<PAGE>
 
================================================================================

                                 UNITED STATES
                      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 March 31, 1998

                                      OR

[_]     Transition Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934

               For the transition period from _______ to _______

                       Commission file number:  0-27310



                            RED BRICK SYSTEMS, INC.
            (Exact name of registrant as specified in its charter)


                  DELAWARE                                 77-0145392
        (State or other jurisdiction of                 (I.R.S. Employer
         incorporation or organization)                  Identification No.)


                                485 ALBERTO WAY
                         LOS GATOS, CALIFORNIA  95032
         (Address of principal executive offices, including zip code)

                                (408) 399-3200
               (Registrant's Telephone No., 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 April 30, 1998, there were 12,542,171 shares of the Registrant's Common
Stock outstanding.

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

<PAGE>
 
<TABLE>
<CAPTION>

                            RED BRICK SYSTEMS, INC.

                                     INDEX


PART I.  FINANCIAL INFORMATION                                                                  PAGE

ITEM 1.  FINANCIAL STATEMENTS
<S>                                                                                             <C>
         Condensed Consolidated Balance Sheets
         As of March 31, 1998 and December 31, 1997.........................................      3

         Condensed Consolidated Statements of Operations
         For the Three Months Ended March 31, 1998 and 1997.................................      4

         Condensed Consolidated Statements of Cash Flows
         For the Three Months Ended March 31, 1998 and 1997.................................      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 6.  EXHIBITS AND REPORTS ON FORM 8-K...................................................     21


SIGNATURES..................................................................................     22
</TABLE>

                                       2
<PAGE>
 
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE> 
<CAPTION> 
                                                      RED BRICK SYSTEMS, INC.
                                               CONDENSED CONSOLIDATED BALANCE SHEETS
                                                          (in thousands)

                                                                                    MARCH 31,           DECEMBER 31,
                                                                                      1998                  1997
                                                                                ----------------      ---------------
                                                                                   (unaudited)
                ASSETS
<S>                                                                             <C>                     <C>
Current assets:                                                                                                    
   Cash and cash equivalents                                                         $ 15,302             $ 12,358 
   Short-term investments                                                              12,497               14,551 
   Accounts receivable, net                                                             7,854               12,291 
   Prepaid expenses and other current assets                                            1,572                  955 
                                                                                     --------             --------
      Total current assets                                                             37,225               40,155
Property and equipment, net                                                             2,673                2,677
Intangible assets, net                                                                    315                  361
Deposits and other assets                                                                 720                  372
                                                                                     --------             --------
         Total assets                                                                $ 40,933             $ 43,565
                                                                                     ========             ========

   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                                  $    702             $    518
   Accrued expenses                                                                     2,389                3,719
   Accrued compensation                                                                 2,316                2,031
   Deferred revenue                                                                     8,527                7,370
   Capital lease obligations due within one year                                          242                  385
                                                                                     --------             --------
      Total current liabilities                                                        14,176               14,023

Capital lease obligations                                                                  53                   60
Commitments and contingencies                   
Stockholders' equity:
   Common stock                                                                             1                    1
   Additional paid-in capital                                                          57,178               56,055
   Accumulated deficit                                                                (30,468)             (26,530)
   Accumulated other comprehensive income                                                  13                   26
                                                                                     --------             --------
                                                                                       26,724               29,552
   Notes receivable from stockholders                                                     (20)                 (70)
                                                                                     --------             --------
      Total stockholders' equity                                                       26,704               29,482
                                                                                     --------             --------
         Total liabilities and stockholders' equity                                  $ 40,933             $ 43,565
                                                                                     ========             ========
</TABLE> 

    See accompanying notes to Condensed Consolidated Financial Statements.


                                       3
<PAGE>

<TABLE> 
<CAPTION> 
 
                                                  RED BRICK SYSTEMS, INC.
                                      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                     (in thousands, except per share data; unaudited)

                                                                                   THREE MONTHS ENDED
                                                                                         MARCH 31,
                                                                        ------------------------------------------
                                                                              1998                       1997
                                                                        ---------------             --------------
<S>                                                                     <C>                         <C>
Revenues:
   Software license                                                        $  4,635                     $  3,645
   Maintenance and service                                                    4,791                        2,878
                                                                           --------                     --------
      Total revenues                                                          9,426                        6,523
                                                                           --------                     --------
Cost of revenues:
   Software license                                                             409                          382
   Maintenance and service                                                    2,442                        1,839
                                                                           --------                     --------        
      Total cost of revenues                                                  2,851                        2,221
                                                                           --------                     --------
          Gross margin                                                        6,575                        4,302
                                                                           --------                     --------
Operating expenses:
   Sales and marketing                                                        6,586                        7,276
   Research and development                                                   3,236                        2,711
   General and administrative                                                   903                          980
                                                                           --------                     --------
      Total operating expenses                                               10,725                       10,967
                                                                           --------                     --------
         Loss from operations                                                (4,150)                      (6,665)

Interest and other income (expense), net                                        373                          466
                                                                           --------                     --------
   Loss before provision for income taxes and minority interest              (3,777)                      (6,199)

Provision for income taxes                                                      161                          100
                                                                           --------                     --------
   Loss before minority interest                                             (3,938)                      (6,299)

Minority interest                                                                --                          (63)
                                                                           --------                     --------
           Net loss                                                        $ (3,938)                    $ (6,362)
                                                                           ========                     ========
Basic loss per share                                                       $  (0.32)                    $  (0.57)
                                                                           ========                     ========
Diluted loss per share                                                     $  (0.32)                    $  (0.57)
                                                                           ========                     ========
Shares used to compute basic loss per share                                  12,326                       11,206
                                                                           ========                     ========
Shares used to compute diluted loss per share                                12,326                       11,206
                                                                           ========                     ========

</TABLE> 


     See accompanying notes to Condensed Consolidated Financial Statements


                                       4
<PAGE>
 
<TABLE> 
<CAPTION> 

                                                      RED BRICK SYSTEMS, INC.
                                          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                     (in thousands; unaudited)


                                                                                        THREE MONTHS ENDED
                                                                                              MARCH 31,
                                                                                ---------------------------------------
                                                                                     1998                    1997
                                                                                ---------------         ---------------
<S>                                                                             <C>                     <C>
Cash flows from operating activities:
   Net loss                                                                        $  (3,938)              $  (6,362)
   Adjustments to reconcile net loss to net cash provided
     by operating activities:
        Depreciation                                                                     419                     370
        Amortization                                                                      46                      41
        Minority interest in subsidiary                                                   --                      63
        Changes in assets and liabilities:              
          Accounts receivable                                                          4,437                   5,383 
          Prepaid expenses and other current assets                                     (617)                     29
          Accounts payable                                                               184                     251
          Accrued expenses and compensation                                           (1,045)                    638
          Deferred revenue                                                             1,157                   2,942 
                                                                                   ---------               --------- 
            Net cash provided by operation activities                                    643                   3,355
                                                                                   ---------               ---------

Cash flows from investing activities:
   Purchases of short-term investments                                                (5,016)                (12,641)
   Proceeds from sales of short-term investments                                       7,070                  17,318
   Acquisition of property and equipment                                                (415)                   (303)
   Deposits and other assets                                                            (348)                   (132)
                                                                                   ---------               ---------
        Net cash provided by investing activities                                      1,291                   4,242
                                                                                   ---------               ---------

Cash flows from financing activities:
   Proceeds from issuance of common stock, net of
      issuance costs                                                                   1,123                   1,609
   Payment on notes receivable                                                            50                      26
   Principle payments on capital lease obligations                                      (150)                   (218)
   Unrealized losses on marketable securities                                            (13)                    (19)
                                                                                   ---------               ---------
                Net cash provided by financing activities                              1,010                   1,398
                                                                                   ---------               ---------

Net increase in cash and cash equivalents                                              2,944                   8,995
Cash equivalents at beginning of period                                               12,358                  14,552
                                                                                   ---------               ---------
Cash and cash equivalents at end of period                                         $  15,302               $  23,547
                                                                                   =========               =========

</TABLE> 

     See accompanying notes to Condensed Consolidated Financial Statements


                                       5
<PAGE>
 
                            RED BRICK SYSTEMS, INC.
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)

1.      Basis of Presentation
        ---------------------

        The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring accruals,
which in the opinion of management are necessary to fairly present 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 included in the
Company's fiscal year 1997 Annual Report on Form 10-K. The consolidated results
of operations for the three months ended March 31, 1998, are not necessarily
indicative of the results to be expected for any subsequent period or for the
entire fiscal year ending December 31, 1998.

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Such estimates are related to the useful lives of fixed
assets, allowances for doubtful accounts and customer returns, other reserves,
and income tax valuation allowances. Actual results inevitably will differ from
those estimates, and such differences may be material to the financial
statements.

        On July 1, 1996, the Company entered into an agreement with Productivity
Software Group Limited ("PSG") to form a joint venture to distribute the
products and services in Australia and New Zealand.  The Company owns
approximately 50.1% of the voting stock of the joint venture and is
consolidating this entity.  The minority interest shown on the financial
statements represents PSG's proportionate share in the net assets and operating
activity of the Australian subsidiary.  Beginning in 1999, the Company may be
obligated to purchase the remaining stock owned by PSG at a pre-determined price
based on 1998 revenue for the joint venture, not to exceed $5 million.

        Certain prior amounts have been reclassified to conform to the 1998
presentation.

2.      Net Loss Per Share
        ------------------  

        In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share exclude any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share are very similar to the previously
reported fully diluted earnings per share. Loss per share amounts for all
periods have been presented and, where appropriate, restated to conform to the
FAS 128 requirements.

        Options to purchase 2,059,477 and 369,132 shares of common stock were
outstanding at March 31, 1998 and 1997, respectively, but were not included in
the computation of diluted loss per share because the options exercise price was
greater than the average market price of the common shares and, therefore, the
effect would be antidilutive.

                                       6
<PAGE>
 
        Additionally, potential common shares of 517,052 and 1,543,146, using
the treasury stock method, were not included in the computation of diluted loss
per share for the three month periods ended March 31, 1998 and 1997, because the
Company incurred losses in those periods and, therefore, the effect would be
antidilutive.


3.      Recent Pronouncements
        ---------------------

        As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS
130 establishes standards for the reporting and display of comprehensive income
and its components; however, the adoption of FAS 130 had no impact on the
Company's net loss or stockholders' equity. Total comprehensive loss for the
three months ended March 31, 1998 and 1997 amounted to approximately $3,951,000
million and $6,381,000 million, respectively.

        As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131"). FAS 131 will change the way companies report
selected segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The Company has not yet reached a conclusion as to the
appropriate segments, if any, it will be required to report to comply with FAS
131.

        In 1997, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2")
which is effective for the Company beginning in fiscal 1998. The Company has
recognized revenue for the three months ended March 31, 1998 in accordance with
this new SOP. Based on its reading and interpretation of SOP 97-2, the Company
believes it is currently in compliance with the final standard. However,
detailed implementation guidelines for this standard have not yet been issued.
Once issued, such detailed implementation guidance could lead to unanticipated
changes in the Company's current revenue accounting practices, and such changes
could be material to the Company's revenues and earnings.


4.      Litigation
        ----------

        On March 25, 1998, two purported class action lawsuits were filed in the
United States District Court for the Northern District of California by or on
behalf of persons who purchased the Company's Common Stock between January 15,
1997 and April 15, 1997. The Company expects these complaints to be amended and
consolidated in the near future. These actions name as defendants, among others,
the Company and certain of its present and former officers and directors. The
complaints allege various violations of the federal securities laws and seek
unspecified monetary damages. The Company believes both complaints are without
merit and is vigorously defending itself against both complaints.

                                       7
<PAGE>
 
                            RED BRICK SYSTEMS, INC.

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

        The discussion in this report contains forward-looking statements that
involve risks and uncertainties including, without limitation, statements made
in the sections entitled "Results of Operations --Revenues", "--Cost of
Revenues", "--Operating Expenses", "--Interest and Other Income (Expense)", "--
Provision for Income Taxes", "--Minority Interest, Net Loss and Net Loss Per
Share", "Liquidity and Capital Resources", "Year 2000 Compliance", and "Risk
Factors That May Affect Future Results" regarding the Company's revenues and
associated costs and expenses. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in the
section entitled "Risk Factors That May Affect Future Results," as well as those
risks discussed in this section and elsewhere in this report.

RESULTS OF OPERATIONS

REVENUES

<TABLE> 
<CAPTION> 

                                         THREE MONTHS ENDED MARCH 31, 
                                        ------------------------------
                                         1998        CHANGE      1997
                                        ------------------------------
                                             (dollars in thousands)
<S>                                    <C>             <C>     <C> 
        Software license                $4.635          27%     $3,645
        Percentage of total revenues        49%                     56%
        Maintenance and service         $4,791          66%     $2,878
        Percentage of total revenues        51%                     44%
        Total revenues                  $9,426          45%     $6,523
</TABLE> 

        The Company's revenues are derived from (i) license fees for its
software products and (ii) fees for services complementing its products,
including software maintenance and support, training, consulting and development
agreements. Fees for service revenues are charged separately from the Company's
software products. Through December 31, 1997, the Company recognized revenue in
accordance with the American Institute of Certified Public Accountants Statement
of Position ("SOP") No. 91-1, "Software Revenue Recognition." In 1997, the
American Institute of Certified Public Accountants issued SOP No. 97-2,
"Software Revenue Recognition," which is effective for the Company beginning in
fiscal 1998. The Company has adopted SOP 97-2 as of January 1, 1998. Revenue
from software licensing is generally recognized after execution of a licensing
agreement and shipment of the product. Maintenance revenue is recognized over
the term of the maintenance period, which is typically 12 months. Consulting and
training revenues are generally recognized at the time the services are
performed. Revenue under software development agreements is recognized using the
percentage-of-completion method, based on the ratio that incurred costs bear to
total estimated costs. The Company's license agreements generally do not provide
a right of return; however, reserves are maintained for potential credit losses.

        Software License Revenues. The Company currently derives substantially
all of its software license revenues from licenses of Red Brick Warehouse, a
relational database management system that is specifically designed for enabling
data warehouse applications, and typically has a selling 

                                       8
<PAGE>
 
price in excess of $100,000. Software license revenues increased for the three
months ended March 31, 1998, compared to the three months ended March 31, 1997,
because of an increase in licensing activity. Prior growth rates of the
Company's software license revenues may not be indicative of future software
license revenue and may not be sustainable in the future.

        The Company intends to continue to enhance its current software
products, as well as to develop new products. The Company expects that prior
growth rates of the Company's software license revenues, particularly those
growth rates experienced in years prior to 1997, may not be sustainable in the
future. See "Risk Factors That May Affect Future Results."

        Maintenance and Service Revenues.  The growth in maintenance and service
revenues for the three month period ended March 31, 1998, was primarily
attributable to the renewal of maintenance contracts and additional professional
services engagements. The Company has invested considerable resources in
enhancing its consulting staff and consulting capabilities. In addition, the
Company is planning to expand the services business internationally and is also
transitioning its consulting and services organizations around with respect to
supporting new products. that are the culmination of the acquisition of in-
process technology from Engage in September 1997. With the costs associated with
international expense expansion and lower revenue-generating activity due to the
re-training of personnel, the Company anticipates that prior growth rates of the
Company's maintenance and service revenues and margins may not be sustainable in
the future., and service revenues and margins will likely return to historical
levels in the second quarter of 1998.

        For the three month period ended March 31, 1998, sales to Holiday
Hospitality Corp. and WorldCom, Inc., each accounted for 10% of total revenue.
For the three month period ended March 31, 1997, no one customer accounted for
10% or more of total revenue. The Company expects that licenses of its products
to a limited number of customers and resellers will continue to account for a
significant percentage of revenue for the foreseeable future. There can be no
assurance that any customer or reseller will continue to license the Company's
products. The loss of a major customer or reseller or any reduction in orders by
such customers or resellers, including reductions due to market or competitive
conditions, would have a materially adverse effect on the Company's business,
financial condition, and results of operations.

        The Company's international revenues for the three month periods ended
March 31, 1998 and 1997, were 9% and 24% of total revenues, respectively. As the
Company continues to strengthen its international presence, fluctuations in
international revenues may occur. The Company intends to continue to expand its
international operations and to enter additional international markets.

COST OF REVENUES

<TABLE> 
<CAPTION> 

                                         THREE MONTHS ENDED MARCH 31, 
                                        ------------------------------
                                         1998        CHANGE      1997
                                        ------------------------------
                                             (dollars in thousands)
<S>                                    <C>             <C>     <C> 
        Software license                $  409           7%     $  382
        Percentage of total revenues         4%                      6%
        Maintenance and service         $2,442          33%     $1,839
        Percentage of total revenues        26%                     28%
        Total cost of revenues          $2,851          28%     $2,221
        Percentage of total revenues        30%                     34%
</TABLE> 

                                       9
<PAGE>
 
        Cost of Software License Revenues.  Cost of software license revenues
consisted primarily of the cost of royalties paid to third-party vendors,
product media and duplication, shipping expenses, manuals and packaging
materials.

        Cost of Maintenance and Service Revenues.  Cost of maintenance and
service revenues consisted primarily of personnel-related costs incurred in
providing telephone support, consulting services, and training to customers.
Cost of maintenance and service revenues for the three month period ended March
31, 1998, increased over such costs for the same periods ended March 31, 1997,
as a result of increased personnel-related costs as the Company continued to
expand its customer service and consulting organizations to support an expected
increase in sales. The Company believes that the cost of maintenance and service
revenues will increase in dollar amount and may increase as a percentage of
total revenues in the future as the Company continues to build its customer
service and consulting organizations, with emphasis in the international
markets. The Company expects that service margins may not be sustainable in the
future due to these increased costs and lower revenue-generating activity due to
retraining of personnel.

OPERATING EXPENSES

<TABLE> 
<CAPTION> 

                                         THREE MONTHS ENDED MARCH 31, 
                                        -------------------------------
                                         1998        CHANGE      1997
                                        -------------------------------
                                             (dollars in thousands)
<S>                                    <C>             <C>     <C> 
        Sales and marketing            $ 6,586          (9)%    $ 7,276
        Percentage of total revenues        70%                     112%
        Research and development       $ 3,236          19%     $ 2,711
        Percentage of total revenues        34%                      42%
        General and administrative     $   903          (8)%    $   980
        Percentage of total revenues        10%                      15%
        Total operating expenses       $10,725          (2)%    $10,967 
        Percentage of total revenues       114%                     168%
</TABLE> 

        Sales and Marketing.  Sales and marketing expenses consisted primarily
of personnel-related costs, including sales commissions, as well as promotional
expenses including advertising, public relations, seminars, and trade shows. The
decrease in dollar amount in sales and marketing expenses was primarily due to a
decrease in staffing of the Company's sales and marketing operations and a
decrease in travel related expenses as well as a decrease in marketing related
activities. The Company believes that sales and marketing expenses will increase
in dollar amount and may increase as a percentage of total revenues in the
future as the Company expands its sales and marketing activities.

        Research and Development.  Research and development expenses consisted
primarily of salaries and other personnel-related expenses, and depreciation of
development equipment. The increase in research and development expenses was
primarily attributable to the increased staffing of software engineers required
to expand and enhance the Company's product line, work on the development of the
in-process technology acquired, and the expensing of technology and software
that had not met technological feasibility. In accordance with SFAS No. 86, the
Company capitalizes eligible computer software costs upon the achievement of
technological feasibility, subject to net realizable value considerations. The
Company has defined technological feasibility as completion of a working model.
As of March 31, 1998, such capitalizable costs were insignificant. Accordingly,
the Company has charged all such costs to research and development expense in
the accompanying condensed consolidated statements of operations. The Company
believes that research and 

                                       10
<PAGE>
 
development expenses will continue to increase in dollar amount and may increase
as a percentage of total revenues in the future as the Company works on the in-
process technology acquired from Engage and continues to update and expand its
product line.

        General and Administrative.  General and administrative expenses
consisted primarily of personnel costs for finance and general management, as
well as insurance and professional expenses. General and administrative expenses
decreased slightly for the three months ended March 31, 1998, compared to the
three months ended March 31, 1997. The Company believes that its general and
administrative expenses may increase in dollar amount in the future as the
Company adds administrative staff and expands its infrastructure.

INTEREST AND OTHER INCOME (EXPENSE)


<TABLE> 
<CAPTION> 

                                         THREE MONTHS ENDED MARCH 31, 
                                        ------------------------------
                                         1998        CHANGE      1997
                                        ------------------------------
                                             (dollars in thousands)
<S>                                    <C>          <C>       <C> 
        Interest and Other income       $  373       (20)%     $  466
             (expense), net
        Percentage of total revenues         4%                     7%
</TABLE> 


        Interest and other income (expense), net, primarily represented interest
income earned on the Company's cash, cash equivalents, and short-term
investments. Interest and other income (expense), net, decreased during the
three month period ended March 31, 1998, compared to the year earlier period
primarily because of the decrease in short-term investments.

PROVISION FOR INCOME TAXES


<TABLE> 
<CAPTION> 

                                         THREE MONTHS ENDED MARCH 31, 
                                        ------------------------------
                                         1998        CHANGE      1997
                                        ------------------------------
                                             (dollars in thousands)
<S>                                    <C>          <C>       <C> 
        Provision for income taxes      $  161        61%      $  100

</TABLE> 

        The income tax provisions for the three month periods ended March 31,
1998 and 1997, of $161,000 and $100,000, respectively, is attributable to
current income taxes, and consists principally of foreign withholding taxes and
other foreign income taxes and state minimum taxes. No income tax benefits have
been recognized for the losses incurred in the first quarters of 1998 and 1997.

        As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $12.0 million and $5.5 million,
respectively, and federal and state research credit carryforwards of $650,000
and $450,000, respectively. Utilization of approximately $1.5 million of the net
operating loss carryforwards is limited to approximately $100,000 per year, due
to the ownership change provisions provided by the Tax Reform Act of 1986 and
similar state provisions. These carryforwards will expire from 1999 to 2012.

                                       11
<PAGE>
 
MINORITY INTEREST, NET LOSS, AND NET LOSS PER SHARE

<TABLE> 
<CAPTION> 

                                         THREE MONTHS ENDED MARCH 31, 
                                        ------------------------------
                                         1998        CHANGE      1997
                                        ------------------------------
                                             (dollars in thousands)
<S>                                    <C>          <C>       <C> 
        Minority Interest               $    --         *      $   (63)
        Percentage of total revenues          *                    (1%)
        Net loss                        $(3,938)       38%     $(6,362)
        Percentage of total revenues       (42%)                  (98%)
        Basic loss per share            $ (0.32)       44%     $ (0.57)
        Diluted loss per share          $ (0.32)       44%     $ (0.57)
        ----------------------------
        *   Not meaningful
</TABLE> 

        Net loss per share for the three month period ended March 31, 1998,
decreased compared to the three months ended March 31, 1997, primarily because
revenues increased by 45% while total expenses increased by only 4%. As noted in
"Risk Factors' below, the Company's expense levels are relatively fixed and are
based, in part, on expectations regarding future revenues. The Company believes
that expenses will continue to increase in dollar amount in the future and may
increase as a percentage of total revenue.


LIQUIDITY AND CAPITAL RESOURCES

<TABLE> 
<CAPTION> 

                                                    MARCH 31,            DECEMBER 31, 
                                                     1998       CHANGE      1997
                                                    ----------------------------------
                                                           (dollars in thousands)
<S>                                                  <C>          <C>       <C> 
Working capital                                         $23,049     (12%)    $26,132 
Cash and cash equivalents and short-term investments    $27,799       3%     $26,909   
</TABLE> 

        Working capital decreased at March 31, 1998, compared to that at
December 31, 1997, primarily due to a decrease in accounts receivable and an
increase in deferred revenue.


<TABLE> 
<CAPTION> 

                                                     THREE MONTHS ENDED MARCH 31, 
                                                    ------------------------------
                                                      1998        CHANGE      1997
                                                    ------------------------------
                                                         (dollars in thousands)
<S>                                                  <C>          <C>       <C> 
Cash provided by operating activities                  $  643      (81%)    $3,355  
Cash provided by investing activites                   $1,291      (70%)    $4,242    
Cash provided by financing activities                  $1,010      (28%)    $1,398    
</TABLE> 

        For the three months ended March 31, 1998, net cash provided by
operating activities resulted primarily from decreases in accounts receivable
and increases in deferred revenue, offset by the net loss adjusted for non-cash
items and decreases in accrued expenses and compensation. For the three months
ended March 31, 1997, net cash provided by operating activities resulted
primarily from decreases in accounts receivable and increases in deferred
revenue, offset by the net loss adjusted for non-cash items.

        For the three months ended March 31, 1998 and 1997, the Company's
investing activities consisted of net sales of investment grade, interest-
bearing securities, offset by purchases of property and equipment. Capital
expenditures were $415,000 in the three months ended March 31, 1998, compared to
$303,000 in the three months ended March 31, 1997. The Company expects that its

                                       12
<PAGE>
 
capital expenditures will increase as the Company's employee base grows. The
Company's principal commitments consist primarily of leases on facilities and
equipment.

        The cash provided by financing activities during the three months ended
March 31, 1998 and 1997, was primarily from issuance of common stock through the
Company's employee stock purchase plan and stock option plans partially offset
by principal payments on capital lease obligations.

        The Company believes that its current cash balance and the expected cash
flow provided by operations, if any, will be sufficient to meet anticipated
working capital and capital expenditure requirements for at least the next 12
months. Thereafter, the Company may find it necessary to obtain additional debt
or equity financing. There can be no assurance that, in the event additional
financing is required, the Company will be able to raise such additional
financing on acceptable terms or at all.

YEAR 2000 COMPLIANCE

        The Company is aware of the issues associated with the programming code
in existing computer systems as the Year 2000 approaches. The "Year 2000
problem" is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. Management is in the process of working with its software vendors to
affirm that the Company is prepared for the Year 2000. Management does not
anticipate that the Company will incur significant operating expenses or be
required to invest heavily in computer systems improvements to be Year 2000
compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with any Year 2000 compliance. The Company believes
that its current products, on all platforms, are Year 2000 compliant by design.
Any Year 2000 compliance problem of either the Company or its customers could
materially adversely affect the Company's business, results of operations,
financial condition and prospects.

        The Company has designed and tested the latest versions of its products
to be Year 2000 compliant. There can be no assurances, however, that the
Company's current products do not contain undetected errors or defects
associated with year 2000 date functions that may result in material costs to
the Company. Some commentators have stated that a significant amount of
litigation will arise out of year 2000 compliance issues. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent the Company may be affected by such issues. Although the Company is not
aware of any material operational issues or costs associated with preparing its
internal systems for the year 2000, there can be no assurances that the Company
will not experience serious unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal systems.

                                       13
<PAGE>
 
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

        In addition to the other information in this report, the following risk
factors should be considered carefully in evaluating the Company and its
business:

        Potential Fluctuations in Quarterly Results; Seasonality.  The Company's
quarterly operating results have varied significantly in the past, and may vary
significantly in the future, depending on factors such as increased competition,
size and timing of significant orders, timing of new product announcements and
pricing policy changes by the Company and its competitors, market acceptance of
new and enhanced versions of the Company's products, changes in operating
expenses, changes in personnel, mix of direct and indirect sales, general
economic factors, and foreign currency exchange rates. The Company currently
operates with virtually no order backlog because its software products typically
are shipped shortly after orders are received. The Company derives a substantial
portion of its revenues from licenses of its Red Brick Warehouse, a relational
database management system that is specifically designed for enabling data
warehouse applications and typically has a selling price in excess of $100,000.
As a result, the timing of the receipt and shipment of a single order can have a
significant impact on the Company's revenues and results of operations for a
particular period. In the first quarter of 1997, for example, the Company
received significantly fewer orders than expected, which had an immediate
adverse impact on operating results for the period. Historically, the Company
has often recognized a substantial portion of its revenues in the last month of
a quarter, with these revenues frequently concentrated in the last two weeks of
a quarter. As a result, product revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter, and revenues for any
future quarter are not predictable with any significant degree of certainty.
Product revenues are also difficult to forecast because the market for data
warehouse software products is rapidly evolving, and the Company's sales cycle,
which may last many months, varies substantially from customer to customer. The
Company's expense levels are relatively fixed and are based, in part, on
expectations as to future revenues. Consequently, if revenue levels fall below
expectations, operating results will likely be adversely affected, and net
income (loss) may be disproportionately affected because a proportionately
smaller amount of the Company's expenses varies with its revenues. In addition,
the Company expects that sales derived through indirect channels, which are
harder to forecast and have lower gross margins than direct sales, will increase
as a percentage of total revenues. Due to all of the foregoing factors, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. The Company's operating results were below the expectations
of financial analysts and investors for the quarter ended March 31, 1997,
resulting in a significant decrease in the Company's stock price. The Company's
operating results may be below analysts' and investors' expectations in some
future quarters. Should this occur, the price of the Company's common stock
would likely be materially adversely affected.

        The Company's business has experienced, and is expected to continue to
experience, significant seasonality, largely due to customer buying patterns. In
recent years, the Company has generally had weaker demand for its software
products and services in the quarters ending in March and September. The Company
believes this pattern could continue.

        Competition.  The market for the Company's products is intensely
competitive and subject to rapid change. The Company primarily encounters
competition from large public companies, including Oracle, Informix, Sybase,
IBM, and NCR/Teradata. In addition, because there are relatively low barriers to
entry in some components of the software market, the Company expects additional
competition from other established and emerging companies as the data warehouse
software market continues to develop and expand. Most of the Company's
competitors have longer 

                                       14
<PAGE>
 
operating histories, significantly greater financial, technical, marketing, and
other resources, significantly greater name recognition, and a larger installed
base of customers. In addition, many of the Company's competitors have well-
established relationships with current and potential customers of the Company,
extensive knowledge of the relational database industry, and are capable of
offering a single vendor solution. As a result, the Company's competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion, and sale of their products than can the Company. In addition, current
and potential competitors have established, or may establish, cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. The Company also expects that competition will
increase as a result of software industry consolidations. Increased competition
is likely to result in price reductions, reduced gross margins, and loss of
market share, any of which could 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 or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition.

        Intense competition in the database market in which the Company competes
may put pressure on the Company to reduce prices on certain products,
particularly where certain vendors offer significant discounts in an effort to
recapture or gain market share. In addition, the bundling of software products
for promotional purposes or as a long-term pricing strategy by certain of the
Company's competitors could have the effect over time of significantly reducing
the prices that the Company can charge for its products. Any such price
reductions could have a material adverse effect on the Company's business,
results of operations or financial condition if the Company cannot offset these
price reductions with a corresponding increase in sales volumes.

        Sales and Marketing Repositioning.  The Company has implemented changes
in the sales and marketing organizations, including changes to the sales and
marketing management, an increased focus on partnership relationships and
indirect sales, and positioning the Company as a leading provider of an
integrated high-performance data warehouse platform. Although such changes are
intended to enhance overall revenues, such changes could materially and
adversely affect the sales process and revenues. In January 1998, the Company
promoted Anthony Layzell to Senior Vice President, Sales and Marketing and
appointed Lawrence Howard as Vice President, North American Sales, reporting to
Mr. Layzell. Also, in January 1998, Alexander Wilson, who had been serving as
the Company's Vice President, Worldwide Sales, decided to leave the Company and
there has been significant turnover in the Company's direct sales force. The
Company believes there may be a transition period before the new sales
management team and sales representatives become fully productive. The Company
may make other management and organization changes in the future. Organizational
and management changes are intended to enhance productivity and competitiveness;
however, such changes may not produce the desired results and could have a
material adverse affect on productivity, expenses and revenues, particularly
over the next several quarters. As a result, the Company's operating results
over the next several quarters may be less predictable than in the past.

        Potential Volatility of Stock Price.  The trading price of the Company's
Common Stock is highly volatile, trading as high as $60.75 and as low as $5.06,
since the Company's initial public offering in January 1996, and may be subject
to wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, changes in financial estimates by securities analysts, and other
events or factors. In addition, the stock market has experienced volatility,
often unrelated to operating performance, that particularly affected market
prices of equity securities of many high technology companies. Market

                                       15
<PAGE>
 
fluctuations may adversely affect the market price of the Company's Common
Stock. There can be no assurance that trading prices of the Company's common
stock will be sustained.

        Dependence on New Products and Rapid Technological Change; Feasibility
of In-Process Technology.   The market for the Company's software is
characterized by rapid technological change, frequent new product introductions,
and evolving industry standards. The introduction by others of products
embodying new technologies and the emergence of new industry standards can
render the Company's existing products obsolete and unmarketable. The life
cycles of the Company's products are difficult to estimate. The Company's future
success depends on its ability to enhance its current products, to develop and
introduce new products that keep pace with technological developments and
emerging industry standards on a timely basis, and to address the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing product enhancements or new
products that respond to technological change or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction, and marketing of these new products
and product enhancements, or that the Company's new products and product
enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance. Any potential new products or product enhancements
would likely be subject to significant technical risks. If the Company
experiences delays in the commencement of commercial shipments of new products
and enhancements, the Company could experience delays or loss of product
revenues. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements of existing products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, operating results, and financial condition
will be materially adversely affected.

        The Company is currently working to integrate the in-process technology
it acquired from Engage into Red Brick Warehouse to create a completely
integrated data warehouse platform. This development effort involves complex
tasks and may take several quarters to complete. There can be no assurance that
the Company will be able to complete the development of such an end-to-end data
warehouse platform in a timely basis, or at all, that such platform will operate
as expected, or that the Company will be able to successfully market and license
such platform. Failure by the Company to complete the development of the
platform or to successfully market and license the platform, or failure of the
platform to operate as expected would have a material adverse effect on the
Company's business, operating results, and financial condition.

        Software products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or when new versions are
released. The Company has previously discovered software errors in certain of
its new products after their introduction. Although the Company has not
experienced materially adverse effects resulting from any such errors to date,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not be found in new versions of Red Brick
Warehouse or administration tools after commencement of commercial shipments,
resulting in loss of or delay in market acceptance which could have a material
adverse effect on the Company's business, financial condition, and results of
operations.

        Dependence Upon Key Personnel; Need to Increase Sales and Technical
Personnel. The Company's future performance depends in a significant part upon
the continued service of its key technical, sales, and senior management
personnel, none of whom is bound by an employment agreement. The Company has
experienced transition at the executive management level. In September 1997,
Robert C. Hausmann, who had been serving as the Company's Vice President,
Finance and Administration, Chief Financial Officer, and Secretary, decided to
leave the Company 

                                       16
<PAGE>
 
to pursue other interests. In December 1997 the Company appointed Margaret
Brauns as Vice President, Finance, Chief Financial Officer, and Secretary. In
addition, there have been several changes in the sales and marketing management,
as noted above. The Company believes that there may be a transition period
before the new management team becomes fully productive. If so, the Company's
operating results could be materially adversely affected. The loss of the
services of one or more of the Company's key employees in the future could have
a material adverse effect on the Company's business, operating results, and
financial condition. The Company's future success also depends on its continuing
ability to attract, train, and retain highly qualified technical, sales, and
managerial personnel. The Company plans to hire a number of additional sales and
technical personnel in 1998. Competition for such personnel is intense, and
there can be no assurance that the Company can retain its key technical, sales,
and managerial employees or that it can attract, assimilate, or retain other
highly qualified technical, sales, and managerial personnel in the future.
Because of the complexity of RDBMS technology and the differences between OLTP
and data warehouse systems, the Company has experienced in the past, and expects
to experience in the future, a time lag between the date technical and sales
personnel are hired and the date such personnel become fully productive.
Although the Company increased the size of its technical personnel in 1998 and
the size of its sales and technical personnel in 1997, the Company experienced
difficulty in recruiting a sufficient number of sales and technical personnel
during these periods. If the Company is unable to hire such personnel on a
timely basis in the future, the Company's business, operating results, and
financial condition could be materially adversely affected.

        Limited Profitability; Accumulated Deficit; Future Operating Results
Uncertain. As of March 31, 1998, the Company had an accumulated deficit of $30.5
million. The Company had a $3.9 million loss in the first quarter of 1998 and
was not profitable in 1997. There can be no assurance that the Company will
return to being profitable on a quarterly basis or on an annual basis in the
future. Future operating results will depend on many factors, including the
demand for the Company's products, the level of product and price competition,
the Company's success in expanding its direct sales force and indirect
distribution channels, the ability of the Company to successfully complete
development of in-process technology acquired, the ability of the Company to
develop and market new products and control costs, and the percentage of the
Company's revenues derived from indirect channels, which have lower gross
margins than direct sales, and general economic conditions.

        Product Concentration.  Substantially all of the Company's revenues have
been attributable to sales of licenses of Red Brick Warehouse and the related
maintenance and service contracts. This product is currently expected to account
for a significant part of the Company's revenues for the foreseeable future. As
a result, a decline in demand for, or failure to achieve broad market acceptance
of, Red Brick Warehouse as a result of competition, technological change or
otherwise, would have a materially adverse effect on the business, operating
results, and financial condition of the Company. A decline in sales of Red Brick
Warehouse would also have a materially adverse effect on licensing of other
Company products that may be licensed to Red Brick Warehouse customers. The
Company's future financial performance will depend in part on the successful
development, introduction, and customer acceptance of new and enhanced versions
of Red Brick Warehouse and other products. There can be no assurance that the
Company will continue to be successful in marketing Red Brick Warehouse or any
new or enhanced products.

        Litigation.  On March 25, 1998, two purported class action lawsuits were
filed in the United States District Court for the Northern District of
California by or on behalf of persons who purchased the Company's Common Stock
between January 15, 1997 and April 15, 1997. The Company expects these
complaints to be amended and consolidated in the near future. These actions name
as defendants, among others, the Company and certain of its present and former
officers and directors. 

                                       17
<PAGE>
 
The complaints allege various violations of the federal securities laws and seek
unspecified monetary damages. The Company believes both complaints are without
merit and is vigorously defending itself against both complaints. The pending
litigation against the Company and any future litigation against the Company or
its employees, regardless of the outcome, may result in substantial costs and
expense to the Company and significant diversion of time and effort by the
Company's technical and management personnel. Depending on the amount and
timing, an unfavorable resolution of such litigation could materially affect the
Company's business, future results of operation, cash flows, or financial
condition. Any such litigation could have a materially adverse effect on the
Company's business, operating results or financial condition.

        Dependence on Continued Growth of the Data Warehouse Market.  Although
demand for data warehouse software has grown in recent years, the market is
still emerging. The Company's future financial performance will depend to a
large extent on continued growth in the number of organizations adopting data
warehouses and existing customers expanding their use of data warehouses. There
can be no assurance that the market for data warehouses will continue to grow.
If the data warehouse market 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.

        Interoperability.  The Company's results will also depend on the ability
of its products to interoperate with existing and future leading, industry-
standard application software products intended to be used in connection with
RDBMSs. Failure to meet existing or future interoperability requirements of
certain independent vendors marketing such applications in a timely manner could
adversely affect the market for the Company's products. Certain leading
applications may not be interoperable with Red Brick's RDBMS until certain
features are added to the Company's RDBMS, which may never occur.

        Customer Concentration.  A relatively small number of customers and
resellers account for a significant percentage of the Company's revenues. The
Company expects that licenses of its products to a limited number of customers
and resellers may continue to account for a high percentage of revenue for the
foreseeable future. For example, in the first quarter of 1998 sales to two
customers each accounted for 10% of total revenue, and in the fourth quarter of
1997, two transactions accounted for 43% of the software license revenue. There
can be no assurance that any customer or reseller will continue to purchase the
Company's products. The loss of a major customer or reseller or any reduction in
orders by such customers or resellers, including reductions due to market or
competitive conditions, would have a material adverse effect on the Company's
business, financial condition, and results of operations.

        Year 2000.  The Company has designed and tested the latest versions of
its products to be Year 2000 compliant. There can be no assurances, however,
that the Company's current products do not contain undetected errors or defects
associated with year 2000 date functions that may result in material costs to
the Company. Some commentators have stated that a significant amount of
litigation will arise out of year 2000 compliance issues. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent the Company may be affected by such issues. Although the Company is not
aware of any material operational issues or costs associated with preparing its
internal systems for the year 2000, there can be no assurances that the Company
will not experience serious unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal systems.

        Expansion of Indirect Channels.  An integral part of the Company's
strategy is to further develop a channel of distributors, value added resellers
(VARs), application partners, and system integrators, and to increase the
proportion of the Company's customers licensed through this indirect channel.

                                       18
<PAGE>
 
The Company is currently investing, and intends to continue to invest,
significant resources in developing this channel, which could adversely affect
the Company's operating results if the Company's efforts do not generate
significant license revenues. There can be no assurance that the Company will be
able to attract or retain distributors, VARs, application partners, and system
integrators that will be able to market the Company's products effectively and
will be qualified to provide timely and cost-effective customer support and
service. The inability to recruit or retain important distributors, VARs,
application partners, or system integrators could adversely affect the Company's
results of operations. In addition, if it is successful in selling products
through this channel, the Company's gross margins will be negatively impacted
due to the lower unit prices the Company expects to receive when selling through
indirect channels.

        Management of Changing Business.  The Company experienced growth in its
employee base and in its revenue during 1997 that placed a strain upon its
management systems and resources. The Company implemented and expanded upon a
number of financial and management controls, reporting systems, and procedures.
The Company's ability to compete effectively and to manage future growth, if
any, will require the Company to continually improve its financial and
management controls, reporting systems, and procedures on a timely basis,
implementing new systems as necessary, and expanding, training, and managing its
employee work force. There can be no assurance that the Company will be able to
do so successfully. The Company's failure to do so could have a material adverse
effect on the Company's business, operating results, and financial condition.

        International Operations. The Company's international revenues for the
three month periods ended March 31, 1998 and 1997, were 9% and 24% of total
revenues, respectively. The Company intends to continue to expand its existing
international operations and enter additional international markets. This will
require significant management attention and financial resources, and could
adversely affect the Company's business, operating results, and financial
condition. In order to expand international sales successfully, the Company
believes it may need to establish additional foreign operations, hire additional
personnel, and recruit additional international resellers and distributors. To
the extent that the Company is unable to do so in a timely manner, the Company's
growth in international sales, if any, will be limited, and the Company's
business, operating results, and financial condition could be materially
adversely affected. In addition, there can be no assurance that the Company will
be able to maintain or increase international market demand for the Company's
products. The Company's operations and financial results could be significantly
affected by factors associated with international operations, including, without
limitation, the general economic conditions in each country and uncertainties
relative to regional economic circumstances, slower adoption of information
technology, changes in foreign currency exchange rates, political instability in
emerging markets and difficulties in staffing and managing foreign operations,
as well as other risks associated with international activities. Additional
risks inherent in the Company's international business activities generally
include unexpected changes in regulatory requirements, tariffs and other trade
barriers, costs of localizing products for foreign countries, lack of acceptance
of localized products in foreign countries, longer accounts receivable payment
cycles, difficulties in managing international operations, potentially adverse
tax consequences including restrictions on the repatriation of earnings, weaker
intellectual property protection, unexpected changes in the economic condition
of foreign countries, and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will not have a
materially adverse effect on the Company's future international sales and,
consequently, the Company's results of operations.

Limited Protection of Proprietary Technology; Risks of Infringement.  The
Company relies primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures, and contractual provisions to protect its
proprietary technology.  For example, the Company licenses rather than sells its
software and requires licensees to enter into license 

                                       19
<PAGE>
 
agreements, which impose certain restrictions on licensees' ability to utilize
the software. In addition, the Company seeks to avoid disclosure of its trade
secrets, including, but not limited to, requiring those persons with access to
the Company's proprietary information to execute confidentiality agreements with
the Company and restricting access to the Company's source code. 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 has filed provisional patent applications in the United States with
respect to certain aspects of its software. None of these patents have been
issued and there can be no assurance that a patent or patents will be issued
pursuant to any of these applications or that, if issued, such patent or patents
would survive a legal challenge to its validity or provide significant
protection to 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 to as great an extent as do the laws of the United
States. There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. There can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products, including any future products based on in-process technology
acquired. 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 consume time, result in costly litigation, 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, or at all, which could have a material adverse effect
on the Company's business, operating results and financial condition.

        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 Red Brick Warehouse 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.

        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.  Although the Company has not experienced
product liability claims to date, the license and support of products by the
Company may entail the risk of such claims.  A successful product liability
claim brought against the Company could have a materially adverse effect on the
Company's business, operating results, and financial condition.

                                       20
<PAGE>
 
PART II.    OTHER INFORMATION


ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits:

          Exhibit 27.1:Financial Data Schedule  (EDGAR version only)
          Exhibit 27.2:Financial Data Schedule (Restated)  (EDGAR version only)
          Exhibit 27.3:Financial Data Schedule (Restated)  (EDGAR version only)

    (b)   Reports on Form 8-K

          No Reports on Form 8-K were filed during the three months ended March
31, 1998.

                                       21
<PAGE>
 
SIGNATURES


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


Date: May 8, 1998               RED BRICK SYSTEMS, INC.
                                (Registrant)



                                By: /s/ Margaret R. Brauns
                                   ------------------------------
                                   Margaret R. Brauns
                                   Vice President, Finance, Chief Financial 
                                   Officer and Secretary
                                   (Duly authorized officer and principal 
                                   financial and accounting officer)

                                       22