<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 June 30, 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 July 31, 1998, there were 12,556,159 shares of the Registrant's Common
Stock outstanding.

--------------------------------------------------------------------------------

                                       1
<PAGE>
 
                            RED BRICK SYSTEMS, INC.

                                     INDEX
<TABLE>
<CAPTION>


PART I.        FINANCIAL INFORMATION                                                    PAGE
<S>                                                                                    <C>
ITEM 1.        FINANCIAL STATEMENTS

               Condensed Consolidated Balance Sheets
               As of June 30, 1998 and December 31, 1997.............................     3

               Condensed Consolidated Statements of Operations
               For the Three Months and Six Months Ended June 30, 1998 and
               1997..................................................................     4

               Condensed Consolidated Statements of Cash Flows
               For the Six Months Ended June 30, 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 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................    23

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K......................................    24

SIGNATURES...........................................................................    25
</TABLE>

                                       2
<PAGE>
 
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE> 
<CAPTION> 

                                              RED BRICK SYSTEMS, INC.
                                       CONDENSED CONSOLIDATED BALANCE SHEETS
                                                  (in thousands)
                                                                                 JUNE 30,           DECEMBER 31,
                                                                                   1998                 1997
                                                                             ------------------   ------------------
                                                                                (unaudited)
                                   ASSETS                                                          
<S>                                                                         <C>                  <C> 
Current assets:
     Cash and cash equivalents                                               $           8,891    $          12,358
     Short-term investments                                                             13,608               14,551
     Accounts receivable, net                                                            5,653               12,291
     Prepaid expenses and other current assets                                           1,473                  955
                                                                             -----------------    -----------------
        Total current assets                                                            29,625               40,155
Property and equipment, net                                                              3,743                2,677
Intangible assets, net                                                                     270                  361
Deposits and other assets                                                                  730                  372
                                                                             -----------------    -----------------
            Total assets                                                     $          34,368    $          43,565
                                                                             =================    =================

                    LIABILITIES AND STOCKHOLDERS' EQUITY                                           

Current liabilities:
     Accounts payable                                                        $             682    $             518
     Accrued expenses                                                                    2,640                3,719
     Accrued compensation                                                                2,791                2,031
     Deferred revenue                                                                    6,946                7,370
     Capital lease obligations due within one year                                         126                  385
                                                                             -----------------    -----------------
        Total current liabilities                                                       13,185               14,023

Capital lease obligations                                                                  142                   60
Commitments and contingencies
Stockholders' equity:
     Common stock                                                                            1                    1
     Additional paid-in capital                                                         57,567               56,055
     Accumulated deficit                                                               (36,540)             (26,530)
     Accumulated other comprehensive income                                                 33                   26
                                                                             -----------------    -----------------
                                                                                        21,061               29,552
     Notes receivable from stockholders                                                    (20)                 (70)
                                                                             -----------------    -----------------
        Total stockholders' equity                                                      21,041               29,482
                                                                             -----------------    -----------------
            Total liabilities and stockholders' equity                       $          34,368    $          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                    SIX MONTHS ENDED
                                                          JUNE 30,                             JUNE 30,
                                             --------------------------------     --------------------------------
                                                   1998             1997                1998             1997
                                             --------------    --------------     --------------    --------------
<S>                                         <C>               <C>                <C>               <C> 
Revenues:
      Software license                       $       3,332     $       7,401      $       7,967     $      11,046
      Maintenance and service                        4,351             3,010              9,142             5,888
                                             --------------    --------------     --------------    --------------
          Total revenues                             7,683            10,411             17,109            16,934
                                             --------------    --------------     --------------    --------------

Cost of revenues:
      Software license                                 338               308                747               690
      Maintenance and service                        2,640             2,115              5,082             3,954
                                             --------------    --------------     --------------    --------------
          Total cost of revenues                     2,978             2,423              5,829             4,644
                                             --------------    --------------     --------------    --------------

               Gross margin                          4,705             7,988             11,280            12,290
                                             --------------    --------------     --------------    --------------

Operating expenses:
      Sales and marketing                            6,424             6,765             13,010            14,041
      Research and development                       3,380             2,065              6,616             4,776
      General and administrative                     1,179             1,176              2,082             2,156
                                             --------------    --------------     --------------    --------------
          Total operating expenses                  10,983            10,006             21,708            20,973
                                             --------------    --------------     --------------    --------------

               Loss from operations                 (6,278)           (2,018)           (10,428)           (8,683)
Interest and other income
      (expense), net                                   335               495                708               961
                                             --------------    --------------     --------------    --------------
      Loss before provision for income
          taxes and minority interest               (5,943)           (1,523)            (9,720)           (7,722)

Provision for income taxes                             129               105                290               205
                                             --------------    --------------     --------------    --------------
      Loss before minority interest                 (6,072)           (1,628)           (10,010)           (7,927)

Minority interest                                       --                95                 --                32
                                             --------------    --------------     --------------    --------------

               Net loss                      $      (6,072)    $      (1,533)     $     (10,010)    $      (7,895)
                                             ==============    ==============     ==============    ==============

Basic loss per share                         $       (0.48)    $       (0.14)     $       (0.80)    $       (0.70)
                                             ==============    ==============     ==============    ==============

Diluted loss per share                       $       (0.48)    $       (0.14)     $       (0.80)    $       (0.70)
                                             ==============    ==============     ==============    ==============
Shares used to compute
      basic loss per share                          12,521            11,318             12,456            11,288
                                             ==============    ==============     ==============    ==============
Shares used to compute
      diluted loss per share                        12,521            11,318             12,456            11,288
                                             ==============    ==============     ==============    ==============
</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)
                                                                                     SIX MONTHS ENDED
                                                                                         JUNE 30,
                                                                           -------------------------------------
                                                                                 1998                1997
                                                                           -----------------    ----------------
<S>                                                                       <C>                  <C> 
Cash flows from operating activities:
     Net loss                                                              $        (10,010)    $        (7,895)
     Adjustments to reconcile net loss to net cash provided
        by operating activities:
            Depreciation                                                              1,023                 746
            Amortization                                                                 91                  95
            Minority interest in subsidiary                                              --                 (34)
            Changes in assets and liabilities:
                Accounts receivable                                                   6,638               6,333
                Prepaid expenses and other current assets                              (518)                163
                Accounts payable                                                        164                 121
                Accrued expenses and compensation                                      (319)              2,148
                Deferred revenue                                                       (424)              2,299
                                                                           -----------------    ----------------
                   Net cash provided by (used in)
                       operating activities                                          (3,355)              3,976
                                                                           -----------------    ----------------

Cash flows from investing activities:
     Purchases of short-term investments                                            (10,491)            (17,949)
     Proceeds from sales of short-term investments                                   11,434              21,218
     Acquisition of property and equipment                                           (2,089)               (953)
     Deposits and other assets                                                         (358)                (73)
                                                                           -----------------    ----------------
                   Net cash provided by (used in)
                       investing activities                                          (1,504)              2,243
                                                                           -----------------    ----------------

Cash flows from financing activities:
     Proceeds from issuance of common stock, net of
        issuance costs                                                                1,512               1,611
     Payment on notes receivable                                                         50                  33
     Principal payments on capital lease obligations                                   (177)               (392)
     Change in other accumulated comprehensive income                                     7                  (6)
                                                                           -----------------    ----------------

                   Net cash provided by financing activities                          1,392               1,246
                                                                           -----------------    ----------------

Net increase (decrease) in cash and cash equivalents                                 (3,467)              7,465
Cash and cash equivalents at beginning of period                                     12,358              14,552
                                                                           -----------------    ----------------

Cash and cash equivalents at end of period                                 $          8,891     $        22,017
                                                                           =================    ================
</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 and six months ended June 30, 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.

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

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

  Net income per share is computed using the weighted average number of
outstanding shares of common stock and the common stock equivalents from
outstanding stock options (when dilutive using the treasury stock method).  In
February 1997, the Financial Accounting Standards board issued Statement No.
128, "Earnings per Share" ("SFAS 128"), which is effective for both interim and
annual financial periods ended after December 15, 1997.  SFAS 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share.  Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities.  Diluted earnings per share is similar to the previously reported
fully diluted earnings per share.  All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform to the
SFAS 128 requirements.
 
 
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 material impact on the
Company's net loss or stockholders' equity.  Total comprehensive loss for the
three and six month periods ended June 30, 1998, amounted to approximately
$6,053,000 and $10,004,000, respectively.  Total comprehensive loss for the
three and six month periods ended June 30, 1997, amounted to approximately
$1,521,000 and $7,901,000, 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 

                                       6
<PAGE>
 
changes 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. 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/losses.

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 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.
 
5. Royalties
   ---------

  In July 1998, the Company signed a five-year, mutual reseller and cross-
licensing agreement with Engage Technologies, Inc., a Delaware corporation,
("Engage"), including its parent company CMG Information Services, Inc., 
("CMGI") and CMGI's majority-owned subsidiaries. The cross-license is royalty
bearing for the Engage products that are sublicensed by the Company. The Company
is required to pay Engage minimum nonrefundable royalties during the years 1998
through 2000.
 
  In addition, the Company is obligated to make minimum license royalty payments
under the terms of its developer/reseller agreement with BMC Software, Inc.
("BMC").  The license is royalty bearing for the products that are sublicensed
by the Company.  The Company is required to make these minimum royalty payments
during the years 1998 through 1999.

                                       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                          SIX MONTHS ENDED
                                                 JUNE 30,                                   JUNE 30,
                                   --------------------------------------    ---------------------------------------
                                      1998        CHANGE        1997             1998        CHANGE        1997
                                   -----------   ----------  ------------    -------------  ----------  ------------
                                                                (dollars in thousands)
<S>                               <C>             <C>       <C>              <C>             <C>       <C> 
Software license                   $    3,332      (55%)     $     7,401     $      7,967     (28%)     $    11,046
Percentage of total revenues              43%                        71%              47%                       65%
Maintenance and service            $    4,351       45%      $     3,010     $      9,142      55%      $     5,888
Percentage of total revenues              57%                        29%              53%                       35%
Total revenues                     $    7,683      (26%)     $    10,411     $     17,109      1%       $    16,934
</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
ratably 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.  Software license revenues decreased for the three and
six month periods ended June 30, 1998, compared to the three and six 

                                       8
<PAGE>
 
month periods ended June 30, 1997, primarily because of the decline in the
average selling price of the product. The average selling price in the prior
four quarters was in excess of $150,000 and declined to approximately $80,000 in
the second quarter of 1998 due to more customers buying the lower priced,
smaller NT systems and the increase in international orders, which are typically
sold through distributors.
 
  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 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 and six month periods ended June 30, 1998, compared to
the same periods in the prior year, 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 capabilities.  In addition, the Company is continuing to expand the services
business internationally and is also transitioning its consulting and services
organizations with respect to supporting new products that are the culmination
of the acquisition of in-process technology from Engage in September 1997 and
the Company's initiative to develop analytic applications and solutions.  With
the costs associated with international 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.
 
  For the three and six month periods ended June 30, 1998, there were no sales
to any one customer that accounted for 10% or more of total revenues.  For the
three and six month periods ended June 30, 1997, sales to Pepsi Cola Company
accounted for 16% and 11% of total revenues, respectively.  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, could have a materially
adverse effect on the Company's business, financial condition, and results of
operations.
 
  The Company's international revenues for the three and six month periods ended
June 30, 1998, were 21% and 15% of total revenues, respectively. The Company's
international revenues for the three and six month periods ended June 30, 1997,
were 14% and 19% 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 evaluate its international
operations and may enter additional international markets.

                                       9
<PAGE>
 
COST OF REVENUES
 
<TABLE> 
<CAPTION> 

                                            Three Months Ended                          Six Months Ended
                                                 June 30,                                   June 30,
                                   --------------------------------------    ---------------------------------------
                                      1998        Change        1997             1998        Change        1997
                                   -----------   ----------  ------------    -------------  ----------  ------------
                                                                (dollars in thousands)
<S>                               <C>             <C>       <C>              <C>             <C>       <C> 
Software license                   $      338       10%      $       308     $        747      8%       $       690
Percentage of total revenues               4%                         3%               4%                        4%
Maintenance and service            $    2,640       25%      $     2,115     $      5,082      29%      $     3,954
Percentage of total revenues              34%                        20%              30%                       23%
Total cost of revenues             $    2,978       23%      $     2,423     $      5,829      26%      $     4,644
Percentage of total revenues              39%                        23%              34%                       27%
</TABLE> 
 
  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 and six month periods ended June
30, 1998, increased over such costs for the same periods ended June 30, 1997, as
a result of increased personnel-related costs as the Company continued to expand
its customer service and consulting organizations.  The Company believes that
the cost of maintenance and service revenues may 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.  The
Company, however, is implementing cost control measures in an effort to manage
expense growth.
 
OPERATING EXPENSES

<TABLE> 
<CAPTION> 

                                            THREE MONTHS ENDED                          SIX MONTHS ENDED
                                                 JUNE 30,                                   JUNE 30,
                                   --------------------------------------    ---------------------------------------
                                      1998        CHANGE        1997             1998        CHANGE        1997
                                   -----------   ----------  ------------    -------------  ----------  ------------
                                                                (dollars in thousands)
<S>                               <C>             <C>       <C>              <C>             <C>       <C> 
Sales and marketing                $    6,424      (5%)      $     6,765     $     13,010     (7%)      $    14,041
Percentage of total revenues              84%                        65%              76%                       83%
Research and development           $    3,380       64%      $     2,065     $      6,616      39%      $     4,776
Percentage of total revenues              44%                        20%              39%                       28%
General and administrative         $    1,179       0%       $     1,176     $      2,082     (3%)      $     2,156
Percentage of total revenues              15%                        11%              12%                       13%
Total operating expenses           $   10,983       10%      $    10,006     $     21,708      4%       $    20,973
Percentage of total revenues             143%                        96%             127%                      124%

</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.
Sales and marketing expenses decreased for the three and six month periods ended
June 30, 1998, compared to the same periods ended June 30, 1997.  The Company
believes that sales and marketing expenses may 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.  The Company, however, is implementing cost
control measures in an effort to manage expense growth.

                                       10
<PAGE>
 
  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 for
the three and six month periods ended June 30, 1998, from the same periods ended
June 30, 1997, 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 June 30, 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
development expenses may 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.  The Company, however, is implementing cost control measures in an
effort to manage expense growth.
 
  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
increased for the three months ended June 30, 1998, compared to the three months
ended June 30, 1997, but decreased slightly for the six months ended June 30,
1998 compared to the six months ended June 30, 1997.  The Company believes that
general and administrative expenses may increase in dollar amount and may
increase as a percentage of total revenues.  The Company, however, is
implementing cost control measures in an effort to manage expense growth.
 
INTEREST AND OTHER INCOME (EXPENSE)
 
<TABLE> 
<CAPTION> 
                                            THREE MONTHS ENDED                          SIX MONTHS ENDED
                                                 JUNE 30,                                   JUNE 30,
                                   --------------------------------------    ---------------------------------------
                                      1998        CHANGE        1997             1998        CHANGE        1997
                                   -----------   ----------  ------------    -------------  ----------  ------------
                                                                (dollars in thousands)
<S>                               <C>            <C>        <C>              <C>            <C>        <C> 
Interest and other income
      (expense), net               $      335      (32%)     $       495     $        708     (26%)     $       961
Percentage of total revenues                4%                         5%               4%                        6%
</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 and six month periods ended June 30, 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                          SIX MONTHS ENDED
                                                 JUNE 30,                                   JUNE 30,
                                   --------------------------------------    ---------------------------------------
                                      1998        CHANGE        1997             1998        CHANGE        1997
                                   -----------   ----------  ------------    -------------  ----------  ------------
                                                                (dollars in thousands)
<S>                               <C>            <C>        <C>              <C>            <C>        <C> 
Provision for income taxes         $      129       23%      $       105     $        290      41%      $       205
</TABLE> 

                                       11
<PAGE>
 
  The income tax provisions for the six months ended June 30, 1998 and 1997, of
$290,000 and $205,000, respectively, are attributable to current income taxes,
and consist 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 six months 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.


MINORITY INTEREST, NET LOSS, AND NET LOSS PER SHARE
 
<TABLE> 
<CAPTION> 
                                            THREE MONTHS ENDED                          SIX MONTHS ENDED
                                                 JUNE 30,                                   JUNE 30,
                                   --------------------------------------    ---------------------------------------
                                      1998        CHANGE        1997             1998        CHANGE        1997
                                   -----------   ----------  ------------    -------------  ----------  ------------
                                                                (dollars in thousands)
<S>                               <C>            <C>        <C>              <C>            <C>        <C> 
Minority Interest                  $      --         *       $        95     $        --        *       $       32
Percentage of total revenues            *                              1%          *                          *
Net loss                           $  (6,072)     (296%)     $   (1,533)     $   (10,010)     (27%)     $   (7,895)
Percentage of total revenues            (79%)                      (15%)            (59%)                     (47%)
Basic loss per share               $   (0.48)     (258%)     $    (0.14)     $     (0.80)     (15%)     $    (0.70)
Diluted loss per share             $   (0.48)     (258%)     $    (0.14)     $     (0.80)     (15%)     $    (0.70)
--------------------------------
*     Not meaningful
</TABLE> 
 
 
  Net loss per share for the six month period ended June 30, 1998 was primarily
the result of the revenue shortfall for the six months ended June 30, 1998.
Software license revenues for the six months ended June 30, 1998, decreased from
the year earlier period, during which time the Company's expense levels
increased. 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 is implementing cost control measures in an effort to
manage expense growth.  However, the Company also plans to continue hiring in
the revenue-generating areas of the Company.
 
LIQUIDITY AND CAPITAL RESOURCES
 
 
<TABLE> 
<CAPTION> 
                                                                  JUNE 30,                         DECEMBER 31,
                                                                    1998             CHANGE             1997
                                                               ----------------     ----------     ---------------
                                                                             (dollars in thousands)
<S>                                                           <C>                    <C>          <C> 
Working capital                                                $        16,440        (37%)        $       26,132
Cash and cash equivalents and short-term investments           $        22,499        (16%)        $       26,909
</TABLE> 

  Working capital decreased at June 30, 1998 compared to that at December 31,
1997, primarily due to a decrease in cash, short-term investments, and accounts
receivable.

                                       12
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                SIX MONTHS ENDED
                                                                                    JUNE 30,
                                                               ---------------------------------------------------
                                                                      1998           CHANGE              1997
                                                               ----------------     ----------     ---------------
                                                                             (dollars in thousands)
<S>                                                           <C>                    <C>          <C>     
Cash provided by (used in) operating activities                $       (3,355)          *          $        3,976
Cash provided by (used in) investing activities                $       (1,504)          *          $        2,243
Cash provided by financing activities                          $        1,392          12%         $        1,246
---------------------------------------------------------------
*     Not meaningful                                                                           
</TABLE> 


  For the six months ended June 30, 1998, net cash used in operating activities
resulted primarily from decreases in accounts receivable, deferred revenue and
accrued expenses and compensation offset by the net loss adjusted for non-cash
items and increases in prepaid expenses and other current assets.  For the six
months ended June 30, 1997, net cash provided by operating activities resulted
primarily from decreases in accounts receivable and increases in deferred
revenue and accrued expenses and compensation, offset by the net loss adjusted
for non-cash items.
 
  For the six months ended June 30, 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 $2,089,000 for the six months ended June 30, 1998, compared to $953,000 for
the six months ended June 30, 1997.
 
  The cash provided by financing activities during the six months ended June 30,
1998 and 1997, was primarily from the 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 at least through December 31, 1998.
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.  Any Year 2000 compliance
problem of either the Company or its customers could materially adversely affect
the Company's business, operating results, 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 

                                       13
<PAGE>
 
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.
 

                                       14
<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 had an average selling price in the second
quarter of 1998 of approximately $80,000.  However, in the four prior quarters,
the average selling price was in excess of $150,000.  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
second quarter of 1998, for example, the Company received many orders with a
lower than expected average selling price, 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 quarters ended March 31, 1997, and June 30, 1998,
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 to continue as the
data 

                                       15
<PAGE>
 
warehouse software market continues to develop and expand. Many of the Company's
competitors have longer 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,
operating results, and 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 environment
of high-performance data warehouse products and services.  Although such changes
are intended to enhance overall revenues, such changes could materially and
adversely affect the sales process and revenues.  In July 1998, Anthony Layzell,
who had been serving as the Company's Senior Vice President, Sales and
Marketing, decided to leave the Company.  Also in July 1998, Christopher G.
Erickson, President, CEO, and Chairman, assumed responsibility for the
international sales organization and Paul A. Rodwick was promoted to Vice
President, Marketing.  The Company has also made several changes within the
senior sales management team, and has experienced significant turnover within
the sales organization.  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, with closing prices as high as $60.75 and as
low as $2.00, 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.  

                                       16
<PAGE>
 
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 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, to effectively market these products and
to address the increasingly sophisticated needs of its customers. The Company
announced its intention to build and market analytic applications in addition to
marketing partner application solutions with Red Brick Warehouse.  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
could be materially adversely affected.
 
  The Company is currently working to integrate the in-process technology it
acquired from Engage Technologies with Red Brick Warehouse to create an
integrated data warehouse platform of products. As part of the in-process
technology, the Company has developed a product called Red Brick Formation ,
which is a data extraction and transformation tool integrated with Red Brick
Warehouse.  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 a 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
could 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, administration tools or other integrated products 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, operating
results, and financial condition.

                                       17
<PAGE>
 
  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 July 1998, the Company formed
an "Office of the President," which Christopher G. Erickson, President, CEO, and
Chairman, and Phillip M. Fernandez, who was promoted to the newly created
position of Executive Vice President and Chief Operating Officer, are sharing.
Also in July 1998, Margaret R. Brauns, who had been serving as the Company's
Vice President, Finance and Administration, Chief Financial Officer and
Secretary, resigned from the Company.  The Company appointed Kristi L. Smith as
Vice President, Finance, Chief Financial Officer, and Secretary.  The Company
also appointed Ron Barale as Vice President, Platform Products Group, and Andrew
Priest as Vice President, Solutions and Services.  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, which could materially adversely affect operating
results.  The loss of the services of one or more of the Company's key employees
in the future could have a materially 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 professional service 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 June 30, 1998, the Company had an accumulated deficit of $36.5
million.  The Company had a $6.1 million loss in the second quarter of 1998 and
a $3.9 million loss in the first quarter of 1998, with a $10.0 million loss for
the six month period ended June 30, 1998, and was not profitable in 1997.  There
can be no assurance that the Company will become 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, the ability of the Company to
control costs while executing a new product plan, 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

                                       18
<PAGE>
 
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.  The complaints allege 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.
 
  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 could 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, could 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

                                       19
<PAGE>
 
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.  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 six
month periods ended June 30, 1998 and 1997, were 15% and 19% of total revenues,
respectively. The Company intends to continue to work 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 

                                       20
<PAGE>
 
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 operating results.
 
  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 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 one patent application and other 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 could 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 

                                       21
<PAGE>
 
against the Company could have a materially adverse effect on the Company's
business, operating results, and financial condition.
 

                                       22
<PAGE>
 
PART II. OTHER INFORMATION

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

        (a) The Company held its Annual meeting of Stockholders on May 15, 1998.
 
        (b) The Company's stockholders voted on the following matters:

                (i)    Election of four directors. All directors proposed by
                       management were elected.

<TABLE> 
<CAPTION> 

                                  Name of             Number of     # of Votes    Number of     # of Broker
                                  Nominee             Votes For      Against     Abstentions     Non-Votes
                        ---------------------------- ------------- ------------- -------------  -------------
                        <S>                           <C>                   <C>     <C>                 <C> 
                        Christopher G. Erickson        10,304,845             0       345,764              0
                        Andrew K. Ludwick              10,341,535             0       309,074              0
                        John F. Shoch                  10,311,239             0       339,370              0
                        John E. Warnock                10,343,710             0       306,899              0
</TABLE> 


                (ii)   Approval of an amendment to the Corporation's Certificate
                       of Incorporation to increase the number of shares of
                       Common Stock that the Corporation is authorized to issue
                       from 20,000,000 to 50,000,000 shares.  9,780,938 votes
                       were cast in favor of the amendment, 841,519 votes were
                       cast against, there were 28,152 abstentions, and no
                       broker non-votes.

                (iii)  Approval of an amendment to the Corporation's 1995 Stock
                       Option Plan to provide for an automatic annual increase
                       in the share reserve in 1999, to increase the per person
                       limit on the number of shares issuable each year under
                       the 1995 Plan from 100,000 to 300,000 shares, with a
                       maximum of 500,000 in a year when an optionee commences
                       service, and to expand the Board's authority to amend the
                       1995 Plan. 5,155,680 votes were cast in favor of the
                       amendment, 1,073,694 votes were cast against, there were
                       37,610 abstentions, and 4,383,625 broker non-votes.

                (iv)   Approval of the adoption of the Corporation's 1998
                       Employee Stock Purchase Plan.  5,555,859 votes were cast
                       in favor of the amendment, 682,715 votes were cast
                       against, there were 28,410 abstentions, and 4,383,625
                       broker non-votes.

                (v)    Ratification of independent public auditors.  The
                       Stockholders ratified the appointment of Ernst & Young as
                       the Company's independent public auditors for the fiscal
                       year ended December 31, 1998.  10,487,487 votes were cast
                       in favor of the amendment, 119,588 votes were cast
                       against, there were 43,534 abstentions, and no broker
                       non-votes.

                                       23
<PAGE>
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (c) Exhibits:
 
            Exhibit 27.1:  Financial Data Schedule  (EDGAR version only)
 
            Exhibit 27.2:  Financial Data Schedule  (EDGAR version only)

        (d) Reports on Form 8-K
 
            No Reports on Form 8-K were filed during the three months ended June
            30, 1998.


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<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:  August 14, 1998      RED BRICK SYSTEMS, INC.
                               (Registrant)



                          By:  /s/ Kristi L. Smith
                               -------------------------
                               Kristi L. Smith
                               Vice President, Finance, Chief Financial Officer
                               and Secretary
                               (Duly authorized officer and principal financial 
                                and accounting officer)
 

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