that the outcome of the Gentia Software
litigation will have a material adverse effect on the Company. During the
quarter, the Company and Comshare settled all claims and counterclaims between
the parties in the action previously filed by the Company. See "Legal
Proceedings" in Part II, Item 1 below.

        Risks Associated with New Versions and New Products; Rapid Technological
Change. The software industry, and specifically the market in which the Company
competes, is characterized by rapid technological change, frequent introductions
of new products, changes in customer demands and evolving industry standards.
The introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
life cycle of each version of Essbase is difficult to estimate. The Company's
future success will depend upon its ability to address the increasingly
sophisticated needs of its customers by developing and introducing enhancements
to Essbase on a timely basis that keep pace with technological developments and
emerging industry standards and customer requirements. There can be no assurance
that the Company will be successful in developing and marketing enhancements to
Essbase that respond to technological change, evolving industry standards or
customer requirements, that the Company will not 


                                       17


<PAGE>   18
experience difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements or that such enhancements will
adequately meet the requirements of the marketplace and achieve any significant
degree of market acceptance. The Company has in the past experienced delays in
the release dates of enhancements to Essbase. If release dates of any future
Essbase enhancements are delayed, or if when released, they fail to achieve
market acceptance, the Company's business, operating results and financial
condition could be materially and adversely affected. There can be no assurance
that the introduction or announcement of new product offerings by the Company or
the Company's competitors will not cause customers to defer or forego purchases
of current versions of Essbase, which could have a material adverse effect on
the Company's business, operating results and financial condition.

        The functioning of Essbase is not affected by dates containing the year
2000 or subsequent years. This is due to the fact that Essbase does not store
any date information as a data type in its database and does not perform any
date calculations. However, customer's allocations of their financial resources
to deal with this issue generally may reduce their ability to purchase products
such as Essbase and related products and services. This reallocation of
financial resources could have an adverse effect on the Company's business,
operating results and financial condition.

        Risks of the Year 2000 Issue on Internal Information Systems. The
Company has recently implemented new information systems and accordingly does
not anticipate any internal Year 2000 issues from its own information systems,
databases or programs. However, the Company could be adversely impacted by Year
2000 issues faced by major distributors, suppliers, customers, vendors and
financial service organizations with which the Company interacts.

        Risks of Software Defects. Software products as internally complex as
Essbase frequently contain errors or defects, especially when first introduced
or when new versions or enhancements are released. Despite product testing by
the Company, the Company has in the past released versions of Essbase with
defects and has discovered software errors in Essbase and certain enhanced
versions of Essbase after their introduction. Although the Company has not
experienced material adverse effects resulting from any such defects and errors
to date, there can be no assurance that, despite testing by the Company and by
current and potential customers, defects and errors will not be found in new
versions or enhancements after commencement of commercial shipments, resulting
in loss of revenues or delay in market acceptance, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.

        Need to Manage Changing Business. The Company has recently experienced a
period of significant expansion. In the future, the Company will be required to
improve its financial and management controls, reporting systems and procedures
and expand, train and manage its work force. There can be no assurance that the
Company will be able to do so effectively, and failure to do so when necessary
would have a material adverse effect upon the Company's business, operating
results and financial condition.

        Proprietary Rights and Risks of Infringement. The Company relies
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining a technology leadership position.
The Company seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. The Company currently has one United States patent and corresponding
patent applications pending in Europe, Canada and Australia. There can be no
assurance that the Company's patent will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications, whether or not being currently challenged by applicable
governmental patent examiners, will be issued with the scope of the claims
sought by the Company, if at all. Furthermore, there can be no assurance that
others will not develop 


                                       18


<PAGE>   19
technologies that are similar or superior to the Company's technology or design
around the patents owned by the Company.

        Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights as fully as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights in the United
States or abroad will be adequate or that competitors will not independently
develop similar technology. The Company has entered into source code escrow
agreements with a number of its customers and indirect channel partners
requiring release of source code under certain conditions. Such agreements
provide that such parties will have a limited, non-exclusive right to use such
code in the event that there is a bankruptcy proceeding by or against the
Company, if the Company ceases to do business or if the Company fails to meet
its contractual obligations. The provision of source code may increase the
likelihood of misappropriation by third parties.

        The Company expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
the Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, if at all. In the event of a successful claim of product
infringement against the Company and failure or inability of the Company to
license the infringed or similar technology, the Company's business, operating
results and financial condition would be materially adversely affected.

        The Company relies upon certain software that it licenses from third
parties, including software that is integrated with the Company's internally
developed software and used in Essbase to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms. The loss of, or inability to
maintain, any such software licenses could result in shipment delays or
reductions until equivalent software could be developed, identified, licensed
and integrated, which would materially adversely affect the Company's business,
operating results and financial condition. In addition, there can be no
assurance that third parties will not claim infringement by the Company with
respect to Essbase or enhancements thereto.

        Currently, the Company is engaged in litigation with Gentia Software
concerning the enforcement and validity of the Company's U.S. patent. See "Legal
Proceedings" in Part II, Item 1 below. See "Risk Factors -- Risks Associated
with Litigation and Related Costs" in this Part I, Item 2.

        Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective as a result of federal, state or local laws or ordinances enacted in
the future or unfavorable judicial decisions. Although the Company has not
experienced any product liability claims to date, the sale and support of
Essbase by the Company may entail the risk of such claims. A successful product
liability claim brought against the Company could have a material adverse effect
upon the Company's business, operating results and financial condition.


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<PAGE>   20
PART II.  OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        On December 12, 1997, the Company and Comshare settled all claims and
counterclaims between the parties in the action entitled Arbor Software
Corporation v. Comshare, Incorporated, Civil Action No. C-96-20812 RMW,
previously filed by the Company in the United States District Court for the
Northern District of California. As a part of the settlement, the Company and
Comshare entered into a Second Amendment to the License Agreement between the
Company and Comshare. On December 19, 1997, the Company and Comshare filed a
joint stipulation whereby all claims and counterclaims asserted in the action
were dismissed with prejudice. See the Company's Form 8-K, dated December 12,
1997, filed with the Securities Exchange Commission on December 24, 1997, for
discussion of the settlement.

        On April 16, 1996, Gentia Software filed an action against the Company
in the United States District Court for the District of Massachusetts (the
"Massachusetts action") seeking a declaratory judgment that U.S. Patent No.
5,359,724 (the "'724 patent"), owned by the Company, is invalid and not
infringed by Gentia Software's products. On April 18, 1996, the Company filed an
action against Gentia Software in the United States District Court for the
Northern District of California (the "California action") alleging that Gentia
Software infringes the '724 patent, and seeking a permanent injunction and
monetary damages, including treble damages. On May 8, 1996, Gentia Software
filed its answer in the California action, including a counterclaim seeking to
declare the '724 patent invalid. Gentia Software also filed a motion to dismiss,
stay or transfer the action to Massachusetts, which the California court denied
on December 12, 1996. On May 13, 1996, the Company filed a motion to transfer
the Massachusetts action to California, which was granted on November 18, 1996.
The Company filed its answer and a counterclaim for patent infringement in the
transferred case on December 12, 1996. On April 7, 1997, the Court consolidated
both actions into a single case pending in the United States District Court for
the Northern District of California. On July 11, 1997, Gentia Software filed a
request for reexamination of the '724 patent with the United States Patent and
Trademark Office (the "PTO"). On September 11, 1997, the PTO granted the request
for reexamination. The reexamination proceedings are currently pending. On
December 11, 1997, the Court ordered 


                                       20


<PAGE>   21
that the litigation will not be set for trial until after completion of the
reexamination, but denied Gentia Software's request to stay the entire
litigation. The parties are presently engaged in discovery.

        The Company believes that it has meritorious claims against Gentia
Software and that it has meritorious defenses against Gentia Software's claims
that the '724 patent is invalid, and intends to vigorously pursue its claims and
defend itself against Gentia Software's claims. The outcome of the litigation is
uncertain at this time and no assurance can be given as to the outcome of the
litigation. However, management does not believe that the outcome of the
litigation will have a material adverse effect on the Company.

        The preceding current litigation and any future litigation against the
Company or its employees, regardless of the outcome, is expected to result in
substantial costs and expenses to the Company and significant diversion of
attention by the Company's management personnel. See "Risks Associated with
Litigation and Related Costs" in Part I, Item 2 above.


                                       21


<PAGE>   22
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

           (a) Exhibits

               Financial Data Schedule (Exhibit 27.1)

           (b) Reports on Form 8-K

               A Report on Form 8-K, dated December 12, 1997, was filed with the
               Securities Exchange Commission on December 24, 1997, for the
               Comshare settlement.


                                       22


<PAGE>   23
                                   SIGNATURES


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


Date:  February 11, 1998         ARBOR SOFTWARE CORPORATION
                                 (Registrant)



                                 By: /s/ Stephen V. Imbler
                                    ---------------------------------------
                                      Stephen V. Imbler
                                      Senior Vice President and Chief Financial
                                      Officer (Duly Authorized Officer and 
                                      Principal Financial Officer)


                                       23


<PAGE>   24

                                EXHIBIT INDEX



Exhibit
  No.                           Description
-------      ----------------------------------------------------

 27.1           Financial Data Schedule