<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 SEPTEMBER 30, 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 October 31, 1997 there were 11,240,028 shares of the Registrant's 
common stock outstanding.

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<PAGE>   2
                           ARBOR SOFTWARE CORPORATION

                                    FORM 10-Q

                                      INDEX

<TABLE>
<CAPTION>
PART I.     FINANCIAL INFORMATION                                                           PAGE
                                                                                            ----
<S>         <C>                                                                             <C>
Item 1.     Financial Statements

            Condensed Consolidated Balance Sheets
            at September 30, 1997 and March 31, 1997...................................      3

            Condensed Consolidated Statements of Income
            for the three months and six months ended September 30, 1997 and 1996......      4

            Condensed Consolidated Statements of Cash Flows
            for the six months ended September 30, 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......................................................      8


PART II.    OTHER INFORMATION

Item 1.     Legal Proceedings..........................................................     19

Item 4.     Submission of Matters to a Vote of Security Holders........................     20

Item 6.     Exhibits and Reports on Form 8-K...........................................     21

SIGNATURES.............................................................................     22
</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>
                                                                      SEPTEMBER 30,      MARCH 31,
                                                                          1997             1997
                                                                       ----------        ---------
                                                                       (UNAUDITED)
                                                 ASSETS
<S>                                                                    <C>               <C>
    Current assets:
      Cash and cash equivalents..................................         $18,285        $ 5,647
      Short-term investments.....................................          19,311         23,204
      Accounts receivable, net of allowances of $1,105 and $783..          12,891         12,877
      Deferred tax assets........................................           4,203          4,203
      Prepaid expenses and other current assets..................           1,669          1,051
                                                                          -------        -------
         Total current assets....................................          56,359         46,982

    Property and equipment, net..................................          11,811         11,424
    Other assets.................................................             979          1,183
                                                                          -------        -------
                                                                          $69,149        $59,589
                                                                          =======        =======

                                  LIABILITIES AND STOCKHOLDERS' EQUITY

    Current liabilities:
      Accounts payable...........................................         $ 1,193        $ 2,183
      Accrued expenses and other current liabilities.............          11,003          7,840
      Deferred revenue...........................................           8,676          5,954
      Current portion of lease obligations.......................             566            761
                                                                          -------        -------
         Total current liabilities...............................          21,438         16,738
                                                                          -------        -------

    Lease obligations, long-term.................................              75            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;  11,202,000 and 11,126,000 shares issued 
         and outstanding.........................................              11             11
       Additional paid-in capital................................          40,370         39,223
       Retained earnings.........................................           7,202          3,307
       Cumulative translation adjustment.........................              53             31
                                                                          -------        -------
         Total stockholders' equity..............................          47,636         42,572
                                                                          -------        -------
                                                                          $69,149        $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              SIX MONTHS ENDED
                                                   SEPTEMBER 30,                 SEPTEMBER 30,
                                               ---------------------         --------------------
                                                  1997        1996            1997         1996
                                                -------      -------         -------      -------
<S>                                             <C>          <C>             <C>          <C>    
  Revenues:
     License............................        $14,365      $ 8,942         $27,469      $16,684
     Maintenance, support and other.....          3,642        1,853           6,650        3,381
                                                -------      -------         -------      -------
        Total revenues..................         18,007       10,795          34,119       20,065
                                                -------      -------         -------      -------

 Cost of revenues:
     License............................            323          251             596          423
     Maintenance, support and other.....          1,529          849           2,872        1,564
                                                -------      -------         -------      -------
        Total cost of revenues..........          1,852        1,100           3,468        1,987
                                                -------      -------         -------      -------

  Gross profit..........................         16,155        9,695          30,651       18,078
                                                -------      -------         -------      -------

  Operating expenses:
     Sales and marketing................          8,920        5,126          17,282        9,824
     Research and development...........          2,390        1,632           4,415        2,953
     General and administrative.........          1,837        1,101           3,417        2,004
                                                -------      -------         -------      -------
        Total operating expenses........         13,147        7,859          25,114       14,781
                                                -------      -------         -------      -------

  Income from operations................          3,008        1,836           5,537        3,297

  Interest and other income.............            446          409             717          858
  Interest expense......................            (32)         (65)            (71)        (138)
                                                -------      -------         -------      -------

  Income before income taxes............          3,422        2,180           6,183        4,017
  Provision for income taxes............         (1,266)        (763)         (2,288)      (1,406)
                                                -------      -------         -------      -------

  Net income............................        $ 2,156      $ 1,417         $ 3,895      $ 2,611
                                                =======      =======         =======      =======

  Net income per share..................        $  0.18      $  0.12         $  0.33      $  0.22
                                                =======      =======         =======      =======

  Shares used to compute net income per
    share......................                  12,045       11,715          11,908       11,709
                                                =======      =======         =======      =======
</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>
                                                                           SIX MONTHS ENDED
                                                                             SEPTEMBER 30,
                                                                         ---------------------
                                                                          1997          1996
                                                                         -------       -------
<S>                                                                      <C>           <C>    
  CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income .....................................................     $ 3,895       $ 2,611
    Adjustments to reconcile net income to net cash
      provided by operating activities:
        Depreciation and amortization...............................       2,152           879
        Provision for doubtful accounts.............................         322            59
        Changes in assets and liabilities:
           Accounts receivable......................................        (336)       (2,861)
           Prepaid expenses and other current assets................        (618)         (361)
           Other assets.............................................         204          (196)
           Accounts payable.........................................        (990)          361
           Accrued expenses and other current liabilities...........       3,163         1,179
           Deferred revenue.........................................       2,722           376
                                                                         -------       -------
               Net cash provided by operating activities............      10,514         2,047
                                                                         -------       -------

  CASH FLOWS FROM INVESTING ACTIVITIES:
    Sales (purchases) of short-term investments, net................       3,893        (2,860)
    Acquisition of property and equipment...........................      (2,511)       (2,279)
                                                                         -------       -------
               Net cash provided by (used in) investing activities..       1,382        (5,139)
                                                                         -------       -------

  CASH FLOWS FROM FINANCING ACTIVITIES:                       
    Proceeds from issuance of common stock, net.....................       1,119           546
    Repayment of capital lease obligations..........................        (399)         (369)
                                                                         -------       -------
               Net cash provided by financing activities............         720           177
                                                                         -------       -------

  Effect of exchange rate changes on cash and cash equivalents......          22            10
                                                                         -------       -------

  NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..............      12,638        (2,905)
  CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................       5,647        10,698
                                                                         -------       -------
  CASH AND CASH EQUIVALENTS AT END OF PERIOD........................     $18,285       $ 7,793
                                                                         =======       =======

  SUPPLEMENTAL DISCLOSURES:
    Cash paid for interest..........................................     $    70       $   138
    Cash paid for income taxes......................................     $ 1,503       $    --
</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
condensed consolidated financial position, condensed results of operations and
condensed 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
September 30, 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.      Net Income Per Share

        Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options (using the treasury stock method).
Common equivalent shares are excluded from the computation if their effect is
antidilutive.

3.      Accrued Expenses and Other Current Liabilities

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

<TABLE>
<CAPTION>
                                                      SEPTEMBER 30,     MARCH 31,
                                                          1997            1997
                                                      ------------      ---------
                                                       (UNAUDITED)
         <S>                                          <C>               <C>
         Income taxes payable..............              $ 2,539         $1,754
         Accrued commissions...............                2,210          1,290
         Accrued benefits..................                1,846          1,758
         Other.............................                4,408          3,038
                                                         -------         ------
                                                         $11,003         $7,840
                                                         =======         ======
</TABLE>


                                       6
<PAGE>   7
4.      Recent Accounting Pronouncements

        In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share." This
statement is effective for the Company's fiscal quarter ending December 31,
1997. The statement redefines earnings per share under generally accepted
accounting principles. Under the new standard, primary earnings per share is
replaced by basic earnings per share and fully diluted earnings per share is
replaced by diluted earnings per share. Net income per share as reported and
unaudited pro forma earnings per share based on the new standard are as follows
for the three months and six months ended September 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                                   THREE MONTHS                  SIX MONTHS
                                                ENDED SEPTEMBER 30,           ENDED SEPTEMBER 30,
                                                -------------------           -------------------
                                                 1997         1996             1997         1996
                                                                   (UNAUDITED)
<S>                                             <C>          <C>               <C>         <C>  
        Net income per share as reported.....   $0.18        $0.12             $0.33       $0.22
        Pro forma basic earnings per share...   $0.19        $0.13             $0.35       $0.24
        Pro forma diluted earnings per share.   $0.18        $0.12             $0.33       $0.22
</TABLE>


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.


                                       7
<PAGE>   8
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.


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                  SIX MONTHS
                                                      ENDED SEPTEMBER 30,           ENDED SEPTEMBER 30,
                                                      -------------------           -------------------
                                                       1997         1996             1997         1996
                                                      ------       ------           ------       ------
             <S>                                      <C>         <C>               <C>          <C>  
             Revenues:
               License.........................         79.8%       82.8%             80.5%        83.1%
               Maintenance, support and other..         20.2        17.2              19.5         16.9
                                                       -----       -----             -----        -----
                  Total revenues...............        100.0       100.0             100.0        100.0
                                                       -----       -----             -----        -----
             Cost of revenues:
               License.........................          1.8         2.3               1.8          2.1
               Maintenance, support and other            8.5         7.9               8.4          7.8
                                                       -----       -----             -----        -----
                  Total cost of revenues.......         10.3        10.2              10.2          9.9
                                                       -----       -----             -----        -----
             Gross profit......................         89.7        89.8              89.8         90.1
                                                       -----       -----             -----        -----
             Operating expenses:
               Sales and marketing.............         49.5        47.5              50.7         49.0
               Research and development........         13.3        15.1              12.9         14.7
               General and administrative......         10.2        10.2              10.0         10.0
                                                       -----       -----             -----        -----
                  Total operating expenses.....         73.0        72.8              73.6         73.7
                                                       -----       -----             -----        -----
             Income from operations............         16.7        17.0              16.2         16.4
             Interest and other income.........          2.5         3.8               2.1          4.3
             Interest expense..................         (0.2)       (0.6)             (0.2)        (0.7)
                                                       -----       -----             -----        -----
             Income before income taxes........         19.0        20.2              18.1         20.0
             Provision for income taxes........         (7.0)       (7.1)             (6.7)        (7.0)
                                                       -----       -----             -----        -----
             Net income........................         12.0%       13.1%             11.4%        13.0%
                                                       =====       =====             =====        =====
</TABLE>


                                       8
<PAGE>   9
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 September 30,
1997 increased 67% to $18.0 million from $10.8 million for the three months
ended September 30, 1996, and for the six months ended September 30, 1997
increased 70% to $34.1 million from $20.1 million for the six months ended
September 30, 1996. License revenues for the three months ended September 30,
1997 increased 61% to $14.4 million from $8.9 million for the three months ended
September 30, 1996, and for the six months ended September 30, 1997 increased
65% to $27.5 million from $16.7 million for the six months ended September 30,
1996. The increase is 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 September 30, 1997
increased by 71% and 37%, respectively, when compared to the three months ended
September 30, 1996, and for the six months ended September 30, 1997 increased by
79% and 33%, respectively, when compared to the six months ended September 30,
1996. Maintenance, support and other revenues for the three months ended
September 30, 1997 increased 97% to $3.6 million from $1.9 million for the three
months ended September 30, 1996, and for the six months ended September 30, 1997
increased 97% to $6.6 million from $3.4 million for the six months ended
September 30, 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 decreased to 80% for the three
months ended September 30, 1997 from 83% for the three months ended September
30, 1996, and for the six months ended September 30, 1997 decreased to 81% from
83% for the six months ended September 30, 1996. The percentage decrease is due
in large part to an increase in the Company's installed base, which resulted in
an increase in maintenance, support and other revenues.

        Revenues derived through indirect channel partners accounted for
approximately 21%, 25%, 20% and 26% of the Company's total revenues for the
three months ended September 30, 1997 and 1996, and the six months ended
September 30, 1997 and 1996, respectively. In the three months ended September
30, 1997 and 1996 and the six months ended September 30, 1997 and 1996, revenues
attributable to Comshare, Incorporated ("Comshare"), the Company's largest
indirect channel partner, accounted for 10%, 24%, 12% and 26% of the Company's
total revenues, respectively. Comshare does not report to the Company the
revenues generated by its sales of the Company's Essbase software for a
particular quarter until 45 days after quarter-end. Accordingly, the Company
records such revenues in that subsequent quarter. License revenues from Comshare
for the quarters ended June 30, 1997, March 31, 1997, December 31, 1996 and
September 30, 1996, totaled approximately $1.8 million, $2.5 million, $2.6
million and $1.4 million, respectively, and were recorded by the Company during
the quarters ended September 30, 1997, June 30, 1997, March 31, 1997 and
December 31, 1996, respectively.

        No assurance can be given that revenues derived from Comshare will not
fluctuate significantly in subsequent periods or terminate entirely. In
addition, the Company is currently in litigation with Comshare. The outcome of
the litigation is uncertain at this time and no assurance can be given as to the
outcome of the litigation. 


                                       9
<PAGE>   10
However, management does not believe that the outcome of the litigation will
have a material adverse effect on the Company, although it does anticipate
unpredictable variations in royalty revenues and substantial legal costs during
the course of the litigation. See "Legal Proceedings" in Part II, Item 1 below.
See also "Risk Factors - Fluctuations in Quarterly Results; Future Operating
Results Uncertain," "Dependence Upon Comshare and Other Indirect Channel
Partners" and "Risks Associated with Litigation and Related Costs" in this Part
I, Item 2 below.

        Although indirect license revenues decreased as a percentage of total
revenues, indirect license revenues excluding revenues from Comshare ("other
indirect channel partners") increased to 11% of total revenues for the three
months ended September 30, 1997 from 1% of total revenues for the three months
ended September 30, 1996. The Company continues it's strategy of signing up new
indirect channel partners to help expand the market share of Essbase worldwide.
The Company reports revenue derived from other 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.

        International revenues (which exclude revenues from the U.S., Canada and
Mexico) from the Company's direct sales accounted for approximately 20%, 11%,
15% and 10% of the Company's total revenues for the three months ended September
30, 1997 and 1996, and the six months ended September 30, 1997 and 1996,
respectively. International license and service revenues increased to $3.6
million for the three months ended September 30, 1997 from $1.2 million for the
three months ended September 30, 1996, and increased to $5.3 million for the six
months ended September 30, 1997 from $2.0 million for the six months ended
September 30, 1996, primarily due to expansion of the international direct and
indirect sales forces. The Company records revenues from Comshare and other
United States-based indirect channel partners as domestic revenues, although
such partners sell the Company's products both domestically and internationally.
Based on reports received from Comshare, the Company believes approximately 51%,
72%, 52% and 63% of revenues generated by Comshare during the three months ended
September 30, 1997 and 1996 and the six months ended September 30, 1997 and
1996, respectively, were derived from sales to international customers.

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
September 30, 1997 decreased as a percentage of license revenues to 2% from 3%
for the three months ended September 30, 1996 and accounted for 2% of total
license revenues for each of the six months ended September 30, 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 42% for the three months ended
September 30, 1997 from 46% for the three months ended September 30, 1996 and
decreased to 43% for the six months ended September 30, 1997 from 46% for the
six months ended September 30, 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.


                                       10

<PAGE>   11
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 $8.9 million for the
three months ended September 30, 1997 from $5.1 million for the three months
ended September 30, 1996, and increased to $17.3 million for the six months
ended September 30, 1997 from $9.8 million for the six months ended September
30, 1996, approximating 50%, 48%, 51% and 49% of total revenues for the three
months ended September 30, 1997 and 1996, and the six months ended September 30,
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 France, Germany, Canada 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 $2.4
million for the three months ended September 30, 1997 from $1.6 million for the
three months ended September 30, 1996, and increased to $4.4 million for the six
months ended September 30, 1997 from $3.0 million for the six months ended
September 30, 1996, approximating 13%, 15%, 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. To date, all research and development costs have been
expensed as incurred.

        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 $1.8 million
for the three months ended September 30, 1997 from $1.1 million for the three
months ended September 30, 1996 and increased to $3.4 million for the six months
ended September 30, 1997 from $2.0 million for the six months ended September
30, 1996, approximating 10% of total revenues for each period. The increase in
dollar amount was 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, adds
infrastructure and incurs additional costs related to being a public company,
such as expenses related to director's and officer's insurance and investor
relations programs. 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 Comshare and the Gentia Software litigations. 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.

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 gains and losses. Interest and other income increased to $446,000 for
the three months ended September 30, 1997 from $409,000 for the three months
ended 


                                       11

<PAGE>   12

September 30, 1996, primarily due to higher cash balances, and decreased to
$717,000 for the six months ended September 30, 1997 from $858,000 for the six
months ended September 30, 1996, primarily due to lower cash balances and
foreign exchange losses in the first quarter of fiscal year 1998. Interest
expense represents interest expense on capital leases. Interest expense
decreased to $32,000 for the three months ended September 30, 1997 from $65,000
for the three months ended September 30, 1996, and decreased to $71,000 for the
six months ended September 30, 1997 from $138,000 for the six months ended
September 30, 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 $1.3 million for the three
months ended September 30, 1997 from $763,000 for the three months ended
September 30, 1996, and increased to $2.3 million for the six months ended
September 30, 1997 from $1.4 million for the six months ended September 30,
1996. The Company's effective tax rate was 37% and 35% for the three and six
months ended September 30, 1997 and 1996, respectively. The Company expects that
its effective tax rate will remain at 37% for the remainder of fiscal 1998.

LIQUIDITY AND CAPITAL RESOURCES

        As of September 30, 1997, the Company had $37.6 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 $10.5 million for the
six months ended September 30, 1997, and was primarily attributable to net
income of $3.9 million, increases in accrued expenses and other current
liabilities of $3.2 million, and deferred revenue of $2.7 million, as well as
depreciation and amortization expense of $2.2 million, offset by an increase in
prepaid expenses and other current assets of $618,000 and a decrease in accounts
payable of $990,000.

        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 1997. As of
September 30, 1997, the Company had no outstanding borrowings under its credit
facility.

        As of September 30, 1997, the Company's principal commitments consisted
of obligations under operating and capital leases. As of September 30, 1997, the
Company had $641,000 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 such as: demand for the Company's Essbase software and related products;
the Company's relationships with its indirect channel partners, particularly
Comshare, and the consistency of sales made by such indirect channel partners;
the level of price and product competition; changes in pricing policies by the
Company or its competitors; changes in the mix of indirect channels through
which Essbase is offered; the number, timing 


                                       12

<PAGE>   13
and significance of product enhancements and new product announcements by the
Company and its competitors; the ability of the Company to develop, introduce
and market new and enhanced versions of Essbase on a timely basis; the size,
timing and structure of significant licenses; changes in the Company's sales
incentive strategy; the timing of revenue recognition under the Company's
agreements; customer order deferrals in anticipation of enhancements to Essbase
or enhancements of new products of competitors; the impact of acquisitions by
competitors and indirect channel partners; the level of the Company's
international revenues; foreign currency exchange rates; the renewal of
maintenance and support agreements; product life cycles; software defects and
other product quality problems; personnel changes; changes in Company strategy;
changes in the level of operating expenses and general domestic and
international economic and political conditions, among others. 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. In
addition, a significant portion of each year's revenues are derived from sales
of the Company's Essbase software by Comshare. The Company's current litigation
with Comshare could have a significant impact on Comshare's sales of Essbase.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Revenues" in Part I, Item 2 above and "Legal Proceedings" in Part
II, Item 1 below. See also "Risk Factors -- Dependence Upon Comshare and Other
Indirect Channel Partners" and "Risks Associated with Litigation and Related
Costs" in this Part I, Item 2.

        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 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 to be 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 Comshare and Other 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. The Company's largest indirect
channel partner is Comshare, a leading provider of decision support
applications, that currently markets a family of products that employ Essbase.
Revenues from Comshare accounted for 10%, 24%, 12% and 26% of the Company's
total revenues for the three months ended September 30, 1997 and 1996 and the
six months 


                                       13

<PAGE>   14
ended September 30, 1997 and 1996, respectively. 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 Comshare and other indirect channel partners
will not fluctuate significantly in subsequent periods or will not terminate
entirely. The loss of, or a significant reduction in revenues from Comshare
could have a material adverse effect on the Company's business, operating
results and financial condition.

        The Company is currently in litigation with Comshare. 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, although
it does anticipate unpredictable variations in royalty revenues and substantial
legal costs during the course of the litigation. See "Legal Proceedings" in Part
II, Item 1 below. See also "Risk Factors -- Fluctuations in Quarterly Results;
Future Operating Results Uncertain" and "Risks Associated with Litigation and
Related Costs" in this Part I, Item 2.

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

        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 Comshare and 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, 


                                       14

<PAGE>   15
conditions and trends in the software and other technology industries, adoption
of new accounting standards affecting the software 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 common 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. Although the Company recently opened 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,
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, including Comshare, currently are 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); and Microsoft Corporation ("Microsoft"), through its
acquisition of OLAP technology from Panorama Software of Tel Aviv, Israel
("Panorama"); (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); Holistic Systems, a division of Seagate Technology, Inc. (Holos) and
Microstrategy, Inc. 


                                       15

<PAGE>   16
(DSS Agent).  See "Risk Factors -- Risks Associated with Litigation and Related
Costs" in this Part I, Item 2.

        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 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 managerial, sales and technical 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. The Company is presently searching
for a Senior Vice President of Product Development.

        Risks Associated with Litigation and Related Costs. The Company's
ongoing litigation with Comshare and Gentia Software has and will lead to
increased legal costs to the Company. No assurance can be given as to when these
litigation proceedings will be resolved or that management will not be
distracted from their normal duties as a result of these litigation proceedings.
The Company believes that it has meritorious claims against Comshare and that it
has meritorious defenses to each of Comshare's counterclaims, and intends to
vigorously pursue its claims and defend itself against the counterclaims. The
outcome of the Comshare 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 Comshare litigation will have a material adverse
effect on the Company, although it does anticipate unpredictable variations in
royalty revenues and substantial legal costs during the course of the
litigation. 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. See "Legal Proceedings" in Part II, Item 1 below.


                                       16
<PAGE>   17
        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 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 Arbor 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 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 an 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 


                                       17

<PAGE>   18
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
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 


                                       18

<PAGE>   19
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.



                                       19
<PAGE>   20
PART II.  OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        On September 27, 1996, the Company filed an action against Comshare in
the United States District Court for the Northern District of California. The
action alleges that Comshare has breached its obligations under its license
agreement with the Company by underpaying royalties and that Comshare
fraudulently induced the Company into entering into the agreement. The action
seeks monetary and injunctive relief with respect to future distribution of
Essbase. On October 21, 1996, Comshare filed its answer and counterclaim against
the Company alleging interference with prospective economic advantage, unfair
competition, defamation and disparagement, and breach of contract. On January
21, 1997, the Court entered an order denying Comshare's motion for a preliminary
injunction and denying Comshare's motion to dismiss the Company's fraud claim
and to strike the Company's request for exemplary damages. On January 31, 1997,
the Company filed its first amended complaint for fraud and breach of written
contract. On May 6, 1997, the Court entered an order denying Comshare's motion
to dismiss the Company's amended fraud claim and to strike the Company's request
for injunctive relief and attorney's fees, and granting Comshare's motion to
strike the Company's request for exemplary damages. On May 20, 1997, Comshare
filed its answer to the first amended complaint as well as its first amended
counterclaim against the Company alleging fraud, breach of contract,
interference with prospective economic advantage, unfair competition, and
defamation and disparagement. Comshare claims that the Company fraudulently
induced Comshare into entering into the agreement, has violated certain
provisions of the agreement, and has disseminated false and misleading
information concerning Comshare's rights under the agreement, and that Comshare
has overpaid royalties to the Company by at least $711,828 as a result of
alleged improper and inaccurate information provided by the Company. Comshare
seeks monetary damages, injunctive relief, a declaratory judgment regarding the
parties' rights and obligations under the license agreement, and attorney's
fees. On September 12, 1997, Comshare filed its second amended counterclaim, in
which it added a claim for declaratory relief regarding a provision of the
license agreement concerning "application-specific value-added code." Comshare
alleges - and the Company disputes - that under such provision, Comshare is
entitled to reduce certain royalties owed to the Company beginning May 21, 1997
by 50 percent, due to the Company's marketing of the Essbase Adjustment Module.
The parties are presently engaged in discovery and a jury trial is set for May
4, 1998.

        The Company believes that it has meritorious claims against Comshare and
that it has meritorious defenses to each of Comshare's counterclaims, and
intends to vigorously pursue its claims and defend itself against the
counterclaims. 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, although it does anticipate unpredictable variations in
royalty revenues and substantial legal costs during the course of the
litigation.

        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 


                                       20

<PAGE>   21
States Patent and Trademark Office (the "PTO"). On September 11, 1997, the PTO
granted the request for reexamination. The reexamination proceedings are
expected to begin in the near future. On October 3, 1997, Gentia Software filed
a motion with the Court requesting that the litigation and discovery be stayed
pending the outcome of the PTO reexamination; the Court has not yet ruled on
that motion. The parties are presently engaged in discovery and a jury trial is
set for October 5, 1998.

        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 "Risk Factors -- Dependence
Upon Comshare and Other Indirect Channel Partners" and "Risks Associated with
Litigation and Related Costs" in Part I, Item 2 above.

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

        At the annual meeting of stockholders of the Company on August 13, 1997
the stockholders (i) elected four members of the Board of Directors to serve
until the next annual meeting, (ii) amended the Company's 1995 Stock
Option/Stock Issuance Plan (the "Plan") to increase the number of shares of
Common Stock reserved for issuance thereunder by 750,000 shares, (iii) amended
the Employee Stock Purchase Plan to increase the number of shares of Common
Stock reserved for issuance thereunder by 150,000 shares, and (iv) ratified the
appointment of Price Waterhouse LLP as the Company's independent public
accountants for the next fiscal year.

           The vote for nominated directors was as follows:
<TABLE>
<CAPTION>
           Nominee              For                       Abstain
           ------------------   ------------              -------
           <S>                  <C>                       <C>   
           James A. Dorrian     9,834,313                 97,464
           John M. Dillon       9,834,313                 97,464
           Mark W. Perry        9,834,238                 97,539
           Ann L. Winblad       9,834,138                 97,639
</TABLE>

           The vote for amending the Plan was as follows:
<TABLE>
<CAPTION>
           For                 Against           Abstain           Broker Non-Vote
          ---------           ---------          -------           --------------- 
          <S>                 <C>                <C>               <C>      
          4,295,618           3,530,023          8,574             2,097,562
</TABLE>

<TABLE>
<CAPTION>
           The vote for amending the Employee Stock Purchase Plan was as
           follows:

           For                 Against           Abstain           Broker Non-Vote
           ---------           ---------         -------           ---------------
           <S>                 <C>               <C>               <C>      
           5,888,654           2,083,336         8,470             1,951,317
</TABLE>

           The vote for ratifying the appointment of Price Waterhouse LLP was as
           follows:
<TABLE>
<CAPTION>
           For                 Against           Abstain
           ---------           -------           -------
           <S>                 <C>               <C>  
           9,921,310           3,360             7,107
</TABLE>


                                       21
<PAGE>   22
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

           (a) Exhibits

               Statement of Computation of Net Income Per Share (Exhibit 11.1)

               Financial Data Schedule (Exhibit 27.1)

           (b) Reports on Form 8-K

               No Reports on Form 8-K were filed during the quarter ended
               September 30, 1997.



                                       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:  October 11, 1997     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                 Description
-------                 -----------

11.1                    Statement of Computation of Net Income Per Share

27.1                    Financial Data Schedule