<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB

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

                  For the fiscal year ended December 31, 1998

                                       or

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

                         Commission File Number 0-23446

                       ENLIGHTEN SOFTWARE SOLUTIONS, INC.
             999 Baker Way, Fifth Floor, San Mateo, California 94404
                                 (650) 578-0700

                                                                 I.R.S. Employer
Incorporated in                                            Identification Number
CALIFORNIA                                                            94-3008888

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

          Securities registered pursuant to Section 12(g) of the Act:
                              Title of Each Class
                           Common Stock, no par value

        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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.

        The registrant's revenues for the fiscal year ended December 31, 1998
were $3,758,408.

        The approximate aggregate market value of the registrant's Common Stock
held by nonaffiliates on February 28, 1999 was $9,028,521. This amount excludes
shares held by directors, executive officers, and holders of 5% or more of the
outstanding Common Stock since such persons may be deemed to be affiliates of
the registrant. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

        The number of common shares outstanding as of February 28, 1999 was
3,959,701.

DOCUMENTS INCORPORATED BY REFERENCE:
                                                           Form 10-KSB reference
(1)     Proxy Statement for Shareholder Meeting
        scheduled for May 20, 1999                               Part III



<PAGE>   2

                                     PART I


        This report includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. In this report, the words "anticipates," "believes," "expects,"
"intends," "future," and similar expressions identify forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from historical results or those anticipated. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in this Item 1 under the heading "Business Risks" on page 18 of
this report. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.

ITEM 1.    BUSINESS

OVERVIEW

        Enlighten Software Solutions, Inc. ("Enlighten Software" or the
"Company") develops, markets, and supports software products for UNIX and
UNIX/Windows environment workgroup administration and enterprise management. The
Company's product solutions are designed for open systems distributed computing
environments in the range of ten to 1,000 servers/clients. The Enlighten(R)
Distributed Systems Manager(TM) ("EnlightenDSMTM") product allows companies to
manage their information systems by enabling systems managers and administrators
to control their systems from diverse UNIX/Windows platform vendors such as
Digital Equipment Corporation ("DEC"), Hewlett-Packard ("HP"), IBM, Microsoft,
Santa Cruz Operation ("SCO"), Silicon Graphics, Inc. ("Silicon Graphics"), and
Sun Microsystems ("Sun"). The Company's award winning EnlightenDSM product suite
provides cost-effective systems administration solutions for such open systems
environments. The product suite is a fully integrated software solution
providing a middle-tier framework that is a standards-based multi-function
management system covering the breadth of workgroup administration and systems
management disciplines.

        Founded in 1986, the Company was a leading provider of systems
management software on the Tandem platform, providing a range of automated
systems management products to over 400 companies in 30 countries. On October 1,
1997, the Company sold its Tandem operation in order to focus efforts on its
UNIX/Windows product suite.

RECENT DEVELOPMENTS FOR THE COMPANY

        Fiscal 1998 was a new beginning for Enlighten Software. Following the
sale of the Tandem product line in October 1997, the Company was able to focus
solely on its UNIX/Windows product line for the first time since that product
line's introduction in 



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late 1995. The results of that focus were demonstrated during 1998 in
significant and meaningful ways. At the time of the Tandem disposition, the
Company's annual revenue from the UNIX/Windows product line was less than
$500,000 and the Company had no significant partner relationships. Shortly
thereafter, in January 1998, Enlighten entered into its first OEM bundling
agreement with Silicon Graphics. In May 1998 the Company raised $2.2 million via
a secondary public offering in order to bolster its cash position and its net
assets. In August 1998 the Company aligned with Access Graphics, a subsidiary of
General Electric's ("GE's") IT Distribution Group. In the third quarter of 1998,
Enlighten recognized its first operating profit from its UNIX/Windows product
line. Most recently, during the first quarter of 1999, the Company announced the
additions of Microsoft Windows95 and Windows98 to its UNIX and Microsoft NT
platforms. That announcement was followed by Sun Microsystems' announcement that
it had chosen EnlightenDSM as an integration partner with their Sun Enterprise
SyMON(TM) performance management software. Finally, and most significantly, in
February 1999 the Company and IBM announced a licensing arrangement in which
EnlightenDSM will be integrated into IBM's Suites for Solaris and AIX UNIX
operating system platforms.

OEM Bundling Agreement

        On January 22, 1998, the Company entered into a three-year worldwide OEM
bundling agreement with Silicon Graphics. Under the terms of the agreement,
Silicon Graphics ships a bundled limited feature version of EnlightenDSM,
EnlightenDSM/Workgroup, on new server and workstation product shipments as well
as with operating system upgrades shipped to already installed Silicon Graphics
customers. Silicon Graphics also offers and includes on its price list a full
feature version of EnlightenDSM as well as agent modules to enable the
management of other UNIX/Windows vendor servers and workstations. The products
are supported through Silicon Graphic's global customer support organization. In
addition to OEM bundling, Silicon Graphics markets the products through its
telesales force, direct field organization, and authorized resellers.

GE IT Distribution Group Distribution Agreement

        On August 28, 1998, the Company entered into a two-year global
distribution agreement with two of GE's subsidiaries, Access Graphics and
Integration Alliance. Under the agreement, Access Graphics and Integration
Alliance offer certified resellers the EnlightenDSM/Workgroup product bundled
with the businesses' high-end server offerings from Sun Microsystems and
Hewlett-Packard, and offer its authorized resellers the entire Enlighten product
line for distribution. This agreement extends the DSM/Workgroup product bundling
opportunity beyond the Silicon Graphics platform to include all server hardware
carried by Access Graphics and Integration Alliance. Access Graphics is the
largest master reseller for Sun Microsystems and Silicon Graphics. Integration
Alliance is the premier distributor of integrated enterprise solutions with a
focus on the HP commercial computing environment.



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Sun Microsystems' SyMON Integration

        In February 1999 Sun Microsystems announced plans to integrate Sun
Enterprise SyMON software with leading management solutions from Enlighten and
other premier systems management software companies in order to simplify their
customers' system management environment. With the products from Enlighten and
the other companies, Sun intends to address three critical areas of system
management: enterprise management, application management and operating system
administration. The announcement was the result of months of working closely
with the SyMON technical personnel at Sun in order to provide a seamless
integration of EnlightenDSM's system administration capabilities and Sun
Enterprise SyMON software.

IBM Licensing Agreement

        In the most significant announcement by the Company since the Silicon
Graphics' relationship, IBM and Enlighten announced on February 22, 1999 that
they had entered into a licensing agreement for Enlighten's flagship product,
EnlightenDSM. Under this agreement, IBM will integrate EnlightenDSM into the new
IBM Suites for Solaris and AIX operating systems. The agreement will provide
IBM's Suites customers with Enlighten's cross-platform solution for workgroup
management and administration of heterogeneous UNIX and Windows systems. In
addition to EnlightenDSM, the Suites includes IBM DB2 Universal Database,
WebSphere Application Server, Lotus Domino, and other IBM products. IBM and its
business partners will market the Suites worldwide with EnlightenDSM as an
integral part.

        IBM Suites for Solaris and AIX are new from IBM. They are designed to
provide reliability, security, and support available for connected enterprises
and autonomous departments using applications on UNIX servers. Software
developers, value-added distributors and resellers, system integrators and other
solution providers can use the IBM Suites as a secure technology base for
developing "e-business" solutions for customers in diverse industries and
markets.

INDUSTRY BACKGROUND

        In recent years there has been a significant change in the market for
networked, enterprise-wide computer systems. Technology advances in hardware and
software have created a new paradigm in computing based upon a client/server
architecture, where the user and the information server are connected via high
speed networks, locally via LANs, or remotely via communications networks. In
many cases, these systems are being deployed to replace the existing mainframe
systems. Yet the Company believes that, in the majority of cases, these systems
are additional and complementary to an organization's existing computing
capability. In the latter situations, computer systems based upon UNIX and
Windows operating systems are generally being deployed at the 



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divisional and departmental levels, although many companies are increasingly
using UNIX and Windows systems for more critical applications used in the
organization's day-to-day operations. The transition to open distributed
computing has been accelerated by the adoption of Internet and Intranet
technologies that utilize such open systems. The development of client/server or
distributed systems has created a significant market for hardware and software
companies that have developed products for these open environments based on UNIX
or Windows. Sun Microsystems, Hewlett Packard, IBM, and Silicon Graphics are a
few of the hardware companies that ship large quantities of UNIX workstations
and servers. Database and programming development products from companies such
as Oracle, Informix, Sybase, Forte, SAP, and Baan have also enjoyed success
based upon the development of open systems.

        Open systems environments offer several benefits, such as common
standards, allowing for combinations of hardware and software from a variety of
vendors. These environments also provide easy portability of applications from
one vendor's UNIX system to another, thereby protecting a customer's original
investment. Other benefits include lower price points, cost effective
networking, and a large pool of experienced technical personnel. However,
managing the operations of large client/server systems can be difficult and
labor intensive. As corporate customers migrate mission critical applications
from mainframes to distributed UNIX and Windows systems, they are demanding the
same type of management and administration tools provided in the mainframe
environment. The diversity of systems and applications has increased
significantly in recent years. The introduction and proliferation of the NT
operating system, the increased scope of applications from core business
transactional software to decision support, groupware, and Internet/Intranet
products, and the advancement of requirements of a centralized information
technology ("IT") department to manage systems in remote physical locations has
greatly expanded the systems management expertise required within IT
organizations of these companies. Additionally, an inherent characteristic of
open systems is a lack of complete integration of the various vendors' products.
The development of standards such as Simple Network Management Protocol
("SNMP"), the leading protocol for network management and the leading standard
for information collection in multi-vendor computing environments, and OpenView
provide a standard framework for systems management products in open
environments, but these standards must be integrated and managed. Many hardware
manufacturers have been slow to provide effective multi-vendor solutions to
manage their own, let alone their competitor's hardware, creating a market need
for truly heterogeneous system administration solutions.

        While open systems have produced significant advantages, the management
of distributed, heterogeneous open systems presents a major challenge. Unlike
the mainframe environments where an operations department typically has both
trained resources and extensive systems utilities, the responsibility for
managing open systems has become the responsibility of technicians who typically
use limited system utilities and "home grown" routines.



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        These market needs are currently being addressed either through manual
procedures by a company's internal IT organization, or by one of three types of
solutions: (i) point products, or stand-alone products designed to address one
particular function or requirement; (ii) interfaced products, or a set of point
products loosely coupled by a common interface but not truly integrated; and
(iii) enterprise systems management frameworks, or large monolithic products
designed to manage a customer's entire computing infrastructure from mainframe
systems, to UNIX/Windows systems, to desktop PCs. Many products serving this
market were developed by porting dated mainframe technology and architecture to
the UNIX environment. These solutions are typically expensive to acquire and
implement due to the extensive efforts associated with installing and
configuring these products to a customer's particular environment.

THE ENLIGHTEN SOFTWARE SOLUTION

        Enlighten Software offers a middle-tier framework for workgroup
administration and systems management for UNIX and Windows open systems.
Enlighten Software's mission is to provide the industry's most pervasive
software solutions which help enterprises monitor, manage, and administer
distributed, heterogeneous computers simply and inexpensively. The Company
intends to establish a presence as a market leader for easy to use,
out-of-the-box, broad-based functionality for workgroup administration and
systems management across major open systems platforms. While numerous standards
are being introduced and companies are vying to position themselves in the open
systems management market, Enlighten Software is positioning its Enlighten
product suite as the one product that is vital and affordable to open systems
managers in mixed UNIX/Windows environments.

        Enlighten Software's systems management solution differentiates itself
from other companies' systems management approaches. The Company believes that
systems managers demand management tools that are simple to use, easy to
install, scalable and customizable, intuitive to learn, and reasonably priced.
The Enlighten product suite is targeted to the broadest segment of the open
systems market: customers with ten to 1,000 workstations from a variety of the
most popular vendors. The Company believes the product's key strengths that
address the needs of this market niche are:

    -   Ease of use: EnlightenDSM is designed to be easily installed, and
        configured. Typically, EnlightenDSM installs and begins operating in
        hours, and can be fully configured with customized event alarms and
        thresholds and integration with other third-party products in weeks.
        Enterprise systems management products such as Computer Associates'
        Unicenter and Tivoli Systems' TME are very complex and often require a
        substantially increased investment of time and money to make useful when
        compared to the Company's product.



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     -  Broad functionality: The customer in the Company's target market
        typically has a limited budget, limited resources, and limited staff.
        Therefore, the Company designed the product to be able to address a
        broad range of system management and administration needs, alleviating
        the customer's need to make a series of investments in point product
        solutions. EnlightenDSM provides a common interface for an integrated
        product that addresses (i) user account configuration, (ii) printer
        resource management, (iii) network services configuration and
        management, (iv) security auditing, (v) disk and file management, (vi)
        archive management, (vi) systems management, and (vii) event generation
        and monitoring.

     -  Price performance: The Company believes its product is generally priced
        below comparable point products in the market, as well as enterprise
        framework products.

     -  Open architecture: EnlightenDSM is based on an architecture which is
        designed to be easily integrated with most existing point solutions as
        well as solutions developed by customers internally. The product is also
        designed to communicate "up" to the enterprise framework products with
        event mechanisms or easy-to-write scripts in the product's Programmable
        Event Processor ("PEP"). EnlightenDSM uses Structured Query Language
        ("SQL") with any Open Database Connectivity ("ODBC") databases and SNMP.
        The product can operate as an integral part of an enterprise management
        environment in a larger customer environment, or as the focal point of
        administration and management in a smaller customer environment, or in
        divisions/sites of a larger customer environment.

        EnlightenDSM is scalable to large networks and supports the day-to-day
operational requirements of networked systems, such as adding users and nodes,
reconfiguring system processes, managing disk storage, and managing
Internet/Intranet users. The Company believes its product suite is affordably
priced, scalable from ten to 1,000 systems, designed to install within one half
hour for most configurations, and will integrate with other system console and
network administration products, such as Tivoli, CA Unicenter, Remedy, and many
others.

COMPANY STRATEGY

        Enlighten Software's objective is to become a market leader in
integrated open systems workgroup administration and systems management. To
achieve this objective, Enlighten Software has adopted a business strategy
incorporating the following elements:



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Focus on the "under-served" market

        The Company believes that most of the products in the enterprise systems
management market are currently focused toward Fortune 500 companies that can
afford the time and expense, and possess the resources necessary to implement a
monolithic enterprise-wide systems management solution. Mid-sized companies, and
smaller sites or departments of larger companies, cannot effectively and
efficiently implement these solutions and require less intrusive, more
cost-effective means to manage their UNIX/Windows systems. The Company believes
there are very few products to assist these organizations in managing and
monitoring their open systems networks. Enlighten Software's focus for its
UNIX/Windows products is this under-served market, defined as sites with ten to
1,000 UNIX or Windows workstations or servers without a large mainframe
presence. The Company feels its low-cost, easy-to-use, non-intrusive workgroup
administrations and systems management solution is the most effective tool for
these companies to use for managing and monitoring their systems.

Penetrate the market primarily through third-party relationships

        The Company shifted its sales and marketing focus from direct sales to
indirect channels sales in late 1997 following the sale of the Tandem operation.
Shortly after this shift occurred, the Company entered into the OEM bundling
agreement with Silicon Graphics, which was then followed by the distribution and
licensing agreements with GE's IT Distribution Group and IBM Corporation, and
the integration with Sun's SyMON software. The Company's product architecture
and design, price point, and ease of use of the EnlightenDSM product allow it to
be effectively bundled with both a hardware manufacturer's operating system and
a software company's independent applications. The relationships with these
entities will allow the Company to continue penetrating the market by
proliferating its products on thousands of systems, thereby providing a base
within which to sell the full feature version of EnlightenDSM, as well as other
products. The Company intends to continue to pursue additional partnering
relationships and intends to continue to focus its sales and marketing efforts
on the following:

        -       Systems management and other software application vendors - The
                Company believes its product suite is complementary with several
                software vendors' applications. EnlightenDSM's architecture is
                designed to allow integration with other third-party software
                products with minimal engineering requirements. The Company
                intends to pursue relationships with software companies
                providing systems management, help desk software, and other
                "customer care" applications with which the Company's product
                could be integrated and sold as a combined solution.



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        -       Additional UNIX hardware manufacturers - The Company believes
                that several UNIX hardware manufacturers lack effective systems
                management solutions. As the competition for UNIX hardware
                increases and price points drop, the Company believes these
                manufacturers will need to differentiate themselves through the
                ability to offer solutions to customers that provide lower cost
                of ownership through ease of use and administration for their
                systems. With relationships established with Silicon Graphics,
                IBM, and Sun, the Company has successfully attracted three of
                the major UNIX hardware manufacturers. The Company's strategy in
                this area will be to leverage its relationships with its current
                vendors to either broaden or deepen the relationship, as well as
                enter into agreements other UNIX vendors.

        -       Systems integrators and consultants - The Company also believes
                that companies providing systems management consulting and
                outsourcing services to IT organizations are in need of
                effective administration and management tools to provide their
                clients with improved efficiencies in managing heterogeneous
                open systems environments.

        -       Selected end-users - The Company has shifted its primary focus
                from direct to indirect channels to market and distribute its
                product. However, it maintains a small direct sales force
                focused on select opportunities where the Company can provide
                value through stronger, more dedicated customer relationships.

        The preceding discussion regarding the Company's response to the systems
management market and its product and marketing strategy contains
forward-looking statements, and actual results may vary substantially depending
upon a variety of factors, including, but not limited to, the development of
emerging markets for systems management and administration software,
competition, technological change, changing customer needs, evolving industry
standards, any product development delays, and the ability of the Company to
manage future growth and new distribution channels, if any. These and other
factors are more fully discussed under the caption "Business Risks" on page 18
of this report.

PRODUCTS

        Enlighten Software offers software products designed to automate the
management and administration of computer systems. Set forth below is a summary
of the Company's principal product offerings by product family.



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OPEN SYSTEMS MANAGEMENT

        In the fast-paced UNIX/Windows environment, millions of new computers
are being deployed annually. All system administrators must learn to manage
networks in which users are added on a regular and continuous basis. The tools
these system administrators need to effectively perform their jobs should be
simple, easy to implement, and intuitive; not complex, rules-based systems
management software. The Company acquired core technology for UNIX systems
administration products in December 1994, and released two complementary UNIX
products in the second quarter of 1995. The features of these two products were
combined in EnlightenDSM version 2.0, which was released in May 1996. The
Company is currently shipping version 2.7 of EnlightenDSM. Product license fees
from the Company's open systems product family represented 100% and 27% of total
product license fees in 1998 and 1997, respectively.

Enlighten Distributed Systems Manager (EnlightenDSM)

        EnlightenDSM is a standards-based, multi-function management system
covering the following disciplines: user administration, file system management,
Internet/Intranet management, printer management, security checking, archiving,
subsystem monitoring, event generation/tracking, and other system functions.
EnlightenDSM runs on a variety of open systems computer platforms, including
HP/UX, SUN/Solaris, IBM/AIX, Intel 486/SCO, Silicon Graphics/IRIX, Digital UNIX,
and Microsoft Windows. Cross-platform functionality enables the management of
diverse and distributed systems from a centralized console.

        EnlightenDSM automatically collects and saves status, configuration,
performance, and capacity information and makes it available for monitoring by
most commercial SNMP managers. The product monitors system resources including
peripheral devices, processes, resources, and services. Thresholds can be set to
generate alarms that warn users of an error or problem about to occur. The
product can also be set to take corrective action automatically. EnlightenDSM
monitors and reports changes in system inventory and can track the addition or
removal of memory, disk drives, tape drives, and other devices, thereby reducing
costly downtime and improving system performance.

TANDEM SYSTEMS MANAGEMENT

        The Company was originally a provider of software tools and utilities to
more effectively manage the performance of Tandem computer systems. Beginning
with one product in 1986, the Company expanded to seven products that were used
by over 400 customers in 30 countries. As the Company shifted its strategic
focus away from the Tandem platform and toward the UNIX/Windows environment, the
Company's Tandem products were sold. Product license fees from the Company's
Tandem product line accounted for 0% and 73% of total product license fees in
1998 and 1997, respectively. 



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<PAGE>   11

In October 1997, the Company sold all of the technology and operating assets
associated with its Tandem product line to New Dimension Software, Inc. ("NDS").

SALES AND DISTRIBUTION

        The Company's revenues are derived from four sources: product license
fees, product maintenance fees, consulting services, and royalties.

Product license fees

        During 1998, Enlighten Software marketed its products through third
party distributors and OEMs and, to a lesser extent, a direct field sales force.
The direct sales of the Company's products were marketed primarily throughout
North America and Europe by its product sales organization located at the
Company's headquarters in San Mateo, California.

        Product license fees in 1998 consisted primarily of revenue from the
granting of perpetual licenses and from the licensing of product upgrades
necessary when customers upgrade their system hardware. Product license fees
include license fees from third party distribution relationships as well as
license fees from end-users licensed directly by the Company. Revenue from third
parties is recognized in the quarter in which the third party has shipped
product. Revenue from end-user licenses is payable in full at the commencement
of the license period and is recognized after all of the following events have
occurred: (i) a product evaluation has been shipped to the customer; (ii) the
customer elects to purchase the software following an evaluation period; and
(iii) the customer signs the related contract. Product license fees represented
65% and 34% of total revenue in 1998 and 1997, respectively.

        Following the disposition of its Tandem product line during the fourth
quarter of 1997, the Company shifted its sales strategy to one based primarily
upon third-party distributors and restructured its sales department as a result
of this shift. This restructuring included personnel changes as well as the
closing of field sales offices in the Chicago and New York areas, as well as the
U.K. sales and support office.

        Enlighten Software then built its sales, marketing, and customer support
organizations with a focus on delivery of its products to OEM partners,
resellers, system integrators, and select end-users. An essential element of the
Company's sales and marketing strategy has been and will continue to be the
development of indirect distribution channels, such as original equipment
manufacturers ("OEMs"), independent software vendors ("ISVs"), and value added
resellers ("VARs"), as well as other systems management and application software
vendors whose products are complementary with those of the Company.



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<PAGE>   12

        In January 1998, the Company established its first OEM relationship with
Silicon Graphics. Under the agreement, Silicon Graphics incorporates a limited
version of EnlightenDSM bundled with its operating system on new servers and
workstations as well as with operating system upgrades shipped to already
installed Silicon Graphics customers. Silicon Graphics also offers and includes
in their price book licenses for the full-feature version of EnlightenDSM as
well as agent modules to enable the management of other UNIX/Windows vendor's
servers and workstations as optional enhancements. The products are supported
through Silicon Graphic's global customer support organization. In addition to
OEM bundling, Silicon Graphics markets the products through its telesales force,
direct field organization, and authorized resellers. The Company receives a
license fee for each copy distributed by Silicon Graphics to its customers.

        In August 1998, the Company entered into a distribution agreement with
Access Graphics and Integration Alliance, two of GE's subsidiaries in their IT
Distribution Group. Under the agreement, the companies offer certified resellers
the EnlightenDSM/Workgroup product bundled with the businesses' high-end server
offerings from Sun Microsystems and Hewlett-Packard, and offer its authorized
resellers the entire Enlighten product line for distribution. The Company
receives a license fee and support revenue from Access Graphics and Integration
Alliance for each copy of EnlightenDSM licensed by their resellers to end-users.

        In February 1999 Sun Microsystems reached an agreement with the Company
that will integrate Sun Enterprise SyMON software with EnlightenDSM and other
leading management solutions from other software companies. Sun will participate
in co-marketing activities with the Company and will cooperatively work with
Enlighten's sales and marketing team in end-user sales opportunities.

        Also in February 1999, the Company entered into a licensing agreement
with IBM. Under this agreement, IBM will integrate EnlightenDSM into the new IBM
Suites for Solaris and AIX operating systems. The agreement will provide IBM's
Suites customers with Enlighten's cross-platform solution for workgroup
management and administration of heterogeneous UNIX and Windows systems. In
addition to EnlightenDSM, the Suites includes IBM DB2 Universal Database,
WebSphere Application Server, Lotus Domino, and other IBM products. IBM and its
business partners will market the Suites worldwide with EnlightenDSM as an
integral part. Enlighten will receive a license fee equal to a percentage of the
revenue IBM generates from the Suites products in which EnlightenDSM is
integrated.

        The Company is currently investing, and intends to continue to invest,
significant resources to develop the OEM, ISV, and VAR channels, which could
have a material adverse affect on the Company's operating margins. The Company's
efforts to expand its third-party channels are intended to penetrate the market
and achieve widespread commercial acceptance of the Company's products as a
workgroup administration 



                                      -12-
<PAGE>   13

standard. There can be no assurance that the Company will be successful in its
efforts to increase the revenues represented by this channel. The Company will
be dependent upon its current and future third-party relationships for a
significant portion of its revenue for the foreseeable future. There is no
assurance that the Company's third party distributors will effectively
distribute and exploit the Company's products. The failure of existing
distributors to sell the Company's products effectively, to the inability to
recruit additional third parties to distribute, market, and support the
Company's products could have a material adverse affect the Company's business,
operating results, and financial condition. A more detailed discussion of these
and other risks associated with the Company's business is set forth under the
caption "Business Risks" on page 18 of this report.

Product maintenance fees

        All customers subscribing to Enlighten Software's maintenance service
agreements are entitled to receive (i) technical support and consultation,
primarily over the telephone, and (ii) subsequent product enhancement and
maintenance releases periodically produced by the Company. Product maintenance
support is provided directly to customers as well as through the Company's
authorized distributors. Since the Company has shifted its sales efforts from
direct to indirect channels, the Company has become more dependent on its
third-party distributors for technical support and consultation to end-users.
The Company will need to continue to increase its training and education efforts
related to its third-party distributors to ensure the technical proficiency and
knowledge of such third parties with respect to the Company's products.

        Product maintenance fees consist of all maintenance revenue on new and
existing installed software products as well as support fees paid to the Company
by its third party resellers. The Company generally charges, on an annual basis,
20% of the current list price of its products in exchange for telephone support,
product updates, and product enhancements. In cases in which a third party
provides support to its end-users, the Company recognizes a portion of the
support fees charged by such third party to its customers. Product maintenance
revenue is recognized ratably over the maintenance contract period (typically
one year). Product maintenance fees accounted for 17% and 61% of total revenue
in 1998 and 1997, respectively.

Consulting services

        Revenue from consulting services consists of fees charged for contract
services, product training, and other service activities. This division of the
Company's technical support organization provides fee-based consulting services
to the Company's customers throughout the U.S. Consulting service revenue is
recognized when services are performed for time and material contracts and on a
percentage of completion basis for fixed price contracts. Consulting services
represented 7% and 5% of total revenue in 1998 and 1997, respectively.



                                      -13-
<PAGE>   14

Royalties

        The Company recognizes royalties from NDS from product license fees and
product maintenance fees generated by the Tandem product line sold to NDS in
October 1997. Royalties represented 11% and 0% of total revenue in 1998 and
1997, respectively.

PRODUCT DEVELOPMENT

        The computer software industry is characterized by rapid technological
change and is highly competitive in regard to timely product innovation.
Accordingly, the Company believes that its future success depends on its ability
to enhance current products that meet a wide range of customer needs and to
develop new products rapidly to attract new customers and provide additional
solutions to existing customers. In particular, the Company believes it must
continue to respond quickly to users' needs for broad functionality and open
systems support.

        Enlighten Software addresses the needs of current users through
regularly scheduled maintenance and enhancement releases. At the same time, the
Company seeks to acquire and develop new products to meet the needs of a broader
group of users.

        The Company provides an integrated workgroup administration and systems
management product for open systems running on six different UNIX-based systems
along with Microsoft Windows NT, Windows98, and Windows95. The EnlightenDSM
product consists of the following features: user administration, file system
management, Internet/Intranet management, printer management, security checking,
archiving, subsystem monitoring, and event alarm generation/tracking.

        The Company significantly enhanced its EnlightenDSM product with several
releases during 1998. The new releases contained new features such as LDAP and
Automount support, security enhancements to the communication layer including
40-bit DES encryption and support for the new operating system releases from the
supported operating system. Appropriate adjustments were made to the
EnlightenDSM product to assure proper product operation beyond the year 2000 and
to support installations of language localized environments. Electronic
documentation for the EnlightenDSM product was enhanced. Both the User Guide and
Reference Manuals are now supplied in a single-file Adobe Acrobat format,
complete with electronic hyperlinks and cross references. In addition, the
Company added to its supported platforms with ports to Windows98 and Windows95.
In preparation of a third-party distribution effort, the Company customized its
central storage facility to integrate with the IBM DB2 Database.

        The Company's strategy is to continue to enhance EnlightenDSM's
functionality through new releases and new feature development to meet the
continually advancing systems administration and management requirements of its
customers, including:



                                      -14-
<PAGE>   15

        -       increased scalability and performance;

        -       increased integration with other systems management point
                solutions as well as other enterprise systems management
                frameworks;

        -       increased levels of automation and ease of use to further reduce
                administrative costs and overhead;

        -       increased range of supported platforms; and

        -       continued customization for the Company's current and new
                third-party distributors.

        There can be no assurance that the Company will be successful in
developing and marketing new features or products that respond to technological
change or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction, and marketing of any new features or products, or that its new
features or products will adequately meet the requirements of the marketplace
and achieve market acceptance. Additionally, the Company's product development
staff will be under increased pressure as the Company's products are deployed on
a significantly greater number and variety of machines by virtue of the
Company's current third party relationships (or other additional third-party
relationships, if any). Due to the complexity of the product and the large
number of network configurations in the market, it is extremely difficult to
fully test EnlightenDSM in all possible environments and, although the Company
employs a continual effort to assure a quality product, there is no assurance
that errors will not be found in the released commercial product resulting in
delays of new feature development. If the Company is unable, due to lack of
resources or for technological or other reasons, to develop and introduce new
features and products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results,
and financial condition will be materially adversely affected. See "Business
Risks" on page 18 of this report.

        As of December 31, 1998, the Company had 17 professional and technical
employees engaged in research and development. During the fiscal years ended
December 31, 1998 and 1997, the Company's research and development expenditures
before the capitalization of software development were $1,691,950 and
$2,125,944, respectively.

COMPETITION

        The systems management market in which the Company competes is intensely
competitive, highly fragmented and rapidly changing. In order to compete, the
Company must enhance its current products, enhance the operability of its
products with other products, management frameworks, and operating systems
through a truly open architecture, develop new products in a timely fashion, and
develop key strategic 



                                      -15-
<PAGE>   16

partnerships with other hardware and software vendors. Many of the Company's
competitors in the open systems markets are larger and have greater financial,
technical, marketing, and other resources than the Company. Because there are
relatively low barriers to entry in the software market, the Company expects
additional competition from other established and emerging companies. Increased
competition is likely to result in price reductions, reduced gross margins, and
increased difficulty in establishing market share, any of which could have a
material adverse effect on the Company's business, operating results, and
financial condition. See "Business Risks" on page 18 of this report.

        The Company's principal competition in the market for open systems
workgroup administration and system management products is from enterprise
systems management vendors such as Tivoli, a wholly-owned subsidiary of IBM, and
Computer Associates, as well as point products from BMC Software, Inc., Platinum
Technologies, Inc., Veritas Software, Inc., Compuware, and Legato Systems, Inc.
The Company also faces competition from internal development groups of
prospective end-user customers and OEMs, including operating system vendors,
many of which have substantial internal programming resources and are capable of
developing specific operating system level products for their own needs. In
addition, certain operating systems vendors have already incorporated systems
management capabilities into their operating system, including HP, Sun, IBM, and
Microsoft, which reduces such vendors' need for the Company's products.
Additional hardware manufacturers may elect to offer similar competitive
products in the future.

        The Company believes that it competes favorably with its competitors
with respect to product features and functionality, such as scalability,
interoperability across multiple platforms, adherence to standards, security, as
well as reliability, ease-of-use, price/performance ratio, and an ability to
integrate easily with third-party vendors' products. However, given the
Company's size, its recent entry into the UNIX/Windows markets, and the
advantages its competition enjoys with respect to size and resources, there can
be no assurances the Company can effectively compete in this market.

PRODUCT PROTECTION

        The Company relies on a combination of copyright, trade secret and
trademark laws, and software security measures, along with employee and
third-party nondisclosure agreements, to protect its intellectual property
rights, products, and technology. The Company's products are typically licensed
on a "right to use" basis pursuant to perpetual licenses that restrict the use
of the products to the customer's internal purposes. The Company distributes its
software under license agreements that are signed by its end-users. Despite the
precautions taken by the Company to protect its software, unauthorized parties
may attempt to reverse engineer, copy, or obtain and use information the Company
regards as proprietary. Policing unauthorized use of the Company's products is
difficult, and software piracy is expected to be a persistent problem.



                                      -16-
<PAGE>   17

Additionally, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States.

        The Company has entered into source code escrow agreements with some of
its customers that require the release of source code to the customer in the
event there is a bankruptcy proceeding by or against the Company, the Company
ceases to do business, or the Company is unable to fulfill its contractual
obligations with respect to support. In the event of a release of the source
code, the customer is required to maintain its confidentiality and, in general,
to use the source code solely for the purpose of maintaining the software's
usability. The provision of source code may increase the likelihood of
misappropriation or other misuse of the Company's intellectual property.

        The Company is not aware that its products, trademarks, or other
proprietary rights infringe the proprietary rights of third parties. However,
from time to time, the Company receives notices from third parties asserting
that the Company has infringed their patents or other intellectual property
rights. In addition, the Company may initiate claims or litigation against third
parties for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Any such claims could be
time-consuming, result in costly litigation, cause product shipment delays or
lead the Company to enter into royalty or licensing agreements rather than
disputing the merits of such claims. As the number of software products in the
industry increases and the functionality of such products further overlap, the
Company believes that software developers may become increasingly subject to
infringement claims. Any such claims, with or without merit, can be time
consuming and expensive to defend. An adverse outcome in litigation or similar
proceedings could subject the Company to significant liabilities to third
parties, require expenditure of significant resources to develop non-infringing
technology, require disputed rights to be licensed from others, or require the
Company to cease the marketing or use of certain products, any of which could
have a material adverse effect on the Company's business, operating results, and
financial condition. See "Business Risks" on page 18 of this report.

EMPLOYEES

        As of December 31, 1998, the Company employed 35 people at its offices
in San Mateo, CA and Denver, CO. Of these employees, 17 were engaged in product
development, 12 in sales, marketing, and customer support, and 6 in finance and
other administrative departments. The Company believes its future success
depends in large part upon the continued service of its key technical and senior
management personnel and its ability to attract and retain highly qualified
technical and managerial personnel. Competition for such personnel is intense,
as certain of these personnel have significant prior industry experience and are
in great demand. There can be no assurance that the Company can retain its key
technical and managerial employees or that it can attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. None of
the Company's employees are subject to any collective bargaining 



                                      -17-
<PAGE>   18

agreements. Each employee of the Company has executed an agreement not to
disclose trade secrets or other confidential information. Enlighten Software
believes its employee relations are good.

BUSINESS RISKS

        In addition to the other information in this Report on Form 10-KSB and
other documents the Company files from time to time with the Securities and
Exchange Commission, the following risk factors should be considered carefully
in evaluating the Company and its business:

Fluctuating Operating Results

        The Company has experienced significant quarterly fluctuations in
operating results and expects that these fluctuations will continue in future
periods. These fluctuations have been caused by a number of factors, including
the timing of new product or product enhancement introductions by the Company or
its competitors, the development and introduction of new operating systems that
require additional development efforts, purchasing patterns of its customers,
size and timing of individual orders, the rate of customer acceptance of new
products, and pricing and promotion strategies undertaken by the Company or its
competitors. Future operating results may fluctuate as a result of these and
other factors, including the Company's ability to continue to develop, acquire,
and introduce new products on a timely basis, the timing and level of sales by
the Company's OEM or other third-party licensees of computer systems or software
incorporating the Company's products, technological changes in computer systems
and environments, quality control of the products sold, the Company's success in
shifting its primary sales strategy from direct to indirect channels, and
general economic conditions. Additionally, the Company's operating results may
be influenced by seasonality and overall trends in the global economy. Because
the Company operates with a relatively small backlog, quarterly sales and
operating results generally depend on the volume and timing of orders received
during the quarter, which are difficult to forecast. Historically, the Company
has recognized a substantial portion of its license revenues in the last month
of the quarter, particularly the last week. Since the Company's staffing levels
and other operating expenses are based upon anticipated revenues, delays in the
receipt of orders can cause significant fluctuations in income from quarter to
quarter.

Uncertainty of Success in Open Systems Market

        The Company has derived a substantial portion of its revenue to date
from its Tandem-based products. The Company, however, sold all rights to its
Tandem technology in October 1997. The future success of the Company is
substantially dependent on its ability to generate significant revenue from its
UNIX/Windows product offering. The Company's initial product entry into the open
systems market in 1995 was 



                                      -18-
<PAGE>   19

unsuccessful. Version 2.0 of EnlightenDSM was released in mid-1996. This version
and its extensions represented 100% and 27% of the Company's license revenues in
1998 and 1997, respectively. In January 1998, the Company signed an OEM bundling
agreement with Silicon Graphics in which Silicon Graphics will bundle a limited
version of the Company's product on each UNIX system shipped. In August 1998,
the Company signed a distribution agreement with Access Graphics and Integration
Alliance, distributors with approximately $2 billion annually in hardware
revenue. In February 1999, the Company signed a licensing and integration
agreement with IBM under which IBM will integrate EnlightenDSM with its new
Suites product line for Solaris and AIX operating systems. Additionally in
February 1999, Sun and the Company announced that EnlightenDSM will be
integrated with Sun's SyMON systems management product. However, the open
systems market is characterized by rapid technological growth and intense
competition. For example, in 1998 the Linux operating system, a derivative of
the UNIX operating system that has been available as "shareware" for several
years, began to achieve significant commercial success. The Company does not
currently have a product that operates in a Linux environment. There can be no
assurance that the Company has the resources, both financial and personnel, to
effectively capitalize on, and continue with, its early and limited success in
this market.

Expansion of New Distribution Channels; Reliance on Resellers

        Prior to October 1997, the Company employed primarily a direct sales
model, complemented with a telesales force, for the sale of its software
products. In the fourth quarter of 1997, the Company began to shift a majority
of its sales and marketing resources toward third-party resellers in both the
United States and internationally. The Company's growth is dependent on its
ability to expand its third-party distribution channel to market, sell, and
support the Company's software products. The Company is currently investing, and
intends to continue to invest, significant resources to develop this channel,
which could materially adversely affect the Company's operating margins. The
Company has only limited experience in marketing its products through
distributors. Additionally, the Company will have no control over its
third-party distributors including their shipping dates or volumes of systems
shipped by its OEM and other third-party customers. There can be no assurance
that the Company will be successful in its efforts to generate significant
revenue from this channel, nor can there can be any assurance that the Company
will be successful in recruiting new organizations to represent the Company and
its products.

        Additionally, since the Company has shifted its sales efforts from
direct to indirect channels, the Company is more dependent on its third-party
distributors for the technical support and consultation to end-users. The
Company will need to continue to increase its training and education efforts
related to its third-party distributors to enable such third parties to obtain
the technical proficiency and knowledge with respect to the Company's products.
Despite these efforts, there can be no assurance that the Company will
successfully train its third party distributors to enable them to provide
adequate technical 



                                      -19-
<PAGE>   20

support to the customer base. This may result in, among other things, increased
workload on the Company's internal support and engineering staff, or poor
customer acceptance of the products, or both, either of which would have a
material adverse effect on the Company's business, operating results, and
financial condition.

        In 1998 and early 1999, the Company entered into agreements with Silicon
Graphics, Access Graphics and Integration Alliance, and IBM, as well as teamed
with Sun Microsystems on product integration, all of which provides new
distribution channels for the Company's products. While the Company believes
these arrangements will be beneficial, there can be no assurance that the
Company will be able to deliver its products to these vendors in a timely manner
or that these vendors will license the Company's products in volumes anticipated
by the Company. Further, these agreements are the Company's only significant
third-party distribution agreements to date. While the Company's strategy is to
obtain additional resellers to reduce the dependence on these few vendors, there
can be no assurance of successfully attracting additional vendors to distribute
the Company's products. Any such failure would result in the Company having
expended significant resources with little or no return on its investment, which
would have a material adverse effect on the Company's business, operating
results, and financial condition.

        These additional investments and responsibilities will require the
expenditure by the Company of substantial resources, including the diversion of
employees from other projects to provide the support services and development
efforts required to provide products and services to its current resellers and
any other new third parties, if any.

Intense Competition

        The Company experiences intense competition from other systems
management companies, and the market is rapidly changing. The Company believes
that its ability to compete successfully depends on a number of factors,
including the performance, price, and functionality of its products relative to
those of its competitors. Most of the Company's competitors are larger and have
greater financial, technical, marketing, support, and other resources than the
Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements. In addition, the
software industry is characterized by low barriers to entry. There can be no
assurance that the Company's current competitors or any new market entrants will
not develop systems management products that offer significant performance,
price, or other advantages over the Company's technology. In addition, operating
system vendors could introduce new or upgrade existing operating systems or
environments that include systems management functionality offered by the
Company, which could render the Company's products obsolete and unmarketable.
There can be no assurance that the Company will be able to successfully compete
against current or future competitors which could have a material adverse effect
on the Company's business, operating results, and financial condition.



                                      -20-
<PAGE>   21

Possible Volatility of Stock Price

        The trading price of the Company's Common Stock has been subject to
significant fluctuations since its initial public offering in 1994. The trading
price of the Company's Common Stock could be subject to wide fluctuations in the
future due to factors such as announcements of technological innovations, new
product introductions by the Company, its competitors and other third parties,
quarterly variations in the Company's operating results, and market conditions
in high technology industries generally and in the software industry in
particular. In addition, the stock market has experienced volatility that has
particularly affected the market prices of many high technology companies which
has often been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock.

Product Concentration

        The Company expects that a substantial majority of the Company's revenue
in future periods will be derived from its UNIX/Windows product, EnlightenDSM.
This product accounted for 100%, and 27% of the Company's license revenue in the
years ended December 31, 1998, and 1997, respectively. The Company disposed of
its Tandem product line that accounted for the balance of its license revenue in
1997. The Company expects that the EnlightenDSM product and its extensions and
derivatives will continue to account for a substantial majority, if not all, of
the Company's revenue for the foreseeable future. Broad market acceptance of
EnlightenDSM is, therefore, critical to the Company's future success. Failure to
achieve broad market acceptance of EnlightenDSM, as a result of competition,
technological change, or otherwise, would have a material adverse effect on the
business, operating results, and financial condition of the Company. The
Company's future financial performance will depend in significant part on the
successful development, introduction, and market acceptance of EnlightenDSM and
its product enhancements. There can be no assurance that the Company will be
successful in marketing EnlightenDSM or any new products, applications, or
product enhancements, and any failure to do so would have a material adverse
effect on the Company's business, operating results, and financial condition.

Support Of Multiple Environments; Product Development

        The Company's future success will depend on the timely and successful
development and introduction of new products (including new releases,
applications, and enhancements). Such activities can involve substantial
commitments of financial, product development, and other resources. Moreover,
even if such efforts are successful, the Company might have focused on
particular applications that do not achieve or maintain widespread market
acceptance or whose users are predisposed to obtain their management tools from
other sources. The result of such occurrence could mean that 



                                      -21-
<PAGE>   22

significant expenditures of time, effort, and funds by the Company have little
or no value, which could have a material adverse effect on the Company's
business, operating results, and financial condition.

        The Company has developed and is continuing to develop various versions
of its products for the Windows NT, Windows98, and Windows95 environments. The
Company also intends to expand its products to support additional applications
and operate across more diverse open networks, which may encompass an increasing
variety of processor, server, and workstation types and multiple operating
systems. Such efforts will require significant commitments of financial and
product development resources, and there can be no assurance that such efforts
will be successful. The failure of such efforts or the failure of any resulting
products to achieve market acceptance could have a material adverse effect on
the Company's business, operating results, and financial condition.

        Software products as complex as those offered by the Company often
contain undetected errors or failures when first introduced or as new versions
are released. The Company has in the past discovered software errors in certain
of its new products after their introduction and has experienced delays or lost
revenues during the period required to correct these errors. Testing of the
Company's products is particularly difficult because of the Company's limited
ability to simulate the wide variety of computing environments in which the
Company's customers may deploy such products Although the Company has not
experienced material adverse effects resulting from any such errors to date,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not be found in new products after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material adverse effect upon the Company's
business, operating results, and financial condition.

Rapid Technological Change

        The market for the Company's products is characterized by rapid
technological developments, evolving industry standards, and rapid changes in
customer requirements. The introduction of products embodying new technologies,
including new operating systems, applications, hardware products, systems
management frameworks, and network management platforms, the emergence of new
industry standards, or changes in customer requirements could render the
Company's existing products obsolete and unmarketable. As a result, the
Company's success depends upon its ability to continue to enhance existing
products, respond to changing customer requirements, and develop and introduce
in a timely manner, new products that keep pace with technological developments
and emerging industry standards.

        Additionally, there can be no assurance that other operating systems,
such as Windows NT or Linux, will not significantly affect deployment of
traditional UNIX systems for business critical applications. A significant
portion of the Company's 



                                      -22-
<PAGE>   23

revenue will continue to be derived from UNIX-based computer systems for the
foreseeable future. While the Company has ported its products to the Windows NT,
Windows98, and Windows95 platforms, the product requires customers to control
systems management for their heterogeneous environment from traditional
UNIX-based systems. A significant decline in sales of traditional UNIX-based
systems would decrease the demand for the Company's products and would have a
material adverse effect on the Company's business, operating results, and
financial condition. Finally, there can be no assurance that the Company will be
successful in developing and marketing, on a timely basis, product enhancements
or new products that respond to technological change or evolving industry
standards, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction, and sale of these products, or
that any such new products or product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance.

Product Liability

        The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. In licensing its products, the Company relies primarily on a
combination of signed license agreements that incorporate by reference "shrink
wrap" licenses that are included electronically with the product. In the future,
particularly in connection with any OEM and other bundling relationships, the
Company will rely on "shrink wrap" licensees that are not signed by the
end-users, and, therefore, such licenses may be unenforceable under the laws of
certain jurisdictions. As a result of these and other factors, the limitation of
liability provisions contained in the Company's license agreements may not be
effective. The Company's products can be used to manage systems critical to
organizations, and, as a result, the sale and support of products by the Company
may entail the risk of product liability claims. A successful product liability
claim brought against the Company could have a material adverse effect upon the
Company's business, operating results, and financial condition.

Dependence on Growth of Systems Management Market

        For the foreseeable future, all of the Company's business will be in the
open systems (UNIX and Windows) systems management market, which is still an
emerging market. The Company's future financial performance will depend in large
part on continued growth in the number of companies adopting systems management
solutions for their client/server computing environments. There can be no
assurance that the market for systems management solutions will continue to
grow. If the systems management market fails to grow or grows more slowly than
the Company currently anticipates, or in the event of a decline in unit price or
demand for the Company's products, as a result of competition, technological
change, or other factors, the Company's business, operating results, and
financial condition would be materially adversely affected. During recent years,
segments of the computer industry have experienced 



                                      -23-
<PAGE>   24

significant economic downturns characterized by decreased product demand,
production overcapacity, price erosion, work slowdowns, and layoffs. The
Company's operations may in the future experience substantial fluctuations from
period-to-period as a consequence of such industry patterns, general economic
conditions affecting the timing of orders from major customers, and other
factors affecting capital spending. There can be no assurance that such factors
will not have a material adverse effect on the Company's business, operating
results, and financial condition.

Management Of Growth; Dependence on Key Personnel

        The Company's success in the future is dependent upon its ability to
grow rapidly and effectively manage growth. Such growth, if any, will require
increased managerial, technical, direct sales, and other personnel, expanded
information systems and additional financial and administrative control
procedures. Expansion of the Company's indirect and direct sales channels will
require significant financial and managerial commitments by the Company. There
can be no assurance that the Company will be able to effectively manage such
growth, if any. Its failure to do so would have a material adverse effect on its
business, operating results, and financial condition. Competition for qualified
technical, sales, and other qualified personnel is intense, and there can be no
assurance that the Company will be able to attract or retain highly qualified
employees in the future. The Company's future success also depends in part upon
the continued service of its key technical, sales and senior management
personnel. The loss of the services of one or more of these key employees could
have a material adverse effect on its business, operating results, and financial
condition.

Year 2000 Compliance

        The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium ("Year 2000") approaches. The
Year 2000 problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
Systems that do not properly recognize date sensitive information when the year
changes to 2000 could generate erroneous data or cause a system to fail.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance.

        The Company has conducted Year 2000 compliance reviews for current
versions of its products. The reviews include assessment, implementation, and
validation testing. The Company believes that all of its existing products are
or will become Year 2000 compliant during fiscal 1999 and new products will be
designed to be Year 2000 compliant. Contingency plans for the handling of its
reasonably likely worst case scenarios will be created during fiscal 1999 to
determine how the Company will handle its reasonably likely worst case
scenarios. Although the Company believes its products will be Year 2000
compliant, its products may not contain all the necessary software routines and
programs for the accurate calculation, display, storage and manipulation of 



                                      -24-
<PAGE>   25

data involving dates. Any failure of the Company's products to perform,
including system malfunctions due to the onset of the calendar year 2000, could
result in claims against the Company, which could have a material adverse effect
on the Company's business, financial condition or results of operations.

        To the extent information is publicly available, the Company has
assessed the Year 2000 compliance status of its customers. The failure of its
current or future customers to achieve Year 2000 compliance, or if they divert
technology expenditures to address Year 2000 compliance problems, could have a
material adverse effect on the Company's business, financial condition or
results of operations.

        We believe the software and hardware we use internally comply with Year
2000 requirements or will comply during 1999. During 1998, we replaced or
upgraded much of our internal use hardware and software. In 1998, the Company
incurred approximately $100,000 in its Year 2000 remediation efforts. Enlighten
expects additional remediation costs of approximately $50,000 in 1999, which
includes expenditures for hardware and software upgrades. In addition, we are
not aware of any material operational issues or costs associated with preparing
our internal use software and hardware for the Year 2000. However, serious,
unanticipated negative consequences, including material costs caused by
undetected errors or defects in the technology used in our internal systems may
occur. The occurrence of any of the foregoing could seriously harm our business,
operating results or financial condition.

        The Company has not yet fully developed a comprehensive contingency plan
to address situations that may result if the Company is unable to achieve Year
2000 readiness of its critical operations. The cost of developing and
implementing such a plan may itself be material.

ITEM 2.    PROPERTIES

        The Company leases approximately 17,000 square feet of office space in
San Mateo, California under a lease which expires in March 2001 and leases a
sales and support office in Denver Colorado under a lease which expires in
August 1999. The Company believes that its current facilities are adequate for
its needs for the foreseeable future and should additional space be needed, it
will be available to accommodate the expansion of the Company's operations on
commercially reasonable terms.

ITEM 3.    LEGAL PROCEEDINGS

        The Company is not currently involved in any legal proceedings and is
not aware of any proceedings that any party is contemplating to bring against
the Company, although from time to time it may become involved in disputes in
connection with the operation of its business.

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

        None.



                                      -25-
<PAGE>   26

                                     PART II

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

        Since April 20, 1994, the Company's Common Stock has been traded on the
Nasdaq SmallCap Market under the symbol "SFTW." As of December 31, 1998, there
were 37 record holders of the Company's Common Stock. As of the same date,
3,899,761 shares of Common Stock were outstanding and 10,000,000 shares of
Common Stock were authorized.

        The following table sets forth the range of high and low closing sale
prices for each of the periods indicated for the shares of Common Stock.

<TABLE>
<CAPTION>
1997
<S>                                                                 <C>                            <C>
Quarter Ended
-------------
March 31, 1997                                                      $5.25                          $2.75
June 30, 1997                                                       $3.25                          $1.38
September 30, 1997                                                  $3.50                          $0.94
December 31, 1997                                                   $3.00                          $2.00
</TABLE>

<TABLE>
<CAPTION>
1998
<S>                                                                 <C>                            <C>
Quarter Ended
-------------
March 31, 1998                                                      $5.25                          $3.00
June 30, 1998                                                       $4.50                          $2.75
September 30, 1998                                                  $3.69                          $2.13
December 31, 1998                                                   $3.81                          $1.91
</TABLE>

DIVIDEND POLICY

        The Company has never paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future. The Company anticipates that it will
retain earnings, if any, for future growth and expansion of its business.




                                      -26-
<PAGE>   27


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

        The following statements regarding the Company's future revenues,
revenue sources, operating expenses, and capital expenditures include
forward-looking information. Actual results may vary substantially depending
upon a variety of factors including those described in "Item 1 - Business
Business Risks" on page 18 of this report, or elsewhere in this report.

OVERVIEW

        Enlighten Software Solutions develops, markets, and supports software
products for UNIX and UNIX/Windows environment workgroup administration and
enterprise management. The Company's product solutions are designed for open
systems distributed computing environments in the range of ten to 1,000
servers/clients. The EnlightenDSM product allows companies to manage their
information systems by enabling systems managers and administrators to control
their systems from diverse UNIX/Windows platform vendors such as DEC, HP, IBM,
SCO, Silicon Graphics, Sun, and Microsoft.

        Founded in 1986, the Company was a leading provider of systems
management software on the Tandem platform, providing a range of automated
systems management products to over 400 companies in 30 countries.

        On October 1, 1997, the Company sold its Tandem product line to NDS in
order to focus efforts on its UNIX/Windows product suite. In connection with
this sale, the Company received approximately $2.5 million in cash, of which
$1.6 million was received in 1997, and the rights to receive royalties on Tandem
related products for a period of three years based upon NDS' licensing and
support of the Tandem software products. The sale of the Tandem product line
also included the transfer to NDS of approximately 12 employees associated with
the Company's Tandem operation.

        Following the disposition of its Tandem product line, the Company
shifted its sales strategy to one based primarily upon third-party distributors
and restructured its sales department as a result of this shift. The Company
intends to build its sales, marketing, and customer support organizations with a
focus on delivery of its products to OEM partners, resellers, system
integrators, and select end-users. An essential element of the Company's sales
and marketing strategy is the development of indirect distribution channels,
such as OEMs, ISVs, and VARs, as well as other systems management and
application software vendors whose products are complementary with those of the
Company.



                                      -27-
<PAGE>   28

VARIABILITY OF QUARTERLY RESULTS

        The Company has experienced significant quarterly fluctuations in
operating results and expects that these fluctuations will continue in future
periods. These fluctuations have been caused by a number of factors, including
the timing of new product or product enhancement introductions by the Company or
its competitors, purchasing patterns of its customers, size and timing of
individual orders, the rate of customer acceptance of new products, and pricing
and promotion strategies undertaken by the Company or its competitors. Future
operating results may fluctuate as a result of these and other factors,
including the Company's ability to continue to develop, acquire, and introduce
new products on a timely basis. Additionally, the Company's operating results
may be influenced by seasonality and overall trends in the global economy.
Because the Company operates with a relatively small backlog, quarterly sales
and operating results generally depend on the volume and timing of orders
received during the quarter, which are difficult to forecast. Historically, the
Company has recognized a substantial portion of its license revenues in the last
month of the quarter, particularly the last week. Since the Company's staffing
levels and other operating expenses are based upon anticipated revenues, delays
in the receipt of orders can cause significant fluctuations in income from
quarter to quarter.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1998 AND 1997

        Total revenue. Total revenue decreased 11% from $4,231,000 in 1997, to
$3,758,000 in 1998. This decrease was primarily due to the sale of the Company's
Tandem products on October 1, 1997, which primarily affected product license
fees and product maintenance fees. Total revenue from the Company's UNIX/Windows
product line increased 538% from $506,000 in 1997, to $3,229,000 in 1998. Total
revenue from the Company's disposed Tandem product line decreased 86% from
$3,725,000 in 1997, to $529,000 in 1998.

        Revenue from product license fees increased 68% from $1,439,000 in 1997,
to $2,417,000 in 1998. The increase was primarily attributable to the revenue
associated with license fees from the Silicon Graphics OEM relationship, signed
in January 1998, which more than offset the decrease in revenue from the
Company's disposed Tandem product line. Revenue from the Company's UNIX/Windows
product license fees increased by 518%, from $391,000 in 1997, to $2,417,000 in
1998. There was no revenue from the Company's Tandem product license fees in
1998 compared to $1,047,000 in 1997.

        Product maintenance fees decreased by $1,943,000, or 75%, to $656,000 in
1998 compared to 1997. This decline is entirely due to the disposition of the
Tandem product line on October 1, 1997. There were no product maintenance fees
from the Tandem 



                                      -28-
<PAGE>   29

product line in 1998, compared to $2,515,000 in 1997. This decrease was
partially offset by an increase in product maintenance fees for the Company's
UNIX/Windows product line of $572,000, or 686%, for the year ended December 31,
1998, when compared to 1997.

        Consulting services revenue increased by $67,000, or 35%, to $261,000 in
1998 when compared with 1997. The increase is primarily attributable to
consulting project work performed in association with Silicon Graphics.

        The Company recognizes royalties from NDS from product license fees and
product maintenance fees generated by the Tandem product line sold to NDS in
October 1997. Royalties were $426,000 in 1998 and there were no comparable
amounts in 1997.

        Cost of revenue. Cost of revenue consists of royalties paid to third
parties, amortization of software development and acquisition costs, product
packaging and documentation, software media, and the costs of employees and
contractors providing consulting services. Cost of revenue decreased by
$307,000, or 31%, to $670,000 in 1998. The reduction in cost of revenue is
caused primarily by the decrease in costs associated with royalties and
technology amortization related to the Company's Tandem product line. Costs
associated with royalties decreased by 37%, to $201,000, while costs associated
with technology amortization decreased 74%, to $139,000. Both these decreases
were a result of the disposition of the Tandem product line.

        Research and development. Research and development expenses consist of
personnel expenses and associated overhead, and costs of short-term independent
contractors required in connection with the Company's product development
efforts, less amounts capitalized. Net research and development expenses
decreased by 18% from $2,059,000, or 49% of revenue in 1997, to $1,692,000, or
45% of revenue in 1998. This decrease is solely attributable to the decrease in
development costs associated with the Company's disposed Tandem product line.
The decrease in Tandem-related development costs were partially offset by an
increase in development costs in connection with the UNIX/Windows product line.

        Costs incurred in the research and development of new software products
are expensed as incurred until technological feasibility is established.
Recently, the establishment of technological feasibility of the Company's
EnlightenDSM product and general release substantially coincided. As a result,
the Company has capitalized a lesser portion of its software development costs
since a majority of such costs have not been significant. The Company expects
research and development expenses to increase in absolute dollars as the Company
continues to invest in the enhancement of existing products and the development
of new products.

        Sales and marketing. Sales and marketing expenses include costs of sales
and marketing personnel, advertising and promotion expenses, 



                                      -29-
<PAGE>   30
travel and entertainment, and other selling and marketing costs. Sales and
marketing expenses decreased by 49%, from $3,820,000, or 90% of revenue in 1997,
to $1,959,000, or 52% of revenue in 1998. The decrease is attributable to the
Company's restructuring of the sales and marketing department related to the
shift in sales strategy from primarily a direct sales approach to an indirect
channels approach. This shift occurred during the fourth quarter of 1997. During
the fourth quarter of 1997, the Company closed its field sales offices in the
Chicago and New York areas and in the U.K. For the foreseeable future, the
Company expects sales and marketing costs to increase in absolute dollars as it
expands its sales and marketing force to enhance its ability to sell and service
its products through third-party resellers.

        General and administrative. General and administrative expenses, which
include personnel costs for finance, administration, information systems, and
general management, as well as professional fees, legal expenses, and other
administrative costs, decreased by 40%, from $1,551,000, or 37% of revenue in
1997, to $930,000, or 25% of revenue in 1998. The decrease in expense is
primarily related to decreased legal fees associated with an arbitration hearing
settled in 1997, and other reduced infrastructure costs associated with the
disposed Tandem operations.

        Gain on sale of Tandem product line. On October 1, 1997, the Company
sold its Tandem product line to NDS. The Company recognized a gain on the sale
of the operating assets of the Tandem product line of $515,000 and $2,158,000 in
1998 and 1997, respectively. The Company received approximately $2.5 million in
cash and the rights to receive royalties on Tandem related products for a period
of three years. The Tandem operations contributed revenue, excluding royalties,
of $104,000 and $3,725,000 in 1998 and 1997, respectively. The sale of the
Tandem product line also included the transfer to NDS of approximately 12
employees associated with the Company's Tandem operation.

        Other income (expense). Other income and expense includes interest
income net of interest expense and gains and losses on foreign currency
transactions. Interest income is primarily derived from interest on the
Company's savings accounts and short-term interest-bearing securities. Interest
expense is comprised of interest on bank notes and capital leases of computer
equipment. Other income and expense (net) increased by $105,000, or 174%, in
1998 when compared to 1997 as a result of increased cash balances, resulting in
an increase in interest income from cash reserves.

        Income tax expense (benefit). The Company recognized a tax benefit of
$41,000 in 1998 as a result of receiving tax refunds on net operating loss
carrybacks in excess of amounts previously provided for by the Company. The tax
benefit was partially offset by a $15,000 tax expense incurred as a result of
the filing of the final tax return for the U.K. operations. The Company's tax
expense recognized in 1997 is primarily due to taxes paid to foreign
jurisdictions. No tax benefit, other than that stated above, was recognized in
either year due to the uncertainty related to the Company's ability to recognize
a tax benefit for loss and credit carryforwards.



                                      -30-
<PAGE>   31

LIQUIDITY AND CAPITAL RESOURCES

        At December 31, 1998, the Company's cash, cash equivalents, and short
term investments were $3,186,000, representing 65% of total assets. The
Company's working capital as of December 31, 1998, was $3,274,000. Cash
equivalents are highly liquid investments with purchased maturities of ninety
days or less. The Company's short term investments are primarily investment
grade commercial paper and other highly liquid investments. The Company had no
debt as of December 31, 1998, other than normal trade payables and accrued
liabilities. Shareholders' equity as of December 31, 1998, was $4,224,000.

        The Company's operating activities used cash of $1,334,000 in 1998,
compared to cash used by operating activities of $1,915,000 in the prior year.
The decrease in cash used by operating activities was principally caused by
decreased net losses. This was partially offset by an increase in accounts
receivable, a decrease in accrued and other liabilities, and a decrease in
deferred revenue.

        The Company's investing activities have consisted primarily of the
disposition of the Tandem operation, short-term investments, and additions to
capital equipment. Investing activities used cash of $684,000 in 1998, compared
with providing cash of $2,473,000 in 1997. The decrease is primarily due to an
increase in purchases of short-term investments and the decrease in proceeds
from the sale of the Tandem operation.

        Financing activities provided cash of $2,512,000 in 1998, compared with
cash provided of $158,000 in the prior year. The increase in cash provided from
financing activities resulted from the Company's issuance and sale of 700,000
shares of Common Stock in a public offering.

        In May 1998, the Company completed a public offering (the "Offering") of
700,000 shares of common stock. The net proceeds from the Offering of $2.2
million were, and will be used for funding operations and capital expenditures
and for other general corporate purposes, including working capital.

        On October 1, 1997, the Company sold its Tandem product line to New
Dimension Software, Inc. ("NDS"). The Company received approximately $2.5
million in cash and the rights to receive royalties on Tandem related products
for a period of three years. The Company received $1.6 million in cash in 1997,
which included a $300,000 prepayment of future royalties.

        The Company will require substantial cash flow to continue operations on
a satisfactory basis and complete its research and development and its sales and
marketing programs. The Company anticipates that cash and short-term investments
and net proceeds from the Offering will provide sufficient liquidity to fund
these requirements for the next twelve months. However, the Company's continued
ability to fund operations 



                                      -31-
<PAGE>   32

and meet its other obligations depends on its future performance, which, in
turn, is subject to general economic conditions, and business and other factors
beyond the Company's control. If the Company is unable to generate sufficient
cash flow from operations, it may be required to obtain additional financing.
There can be no assurance that the Company would be able to obtain such
financing, or that any financing would result in a level of net proceeds
required.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

        See Consolidated Financial Statements included herein beginning on page
        F-1.

ITEM 8  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        None.



                                      -32-
<PAGE>   33

        Certain information required by Part III is omitted from this report, in
that the Company will file its Proxy Statement for its Annual meeting of
Shareholders with the Securities and Exchange Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
report, and certain information included therein is incorporated herein by
reference.

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this Item 9 is set forth in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held on May 20,
1999, under the captions "Directors and Executive Officers" and "Section 16(b)
Beneficial Ownership Reporting Compliance," and is incorporated herein by
reference.

ITEM 10. EXECUTIVE COMPENSATION

        The information required by this Item 10 is set forth in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held on May 20,
1999, under the caption "Executive Compensation and Other Matters," and is
incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this Item 11 is set forth in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held on May 20,
1999, under the caption "Stock Ownership of Certain Beneficial Owners and
Management," and is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this Item 12 is set forth in the Company's
Proxy Statement for its Annual Meeting of Shareholders to be held on May 20,
1999, under the caption "Certain Relationships and Related Transactions," and is
incorporated herein by reference.



                                      -33-
<PAGE>   34

                                     PART IV

ITEM 13. FINANCIAL STATEMENTS, EXHIBITS, SCHEDULES, AND REPORTS ON FORM 8-K

<TABLE>
<S>                                                                         <C>
         (a)(1) Financial Statements:
           
                  Independent Auditors' Report                              F-1
           
                  Consolidated Balance Sheets:
                    December 31, 1998 and 1997                              F-2
           
                  Consolidated Statements of Operations:
                    Years ended December 31, 1998 and 1997                  F-3
           
                  Consolidated Statements of Shareholders' Equity:
                    Years ended December 31, 1998 and 1997                  F-4
           
                  Consolidated Statements of Cash Flows:
                    Years ended December 31, 1998 and 1997                  F-5
           
                  Notes to Consolidated Financial Statements                F-6
           
        (a)(2) Exhibits:
</TABLE>

        See Exhibits Index on Page 35. The Exhibits listed in the accompanying
Exhibits Index are filed or incorporated by reference as part of this report.
Exhibit Nos. 10.28, 10.29, 10.31, and 10.32 are compensatory plans or
arrangements.

        (b) Reports on Form 8-K:

        None



                                      -34-
<PAGE>   35

                                 EXHIBITS INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
------                            -----------
<S>               <C>
3.1(1)            Amended and Restated Articles of Incorporation.

3.2(1)            By Laws.

10.27(2)          Agreement dated as of September 22, 1997, by and among
                  Enlighten Software Solutions, Inc., Peter J. McDonald, and New
                  Dimension Software, Inc.

10.28(4)(@)       Employment letter, dated July 3, 1997, by and between Enlighten
                  Software Solutions, Inc. and Mike Seashols.

10.29(4)(@)       Employment letter, dated August 28, 1997, by and between Enlighten
                  Software Solutions, Inc. and David D. Parker.

10.30(4)          Agreement dated as of January 21, 1998, by and between Enlighten Software
                  Solutions, Inc. and Silicon Graphics, Inc.

10.31(@)          Employment letter, dated July 15, 1998, by and between Enlighten
                  Software Solutions, Inc. and Bill Bradley.

10.32(@)          Employment letter, dated January 15, 1999, by and between Enlighten
                  Software Solutions, Inc. and Tim Gardner.

10.33             Agreement dated as of December 31, 1998, by and between Enlighten
                  Software Solutions, Inc. and International Business Machines.

21.1(3)           Subsidiaries of the Company.

23.1              Consent of KPMG LLP.

27.1              Financial Data Schedule           .
</TABLE>

----------

(1)     Incorporated by reference from exhibits of the same number in the
        Company's Registration Statement on Form S-1, which became effective
        April 19, 1994.

(2)     Incorporated by reference from exhibit 10.27 in the Company's Current
        Report on Form 8-K dated October 1, 1997.

(3)     Incorporated by reference from an exhibit of the same number in the
        Company's Annual Report on Form 10-K for the year ended December 31,
        1994.

(4)     Incorporated by reference from an exhibit of the same number in the 
        Company's Annual Report on Form 10-KSB for the year ended December 31, 
        1997.

(@)     Compensatory or employment arrangement.


                                      -35-
<PAGE>   36

                       ENLIGHTEN SOFTWARE SOLUTIONS, INC.

                         FORM 10-KSB, DECEMBER 31, 1998

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.

                                            ENLIGHTEN SOFTWARE SOLUTIONS, INC.


                                            /s/ David D. Parker
                                            ------------------------------------
                                               David D. Parker
                                               Chief Executive Officer


/s/ David D. Parker
------------------------------------
David D. Parker,  March 31, 1999
Chief Executive Officer


/s/ Michael A. Morgan
------------------------------------
Michael A. Morgan,  March 31, 1999
Chief Financial Officer


/s/ Michael Seashols
------------------------------------
Michael Seashols,  March 31, 1999
Chairman of the Board 


/s/ Peter J. McDonald
------------------------------------
Peter J. McDonald,  March 31, 1999
Director


/s/ Peter J. Sprague
------------------------------------
Peter J. Sprague,  March 31, 1999
Director


/s/ Bruce Cleveland
------------------------------------
Bruce Cleveland,  March 31, 1999
Director



                                      -36-

<PAGE>   37

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Enlighten Software Solutions, Inc.:

We have audited the consolidated financial statements of Enlighten Software
Solutions, Inc. and subsidiary as listed in the index under Item 13(a)(1). These
consolidated 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 consolidated financial statements referred to above present 
fairly, in all material respects, the financial position of the Enlighten 
Software Solutions, Inc. and subsidiary as of December 31, 1998 and 1997, and 
the results of their operations and their cash flows for each of the years in 
the two-year period ended December 31, 1998, in conformity with generally 
accepted accounting principles.

                                                               KPMG LLP

Mountain View, California
February 5, 1999



                                      F-1
<PAGE>   38

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                     Years ended December 31, 1998 and 1997


<TABLE>
<CAPTION>
                                                 ASSETS                            1998                  1997
                                                                                -----------           -----------
<S>                                                                             <C>                   <C>        
Current assets:
     Cash and cash equivalents                                                  $ 1,899,976           $ 1,406,141
     Short term investments                                                       1,285,551               286,000
     Accounts receivable, less allowance for doubtful accounts of
       $25,000 and $125,000 respectively                                            653,438               240,444
     Refundable income taxes                                                             --               127,035
     Prepaid expenses and other assets                                              140,170               449,256
                                                                                -----------           -----------

                    Total current assets                                          3,979,135             2,508,876

Property and equipment, net                                                         588,630               748,736
Acquired technology and software development costs, net                              92,248               231,063
Other assets                                                                        269,409               226,034
                                                                                -----------           -----------

                                                                                $ 4,929,422           $ 3,714,709
                                                                                ===========           ===========

                                  LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Trade accounts payable                                                     $   202,547           $   134,043
     Accrued and other current liabilities                                          458,568               728,975
     Deferred revenue                                                                43,809               359,361
                                                                                -----------           -----------

                    Total current liabilities                                       704,924             1,222,379
                                                                                -----------           -----------


Shareholders' equity:
     Preferred stock; 1,000,000 shares authorized; none issued
       and outstanding                                                                   --                    --
     Common stock; 10,000,000 shares authorized; 3,899,761
       and 2,963,635 shares issued and outstanding
       in 1998 and 1997, respectively                                             7,591,538             5,079,505
     Accumulated other comprehensive income                                           5,551                    --
     Accumulated deficit                                                         (3,372,591)           (2,587,175)
                                                                                -----------           -----------

                    Total shareholders' equity                                    4,224,498             2,492,330
                                                                                -----------           -----------

                                                                                $ 4,929,422           $ 3,714,709
                                                                                ===========           ===========
</TABLE>


               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-2
<PAGE>   39

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                      Consolidated Statement of Operations

<TABLE>
<CAPTION>
                                                                           Years ended December 31,
                                                                       ---------------------------------
                                                                          1998                  1997
                                                                       -----------           -----------
<S>                                                                    <C>                   <C>        
Revenue:
     Product license fees                                              $ 2,416,725           $ 1,438,805
     Product maintenance fees                                              655,510             2,598,679
     Consulting services                                                   260,596               193,358
     Royalties                                                             425,577                    --
                                                                       -----------           -----------

              Total revenue                                              3,758,408             4,230,842
                                                                       -----------           -----------

Cost of revenue:
     Product licenses                                                      550,511               698,714
     Product maintenance                                                     7,115               182,096
     Consulting services                                                   111,976                95,525
                                                                       -----------           -----------

              Total cost of revenue                                        669,602               976,335
                                                                       -----------           -----------

              Gross profit                                               3,088,806             3,254,507
                                                                       -----------           -----------

Operating expenses:
     Research and development                                            1,691,950             2,059,495
     Sales and marketing                                                 1,958,827             3,819,738
     General and administrative                                            929,683             1,551,457
     Gain on sale of Tandem product line                                  (515,487)           (2,157,827)
                                                                       -----------           -----------

              Total operating expenses                                   4,064,973             5,272,863
                                                                       -----------           -----------

              Operating loss                                              (976,167)           (2,018,356)

Other income, net                                                          165,357                60,323
                                                                       -----------           -----------

              Loss before income taxes                                    (810,810)           (1,958,033)

Income taxes                                                               (25,394)                2,390
                                                                       -----------           -----------

              Net loss                                                    (785,416)           (1,960,423)

Other comprehensive income - unrealized
     gains on securities                                                     5,551                    --
                                                                       -----------           -----------

Comprehensive loss                                                     $  (779,865)          $(1,960,423)
                                                                       ===========           ===========

Basic and diluted net loss per share                                   $     (0.22)          $     (0.67)
                                                                       ===========           ===========

Shares used in computing basic and diluted net loss per share            3,508,258             2,944,228
                                                                       ===========           ===========
</TABLE>



               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-3
<PAGE>   40


                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                 Consolidated Statements of Shareholders' Equity

                     Years ended December 31, 1998 and 1997



<TABLE>
<CAPTION>
                                                                         Accumulated
                                                                            Other                                Total
                                             Common Stock               Comprehensive      Accumulated       Shareholders'
                                       Shares             Amount            Income           Deficit            Equity
                                     -----------       -----------       -----------       -----------        -----------
<S>                                  <C>               <C>              <C>                <C>               <C>
Balances at December 31, 1996          2,910,956       $ 4,921,208       $        --       $  (626,752)       $ 4,294,456


Stock options exercised                   27,963           125,215                --                --            125,215

Employee stock purchase plan
  shares issued                           24,716            33,082                --                --             33,082


Net loss                                      --                --                --        (1,960,423)        (1,960,423)
                                     -----------       -----------       -----------       -----------        -----------
Balances at December 31, 1997          2,963,635         5,079,505                --        (2,587,175)         2,492,330


Stock options exercised                  184,449           242,055                --                --            242,055

Employee stock purchase plan
  shares issued                           51,677            52,606                --                --             52,606

Stock offering, net                      700,000         2,217,372                --                --          2,217,372

Unrealized gain on investments                --                --             5,551                --              5,551

Net loss                                      --                --                --          (785,416)          (785,416)
                                     -----------       -----------       -----------       -----------        -----------
Balances at December 31, 1998          3,899,761       $ 7,591,538       $     5,551       $(3,372,591)       $ 4,224,498
                                     ===========       ===========       ===========       ===========        ===========
</TABLE>



               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-4
<PAGE>   41


                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                     Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                        Years ended December 31,
                                                                                      ------------------------------
                                                                                          1998              1997
                                                                                      -----------        -----------
<S>                                                                                   <C>                <C>         
Cash flows from operating activities:
       Net loss                                                                       $  (785,416)       $(1,960,423)
       Adjustments to reconcile net loss to net
            cash used for operating activities:
                  Depreciation and amortization                                           504,374            813,636
                  Gain on sale of Tandem product line                                    (515,487)        (2,157,827)
                  Loss on disposal of property and equipment                                   --             38,422
                  Changes in operating assets and liabilities:
                       Accounts receivable                                               (412,994)         1,259,607
                       Refundable income taxes                                            127,035            273,634
                       Prepaid expenses and other assets                                  265,711           (251,087)
                       Trade accounts payable                                              68,504           (210,223)
                       Accrued and other liabilities                                     (270,407)           133,724
                       Deferred revenue                                                  (315,552)           145,359
                                                                                      -----------        -----------

                            Net cash used for operating activities                     (1,334,232)        (1,915,178)
                                                                                      -----------        -----------

Cash flows from investing activities:
       Purchases of short-term investments                                             (1,200,000)                --
       Sales of short-term investments                                                    206,000          1,353,065
       Proceeds from sale of Tandem product line                                          515,487          1,285,378
       Capitalization of software development costs                                            --            (66,449)
       Purchases of property and equipment                                               (205,453)           (98,583)
                                                                                      -----------        -----------

                            Net cash (used in) provided by investing activities          (683,966)         2,473,411
                                                                                      -----------        -----------

Cash flows from financing activities:
       Proceeds from public offering of stock, net                                      2,217,372                 --
       Proceeds from issuance of stock                                                    294,661            158,297
                                                                                      -----------        -----------

                            Net cash provided by financing activities                   2,512,033            158,297
                                                                                      -----------        -----------

Net increase in cash and cash equivalents                                                 493,835            716,530

Cash and cash equivalents at beginning of year                                          1,406,141            689,611
                                                                                      -----------        -----------

Cash and cash equivalents at end of year                                              $ 1,899,976        $ 1,406,141
                                                                                      ===========        ===========
</TABLE>



               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-5
<PAGE>   42

                ENLIGHTEN SOFTWARE solutions, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                     Years ended December 31, 1998 and 1997


(1)        DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
           POLICIES

           Description of Business

           Enlighten Software Solutions develops, markets, and supports software
           products for UNIX and UNIX/Windows environment workgroup
           administration and enterprise management. The Company's product
           solutions are designed for open systems distributed computing
           environments in the range of ten to 1,000 servers/clients.

           Founded in 1986, the Company was a leading provider of systems
           management software on the Tandem platform, providing a range of
           automated systems management products to over 400 companies in 30
           countries. On October 1, 1997, the Company sold its Tandem product
           line to New Dimension Software, Inc. ("NDS"), a subsidiary of New
           Dimension Software, Ltd. in order to focus efforts on its UNIX/NT
           product suite. The Company recognized a gain on the sale of the
           operating assets of the Tandem product line of approximately $0.5
           million and $2.2 million, in 1998 and 1997, respectively. In
           addition, NDS is required to pay the Company royalties through
           September 2000 from NDS' licensing and support of the Tandem software
           products. The sale of the Tandem product line included the transfer
           of property and equipment, purchased and internally developed
           software, and deferred maintenance revenue with net book values of
           $141,000, $248,000, and $1,261,000, respectively. The sale of the
           Tandem product line also included the transfer to NDS of
           approximately 12 employees associated with the Company's Tandem
           operation.

           


                                      F-6
<PAGE>   43

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

           Principles of Consolidation

           The accompanying consolidated financial statements include the
           accounts of Enlighten Software Solutions, Inc. and its wholly-owned
           subsidiary, a field sales office in Europe. All significant
           intercompany accounts and transactions have been eliminated in
           consolidation.

           Revenue Recognition

           The Company adopted the provisions of Statement of Position No. 97-2,
           or SOP No. 97-2, Software Revenue Recognition, as amended by
           Statement of Position No. 98-4, Deferral of the Effective Date of
           Certain Provisions of SOP No. 97-2, effective January 1, 1998. SOP
           No. 97-2 supersedes Statement of Position No. 91-1, Software Revenue
           Recognition. SOP No. 97-2 generally requires revenue earned on
           software arrangements involving multiple elements to be allocated to
           each element based on its relative fair value. The fair value of the
           element must be based on objective evidence that is specific to the
           vendor. If the vendor does not have objective evidence of the fair
           value of all elements in a multiple-element arrangement, all revenue
           from the arrangement must be deferred until such evidence exists or
           until all elements have been delivered. Under SOP No. 97-2, the
           Company recognizes license revenue upon shipment if a signed contract
           exists, the fee is fixed and determinable, collection of resulting
           receivables is probable and product returns are reasonably estimable.
           Product license fees are recognized after the following events have
           occurred: a product evaluation has been shipped to the customer; the
           customer elects to purchase the software following an evaluation
           period; the customer signs the related contract; and collection of
           the sales price is probable. Royalty revenues that are contingent
           upon sale to an end-user by OEMs are recognized upon receipt of a
           report of shipment. Product maintenance fees committed as part of new
           product licenses and maintenance resulting from renewed maintenance
           contracts are deferred and recognized ratably over the contract
           period, generally one year. Consulting service revenue is recognized
           when services are performed for time and material contracts and on a
           percentage of completion basis for fixed price contracts. The
           adoption of SOP No. 97-2 did not have a material effect on the
           Company's operating results.

           Cash Equivalents and Short Term Investments

           The Company considers all liquid investments purchased with an
           original maturity of three months or less to be cash equivalents.

           The Company has classified its investments in commercial paper and
           U.S. Treasury notes as "held-to-maturity." All such investments
           mature in less than one year and are stated at amortized cost, which
           approximates fair value. Interest income is recorded using an
           effective interest rate, with the associated discount or premium
           amortized to interest income.



                                      F-7
<PAGE>   44

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


           Additionally, the Company has classified its investments in preferred
           stock and municipal bonds as "available-for-sale." Such investments
           are recorded at fair market value based on quoted market prices, with
           unrealized gains and losses reported as a separate component of
           stockholders' equity. As of December 31, 1998 and 1997, unrealized
           gains and losses were not significant. The cost of securities sold is
           determined based on the specific identification method.

           Property and Equipment

           Property and equipment are stated at cost. Depreciation is calculated
           on the straight-line method over the estimated useful lives of the
           assets, generally five years. Leasehold improvements are amortized on
           a straight-line basis over the lease term or the estimated useful
           life of the asset, whichever is less.

           The Company reviews property and equipment for impairment whenever
           events or changes in circumstances indicate that the carrying amount
           of an asset may not be recoverable. Recoverability of property and
           equipment is measured by comparison of its carrying amount to future
           net undiscounted cash flows the property and equipment are expected
           to generate. If such assets are considered to be impaired, the
           impairment to be recognized is measured by the amount by which the
           carrying amount of the property and equipment exceeds its fair value.
           To date, the Company has made no impairment adjustments to the
           carrying values of its property and equipment.

           Acquired Technology and Software Development Costs

           Acquired technology represents amounts paid by the Company for the
           rights to use certain completed software that is either incorporated
           into the Company's products or sold as a stand-alone product, and is
           amortized using the straight-line method over the estimated useful
           lives of the related products, generally three years.

           Software development costs incurred subsequent to the determination
           of product technological feasibility are capitalized and amortized
           over the products' estimated useful lives, generally three years.
           Costs related to computer software development incurred prior to
           establishing product technological feasibility are expensed as
           incurred.

           The Company periodically assesses the recoverability of these
           intangible assets by comparing their amortized cost to the net
           realizable value of the related products. The amount by which the
           unamortized costs exceed the net realizable value is written off.

           Foreign Currency Translation

           The functional currency for the Company's foreign subsidiary is the
           U.S. dollar. Accordingly, this entity remeasures monetary assets and
           liabilities at year-end exchange 



                                      F-8
<PAGE>   45

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

           rates while nonmonetary items are remeasured at historical rates.
           Income and expense accounts are remeasured at the average rates in
           effect during the year, except for depreciation which is remeasured
           at historical rates. Transaction gains and losses are recognized in
           income in the period of occurrence.

           Use of Estimates

           The Company's management has made a number of estimates and
           assumptions relating to the reported amounts of assets and
           liabilities and the disclosure of contingent assets and liabilities
           at the date of the consolidated financial statements, and the
           reported amounts of revenues and expenses during the reporting period
           to prepare these financial statements in conformity with generally
           accepted accounting principles. Actual results may differ from those
           estimates.

           Stock Based Compensation

           The Company uses the intrinsic value-based method to account for all
           of its employee stock-based compensation plans.

           Fair Value of Financial Instruments and Concentration of Credit Risk

           The fair value of the Company's cash, cash equivalents, accounts
           receivable, and accounts payable approximate the carrying amount due
           to the relatively short maturity of these items. The fair value of
           the Company's short term investments are based on quoted market
           prices. Financial instruments that potentially subject the Company to
           concentrations of credit risk consist principally of short term
           investments and trade account receivables. The Company has investment
           policies that limit the amount of credit exposure to any one
           financial institution and restrict placement of these investments to
           financial institutions evaluated as credit worthy. Substantially all
           of the Company's accounts receivable are derived from sales to large
           OEM partners and select end-users.

           Other Comprehensive Income

           The Company adopted Statement of Financial Accounting Standards No.
           130, or SFAS 130, Accounting for Comprehensive Income, during the
           fiscal year ended 1998. This statement establishes standards for
           reporting and display of comprehensive income and its components
           (including revenues, expenses, gains and losses) in a full set of
           general-purpose financial statements. The Company's unrealized gains
           on investments represent the only component of comprehensive income
           which is excluded from net income for 1998 and prior years. The
           Company's comprehensive income has been presented in the consolidated
           financial statements. As of December 31, 1998 and 1997, the tax
           effects



                                      F-9
<PAGE>   46

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

           allocated to the component of other comprehensive income and
           accumulated other comprehensive income balances were not significant.

           Income Taxes

           The Company accounts for income taxes using the asset and liability
           method. Deferred tax assets and liabilities are recognized for the
           future tax consequences attributable to differences between the
           financial statement carrying amounts of existing assets and
           liabilities and their respective tax bases and operating loss and tax
           credit carryforwards. Deferred tax assets and liabilities are
           measured using enacted tax rates expected to apply to taxable income
           in the years in which those temporary differences are expected to be
           recovered or settled. Deferred tax assets are reduced by an allowance
           to an amount whose realization is more likely than not. The effect on
           deferred tax assets and liabilities of a change in tax rates is
           recognized in income in the period that includes the enactment date.

           Net Loss Per Share

           Basic net earnings (loss) per share is computed using the weighted
           average number of common shares outstanding during the period.
           Diluted net earnings (loss) per share is computed using the weighted
           average number of common and dilutive common equivalent shares
           outstanding for the period, if any. Common equivalent shares from
           stock options outstanding (see Note 7) have not been included as
           their effect would be antidilutive.

           Recent Accounting Pronouncements

           In March 1998, the American Institute of Certified Public Accountants
           ("AICPA") issued SOP No. 98-1, "Accounting for the Costs of Computer
           Software Developed or Obtained for Internal Use." SOP No. 98-1
           requires that entities capitalize certain costs related to
           internal-use software once certain criteria have been met. The
           Company expects that the adoption of SOP No. 98-1 will have no
           material impact on its financial position, results of operations or
           cash flows. The Company will be required to implement SOP No. 98-1
           for the year ending December 31, 1999.

           In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs
           of Start-Up Activities." SOP No. 98-5 requires that all start-up
           costs related to new operations must be expensed as incurred. In
           addition, all start-up costs that were capitalized in the past must
           be written off when SOP No. 98-5 is adopted. The Company expects that
           the adoption of SOP No. 98-5 will have no material impact on its
           financial position, results of operations or cash flows. The Company
           will be required to implement SOP No. 98-5 



                                      F-10
<PAGE>   47

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

           for the year ending December 31, 1999.

           In June 1998, the Financial Accounting Standards Board issued
           Statement of Financial Accounting Standards ("SFAS") No. 133,
           "Accounting for Derivative Instruments and Hedging Activities." SFAS
           No. 133 established methods of accounting for derivative financial
           instruments and hedging activities related to those instruments as
           well as other hedging activities. Because the Company currently holds
           no derivative instruments and does not engage in hedging activities,
           the Company expects that the adoption of SFAS No. 133 will have no
           material impact on its financial position, results of operations or
           cash flows. The Company will be required to implement SFAS No. 133
           for the year ending December 31, 2000.

           In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP
           97-2, Software Revenue Recognition, with Respect to Certain
           Transactions." SOP No. 98-9 requires recognition of revenue using the
           "residual method" in a multiple-element software arrangement when
           fair value does not exist for one or more of the delivered elements
           in the arrangement. Under the "residual method," the total fair value
           of the undelivered elements is deferred and recognized in accordance
           with SOP No. 97-2. The Company will be required to implement SOP No.
           98-9 for the year ending December 31, 2000. SOP No. 98-9 also extends
           the deferral of the application of SOP No. 97-2 to certain other
           multiple element software arrangements through the Company's year
           ending December 31, 1999. The Company is evaluating the provisions of
           SOP No. 98-9 and has not yet determined what impact, if any, SOP No.
           98-9 will have on its financial position, results of operations or
           cash flows.
           
(2)        CASH, CASH EQUIVALENTS, AND SHORT TERM INVESTMENTS

           Cash and cash equivalents consisted of the following:


<TABLE>
<CAPTION>
                                                                December 31,
                                                         ---------------------------
                                                            1998             1997
                                                         ----------       ----------
<S>                                                      <C>              <C>       
Cash                                                     $  833,927       $  400,794
Money market funds                                        1,066,049        1,005,347
                                                         ----------       ----------

                                                         $1,899,976       $1,406,141
                                                         ==========       ==========


Short term investments consisted of the following:


Equity securities                                        $  285,551       $  286,000
Municipal bonds                                           1,000,000               --
                                                         ----------       ----------

                                                         $1,285,551       $  286,000
                                                         ==========       ==========
</TABLE>



                                      F-11
<PAGE>   48

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(3)        PROPERTY AND EQUIPMENT

           A summary of property and equipment follows:

<TABLE>
<CAPTION>
                                                            December 31,
                                                     ---------------------------
                                                        1998             1997
                                                     ----------       ----------
<S>                                                  <C>              <C>       
Equipment                                            $1,090,062       $1,224,991
Furniture and fixtures                                  285,907          271,511
Leasehold improvements                                  142,238          136,669
                                                     ----------       ----------

                                                      1,518,207        1,633,171
Less accumulated depreciation and amortization          929,577          884,435
                                                     ----------       ----------


                                                     $  588,630       $  748,736
                                                     ==========       ==========
</TABLE>

(4)        ACQUIRED TECHNOLOGY AND SOFTWARE DEVELOPMENT COSTS

           A summary of acquired technology and software development costs
follows:

<TABLE>
<CAPTION>
                                          December 31,
                                    -----------------------
                                      1998           1997
                                    --------       --------
<S>                                 <C>            <C>     
Acquired technology                 $416,444       $416,444
Less accumulated amortization        324,196        185,381
                                    --------       --------


                                    $ 92,248       $231,063
                                    ========       ========
</TABLE>

           On October 1, 1997, the Company sold its Tandem product line and as a
           result, the Company sold developed software with a gross cost of
           $838,316 and accumulated amortization of $691,203. The Company also
           sold acquired technology with a gross cost of $475,000 and
           accumulated amortization of $374,375.

           In 1997, the Company also had a write-off related to certain products
           which totaled $324,422 of gross developed software that had an
           accumulated amortization balance of $174,086. These products were not
           expected to generate sufficient future revenue which would be
           required for the Company to realize the carrying value of the assets.



                                      F-12
<PAGE>   49

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

(5)        INCOME TAXES

           Income taxes consist of:

<TABLE>
<CAPTION>
                                    Current     Deferred       Total
                                    ------       ------       ------
<S>                                 <C>         <C>           <C>
Year ended December 31, 1998:
Federal                           $(40,604)      $   --     $(40,604)  
State and local                        800           --          800
Foreign                             14,410           --       14,410 
                                  --------       ------     --------


                                  $(25,394)      $   --     $(25,394)
                                  ========       ======     ========

Year ended December 31, 1997:
Federal                           $     --       $   --     $     --
State and local                        800           --          800
Foreign                              1,590           --        1,590
                                  --------       ------     --------


                                  $  2,390       $   --     $  2,390
                                  ========       ======     ========
</TABLE>

           The Company's income tax expense differed from the expected tax
           benefit computed by applying the statutory U.S. federal income tax
           rate (34%) to loss before income taxes as a result of the following:

<TABLE>
<CAPTION>
                                                             Year ended December 31, 
                                                           --------------------------
                                                             1998             1997
                                                           ---------        ---------
<S>                                                        <C>              <C>       
Computed "expected" tax benefit                            $(275,675)       $(665,731)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal benefit             528              528
Change in valuation allowance                                229,832          673,086
Foreign taxes                                                 14,410            1,590
Other                                                          5,511           (7,083)
                                                           ---------        ---------

                                                           $ (25,394)       $   2,390
                                                           =========        =========
</TABLE>



                                      F-13
<PAGE>   50

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

           The tax expense recognized in 1998 was due to the Company's inability
           to recognize a tax benefit for loss and credit carryforwards. The tax
           effects of temporary differences that give rise to significant
           portions of the deferred tax assets and deferred tax liabilities are
           presented below:

<TABLE>
<CAPTION>
                                               December 31,
                                      ------------------------------
                                         1998               1997
                                      -----------        -----------
<S>                                   <C>                <C>        
Deferred tax assets:
Allowance for doubtful accounts       $    10,035        $    50,173
Covenant not to compete                    62,647             64,189
Accrued compensation                       22,645             18,144
Credit carryforward                       500,535            326,212
Loss carryforward                         851,132            784,782
                                      -----------        -----------


Deferred tax assets                     1,446,994          1,243,500

Valuation allowance                    (1,342,962)        (1,072,526)
                                      -----------        -----------

Net deferred tax assets                   104,032            170,974
                                      -----------        -----------

Deferred tax liabilities:
Software development costs                 37,026             92,744
Depreciation and amortization              67,006             78,320
                                      -----------        -----------
Total deferred tax liabilities            104,032            170,974
                                      -----------        -----------
Net deferred tax asset                $        --        $        --
                                      ===========        ===========
</TABLE>

           The Company has recorded a valuation allowance of $1,342,962 with
           respect to the deferred tax assets as of December 31, 1998.
           Management has determined that such portion of deferred tax assets
           may not be realized.

           The Company has federal and state net operating loss carryforwards of
           approximately $2,852,000 and $2,458,000, respectively, that may be
           used to offset future taxable income and federal and state research
           tax credits of approximately $398,000 and $212,000, respectively,
           that may be used to offset future tax liability. If unused, both the
           net operating loss and research credit carryforwards will expire in
           the year 2013.



                                      F-14
<PAGE>   51

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(6)        ACCRUED AND OTHER CURRENT LIABILITIES

           Accrued and other current liabilities consisted of the following:

<TABLE>
<CAPTION>
                                          December 31,
                                    -----------------------
                                      1998           1997
                                    --------       --------
<S>                                 <C>            <C>     
Accrued employee compensation       $147,287       $250,747
Deferred rent                         51,613         51,141
Royalty payable                       45,415          3,820
Other                                214,253        423,267
                                    --------       --------

                                    $458,568       $728,975
                                    ========       ========
</TABLE>

(7)        SHAREHOLDERS' EQUITY

           (a) Preferred Stock

           The Board of Directors has the authority to issue, without further
           action by the shareholders, up to 1,000,000 shares of Preferred Stock
           in one or more series and to fix the rights, preferences, privileges,
           and restrictions thereof, including dividend rights, conversion
           rights, voting rights, terms of redemption, liquidation preferences,
           sinking fund terms, and the number of shares constituting any series
           or the designation of such series.

           (b) Employee Stock Option and Purchase Plans

           As of December 31, 1998, the Company had authorized 1,500,000 shares
           of Common Stock for issuance under the 1992 Employee Stock Option
           Plan (the Option Plan). The Option Plan may be administered by the
           Board of Directors or a committee of the Board, which determines the
           terms of the options granted under the Option Plan, including
           exercise price, number of shares subject to each option, and the
           exercisability thereof. The vesting periods determined by the Board
           of Directors generally provides for shares to vest ratably over 3.5
           years and expire over 10 years.



                                      F-15
<PAGE>   52

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

           The Company's option activity was as follows:

<TABLE>
<CAPTION>
                                                Number of    Weighted-average
                                                  shares      exercise price
<S>                                             <C>          <C>
Balance at December 31, 1996                      689,108        $3.06

Granted                                           869,655         1.70
Exercised                                         (27,963)        2.47
Terminated                                       (607,876)        2.95
                                                 --------
Balance at December 31, 1997                      922,924         1.87


Granted                                           393,750         2.71
Exercised                                        (184,449)        1.37
Terminated                                        (65,432)        2.76
                                                ---------
Balance at December 31, 1998                    1,066,793         2.21
                                                =========

Available for grant at December 31, 1998          357,847
                                                =========
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
                           Options outstanding                                         Options exercisable
             ----------------------------------------------------         -----------------------------------------------
               Range                                 Weighted-            Weighted-                             Weighted-
                of                                    average              average                               average
             exercise            Number              remaining            exercise              Number          exercise
              prices            of shares        contractual life           price              of shares          price
              ------           -----------       ----------------          -----              -----------         -----
<S>                            <C>               <C>                      <C>                 <C>               <C>
            $1.00 - 1.88         328,503             6.8 Years              $1.36               232,681           $1.42
             1.91 - 2.06         339,040             8.3                     1.93               107,055            1.95
             2.25 - 4.68         399,250             8.9                     3.15               128,882            3.43
                               ---------                                                        -------
             1.00 - 4.68       1,066,793             8.1                     2.21               468,618            2.09
                               =========                                                        =======
</TABLE>



           Under the Company's 1994 Employee Stock Purchase Plan (the Purchase
           Plan) a total of 96,465 shares of common stock remain reserved for
           issuance under the Purchase Plan. The Purchase Plan permits eligible
           employees to purchase common stock through payroll deductions, which
           may not be less than 1% nor exceed 10% of an employee's compensation,
           not to exceed shares with a fair market value of $25,000. The price
           of 



                                      F-16
<PAGE>   53

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


           stock purchased under the Purchase Plan must be at least 85% of the
           lower of the fair market value of the common stock at the beginning
           of each six-month offering period or at the end of the present
           purchasing period. Employees may end their participation in the
           offering at any time during the offering period, and participation
           ends automatically upon termination of employment with the Company.

           (c)  Accounting for Stock-Based Compensation Plans

           The Company has elected to use the intrinsic value-based method in
           accounting for its Plan. Accordingly, no compensation cost has been
           recognized in the accompanying consolidated financial statements
           because the exercise price of each option equaled or exceeded the
           fair value of the underlying common stock as of the grant date for
           each option. Had compensation cost for the Company's stock options
           been determined in a manner consistent with SFAS No. 123, the
           Company's net loss and net loss per share as reported would have been
           increased to the pro forma amounts indicated below (in thousands,
           except per share amounts):

<TABLE>
<CAPTION>
                                      1998             1997
                                      ----             ----
<S>                                <C>              <C>       
Reported net loss                  $    (785)       $  (1,960)
Pro forma net loss                 $  (1,302)       $  (2,408)

Reported net loss per share        $   (0.22)       $   (0.67)
Pro forma net loss per share       $   (0.37)       $   (0.82)
</TABLE>

           The fair value of each option is estimated on the date of grant using
           the Black-Scholes option-pricing model with the following weighted
           average assumptions: 1998 - an expected life of 3.5 years, risk-free
           interest rates of 4.62%, 117.3% expected volatility, and no dividend
           yield; 1997 - an expected life of 3.5 years, risk-free interest rates
           of 5.84%, 140.4% expected volatility, and no dividend yield. The
           weighted-average fair value of options granted during the period at
           an exercise price equal to market price at grant date was $2.25 and
           $1.57 for the periods ended December 31, 1998 and 1997, respectively.

           The fair value of employees' stock purchase rights under the Purchase
           Plan was estimated by calculating the difference between the share
           purchase price and the fair market value of the share at the date of
           the purchase. 

           Pro forma net income reflects only options granted since the
           beginning of 1995. Therefore, the full impact of calculating
           compensation cost for stock options under SFAS No. 123 is not
           reflected in the pro forma net income amounts presented above because



                                      F-17
<PAGE>   54

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


           compensation cost is reflected over the options' vesting period of
           3.5 years and compensation cost for options granted prior to January
           1, 1995 is not considered.

(8)        COMMITMENTS

           Leases

           The Company leases office space, automobiles, and certain office
           equipment under noncancelable leases expiring through 2001. Future
           minimum lease payments under these leases aggregate approximately
           $407,092, $421,340, and $142,048 in 1999, 2000, and 2001. Rent
           expense was $279,266 and $459,108 in 1998 and 1997, respectively.

           Royalties

           The Company has license agreements with unrelated third parties
           covering certain of its products requiring royalty payments ranging
           from 10% to 50% of product license and maintenance fees. Royalties
           related to these agreements were $201,196 and $320,818 in 1998 and
           1997, respectively.


(9)        FOREIGN OPERATIONS

           The Company has adopted the provisions of statement of financial
           accounting standards No. 131 "Disclosures about Segments of an
           Enterprise and Related Information." The Company operates in one
           segment and accordingly has provided only the required enterprise
           wide disclosures. For the year ended December 31, 1998, sales to one
           customer exceeded 10% of gross revenues. Sales to Silicon Graphics
           Inc. as a percentage of gross revenues were 68% for the year ended
           December 31, 1998. There were no sales to customers that exceeded 10%
           of gross revenues in 1997.

           The Company's operations outside of the United States consisted
           solely of a sales office in the United Kingdom. During 1997, the
           Company restructured its sales force and closed the sales office in
           the United Kingdom. Domestic operations are responsible for



                                      F-18
<PAGE>   55

                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


           the design, development, and licensing of all products. Following are
           selected financial data, categorized by primary geographic area:


<TABLE>
<CAPTION>
                                          Year ended December 31, 
                                       ------------------------------
                                          1998               1997
                                       -----------        -----------
<S>                                    <C>                <C>        
Sales to unaffiliated customers:
  North America                        $ 3,758,408        $ 3,189,407
  United Kingdom                                --          1,041,435
                                       -----------        -----------

          Total                        $ 3,758,408        $ 4,230,842
                                       ===========        ===========
Operating income (loss):
  North America                        $  (976,167)       $(2,052,865)
  United Kingdom                                --             34,509
                                       -----------        -----------

          Total                        $  (976,167)       $(2,018,356)
                                       ===========        ===========
Total assets:
  North America                        $ 4,929,422        $ 3,400,998
  United Kingdom                                --            313,711
                                       -----------        -----------

          Total                        $ 4,929,422        $ 3,714,709
                                       ===========        ===========

Export sales                           $    59,519        $   310,594
                                       ===========        ===========
</TABLE>



                                      F-19
<PAGE>   56

                                 EXHIBITS INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
------                            -----------
<S>               <C>
3.1(1)            Amended and Restated Articles of Incorporation.

3.2(1)            By Laws.

10.27(2)          Agreement dated as of September 22, 1997, by and among
                  Enlighten Software Solutions, Inc., Peter J. McDonald, and New
                  Dimension Software, Inc.

10.28(4)(@)       Employment letter, dated July 3, 1997, by and between Enlighten
                  Software Solutions, Inc. and Mike Seashols.

10.29(4)(@)       Employment letter, dated August 28, 1997, by and between Enlighten
                  Software Solutions, Inc. and David D. Parker.

10.30(4)          Agreement dated as of January 21, 1998, by and between Enlighten Software
                  Solutions, Inc. and Silicon Graphics, Inc.

10.31(@)          Employment letter, dated July 15, 1998, by and between Enlighten
                  Software Solutions, Inc. and Bill Bradley.

10.32(@)          Employment letter, dated January 15, 1999, by and between Enlighten
                  Software Solutions, Inc. and Tim Gardner.

10.33             Agreement dated as of December 31, 1998, by and between Enlighten
                  Software Solutions, Inc. and International Business Machines.

21.1(3)           Subsidiaries of the Company.

23.1              Consent of KPMG LLP.

27.1              Financial Data Schedule           .
</TABLE>

----------

(1)     Incorporated by reference from exhibits of the same number in the
        Company's Registration Statement on Form S-1, which became effective
        April 19, 1994.

(2)     Incorporated by reference from exhibit 10.27 in the Company's Current
        Report on Form 8-K dated October 1, 1997.

(3)     Incorporated by reference from an exhibit of the same number in the
        Company's Annual Report on Form 10-K for the year ended December 31,
        1994.

(4)     Incorporated by reference from an exhibit of the same number in the 
        Company's Annual Report on Form 10-KSB for the year ended December 31, 
        1997.

(@)     Compensatory or employment arrangement.