<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, 1997

                                       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, 1997
were $4,230,842.

        The approximate aggregate market value of the registrant's Common Stock
held by nonaffiliates on February 28, 1998 was $7,423,746. 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, 1998 was
2,992,691.

DOCUMENTS INCORPORATED BY REFERENCE:

                                                         Form 10-KSB reference
(1)   Proxy Statement for Shareholder Meeting
      scheduled for May 20, 1998                                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 16 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/NT 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 ManagerTM ("EnlightenDSMTM") product allows companies to
manage their information systems by enabling systems managers and administrators
to control their systems from diverse UNIX/NT platform vendors such as Digital
Equipment Corporation ("DEC"), Hewlett-Packard ("HP"), IBM, Microsoft, Santa
Cruz Operation ("SCO"), 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/NT product suite.

RECENT DEVELOPMENTS FOR THE COMPANY

        Fiscal 1997 was a period of significant change for Enlighten Software.
In May 1997 the Company released version 2.2 of EnlightenDSM which included
support for the Windows NT operating system. Allowing management of both UNIX
and NT operating systems was a significant advancement of EnlightenDSM,
broadening its market to include the rapidly expanding NT operating system
deployment. After continued 


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disappointing results from the sales and marketing efforts related to the
Company's UNIX/NT product, the Company began a search for a new Chairman of the
Board and a new President and Chief Executive Officer ("CEO"). These
appointments were made in July and August 1997, respectively. In October 1997,
the Company sold its Tandem operation in order to focus on its UNIX/NT product
line. During the fourth quarter of 1997 the Company streamlined its operations
and shifted its primary sales strategy from direct field sales to indirect
channels sales, resulting in a reduction and change of its sales and marketing
personnel and the elimination of field sales offices in the U.S. and Europe. In
January 1998, following the Company's shift to the indirect sales model,
Enlighten entered into its first OEM bundling agreement with Silicon Graphics,
Inc. ("Silicon Graphics").

Key Management Changes

        In July 1997, the Company appointed Michael Seashols as Chairman of the
Board. In August 1997, the Company hired David D. Parker as the Company's new
President and CEO. Mr. Seashols previously served as CEO of Usoft, Inc. from
1994 through 1997. Prior to that, he served as CEO and was a founder of Versant
Object Technology, Inc. ("Versant") and Documentum, Inc., as well as vice
president of sales for several software companies, including Oracle Corporation
and Ingres. In addition to his role with Enlighten Software, he currently serves
as Chairman of the Board of Evolve Corporation. Mr. Parker brings 19 years of
software industry experience at companies such as IBM, Versant, and Quintus
Corporation ("Quintus"), where he held several sales and marketing positions,
most recently vice president of sales and marketing at Quintus. Prior to joining
Enlighten Software, Mr. Parker was President of Web Logic, a privately held Java
middleware software development company. Additionally, in the restructuring of
the Company's sales and marketing departments, the Company's Vice President of
Sales and Marketing, its Director of Marketing, and its Managing Director,
Europe, Middle-East and Africa were either replaced or left the Company during
the fourth quarter of 1997.

Tandem Divestiture

        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"), a subsidiary of New Dimension Software, Ltd. In this transaction the
Company will receive approximately $2.5 million in cash, which resulted in a
gain to the Company of approximately $2.2 million in 1997. Approximately $1.6
million was received in 1997, with the substantial portion of the remaining
amounts due in the first quarter of 1998. 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 also included
the transfer to NDS of approximately 12 employees associated with the Company's
Tandem operation.

OEM Bundling Agreement


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        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 will ship a bundled limited feature version of EnlightenDSM on
new server and workstation product shipments as well as with operating system
upgrades shipped to already installed Silicon Graphics customers. Silicon
Graphics will also offer and include on its price list a full feature version of
EnlightenDSM as well as agent modules to enable the management of other UNIX/NT
vendor servers and workstations. The products will be supported through Silicon
Graphic's global customer support organization. In addition to OEM bundling,
Silicon Graphics will market the products through its telesales force, direct
field organization, and authorized resellers.

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 NT
operating systems are generally being deployed at the divisional and
departmental levels, although many companies are increasingly using UNIX and NT
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 NT. 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 NT 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 


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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 became the responsibility of technicians who typically use
limited system utilities and "home grown" routines.

        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/NT 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 NT 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 


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one product that is vital and affordable to open systems managers in mixed
UNIX/NT 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. 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. 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.

-       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 from the 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


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        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 several thousand 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:

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/NT 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/NT products
is this under-served market, defined as sites with ten to 1,000 UNIX or NT
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 has recently shifted its sales and marketing focus from
direct sales to indirect channels sales. Shortly after this shift occurred the
Company entered into an OEM bundling agreement with Silicon Graphics. The
Company's product architecture and the design, price point, and ease of use of
the EnlightenDSM product allow it to be effectively bundled with a hardware
manufacturer's operating system. The relationship with Silicon Graphics will
allow the Company to begin penetrating the market by proliferating a limited
version of its product on thousands of Silicon Graphics 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


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partnering relationships and intends to focus its sales and marketing efforts on
the following:

        -       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 feels 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.

        -       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.

        -       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 16
of this report.

PRODUCTS


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        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.

OPEN SYSTEMS MANAGEMENT

        In the fast-paced UNIX/NT 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 2.3 of EnlightenDSM. Product license fees from the
Company's open systems product family represented 27% and 22% of total product
license fees in 1997 and 1996, 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 NT. 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 


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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/NT environment, the Company's
Tandem products were sold. Product license fees from the Company's Tandem
product line accounted for 73% and 78% of total product license fees in 1997 and
1996, respectively. In October 1997, the Company sold all of the technology and
operating assets associated with its Tandem product line to NDS.

SALES AND DISTRIBUTION

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

Product license fees

        During 1997, Enlighten Software marketed its products through a direct
field sales force, an inside telesales channel, and third-party distributors.
The Company's products were marketed throughout North America, South America,
and parts of the Pacific Rim by its product sales organization located at the
Company's headquarters in San Mateo, California as well as through its regional
field sales offices in the Chicago and New York areas. Enlighten Software
marketed its products in Europe, the Middle East, and Africa through its
wholly-owned subsidiary headquartered in the United Kingdom and through
independent distributors.

        Product license fees in 1997 consisted primarily of revenue from the
granting of perpetual licenses and from the licensing of product upgrades
necessary when customers upgrade their system hardware. 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 34% and 41% of
total revenue in 1997 and 1996, 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 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 original equipment manufacturers ("OEMs"),
independent software vendors ("ISVs"), and value 


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added resellers ("VARs"), as well as other systems management and application
software vendors whose products are complementary with those of the Company.

        In January 1998, the Company established its first OEM relationship with
Silicon Graphics. Under the agreement, Silicon Graphics will incorporate a
limited version of EnlightenDSM bundled with its operating system on a bundled
basis on new servers and workstations as well as with operating system upgrades
shipped to already installed Silicon Graphics customers. Silicon Graphics will
also offer and included in their price book licenses for the full-feature
version of EnlightenDSM as well as agent modules to enable the management of
other UNIX/NT vendor servers and workstations as optional enhancements. The
products will be supported through Silicon Graphic's global customer support
organization. In addition to OEM bundling, Silicon Graphics will market 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.

        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 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 Silicon Graphics and new 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 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 16 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. As the Company shifts its sales efforts from direct to
indirect channels, the Company will become more dependent on its third-party
distributors for the technical support and consultation to end users. The
Company will need 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.


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        Product maintenance fees consist of all maintenance revenue on new and
existing installed software products. 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. Product
maintenance revenue is recognized ratably over the maintenance contract period
(typically one year). Product maintenance fees accounted for 61% and 53% of
total revenue in 1997 and 1996, 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 5% and 7% of total revenue in 1997 and 1996, 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
and Microsoft NT. 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 generation/tracking.

        The Company significantly enhanced its EnlightenDSM product with several
releases during 1997. The new releases contained new features such as NFS and
Veritas file system monitoring, performance enhancements to the communication
layer resulting in better reliability and response time, and support for the new
operating system releases from the supported operating system vendors.
Electronic documentation was also added 


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to the EnlightenDSM product. Both the User Guide and Reference Manuals are now
supplied in Adobe Acrobat format, complete with electronic hyperlinks and cross
references. In addition, the Company added to its supported platforms with ports
to DEC ALPHA OSF and Windows NT. In preparation for its third-party distribution
efforts, the Company customized its licensing procedures to allow more flexible,
multi-tiered licensing structures. Additionally, the product suite was modified
to allow for distribution of both a limited feature and an enhanced feature
product for its newly established OEM relationship with Silicon Graphics.

        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:

        -       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 Silicon
Graphics bundling relationship (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 16
of this report.

        As of December 31, 1997, the Company had ten professional and technical
employees engaged in research and development. During the fiscal years ended


                                      -13-


<PAGE>   14
December 31, 1997 and 1996, the Company's research and development expenditures
before the capitalization of software development were $2,125,944 and
$2,531,237, 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 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 affect the Company's
business, operating results, and financial condition. See "Business Risks" on
page 16 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., 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 this market, 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


                                      -14-


<PAGE>   15
        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.
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 16 of this report.

EMPLOYEES


                                      -15-


<PAGE>   16
        As of December 31, 1997, the Company employed 34 people worldwide,
consisting of 31 in the United States and 3 in Europe. Of these employees, 10
were engaged in product development, 16 in sales, marketing, and customer
support, and 8 in finance and other administrative departments. The Company's
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 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 


                                      -16-


<PAGE>   17
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/NT product offering. The Company's initial product entry into the open
systems market in 1995 was unsuccessful. Version 2.0 of EnlightenDSM was
released in mid-1996 and represented 27% and 22% of the Company's license
revenues in 1997 and 1996, 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.
This was the first such OEM agreement entered into by the Company. However, the
open systems market is characterized by rapid technological growth and intense
competition. 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 will be 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, as the Company shifts its sales efforts from direct to
indirect channels, the Company will become more dependent on its third-party
distributors for the technical support and consultation to end users. The
Company will need 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 


                                      -17-


<PAGE>   18
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 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 January 1998, the Company entered into a Software License, OEM, and
Distribution Agreement with Silicon Graphics which will provide a new
distribution channel for the Company's products. The Company has agreed to
provide a limited feature version of the EnlightenDSM product which will be
bundled with Silicon Graphic's IRIX operating system. While the Company believes
that this arrangement with Silicon Graphics will be beneficial, there can be no
assurance that the Company will be able to deliver its products to Silicon
Graphics in a timely manner or that Silicon Graphics will license the Company's
products in volumes anticipated by the Company. Further, the agreement with
Silicon Graphics is the Company's only significant third-party distribution
agreement to date. While the Company's strategy is to obtain additional
resellers to reduce the dependence on one vendor, 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 Silicon Graphics and 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


                                      -18-


<PAGE>   19
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.

Possible Need for Additional Financing

        The Company currently funds product development and the expansion of
sales and marketing activities through existing cash reserves and cash from
operations. In the event that cash from operations and other available funds
prove to be insufficient to fund the Company's presently anticipated operations
the Company may be required to seek additional financing. There can be no
assurance that, if additional financing is required, it will be available on
acceptable terms, or at all. Additional financing may involve substantial
dilution to the interests of the Company's then-current shareholders.

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 substantial majority of the Company's revenue
in future periods will be derived from its UNIX/NT product, EnlightenDSM. This
product accounted for 27%, and 22% of the Company's license revenue in the years
ended December 31, 1997, and 1996, respectively. The Company has disposed of its
Tandem product line that accounted for the balance of its license revenue in
each year. 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 as a result of its strategic
decision to divest itself of its Tandem technology in order to focus its
financial and other resources to selling, servicing, and supporting
EnlightenDSM. 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 


                                      -19-


<PAGE>   20
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 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 environment. 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


                                      -20-


<PAGE>   21
        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, will not significantly affect deployment of UNIX systems for
business critical applications. A significant portion of the Company's 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 platform,
the product requires customers to control systems management for their
heterogeneous environment from UNIX-based systems. A significant decline in
sales of 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.


                                      -21-


<PAGE>   22
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 NT) 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 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.

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. The Company
previously leased additional sales and support offices in Lisle, Illinois,
Saddlebrook, New Jersey, and 


                                      -22-


<PAGE>   23
the United Kingdom under month-to-month leases, each of which were terminated in
the fourth quarter of 1997. The Company believes that its current facilities are
adequate for its needs through 1998 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.


                                      -23-


<PAGE>   24
                                     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 National Market under the symbol "SFTW." As of December 31, 1997, there
were 36 record holders of the Company's Common Stock. As of the same date,
2,963,635 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>
1996
Quarter Ended                                    High                  Low
-------------                                    ----                  ---
<S>                                             <C>                   <C>  
March 31, 1996                                  $2.63                 $1.63
June 30, 1996                                   $6.88                 $1.88
September 30, 1996                              $6.50                 $3.38
December 31, 1996                               $6.25                 $3.50

1997
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>


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.


                                      -24-


<PAGE>   25
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 16 of this report, or elsewhere in this report.

OVERVIEW

        Enlighten Software Solutions develops, markets, and supports software
products for UNIX and UNIX/NT 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/NT 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/NT product suite. In connection with this
sale, the Company will receive 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.


                                      -25-


<PAGE>   26
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, 1997 AND 1996

        Total revenue. Total revenue decreased 35% from $6,477,000 in 1996, to
$4,231,000 in 1997. 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. For the first nine months of 1997, total
revenue decreased 9%, from $4,388,000 in 1996 to $3,993,000 in 1997. The Company
had minimal revenue in the fourth quarter of 1997 as it transitioned away from
the Tandem product line and restructured its sales force to accommodate its
strategic shift from direct sales to indirect sales.

        Revenue from product license fees decreased 46% from $2,645,000 in 1996,
to $1,439,000 in 1997. The decrease was primarily attributable to the sale of
the Tandem product line. Revenue from the Company's Tandem product license fees
decreased by 49%, from $2,071,000 in 1996, to $1,047,000 in 1997. Through
September 30, 1997, prior to the sale of the Tandem products, product license
fees decreased 8%, from $1,453,000 in 1996 to $1,338,000 in 1997. The decline in
product license fees during the first nine months of 1997 is primarily related
to a decline in Tandem license revenue. Tandem license revenue during this nine
month period was affected by the change in sales management and other personnel,
as well as the pending sale of the Tandem product line. The decrease in Tandem
product license fees during the first nine months of 1997 was partially offset
by an increase of $284,000, or 265%, for the Company's UNIX 


                                      -26-


<PAGE>   27
product, EnlightenDSM, for nine months ended September 30, 1997 when compared to
the same period in 1996.

        On an annual basis, product license fees from EnlightenDSM licensed
directly to end users increased by $266,000, or 212%, to 391,000 in 1997 when
compared to 1996. This increase excludes license fees generated in 1996 that
represented prepaid license fees paid to the Company by distributors in exchange
for future product license credits and exclusive rights to distribute the
Company's products in certain territories. There were no such comparable
transactions in 1997.

        As noted above, product maintenance fees decreased by $809,000, or 24%,
to $2,599,000 in 1997 compared to 1996. This decline is almost entirely due to
the disposition of the Tandem product line on October 1, 1997. Product
maintenance fees for the first nine months of 1997 when compared to the same
period in 1996, decreased by only $16,000, or 1%. Product maintenance fees for
EnlightenDSM increased by $92,000 for the year ended December 31, 1997, compared
to 1996.

        Consulting services revenue decreased by $232,000, or 55%, to $193,000
in 1997 when compared with 1996. The decrease is due to a restructuring of the
Company's service division that resulted in the termination of low margin, high
level, Tandem-related custom development services projects the Company had
engaged in during prior years.

        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 $58,000,
or 20%, to $976,000 in 1997. Excluding the write-off of software development
costs discussed below, cost of revenue decreased by $208,000, or 20%, in 1997
when compared to 1996. The reduction in cost of revenue is caused primarily by
the decrease in costs associated with consulting services. Costs associated with
consulting services decreased by 72%, commensurate with the decrease in
consulting service revenue. Margins related to services revenue increased in
1997 due to the shift away from low margin, customized development projects to
higher margin consulting services and training related to the Company's
products.

        The Company amortized $540,000 and $349,000 in 1997 and 1996,
respectively, of acquired technology and capitalized software development costs
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 86. The
amount in 1997 includes a $150,000 write-off related to certain software
products, or product versions. These software products were not expected to
generate sufficient future revenue which would be required for the Company to
realize the carrying value of the assets.

        Research and development. Research and development expenses consist of
personnel expenses and associated overhead, and costs of short-term independent


                                      -27-


<PAGE>   28
contractors required in connection with the Company's product development
efforts, less amounts capitalized. Net research and development expenses
increased by less than 1% from $2,048,000, or 32% of revenue in 1996, to
$2,059,000, or 49% of revenue in 1997. This increase is solely attributable to
the decrease in the portion of the Company's research and development expenses
that were capitalized pursuant to SFAS No. 86 in 1997 when compared to 1996. In
1997 and 1996 the Company capitalized $66,000 and $484,000, respectively, of
software development costs. Gross research and development costs decreased by
$405,000, or 16%, in 1997 when compared to 1996. This decrease is related to the
sale of the Tandem product line on October 1, 1997. Prior to that product line's
disposition, gross research and development expenses were approximately the same
in 1997 as in 1996.

        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 continue 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, customer service
and technical support, travel and entertainment, and other selling and marketing
costs. Sales and marketing expenses increased by 28%, from $2,979,000, or 46% of
revenue in 1996, to $3,820,000, or 90% of revenue in 1997, primarily due to the
increase in sales and marketing costs during the first nine months of 1997 when
compared to the same period in 1996. Sales and marketing costs for the first
nine months ended September 30, 1997, prior to the Tandem product line
disposition, increased by $826,000, or 41%, when compared to the nine months
ended September 30, 1996. The increase during this nine month period is
primarily due an increase in expenses related to the Company's U.K. subsidiary
including the addition of senior sales management personnel and the undertaking
of several new marketing initiatives. Additionally, sales and marketing expenses
for the first nine months of 1996 reflected lower personnel costs due to a
reduction in force in January 1996. An expansion of the worldwide sales force
occurred in the fourth quarter of 1996, thus increasing the sales and marketing
costs thereafter.

        Despite the sale of the Tandem product line, sales and marketing
expenses in the fourth quarter of 1997 were approximately equal to the fourth
quarter of 1996. Only two employees in the sales and support departments were
transferred to NDS as a result of the transaction. The Company's restructuring
of the sales and marketing department related to the shift in sales strategy
from direct to indirect occurred during the fourth quarter of 1997. Most
employees terminated as a result of the restructuring were employed by the
Company through December 31, 1997. Additionally, sales and marketing costs for
the 


                                      -28-


<PAGE>   29
fourth quarter of 1997 include one-time charges related to severance packages
given to employees affected by the restructuring and expenses related to the
office closures of the Company's field sales offices in the Chicago and New York
areas and in the U.K. The Company expects sales and marketing costs to continue
to increase in absolute dollars for the foreseeable future as it expands its
ability to sell and service its products through third-party resellers and
expands its direct sales force.

        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, increased by 13%, from $1,371,000, or 21% of revenue in
1996, to $1,551,000, or 37% of revenue in 1997. The increase in expense is
primarily related to increased legal fees associated with an arbitration hearing
settled in 1997, other professional fees, investor relations costs, and
personnel costs.

        Acquired in-process research and development. In December 1994, the
Company acquired (the "Acquisition") all of the outstanding shares of Network
Partners, Inc. ("NPI"). At the time of the Acquisition, NPI's sole asset
consisted of core UNIX systems management technology. In connection with this
acquisition, the purchase price was allocated to in-process research and
development, expensed in the fourth quarter of 1994. The acquisition of NPI was
accounted for using the purchase method and was not considered deductible for
tax purposes. Under the terms of the agreements for the acquisition, the
purchase price was to be increased upon sales of the acquired technology. In
December 1996 the Company successfully negotiated a termination agreement with
the former shareholders of Network Partners, Inc. ("NPI Shareholders"). In
exchange for a guaranteed payment, the NPI Shareholders agreed to forego any and
all rights to future revenue from the UNIX technology purchased in connection
with the Acquisition.

        Gain on sale of Tandem product line. On October 1, 1997, the Company
sold its Tandem product line to NDS. In 1997, the Company recognized a gain on
the sale of the operating assets of the Tandem product line of approximately
$2.2 million. The Company will receive 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. The Tandem operations
contributed revenues of $3,659,000 and $5,882,000 in 1997 and 1996,
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) decreased by 


                                      -29-


<PAGE>   30
$125,000, or 68%, in 1997 when compared to 1996 as a result of lower cash
balances, resulting in a decrease in interest income from cash reserves.

        Income tax expense. The Company's tax expense recognized in 1997 and
1996 is primarily due to taxes paid to foreign jurisdictions. No tax benefit 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.

LIQUIDITY AND CAPITAL RESOURCES

        At December 31, 1997, the Company's cash, cash equivalents, and short
term investments were $1,692,000, representing 46% of total assets. The
Company's working capital as of December 31, 1997, was $1,286,000. Cash
equivalents are highly liquid with original maturities of ninety days or less.
The Company's short term investments are primarily investment grade commercial
paper and highly liquid. The Company had no debt as of December 31, 1997, other
than normal trade payables and accrued liabilities. Stockholders' equity as of
December 31, 1997, was $2,492,000.

        The Company's operating activities used cash of $1,915,000 in 1997,
compared to cash used by operating activities of $570,000 in the prior year. The
increase in cash used by operating activities was principally caused by
increased net losses excluding the gain on the sale of the Tandem operation.
This was partially offset by a decrease in accounts receivable.

        The Company's investing activities have consisted primarily of
short-term investments, capitalization of software development costs, and
additions to capital equipment. Investing activities provided cash of $2,473,000
in 1997, compared with using cash of $1,024,000 in 1996. The increase is
primarily due to an increase in sales of short-term investments, the cash
received for the sale of the Tandem operation, and a decrease in both
capitalized software development costs and equipment acquisitions.

        Financing activities provided cash of $158,000 in 1997, compared with
cash provided of $159,000 in the prior year. An increase in cash provided from
financing activities that resulted from a reduction in payments on bank
borrowings was more than offset by a decrease in cash provided by the exercise
of employee stock options.

        On October 1, 1997, the Company sold its Tandem product line to New
Dimension Software, Inc. ("NDS"). The Company will receive approximately $2.5
million in cash and the rights to receive royalties on Tandem related products
for a period of three years. In 1997 the Company received $1.6 million in cash,
which included a $300,000 prepayment of future royalties. The Company expects to
receive the remaining amount related to the sale, equal to approximately
$900,000, in 1998. Of the remaining amount, approximately $700,000 is held in
escrow pending the satisfactory completion of certain short-term performance
objectives. The majority of such performance objectives were met during the
first quarter of 1998.


                                      -30-


<PAGE>   31
        The Company believes that its cash, cash equivalents, and short term
investment balances, the additional proceeds from the sale of the Tandem product
line, and funds from operations will satisfy the Company's projected working
capital and capital expenditure requirements through the next twelve months.
However, the Company may require funds to support additional working capital
requirements or for other purposes and may seek to raise such additional funds
through public or private equity financing or from other sources. There can be
no assurance that additional financing will be available at all or that, if
available, such financing will be obtainable on terms favorable to the Company.

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.


                                      -31-


<PAGE>   32
        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,
1998, 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,
1998, 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,
1998, 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,
1998, under the caption "Certain Relationships and Related Transactions," and is
incorporated herein by reference.


                                      -32-


<PAGE>   33
                                        PART IV

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

        (a)(1) Financial Statements:


<TABLE>
<S>                                                                            <C>
             Report of Independent Auditors ................................... F-1

             Consolidated Balance Sheets:
               December 31, 1997 and 1996 ..................................... F-2

             Consolidated Statements of Operations:
               Years ended December 31, 1997 and 1996 ......................... F-3

             Consolidated Statements of Shareholders' Equity:
               Years ended December 31, 1997 and 1996 ......................... F-4

             Consolidated Statements of Cash Flows:
               Years ended December 31, 1997 and 1996 ......................... F-5

             Notes to Consolidated Financial Statements ....................... F-6
</TABLE>


        (a)(2) Exhibits:

        See Exhibits Index on Page 34. The Exhibits listed in the accompanying
Exhibits Index are filed or incorporated by reference as part of this report.
Exhibit Nos. 10.21, 10.21.1, 10.22, 10.23, 10.24, 10.25, 10.26, 10.28, and 10.29
are compensatory plans or arrangements.

        (b) Reports on Form 8-K:

        The Company filed one Report on Form 8-K, reporting an event occurring
on October 1, 1997, under Item 2 - Acquisition or Disposition of Assets,
relating to the sale of the Company's Tandem product line to New Dimension
Software, Inc.


                                      -33-


<PAGE>   34
                                 EXHIBITS INDEX


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

3.2(1)       By Laws.

10.21(2)@    Employment letter and Termination and Change in Control Agreement, dated
             March 4, 1996, by and between Enlighten Software Solutions, Inc. and
             Byron E. Jacobs.

10.21.1(3)@  Amendment to Employment letter and Termination and Change in Control
             Agreement, dated November 6, 1996, by and between Enlighten Software
             Solutions, Inc. and Byron E. Jacobs.

10.22(2)@    Nonqualified Stock Option Agreement, dated March 4, 1996, by and between
             Enlighten Software Solutions, Inc. and Byron E. Jacobs.

10.23(2)@    Incentive Stock Option Agreement, dated March 4, 1996, by and between
             Enlighten Software Solutions, Inc. and Byron E. Jacobs.

10.24(3)@    Termination and Change in Control Agreement, dated April 24, 1996, by and
             between Enlighten Software Solutions, Inc. and Michael A. Morgan.

10.25(3)@    Employment letter, dated December 27, 1996, by and between Enlighten
             Software Solutions, Inc. and Mark Himelstein.

10.26(3)@    Nonqualified Stock Option Agreement, dated December 27, 1996, by and
             between Enlighten Software Solutions, Inc. and Mark Himelstein.

10.27(4)     Agreement dated as of September 22, 1997, by and among Enlighten
             Software Solutions, Inc., Peter J. McDonald, and New Dimension
             Software, Inc.

10.28@       Employment letter, dated July 3, 1997, by and between Enlighten
             Software Solutions, Inc. and Michael Seashols.

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

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

21.1(5)      Subsidiaries of the Company.

23.1         Consent of KPMG Peat Marwick LLP.
</TABLE>


                                      -34-


<PAGE>   35
<TABLE>
<CAPTION>
<S>          <C>
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 an exhibit of the same number in the
        Company's Quarterly Report on Form 10-QSB for the year ended March 31,
        1996.

(3)     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,
        1996.

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

(5)     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.

(@)     Compensatory or employment arrangement.


   

                                      -35-


<PAGE>   36
                       ENLIGHTEN SOFTWARE SOLUTIONS, INC.

                         FORM 10-KSB, DECEMBER 31, 1997

                                   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 26, 1998
Chief Executive Officer


/s/ Michael A. Morgan
-----------------------------------------
Michael A. Morgan,  March 26, 1998
Chief Financial Officer


/s/ Michael Seashols
-----------------------------------------
Michael Seashols,  March 26, 1998
Chairman of the Board


/s/ Peter J. McDonald
-----------------------------------------
Peter J. McDonald,  March 26, 1998
Director


/s/ Peter J. Sprague
-----------------------------------------
Peter J. Sprague,  March 26, 1998
Director


/s/ Bruce Cleveland
-----------------------------------------
Bruce Cleveland,  March 26, 1998
Director


                                      -36-


<PAGE>   37
                         Report of Independent Auditors


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 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.




                                                         KPMG PEAT MARWICK LLP

Mountain View, California
February 4, 1998


                                       F-1


<PAGE>   38
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                           Consolidated Balance Sheets

                           December 31, 1997 and 1996


<TABLE>
<CAPTION>
                            ASSETS                                        1997               1996
                                                                       -----------        -----------
<S>                                                                    <C>                <C>        
Current assets:
    Cash and cash equivalents                                          $ 1,406,141        $   689,611
    Short term investments                                                 286,000          1,639,065
    Accounts receivable, less allowance for doubtful accounts of
      $125,000 and $210,000 respectively                                   240,444          1,500,051
    Refundable income taxes                                                127,035            400,669
    Prepaid expenses and other assets                                      449,256            215,819
                                                                       -----------        -----------

                   Total current assets                                  2,508,876          4,445,215

Property and equipment, net                                                748,736          1,152,302
Acquired technology and software development costs, net                    231,063            903,346
Other assets                                                               226,034            208,384
                                                                       -----------        -----------

                                                                       $ 3,714,709        $ 6,709,247
                                                                       ===========        ===========

             LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Trade accounts payable                                             $   134,043        $   344,266
    Accrued and other current liabilities                                  728,975            595,252
    Deferred revenue                                                       359,361          1,475,273
                                                                       -----------        -----------

                   Total current liabilities                             1,222,379          2,414,791
                                                                       -----------        -----------

Commitments

Shareholders' equity:
    Preferred stock; 1,000,000 shares authorized; none issued
      and outstanding                                                           --                 --
    Common stock; 10,000,000 shares authorized; 2,963,635
      and 2,910,956 shares issued and outstanding
      in 1997 and 1996, respectively                                     5,079,505          4,921,208
    Accumulated deficit                                                 (2,587,175)          (626,752)
                                                                       -----------        -----------

                   Total shareholders' equity                            2,492,330          4,294,456
                                                                       -----------        -----------

                                                                       $ 3,714,709        $ 6,709,247
                                                                       ===========        ===========
</TABLE>


          The accompanying notes to consolidated financial statements.


                                       F-2


<PAGE>   39
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                      Consolidated Statements of Operations



<TABLE>
<CAPTION>
                                                                       Years ended December 31,
                                                                    ------------------------------
                                                                        1997               1996
                                                                    -----------        -----------
<S>                                                                 <C>                <C>        
Revenue:
    Product license fees                                            $ 1,438,805        $ 2,644,546
    Product maintenance fees                                          2,598,679          3,407,778
    Consulting services                                                 193,358            424,975
                                                                    -----------        -----------

    Total revenue                                                     4,230,842          6,477,299
                                                                    -----------        -----------

Cost of revenue:
    Product licenses                                                    698,714            593,206
    Product maintenance                                                 182,096            101,675
    Consulting services                                                  95,525            338,768
                                                                    -----------        -----------

    Total cost of revenue                                               976,335          1,033,649
                                                                    -----------        -----------

    Gross profit                                                      3,254,507          5,443,650
                                                                    -----------        -----------

Operating expenses:
    Research and development                                          2,059,495          2,047,604
    Sales and marketing                                               3,819,738          2,979,078
    General and administrative                                        1,551,457          1,371,108
    Acquired in-process research and development                             --            210,469
    Gain on sale of Tandem product line                              (2,157,827)                --
                                                                    -----------        -----------

    Total operating expenses                                          5,272,863          6,608,259
                                                                    -----------        -----------

    Operating loss                                                   (2,018,356)        (1,164,609)

Other income (expense):
    Interest income, net                                                 61,228            190,016
    Foreign exchange loss, net                                             (905)            (4,852)
                                                                    -----------        -----------

    Loss before income taxes                                         (1,958,033)          (979,445)

Income taxes                                                              2,390             58,535
                                                                    -----------        -----------

    Net loss                                                        $(1,960,423)       $(1,037,980)
                                                                    ===========        ===========

Basic and diluted net loss per share                                $     (0.67)       $     (0.36)
                                                                    ===========        ===========

Shares used in computing basic and diluted net loss per share         2,944,228          2,870,448
                                                                    ===========        ===========
</TABLE>


          The accompanying notes to consolidated financial statements.


                                       F-3


<PAGE>   40
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                 Consolidated Statements of Shareholders' Equity

                     Years ended December 31, 1997 and 1996


<TABLE>
<CAPTION>
                                            Common Stock               Retained Earnings          Total
                                       Shares            Amount      (Accumulated Deficit)  Shareholders' Equity
                                    -----------       -----------    ---------------------  --------------------
<S>                                 <C>               <C>            <C>                    <C>
Balances at December 31, 1995         2,821,214       $ 4,639,954    $           411,228        $ 5,051,182
                                                                        
                                                                        
Stock options exercised                  79,080           263,129                     --            263,129
                                                                        
Employee stock purchase plan                                            
shares issued                            10,662            18,125                     --             18,125
                                                                        
Net loss                                     --                --             (1,037,980)        (1,037,980)
                                                                        
                                                                        
                                    -----------       -----------    -------------------        -----------
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
                                    ===========       ===========    ===================        ===========
</TABLE>


          The accompanying notes to consolidated financial statements.



                                      F-4


<PAGE>   41
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                  Year ended December 31,
                                                                               ------------------------------
                                                                                  1997                1996
                                                                               -----------        -----------
<S>                                                                            <C>                <C>         
Cash flows from operating activities:
     Net loss                                                                  $(1,960,423)       $(1,037,980)
     Adjustments to reconcile net loss to net
          cash used for operating activities:
            Depreciation and amortization                                          813,636            639,044
            Gain on sale of Tandem product line                                 (2,157,827)
            Deferred income taxes                                                       --            210,512
            Acquired in-process research and development                                --            210,469
            Loss on disposal of property and equipment                              38,422                 --
            Changes in operating assets and liabilities:
                Accounts receivable                                              1,259,607           (399,426)
                Refundable income taxes                                            273,634           (112,404)
                Prepaid expenses and other assets                                 (251,087)          (129,090)
                Trade accounts payable                                            (210,223)            68,115
                Accrued and other liabilities                                      133,724             44,288
                Deferred revenue                                                   145,359            (63,801)
                                                                               -----------        -----------
                    Net cash used for operating activities                      (1,915,178)          (570,273)
                                                                               -----------        -----------

Cash flows from investing activities:
     Purchases of short-term investments                                                --         (1,331,338)
     Sales of short-term investments                                             1,353,065          1,013,000
     Proceeds from sale of Tandem product line                                   1,285,378                 --
     Capitalization of software development costs                                  (66,449)          (483,632)
     Purchases of property and equipment                                           (98,583)          (222,056)
                                                                               -----------        -----------
                    Net cash provided by (used for) investing activities         2,473,411         (1,024,026)
                                                                               -----------        -----------

Cash flows from financing activities:
     Repayment of bank borrowings and debt                                              --           (121,869)
     Proceeds from issuance of stock                                               158,297            281,254
                                                                               -----------        -----------
                    Net cash provided by financing activities                      158,297            159,385
                                                                               -----------        -----------
Net increase (decrease) in cash and cash equivalents                               716,530         (1,434,914)
Cash and cash equivalents at beginning of year                                     689,611          2,124,525
                                                                               -----------        -----------
Cash and cash equivalents at end of year                                       $ 1,406,141        $   689,611
                                                                               ===========        ===========
</TABLE>


          The accompanying notes to consolidated financial statements.


                                      F-5


<PAGE>   42
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                     Years ended December 31, 1997 and 1996


(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/NT 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/NT platform
        vendors such DEC, HP, IBM, SCO, Silicon Graphics, Sun, and Microsoft.
        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 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.
        In 1997, the Company recognized a gain on the sale of the operating
        assets of the Tandem product line of approximately $2.2 million.
        Approximately $1.6 million was received in 1997, and the Company expects
        to receive the remaining amount related to the sale, equal to
        approximately $900,000, in 1998. Of the remaining amount, approximately
        $700,000 is held in escrow pending the satisfactory completion of
        certain short-term performance objectives. The majority of such
        performance objectives were met during the first quarter of 1998. 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.

        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

        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 original equipment manufacturers 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,


                                      F-6


<PAGE>   43
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

        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. In October
        1997, the American Institute of Certified Public Accountants (AICPA)
        issued Statement of Position (SOP) 97-2, "Software Revenue Recognition,"
        which supersedes SOP No. 91-1. SOP No. 97-2 will change the accounting
        for "multiple-element arrangements" and is effective for fiscal years
        beginning after December 15, 1997. SOP 97-2 generally requires revenue
        earned on software arrangements involving multiple elements to be
        allocated to each element based on the relative fair values of the
        elements. If a vendor does not have evidence of the fair value for all
        elements in a multiple-element arrangement, all revenue from the
        arrangement is deferred until such evidence exists or until all elements
        are delivered. The Company will adopt the provisions of SOP 97-2 for all
        software revenue transactions beginning January 1, 1998. The adoption of
        SOP 97-2 is not expected to have a material effect upon the Company's
        results of operations.

        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.

        Additionally, the Company has classified its investments in preferred
        stock 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, 1997 and 1996, unrealized gains and losses were not
        significant.

        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
        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 market value. To date, the Company has made
        no adjustments to the carrying values of its property and equipment.


                                      F-7


<PAGE>   44
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

        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 remaining 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 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. Remeasurement
        adjustments and transaction gains and losses are recognized in income in
        the year of occurrence.

        Use of Estimates

        The Company's management has made a number of estimates and assumptions
        relating to the reporting of assets and liabilities and the disclosure
        of contingent assets and liabilities 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.


                                      F-8


<PAGE>   45
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

        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. Concentrations of credit risk
        with regard to trade account receivables are limited due to the large
        number of customers comprising the Company's customer base and their
        dispersion across many different industries and geographies. The Company
        has no significant concentration of credit risk in any geographic area
        or industry.

        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.


                                      F-9


<PAGE>   46
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

        Net Loss Per Share

        Net loss per share has been computed in accordance with Statement of
        Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."
        Basic earnings per share is computed using the weighted average number
        of common shares outstanding during the period. Diluted earnings 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.


(2)    CASH, CASH EQUIVALENTS, AND SHORT TERM INVESTMENTS

       Cash and cash equivalents consisted of the following:


<TABLE>
<CAPTION>
                                 December 31,
                         ---------------------------
                            1997             1996
                         ----------       ----------
<S>                      <C>              <C>       
Cash                     $  440,794       $  440,880
Money market funds        1,005,347          248,731
                         ----------       ----------
                         $1,406,141       $  689,611
                         ==========       ==========
</TABLE>

       Short term investments consisted of the following:
<TABLE>
<S>                      <C>              <C>       
Equity securities        $  286,000       $1,120,152
Commercial paper                 --          518,913
                         ----------       ----------

                         $  286,000       $1,639,065
                         ==========       ==========
</TABLE>



                                      F-10


<PAGE>   47
                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,
                                                     ---------------------------
                                                        1997            1996
                                                     ----------       ----------
<S>                                                  <C>              <C>       
Equipment                                            $1,224,991       $2,039,723
Furniture and fixtures                                  271,511          271,511
Leasehold improvements                                  136,669          136,669
                                                     ----------       ----------
                                                      1,633,171        2,447,903
Less accumulated depreciation and amortization          884,435        1,295,601
                                                     ----------       ----------
                                                     $  748,736       $1,152,302
                                                     ==========       ==========
</TABLE>


(4)     ACQUIRED TECHNOLOGY AND SOFTWARE DEVELOPMENT COSTS

        A summary of acquired technology and software development costs as of
        December 31, 1997 and 1996, follows:


<TABLE>
<CAPTION>
                                                     1997               1996
                                                  ----------          ----------
<S>                                               <C>                 <C>       
Acquired technology                               $       --          $  475,000
Software development costs                           416,444           1,512,733
                                                  ----------          ----------
                                                     416,444           1,987,733
Less accumulated amortization:
    Acquired technology                                   --             334,999
    Software development costs                       185,381             749,388
                                                  ----------          ----------
                                                     185,381           1.084,387
                                                  $  231,063          $  903,346
                                                  ==========          ==========
</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.


                                      F-11


<PAGE>   48
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

        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.

(5)    INCOME TAXES

       Income taxes consist of:


<TABLE>
<CAPTION>
                                      Current         Deferred          Total
                                     ---------        ---------       ---------
<S>                                  <C>              <C>             <C>       
Year ended December 31, 1997:
   Federal                           $      --        $      --       $      --
   State and local                         800               --             800
   Foreign                               1,590               --           1,590
                                     ---------        ---------       ---------
                                     $   2,390        $      --       $   2,390
                                     =========        =========       =========

Year ended December 31, 1996:
   Federal                           $(164,333)       $ 142,767       $ (21,566)
   State and local                         800           67,745          68,545
   Foreign                              11,556               --          11,556
                                     ---------        ---------       ---------
                                     $(151,977)       $ 210,512       $  58,535
                                     =========        =========       =========
</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,
                                                           --------------------------
                                                              1997            1996
                                                           ---------        ---------
<S>                                                        <C>              <C>       
Computed "expected" tax benefit                            $(665,731)       $(333,011)
Increase (reduction) in income taxes resulting from:
  State and local income taxes, net of
      federal benefit                                            528           45,240
  Change in valuation allowance                              673,086          399,440
  Foreign taxes                                                1,590           11,556
  Other                                                       (7,083)         (64,690)
                                                           ---------        ---------
                                                           $   2,390        $  58,535
                                                           =========        =========
</TABLE>


                                      F-12


<PAGE>   49
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       The tax expense recognized in 1997 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,
                                            ------------------------------
                                                1997               1996
                                            -----------        -----------
<S>                                         <C>                <C>   
Deferred tax assets:
    Allowance for doubtful accounts         $    50,173        $    84,290
    Covenant not to compete                      64,189             65,730
    Accrued compensation                         18,144             21,294
    Depreciation and amortization                    --             88,950
    State taxes                                      --                272
    Credit carryforward                         326,212            233,727
    Loss carryforward                           784,782            211,569
                                            -----------        -----------


       Deferred tax assets                    1,243,500            705,832

    Valuation allowance                      (1,072,526)          (399,440)
                                            -----------        -----------

       Net deferred tax assets                  170,974            306,392
                                            -----------        -----------

Deferred tax liabilities:
    Software development costs                   92,744            306,392
    Depreciation and amortization                78,320                 --
                                            -----------        -----------
       Total deferred tax liabilities           170,974            306,392
                                            -----------        -----------
       Net deferred tax asset               $        --        $        --
                                            ===========        ===========
</TABLE>


       The Company has recorded a valuation allowance of $1,072,526 with respect
       to the deferred tax assets as of December 31, 1997. 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 $1,983,000 and $1,802,000, respectively, that may be used
       to offset future taxable income and federal and state research tax
       credits of approximately $246,000 and $80,000, 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 2012.


                                      F-13


<PAGE>   50
                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>
                                       1997           1996
                                     --------       --------
<S>                                  <C>            <C>     
Accrued employee compensation        $230,696       $135,416
Royalties payable                          --         79,563
Acquisition related settlement             --        200,000
Other                                 498,279        180,273
                                     --------       --------
                                     $728,975       $595,252
                                     ========       ========
</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, 1997, 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.

        The Company's option activity was as follows:


<TABLE>
<CAPTION>
                                    Number of    Weighted-average
                                     shares       exercise price
                                    --------        --------
<S>                                 <C>          <C>     
Balance at  December 31, 1995        532,668        $   3.30

Granted                              383,750            2.88
Exercised                            (79,080)           3.33
Terminated                          (148,230)           3.28
                                    --------
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
                                    ========
</TABLE>


                                      F-14


<PAGE>   51
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

The following table summarizes information about stock options outstanding at
December 31, 1997:


<TABLE>
<CAPTION>
                          Options outstanding                     Options exercisable
     --------------------------------------------------------    -----------------------
        Range                        Weighted-      Weighted-                  Weighted-
         of                          average        average                    average
      exercise         Number       remaining      exercise        Number     exercise
       prices       outstanding  contractual life    price       outstanding    price
       ------       -----------  ----------------    -----       -----------    -----
<S>                 <C>          <C>               <C>           <C>          <C>
     $1.00 - 1.88      494,567       8.2 Years      $1.29          155,234     $1.37
      1.91 - 4.68      428,357       8.1             2.53          147,598      3.20
                       -------                                     -------

      1.00 - 4.68      922,924       8.1             1.87          302,832      2.27
                       =======                                     =======
</TABLE>


        Under the Company's 1994 Employee Stock Purchase Plan (the Purchase
        Plan) a total of 148,142 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 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>
                                      1997            1996
                                   ---------        --------- 
<S>                                <C>              <C>       
Reported net loss                  $  (1,960)       $  (1,038)
Pro forma net loss                 $  (2,408)       $  (1,444)

Reported net loss per share        $   (0.67)       $   (0.36)
Pro forma net loss per share       $   (0.82)       $   (0.50)
</TABLE>


                                      F-15


<PAGE>   52
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       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: 1997 - an expected life of 3.5 years, risk-free interest
       rates of 5.84%, 140.4% expected volatility, and no dividend yield; 1996 -
       an expected life of 3.5 years, risk-free interest rates of 6.25%, 114.9%
       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 $1.57 and $2.10 for the periods ended
       December 31, 1997 and 1996, 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. All assumptions were omitted in the estimate due to the
       immateriality of the compensation cost generated in association with the
       Purchase Plan.

       Pro forma net income reflects only options granted in 1997, 1996, and
       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 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
        $393,328, $407,092, $421,340, and $142,048 in 1998, 1999, 2000, and
        2001. Rent expense was $459,108 and $550,387 in 1997 and 1996,
        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 $320,818 and $289,273 in 1997 and 1996, respectively.


                                      F-16


<PAGE>   53
                ENLIGHTEN SOFTWARE SOLUTIONS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

(9)    FOREIGN OPERATIONS AND MAJOR CUSTOMERS

       The Company's operations outside of the United States consist solely of a
       sales office in the United Kingdom. Domestic operations are responsible
       for the design, development, and licensing of all products. Following are
       selected financial data, categorized by primary geographic area, for the
       years ended December 31, 1997 and 1996.


<TABLE>
<CAPTION>
                                           1997              1996
                                       -----------        -----------
<S>                                    <C>                <C>        
Sales to unaffiliated customers:
  North America                        $ 3,189,407        $ 5,306,348
  United Kingdom                         1,041,435          1,170,951
                                       -----------        -----------

       Total                           $ 4,230,842        $ 6,477,299
                                       ===========        ===========
Operating income (loss):
  North America                        $(2,052,865)       $(1,181,971)
  United Kingdom                            34,509             17,362
                                       -----------        -----------

       Total                           $(2,018,356)       $(1,164,609)
                                       ===========        ===========
Total assets:
  North America                        $ 3,400,998        $ 6,296,838
  United Kingdom                           313,711            412,409
                                       -----------        -----------

       Total                           $ 3,714,709        $ 6,709,247
                                       ===========        ===========

Export sales                           $   310,594        $ 1,045,775
                                       ===========        ===========
</TABLE>




                                      F-17


<PAGE>   54
                                 EXHIBITS INDEX


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

3.2(1)       By Laws.

10.21(2)@    Employment letter and Termination and Change in Control Agreement, dated
             March 4, 1996, by and between Enlighten Software Solutions, Inc. and
             Byron E. Jacobs.

10.21.1(3)@  Amendment to Employment letter and Termination and Change in Control
             Agreement, dated November 6, 1996, by and between Enlighten Software
             Solutions, Inc. and Byron E. Jacobs.

10.22(2)@    Nonqualified Stock Option Agreement, dated March 4, 1996, by and between
             Enlighten Software Solutions, Inc. and Byron E. Jacobs.

10.23(2)@    Incentive Stock Option Agreement, dated March 4, 1996, by and between
             Enlighten Software Solutions, Inc. and Byron E. Jacobs.

10.24(3)@    Termination and Change in Control Agreement, dated April 24, 1996, by and
             between Enlighten Software Solutions, Inc. and Michael A. Morgan.

10.25(3)@    Employment letter, dated December 27, 1996, by and between Enlighten
             Software Solutions, Inc. and Mark Himelstein.

10.26(3)@    Nonqualified Stock Option Agreement, dated December 27, 1996, by and
             between Enlighten Software Solutions, Inc. and Mark Himelstein.

10.27(4)     Agreement dated as of September 22, 1997, by and among Enlighten
             Software Solutions, Inc., Peter J. McDonald, and New Dimension
             Software, Inc.

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

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

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

21.1(5)      Subsidiaries of the Company.

23.1         Consent of KPMG Peat Marwick LLP.
</TABLE>