<PAGE>   1
 
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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                             ---------------------
 
                                   FORM 10-Q

                                QUARTERLY REPORT
                        PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                      FOR QUARTER ENDED SEPTEMBER 30, 1998
 
                         COMMISSION FILE NUMBER 0-23117
 
                              BEST SOFTWARE, INC.
             (Exact Name of Registrant as Specified in its Charter)
 
<TABLE>
<S>                            <C>                            <C>
          VIRGINIA                         7372                        54-1222526
(State or other jurisdiction   (Primary Standard Industrial         (I.R.S. Employer
     of incorporation or        Classification Code Number)        Identification No.)
        organization)   
                        
</TABLE>
 
                           11413 ISAAC NEWTON SQUARE
                                RESTON, VA 20190
                                 (703) 709-5200
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
 
                             ---------------------
 
     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  [ ]
 
     Indicate the number of shares outstanding of each of issuer's classes of
common stock as of the latest practicable date:
 
<TABLE>
<CAPTION>
                                                               NUMBER OF
                                                                 SHARES
                                                             OUTSTANDING ON
                      TITLE OF CLASS                        OCTOBER 31, 1998
                      --------------                        ----------------
<S>                                                         <C>
Common Stock, no par value................................     11,640,121
</TABLE>
 
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<PAGE>   2
 
                              BEST SOFTWARE, INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
PART I  FINANCIAL INFORMATION
  ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     (UNAUDITED)
  Consolidated Balance Sheets as of September 30, 1998 and
     December 31, 1997......................................   3
  Consolidated Statements of Operations for the three and
     nine months ended September 30, 1998 and 1997..........   4
  Consolidated Statement of Comprehensive Income for the
     three and nine months ended September 30, 1998 and
     1997...................................................   4
  Consolidated Statements of Cash Flows for the nine months
     ended September 30, 1998 and 1997......................   5
  Notes to Consolidated Financial Statements................   6
  ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
     CONDITION AND RESULTS OF OPERATIONS....................   10
  ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
     MARKET RISK............................................   17
PART II  OTHER INFORMATION
  ITEM 1.  LEGAL PROCEEDINGS................................   18
  ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS........   18
  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES..................   18
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
     HOLDERS................................................   18
  ITEM 5.  OTHER INFORMATION................................   18
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.................   18
  SIGNATURE.................................................   19
  EXHIBIT INDEX.............................................   20
</TABLE>
 
                                        2
<PAGE>   3
 
                                     PART I
 
ITEM 1.  FINANCIAL STATEMENTS
 
                              BEST SOFTWARE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  1998            1997
                                                              -------------   ------------
                                                               (UNAUDITED)
<S>                                                           <C>             <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents.................................     $26,142        $33,164
  Short-term investments....................................      20,598         12,268
  Accounts receivable, net of allowance ($1,179 and $991,
     respectively)..........................................       6,601          4,661
  Inventory.................................................         200            280
  Prepaid expenses and other current assets.................       2,794          1,419
  Deferred tax asset........................................       1,400            700
                                                                 -------        -------
          Total.............................................      57,735         52,492
                                                                 -------        -------
  Property and equipment, net...............................       3,667          2,182
  Deferred tax asset........................................       5,350          2,300
  Other assets..............................................       1,118             36
                                                                 -------        -------
          Total.............................................     $67,870        $57,010
                                                                 =======        =======
                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.....................     $14,531        $10,375
  Notes payable -- current..................................         325            650
  Deferred maintenance and services revenue.................      17,856         14,918
                                                                 -------        -------
          Total.............................................      32,712         25,943
                                                                 -------        -------
  Note payable -- noncurrent................................         126             --
  Deferred maintenance and services revenue.................         788          1,313
  Other noncurrent liabilities..............................         248             --
                                                                 -------        -------
          Total liabilities.................................      33,874         27,256
                                                                 -------        -------
Shareholders' equity:
  Preferred stock, $0.01 par value; 1,000,000 shares
     authorized, none issued................................          --             --
  Common stock, no par value; 40,000,000 shares authorized;
     11,615,231 and 10,913,385 shares issued and
     outstanding, respectively..............................      33,683         33,604
  Additional paid-in capital................................       5,004          1,000
  Deferred compensation.....................................        (102)          (124)
  Foreign currency translation adjustments, net.............          72             --
  Accumulated deficit.......................................      (4,661)        (4,726)
                                                                 -------        -------
          Total shareholders' equity........................      33,996         29,754
                                                                 -------        -------
          Total.............................................     $67,870        $57,010
                                                                 =======        =======
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                        3
<PAGE>   4
 
                              BEST SOFTWARE, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED           NINE MONTHS ENDED
                                                       SEPTEMBER 30,               SEPTEMBER 30,
                                                 -------------------------   -------------------------
                                                    1998          1997          1998          1997
                                                 -----------   -----------   -----------   -----------
                                                 (UNAUDITED)   (UNAUDITED)   (UNAUDITED)   (UNAUDITED)
<S>                                              <C>           <C>           <C>           <C>
Revenue:
  License fees and royalty.....................    $ 9,035       $ 5,889       $24,177       $16,237
  Services.....................................      8,967         5,936        23,776        16,400
                                                   -------       -------       -------       -------
          Total................................     18,002        11,825        47,953        32,637
                                                   -------       -------       -------       -------
Cost of revenue:
  License fees and royalty.....................        422           556         1,317         1,730
  Services.....................................      3,051         1,492         7,997         4,527
                                                   -------       -------       -------       -------
          Total................................      3,473         2,048         9,314         6,257
                                                   -------       -------       -------       -------
Gross margin...................................     14,529         9,777        38,639        26,380
                                                   -------       -------       -------       -------
Operating expenses:
  Sales and marketing..........................      6,559         4,418        17,110        12,267
  Research and development.....................      2,898         2,077         7,719         5,463
  General and administrative...................      2,336         1,584         6,142         4,561
  Write-off of purchased research and
     development...............................         --            --         9,370            --
                                                   -------       -------       -------       -------
          Total................................     11,793         8,079        40,341        22,291
                                                   -------       -------       -------       -------
Operating income (loss)........................      2,736         1,698        (1,702)        4,089
Other income (expense), net....................        606            82         1,758           (86)
                                                   -------       -------       -------       -------
Income from operations before income taxes.....      3,342         1,780            56         4,003
Income tax (benefit) provision.................      1,280           685           (10)          455
                                                   -------       -------       -------       -------
Net income.....................................    $ 2,062       $ 1,095       $    66       $ 3,548
                                                   =======       =======       =======       =======
Basic net income per share.....................    $   .18       $   .15       $   .01       $   .50
                                                   =======       =======       =======       =======
Diluted net income per share...................    $   .17       $   .12       $   .01       $   .42
                                                   =======       =======       =======       =======
Basic weighted average shares outstanding......     11,610         7,437        11,389         7,058
                                                   =======       =======       =======       =======
Diluted weighted average shares outstanding....     12,284         8,844        12,122         8,487
                                                   =======       =======       =======       =======
</TABLE>
 
                 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED      NINE MONTHS ENDED
                                                            SEPTEMBER 30,           SEPTEMBER 30,
                                                          ------------------      ------------------
                                                           1998        1997       1998        1997
                                                          ------      ------      -----      -------
                                                             (UNAUDITED)             (UNAUDITED)
<S>                                                       <C>         <C>         <C>        <C>
Net Income..........................................      $2,062      $1,095      $ 66       $3,548
  Other comprehensive income, net of tax:
     Foreign currency translation adjustments.......          62          --        72           --
     Unrealized holding gains.......................          --          --        --           --
                                                          ------      ------      ----       ------
Comprehensive income................................      $2,124      $1,095      $138       $3,548
                                                          ======      ======      ====       ======
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                        4
<PAGE>   5
 
                              BEST SOFTWARE, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                                    SEPTEMBER 30,
                                                              -------------------------
                                                                 1998          1997
                                                              -----------   -----------
                                                              (UNAUDITED)   (UNAUDITED)
<S>                                                           <C>           <C>
Net income..................................................   $     66      $  3,548
Adjustments to reconcile net income to net cash provided by
  operating
  activities:
  Depreciation and amortization.............................      1,226         1,018
  Compensation associated with stock options................         20          (131)
  Modification of warrants and amortization of debt
     discount...............................................         --           301
  Tax benefit from options exercised........................        426           538
  Write-off of purchased research and development...........      9,370            --
  Deferred taxes............................................     (3,750)       (1,098)
(Increase) decrease in assets:
  Accounts receivable (net).................................       (567)          386
  Inventory.................................................         91            74
  Prepaid expenses and other assets.........................       (964)         (461)
Increase (decrease) in liabilities:
  Accounts payable and accrued expenses.....................      3,831         2,965
Deferred maintenance and services revenue...................      1,912         1,895
                                                               --------      --------
     Net cash provided by operating activities..............     11,661         9,035
                                                               --------      --------
Cash flows from investing activities:
  Purchases of property and equipment.......................     (2,362)       (1,036)
  Purchases of short-term investments.......................    (38,727)           --
  Sales of short-term investments...........................     30,395            --
  Acquisition of HR Management Software GmbH................     (6,800)           --
                                                               --------      --------
     Net cash used in investing activities..................    (17,494)       (1,036)
                                                               --------      --------
Cash flows from financing activities:
  Proceeds from exercise of stock options and warrants......        318           654
  Purchase and retirement of treasury stock.................       (355)       (1,089)
  Cash dividends paid to shareholders.......................         --       (11,121)
  Principal payments on notes payable or capital lease
     obligation.............................................     (1,157)         (712)
                                                               --------      --------
     Net cash used in financing activities..................     (1,194)      (12,268)
                                                               --------      --------
Effect of exchange rate changes.............................          5            --
                                                               --------      --------
Net decrease in cash and cash equivalents...................     (7,022)       (4,269)
Cash and cash equivalents, beginning of period..............     33,164        13,231
                                                               --------      --------
Cash and cash equivalents, end of period....................   $ 26,142      $  8,962
                                                               ========      ========
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid during the period for:
     Income taxes...........................................   $  3,040      $    454
     Interest...............................................   $     44      $    509
 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
  ACTIVITIES:
     240,000 Shares issued to HR Management Software GmbH...   $  3,630      $     --
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                        5
<PAGE>   6
 
                              BEST SOFTWARE, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      AS OF SEPTEMBER 30, 1998 (UNAUDITED)
 
1.  BASIS OF PRESENTATION
 
     The accompanying unaudited consolidated financial statements and notes
thereto have been prepared in accordance with generally accepted accounting
principles for interim financial information and should be read in conjunction
with the audited consolidated financial statements for the nine month transition
period ended December 31, 1997 included in the Company's Form 10-K. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted as permitted by rules and regulations of the
Securities and Exchange Commission. Interim results of operations for the nine
month period ended September 30, 1998 are not necessarily indicative of
operating results for the full fiscal year.
 
     In the opinion of management, all adjustments (consisting of normal
recurring entries) necessary for the fair presentation of the consolidated
financial position, results of operations, and changes in cash flows for the
periods presented have been included. 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 at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
FOREIGN CURRENCY TRANSLATION
 
     In general, the functional currency of a foreign operation is deemed to be
the local country's currency. Consequently, assets and liabilities of operations
outside the United States are translated into United States dollars using the
exchange rate in effect at the balance sheet date. Revenue and expense accounts
for these operations are translated using the average exchange rate during the
period. The effects of foreign currency translation adjustments are included as
a separate component of shareholders' equity.
 
2.  NET INCOME PER SHARE
 
     In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Account Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128
requires dual presentation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding for the period.
 
     In February 1998, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 98 on computation of earnings per share. SAB 98
replaces SAB 83 which previously required that all common stock, options and
warrants issued within one year of an Initial Public Offering be included in the
calculation of earnings per share as if outstanding for all periods presented.
Under SAB 98, only issuances of common stock, options and warrants issued for
nominal consideration in periods preceding an Initial Public Offering are
required to be included in the calculation of earnings per share as if they were
outstanding for all periods presented. In the periods preceding the Company's
Initial Public Offering, the Company had no issuances of common stock, options
or warrants for nominal consideration.
 
     Earnings per share for all 1997 periods presented has been restated to
comply with Statement of Financial Accounting Standards ("SFAS") No. 128 and SAB
No. 98.
 
                                        6
<PAGE>   7
                              BEST SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company implemented SFAS No. 128, "Earnings Per Share." In accordance
with SFAS No. 128, basic net income per share and diluted net income per share
can be reconciled as indicated below (in thousands, except per share data)
(Unaudited):
 
<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED            THREE MONTHS ENDED
                                        SEPTEMBER 30, 1998            SEPTEMBER 30, 1997
                                    ---------------------------   ---------------------------
                                                      PER-SHARE                     PER-SHARE
                                    INCOME   SHARES    AMOUNT     INCOME   SHARES    AMOUNT
                                    ------   ------   ---------   ------   ------   ---------
<S>                                 <C>      <C>      <C>         <C>      <C>      <C>
Basic net income per share:
  Income available to common
     shareholders.................  $2,062   11,610     $0.18     $1,095   7,437      $0.15
Effect of dilutive securities
  Preferred stock.................               --                          625
  Options and warrants............              674                          782
                                    ------   ------               ------   -----
Diluted net income per share:
  Income available to common
     shareholders.................  $2,062   12,284     $0.17     $1,095   8,844      $0.12
                                    ======   ======               ======   =====
</TABLE>
 
<TABLE>
<CAPTION>
                                         NINE MONTHS ENDED             NINE MONTHS ENDED
                                        SEPTEMBER 30, 1998            SEPTEMBER 30, 1997
                                    ---------------------------   ---------------------------
                                                      PER-SHARE                     PER-SHARE
                                    INCOME   SHARES    AMOUNT     INCOME   SHARES    AMOUNT
                                    ------   ------   ---------   ------   ------   ---------
<S>                                 <C>      <C>      <C>         <C>      <C>      <C>
Basic net income per share:
  Income available to common
     shareholders.................  $   66   11,389     $0.01     $3,548   7,058      $0.50
Effect of dilutive securities
  Preferred stock.................               --                          625
  Options and warrants............              733                          804
                                    ------   ------               ------   -----
Diluted net income per share:
  Income available to common
     shareholders.................  $   66   12,122     $0.01     $3,548   8,487      $0.42
                                    ======   ======               ======   =====
</TABLE>
 
3.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
     The American Institute of Certified Public Accountants (the "AICPA") has
issued a Statement of Position (the "SOP") SOP 97-2, "Software Revenue
Recognition". The Company has adopted SOP 97-2 effective January 1, 1998. The
adoption of SOP 97-2 did not have a material impact on the Company.
 
     In 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No.
131, "Disclosures about Segments of an Enterprise and Related Information". The
Company adopted SFAS No. 130 effective January 1, 1998 which requires companies
to report comprehensive income which is the total of net income plus all changes
in equity during a period except those resulting from investment by owners and
distribution to owners. SFAS No. 131 becomes effective for the Company's
year-end 1998 financial statements. The Company is evaluating this statement to
determine the impact on its reporting and disclosure requirements.
 
4.  ACQUISITIONS
 
     In March 1998, the Company acquired HR Management Software GmbH (HRS), a
provider of human resource software in the European marketplace. The acquisition
price was approximately $10.4 million consisting of $6.4 million in cash,
240,000 shares of Common Stock, and out-of-pocket acquisition costs of
 
                                        7
<PAGE>   8
                              BEST SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
approximately $400,000. The closing occurred on March 31, 1998; therefore the
results of operations of HRS are included beginning April 1, 1998. The
acquisition was accounted for as a purchase and the Company recorded a charge of
approximately $9.4 million in the first quarter of 1998 to in-process research
and development.
 
     Prior to discussions with the Company, HRS had undertaken and made
substantial progress on a completely new HR solution (code named "Generation X")
for which the Version 1 release is scheduled for the latter half of 1999. The
successful introduction of the initial version and subsequent planned products
is critical in order to realize both revenue growth and profitability in the
future. HRS has incurred losses in two of the three prior years and minimal
profit in the third year. Its existing products are rapidly approaching
obsolescence. As such, HRS is attempting to develop a truly global,
state-of-the-art HR solution. In conjunction with the major Generation X
development efforts, HRS management had identified a promising opportunity to
cooperate with a U.S. or multinational enterprise solution firm (such as the
Company). HRS management has performed extensive research on the current
applications in today's market, and found most consisted of "patchwork"
solutions that lacked complete globalization and localization functionality.
While still in its early stages of development, HRS had made impressive
achievements and innovations in the design, planning, architectural layout and
early development of the Generation X offering. In its planning phase, HRS
identified in detail the unique system and user needs, including the general
architectural layout and methodologies, for the provision of a state-of-the-art,
global HR solution. The progress and accomplishments achieved to date in HRS'
research and development projects and the economic potential for these
development stage products and technologies (if successfully completed) were the
major consideration in the Company's purchase decision. Not withstanding HRS
impressive progress to date, a significant amount of HR related research, code,
integration, test, and optimization efforts were, and still are, necessary to
successfully bring the new product line and technologies to market.
 
     These projects are time consuming and difficult to complete. If the
research and development projects are not completed as planned, they will
neither satisfy the technical requirements of a changing market nor be cost
effective. Further, if the research and development fails, the value associated
with the HRS acquisition could not be realized. Because these projects have not
yet reached technological feasibility and have no alternative future uses, there
can be no guarantee as to the achievability of the projects or the ascribed
values. Accordingly, these costs were expensed as of the acquisition date.
 
     Based on HRS' development roadmap, which was confirmed by development
specialists at the Company, the first release of Generation X products are
expected to be completed and reach the market in the latter half of 1999. Beyond
the initial release of Generation X products in 1999, HRS had also outlined its
planned release of additional versions and modules of these discreet products as
well as the use of the developmental stage of globalization and localization
technologies outside of HRS' product suite. In order to meet its product release
expectations, HRS management has developed a medium-term Generation X product
development roadmap which extends into 2000 and includes at least two
significant upgrades to the original Generation X offering. Expenditures to
complete these projects are expected to total approximately $4.3 million, or
$730,000 for the remaining 9 months of 1998, $1.88 million in 1999, and $1.73
million in 2000. These estimates are subject to change, given the uncertainties
of the development process, and no assurance can be given that deviations from
these estimates will not occur. Even if successfully completed, the projects
will require maintenance research and development after they have reached a
state of technological and commercial feasibility. In addition to usage of HRS
internal cash flows, the Company will likely provide a substantial amount of
funding to complete the HRS research and development. If the HRS research and
development is not successfully completed, the sales and profitability of the
combined company may be adversely affected in future periods. The purchase price
allocation represents the estimated fair market value based on risk-adjusted
cash flows related to the incomplete products.
 
                                        8
<PAGE>   9
                              BEST SOFTWARE, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The remaining purchase price resulted in an excess of the purchase price
over the fair value of the net assets of approximately $1.0 million. This amount
is comprised of legacy technology and longer-lived goodwill intangibles such as
the HRS work force and customer relationships. The realization of the value
ascribed to the existing technology, customer relationships, and work force is
highly correlated with the HRS research and development efforts. If the research
and development efforts fail, the Company will have very little ability to
exploit the non-R&D intangibles (e.g., aging technology and European HR system
users). Furthermore, the Company believes that the current HRS product suite
will be effectively obsolete and unsaleable in material quantities beyond the
year 2000. While the customer relationships and assembled work force values are
also inextricably linked to the research and development, a longer life of 5 to
7 years was applied to these assets based on historical attrition rates, general
survival distributions and the Company's experience. The Company also acquired
tangible assets of approximately $2.7 million consisting primarily of accounts
receivable and fixed assets. The Company also assumed liabilities of $2.7
million.
 
     The following consolidated proforma information assumes the HRS acquisition
occurred on January 1, 1997 (In thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                               FOR THE NINE MONTHS ENDED
                                                             -----------------------------
                                                             SEPTEMBER 30,   SEPTEMBER 30,
                                                                 1998            1997
                                                             -------------   -------------
                                                                      (UNAUDITED)
<S>                                                          <C>             <C>
Revenue....................................................     $49,405         $36,413
Income (loss) from operations before income taxes..........          72          (5,268)
Net income (loss)..........................................          82          (2,203)
Earnings (loss) per share..................................     $   .01         $  (.22)
</TABLE>
 
     In October 1998, the Company closed on the acquisition of certain
technological assets of HR Soft, Inc., a provider of human resource software.
The acquisition price was for approximately $1.9 million cash including
out-of-pocket acquisition costs of approximately $300,000. The acquisition was
accounted for as a purchase. The Company is in the process of finalizing the
allocation of the purchase price and expects that a portion of the purchase
price will be allocated and charged as in-process research and development.
 
                                        9
<PAGE>   10
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
     This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risk and
uncertainties. For this purpose, the following discussion of the financial
condition and results of operations of the Company should be read in conjunction
with the Form 10-K, the Consolidated Financial Statements and Notes thereto.
Statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. Important factors known to Best
Software, Inc. that could cause such material differences are discussed under
the caption "Certain Factors That May Affect Future Results" in Item 7 of the
Company's annual report on Form 10-K, which is incorporated herein by reference.
These and other important factors could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. The
Company undertakes no obligations to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise.
 
                                    OVERVIEW
 
     The Company is a leader in corporate resource management software and
services, helping organizations to better manage their people, assets and
budgeting processes. The Company's feature-rich, cost-effective solutions are
easy to implement and enhance productivity by automating management, compliance
and reporting functions in areas of specialized expertise that entail complex
and frequently changing laws and regulations. The Company's solutions have been
designed to complement core accounting systems and are scaleable from
stand-alone desktop applications running on personal computers to multi-user
work group and client/server programs designed for use on personal computer
local area networks. As of September 30, 1998, the Company had over 45,000
licensed customer locations.
 
     Prior to fiscal 1994, substantially all of the Company's revenues from the
FAS and Abra product lines were derived from licenses of DOS-based versions of
these products. Since fiscal 1994, the Company has introduced Microsoft Windows
versions of these products and, since fiscal 1995, a significant number of the
Company's DOS customers have migrated to the Company's Windows-based products.
Additionally, since the introduction of multi-user versions of its products in
fiscal 1995 and fiscal 1996, the Company has sold an increased number of
multi-user licenses of its FAS and Abra products. Upon the introduction of a new
product or an enhanced version of an existing product, the Company has typically
derived significant license fee revenue from trade-ups by existing customers.
Typically, the license fees paid for trade-ups are lower than the license fees
for an initial license. In addition, the Windows-based products and the
multi-user products generally have higher average license fees and gross margins
than the DOS-based products.
 
     In April 1998, the Company released the newest fixed asset management
system, Best! Imperativ Asset Accounting, a client/server solution that delivers
control over fixed assets with accurate, timely reporting at a lower total cost
of ownership. The product utilizes the Microsoft BackOffice platform and allows
integration into a variety of financial accounting packages. Best! Imperativ
Asset Accounting provides scalability and compliance with changing Internal
Revenue Service (IRS) and Generally Accepted Accounting Principles (GAAP) rules.
 
     During the quarter ended June 30, 1998, the Company introduced a
customization tool for the comprehensive human resource software package. The
Abra Suite Custom Studio allows users to easily and cost-effectively customize
their requirements through two new tools, Abra Toolkit for end users and
Developer's Toolkit for Business Partners. Abra Toolkit allows users to create
custom screens with more features and flexibility, as well as modify the menus
with more efficient actions, processes, reports and rules for their
organizations.
 
     In addition to revenue from product licenses, the Company derives
significant recurring revenue from maintenance and support agreements. Under its
maintenance and support agreements, the Company provides technical support and
periodic software updates. In late fiscal 1997, the Company launched its
consulting
 
                                       10
<PAGE>   11
 
services, which include installation, set-up and conversion services. Training
and consulting revenue are anticipated to have lower gross margins than revenue
from maintenance and support agreements. Maintenance and support agreements are
generally priced as a percentage of the initial license fee for the underlying
products.
 
     The Company recognizes revenue on license fees upon shipment of the
product, net of provisions for returns and allowances, provided that no
significant Company obligations remain and that collection of the resulting
account receivable is probable. For products with free trial periods, revenue is
recognized upon acceptance of the product by the customer. Revenue from the MYOB
License is recognized ratably within each year of the term of the license
agreement, based on specified annual royalty payments. Revenue from maintenance
and support agreements is recognized pro rata over the term of the agreements,
which is generally one year. Revenue from other services, such as training and
consulting, is recognized as the services are provided.
 
                               OPERATING RESULTS
 
     The following table sets forth for the periods indicated certain
consolidated statement of operations data expressed as a percentage of total
revenue:
 
<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED           NINE MONTHS ENDED
                                               SEPTEMBER 30,               SEPTEMBER 30,
                                         -------------------------   -------------------------
                                            1998          1997          1998          1997
                                         -----------   -----------   -----------   -----------
                                         (UNAUDITED)   (UNAUDITED)   (UNAUDITED)   (UNAUDITED)
<S>                                      <C>           <C>           <C>           <C>
Revenue:
  License fees and royalty.............      50.2%         49.8%         50.4%         49.8%
  Services.............................      49.8          50.2          49.6          50.2
                                            -----         -----         -----         -----
          Total........................     100.0         100.0         100.0         100.0
                                            -----         -----         -----         -----
Cost of revenue:
  License fees and royalty.............       2.4           4.7           2.7           5.3
  Services.............................      16.9          12.6          16.7          13.9
                                            -----         -----         -----         -----
          Total........................      19.3          17.3          19.4          19.2
                                            -----         -----         -----         -----
Gross margin...........................      80.7          82.7          80.6          80.8
                                            -----         -----         -----         -----
Operating expenses:
  Sales and marketing..................      36.4          37.4          35.7          37.6
  Research and development.............      16.1          17.5          16.1          16.7
  General and administrative...........      13.0          13.4          12.8          14.0
  Write-off of purchased research and
     development.......................       0.0           0.0          19.5           0.0
                                            -----         -----         -----         -----
          Total........................      65.5          68.3          84.1          68.3
                                            -----         -----         -----         -----
  Operating income (loss)..............      15.2          14.4          (3.5)         12.5
  Other income (expense) net...........       3.4            .7           3.6          (0.2)
                                            -----         -----         -----         -----
  Income from operations before income
     taxes.............................      18.6          15.1           0.1          12.3
  Income tax (benefit) provision.......       7.1           5.8          (0.0)          1.4
                                            -----         -----         -----         -----
Net income.............................      11.5%          9.3%          0.1%         10.9%
                                            =====         =====         =====         =====
</TABLE>
 
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
 
     License Fees and Royalty Revenue.  License fees and royalty revenue
consists of fees from software licenses and royalties. License fees and royalty
revenue increased from $5.9 million for the three months ended September 30,
1997 to $9.0 million for the three months ended September 30, 1998, representing
an increase
 
                                       11
<PAGE>   12
 
of 53.4%. As a percentage of total revenue, license fees and royalty revenue was
49.8% for the three months ended September 30, 1997 and 50.2% for the three
months ended September 30, 1998, respectively. The dollar increase in license
fees and royalty revenue was due to increases in both the FAS and Abra product
lines primarily from increased sales of higher priced Windows-based and
multi-user products. The acquisition of HRS on March 31, 1998 also contributed
to the increased license fee and royalty revenue in the three months ended
September 30, 1998 compared to the three months ended September 30, 1997.
Royalties from the MYOB License increased from $413,250 during the three months
ended September 30, 1997 to $591,000 for the three months ended September 30,
1998. The royalty is based on the total revenue of the licensee attributable to
this product line, with the royalty rate escalating over the four-year license
period. The Company does not anticipate generating any additional revenue from
this product line upon termination of the license agreement in June 2000.
 
     Services Revenue.  Services revenue includes revenue from maintenance and
support agreements and training and consulting services. Services revenue
increased from $5.9 million for the three months ended September 30, 1997 to
$9.0 million for the three months ended September 30, 1998, representing an
increase of 51.1%. As a percentage of total revenue, services revenue decreased
from 50.2% for the three months ended September 30, 1997 to 49.8% for the three
months ended September 30, 1998. The dollar increase in services revenue was
primarily due to an increase in the number of maintenance and support
agreements, which resulted from a larger installed base of customers, and a
higher average contract value resulting from increased sales of higher priced
license products. To a lesser extent, the increase in services revenue was due
to the Company's increased focus on offering training and other consulting
services, which include installation, set-up and data conversion activities. The
acquisition of HRS also contributed to the increased services revenue in the
three months ended September 30, 1998 compared to the corresponding period of
1997.
 
     Cost of License Fees and Royalty Revenue.  Cost of license fees and royalty
revenue consists primarily of the costs of media, product manuals, shipping and
fulfillment, and royalties paid to third parties. Cost of license fees and
royalty revenue decreased from $556,000 for the three months ended September 30,
1997 to $422,000 for the three months ended September 30, 1998, representing a
decrease of 24.1%. As a percentage of total revenue, cost of license fees and
royalty revenue decreased from 4.7% to 2.4% for the three-month periods ended
September 30, 1997 and 1998, respectively. As a percentage of license fees and
royalty revenue, cost of license fees and royalty revenue decreased from 9.4% to
4.7% for the three months ended September 30, 1997 and 1998, respectively. The
decrease was primarily due to increased sales of higher margin Windows-based and
multi-user products and cost improvements on the license media and fulfillment
operations. To a lesser extent, the decrease was due to royalty revenue received
under the MYOB License, for which the associated costs are nominal.
 
     Cost of Services Revenue.  Cost of services revenue consists primarily of
personnel costs, telephone charges and other costs related to providing
telephone support, training and consulting services. Cost of services revenue
increased from $1.5 million for the three months ended September 30, 1997 to
$3.1 million for the three month period ended September 30, 1998, representing a
104.5% increase. As a percentage of total revenue, cost of services revenue
increased from 12.6% to 16.9% for the three-month periods ended September 30,
1997 and 1998, respectively. As a percentage of services revenue, cost of
services revenue increased from 25.1% to 34.0% for the three months ended
September 30, 1997 and 1998, respectively. The increase was primarily due to
ramping up of personnel in professional services.
 
     Sales and Marketing.  Sales and marketing expenses consist primarily of
direct mail programs, advertising, and other marketing programs, personnel
costs, commissions, travel and operating costs. Sales and marketing expenses
increased from $4.4 million for the three months ended September 30, 1997, to
$6.6 million for the three months ended September 30, 1998, representing an
increase of 48.5%. As a percentage of total revenue, sales and marketing
expenses decreased from 37.4% to 36.4% for the three-month periods ended
September 30, 1997 and 1998, respectively. The dollar increase was primarily due
to marketing activities related to new product releases, increased website
activities, and general product awareness.
 
     Research and Development.  Research and development expenses consist
primarily of personnel costs and fees paid to outside consultants. Research and
development expenses increased from $2.1 million for the
 
                                       12
<PAGE>   13
 
three months ended September 30, 1997 to $2.9 million for the three months ended
September 30, 1998, representing an increase of 39.5%. As a percentage of total
revenue, research and development expenses decreased from 17.5% to 16.1% for the
three-month periods ended September 30, 1997 and 1998, respectively. The dollar
increase in research and development expenses was primarily the result of
increased expenses relating to the development of the Best! Imperativ products.
 
     General and Administrative.  General and administrative expenses include
the costs of corporate operations, finance and accounting, human resources and
other general operations. General and administrative expenses increased from
$1.6 million for the three months ended September 30, 1997 to $2.3 million for
the three months ended September 30, 1998, representing an increase of 47.5%. As
a percentage of total revenue, general and administrative expenses decreased
from 13.4% to 13.0% for the three-month periods ended September 30, 1997 and
1998, respectively. The dollar increase in general and administrative expenses
was the result of increased staffing and related expenses necessary to manage
and support the expansion of the Company's operations.
 
     Other Income (Expense) Net.  Other income (expense) consists primarily of
earnings from cash, cash equivalents and short-term investments, net of any
interest expense. Other income (expense), net was $82,000 for the three months
ended September 30, 1997 and $606,000 for the three months ended September 30,
1998. The significant dollar increase was due to increased interest income
through investing the proceeds of the Initial Public Offering.
 
     Provision for Income Taxes.  The provision for income taxes was $685,000
and $1.3 million for the three months ended September 30, 1997 and 1998
respectively, representing 38.4% and 38.5% of income before taxes respectively.
 
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
 
     License Fees and Royalty Revenue.  License fees and royalty revenue
consists of fees from software licenses and royalties. License fees and royalty
revenue increased from $16.2 million for the nine months ended September 30,
1997 to $24.2 million for the nine months ended September 30, 1998, representing
an increase of 48.9%. As a percentage of total revenue, license fees and royalty
revenue was 49.8% for the nine months ended September 30, 1997 and 50.4% for the
nine months ended September 30, 1998, respectively. The dollar increase in
license fees and royalty revenue was due to an increase in license fee revenue
from FAS and Abra products, which resulted primarily from increased sales of
higher priced Windows-based and multi-user products. The six months of revenue
included since the acquisition of HRS also contributed to the increased license
fee and royalty revenue in the nine months ended September 30, 1998 compared to
the corresponding period of 1997. Royalties from the MYOB License increased from
$885,750 during the nine months ended September 30, 1997 to $1,417,500 for the
nine months ended September 30, 1998. The royalty is based on the total revenue
of the licensee attributable to this product line, with the royalty rate
escalating over the four-year license period. The Company does not anticipate
generating any additional revenue from this product line upon termination of the
license agreement in June 2000.
 
     Services Revenue.  Services revenue includes revenue from maintenance and
support agreements and training and consulting services. Services revenue
increased from $16.4 million for the nine months ended September 30, 1997 to
$23.8 million for the nine months ended September 30, 1998, representing an
increase of 45.0%. As a percentage of total revenue, services revenue decreased
from 50.2% for the nine months ended September 30, 1997 to 49.6% for the nine
months ended September 30, 1998. The dollar increase in services revenue was
primarily due to an increase in the number of maintenance and support
agreements, which resulted from a larger installed base of customers, and a
higher average contract value resulting from increased sales of higher priced
license products. To a lesser extent, the increase in services revenue was due
to the Company's increased focus on offering training and other consulting
services, which include installation, set-up and data conversion activities. The
six months of revenue included since the acquisition of HRS also contributed to
the increased services revenue in the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997.
 
                                       13
<PAGE>   14
 
     Cost of License Fees and Royalty Revenue.  Cost of license fees and royalty
revenue consists primarily of the costs of media, product manuals, shipping and
fulfillment, and royalties paid to third parties. Cost of license fees and
royalty revenue decreased from $1.7 million for the nine months ended September
30, 1997 to $1.3 million for the nine months ended September 30, 1998,
representing a decrease of 23.9%. As a percentage of total revenue, cost of
license fees and royalty revenue decreased from 5.3% to 2.7% for the nine-month
periods ended September 30, 1997 and 1998, respectively. As a percentage of
license fees and royalty revenue, cost of license fees and royalty revenue
decreased from 10.7% to 5.4% for the nine months ended September 30, 1997 and
1998, respectively. The decrease was primarily due to increased sales of higher
margin Windows-based and multi-user products and cost improvements on the
license media and fulfillment operations. To a lesser extent, the decrease was
due to royalty revenue received under the MYOB License, for which the associated
costs are nominal.
 
     Cost of Services Revenue.  Cost of services revenue consists primarily of
personnel costs, telephone charges and other costs related to providing
telephone support, training and consulting services. Cost of services revenue
increased from $4.5 million for the nine months ended September 30, 1997 to $8.0
million for the nine month period ended September 30, 1998, representing a 76.7%
increase. As a percentage of total revenue, cost of services revenue increased
from 13.9% to 16.7% for the nine-month periods ended September 30, 1997 and
1998, respectively. As a percentage of service revenue, cost of services revenue
increased from 27.6% to 33.6% for the nine months ended September 30, 1997 and
1998, respectively. The increase was primarily due to ramping up of personnel in
professional services.
 
     Sales and Marketing.  Sales and marketing expenses consist primarily of
direct mail programs, advertising, and other marketing programs, personnel
costs, commissions, travel and operating costs. Sales and marketing expenses
increased from $12.3 million for the nine months ended September 30, 1997, to
$17.1 million for the nine months ended September 30, 1998, representing an
increase of 39.5%. As a percentage of total revenue, sales and marketing
expenses decreased from 37.6% to 35.7% for the nine-month periods ended
September 30, 1997 and 1998, respectively. The dollar increase was primarily due
to new product releases, increased website activities and general product
awareness.
 
     Research and Development.  Research and development expenses consist
primarily of personnel costs and fees paid to outside consultants. Research and
development expenses increased from $5.5 million for the nine months ended
September 30, 1997 to $7.7 million for the nine months ended September 30, 1998,
representing an increase of 41.3%. As a percentage of total revenue, research
and development expenses decreased from 16.7% to 16.1% for the nine-month
periods ended September 30, 1997 and 1998, respectively. The dollar increase in
research and development expenses was primarily the result of increased expenses
relating to the development of a new budgeting product and the Best! Imperativ
products.
 
     General and Administrative.  General and administrative expenses include
the costs of corporate operations, finance and accounting, human resources and
other general operations. General and administrative expenses increased from
$4.6 million for the nine months ended September 30, 1997 to $6.1 million for
the nine months ended September 30, 1998, representing an increase of 34.7%. As
a percentage of total revenue, general and administrative expenses decreased
from 14.0% to 12.8% for the nine-month periods ended September 30, 1997 and
1998, respectively. The dollar increase in general and administrative expenses
was the result of increased staffing and related expenses necessary to manage
and support the expansion of the Company's operations.
 
     Write-off of purchased research and development.  The write-off is the
result of the purchased research and development associated with the Company's
acquisition of HRS described in note 4 of the financial statements. The one time
charge of approximately $9.4 million represents 19.5% of total revenue for the
nine months ended September 30, 1998.
 
     Other Income (Expense) Net.  Other income (expense) consists primarily of
earnings from cash, cash equivalents and short-term investments, net of any
interest expense. Other income (expense), net was ($86,000) for the nine months
ended September 30, 1997 and $1.8 million for the nine months ended September
30, 1998. The significant dollar increase was due to increased interest income
earned through investing the proceeds of the Initial Public Offering. Other
expense for the nine months ended September 30,
                                       14
<PAGE>   15
 
1997 was to some extent due to $432,000 of interest expense attributable to a
reduction in the exercise price of a warrant in connection with the June 1997
dividend to shareholders, offset by interest income.
 
     (Benefit) Provision for Income Taxes.  The provision for income taxes was
$455,000 for the nine months ended September 30, 1997 and $10,000 benefit was
recorded for the same period in 1998, representing 11.4% and 17.9% of income
before taxes respectively.
 
                        LIQUIDITY AND CAPITAL RESOURCES
 
     The Company funds its operations through cash provided by operations. The
Company had cash, cash equivalents and short-term investments of $46.7 million
as of September 30, 1998. The Company's short-term investments include
securities of U.S. Government agencies, municipalities and corporations.
 
     For the nine months ended September 30, 1998 and 1997, net cash provided by
operating activities was $11.7 million and $9.0 million, respectively. The
increase in cash provided by operating activities was primarily a result of the
net effect of the one-time charge against earnings for purchased research and
development from the acquisition of HRS.
 
     Net cash used in investing activities for the nine months ended September
30, 1998 and 1997 was $17.5 million and $1.0 million, respectively. The increase
in cash used in investing activities was related to the purchases of short-term
investments with the proceeds from the Initial Public Offering and the
acquisition of HRS. In the nine months ended September 30, 1998 and 1997, cash
was used for the purchase of property and equipment of $2.4 million and $1.0
million respectively. Although the Company does not currently have any material
identifiable commitments for capital expenditures, the Company expects to
continue to invest in the acquisition of property and equipment in the ordinary
course of its business. The Company does not have any material commitments
related to its royalty obligations arising from licenses of certain products and
technologies used in the Company's products.
 
     Net cash used in financing activities for the nine months ended September
30, 1998 and 1997 was $1.2 million and $12.3 million, respectively. During the
nine months ended September 30, 1997, the principal use of cash was the payment
of dividends and the repurchase of treasury shares. During the nine months ended
September 30, 1998, the principal use of cash was the payment of notes payable
assumed in the acquisition of HRS.
 
     The Company believes that the net proceeds from the offering and cash
generated from operations will be sufficient to fund its operations for at least
the next 12 months.
 
                                YEAR 2000 ISSUES
 
     Certain computer programs were written using two digits rather than four to
define the applicable calendar year. Such programs may recognize a date using
"00" as the year 1900 rather than the year 2000. This is referred to as the
"Year 2000 Issue."
 
     The Company has completed certain internal testing of the file server
versions of its human resources and payroll products, as well as the client
server human resource product and confirmed that they are year 2000 compatible.
ITAA certification (meaning that the Company has been found to meet the
information technology industry's best software development practices for
addressing the Year 2000 issue) has been obtained for the Abra Suite and Best!
Imperativ HRMS products. The Company has further determined that the Abra Tax
File product is not Year 2000 compatible, but it is currently anticipated that
the effort and cost to resolve this issue will be minimal and that a release,
now planned for the third quarter of 1999, will resolve the problem. The DOS
versions of the Abra product lines are not Year 2000 compatible. Existing
customers of these DOS versions have been informed or are in the process of
being informed that the Company will not support the DOS products beyond 1999.
The Company is conducting campaigns to convert these customers to its Year 2000
compatible programs.
 
     For the FAS Windows 95 and NT-based products and the Best! Imperativ Asset
Accounting product, the only significant date-related restriction of which the
Company is currently aware is that the "placed in service date" field will not
allow new assets to be entered in years beyond the year 2019. By definition,
this restriction will not negatively impact a user of the existing FAS products
for approximately 20 years. The Company's next generation of FAS Windows
products, scheduled for release within the next two to three years, will not
contain this date related restriction. The Company is in the final stages of
internal testing of all its Windows
                                       15
<PAGE>   16
 
based FAS products and it is anticipated that all such testing will be completed
in the fourth quarter of 1998. The DOS versions and certain Windows 3.1 and
3.11-based products of FAS are not Year 2000 compatible. Existing customers of
these versions have been informed or are in the process of being informed that
the Company will not support these products beyond 1999. The Company is
conducting campaigns to convert these customers to its Year 2000 compatible
programs.
 
     Notwithstanding the above, there can be no assurances that the Company's
current products do not contain undetected errors or defects associated with
Year 2000 date functions that may materially and/or adversely affect the
Company.
 
     The Company has not specifically tested third-party software that is
incorporated into its products, but the Company has sought and is seeking
assurances from its third-party licensors that the licensed software will not
have date-related Year 2000 issues. Despite this, unknown errors in the
Company's third-party licensed software may materially and/or adversely affect
the Company.
 
     Some analysts have stated that a significant amount of litigation will
arise out of Year 2000 compliance issues, and the Company is aware of an
increasing number of lawsuits against other software vendors. Although no
lawsuits have been filed against the Company, the outcome of any such lawsuits
and the impact on the Company cannot be determined at the present time because
of the unique nature of such potential litigation. Furthermore, because it is in
the business of selling software products, the Company's risk of being subjected
to lawsuits relating to Year 2000 issues with its software products is likely to
be greater than that of companies in other non-software related industries.
Because computer systems may involve different hardware, firmware and software
components from different manufacturers, it may be difficult to determine which
component in a computer system may cause a Year 2000 issue. As a result, the
Company may be subjected to Year 2000-related lawsuits independent of whether
its products and services are Year 2000 ready. The outcome of any such lawsuits
and the impact on the Company cannot be determined at this time.
 
     Additionally, the Company has performed an assessment of its principal
internal management information software and systems including IT systems
(computer hardware and software) and Non-IT systems (equipment, phone systems,
etc.) to determine if they are Year 2000 compliant. Management's assessment is
that minimal modifications will be necessary to the Company's existing principal
internal management information system software to achieve Year 2000 compliance.
Management's assessment of the critical internal management information systems
applications will be further inspected by a third party, to determine what, if
any, modifications are required. This inspection is scheduled to be completed by
the end of the first quarter of 1999. The Company believes that if any
modifications are necessary, the cost will not be material. The Company expects
its principal internal management information systems to be fully Year 2000
compliant by the end of 1999, and is in the process of creating contingency
plans for its critical processes that rely on the principal internal management
information software and systems.
 
     The Company also faces risks and uncertainties to the extent that third
party suppliers of products, services and systems purchased by the Company and
others with whom the Company transacts business on a worldwide basis do not have
business systems or products that comply with the Year 2000 requirements.
Although the Company is currently analyzing the impact, if any, of the Year 2000
issue surrounding such third party interactions, failure of any critical
technology components to operate properly in the Year 2000 and beyond may have
an adverse impact on business operations or require the Company to incur
unanticipated expenses to remedy any problems. The Company expects to complete
this analysis by the end of the first quarter of 1999. A contingency plan will
be prepared if it is determined that the compliance objectives will not be met.
 
     All costs of all of the above measures are being funded out of current
operations, but have not been separately accounted for in the past. Cost of the
above measures includes systems software and hardware, outside contractors,
technical support from various internal groups and administrative costs to
manage. The Company's total cost relating to these activities has not been and
is not expected to be material to the overall financial position, results of
operations or cash flows of the Company. However, there can be no assurance that
there will not be a delay in or increased costs associated with the above
measures, or that the Company's suppliers will adequately prepare for the Year
2000 issue. It is possible that any such delays, increased costs, or supplier
failures could have a material adverse impact on the Company's operations and
financial results.
                                       16
<PAGE>   17
 
                                EURO CONVERSION
 
     Effective January 1, 1999, eleven of the fifteen member countries of the
European Unions (the "participating countries") are scheduled to establish fixed
conversion rates between their existing sovereign currencies (the "legacy
currencies") and the new currency of the European Union, the euro. Following
introduction of the euro, the legacy currencies are scheduled to remain legal
tender in the participating countries as denominations of the euro between
January 1, 1999 and January 1, 2002 (the "transition period"). During the
transition period, public and private parties may pay for goods and services
using either the euro or the participating country's legacy currency on a
"nocompulsion, no prohibition" basis. However, conversion rates no longer will
be computed directly from one legacy currency to another. Rather, a
"triangulation" process must be applied with any amount denominated in a legacy
currency. The Company has adjusted its products that are sold in Europe to
comply with the new currency. Additionally, the internal information management
and accounting systems used in our European operations are in the process of
being modified.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Not applicable.
 
                                       17
<PAGE>   18
 
                                    PART II
 
ITEM 1.  LEGAL PROCEEDINGS
 
     On July 6, 1998 Spectrum Human Resource Systems Corporation (Spectrum)
filed suit against Best Software, Inc., HR Management Software GmbH (HRS), a
wholly owned subsidiary of the Company, and the former owners of HRS, in the
United States District Court for the District of Colorado alleging, among other
things, trademark infringement, trade secret misappropriation and interference
with contract in connection with the Company's acquisition of HRS. The lawsuit
was settled in October, 1998 and the matter was dismissed on stipulation of the
parties.
 
ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
 
     None
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
     None.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     None.
 
ITEM 5.  OTHER INFORMATION
 
     In October 1998, the Company closed on the acquisition of HR Soft, Inc., a
provider of human resource software. The acquisition is discussed in Note 4 of
the Notes to Consolidated Financial Statements in this report.
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
 
     (a) Exhibits:
 
<TABLE>
<S>      <C>  <C>
27       --   Financial Data Schedule, which is submitted electronically
              to the Securities and Exchange Commission for information
              only and not filed.
</TABLE>
 
     (b) Reports on Form 8-K:
 
          None
 
                                       18
<PAGE>   19
 
                                   SIGNATURE
 
     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.
 
                                          BEST SOFTWARE, INC.
 
                                          By:    /s/ DAVID N. BOSSERMAN
                                            ------------------------------------
                                                     David N. Bosserman
                                                 Executive Vice President,
                                                Chief Financial Officer and
                                                          Treasurer
 
Date: November 16, 1998
 
                                       19
<PAGE>   20
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C>           <S>
    3.1       -- Second Amended and Restated Articles of Incorporation of
                 the Company. (Incorporated by reference to Exhibit 3.1 of
                 the Company's Form 10-K) (Registration Statement #0-23117
                 "Form 10-K")
    3.2       -- Amended and Restated By-Laws of the Company.
                 (Incorporated by reference to Exhibit 3.2 of the
                 Company's Form 10-K)
   27         -- Financial Data Schedule*
</TABLE>
 
---------------
* Submitted only with the electronic filing of this document with the Commission
  pursuant to Regulation S-T under the Securities Act of 1933, as amended.
 
                                       20