<PAGE>
 
 ===============================================================================
                                UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549
                            --------------------

                                  FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED MARCH 31, 1997

                                     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: 0-21127

                          VISIGENIC SOFTWARE, INC.
           (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                  DELAWARE                             94-3173927
         (STATE OR OTHER JURISDICTION OF           (I.R.S. EMPLOYER            
          INCORPORATION OR ORGANIZATION)          IDENTIFICATION NO.)

                         951 MARINER'S ISLAND BLVD.
                                  SUITE 120
                             SAN MATEO, CA 94404
         (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

                       TELEPHONE NUMBER (415) 286-1900
            (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

      Securities registered pursuant to Section 12 (b) of the Act: None

        Securities registered pursuant to Section 12 (g) of the Act:
                   Common Stock, $.001 par value per share

         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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. 
                             --- 
         The aggregate market value of Common Stock held by non-affiliates of
the Registrant as of May 9, 1997 was approximately $76,898,620. Shares of Common
Stock held by each executive, director and 5% or greater shareholder have been
excluded in that such persons may be deemed affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

         As of May 9, 1997, there were approximately 13,996,267 shares of the
Registrant's Common Stock outstanding.

                     DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the definitive Proxy Statement in connection with the
Registrant's Annual Meeting of Stockholders to be held July 30, 1997 are
incorporated by reference in Part III.

================================================================================
<PAGE>
 
<TABLE> 
<CAPTION> 

                                         VISIGENIC SOFTWARE, INC.
                                                FORM 10-K

                                            TABLE OF CONTENTS

                                                                                                       PAGE NO.
                                                                                                       --------
                                                  PART I.
<C>             <S>                                                                                    <C> 
Item 1.          Business..............................................................................     3
Item 2.          Properties............................................................................    10
Item 3.          Legal Proceedings.....................................................................    10
Item 4.          Submission of Matters to a Vote of Security Holders...................................    11

                                                  PART II.

Item 5.          Market for Registrant's Common Equity and Related Stockholder Matters.................    11
Item 6.          Selected Financial Data...............................................................    12
Item 7.          Management's Discussion and Analysis of Financial Condition
                 and Results of Operations.............................................................    13
Item 8.          Financial Statements and Supplementary Data...........................................    25
Item 9.          Changes in and Disagreements with Accountants on Accounting
                 and Financial Disclosures.............................................................    41

                                                  PART III.

Item 10.         Directors and Executive Officers of the Registrant....................................    41
Item 11.         Executive Compensation................................................................    41
Item 12.         Security Ownership of Certain Beneficial Owners and Management........................    41
Item 13.         Certain Relationships and Related Transactions........................................    41

                                                  PART IV.

Item 14.         Exhibits, Financial Statement Schedule and Reports on Form 8-K........................    41
Signatures       ......................................................................................    43
</TABLE> 

                                       2
<PAGE>
 
                                    PART 1

Except for the historical information contained herein, the discussion in this
------------------------------------------------------------------------------
Annual Report on Form 10-K contains certain forward-looking statements that
---------------------------------------------------------------------------
involve risks and uncertainties, such as statements of the Company's plans,
---------------------------------------------------------------------------
objectives, expectations and intentions. The cautionary statements and the
--------------------------------------------------------------------------
discussion of risks associated with the Company made in this Annual Report on
-----------------------------------------------------------------------------
Form 10-K, including those in "Additional Factors that Might Affect Future
--------------------------------------------------------------------------
Results," should be read as being applicable to all related forward-looking
---------------------------------------------------------------------------
statements wherever they appear in this Report. The Company's actual results
----------------------------------------------------------------------------
could differ materially from those discussed here.
--------------------------------------------------

ITEM 1.  BUSINESS

OVERVIEW

     Visigenic Software, Inc. ("Visigenic" or the "Company") is a leading
independent provider of software tools for distributed object and database
access technologies for the Internet, Intranet and enterprise computing
environments. The Company's standards-based products facilitate the development,
deployment and management of distributed business applications by providing the
communication framework for distributed object applications and
database-independent access to leading databases. The Company's distributed
object products, consisting of the Common Object Request Broker Architecture
("CORBA")-compliant object request brokers, provide a communication framework
and enable the development and deployment of reliable, flexible and
cost-effective distributed business applications. The Company's cross-platform
database access products, based on the Open Database Connectivity ("ODBC") and
Java Database Connectivity ("JDBC") application programming interfaces ("APIs"),
are open, flexible and cost-effective for developing, deploying and maintaining
database management systems ("DBMS")-independent applications.

     The Company markets and sells its software through its direct sales and
telesales forces, independent software vendors ("ISVs"), value added resellers
("VARs") and international distributors in North America, Europe and Asia. The
Company's customers include Borland, Cisco, Compuware, Healtheon,
Hewlett-Packard, Hitachi, Microsoft, Netscape, Novell, Oracle, Platinum
technology, Software AG and Sybase.

PRODUCTS

     The Company's distributed object products include VisiBroker for Java and
VisiBroker for C++ which are both based on the CORBA standard, and utilize
Internet Inter-Orb Protocol ("IIOP"). The Company's VisiBroker product line also
includes two object services, Events and Naming, that are service
implementations of the Naming and Events CORBA specification. Developers
frequently need these services when implementing distributed object
applications. In addition, the Company has developed VisiBroker Bridge, a bridge
from Microsoft's ActiveX and Distributed Component Object Model ("DCOM"), to
CORBA-based applications. The Company's database access products include
VisiChannel for JDBC, VisiChannel for ODBC, VisiODBC Drivers, and VisiODBC
Software Development Kits.

Distributed Object Products
---------------------------

     VisiBroker for C++. VisiBroker for C++ is a complete CORBA 2.0 compliant
     ------------------
Object Request Broker runtime and supporting development environment for
building, deploying and managing distributed C++ applications that are open,
flexible and interoperable across multiple platforms. Objects built with
VisiBroker for C++ can easily be accessed by Web-based applications, such as
applications built with VisiBroker for Java, that communicate using CORBA's
IIOP.

     VisiBroker for C++ operates on SunOS, Solaris, Digital UNIX, HP-UX, IBM
AIX, SGI Irix, Windows NT and Windows 95 platforms. VisiBroker for C++ was first
released in September 1994 and the Company is currently shipping version 2.1.

                                       3
<PAGE>
 
      VisiBroker for Java. VisiBroker for Java is the first client- and
      -------------------
server-side CORBA 2.0 compliant Object Request Broker written completely in
Java. VisiBroker for Java consists of a runtime and supporting development
environment for building distributed Java applications for the Internet and
Intranets. VisiBroker for Java can be used for client applets that run in
Java-enabled browsers such as Netscape Navigator and Microsoft Internet
Explorer, as well as objects that reside on servers.

     The VisiBroker for Java development environment is available on Windows NT,
Windows 95 and Solaris. Distributed applications developed with VisiBroker for
Java can be deployed on any platform supporting the Java environment. VisiBroker
for Java was first released in April 1996.

     VisiBroker Event Service for C ++ and Java. The VisiBroker Event Service
     ------------------------------------------
for C++ and Java is a full implementation of the Object Management Group's
("OMG's") CORBA Events Service specification. The event service allows "supplier
objects" to communicate via an event channel, notifying any number of "consumer
objects" when events they "subscribe to" take place. This supplier-consumer
model reduces server traffic and improves scalability over the alternative of a
polling scheme.

     The VisiBroker Events Service was first released in December 1996 and is
currently available for Windows NT, Solaris and Java environments.

      VisiBroker Naming Service for C ++ and Java. The VisiBroker Naming Service
      -------------------------------------------
for C ++ and Java is a full implementation of the OMG's CORBA Naming Service
specification. The naming service enables developers to register object names at
runtime. Naming contexts are organized into a hierarchical namespace. Client
applications can then use the Naming Service to discover the names and object
references for objects they wish to use by simply traversing the naming context
hierarchy.

     The VisiBroker Naming Service was first released in December 1996 and is
currently available for Windows NT, Solaris and Java environments.

     VisiBroker Bridge.  VisiBroker Bridge is currently in beta test and the 
     -----------------
Company expects it to be commercially available in the first half of 1997.
VisiBroker Bridge is a connectivity tool that enables Microsoft's ActiveX
controls implemented in Web pages, Visual Basic applications or OLE-enabled
applications to interoperate with CORBA objects. This technology provides
customers the flexibility to operate in familiar Microsoft applications and
development environments, with the added benefit of transparently accessing
distributed objects based on CORBA standards. Developers using ActiveX-enabled
tools such as Microsoft Excel or Microsoft Access, or ActiveX-enabled
development environments such as Microsoft's Visual Basic and Visual C++,
Borland's Delphi and Powersoft's PowerBuilder, can build applications that
transparently and easily access CORBA objects over the Internet or Intranets.
Additionally, VisiBroker Bridge also serves to bridge the Microsoft DCOM
environment to the VisiBroker CORBA/IIOP environment. VisiBroker Bridge provides
information technology ("IT") organizations that have a strong commitment to
Microsoft's standard for object development with a way to access environments
where application functionality exists as CORBA objects.

Database Access Products
------------------------

     VisiChannel for ODBC. VisiChannel for ODBC provides an architecture that
     --------------------
simplifies database access in large distributed application environments such as
the Internet, Intranets and enterprise computing environment. VisiChannel for
ODBC can be deployed for use with existing ODBC applications without any changes
to the client application. VisiChannel for ODBC is optimized for large-scale
ODBC traffic and runs over standard TCP/IP transports, enabling it to be used
for database access across the Internet. In addition, the VisiChannel Manager (a
component of VisiChannel for ODBC) is a monitoring tool that allows IT
professionals to monitor all VisiChannel connections and adjust system
configuration parameters from a single location.

     The Company initially released VisiChannel for ODBC in March 1996. The
VisiChannel Server for ODBC is available for Windows NT, HP-UX, IBM AIX, and Sun
Solaris. VisiChannel Clients are available for Windows, Windows NT, Windows 95,
HP-UX, and Sun Solaris. The Company expects to begin shipping a VisiChannel
Client for Windows 3.1 in the first half of 1997.

                                       4
<PAGE>
 
     VisiChannel for JDBC. VisiChannel for JDBC simplifies database access from
     --------------------
Internet/Intranet Java applications to Intranet-based DBMSs. VisiChannel for
JDBC is the first product that integrates Visigenic's data access and
distributed object technologies. Conforming to the JDBC standard, VisiChannel
for JDBC uses the IIOP to provide optimized communication between client and
server. The thin all-Java VisiChannel for JDBC clients may be deployed on any
platform where a Java runtime environment exists. The VisiChannel for JDBC
Server, using the ODBC database access standard, accesses data via the
appropriate ODBC database driver, either supplied with VisiChannel (Oracle,
Sybase, Informix), or by third parties. This allows enterprises to leverage
their investment in their existing ODBC database access infrastructure.

     VisiChannel for JDBC is available for Windows NT (Versions 3.51 and 4.0)
and Sun Solaris (Version 2.5.1). The VisiChannel for JDBC Client runs on any
platform with a Java runtime environment on a Java-enabled Web browser. The
Company initially released VisiChannel for JDBC in March 1997.

     VisiODBC Drivers and DriverSets. The VisiODBC Drivers and DriverSets
     -------------------------------
provide cross-platform access to multiple SQL relational DBMSs--including
Adabas, CA-Ingres, IBM DB2, Informix, Microsoft SQL Server, Oracle and Sybase
SQL Server (DBLib and CTLib)--from any ODBC-enabled application. The VisiODBC
Driver and DriverSets are made up of two ODBC components: the Driver Manager and
a set of database drivers. The Company sells VisiODBC drivers separately or as
the VisiODBC DriverSet, which consists of the full set of VisiODBC drivers
available for each platform. VisiODBC Drivers are available for Windows, Windows
NT, HP-UX, IBM AIX, SGI Irix, SCO, Solaris, and Power Macintosh and OS/2. The
Company initially released VisiODBC Drivers and DriverSets in November 1994.

     VisiODBC SDKs. VisiODBC Software Development Kits ("SDKs") allow developers
     -------------
to develop vendor-independent database applications and ODBC drivers. Using the
VisiODBC SDKs, developers write database-independent C and C++ applications that
communicate simultaneously with multiple databases from different vendors. Each
VisiODBC SDK comes with the Driver Manager, header files, programmer's reference
and graphical utilities.

     Visigenic has ported the Microsoft ODBC 2.X SDK to ATT GIS, HP-UX, IBM AIX,
SGI Irix, SCO, Solaris, Sun OS, Macintosh, Power Macintosh and OS/2. Visigenic
has ported the Microsoft ODBC 3.0 SDK to HP-UX and IBM AIX and plans to release
the Solaris port in June 1997. Visigenic currently has the right to license and
port the Microsoft ODBC SDK versions 2.X and 3.0 for Windows to all
non-Microsoft platforms. The Company released its first VisiODBC SDK in November
1994.

CUSTOMERS

        Worldwide, the Company has sold its products to more than 700 customers,
including end user IT organizations, ISVs, VARs, and distributors. Most of the
Company's customers come from the following industries: Financial Services,
Telecommunications, Network Management/Systems Management, and ISV's and VAR's.
In fiscal 1996, one customer, Platinum technology, accounted for approximately
25% of revenue. No individual customer accounted for more than 10% of revenue in
fiscal 1997. A relatively small number of ISV and VAR customers have accounted
for a significant percentage of the Company's revenue, and the Company expects
that sales to ISV and VAR customers will continue to represent a significant
portion of the Company's revenue in future periods. In fiscal 1996,
approximately 78% of the Company's revenue was derived from ten customers. In
fiscal 1997, approximately 55% of the Company's revenue was derived from ten
customers.

SALES AND MARKETING

         The Company's sales and marketing objective is to achieve broad market
penetration by targeting multiple channels of distribution, including direct
sales and telesales, ISVs, VARs, system integrators ("SIs"), and international
distributors. The Company is actively seeking to increase its base of VARs,
ISVs, SIs and international distributors. As of March 31, 1997, the Company's
sales organization included 40 employees and its marketing organization included
16 employees.

                                       5
<PAGE>
 
     Direct Sales/Telesales. The Company's direct sales and telesales forces
     ----------------------
focus on medium to large-sized ISVs, VARs and corporate IT opportunities. To
date, the direct sales and telesales forces have been primarily targeting
strategic ISVs and VARs to leverage their sales and marketing expertise as well
as their position in the market. The Company has direct sales offices or
personnel in San Mateo, California; Denver, Colorado; Atlanta, Georgia; Chicago,
Illinois; Boston, Massachusetts; Dallas, Texas; Reston, Virginia; and Paris,
France. The Company's telesales organization, based in San Mateo, works jointly
with the direct sales force to receive customer orders as well as proactively
identify, contact and qualify customer leads.

     Independent Software Vendors. The Company has relationships with a number
     ----------------------------
of ISVs to leverage their sales and marketing channels through joint marketing
programs and product bundling agreements.

     Value Added Resellers and System Integrators. VARs and SIs customize,
     --------------------------------------------
configure and install the Company's software products and bundle these products
with their software solutions and services.

     International Distributors. The Company believes that it is important to
     --------------------------
develop a strong international presence and intends to do business in markets
outside of North America principally through distributors. International sales
accounted for 10% and 11% of revenue in fiscal 1996 and fiscal 1997,
respectively. The Company did not have material international sales in fiscal
1995. The Company is working with its distributors to develop end user, ISV, VAR
and SI relationships in their respective territories. As of March 31, 1997, the
Company had 26 international distributors. In April 1997, the Company and
Valtech-iO commenced an exclusive arrangement pursuant to which Valtech-iO will
distribute Visigenic products and provide training and support for those
products throughout Europe. Valtech-iO is a European provider of distributed
object and data access technologies. Valtech-iO's main offices are located in
London, England; Paris, France; and Freidburg, Germany.

     See "Additional Factors That Might Affect Future Results--Reliance on VARs
and ISVs" and "--International Sales."

     The Company's marketing efforts are directed at building brand name
awareness while also highlighting the value of the Company's distributed object
and database access products. The Company's marketing efforts include market
research, product planning, creating collateral materials, managing press
coverage and other public relations, identifying potential customers,
advertising, attending tradeshows, speaking at industry conferences, direct mail
campaigns and establishing and maintaining close relationships with recognized
industry analysts. The Company also maintains a home page on the Internet that
is a source of sales leads.

PROFESSIONAL SERVICES

     The Company believes that a high level of customer service and support is
critical to the Company's success. In December 1996, the Company acquired
CustomWare, Inc. ("CustomWare"), a training and consulting firm focused on Java
and CORBA technologies. In fiscal 1997, the Company grew its professional
service organization from 7 employees to 27 employees.

       The Company's professional services organization provides product
training, specialized consulting, and product support. These services are
designed to promote the successful development and deployment of distributed
business applications built with Visigenic's distributed object and database
access products.

     Consulting and Training. Visigenic's consulting services include
     -----------------------
application design and development, strategy assessments, project mentoring and
technology transfer, thereby enabling the customer to choose the level of
service that fits their development needs. Visigenic's consultants are
experienced in distributed objects, database access and application
architecture. The Company complements its consulting services with a training
curriculum that covers product training and complementary technologies, such as
CORBA, Java, ODBC and JDBC.

     Technical Support and Maintenance. The Company offers customer support
     ---------------------------------
through telephone, electronic mail and fax. Visigenic provides new software
releases, maintenance releases and enhancements under annual support agreements
with customers. Maintenance and customer support license fees are not included
in software license fees but are purchased separately for an annual fee.

                                       6
<PAGE>
 
PRODUCT DEVELOPMENT

     The Company believes its future success will depend in large part on its
ability to expand the Visigenic product family by enhancing existing products,
integrating database access technology with distributed object technology and
developing new products to meet a broad range of customer needs. The Company's
product development organization is responsible for new product and technology
development, product testing and user interface development. This organization
is working to expand the availability of the Company's products on the leading
hardware platforms, operating systems, DBMSs, programming languages and
networking and communication protocols.

     Since inception, the Company has made substantial investments in product
development and related activities. The Company's products have been developed
primarily by the Company's internal development staff and, in some instances,
with the assistance of external consultants. Certain technologies have been
acquired and integrated into the Company's products through licensing
arrangements. The Company expects that most of its new products will be
developed internally. However, the Company will evaluate on an ongoing basis
externally developed technologies and products for integration into its product
lines.

     The Company expects to enhance its VisiBroker for C++ and VisiBroker for
Java products and expand its distributed object product line. The Company is
developing an object-oriented transaction processing system based on the Object
Transaction Service ("OTS") specified by the OMG that enables mission-critical
On-line Transaction Process ("OLTP") applications. In addition, the Company is
jointly developing a product, TP Broker, with Hitachi that is a combination of
the Company's VisiBroker for C++ product, a transaction interface implementation
and OpenTP1, Hitachi's advanced transaction processing engine.

     The Company expects that development activities with respect to its
database access products will include development of VisiODBC SDKs, VisiODBC
drivers compliant with the ODBC 2.5 specification as well as additional features
for its VisiChannel products, including high performance scalability, and
management and monitoring tools.

     The Company also intends to continue to leverage its technologies to
provide integrated database capabilities for its VisiBroker product line.
VisiChannel for JDBC is the first product that integrates the database access
and CORBA/IIOP technologies. The Company's VisiBroker products will provide a
more complete distributed object solution, addressing both the distributed
object and database access requirements of its customer base.

     As of March 31, 1997, there were 66 employees on the Company's product
development staff. The Company's product development expenditures in fiscal
1995, fiscal 1996 and fiscal 1997 were $3.2 million, $4.3 million and $9.5
million, respectively. The Company expects that it will continue to commit
substantial resources to product development in the future.

COMPETITION

     The Company's products are targeted at the emerging markets for
standards-based distributed object software and standards-based database access
software. The markets for the Company's products are intensely competitive,
subject to rapid change and significantly affected by new product introductions
and other market activities of industry participants. The Company believes that
the principal competitive factors in these markets are product quality,
performance and price, vendor and product reputation, product architecture and
quality of support.

     In the standards-based database access market, the Company competes
principally against Intersolv. The Company's database access products also
indirectly compete against proprietary database access solutions from database
vendors. In the standards-based distributed object market, the Company competes
principally against Iona Technologies, a public company, Expersoft, a privately
held company, and BEA, a public company which recently acquired Digital
Equipment Corporation's ("DEC") object request broker. The Company's distributed
object products also compete against existing or proposed distributed object
solutions from hardware vendors such as DEC, Hewlett-Packard, IBM and Sun. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressures will not
materially and adversely 

                                       7
<PAGE>
 
affect its business, financial condition or results of operations. See
"Additional Factors That Might Affect Future Results--Intense Competition."

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

     The Company's success is dependent in part upon its proprietary technology.
While the Company relies on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary rights, the Company believes that factors such as the technical and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable products and product support are
more essential to establishing and maintaining a technology leadership position,
particularly because the Company is supplying standards-based products. The
Company seeks to protect its software, published data, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. The Company has granted limited access to its source code to
third parties under confidentiality obligations. 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. The Company distributes its products electronically
through the Internet. Distributing the Company's products through the Internet
makes the Company's software more susceptible to unauthorized copying and use.
The Company has historically allowed and intends to continue to allow customers
to electronically download its client and server software. If as a result of
changing legal interpretations of liability for unauthorized use of the
Company's software or otherwise, users were to become less sensitive to avoiding
copyright infringement, the Company's business, results of operations and
financial condition could be materially adversely affected.

     From time to time, the Company has received claims that it has infringed
third parties' intellectual property rights and there can be no assurance that
in the future, third parties will not claim infringement by the Company with
respect to current or future products. See Item 3, Legal Proceedings. The
Company expects that software developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time-
consuming, 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 upon the Company's business, results of operations and financial
condition.

     In addition, the Company relies on certain software that it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. The
Company licenses the base technology for the VisiODBC SDK products from
Microsoft, security technology it plans to use in several of its future products
from RSA Data Security, Inc. ("RSA") and Talarian SmartSockets from Talarian for
inclusion into a version of the VisiChannel product line. Microsoft has the
right to terminate its license with the Company any time after delivery to the
Company of the Microsoft SDK for ODBC 3.0, which occurred in December 1996. In
addition, in February 1997, Microsoft converted its license to the Company from
an exclusive to a non-exclusive license. The Company's licenses with RSA and
Talarian may only be terminated for material breach. The Company has entered
into a joint technology agreement with JavaSoft, a subsidiary of Sun, that
grants the Company the right to sublicense JavaSoft's JDBC test suites and ODBC
bridge. There can be no assurances that such firms will remain in business, that
they will continue to support their technology or that their technology will
otherwise continue to be available to the Company on commercially reasonable
terms. The loss of or inability to maintain any of these software licenses could
result in delays or cancellations in product shipments until equivalent software
can be identified and licensed or developed and integrated with the Company's
products. Any such delay or cancellation could materially adversely affect the
Company's business, results of operations and financial condition.

                                       8
<PAGE>
 
EMPLOYEES

     As of March 31, 1997, the Company employed 171 full time personnel,
including 66 in product development, 27 in professional services, 56 in sales
and marketing and 22 in finance and administration. See "Additional Factors That
Might Affect Future Results--Dependence on Key Personnel; Need to Increase
Technical and Sales Personnel."

EXECUTIVE OFFICERS

     The executive officers of the Company, and their respective ages as May 9,
1997 are as follows:

<TABLE> 
<CAPTION> 

 NAME                        AGE                  POSITION
------                       ---                  --------
<S>                          <C>        <C> 
Roger J. Sippl .............   42       Chairman of the Board of Directors
                                        and Chief Executive Officer
Mark D. Hanson..............   36       President and Chief Operating Officer
Jens Christensen, Ph.D......   34       Vice President, Chief Technical Officer and Director
Kevin C. Eichler............   37       Vice President, Operations, Chief Financial
                                        Officer, Treasurer and Secretary
Scott Chalmers..............   52       Vice President, Worldwide Sales
Robert Macdonald............   40       Vice President, Marketing
Robert Perreault............   39       Vice President, Professional Services
Richard W. Kelman...........   54       Vice President, Engineering
Therese H. Langlais.........   38       Vice President, Business Development

</TABLE> 

     Roger J. Sippl is the founder of the Company and has served as a Director
     --------------
and the Chief Executive Officer since February 1993. Mr. Sippl is a co-founder
of The Vantive Corporation, a customer interaction applications software company
("Vantive") and serves as the Chairman of the Board. Mr. Sippl served as a
director of Vantive since December 1990 until his appointment as Chairman in
December 1996. Prior to his relationship with Vantive, Mr. Sippl founded
Informix Software, a database software company ("Informix"), in 1980 and served
as that company's President and Chief Executive Officer until 1989, and its
Chairman of the Board until December 1992.

     Mark D. Hanson has served as President and Chief Operating Officer of the
     --------------
Company since January 1995. Mr. Hanson served as Vice President, Worldwide Sales
from June 1994 when he joined the Company until his appointment as President and
Chief Operating Officer. From July 1992 to March 1994, Mr. Hanson was Vice
President of Channel Sales of Sybase, a database software company, and Vice
President, International Sales of Gain Technology ("Gain"), a software company,
before the acquisition of Gain by Sybase. From January 1991 to June 1992, Mr.
Hanson served as Vice President, Worldwide Sales and Support for Macromedia, a
supplier of PC multimedia software and services. Prior to that time, Mr. Hanson
was employed as Vice President at Informix from 1984 to January 1991, most
recently as Vice President, Americas Sales.

     Jens Christensen has served as Vice President, Chief Technical Officer and
     ----------------
a Director of the Company since May 1996. From October 1991 to May 1996, Mr.
Christensen served as President and Chief Executive Officer of PostModern
Computing Technologies Inc., a software company he founded in 1991. From October
1990 to September 1991, Mr. Christensen was employed as a software engineer for
Teknekron, a software company.

     Kevin C. Eichler has served as Vice President, Operations, Chief Financial
     ----------------
Officer, Treasurer and Secretary of the Company since July 1996. From July 1995
to July 1996, Mr. Eichler served as Executive Vice President, Finance, and Chief
Financial Officer for National Insurance Group, a financial services and related
technology solution provider. From January 1991 to June 1995, Mr. Eichler served
as Executive Vice President, Finance and Chief Financial Officer for Mortgage
Quality Management, Inc., a national provider of quality control services and
technologies to residential mortgage lenders. From January 1990 to January 1991,
Mr. Eichler served as Tax Manager, Corporate Finance for NeXT Software, Inc., a
software company. From May 1988 to January 1990, Mr. Eichler served as Domestic
Tax Manager for Microsoft Corporation, a software company.

     Scott Chalmers has served as Vice President, Worldwide Sales of the Company
     --------------
since October 1996. Prior to joining the Company, Mr. Chalmers was employed for
six years at Informix, where he held various positions, the 

                                       9
<PAGE>
 
most recent being Vice President of U.S. Sales. Mr. Chalmers has had 25 years
experience in senior sales and management positions at such companies as
Cullinet, AT&T Information Systems and IBM.

     Robert J. Macdonald has served as Vice President, Marketing of the Company
     -------------------
since September 1996. Prior to that, Mr. Macdonald was employed for over 10
years at Informix where he held various positions, the most recent being Vice
President, Corporate Marketing.

     Robert Perreault has served as Vice President, Professional Services of the
     ----------------
Company since September 1996. Mr. Perreault served as Vice-President of Research
and Development from September 1995, when he joined the Company, until his
appointment as Vice-President, Professional Services. From May 1994 to September
1995, Mr. Perreault served as Vice President of Client/Server Technology at
Compuware Corporation, a software company. From September 1993 to May 1994, he
served as Vice President of Database and Connectivity Products at Uniface
Corporation, a software company which merged with Compuware Corporation in May
1994. In 1993, Mr. Perreault co-founded and served as President of Data
Accessibility Solutions, Inc., a consulting company which merged with the
Company in May 1996. Mr. Perreault co-founded and served as Vice President of
U.S. Operations for RIAL, Inc., a consulting company, from September 1991 to
August 1993.

     Richard W. Kelman has served as Vice President, Engineering of the Company
     -----------------
since February 1997. From April 1995 to January 1997, Mr. Kelman was Vice
President of Client Services Development for Tesseract Corporation, a leading
provider of human resources management systems. From January 1992 to February
1995, he served as Director of Systems Development for Dow Jones and from
October 1987 to January 1992, he was Vice President of Market Applications
Development at Telerate Systems. From 1969 to 1987, Mr. Kelman held a variety of
positions at UNI VAC Corporation.

     Therese H. Langlais has served as Vice President, Business Development
     -------------------
since September 1996. Ms. Langlais served as Vice President of Marketing from
November 1993 until her appointment as Vice President, Business Development and
as Director of Marketing from April 1993 to November 1993. Prior to joining the
Company, Ms. Langlais was employed for nine years at Informix, where she held
various positions, the most recent being Director of Strategic Projects.


ITEM 2.  PROPERTIES

     The Company's principal executive offices and product development
facilities are located in San Mateo, California and consist of approximately
40,000 square feet under leases that will expire between November 2001 and
February 2003. The Company has sales offices in Atlanta, Boston, Chicago,
Dallas, Denver, and the Washington, D.C. area and in Paris, France.

ITEM 3.  LEGAL PROCEEDINGS

        On April 10, 1997, Western Imaging, Inc. ("Western Imaging") filed a
complaint in the U.S. District Court for the Northern District of California
against the Company and Corel Corporation ("Corel"), a licensee of the Company,
alleging breach of contract, intentional and negligent misrepresentation,
copyright infringement, trademark infringement, misappropriation of trade
secrets and other related claims.

        The lawsuit claims that in a May 1994 agreement with Western Imaging,
the Company sold to Western Imaging all right, title and interest not only to
its Lumena product, but also to its Color Tools, Creative License, Oasis and
Signature products as well. As a result, Western Imaging asserts that the
Company breached the terms of the agreement with Western Imaging when, among
other things, it licensed Creative License, Color Tools, Oasis and Signature
to Corel. Western Imaging is seeking injunctive relief, unspecified damages,
impoundment of the disputed software during the pendency of the litigation,
and punitive damages.

        The Company has not sold or marketed the disputed software products
since January 1995. The Company does not utilize this technology in any
current product offering.

                                       10
<PAGE>
 
        The Company has agreed to defend Corel pursuant to the terms of its
license to Corel. Neither the Company nor Corel has responded to the complaint.
The Company is currently investigating the allegations and believes it has
meritorious defenses to such claims and intends to defend the litigation
vigorously. However, due to the nature of the litigation and because the lawsuit
is at an early stage, the Company cannot determine the total expense or possible
loss, if any, that may ultimately be incurred either in the context of a trial
or as a result of a negotiated settlement. Regardless of the ultimate outcome of
the litigation, it could result in significant diversion of time by the
Company's technical and managerial personnel. Because the results of the
litigation, including any potential settlement, are uncertain, there can be no
assurance that they will not have a material adverse effect on the Company's
business, operating results and financial condition.


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

     During the fourth quarter of 1997, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

     The Company's Common Stock is traded on the Nasdaq National Market under
the symbol VSGN. The following table sets forth, for the period's indicated, the
range of high and low sale prices since the Company completed its initial public
offering on August 8, 1996:
                                                            HIGH       LOW
                                                            ----       ---
        FISCAL YEAR ENDING MARCH 31, 1997
             Second Quarter (from August 8, 1996).......   $13.250  $  9.000
             Third Quarter..............................   $17.750  $ 10.500
             Fourth Quarter ............................   $16.250  $  8.625

     On May 9, 1997, there were approximately 241 record holders of Visigenic
Software, Inc. Common Stock. Because many of such shares are held by brokers and
other institutions on behalf of stockholders, the Company is unable to estimate
the total number of stockholders represented by these record holders.

DIVIDEND POLICY

     The Company has not declared or paid any cash dividends on its capital
stock. It is the present policy of the Company to retain earnings to finance the
growth and development of the business and, therefore, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
In addition, the Company's bank credit facility contains covenants that prohibit
the Company from paying dividends without prior bank consent.

                                       11
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and other
financial information included elsewhere in this Annual Report on Form 10-K.

<TABLE> 
<CAPTION> 
                                                                                   YEAR ENDED MARCH 31,
                                                               -----------------------------------------------------------
                                                                  1994             1995          1996             1997
                                                               ----------       ---------     -----------       ----------
                                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                            <C>              <C>           <C>              <C> 
   CONSOLIDATED STATEMENT OF OPERATIONS DATA:
   Total revenue ......................................        $     --         $  1,115       $    5,575       $ 17,018          
   Gross profit .......................................        $     --         $    820       $    4,564       $ 14,058          
   Loss from operations ...............................        $ (2,496)        $ (4,723)      $   (4,464)      $(20,681)         
   Net loss ...........................................        $ (2,454)        $ (4,629)      $   (4,379)      $(20,330)         

   Net loss per share (1) .............................                                                --       $  (1.63)         
   Pro forma net loss per share (1) ...................                                        $    (0.40)      $     --          
   Shares used in per share calculation (1) ...........                                            11,064         12,453          

   CONSOLIDATED BALANCE SHEET DATA:                                                                                               
                                                                                                                                  
   Cash and cash equivalents ..........................        $  2,901         $    553       $    2,399       $ 19,445          
   Working capital ....................................        $  2,722         $    488       $      816       $ 22,749          
   Total assets .......................................        $  3,346         $  1,829       $    4,820       $ 32,333          
   Stockholders' equity ...............................        $  3,132         $  1,117       $    2,220       $ 26,913           
</TABLE> 
----------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
    of the method used to determine the number of shares used to compute per
    share amounts.

SELECTED QUARTERLY RESULTS OF OPERATIONS

     The following tables set forth statements of operations for each of the
eight quarters ended March 31, 1997. This quarterly information is unaudited,
but has been prepared on the same basis as the annual Consolidated Financial
Statements and, in the opinion of the Company's management, reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair representation of the information for the periods presented. Such
statements of operations should be read in conjunction with the Company's
audited Consolidated Financial Statements and Notes thereto included elsewhere
herein. Operating results for any quarter are not necessarily indicative of
results for any future period.

<TABLE> 
<CAPTION> 

                                                                          QUARTER ENDED
                                       ----------------------------------------------------------------------------------------
                                        JUNE 30,   SEPT. 30,  DEC. 31,  MAR. 31,     JUNE 30,     SEPT. 30,  DEC. 31,  MAR. 31,   
                                         1995        1995      1995      1996         1996         1996      1996       1997     
                                       ----------  --------- --------- ---------    --------    ---------- ---------  --------- 
                                                                        (IN THOUSANDS)                                    
<S>                                    <C>         <C>       <C>       <C>          <C>         <C>        <C>        <C>  
Total revenue.......................    $    911   $  1,301   $ 1,093    $ 2,270     $  2,961   $  3,822    $  4,751   $   5,484  
Gross profit........................    $    722   $  1,059   $   786    $ 1,997     $  2,528   $  3,290    $  3,887   $   4,353    

Loss from operations................    $   (978)  $ (1,019)  $(1,746)   $  (721)    $(13,665)  $ (2,345)   $ (2,451)  $  (2,220) 
Net loss............................    $   (977)  $   (991)  $(1,698)   $  (713)    $(13,659)  $ (2,303)   $ (2,309)  $  (2,059)
</TABLE> 

        With the exception of the third quarter of fiscal 1996, the Company's
revenue has increased in each of the eight quarters ending March 31, 1997. The
decline in revenue in the third quarter of fiscal 1996 resulted primarily from
the delay in completion of a large sale which closed in the fourth quarter of
fiscal 1996.

                                       12
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
        RESULTS OF OPERATIONS  

     The following discussion and analysis should be read in conjunction with
     ------------------------------------------------------------------------
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
-------------------------------------------------------------------------------
Statements and Notes thereto included elsewhere in this Annual Report on Form
-----------------------------------------------------------------------------
10-K.
----

OVERVIEW

     The Company commenced operations in February 1993 and was engaged
principally in product and market research and product development until the
launch of its initial products in November 1994. The Company first recognized
material revenue in the fourth quarter of fiscal 1995. The Company shipped
version 1.0 of the VisiODBC SDK and the VisiODBC Drivers in November 1994,
version 1.0 of its VisiChannel product in March 1996 and version 2.0 of its
VisiODBC product line in June 1996. In May 1996, the Company acquired PostModern
Computing Technologies Inc. ("PostModern"), a supplier of distributed object
technology, and began selling VisiBroker for C++ and VisiBroker for Java,
distributed object products based on technology acquired from PostModern.

     The Company's revenue is derived from license fees from licensing its
products, royalties from VARs, ISVs and distributors, and fees for services
related to its products, including software maintenance, development contracts,
consulting and training. License fees for the Company's products vary according
to the specific products licensed. Terms and conditions of individual license
transactions, including prices and discounts, are often highly negotiated based
on volumes and commitments and vary considerably from customer to customer.
Certain of the Company's license arrangements with VARs and ISVs provide for
sublicense fees payable to the Company based on a percent of the VAR's or ISV's
net revenue. Certain of the Company's license arrangements with VARs and ISVs
provide for fixed fees for the right to make and distribute an unlimited number
of copies of the Company's product for a specified period of time. Service
revenue is primarily attributable to lower margin maintenance and other revenue,
including training and consulting revenue and engineering development fees.
Prior to the acquisition of PostModern, the Company's revenue was attributable
to non-recurring license fees for its database access products, particularly its
VisiODBC product line, and fees from related services. Since the acquisition of
PostModern, the Company's revenue has been attributable to non-recurring license
fees for both its database access and its distributed object products and fees
from related services. The Company expects that such products will account for
substantially all of its license revenue for the foreseeable future. Factors
adversely affecting the pricing of or demand for its products could have a
material adverse effect on the Company's business, results of operations and
financial condition.

     The Company generally recognizes revenue from license and pre-paid royalty
fees upon delivery of software products if there are no significant
post-delivery obligations, if collection is probable and if the license
agreement requires payment within ninety (90) days. If significant post-delivery
obligations exist or if a product is subject to customer acceptance, revenue is
deferred until no significant obligations remain or acceptance has occurred.
Royalty revenue (other than from pre-paid royalties) is recognized when it is
reported by VARs, ISVs and distributors. Maintenance revenue from ongoing
customer support and product upgrades is recognized ratably over the term of the
applicable maintenance period, which is typically twelve months. Consulting and
training revenue is generally recognized as services are performed over the term
of the agreement. If maintenance revenue is included in a license agreement,
such amount is unbundled from the license fee at its fair market value. Revenue
from engineering development work is generally recognized on a percentage of
completion basis. If a transaction includes both license and service elements,
license fee revenue is recognized upon shipment of the software, provided
services do not include significant customization or modification of the base
product and payment terms are not subject to acceptance criteria. In cases where
license fee payments are contingent upon the acceptance of services, revenues
from both the license and service elements are deferred until the acceptance
criteria are met. See Note 2 of Notes to Consolidated Financial Statements.

     The Company licenses its products to VARs and ISVs, who include the
Company's products in their own products, and to end users, who deploy the
Company's products in their own computing environments. A substantial portion of
the Company's license revenue to date is attributable to licenses to VARs and
ISVs. A 

                                       13
<PAGE>
 
relatively small number of VAR and ISV customers have accounted for a
significant percentage of the Company's license revenue. For fiscal 1996,
licenses to the Company's ten largest customers accounted for approximately 78%
of the Company's total revenue and licenses to one customer, Platinum
technology, accounted for approximately 25% of the Company's total revenue. For
fiscal 1997, licenses to the Company's ten largest customers accounted for
approximately 55% of the Company's total revenue and no customer accounted for
greater than 10% of the Company's total revenue. The Company expects that
licenses to a limited number of VAR and ISV customers will continue to account
for a large percentage of revenue for the foreseeable future.

     The sales cycles associated with the license of the Company's products are
often lengthy (typically ranging from six to twelve months) and are subject to a
number of significant delays over which the Company has little or no control. In
some cases, the license of the Company's software products is an enterprise-wide
decision by prospective end user customers or a product strategy decision by
VARs and ISVs. Generally, the Company must provide a significant amount of
information to prospective customers regarding the use and benefits of the
Company's products as part of its sales efforts. In addition, the implementation
of some of the Company's products involves a significant commitment of resources
by prospective customers and may require substantial reengineering of customers'
computing environments. The cost to the customer of the Company's product is
typically only a portion of the related hardware, software, development,
training and integration costs of implementing a large scale system. Given these
factors and the Company's expected continued dependence on a limited number of
customers for a substantial part of its license revenue, the loss of a major
customer or any reduction or delay in sales to or implementations by such
customers could have a material adverse effect on the Company's business,
results of operations and financial condition.

     The Company markets its products in North America through its direct sales
and telesales organizations and through VARs and ISVs. Throughout the rest of
the world, the Company markets its products through distributors, VARs and ISVs.
International revenue accounted for approximately 10% of total revenue in fiscal
1996 and approximately 11% of total revenue for fiscal 1997. In February 1996,
the Company opened a European sales office in France. In April 1997, the Company
and Valtech-iO commenced an exclusive arrangement pursuant to which Valtech-iO
will distribute Visigenic products and provide training and support for those
products throughout Europe. Valtech-iO's main offices are located in London,
England; Paris, France; and Freidburg, Germany. The Company intends to increase
its international sales force and focus on establishing additional international
distributor, VAR and ISV relationships. The Company expects that international
revenue will account for an increasing portion of total revenue in the future.
As a result, failure to manage international sales appropriately could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Additional Factors That Might Affect Future
Results--International Sales."

     With the exception of the third quarter of fiscal 1996, the Company's
revenue has increased in each of the last nine quarters primarily due to growth
in software license revenue. The Company's limited operating history, however,
makes the prediction of future operating results difficult. The Company expects
that prior growth rates of the Company's software products revenue will not be
sustainable in the future. The Company's future operating results will depend on
many factors, including the size, timing and terms and conditions of individual
license transactions; the relatively long sales and implementation cycles for
the Company's products; the delay or deferral of customer implementations;
changes in the Company's operating expenses; the ability of the Company to
develop and market new products and control costs; market acceptance of new
products; timing of introduction or enhancement of products by the Company or
its competitors; the level of product and price competition; the ability of the
Company to expand its direct sales and telesales force, its indirect
distribution channels and its customer support capabilities; activities of and
acquisitions by competitors; changes in database access and distributed object
software, database technology and industry standards; changes in the mix of
products and services sold; changes in the mix of channels through which
products and services are sold; levels of international sales; personnel changes
and difficulties in attracting and retaining qualified sales, marketing and
technical personnel; changes in customers' budgeting cycles; foreign currency
exchange rates; quality control of products sold; and general economic
conditions. The Company has not been profitable to date and the Company
currently anticipates that it will operate at a loss through at least the end of
1997. There can be no assurance that any of the Company's business or strategies
will be successful or that the Company will be able to achieve or sustain
profitability on a quarterly or annual basis.

                                       14
<PAGE>
 
     In fiscal 1995 and fiscal 1996, the Company's consulting services,
maintenance and other revenue consisted primarily of maintenance and consulting
directly related to license sales and development fees. In fiscal 1997, the
Company began making a significant investment in a professional services
organization and a growing portion of its service and other revenue consisted of
consulting and training revenues.

     The Company's sales generally reflect a relatively high amount of revenue
per order. The loss or delay of individual orders, therefore, can have a
significant impact on the revenue and quarterly results of the Company. Because
the Company's operating expenses are relatively fixed, a delay in the
recognition of revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter and could
result in significant losses. To the extent such expenses precede, or are not
subsequently followed by, increased revenue, the Company's operating results
would be materially adversely affected. As a result of these and other factors,
revenue for any quarter is subject to significant variation, and 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. It is likely that in some future quarter the Company's operating
results will be below the expectations of market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially
adversely affected.

     The Company acquired PostModern effective May 31, 1996 and CustomWare
effective December 3, 1996. The acquisitions of PostModern and CustomWare were
accounted for as a purchase in the quarter ended June 30, 1996 and the quarter
ended December 31, 1996, respectively. See "--Purchased In Process Product
Development and Amortization." PostModern's and CustomWare's financial results
prior to the effective date of their respective acquisitions are not included in
the Company's financial results presented herein.

RESULTS OF OPERATIONS

     The Company first recognized material revenue in the fourth quarter of
fiscal 1995 after the Company shipped version 1.0 of its VisiODBC product line.
As a result, the Company believes that period-to-period comparisons of annual
operating results are less meaningful than an analysis of recent quarterly
results. The following table sets forth for the periods indicated the percentage
of total revenue represented by certain line items from the Company's
Consolidated Statements of Operations.

<TABLE> 
<CAPTION> 
                                                                             YEAR ENDED MARCH 31,
                                                                             --------------------
                                                                        1995        1996        1997
                                                                      --------     -------    --------
<S>                                                                     <C>         <C>          <C> 
Revenue:
     Software products..............................................      80.0%       83.3%       80.3%
     Consulting services, maintenance and other.....................      20.0        19.7        16.7
                                                                      --------     -------    --------
          Total revenue.............................................     100.0       100.0       100.0
                                                                      --------     -------    --------
Cost of revenue:
     Software products..............................................       3.3         5.1         3.7
     Consulting services, maintenance and other.....................      23.2        13.0        13.7
                                                                      --------     -------    --------
          Total cost of revenue.....................................      26.5        18.1        17.4
                                                                      --------     -------    --------
Gross profit........................................................      73.5        81.9        82.6
                                                                      --------     -------    --------
Operating expenses:
     Product development............................................     283.4        78.0        55.8
     Sales and marketing............................................     135.5        57.7        56.5
     General and administrative.....................................      78.2        26.3        15.2
     Purchased in process product development.......................        --          --        72.7
     Amortization of excess of purchase price over net assets 
      acquired......................................................        --          --         3.9
                                                                      --------     -------    --------
          Total operating expenses..................................     497.1       162.0       204.1
                                                                      --------     -------    --------
                Loss from operations................................    (423.6)      (80.1)     (121.5)
Interest and other income, net......................................       8.4         1.6         2.0
                                                                      --------     -------    --------
Net loss.............................................................   (415.2)%     (78.5)%    (119.5)%
                                                                      ========     =======    ========
</TABLE> 
                                

                                       15
<PAGE>
 
REVENUE

     Software Products. Revenues from software products were $892,000,
     -----------------
$4,479,000, and $14,175,000 in fiscal 1995, 1996, and 1997, respectively,
representing increases of 402% from fiscal 1995 to fiscal 1996 and 216% from
fiscal 1996 to fiscal 1997. The revenue increase from fiscal 1995 to fiscal 1996
was primarily due to an increased volume of licensing of the Company's database
access products, resulting from an increase in the number of products offered
and the expansion of the Company's direct sales and telesales organizations. The
revenue increase from fiscal 1996 to fiscal 1997 was primarily due to the
increased volume of licensing of distributed object products, resulting from the
acquisition of PostModern, and the Company's database access products.

     Consulting services, maintenance and other. Revenues from consulting
     ------------------------------------------
services, maintenance and other were $223,000, $1,096,000, and $2,843,000 in
fiscal 1995, 1996, and 1997, respectively, representing increases of 391% from
fiscal 1995 to fiscal 1996 and 159% from fiscal 1996 to fiscal 1997. The revenue
increases from fiscal 1995 to fiscal 1996 and from fiscal 1996 to fiscal 1997
were due to the greater licensing of products to customers under agreements with
a maintenance component, growth in the Company's installed base, and growth in
training, consulting and development activities.


COST OF REVENUE

     Software Products. Cost of software products revenue includes product
     -----------------
packaging, documentation, production and shipping. Cost of software products
revenue was $36,000, $284,000, and $630,000 in fiscal 1995, 1996, and 1997,
respectively. The increase resulted from increased volume of licensing of the
Company's products.

     Consulting services, maintenance and other. Cost of consulting service,
     ------------------------------------------
maintenance and other revenue consists primarily of personnel and personnel
related overhead allocation, facility and systems costs incurred in providing
consulting, training, customer support and engineering development services.
Cost of consulting services, maintenance and other revenue was $259,000,
$727,000, and $2,330,000 in fiscal 1995, 1996, and 1997, respectively. The
increase between fiscal 1996 and fiscal 1997 reflects the effect of fixed costs
resulting from the Company's investment during fiscal 1997 in a larger
professional services organization. The Company intends to continue investing
resources in its professional services organization and anticipates that the
cost of consulting service, maintenance and other revenue may exceed consulting
service, maintenance and other revenue in future periods.

OPERATING EXPENSES

     Product Development. Product development expenses include expenses
     -------------------
associated with the development of new products, enhancements of existing
products and quality assurance activities, and consist primarily of employee
salaries, personnel-related overhead allocation, benefits, consulting costs, the
cost of technology licensed from other software companies and the cost of
software development tools. Product development expenses were $3,160,000,
$4,348,000, and $9,497,000 in fiscal 1995, 1996, and 1997, respectively,
representing increases of 38% from fiscal 1995 to fiscal 1996 and 118% from
fiscal 1996 to fiscal 1997. The increases in the dollar amount of product
development expenses were primarily attributable to costs of additional
personnel, including the engineering personnel from PostModern beginning in June
1996, and full-time contractors in the Company's product development operations
and, to a lesser extent, the licensing of existing technology from third parties
which has been or will be incorporated into the Company's products. Of the
product development costs, approximately $1.2 million in fiscal 1995 consisted
of expenses for the development of a product the Company later chose not to
introduce commercially. There can be no assurance that the Company will not
devote significant resources in the future to develop and market other products
that the Company may choose not to introduce commercially. The Company
anticipates that it will continue to devote substantial resources to product
development, including acquiring or licensing technology from others, in order
to introduce new products, enhance existing products or accelerate its time to
market.

     In accordance with Statement of Financial Accounting Standards No. 86, the
Company has charged all software development costs to product development
expense as incurred because expenditures which were eligible for capitalization
in prior periods were insignificant.

                                       16
<PAGE>
 
     Sales and Marketing. Sales and marketing expenses consist primarily of
     -------------------
salaries, commissions and bonuses earned by sales and marketing personnel,
personnel related overhead allocation, field office rent and related expenses,
travel and entertainment, and advertising and promotional expenses. Sales and
marketing expenses were $1,511,000, $3,215,000, and $9,615,000 in fiscal 1995,
1996, and 1997, respectively, representing increases of 113% from fiscal 1995 to
fiscal 1996 and 199% from fiscal 1996 to fiscal 1997. The increases in sales and
marketing expenditures reflect primarily the hiring of additional sales and
marketing personnel, costs associated with expanded advertising and promotional
activities, increased sales commissions and increased costs associated with
field sales offices. Of the sales and marketing costs, approximately $900,000 in
fiscal 1995 consisted of expenses relating to a product the Company later chose
not to introduce commercially, none of which expenses was of a recurring nature.
The Company expects that sales and marketing expenses will continue to increase
in absolute dollar amount as the Company continues to expand its sales and
marketing efforts domestically and internationally, establishes additional sales
offices and increases advertising and promotional activities.

     General and Administrative. General and administrative expenses consist
     --------------------------
primarily of salaries and occupancy costs for administrative, executive and
finance personnel and personnel related overhead allocation. General and
administrative expenses were $872,000, $1,465,000, and $2,596,000 in fiscal
1995, 1996, and 1997, respectively, representing increases of 68% from fiscal
1995 to fiscal 1996 and 77% from fiscal 1996 to fiscal 1997. The increases in
the absolute dollar amounts of general and administrative expenses were
primarily due to increased staffing and associated expenses necessary to manage
and support the Company's increased scale of operations and, since August 1996,
expenses associated with being a public company. The Company believes that the
absolute dollar amount of its general and administrative expenses will continue
to increase as a result of the anticipated expansion of the Company's
administrative staff to support growing operations.

PURCHASED IN PROCESS PRODUCT DEVELOPMENT AND AMORTIZATION

     In May 1996, the Company completed the acquisition of PostModern which was
accounted for as a purchase in the quarter ended June 30, 1996. In December
1996, the Company completed the acquisition of CustomWare which was accounted
for as a purchase in the quarter ended December 31, 1996. In connection with the
acquisition of PostModern, the Company recorded a write-off in the quarter ended
June 30, 1996 of approximately $12.0 million related to in process product
development which had not reached technological feasibility and, in the opinion
of management, had no alternative future use. The remaining excess of purchase
price over net assets acquired of approximately $1.1 million will be amortized
over two years. In connection with the acquisition of CustomWare, the Company
recorded a write-off in the quarter ended December 31, 1996 of approximately
$350,000 related to in process product development which had not reached
technological feasibility and, in the opinion of management, had no alternative
future use. The remaining excess of purchase price over net assets acquired of
approximately $700,000 will be amortized over one year.

INTEREST AND OTHER INCOME, NET

     Interest and other income, net, is comprised primarily of interest income
earned on the Company's cash and cash equivalents. Interest and other income,
net, was $94,000, $85,000, and $351,000 in fiscal 1995, 1996, and 1997,
respectively. The increase of 313% from fiscal 1996 to fiscal 1997 was primarily
due to the cash received from the Company's initial public offering, completed
August 8, 1996, and the Company's second public offering, completed February 12,
1997.

PROVISION FOR INCOME TAXES

     As of March 31, 1997, the Company had Federal and state net operating loss
carryforwards of approximately $17.2 million and $1.4 million, respectively,
which expire at various dates through 2012. In addition, as of March 31, 1997,
the Company had general business credit carryforwards of approximately $981,000,
which expire at various dates through 2012. Utilization of the net operating
loss and business credit carryforwards may be subject to an annual limitation
due to the ownership change limitations provided by the Internal Revenue Code of
1986, as amended, and similar state provisions. See Note 9 of Notes to
Consolidated Financial Statements.

                                       17
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

     In August 1996, the Company completed the initial public offering of its
Common Stock. The Company sold 2,015,000 shares of Common Stock for net proceeds
of approximately $13.2 million. In February 1997, the Company completed a second
public offering of its Common Stock. The Company sold 1,180,000 shares of Common
Stock for net proceeds of approximately $13.3 million. Prior to its public
offerings, the Company financed its operations and met its capital requirements
primarily from proceeds from the private sales of Preferred and Common Stock. At
March 31, 1997, the Company's principal sources of liquidity included cash and
cash equivalents of $19.4 million and a $3.0 million revolving line of credit
agreement which expires on July 15, 1997. Advances under the line of credit
agreement, which bear interest at the bank's prime lending rate plus 1.0%, are
limited to 80% of the Company's eligible accounts receivable and are secured by
substantially all of the assets and contractual rights of the Company. The line
of credit agreement also contains certain financial restrictions and covenants.
As of March 31, 1997, the Company was in compliance with these financial
restrictions and covenants. There were no borrowings outstanding under the line
of credit agreement as of March 31, 1997. See Note 4 of Notes to Consolidated
Financial Statements.

     The Company's operating activities used cash of $4.6 million in fiscal
1995, $2.6 million in fiscal 1996 and $11.9 million in fiscal 1997. The decline
in net cash used in operations in fiscal 1996 as compared with fiscal 1995 was
primarily due to an increase in accounts payable, accrued liabilities and
deferred revenue. The increased use of cash in fiscal 1997 was primarily due to
investments in the Company's infrastructure and product development as well as
an increase in accounts receivable. The increase in accounts receivable was
primarily due to an increase in revenues in fiscal 1997.

     The Company used $378,000, $1.1 million and $4.2 million of net cash during
fiscal 1995, fiscal 1996 and fiscal 1997, respectively, for investing
activities, due primarily to purchases of property and equipment. In fiscal
1997, $1.9 million of cash, net of cash acquired, was used for the acquisition
of PostModern and CustomWare. Financing activities provided $2.6 million, $5.5
million and $33.1 million of net cash during fiscal 1995, fiscal 1996 and fiscal
1997, respectively, due to the issuance of Preferred and Common Stock and
convertible notes and debt financing.

     Deferred revenue consists primarily of the unrecognized portion of revenue
under maintenance and support contracts (which revenue is deferred and
recognized ratably over the term of such contracts) and advance payments of
software development fees and software license fees. Capital expenditures were
primarily for computers, furniture and equipment. The Company expects that its
capital expenditures will increase as the Company's employee base grows. As of
March 31, 1997, the Company did not have any material commitments for capital
expenditures.

     The Company believes that its existing sources of liquidity and cash
generated from operations will satisfy the Company's projected working capital
and other cash requirements for at least the next twelve months. Although
operating activities may provide cash in certain periods, to the extent the
Company experiences growth in the future, the Company anticipates that its
operating and investing activities will use cash. Any such future growth and any
acquisitions of other technologies, products or companies may require the
Company to obtain additional equity or debt financing, which may not be
available or may be dilutive.

ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS

     Limited Operating History and History of Losses. The Company was
     -----------------------------------------------
incorporated in 1993 and commenced shipment of its initial products in November
1994. In May 1996, the Company acquired PostModern. PostModern was founded in
1991, commenced shipment of its initial products in 1992 and had very limited
product sales prior to the acquisition. In December 1996, the Company acquired
CustomWare. CustomWare was founded in 1994 and had very limited operations prior
to the acquisition. Accordingly, the Company has only a limited operating
history, particularly with respect to its newly acquired distributed object
business, upon which an evaluation of the Company and its future operating
results can be based.

     Since inception, the Company has incurred significant losses and negative
cash flow. At March 31, 1997, the Company had cumulative operating losses of
$31.8 million, with net losses of $2.5 million, $4.6 million, $4.4 

                                       18
<PAGE>
 
million and $20.3 million for fiscal 1994, fiscal 1995, fiscal 1996 and fiscal
1997, respectively. A substantial portion of the accumulated deficit is due to
the significant commitment of resources to the Company's product development and
sales and marketing activities and the write-off of approximately $12.0 million
and $350,000 of in process product development in the quarters ended June 30,
1996 and December 31, 1996, respectively, in connection with the acquisitions of
PostModern and CustomWare. The Company expects to continue to devote substantial
resources in these areas and as a result will need to generate significant
revenue in order to achieve profitability. The Company currently anticipates
that it will operate at a loss through at least the end of 1997. The Company has
experienced substantial growth in revenue in fiscal 1996 and fiscal 1997. The
Company expects that prior growth rates of the Company's software product
revenue will not be sustainable in the future.

     Potential Fluctuations in Operating Results. The Company's revenue and
     -------------------------------------------
results of operations have varied on a quarterly basis in the past and are
expected to vary significantly in the future. Accordingly, 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 revenue and results of operations are difficult to
forecast and could be adversely affected by many factors, including, among
others, the size, timing and terms of individual license transactions; the
relatively long sales and implementation cycles for the Company's products; the
delay or deferral of customer implementations; changes in the Company's
operating expenses; the ability of the Company to develop and market new
products and control costs; market acceptance of new products; timing of
introduction or enhancement of products by the Company or its competitors; the
level of product and price competition; the ability of the Company to expand its
direct sales and telesales forces, its indirect distribution channels and its
customer support capabilities; activities of and acquisitions by competitors;
changes in database access and distributed object software, database technology
and industry standards; changes in the mix of products and services sold;
changes in the mix of channels through which products and services are sold;
levels of international sales; personnel changes and difficulties in attracting
and retaining qualified sales, marketing and technical personnel; changes in
customers' budgeting cycles; foreign currency exchange rates; quality control of
products sold; and general economic conditions. In particular, the ability of
the Company to achieve revenue growth in the future will depend on its success
in adding a substantial number of sales and sales support personnel in the next
twelve months. Competition for such personnel is intense and there can be no
assurance the Company will be able to attract and retain these personnel.

     Licensing of the Company's software products historically has accounted for
the substantial majority of the Company's revenue, and the Company anticipates
that this trend will continue for the foreseeable future. The Company's software
products revenue is difficult to forecast for a number of reasons. The Company
typically does not have a material backlog of unfilled orders, and revenue in
any quarter is substantially dependent on contracts received in that quarter. A
significant portion of the Company's revenue in prior periods has been derived
from relatively large sales to a limited number of customers, and the Company
currently anticipates that future quarters will continue to reflect this trend.
In fiscal 1996, approximately 78% of the Company's revenue was derived from ten
customers and revenue from one customer, Platinum technology, accounted for
approximately 25% of the Company's total revenue. In fiscal 1997, approximately
55% of the Company's revenue was derived from ten customers, and no individual
customer accounted for more than 10% of the Company's total revenue. Sales
cycles for the Company's products typically range from six to twelve months, and
the terms and conditions of individual license transactions, including prices
and discounts, are often highly negotiated based on volumes and commitments, and
vary considerably from customer to customer. In addition, the Company has
generally recognized a substantial portion of its revenue in the last month of
each quarter, with this revenue concentrated in the last weeks of the quarter.
Accordingly, the cancellation or deferral of even a small number of purchases of
the Company's products has in the past and could in the future have a material
adverse effect on the Company's business, results of operations and financial
condition in any particular quarter. Cancellations or deferrals of orders may be
caused by any of a number of factors, including delays in new or enhanced
product shipments. To the extent that significant sales occur earlier than
expected, operating results for subsequent quarters may be adversely affected. A
significant portion of the Company's revenue has been and is expected in the
future to continue to be based upon sales to third party vendors, who will
incorporate the Company's products in their own products. This revenue depends
upon the success of third parties, and as a result is difficult for the Company
to predict and may be subject to extreme fluctuation.

     The Company's expense levels are based, in part, on its expectations as to
future revenue and to a large extent are fixed in the short term. The Company
may be unable to adjust spending in a timely manner to compensate for 

                                       19
<PAGE>
 
any unexpected revenue shortfall. Accordingly, any significant shortfall of
revenue in relation to the Company's expectations would have an almost immediate
adverse effect on the Company's business, financial condition and results of
operations. Further, the Company intends to continue to expand its development
teams and its sales force. The timing of such expansion and the rate at which
new development and sales personnel become productive could cause material
fluctuations in quarterly results of operations.

     As a result of the foregoing or other factors, it is likely that in some
future period the Company's results of operations will fail to meet the
expectations of public market analysts or investors, and the price of the
Company's Common Stock would likely be materially adversely affected.

     Dependence on Emerging Markets and Evolving Standards; Acceptance of the
     ------------------------------------------------------------------------
Company's Products. The Company's future financial performance will depend on
------------------
the growth in demand for standards-based database access and distributed object
software products. These markets are new and emerging, are rapidly evolving, are
characterized by an increasing number of market entrants and will be subject to
frequent and continuing changes in customers' preferences and technology. As is
typical in new and evolving markets, demand and market acceptance for products
are subject to a high level of uncertainty.

     The Company's database access products are based on the ODBC standard,
which was developed to enable applications to access data from all
ODBC-compliant data sources. While the ODBC standard is supported by most of the
major database and software vendors, it is a recent standard that has not yet
gained widespread acceptance and that currently co-exists with proprietary
database access solutions from many of these same database and software vendors.

     With the acquisition of PostModern in May 1996, the Company began to offer
standards-based distributed object products. The Company's current distributed
object products are based on several standards, including CORBA and IIOP. These
standards are intended to facilitate the management and communication of
applications created in object-oriented programming languages such as C++ and
Java. These standards are new, are just beginning to gain widespread acceptance
and compete with proprietary solutions such as Microsoft's ActiveX and DCOM. The
distributed object software market is relatively young and there are few proven
products. Further, some of the Company's distributed object products are
designed specifically for use in applications for the Internet and Intranets.
Because critical issues concerning the Internet and Intranets -- including
security, reliability, cost, ease of use and access and quality of service --
remain unresolved, the growth of applications targeted at the Internet and
Intranets is uncertain and difficult to predict.

     Because the markets for the Company's products are new and evolving, it is
difficult to assess or predict with any assurance the size or growth rate, if
any, of these markets. There can be no assurance that the markets for the
Company's products will develop, or that the Company's products will be adopted.
If these markets fail to develop, develop more slowly than expected or attract
new competitors, or if the Company's products do not achieve market acceptance,
the Company's business, results of operations and financial condition could be
materially adversely affected. Because the Company's strategy is to develop
standards-based products and these standards are relatively new, not widely
accepted and compete with other emerging standards, to the extent that these
standards are not commercially successful, this will have a material adverse
affect on the Company's business, results of operations and financial condition.
Competing or alternative technologies are being or are likely in the future to
be promoted by current and potential competitors of the Company, some of which
have well-established relationships with current and potential customers of the
Company and have extensive knowledge of the markets served by the Company,
better name recognition and more extensive development, sales and marketing
resources than the Company.

     While the Company has licensed its products to numerous customers, most of
these customers are currently developing applications that incorporate the
Company's products, and only a very limited number of them have deployed or
shipped such applications. To the extent these customers are unable to or
otherwise do not deploy or ship applications that incorporate the Company's
products, or if these applications are not successful, this will have a material
adverse effect on the Company's business, results of operations and financial
condition. See "--Intense Competition."

                                       20
<PAGE>
 
     Reliance on VARs and ISVs. A significant element of the Company's strategy
     -------------------------
is to embed its technology in products offered by the Company's VAR and ISV
customers, such as Borland, Cisco, Compuware, Healtheon, Hewlett-Packard,
Microsoft, Netscape, Novell, Oracle, Platinum technology and Sybase. A
relatively small number of VAR and ISV customers have accounted for a
significant percentage of the Company's revenue. In fiscal 1996, ten VAR and ISV
customers accounted for approximately 78% of the Company's revenue, while in
fiscal 1997, ten VAR and ISV customers accounted for approximately 55% of the
Company's revenue. The Company intends to seek similar distribution arrangements
with other VARs and ISVs to embed the Company's technology in their products and
expects that these arrangements will account for a significant portion of the
Company's revenue in future periods. To date, the terms and conditions,
including prices and discounts, of the Company's agreements with its VAR and ISV
customers have been highly negotiated and vary significantly between customers,
however, all of these agreements are non-exclusive and do not require the VAR or
ISV to make minimum purchases. Many of the markets for the VAR and ISV products
in which the Company's technology are being embedded are new and evolving and,
therefore, subject to the same risks faced by the Company in the markets for its
own products. If the Company is unsuccessful in securing license agreements with
additional VARs and ISVs on commercially reasonable terms or at all, or if the
Company's VAR and ISV customers are unsuccessful in selling their products, this
would have a material adverse effect on the Company's business, results of
operations and financial condition.

     Product Concentration. Prior to the acquisition of PostModern in May 1996,
     ---------------------
the Company derived substantially all of its revenue from the licensing of its
database access products, particularly its ODBC product line, and fees from
related services. Since the acquisition of PostModern, the Company has also
derived a significant portion of its revenue from its distributed object
products. The Company's database access and distributed object products and
services are each expected to continue to account for a significant portion of
the Company's revenue for the foreseeable future. As a result, a reduction in
demand or an increase in competition for these products, or a decline in sales
of such products, would have a material adverse effect on the Company's
business, results of operations and financial condition. See
"Business--Products."

     Dependence on the Internet and Intranets. The Company believes that sales
     ----------------------------------------
of its products, particularly its distributed object products, will depend in
large part upon the adoption by businesses and end-users of the Internet and
Intranets for commerce and communications. The Internet and Intranets are new
and evolving, and there can be no assurance of their widespread adoption.
Critical issues concerning the Internet and Intranets, including security,
reliability, cost, ease of use and access and quality of service, remain
unresolved at this time, inhibiting adoption by many enterprises and end-users.
If the Internet and Intranets are not widely used by businesses and end-users,
this will have a material adverse effect on the Company's business, results of
operations and financial condition.

     Dependence on Java; Risks Associated with Encryption Technology. Certain of
     ---------------------------------------------------------------
the Company's products are based on Java, an object-oriented programming
language developed by JavaSoft, a subsidiary of Sun Microsystems. Java was
developed primarily for Internet and Intranet applications. Java was only
recently introduced and does not yet have sufficient history to establish its
reliability, thereby inhibiting adoption of Java. To date, there have been only
a very limited number of commercially significant Java-based products, and it is
too early to determine whether Java will become a significant technology.
Alternatives to Java have been announced by several companies, including
Microsoft. To the extent that Java is not adopted or is adopted more slowly than
anticipated, this could have a material adverse effect on the Company's
business, results of operations and financial condition.

     The Company plans to use encryption technology in certain of its future
products to provide the security required for the exchange of confidential
information. Encryption technologies have been breached in the past. There can
be no assurance that there will not be a compromise or breach of the security
technology used by the Company. If any such compromise or breach were to occur,
it could have a material adverse effect on the Company's business, results of
operations and financial condition.

     Need to Develop New Software Products and Enhancements. The markets for the
     ------------------------------------------------------
Company's products are characterized by rapid technological developments,
evolving industry standards, swift changes in customer requirements, computer
operating environments and software applications, and frequent new product
introductions and enhancements. As a result, the Company's success depends
substantially upon its ability to anticipate changes and continue to enhance its
existing products, develop and introduce in a timely manner new products
incorporating technological advances, comply with emerging industry standards
and meet increasing customer expectations. The Company's products may be
rendered obsolete if the Company fails to anticipate or react to change. To the
extent 

                                       21
<PAGE>
 
one or more of the Company's competitors introduce products that better address
customer needs, the Company's business, results of operations and financial
condition could be materially adversely affected. There can be no assurance that
the Company will be successful in developing and marketing new products or
enhancements to its existing products on a timely basis or at all or that any
new or enhanced products will adequately address the changing needs of the
marketplace. The Company has in the past incurred product development expenses
and sales and marketing expenses in connection with product development
activities that did not result in commercially introduced products. Some of the
Company's products are based on technology from third parties and the Company
therefore has limited control over whether and when these technologies are
enhanced. For instance, the VisiODBC SDK products are based upon ODBC software
licensed from Microsoft. The failure or delay in enhancements of technology from
third parties used in the Company's products could have a material adverse
effect on the Company's ability to develop and enhance its own products. Also,
negative reviews of the Company's new products or product versions in industry
publications could have a material adverse effect on the Company's sales. The
Company has in the past experienced delays in the development of new products
and product versions. If the Company is unable to develop and introduce new
products or enhancements to existing products in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
results of operations and financial condition would be materially and adversely
affected.

     The Company has in the past engaged and expects that it will continue in
the future to engage in joint development projects with third parties.
Currently, the Company is engaged in joint development with Hitachi of
distributed object software targeted at transaction processing applications.
Joint development creates several risks for the Company, including loss of
control over the development of aspects of the jointly developed product and
over the timing of product availability. There can be no assurance that joint
development activities will result in products, or that any products developed
will be commercially successful.

     Dependence on Key Personnel; Need to Increase Technical and Sales
     -----------------------------------------------------------------
Personnel. The Company's future performance depends to a significant extent upon
---------
the continued service of its key technical, development, sales and marketing and
management personnel. The loss of the services of any of these individuals would
have a material adverse effect on the Company. All employees are employed
at-will, and the Company has no fixed term employment agreements with any of its
employees. The Company's future success also depends on its continuing ability
to attract, train and retain highly qualified technical, sales and marketing and
managerial personnel. An increase in the sales staff will be required to expand
both the Company's direct and indirect sales activities and achieve revenue
growth. The Company intends to hire a number of additional development and sales
personnel in fiscal 1998 and beyond. Competition for such personnel is intense,
and there can be no assurance that the Company can attract, assimilate or retain
such personnel. Because of the complexity of database access and distributed
object products, the Company has in the past experienced and expects to continue
in the future to experience a time lag between the date technical and sales
personnel are hired and the date such persons become fully productive. If the
Company is unable to hire and train such personnel on a timely basis in the
future, the Company's business, results of operations and financial condition
could be materially adversely affected.

     Management of Growth. The Company's business has grown rapidly in recent
     --------------------
periods, with revenue increasing from $1.1 million in fiscal 1995 to $5.6
million in fiscal 1996 and to $17.0 million in fiscal 1997. In addition, the
Company acquired PostModern in May 1996 as part of its strategy of adding
distributed object products to its product line. The growth of the Company's
business and the expansion of the Company's customer base have placed a
significant strain on the Company's management, operations and financial
systems. The Company's recent expansion has also resulted in substantial growth
in the number of its employees, the scope of its operating and financial systems
and the geographic area of its operations, resulting in increased responsibility
for management personnel. The Company's future results of operations will depend
in part on the ability of its officers and other key employees to continue to
implement its operational, customer support and financial control systems and to
expand, train and manage its employee base. The Company hired a new Chief
Financial Officer and a new Controller in July 1996, a new Vice President,
Marketing in September 1996, a new Vice President, Worldwide Sales in October
1996, and a new Vice President, Engineering in February 1997. There can be no
assurance that the Company will be able to manage any future expansion of its
business, if any, successfully, or that its management, personnel, procedures
and systems will be adequate to support the Company's operations. Any such
inabilities or inadequacies to do so would have a material adverse effect on the
Company's business, results of operations and financial condition.

                                       22
<PAGE>
 
     Potential Acquisitions. If appropriate opportunities present themselves,
     ----------------------
the Company intends to acquire businesses, products or technology that the
Company believes are strategic, although the Company currently has no
understandings, commitments or agreements with respect to any material
acquisition and no material acquisition is currently being pursued. There can be
no assurance that the Company will be able to successfully identify, negotiate
or finance such acquisitions, or to integrate such acquisitions with its current
business. The process of integrating an acquired business, product or technology
into the Company may result in unforeseen operating difficulties and
expenditures and may absorb significant management attention that would
otherwise be available for ongoing development of the Company's business.
Moreover, there can be no assurance that the anticipated benefits of any
acquisition will be realized. Acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, which could materially adversely affect the Company's business, results
of operations and financial condition. Any such future growth and any
acquisitions of other technologies, products or companies may require the
Company to obtain additional equity or debt financing, which may not be
available or may be dilutive.

     Intense Competition. The Company's products are targeted at the emerging
     -------------------
markets for standards-based database access software and standards-based
distributed object software. The markets for the Company's products are
intensely competitive, subject to rapid change and significantly affected by new
product introductions and other market activities of industry participants. The
Company believes that the principal competitive factors in these markets are
product quality, performance and price, vendor and product reputation, product
architecture and quality of support.

     In the standards-based database access market, the Company competes
principally against Intersolv. The Company's database access products also
indirectly compete against proprietary database access solutions from database
vendors. In the standards-based distributed object market, the Company competes
principally against Iona Technologies which went public in February 1997,
Expersoft, a privately held company, and BEA, which recently acquired DEC's
object request broker and went public. The Company's distributed object products
also compete against existing or proposed distributed object solutions from
hardware vendors such as DEC, Hewlett-Packard, IBM and Sun. In addition, because
there are relatively low barriers to entry in the software market and because
the Company's products are based on publicly available standards, the Company
expects to experience additional competition in the future from other
established and emerging companies if the market for database access and
distributed object software continues to develop and expand. In particular,
relational database vendors including Informix, Microsoft, Oracle and Sybase may
offer standards-based database access software to their customers, eliminating
or reducing demand for the Company's products. Similarly, operating system
vendors such as DEC, Hewlett-Packard, IBM, Microsoft and Sun may offer
standards-based distributed object products bundled with their operating
systems. For instance, Microsoft has introduced DCOM, which could reduce or
eliminate the need for CORBA-compliant ORBs, such as those offered by the
Company, for Microsoft operating systems. Many of these current and potential
competitors have well-established relationships with current and potential
customers of the Company, have extensive knowledge of the markets serviced by
the Company, better name recognition and more extensive development, sales and
marketing resources and are capable of offering single vendor solutions. As a
result, these current and potential 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 the Company. It is also 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.

     The Company expects that it will face increasing pricing pressures from its
current competitors and new market entrants. Increased price competition may
result in price reductions, reduced gross margins and loss of market share, any
of which could materially adversely affect the Company's business, financial
condition or results of operations. There can be no assurance that the Company
will be able to compete successfully against current and future competitors or
that competitive pressures will not materially and adversely affect its
business, results of operations and financial condition.

     Risk of Product Defects. Software products as complex as those offered by
     -----------------------
the Company frequently contain undetected errors or failures that may be
detected at any point in the product's life cycle. The Company has in the past
discovered software errors in certain of its new products and enhancements and
has experienced delays in shipment of products during the period required to
correct these errors. There can be no assurance that, despite 

                                       23
<PAGE>
 
testing by the Company and potential customers, errors will not occur, resulting
in loss of or delay in market acceptance and sales, diversion of development
resources, injury to the Company's reputation or increased service and warranty
costs, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition. This risk is amplified
for the Company because a significant portion of its future sales are expected
to be derived from arrangements under which third parties embed the Company's
products in their own products. Any significant errors in the Company's
products, or in the products of VARs or ISVs which embed the Company's products,
might discourage such third parties or other customers from utilizing the
Company's products, which would have a material adverse effect on the Company's
business, results of operations and financial condition. Although the Company
generally attempts to limit by contract its exposure to incidental and
consequential damages, and to cap the Company's liabilities to its proceeds
under a contract, if a court failed to enforce the liability limiting provisions
of the Company's contracts for any reason, or if liabilities arose which were
not effectively limited, the Company's business, results of operations and
financial condition could be materially and adversely affected.

     International Sales. The Company's export sales accounted for approximately
     -------------------
10% and 11% of the Company's total revenue in fiscal 1996 and fiscal 1997,
respectively. The Company had no material export sales in fiscal 1995. The
Company expects to increase its emphasis on export sales. Revenue derived from
export sales may account for a growing percentage of the Company's revenue in
future periods, although there can be no assurance that the Company will achieve
significant penetration in any international market. In fiscal 1997, the Company
had only one international sales office, which is located in Paris, France. The
Company believes that its continued growth will require expansion of its
international operations and export sales. To successfully expand export sales,
the Company must establish additional foreign sales offices, hire additional
personnel and recruit additional international resellers. To the extent the
Company is unable to do so in a timely manner, the Company's growth in export
sales, if any, will be limited, and the Company's business, results of
operations and financial condition could be materially adversely affected. The
Company has granted exclusive distribution rights in Europe to Valtech-iO, a
European consultancy and software distributor. Under the terms of the agreement,
Valtech-iO will provide sales, marketing, and technical support for the
Company's products throughout Europe. The agreement with Valtech-iO is for five
years, but either party may terminate the agreement if the other party breaches
the agreement and fails to cure such breach within thirty days after receipt of
written notice thereof. Valtech-iO's failure to meet revenue targets under the
agreement shall not constitute a material breach of the agreement. There can be
no assurance that Valtech-iO will be successful in selling the Company's
products. The Company has granted exclusive distribution rights in Japan for the
Japanese versions of its ODBC products to ASCII Something Good Corporation
("ASCII"), a Japanese software distributor. The Company may not terminate these
exclusive rights unless ASCII fails to meet certain minimum annual sales
objectives commencing in fiscal year 1998 or otherwise breaches the agreement.
There can be no assurance that ASCII will be successful selling the Company's
products.

     There are a number of risks inherent in the Company's international
business activities, including unexpected changes in regulatory requirements,
tariffs and other trade barriers, costs and risks of localizing and
internationalizing products for foreign countries, longer accounts receivable
payment cycles, potentially adverse tax consequences, repatriation of earnings
and the burdens of complying with a wide variety of foreign laws. None of the
Company's products is currently a "double byte" product, which is required to
localize these products in certain non-English character set markets such as
Asia. The Company believes that it will be required to develop double byte
versions of its products and engage in other internationalization and
localization activities. There can be no assurance the Company will successfully
complete these activities in a timely manner. All of the Company's sales are
currently denominated in U.S. dollars and, therefore, increases in the value of
the U.S. dollar relative to foreign currencies could make the Company's products
less competitive in foreign markets. In addition, revenue of the Company earned
in various countries where the Company does business may be subject to taxation
by more than one jurisdiction, thereby adversely affecting the Company's
earnings. There can be no assurance that such factors will not have an adverse
effect on the revenue from the Company's future international sales and,
consequently, the Company's financial condition or results of operations.

     Concentration of Share Ownership and Voting Power; Anti-Takeover
     ----------------------------------------------------------------
Provisions. At May 9, 1997, officers, directors and affiliates of the Company
----------
beneficially owned approximately 45.5% of the Company's outstanding Common
Stock. As a result, these stockholders as a group may be able to control the
management and affairs of the Company and all matters requiring stockholder
approval, including election of directors, any merger, consolidation or sale of
all or substantially all of the Company's assets and any other significant
corporate transactions. The 

                                       24
<PAGE>
 
concentration of ownership could have the effect of delaying or preventing a
change in control of the Company, reducing the likelihood of any acquisition of
the Company at a premium price.

     The Company's Board of Directors ("Board of Directors" or "Board") has the
authority to issue up to 2,000,000 shares of Preferred Stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or action by the stockholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
shares of Preferred Stock, while potentially providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no present
intention to issue shares of Preferred Stock. In addition, certain provisions of
the Company's Restated Certificate of Incorporation may have the effect of
delaying or preventing a change of control of the Company, which could adversely
affect the market price of the Company's Common Stock. These provisions provide,
among other things, that the Board of Directors is divided into three classes to
serve for staggered three-year terms, that a director may be removed from the
Board of Directors only for cause and only upon the vote of at least 662/3% of
the voting power of all outstanding shares of the Company's capital stock, that
stockholders may not take action by written consent, that the ability of
stockholders to call special meetings of stockholders and to raise matters at
meetings of stockholders is restricted and that certain amendments of the
Company's Restated Certificate of Incorporation, and all amendments by the
stockholders of the Company's Amended and Restated Bylaws, require the approval
of holders of at least 662/3% of the voting power of all outstanding shares. In
addition, the Company is subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law, which prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. The application of Section 203 also could have the effect
of delaying or preventing a change of control of the Company.

     Possible Volatility of Stock Price. The market price of the Company's
     ----------------------------------
Common Stock has been, and is likely to continue to be, volatile. Factors such
as new product announcements or changes in product pricing policies by the
Company or its competitors, quarterly fluctuations in the Company's operating
results, announcements of technical innovations, announcements relating to
strategic relationships or acquisitions, changes in earnings estimates by
analysts and general conditions in the software development tools market, among
other factors, may have a significant impact on the market price of the
Company's Common Stock. Should the Company fail to introduce products on the
schedule expected, the Company's stock price could be adversely affected. In
addition, in recent years the stock market in general, and the shares of
technology companies in particular, have experienced extreme price fluctuations.
This volatility has had a substantial effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                   PAGE
                                                                   ----
VISIGENIC SOFTWARE, INC.:                                       
     Report of Independent Public Accountants...................    26
     Consolidated Balance Sheets................................    27
     Consolidated Statements of Operations......................    28
     Consolidated Statements of Stockholders' Equity............    29
     Consolidated Statements of Cash Flows......................    30
     Notes to Consolidated Financial Statements.................    31

                                       25
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Visigenic Software, Inc.:

     We have audited the accompanying consolidated balance sheets of Visigenic
Software, Inc. (a Delaware corporation) and subsidiary as of March 31, 1996 and
1997 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended March 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Visigenic Software, Inc. and
subsidiary as of March 31, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997 in conformity with generally accepted accounting principles.





                                   ARTHUR ANDERSEN LLP

San Jose, California
April 18, 1997

                                       26
<PAGE>
 
<TABLE> 
<CAPTION> 

                            VISIGENIC SOFTWARE, INC.

                           CONSOLIDATED BALANCE SHEETS

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
                                                                                         MARCH 31,
                                                                                  --------------------
                                                                                    1996        1997
                                                                                  --------    --------
<S>                                                                              <C>          <C> 
                                  ASSETS
CURRENT ASSETS:
     Cash and cash equivalents ................................................   $  2,399    $ 19,445
     Accounts receivable, net of allowance for doubtful accounts
        of  $60 in 1996 and $144 in 1997 ......................................        760       8,028
     Other current assets .....................................................        257         696
                                                                                  --------    --------
          Total current assets ................................................      3,416      28,169
PROPERTY AND EQUIPMENT, net ...................................................      1,349       3,003
OTHER ASSETS, net:
     Excess of purchase price over net assets acquired ........................         --       1,078
     Other ....................................................................         55          83
                                                                                  --------    --------
                                                                                  $  4,820    $ 32,333
                                                                                  ========    ========
                   LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Accounts payable .........................................................   $    811    $    684
     Accrued liabilities-
        Payroll and related benefits ..........................................        347       1,406
        Other .................................................................        301         923
     Deferred revenue .........................................................      1,141       2,407
                                                                                  --------    --------
          Total current liabilities ...........................................      2,600       5,420
                                                                                  --------    --------
COMMITMENTS  AND CONTINGENCIES (Note 5)

STOCKHOLDERS' EQUITY:
     Convertible preferred stock, $.001 par value
          Authorized--10,000,000 shares at March 31, 1996; 2,000,000
                     shares at March 31, 1997
          Outstanding--3,674,625 shares in 1996 ...............................          4          --
     Common stock, $.001 par value,
          Authorized--20,000,000 shares at March 31, 1996; 50,000,000 shares at
             March 31, 1997
          Outstanding--2,835,905 shares in 1996 and 13,990,707 shares in 1997 .          3          14
     Additional paid-in capital ...............................................     13,675      58,691
     Accumulated deficit ......................................................    (11,462)    (31,792)
                                                                                  --------    --------
          Total stockholders' equity ..........................................      2,220      26,913
                                                                                  --------    --------
                                                                                  $  4,820    $ 32,333
                                                                                  ========    ========
</TABLE> 
      The accompanying notes are an integral part of these balance sheets.

                                       27
<PAGE>
 
<TABLE> 
<CAPTION> 

                            VISIGENIC SOFTWARE, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                                                            YEAR ENDED MARCH 31,
                                                                     --------------------------------
                                                                        1995        1996        1997
                                                                      --------   -------     --------
<S>                                                                  <C>          <C>         <C> 
REVENUE:
     Software products...........................................     $    892  $  4,479    $  14,175
     Consulting services, maintenance and other..................          223     1,096        2,843
                                                                      --------   -------     --------
          Total revenue..........................................        1,115     5,575       17,018
                                                                      --------   -------     --------
COST OF REVENUE:
     Software products...........................................           36       284          630
     Consulting services, maintenance and other..................          259       727        2,330
                                                                      --------   -------     --------
          Total cost of revenue..................................          295     1,011        2,960
                                                                      --------   -------     --------
GROSS PROFIT .                                                             820     4,564       14,058
                                                                      --------   -------     --------
OPERATING EXPENSES:
     Product development.........................................        3,160     4,348        9,497
     Sales and marketing.........................................        1,511     3,215        9,615
     General and administrative..................................          872     1,465        2,596
     Purchased in process product development....................           --        --
                                                                                               12,364
     Amortization of excess of purchase price over net assets
        acquired.................................................           --        --          667
                                                                      --------   -------     --------
          Total operating expenses...............................        5,543     9,028       34,739
                                                                      --------   -------     --------
          Loss from operations...................................       (4,723)   (4,464)     (20,681)
INTEREST AND OTHER INCOME, net...................................           94        85          351
                                                                      --------   -------     --------
NET LOSS.........................................................     $ (4,629)  $(4,379)    $(20,330)
                                                                      ========   =======     ========
NET LOSS PER SHARE...............................................                            $  (1.63)
                                                                                             ========
PRO FORMA NET LOSS PER SHARE.....................................                $  (.40)
                                                                                 =======
SHARES USED IN PER SHARE CALCULATION.............................                 11,064       12,453
                                                                                 =======     ========
</TABLE> 


   The accompanying notes are an integral part of these financial statements.

                                       28
<PAGE>
 
<TABLE> 
<CAPTION> 

                            VISIGENIC SOFTWARE, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                             (DOLLARS IN THOUSANDS)

                                           CONVERTIBLE                      
                                        PREFERRED STOCK       COMMON STOCK   ADDITIONAL                 TOTAL    
                                       ------------------   ----------------   PAID-IN   ACCUMULATED STOCKHOLDERS' 
                                         SHARES   AMOUNT     SHARES   AMOUNT   CAPITAL     DEFICIT      EQUITY
                                       --------- --------   --------- ------ ----------- ----------- -------------
<S>                                    <C>       <C>        <C>       <C>    <C>         <C>         <C>         
BALANCE, MARCH 31, 1994..............  1,674,625  $   2      2,427,019  $ 2  $   5,582   $  (2,454)  $     3,132 
  Issuance of common stock...........         --     --        459,575    1        183          --           184
  Repurchase of common stock.........         --     --       (103,717)  --        (35)         --           (35)
  Issuance of Series B convertible
    preferred stock..................    625,000      1             --   --      2,464          --         2,465
  Net loss...........................         --     --             --   --         --      (4,629)       (4,629)
                                      ----------  ------   ----------- ----  ---------   ---------   ----------- 
BALANCE, MARCH 31, 1995..............  2,299,625       3     2,782,877    3      8,194      (7,083)        1,117
  Issuance of Series B convertible
    preferred stock..................  1,375,000       1            --   --      5,459          --         5,460
  Exercise of stock options..........         --      --        54,068   --         22          --            22
  Repurchase of common stock, net of
    issuances........................         --      --        (1,040)  --         --          --            --
  Net loss...........................         --      --            --   --         --      (4,379)       (4,379)
                                      ----------  ------   ----------- ----  ---------   ---------   -----------  
BALANCE, MARCH 31, 1996..............  3,674,625       4     2,835,905    3     13,675     (11,462)        2,220
  Issuance of Series C convertible
    preferred stock .................    444,444      --            --   --      4,000          --         4,000
  Issuance of common stock in 
    connection with the acquisition 
    of PostModern Computing 
    Technologies, Inc................         --      --     3,099,821    3     10,382          --        10,385 
  Issuance of common stock in
    connection, with the public     
    offerings........................         --      --     3,195,000    3     26,467          --        26,470 
  Conversion of preferred stock in
    public offering  ................ (4,119,069)     (4)    4,119,069    4         --          --            -- 
  Conversion of convertible notes....         --      --       270,871   --      2,031          --         2,031
  Issuance of common stock in
    connection with the acquisition of                    
    CustomWare, Inc. .................        --      --       125,000   --      1,500          --         1,500 
  Issuance of common stock, net
     of repurchases...................        --      --       345,041    1        636          --           637 
  Net loss ..........................         --      --            --   --         --     (20,330)      (20,330)
                                      ----------  ------   -----------  ---  ---------   ---------   -----------  
BALANCE, MARCH  31, 1997.............         --  $   --    13,990,707 $ 14  $  58,691   $ (31,792)  $    26,913
                                      ==========  ======   =========== ====  =========   =========   ===========      

</TABLE> 





   The accompanying notes are an integral part of these financial statements.

                                       29
<PAGE>
 
<TABLE> 
<CAPTION> 

                            VISIGENIC SOFTWARE, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)


                                                                    YEARS ENDED MARCH 31,
                                                                ------------------------------
                                                                  1995      1996       1997
                                                                --------- --------   ---------
<S>                                                             <C>       <C>        <C>  
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss.................................................  $ (4,629) $ (4,379)  $(20,330)
     Adjustments to reconcile net loss to net cash used in
        operating activities--
        Depreciation and amortization.........................       158       310      1,301
        Purchased in process product development..............        --        --     12,364
        Provision  for doubtful accounts......................        --        60         84
        Changes in  assets and liabilities, net of
          acquisition of PostModern and CustomWare--
          Increase in accounts receivable.....................      (472)     (348)    (7,006)
          Increase in prepaid expenses and other current
             assets...........................................      (139)      (82)      (341)
          Increase (decrease) in accounts payable.............        53       610       (218)
          Increase in accrued liabilities.....................       142       440      1,170
          Increase in deferred revenue........................       303       838      1,083
                                                               ---------  --------   --------   
             Net cash used in operating activities............    (4,584)   (2,551)   (11,893)
                                                               ---------  --------   --------   
CASH FLOWS FROM INVESTING ACTIVITIES:
     Payment for purchase of PostModern and
        CustomWare, net of cash acquired......................        --        --     (1,919)
     Purchases of property and equipment......................      (373)   (1,052)    (2,221)
     Organization costs and other assets......................        (5)      (33)       (28)
                                                               ---------  --------   --------   
             Net cash used in investing activities............      (378)   (1,085)    (4,168)
                                                               ---------  --------   --------   
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of convertible notes..............        --        --      2,000
     Net proceeds from issuance of preferred stock............     2,465     5,460      4,000
     Net proceeds from issuance of common stock...............       149        22     27,107
                                                               ---------  --------   --------   
             Net cash provided by financing activities........     2,614     5,482     33,107
                                                               ---------  --------   --------   
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS................................................    (2,348)    1,846     17,046
CASH AND CASH EQUIVALENTS, BEGINNING OF
   PERIOD.....................................................     2,901       553      2,399
                                                               ---------  --------   --------  
CASH AND CASH EQUIVALENTS, END OF PERIOD...................... $     553  $  2,399   $ 19,445
                                                               =========  ========   ========  
</TABLE> 

   The accompanying notes are an integral part of these financial statements.

                                       30
<PAGE>
 
                            VISIGENIC SOFTWARE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 MARCH 31, 1997

1.  ORGANIZATION AND OPERATIONS OF THE COMPANY:

     Visigenic Software, Inc. (the "Company") was incorporated on February 12,
1993. The Company operates in a single industry segment and is involved in the
design, development and marketing of distributed object and database access
software products. Through March 31, 1995 the Company's principal efforts were
focused on raising capital, developing its products and applications,
establishing marketing and sales channels and recruiting key personnel. During
fiscal 1996, the Company emerged from the development stage, however, the
Company continues to be subject to the risks associated with companies in a
comparable stage of development including, but not limited to, dependence on key
personnel; limited operating history and a history of losses; and the need to
develop new software products and product enhancements.

     In May 1996, the Company acquired PostModern Computing Technologies Inc.
(PostModern) (See Note 3). Prior to the acquisition of PostModern, the Company
derived substantially all of its revenue from the licensing of its database
access products and fees from related services. Since the acquisition of
PostModern, the Company has also derived a significant portion of its revenue
from its distributed object products. The Company's database access and
distributed object products and services are each expected to continue to
account for a significant portion of the Company's revenue for the foreseeable
future.


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

   Principles of Consolidation and Functional Currency
   ---------------------------------------------------

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary after elimination of intercompany transactions
and balances. The functional currency of the Company's foreign subsidiary is the
U.S. dollar. Foreign exchange gains and losses resulting from the remeasurement
of the financial statements for the subsidiary, which are not material, are
included in other income in the accompanying consolidated statements of
operations.

   Use of Estimates in Preparation of Financial Statements
   -------------------------------------------------------

     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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.

   Cash Equivalents and Short-Term Investments
   -------------------------------------------

     The Company considers all highly liquid investments with an original
maturity of three months or less from the date of purchase to be cash
equivalents. The Company's short-term investments are accounted for pursuant to
the provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." As of March
31, 1996 and 1997, the Company's cash and cash equivalents were deposited in
checking and money market accounts and certificates of deposit.

   Software Development Costs
   --------------------------

         In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," the Company capitalizes
eligible computer software development costs upon the establishment of
technological feasibility, which it has defined as completion of a working
model. For the years

                                       31
<PAGE>
 
                           VISIGENIC SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

ended March 31, 1995, 1996 and 1997, the amount of costs eligible for
capitalization, after consideration of factors such as realizable value, were
not material and, accordingly, all software development costs have been charged
to product development expense in the accompanying consolidated statements of
operations.

   Property and Equipment
   ----------------------

     Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets (or over
the lease term if it is shorter for leasehold improvements), which range from
three to five years. Property and equipment consists of the following (in
thousands):

                                                              MARCH 31,
                                                          -----------------
                                                             1996    1997
                                                          --------- -------
     Computer equipment.................................  $ 1,126   $ 2,666
     Furniture and fixtures.............................      320       619
     Purchased software.................................      401       742
     Leasehold improvements.............................       34       142
                                                          -------   -------
                                                            1,881     4,169
     Less--Accumulated depreciation and amortization....     (532)   (1,166)
                                                          -------   -------
          Property and equipment, net...................  $ 1,349   $ 3,003
                                                          =======   =======

   Revenue Recognition and Deferred Revenue
   ----------------------------------------

     The Company's revenue is derived from fixed license fees from licensing its
products, royalties from value added resellers (VARs), independent software
vendors (ISVs) and distributors, and fees for services related to its products,
including software maintenance, development contracts and consulting and
training. Certain of the Company's license arrangements with VARs and ISVs
provide for sublicense fees payable to the Company based on a percentage of the
VAR's or ISV's net revenue. Other license arrangements provide for fixed license
fees for the right to make and distribute an unlimited number of copies of the
Company's product for a specified period of time. Royalty revenue, other than
from prepaid royalties, is recognized when it is reported by the VAR, ISV or
distributor. Service revenue is primarily attributable to lower margin
maintenance and other revenue, including training revenue and engineering
development fees.

     The Company generally recognizes revenue from license and prepaid royalties
upon delivery of software products if there are no significant post-delivery
obligations, if collection is probable and if the license agreement requires
payment within 90 days. If significant post-delivery obligations exist or if a
product is subject to customer acceptance, revenue is deferred until no
significant obligations remain or acceptance has occurred.

     Maintenance revenue from ongoing customer support and product upgrades is
recognized ratably over the term of the applicable maintenance period, which is
typically 12 months. If maintenance is included in a license agreement, such
amounts are unbundled from the license fee at their fair market value.
Consulting and training revenue is generally recognized as services are
performed over the term of the agreement. Revenue from engineering development
work is generally recognized on a percentage of completion basis. If a
transaction includes both license and service elements, license fee revenue is
recognized upon shipment of the software, provided services do not include
significant customization or modification of the base product and payment terms
are not subject to acceptance criteria. In cases where license fee payments are
contingent upon the acceptance of services, revenues from both the license and
service elements are deferred until the acceptance criteria are met.

     Deferred revenue consists primarily of the unrecognized portion of revenue
under maintenance and support contracts (which revenue is deferred and
recognized ratably over the term of such contract) and advance payment of
software development fees and license fees.

                                       32
<PAGE>
 
                            VISIGENIC SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

    Significant Customers and Related Parties
    -----------------------------------------

     A relatively small number of customers have accounted for a significant
percentage of the Company's total revenue. The following customers accounted for
more than 10% of total revenue:


                                    YEAR ENDED
                                     MARCH 31,
                             -----------------------
                             1995     1996      1997
                             -----    -----     ----
     Customer A......         55%       *        *
     Customer B......         20%       *        *
     Customer C......          *       25%       *

--------
*less than 10%

    Export Sales
    ------------

     The Company markets its products in North America and in foreign countries
(primarily Europe and Japan) through its sales personnel, VARs, ISVs and
distributors. For fiscal 1996 and 1997, export sales, which consist of domestic
sales to customers in foreign countries, were 10% and 11%, respectively, of
total revenue. For fiscal 1995, export sales were less than 10% of total
revenue.

   Concentration of Credit Risk
   ----------------------------

     Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. As of
March 31, 1997, approximately 70% of accounts receivable was concentrated with
ten customers. The Company generally does not require collateral on accounts
receivable as the majority of the Company's customers are large, well
established companies. The Company provides reserves for credit losses, which to
date have been insignificant.

   Stock-Based Compensation
   ------------------------

     Effective April 1, 1996, the Company adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with the
provisions of SFAS No. 123, the Company applies Accounting Principals Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plans.

   Net Loss per Share and Pro Forma Net Loss per Share
   ---------------------------------------------------

       For periods after the Company's initial public offering in August 1996,
net loss per share has been computed using the weighted average number of common
shares outstanding. Common equivalent shares have not been included as their
effect would be antidilutive. For the portion of fiscal 1997 prior to the
Company's initial public offering, net loss per share has been computed on a pro
forma basis.

         Pro forma net loss per share is computed using the pro forma weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of convertible preferred stock (using
the if converted method) and stock options (using the treasury stock method).
Common stock options are excluded from the computation if their effect is
antidilutive. Convertible preferred stock outstanding

                                       33
<PAGE>
 
                            VISIGENIC SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

during the period is included (using the if converted method) in the computation
of common equivalent shares even though the effect is antidilutive. Also,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins
and staff policy, such computations include all common and common equivalent
shares issued within the 12 months preceding the Company's initial public
offering as if they were outstanding for all periods presented. Historical net
loss per share amounts for periods prior to fiscal 1996 have not been presented
since such amounts are not deemed meaningful due to the significant change in
the Company's capital structure that occurred upon consummation of the Company's
initial public offering.

   New Accounting Standards
   ------------------------

       In February 1997, the Financial Accounting Standards Board (FASB) issued 
SFAS No. 128, "Earnings per Share," which specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS No. 128
will become effective for the Company's year ending March 31, 1998. SFAS No. 128
will not have a material impact on the Company's results of operations.

        In February 1997, FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure," which will be adopted by the Company in the fourth
quarter of 1998. SFAS No. 129 requires companies to disclose certain information
about their capital structure. SFAS No. 129 will not have a material impact on
the Company's financial statement disclosures.


3.  FISCAL 1997 ACQUISITIONS:

     Acquisition of  PostModern
     --------------------------

        In May 1996, the Company completed the acquisition of PostModern, a
supplier of distributed object technology. In the acquisition the Company issued
3,099,821 shares of its common stock, valued at $3.00 per share based on an
independent appraisal of the Company's common stock, and paid a total of $2.3
million in exchange for all of PostModern's outstanding shares. The Company also
incurred acquisition-related costs of approximately $450,000, resulting in a
total purchase price of approximately $13.1 million. In addition, the Company
made cash payments, subject to one-year vesting and totaling $1.5 million, to
certain PostModern employees. The acquisition of PostModern was accounted for as
a purchase in the quarter ended June 30, 1996 and, accordingly, the results of
PostModern from the date of acquisition forward have been recorded in the
Company's consolidated financial statements.

        In connection with the purchase price allocation, the Company received
an appraisal of the intangible assets which indicated that approximately $12.0
million of the acquired intangible assets consisted of in process product
development which had not reached technological feasibility and, in the opinion
of management, had no alternative future use. The acquired in process product
development was charged to expense in the Company's 1997 Statement of
Operations.

        As a result of the purchase price allocation, the excess of the purchase
price over net assets acquired is $1.1 million, which is being amortized on a
straight-line basis over a period of two years. Management believes that the
unamortized balance is recoverable through future operating results.

                                       34
<PAGE>
 
                           VISIGENIC SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

        The following unaudited pro forma information shows the results of
operations for the two fiscal years ended March 31, 1997 as if the PostModern
acquisition had occurred at the beginning of each period presented and at the
purchase price established in May 1996. The results are not necessarily
indicative of what would have occurred had the acquisition actually been made at
the beginning of each of the respective periods presented or of future
operations of the combined companies. The pro forma results for 1997 combine the
Company's results for the year ended March 31, 1997 with the results of
PostModern for the period from April 1, 1996 through the date of acquisition and
includes the $12.0 million write-off discussed above. The following unaudited
pro forma results include the straight-line amortization of intangibles over a
period of two years.

<TABLE> 
<CAPTION> 
                                                             YEAR ENDING MARCH 31,
                                                          -------------------------
                                                            1996           1997
                                                          ---------     -----------
                                                          (IN THOUSANDS, EXCEPT PER
                                                              SHARE AMOUNTS)
<S>                                                         <C>          <C> 
         Revenue......................................      $ 6,577      $ 17,150
         Net loss.....................................      $(6,337)     $(20,566)
         Net loss per share...........................      $  (.57)     $  (1.65)
         Shares used in per share calculation.........       11,064        12,453

</TABLE> 
        In connection with the acquisition, the Company also assumed
PostModern's outstanding stock options and reserved 361,785 shares of the
Company's common stock for issuance upon exercise of such options at an exercise
price of $0.24 to $0.60 per share under similar vesting terms. As of March
31,1997, 15,000 options had been exercised, 346,785 are outstanding and 147,061
shares are vested.


      Acquisition of CustomWare
      -------------------------

     In December 1996, the Company completed the acquisition of CustomWare, Inc.
("CustomWare"), a training and consulting firm focused on Java and CORBA
technologies. In the acquisition, the Company issued 125,000 shares of its
common stock to the shareholder of CustomWare, resulting in a total purchase
price of approximately $1.5 million. The acquisition of CustomWare was accounted
for as a purchase in the quarter ended December 31, 1996.

     In connection with the purchase price allocation, the Company received an
appraisal of the intangible assets which indicated that approximately $350,000
of the acquired intangible assets consisted of in process product development.
Because there can be no assurance that the Company will be able to successfully
complete the development of the CustomWare products or that the acquired
technology has any alternative future use, the acquired in process product
development was charged to expense by the Company in its quarter ended December
31, 1996 and accordingly, the results of CustomWare from the date of acquisition
forward have been recorded in the Company's consolidated financial statements.

     As a result of the purchase price allocation, the excess of the purchase
price over net assets acquired is $700,000, which is being amortized on a
straight-line basis over a period of one year. Management believes that the
unamortized balance is recoverable through future operating results.

       Comparative pro forma information reflecting the acquisition of
CustomWare has not been presented because the operations of CustomWare are not
material to the Company's consolidated financial statements.

                                       35
<PAGE>
 
                            VISIGENIC SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4.  LINE OF CREDIT:

     The Company has a $3.0 million revolving line of credit agreement (the
"Agreement") with a bank, which expires on July 15, 1997. Advances under the
Agreement bear interest at the bank's prime lending rate plus 1.0% (9.3% at
March 31, 1997), are limited to 80% of eligible accounts receivable and are
secured by substantially all of the assets and contractual rights of the
Company. The Agreement also contains certain financial restrictions and
covenants which require, among other things, that the Company maintain a minimum
monthly tangible net worth, and a minimum monthly ratio of debt to equity. In
addition, the Agreement prohibits the Company from paying dividends without
prior bank consent. As of March 31, 1997, the Company was in compliance with the
financial covenants. There were no borrowings outstanding under the Agreement as
of March 31, 1997.

 5. COMMITMENTS AND CONTINGENCIES:

     The Company leases its facilities under operating lease agreements expiring
through February 2003. Rent expense for all operating leases totaled
approximately $192,000, $304,000 and $853,000 for the years ended March 31,
1995, 1996 and 1997, respectively. Minimum future lease payments under all
noncancellable operating leases were as follows (in thousands):

YEAR ENDING
MARCH 31,
---------
   1998...................................................  $ 1,017
   1999...................................................    1,049
   2000...................................................    1,073
   2001...................................................      784
   2002...................................................      401
   Thereafter.............................................      105
                                                             ------
                                                             $4,429
                                                             ======

        On April 10, 1997, Western Imaging, Inc. ("Western Imaging") filed a
complaint in the U.S. District Court for the Northern District of California
against the Company and Corel Corporation ("Corel"), a licensee of the Company,
alleging breach of contract, intentional and negligent misrepresentation,
copyright infringement, trademark infringement, misappropriation of trade
secrets and other related claims.

        The lawsuit claims that in a May 1994 agreement with Western Imaging,
the Company sold to Western Imaging all right, title and interest not only to
its Lumena product, but also to its Color Tools, Creative License, Oasis and
Signature products as well. As a result, Western Imaging asserts that the
Company breached the terms of the agreement with Western Imaging when, among
other things, it licensed Creative License, Color Tools, Oasis and Signature
to Corel. Western Imaging is seeking injunctive relief, unspecified damages,
impoundment of the disputed software during the pendency of the litigation,
and punitive damages.

        The Company has not sold or marketed the disputed software products
since January 1995. The Company does not utilize this technology in any
current product offering.

        The Company has agreed to defend Corel pursuant to the terms of its
license to Corel. Neither the Company nor Corel has responded to the complaint.
The Company is currently investigating the allegations and believes it has
meritorious defenses to such claims and intends to defend the litigation
vigorously. However, due to the nature of the litigation and because the lawsuit
is at an early stage, the Company cannot determine the total expense or possible
loss, if any, that may ultimately be incurred either in the context of a trial
or as a result of a negotiated settlement. Regardless of the ultimate outcome of
the litigation, it could result in significant diversion of time by the
Company's technical and managerial personnel. Because the results of the
litigation, including any potential settlement, are uncertain, there can be no
assurance that they will not have a material adverse effect on the Company's
business, operating results and financial condition.

                                       36
<PAGE>
 
                            VISIGENIC SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

     From time to time the Company is involved in other various disputes
which have arisen in the ordinary course of business. Management believes that
the ultimate resolution of the disputes will not have a material adverse impact
on the Company's financial position or results of operations.

6. CONVERTIBLE PREFERRED STOCK AND CONVERTIBLE NOTES:

     In June 1996, the Company's Board of Directors approved a one-for-two
reverse split of its common and preferred stock. All common and preferred share
and per share amounts in the accompanying consolidated financial statements have
been adjusted retroactively to give effect to this reverse stock split.

     The Company's certificate of incorporation, as amended in May 1996,
authorized the issuance of up to 10,000,000 shares of convertible preferred
stock, of which the Company had designated 1,606,000 shares as Series A
preferred stock, 6,000,000 shares as Series B preferred stock and 1,000,000
shares as Series C preferred stock. In conjunction with the initial public
offering of the Company's common stock on August 8, 1996, all outstanding shares
of convertible preferred stock automatically converted into common stock upon
closing of the offering. The Company amended its certificate of incorporation in
August 1996 authorizing the issuance of up to 2,000,000 shares of preferred
stock. No preferred shares had been issued as of March 31, 1997.

     Issuance of Series C Convertible Preferred Stock and Convertible Notes
     ----------------------------------------------------------------------

     On May 24, 1996, the Company sold 444,444 shares of its Series C preferred
stock at a price of $9.00 per share to three investors, for aggregate proceeds
of $4.0 million. Between May 28 and June 7, 1996, the Company issued $2.0
million principal amount of convertible notes to the same three investors,
bearing interest at the rate of 8.25% per annum. Upon the closing of the
Company's initial public offering on August 8, 1996, the principal amount of
each note and all accrued interest automatically converted into shares of the
Company's common stock at $7.50 per share, the offering price per share to the
public, and the Series C preferred stock automatically converted into shares of
the Company's common stock. The Company used a portion of the proceeds from the
sale of the Series C preferred stock and the convertible notes to pay amounts
due in connection with the acquisition of PostModern. (See Note 3)

7. COMMON STOCK:

     In June 1996, the Company's Board of Directors approved a one-for-two
reverse split of its common and preferred stock. All common and preferred share
and per share amounts in the accompanying consolidated financial statements have
been adjusted retroactively to give effect to this reverse stock split.

     In August 1996, the Company completed the initial public offering of its
common stock. The Company sold 2,015,000 shares for net proceeds of
approximately $13.2 million. Concurrent with the closing of the initial public
offering, 4,119,069 shares of convertible preferred stock were converted into an
equivalent number of shares of common stock and $2,000,000 of convertible notes
plus accrued interest of $31,526 converted into 270,871 shares of common stock.
(see Note 6)

     In February 1997, the Company completed a second public offering of its
common stock. The Company sold 1,180,000 shares for net proceeds of
approximately $13.3 million.

     Prior to July 1993, the Company issued 232,575 shares of common stock to
certain employees and directors of the Company that are subject to certain
repurchase rights. These rights of repurchase lapse over a five-year period. As
of March 31, 1997, 31,728 shares of common stock are subject to repurchase by
the Company at prices ranging from $.08 to $.40 per share.

                                       37
<PAGE>
 
                            VISIGENIC SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

     Stock Purchase Plans
     --------------------

     In April 1993 and August 1994, the Company adopted Stock Purchase Plans
(the "Stock Plans") and authorized the issuance of 952,500 shares thereunder to
employees and consultants. Stock purchased under these Stock Plans generally
vests ratably over a five-year period. Unvested shares may be repurchased by the
Company at the original issuance price in the event of the employee's or
consultant's termination.

     As of March 31, 1997, 526,287 shares were issued and outstanding under
these Stock Plans at prices ranging from $.20 to $.40 per share, which was the
fair market value of the common stock, as determined by the Board of Directors,
on the date of grant, of which 193,373 shares were subject to repurchase. As of
March 31, 1997, no further shares were available for issuance under the Stock
Plans.

      1995 Stock Option Plan
      ----------------------

     In fiscal 1996, the Company established the 1995 Stock Option Plan (the
"1995 Plan"). As of March 31, 1997, the Company had reserved 2,500,000 shares of
common stock for issuance under the 1995 Plan. In April 1997, the Board of
Directors approved an increase in the reserve under the 1995 Plan, subject to
stockholder approval, of 1,500,000 shares. Under the 1995 Plan, the Board of
Directors may grant incentive and nonqualified stock options to employees,
consultants and directors of the Company. The exercise price per share for an
incentive stock option cannot be less than the fair market value of the stock on
the date of grant. The exercise price per share for nonqualified stock options
cannot be less than 85% of the fair market value of the stock on the date of
grant. Options generally expire ten years after the date of grant and vest over
a period of four years. Option activity under the 1995 Plan was as follows:

<TABLE> 
<CAPTION> 
                                                                                   OPTIONS OUTSTANDING
                                                                              -----------------------------
                                                                  OPTIONS                 WEIGHTED AVERAGE
                                                                 AVAILABLE      SHARES     EXERCISE PRICE
                                                               ------------   ------------ ----------------
<S>                                                            <C>            <C>           <C> 
        Authorized.........................................       2,000,000          --           --
        Granted............................................        (820,750)     820,750       $ .40
        Exercised..........................................              --      (54,068)      $ .40
        Canceled...........................................          12,932      (12,932)      $ .40
     Balance at March 31, 1996.............................       1,192,182      753,750       $ .40
        Authorized.........................................         500,000           --          --
        Granted............................................      (1,690,250)   1,690,250       $9.40
        Exercised..........................................              --     (225,611)      $ .48
        Canceled...........................................          77,967      (77,967)      $7.71
     Balance at March 31, 1997.............................          79,899    2,140,422       $7.23

</TABLE> 
       As of March 31, 1997, all of the outstanding options were immediately
exercisable in full on the date of grant subject to repurchase of unvested
shares by the Company at cost and at the option of the Company if employment is
terminated. As of March 31, 1997, 115,392 shares were subject to repurchase.

   1996 Employee Stock Purchase Plan
   ---------------------------------

     The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company's Board of Directors in June 1996. A total of 450,000
shares of common stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan permits eligible employees to purchase common stock at 85% of
the lower of the fair market value of the Company's common stock on the first
day or the last day of each six-month offering period. As of March 31, 1997,
60,822 shares had been issued under the Purchase Plan. The weighted average
fair value of shares issued in fiscal 1997 was $2.72.

                                       38
<PAGE>
 
                            VISIGENIC SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

     1996 Outside Director's Stock Option Plan
     -----------------------------------------

     The Company's 1996 Outside Director's Stock Option Plan (the
"Director's Plan") was adopted by the Company's Board of Directors in June 1996.
A total of 200,000 shares of common stock has been reserved for issuance under
the Director's Plan. The Director's Plan provides for the initial grant of
nonstatutory stock options to purchase 15,000 shares of common stock on the
earlier of the first annual meeting following the initial public offering of the
Company's common stock or the date on which the optionee first becomes a
nonemployee director of the Company, and an additional option to purchase 5,000
shares of common stock on the next anniversary to existing and future
nonemployee directors of the Company. The exercise price per share of all
options granted under the Director's Plan will equal the fair market value of a
share of the Company's common stock on the date of grant of the option. No
options have been issued under the Director's Plan as of March 31, 1997.

      Stock-Based Compensation
      ------------------------

      The Company accounts for the 1995 Plan, the Purchase Plan and the
Director's Plan (the "Plans") under APB Opinion No. 25 and related
interpretations, under which no compensation cost has been recognized as the
exercise price per share for stock options was equal to the fair market value of
the stock on the date of grant and the Purchase Plan qualified as a non
compensatory plan under APB Opinion No. 25. Had compensation cost for these
Plans been determined consistent with SFAS No. 123, the Company's net loss and
net loss per share would have been reduced to the following pro forma amounts
(in thousands):

                                              YEAR ENDING MARCH 31,
                                           ----------------------------
                                              1996               1997
                                           -----------        ---------
Net loss:                  As reported      $(4,379)          $(20,330)
                           Pro forma        $(4,392)          $(21,633)

Net loss per share:        As reported      $  (.40)          $  (1.63)
                           Pro forma        $  (.40)          $  (1.73)

     The weighted average fair values of options granted during fiscal 1996 and
fiscal 1997 were $.09 and $5.70 per share, respectively. The fair value of each
stock option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
grants in fiscal 1996 and fiscal 1997:

                                    1996              1997
                                    ----              ----
Volatility                             0%               75%
Risk-free interest rate              5.9%              6.8%
Dividend yield                         0%                0%
Expected lives                         4 years           4 years

     The following table summarizes information regarding stock options
outstanding under the 1995 Plan at March 31, 1997 (in thousands, except per
share and life amounts):

<TABLE> 
<CAPTION> 

                                Options Outstanding                         Options Vested and Exercisable
                   ---------------------------------------------------   ---------------------------------------
                                      Weighted    
                    Number             Average           Weighted           Number Vested           Weighted
Range of           Outstanding        Remaining            Average          and Exercisable          Average
Exercise Prices    at 3/31/97      Contractual Life    Exercise Price         at 3/31/97          Exercise Price
----------------------------------------------------------------------------------------------------------------
<S>                <C>            <C>                  <C>                 <C>                  <C> 
$0.40                   508             8.58                $  0.40               138                 $  0.40
$2.00-$6.00             550             9.16                   4.45               104                    4.27
$8.00-$10.50            530             9.55                   9.67                36                    9.18
$11.25-$16.50           552             9.63                  13.94                10                   11.95
----------------------------------------------------------------------------------------------------------------
$0.40-$16.50          2,140             9.24                $  7.23               288                 $  3.30

</TABLE> 

                                       39
<PAGE>
 
                            VISIGENIC SOFTWARE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

     Executive Performance Incentive Plan
     ------------------------------------

     The Company's Executive Performance Incentive Plan (the "Incentive Plan")
was adopted by the Company's Board of Directors in October 1996. A total of
100,000 shares of common stock has been reserved for issuance under the
Incentive Plan. Under the Incentive Plan, the Compensation Committee of the
Board of Directors may award performance units to designated executives that
will vest and become payable if one or more pre-established performance goals
are attained during a specified performance period and the participant remains
an employee. As of March 31, 1997, 3,615 shares had been issued under the
Incentive Plan.

    Common Stock Reserved for Future Issuance
    -----------------------------------------

    As of March 31, 1997, the Company has reserved 3,252,669 shares of common
stock for future issuance under the Plans, the Incentive Plan, and for options
assumed from PostModern.

8.  EMPLOYEE BENEFIT PLAN:

    In June 1995, the Company adopted the Visigenic Software, Inc. 401(k) Plan
(the "401(k) Plan"), as allowed under Section 401(k) of the Internal Revenue
Code, which provides for tax deferred salary deductions for eligible employees
of the Company. Employees who are 21 years of age or older are eligible to
participate immediately upon the date of hire and may make voluntary
contributions of their compensation to the 401(k) Plan. The 401(k) Plan does not
provide for Company contributions and the Company is the administrator.

9.  INCOME TAXES:

    The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns based upon enacted tax laws
and rates applicable to the periods in which taxes become payable. A valuation
allowance has been recorded for the entire deferred tax asset as a result of
uncertainties regarding realization of the asset, including the limited
operating history of the Company, the lack of profitability to date and the
uncertainty over future operating profitability. Components of the net deferred
tax asset are as follows (in thousands):

                                                     MARCH 31,
                                                  ----------------
                                                   1996      1997
                                                  ------   -------
     Net operating loss carryforwards.........    $3,398    $5,916
     Cumulative book to tax differences.......       994     1,368
     General business credit carryforwards....       372       981
                                                  ------   -------
                                                   4,764     8,265
     Valuation allowance......................    (4,764)   (8,265)
                                                  -------  -------
               Net deferred tax asset.........    $    --  $    --
                                                  =======  =======

     As of March 31, 1997, the Company had Federal and state net operating loss
carryforwards of approximately $17.2 million and $1.4 million, respectively,
which expire at various dates through 2012. In addition, as of March 31, 1997,
the Company had general business credit carryforwards of approximately $981,000
which expire at various dates through 2012.

        Under current tax law, net operating loss and credit carryforwards
available in any given year may be limited upon the occurrence of certain
events, including significant changes in ownership interests.

                                       40
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES

 None

                                    PART III


        Certain information required by Part III is omitted from this report in
that the Company intends to file its definitive Proxy Statement pursuant to
Regulation 14A (the "definitive Proxy Statement") not later than 120 days after
the end of the fiscal year covered by this report, and certain information
therein is incorporated herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Information required by this Item regarding the Company's directors is
incorporated herein by reference from the section entitled "Proposal No. 1 -
Election of Directors" of the Company's definitive Proxy Statement. Information
regarding the Company's executive officers may be found in Part I of the
definitive Proxy Statement in the section entitled "Executive Officers of the
Company" and is incorporated by reference herein. Information required by this
Item concerning compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, is incorporated herein by reference from the section of the
definitive Proxy Statement entitled "Section 16(a) Beneficial Ownership
Reporting Compliance."

ITEM 11.  EXECUTIVE COMPENSATION

        Information required by this Item is incorporated herein by reference
from the section of the definitive Proxy Statement entitled "Executive
Compensation and Other Matters."

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information required by this Item is incorporated herein by reference
from the section of the definitive Proxy Statement entitled "Stock Ownership of
Certain Beneficial Owners and Management."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information required by this Item is incorporated herein by reference
from the section entitled "Certain Relationships and Related Transactions" of
the definitive Proxy Statement to be delivered to stockholders with the
Company's Annual Report to Stockholders.



                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

     (a)   The following documents are filed as part of this report:

         1.    Financial Statements --- see Index to Consolidated Financial
               Statements at Item 8 on page 25 of this Report.

         2.    Financial Statement Schedule:

               All schedules for which provision is made in the applicable
               accounting regulations of the Securities and Exchange Commission
               are omitted because they are not required under the related

                                       41
<PAGE>
 
               instructions, are inapplicable or the required information is
               disclosed elsewhere in the Consolidated Financial Statements.

               The independent accountant's report with respect to the above
               listed financial statements and financial statement listed in
               Items 14(a) is filed on page 26 of this Report on Form 10-K.

         3.    Exhibits  ---The  following  exhibits are filed as part of, or  
               incorporated  by reference into, this Report:

<TABLE> 
<CAPTION> 


   EXHIBIT
   NUMBER                                DESCRIPTION OF DOCUMENT
-----------                              -----------------------                 
<C>            <S> 
      3.1      Restated Certificate of Incorporation.(1)
      3.2      Bylaws.(1)
      4.1      Registration Rights Agreement between the Company and certain investors dated March 31,
               1993.(1)
      4.2      Supplemental Registration Rights Agreement between the Company and certain investors dated
               May 10, 1996.(1)
     10.1      Form of Indemnification Agreement for directors and officers.(1)
     10.2      1995 Stock Option Plan and forms of agreements thereunder.(1)
     10.3      1996 Employee Stock Purchase Plan.(1)
     10.4      1996 Outside Directors Stock Option Plan.(1)
     10.5      Non-Compete and Non-Solicitation Agreement between the Company and Jens Christensen dated
               April 28, 1996.(1)
     10.6      Non-Compete and Non-Solicitation Agreement between the Company and Neguine Navab dated
               April 28, 1996.(1)
     10.7      Non-Compete and Non-Solicitation Agreement between the Company and Prasad Mokkapatti
               dated April 28, 1996.(1)
     10.8      Convertible Note and Series C Preferred Stock Purchase Agreement by and among the Company,
               Cisco Systems, Inc., Netscape Communications Corporation and Platinum technology dated May
               24, 1996.(1)
     10.9      Form of Convertible Promissory Note.(1)
     10.10     Source Code License Agreement, as amended, between the Company and Microsoft Corporation
               ("Microsoft") dated June 20, 1995.(1)
     10.11     Source Code License Agreement between the Company and Microsoft dated
               February 10, 1995.(1)
     10.12     Lease Agreement, as amended, between the Company and San Mateo Office Limited, dated
               March 7, 1993.(2)
     10.13     Lease Agreement, as amended, between the Company and Spieker-Singleton #68 Limited
               Partnership dated September 11, 1996.(2)
     11.1      Statement regarding computation of per share loss.
     23.1      Consent of Independent Auditors.
     24.1      Power of Attorney (see page 43).
     27.1      Financial Data Schedule (available in EDGAR format only).
     -------
</TABLE> 

   (1)   Incorporated by reference herein to the Company's Registration
         Statement on Form S-1 (File No. 333-06285).

   (2)   Incorporated by reference herein to the Company's Registration
         Statement on Form S-1 (File No. 333-20583).

   (b)   Reports on Form 8-K ---No reports on Form 8-K were filed in the fiscal
         quarter ended March 31, 1997.

   (c)   Exhibits: The Company hereby files as part of this Report the exhibits
         listed in Item 14(a)(3) as set forth above.

   (d)   Financial Statement Schedules

                                       42
<PAGE>
 
                                   SIGNATURES

     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF ON JUNE 5, 1997 BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.


                                        VISIGENIC SOFTWARE, INC.
                                        (REGISTRANT)


                                      
                                   By:  /s/ MARK D. HANSON 
                                      ________________________________________
                                                  MARK D. HANSON
                                       PRESIDENT AND CHIEF OPERATING OFFICER

                                POWER OF ATTORNEY

KNOW TO ALL PERSONS BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS MARK D. HANSON AND KEVIN C. EICHLER, JOINTLY AND
SEVERALLY, HIS ATTORNEY IN FACT, EACH WITH THE FULL POWER OF SUBSTITUTION, FOR
SUCH PERSON, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS
(INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REPORT ON FORM 10-K, AND TO FILE
THE SAME, WITH ALL EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH,
WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEY-IN-FACT
AND AGENT FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND
THING REQUISITE AND NECESSARY TO BE DONE IN CONNECTION THEREWITH, AS FULLY TO
ALL INTENTS AND PURPOSES AS HE MIGHT DO OR COULD DO IN PERSON HEREBY RATIFYING
AND CONFIRMING ALL THAT EACH OF SAID ATTORNEYS-IN-FACT AND AGENTS, OR HIS
SUBSTITUTE, MAY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
ON FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:



        SIGNATURE                   TITLE                            DATE
        ---------                   -----                            ----


   /s/ ROGER J. SIPPL         Chief Executive Officer and         June 5, 1997
-------------------------      Director (Principal 
    ROGER J. SIPPL             Executive Officer)


   /s/ KEVIN C. EICHLER       Vice President--Finance             June 5, 1997
-------------------------      (Principal Financial and 
    KEVIN C. EICHLER           Accounting Officer) 



    /s/ GILL COGAN            Director                            June 5, 1997
-------------------------
      GILL COGAN
                                  

   /s/ CRISTINA MORGAN        Director                            June 5, 1997
-------------------------
    CRISTINA MORGAN

                                       43
<PAGE>
 
        SIGNATURE                   TITLE                            DATE
        ---------                   -----                            ----


   /s/ MICHAEL MORITZ         Director                            June 5, 1997
-------------------------
      MICHAEL MORITZ


   /s/ J. SIDNEY WEBB         Director                            June 5, 1997
-------------------------
     J. SIDNEY WEBB
                                  

     /s/ ERIC YOUNG           Director                            June 5, 1997
-------------------------
        ERIC YOUNG


 /s/ JENS CHRISTENSEN         Director                            June 5, 1997
-------------------------
     JENS CHRISTENSEN

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