<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934.
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                         COMMISSION FILE NUMBER 0-19682

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

                     MASSACHUSETTS                   04-2784044
          (STATE OR OTHER JURISDICTION OF         (I.R.S. EMPLOYER
           INCORPORATION OR ORGANIZATION)         IDENTIFICATION NO.)

                                 14 CROSBY DRIVE
                          BEDFORD, MASSACHUSETTS 01730
                         TELEPHONE NUMBER (781) 273-9003

             SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE
               ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION
                                12(G) OF THE ACT:
                          COMMON STOCK, $0.01 PAR VALUE

                 NAME OF EACH EXCHANGE ON WHICH REGISTERED: NONE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

     As of March 18, 1998, there were 21,299,545 shares outstanding of the
registrant's common stock, $0.01 par value. As of that date, the aggregate
market value of common stock held by non-affiliates of the registrant was
approximately $46,154,086.


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                             CAYENNE SOFTWARE, INC.

                 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
                                TABLE OF CONTENTS

                                  PART I

<TABLE>
<CAPTION>
                                                                        PAGE

<S>                                                                     <C>
Item 1. Business.......................................................   3
Item 2. Properties.....................................................  12
Item 3. Legal Proceedings..............................................  13
Item 4. Submission of Matters to a Vote of Security Holders............  13

                                  PART II

Item 5. Market for Registrant's Common Equity and Related
          Stockholder Matters..........................................  13
Item 6. Selected Financial Data........................................  14
Item 7. Management's Discussion and Analysis of Financial
          Condition and Results of Operations..........................  15
Item 8. Financial Statements and Supplementary Data....................  27
Item 9. Changes in and Disagreements with Accountants on
        Accounting and Financial Disclosure............................  47

                                  PART III

Item 10. Directors and Executive Officers of the Registrant............  48
Item 11. Executive Compensation........................................  48
Item 12. Security Ownership of Certain Beneficial Owners
           and Management..............................................  48
Item 13. Certain Relationships and Related Transactions................  48

                                  PART IV

Item 14. Exhibits, Financial Statement Schedules, and
           Reports on Form 8-K.........................................  48
Signatures.............................................................  51
</TABLE>


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                                     PART I

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

Cayenne Software, Inc. (formerly Bachman Information Systems, Inc.) ("Cayenne"
or the "Company"), organized as a Massachusetts corporation in 1983, develops,
markets and supports a suite of workgroup-to-enterprise analysis and design
solutions for the practical challenges software developers face every day.
Global 2000 companies and government agencies around the world use Cayenne
products as they develop, implement, and maintain enterprise-wide,
business-critical information systems, such as billing, trading, and customer
support applications, as well as mission-critical technical embedded systems
such as telecommunications switching software, aeronautics, and navigation
systems. These companies and agencies are using computing platforms ranging from
Intel-based computers running Microsoft operating systems, to UNIX workstations,
mid-range, and mainframe computers. Cayenne's products are designed around an
open architecture that enables organizations to create applications that
integrate diverse information sources into new high-performance computing
environments, to modify applications as business requirements and technologies
change, and to run those applications on a variety of platforms. Cayenne's
approach to reusability and its open architecture support applications being
developed using business modeling, data modeling and database design, structured
modeling, and object-oriented modeling, with target computing architectures
ranging from mainframe to client-server to n-tiered to inter/intranet.

The Company faces many challenges in providing customers with a more open and
flexible set of solutions. The Company has addressed some of these challenges
over the past several years by introducing additional products targeted at the
client/server and object-oriented markets both through internal development and
by means of acquisitions. The actions necessary to execute this transition have
had an adverse effect on the Company's operating results for the year ended
December 31, 1997 and for the transition period from July 1, 1996 through
December 31, 1996 and fiscal years ended June 30, 1996 and 1995, respectively,
and may continue to adversely affect operating results in the future.

In October 1996, the Company elected to change its year end to December 31st. As
a result, the period from July 1, 1996 through December 31, 1996 was designated
as the "Transition Period."

ACQUISITIONS

On March 27, 1997, the Company acquired the assets and liabilities of
Multiquest Corporation ("Multiquest") in a transaction accounted for as a
purchase. The Company acquired such assets and liabilities in exchange for
50,000 shares of the Company's common stock. The purchase price for Multiquest
was approximately $209,000 based upon a stock price of $4.1875 (which
approximated the fair market value of the Company's common stock at the closing
of the acquisition). The net tangible assets and liabilities of Multiquest
acquired by the Company were insignificant. The purchase price was allocated to
the fair value of the technology acquired and customer lists. The Company's
results reflect the allocation of the purchase price in accordance with
generally accepted accounting principles and the results of operations reflect
the impact of the acquisition since the closing date. The pro-forma results of
Multiquest prior to the acquisition would be immaterial to the Company's
reported results and are therefore not presented. The acquisition resulted in
Cayenne Software having rights to a low-cost, entry level Object Oriented design
tool named "S-Case", renamed "PepperSeed" and subsequently "ClassDesigner" by
Cayenne. (See, Also Note 13 to the Consolidated Financial Statements)

On July 18, 1996, the Company completed its acquisition of Cadre Technologies
Inc. ("Cadre") under an Agreement and Plan of Merger (the "Merger Agreement")
dated as of March 25, 1996 by and among the Company, Cadre and B.C. Acquisition
Corp. ("Acquisition Corp"), a wholly-owned subsidiary of the Company. The Merger
Agreement provided that upon the terms and subject to the conditions specified
therein that, effective on the closing, Acquisition Corp. would be merged with
and into Cadre, the separate corporate existence of Acquisition Corp. would
cease, and Cadre would continue as the surviving corporation in the merger and
as a wholly-owned subsidiary of the Company. The acquisition was accounted for
as a "pooling of interests" during the six-month transition period ended
December 31, 1996. Pursuant to the Merger Agreement, the amount of Company
shares of common stock issued was 4,716,442 and the exchange ratio was
determined to be 0.3088 Company share for each outstanding Cadre share. The fair
market value of a share of the Company's common stock at the time of the merger
was $5.625 per share. Stratagem Partnering Inc. acted as the Company's financial
advisor in connection with the Cadre acquisition. This acquisition added a
number of products to Cayenne's tool suite, including "Teamwork", a structured
modeling tool, "Ensemble", a C language reverse engineering and modeling tool,
and products resulting from Cadre's earlier acquisition of Westmount BV.


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INDUSTRY BACKGROUND

SOFTWARE DEVELOPMENT IN THE LATE 1990'S

For most software development teams, the task of developing systems and
applications continues to become more complicated. The business climate of the
late 1990's is one of increasing pressure on organizations to react quickly to
change, to rapidly offer new services and products to remain competitive, and to
find greater economies in their operations. This requires supporting software to
be more flexible, user friendly, and more reusable, while holding to high
quality standards. Newly emerging technologies must be exploited, yet the
systems being developed must work side-by-side with systems build or acquired
over the last three decades.

To remain competitive in this business climate, commercial business managers,
systems analysts, and project managers, as well as technical systems engineers
and product managers need to redefine goals, involve users, understand their
requirements and take the time to plan and design their systems carefully. Most
software project costs are committed in the early stages of analysis and system
design. In projects that are not carefully planned, a significant percent of
software defects are introduced before the first line of code is written. If
they are corrected at this point, the costs are low. If corrections are delayed
until the implementation phase, however, the price tag can be significantly
higher.

THE NEED FOR MODELING

Software modeling tools encourage teams to spend the necessary time to
understand project requirements and to design applications which directly
address those requirements in a well-architected manner. This alone can reduce
software errors, their associated costs and possibly months of development time
devoted to correcting those errors.

Modeling also allows software designers and developers to improve their
development lifecycle and reduce costs as a result of other product features as
well. By planning ahead, they can design components to be reusable by others,
reducing errors and increasing productivity. Reusability permits them to
construct new products from proven components - shortening the testing time of a
new product (thus allowing them to deliver more quickly to market), and raising
confidence in the product's overall quality (making the product more
competitive). With well-defined, graphical models of their systems, designers
can communicate easily with team members, avoiding errors, misunderstanding, and
duplication of efforts. Certain features built into modeling tools, such as code
generation and DDL (data definition language) generation, can automate much of
the work to save time and ensure accuracy. In these ways, modeling tools allow
developers to work more efficiently, and to generate higher quality, more
supportable software - ultimately improving their return on investment.

An additional and important byproduct of modeling is the automatic generation of
complete and accurate systems documentation, improving software supportability,
and improving the expertise of developers for existing applications. Modeling
provides a mechanism whereby teams of engineers may communicate using a common
language and notation - reducing costly misunderstandings or design conflicts.
Up-to-date system documentation reflecting that common language provides a means
for that communication.

CAYENNE'S MARKET SEGMENTATION

Cayenne Software groups its customers and prospects into three market segments:
IS/IT, Market-driven, and Bid-driven. The sales approach, product features, and
support requirements differ from segment to segment, as explained below.

IS/IT MARKET SEGMENT

Software development organizations in the IS/IT (Information Systems /
Information Technology ) market segment develop software primarily for in-house
use. They are development groups within an IS organization who, for example,
develop software to generate reports against a corporate database, develop
customer billing applications, general ledger programs, and payroll
applications.

IS/IT organizations have found in recent years that good information systems
supporting well-designed business processes can provide a substantial
competitive edge. The growth of business process re-engineering is an attempt to
re-think business processes and


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work flow from the ground up in order to achieve the dramatic improvements in
productivity required to reduce costs, improve service to customers and gain
competitive advantage. This re-thinking of the business process creates
challenges for IS professionals by creating many new processes to support, and
by rendering existing systems partially or completely obsolete. As a result,
there is an increasing demand for new application development as well as a need
for better integration among existing information resources.

Today, several very different types of technology coexist in large
organizations, each serving the needs of a specific user constituency. This
diversity of technology creates serious challenges for information systems
professionals, as they work to build new applications, maintain "legacy"
applications, incorporate and support new computing platforms (Client/Server,
Inter/Intranet), and integrate a growing variety of database technologies and
applications for improved access to information. To manage and evolve their
data-based systems, IS/IT organizations will use a variety of modeling
techniques. They will use business and data modeling to design the processes
that should be followed and the data which must flow between organizations in
order to keep the business operational. They will also use database design tools
to design the actual databases and database tables that will store that data.
For the applications or systems which must operate on that data, IS/IT
organization will either use traditional, structured programming, or will be
using more modern object-oriented programming techniques. In the latter case,
they may be well served with object modeling tools to aid in their design.

The IS/IT market segment uses a variety of modeling tools to manage data and
develop software today: business modeling, tools, data modeling and database
design tools, and application (recently object oriented) modeling tools.
Cayenne's Groundworks, Terrain, and ObjectTeam, respectively, are examples of
modeling tools used in IS/IT.

MARKET-DRIVEN SEGMENT

Software developers in the market-driven segment are creating software
applications for the purpose of resale. These applications may be packaged
applications (such as off-the-shelf MRP-II applications and accounts payable
programs), tools (such as development tools, compilers, operating systems,
CAD/CAM systems), or software embedded in consumer and commercial devices (such
as controller software in laser printers, anti-lock braking systems, and heart
monitors).

The challenge for market-driven companies is to deliver superior, commercially
acceptable and competitive software quickly. In packaged software, time to
market is a key differentiator. Additionally, market-driven applications need to
take full advantage of the latest technologies, platforms, and methodologies.
Increasingly, packaged applications are being used to augment legacy systems in
IS/IT organizations. These organizations will want to replace their mainframe
based systems with client-server or web-based applications, running on modern PC
or UNIX workstation based computers. The applications provided by market-driven
developers will need to support more complex, heterogeneous computing
environments, using the appropriate programming languages, tools, and
methodologies on those environments.

For packaged applications the choice of development technology today is object
orientation. Modeling tools are required which support the analysis and design
of object classes, associations, and components, facilitating object reuse and
better design. Cayenne's ObjectTeam and ClassDesigner products are object
modeling tools. ObjectTeam is designed for teams of developers working on
complex applications, needing to do in-depth analysis and design of object
oriented systems; ClassDesigner is an entry-level object design product for
individuals just beginning with object oriented development.

For embedded software, object oriented techniques are gradually replacing more
traditional structured modeling techniques, but the latter is still prevalent.
Structured modeling provides analysis and design for software development
following the industry standard software development process of the 1980's, and
is still widely in use today. For many organizations developing technical
embedded software, there is a perceived value to the deterministic nature of
structured design and there is no perceived advantage of object orientation over
structured design which would justify the investment to migrate to a new
methodology. These organizations continue to use structured techniques, aided by
structured modeling tools, such as Cayenne's TeamWork product.

BID-DRIVEN MARKET SEGMENT

Software developers in the bid-driven segment are creating software applications
on contract, in response to a detailed requirements specification. These
software applications may be technical in nature (such as embedded navigation
software for a fighter plane being developed for the federal government) or
commercial in nature (such as a financial management system being developed for
an insurance company). The software they develop can be as technical as that of
the market-driven segment, with all of the technical challenges. Since many of
the systems and applications being developed in this market segments are
mission- or life-critical, the



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quality and reliability of the system is extremely important, further
emphasizing the need to design them well from the start. Unique to the
bid-driven segment, it is usually necessary to prove that all the original
requirements specified during the bid process were met, and which sections of
software directly addressed them. Integration with requirements definition and
traceability tools is therefore important. Also unique to the bid-driven
segment, it is as important to deliver systems documentation for the delivered
software as the software itself. Many of these systems must be maintained for
decades, also contributing to the need for accurate and complete systems
documentation.

Cayenne's analysis and design products, in addition to complementary products
supported through strategic partnerships, directly address the additional
requirements of the bid-driven market segment. Both TeamWork and ObjectTeam
provide solutions for generating complete, accurate systems documentation from
the actual model of the system - "model-driven documentation". Integration with
leading requirements definition and traceability tools satisfy the need to prove
compliance to contact. Cayenne's Groundworks and Terrain products provide
detailed, up to date models of the data and processes which define the
information necessary to operate an enterprise.

CAYENNE'S STRATEGIC DIFFERENTIATORS

Cayenne takes the following approach to these areas, which provides a number of
benefits to organizations seeking strategic solutions to their information
systems challenges.

ANALYSIS AND DESIGN SOLUTIONS FOR A WIDE VARIETY OF MODELING APPROACHES.
Cayenne's products support analysis and design for every major approach to
modeling: business process modeling (ProcessTeam), data modeling (Groundworks),
database design (Terrain), structured modeling (TeamWork), and object oriented
modeling (ObjectTeam and ClassDesigner).

One market in which this breadth is particularly useful is the IS/IT segment,
where developers wish to develop applications using latest object oriented
techniques, but must have those applications access legacy or traditional
relational database systems. The integration of Cayenne's ObjectTeam (object
oriented modeling) with Groundworks (traditional data modeling) and Terrain
(relational database design) provides a unique, single-vendor solutions to this
"coexistence" challenge.

Having access to a variety of analysis and design tools is also important to
developers of technical applications, whether in the market or bid-driven
segment. Since most development is an iterative process, development
organizations will want to reuse designs used with earlier technology while they
implement new designs with newer technology. For these technical developers,
access to Teamwork for structured modeling and ObjectTeam for object oriented
modeling, may be highly desirable.

TECHNOLOGY INDEPENDENCE. Cayenne solutions enforce a separation between
conceptual business requirements or systems analysis, where organizations
capture information about what data needs to be available and what happens to
it, and physical implementation, where technology-specific concerns are
addressed in an implementation design. This separation provides flexibility.
Changes to the business requirements or policies and changes to the technology
environment can be addressed independently, allowing organizations to leverage
investments in each. The technology-independent approach helps organizations to
focus on business requirements, increasing the likelihood that the finished
application will meet those requirements. This separation is evidenced in the
areas of business modeling and database design (ProcessTeam and Groundworks -
conceptual, Terrain - physical), structured modeling (Teamwork - conceptual,
Ensemble - physical), and ObjectTeam (analysis and higher level design phases -
conceptual, object design and code generation phases - physical).

SUPPORT FOR AN ITERATIVE DEVELOPMENT PROCESS. Software development projects
often do not have the luxury of "starting from scratch". Typically, software
will be developed starting from a foundation of pre-existing software. The
challenge for software project managers is to continue to innovate and enhance
subsequent versions of software. While Cayenne solutions address the entire life
cycle of application development, there is no assumption that the software is
being designed "from scratch". For example, database design products can capture
existing database structures from applications that have already been developed,
allowing database designers to view and optimize the data structures. Design can
begin with a new project or with an existing system already in production. The
structured and object modeling products allow the reverse engineering of legacy
software into models, which can then be reworked and enhanced to generate new
systems or subsequent versions of an existing system. This inherent support for
an iterative development process is a key factor in the value added by analysis
and design modeling tools.

SUPPORT FOR HETEROGENEOUS COMPUTING ENVIRONMENTS. Used individually, Cayenne
products provide users with sophisticated solutions to application development
problems. Cayenne enhances their utility by providing these tools on a variety
of


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computing platforms - from PC Windows to NT to a variety of UNIX systems.
Product integration enhances communication, efficiency, and productivity, and it
increases the return on the investment in time and effort expended throughout
the application development life cycle. Using Cayenne products, systems
analysts, software developers, and database designers can work in concert.

ABILITY TO ACHIEVE PRODUCTIVITY BY REUSING PREVIOUS WORK. The
technology-independent approach, combined with the use of object-oriented
techniques, allows for the reuse of valuable work -- a very important
contributor to productivity. Cayenne supports reuse by facilitating the
development of data and application models, so that existing solutions are well
documented and understood and easily accessible for use in other systems.
Additionally, the support in ObjectTeam, ClassDesigner, Ensemble, and Terrain to
reverse engineer legacy systems (code and databases) directly enables reuse.
Also, both ClassDesigner and ObjectTeam include models of industry-standard
class libraries of components, such as the Java JDK and the Microsoft Foundation
Classes. By providing built-in models of these components, developers have
easier access to standard components that may fit their purpose. In ObjectTeam,
a corporate grouping mechanism allows software developers to populate a publicly
accessible area with components designed and intended for reuse.

SUPPORT FOR TEAM DEVELOPMENT. Cayenne's ObjectTeam and TeamWork tools have
built-in mechanisms (repositories) which specifically provide advance support
for large teams of developers working on the same project or projects
simultaneously. Cayenne's tool, Shared Work Manager, provides similar team
support for teams of business and process designers.

STRATEGIC DIRECTION

Cayenne continues to invest in solutions that facilitate development of critical
applications that are applicable across multiple platforms and can be used
throughout the application development life cycle. These solutions result from a
combination of Cayenne-built software products, joint development efforts with
partners, acquired technology, and services provided by Cayenne's experienced
trainers and consultants. Cayenne has invested in its client/server,
object-oriented, and structured analysis solutions, recognizing that many
organizations will need to maintain multiple types of environments for some time
to come. Although, the Company is well positioned in the midst of several
industry megatrends, towards data warehousing, the internet and intranet, the
use of the object-oriented software development approach, and Year 2000
reengineering initiatives, it has not yet seen rising demand that has translated
to positive operating results

CAYENNE'S SOLUTIONS

Cayenne's diverse solutions, composed of software products and services, assist
complex systems designers and information systems specialists in the following
areas: modeling systems and business requirements; designing and re-engineering
legacy code and databases; developing and deploying embedded systems, IT
systems, and packaged applications. Cayenne products provide a team-based
structured analysis and design, object-oriented analysis and design, and
business process and data modeling. The suite of products and services provided
by Cayenne and its complementary tool partners allows customers to choose from
the wide variety of application development tools on the market that best meet
their needs. Cayenne offers products and services today in each of the following
solution areas.

OBJECT ORIENTED TECHNOLOGY

Cayenne's OBJECTTEAM is an analysis and design tool which automates and manages
object oriented software construction using industry standard modeling notations
such as the Unified Modeling Language (OMG UML) and Object Modeling Technique
(OMT). It provides a multi-user repository with version and configuration
management for large teams of developers, and supports the forward and reverse
engineering of a dozen programming languages, including Ada 83, Ada 95, C++,
Delphi, Forte, Java, Powerbuilder, and Smalltalk. Forward engineering of
programming languages refers to the ability of OBJECTTEAM to generate from an
object oriented model, source code files which are the basis for object oriented
applications and systems. Reverse engineering of programming languages refers to
the ability of ObjectTeam to parse existing (legacy) code, and to construct a
model representing the application or system that code comprises. From there,
the application or system can be modified, evolved, and enhanced. With
OBJECTTEAM, a developer can make logical (model) or physical (code) changes to
the application or system, and keep the code and models in sync - referred to as
"synchronous engineering".


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Additionally, OBJECTTEAM supports a function named ObjectLoad which integrates
OBJECTTEAM's object oriented models with GROUNDWORKS business data models. This
allows teams of data systems analysts to work in sync with teams of object
oriented software analysts and developers.

MODELING BUSINESS REQUIREMENTS

Cayenne GROUNDWORKS enables data analysts, system analysts, and other business
analysts to model information systems more quickly and thoroughly than they can
using conventional techniques. GROUNDWORKS incorporates the data, logic, and
process requirements into a unified model. Further, it can be used to generate
implementation components for a variety of database and software environments.
These data modeling tools incorporate a rule-based expert system that places
Cayenne's modeling expertise in the hands of users, helping them to improve the
quality and effectiveness of the resulting models.

Cayenne PROCESSTEAM is a business process modeling tool, for process domain
experts to model "as is" business processes, and to design "to be" processes for
the future. These process models increase process understanding, and are a basis
for new systems design using Cayenne's Groundworks or ObjectTeam. Increasingly,
IS/IT organizations are looking to more closely couple their business modeling
and systems design functions. The ability to pass business models directly to
the systems development team, and to keep the business model and systems model
in sync, may result in support systems which better match the desires of the
business itself, and may allow that business to provide new and better services
to their customer in a more timely fashion.

DESIGNING AND RE-ENGINEERING DATABASES

Cayenne's TERRAIN family of products allows data analysts, application
developers, and database designers to design, implement, and maintain
high-performance relational databases. TERRAIN is Cayenne's family of database
design tools that offers a comprehensive, scaleable database design environment
for business-critical client/server databases. They provide graphical support
for basic design tasks, such as object creation and maintenance, reporting, and
database documentation for databases such as Sybase SQL Server, Oracle,
Informix, DB2, DB2/6000, and ODBC-supporting databases.

Cayenne's GROUNDWORKS and TERRAIN products are integrated through TERRAINMAP, a
product which translates GroundWorks data models into Terrain database designs.
This integration makes it possible to re-engineer existing production systems,
and to maintain a single data model and deploy it across any number of database
platforms. Organizations can start in either place --with an existing data model
or an existing database-- and use TerrainMap to help achieve optimal design and
performance.

SHARED WORK MANAGER allows groups of analysts to share models and integrate the
results of their work. Shared Work Manager is a work group modeling product that
takes an intelligent approach to resolving modeling conflicts that arise in a
multi-user environment. It enables groups to interact in a manner consistent
with their organization's culture and workflow methods. The product helps users
achieve a shortened development cycle without sacrificing application quality
because it supports parallel development, increases consistency across
applications, streamlines work flow, and simplifies and encourages teamwork.

STRUCTURED ANALYSIS AND DESIGN

TEAMWORK is a family of structured methods products, used by both C++ and Ada
developers, which help software engineers improve software quality, streamline
the software development process, and reduce development costs. Specific
Teamwork tools address aspects of development including requirements analysis,
real-time systems development, dynamic verification, structured design, testcase
generation, and document generation. Included in the TEAMWORK family is
ENSEMBLE, a tool suite ancillary to TEAMWORK for reverse engineering, modeling,
and generating C language code.

VANTAGETEAM is a family of structured method products that enable relational
database developers to build and maintain enterprise client/server systems. Its
integrated, model-driven environment offers developers a choice of either
structured or object-oriented modeling approach. VantageTeam features extensive
code-generation capabilities for popular 3GLs and 4GLs, and supports the leading
relational database management systems, including CA-Ingres, Informix, Oracle
and Sybase.

INTERNATIONAL VERSIONS OF CAYENNE PRODUCTS


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The Cayenne product set is available worldwide. Some of Cayenne's products are
enabled for double-byte character sets. This enablement is a prerequisite for
translation into languages utilitizing ideographic character sets: Chinese
(Simplified and Traditional), Japanese, and Korean. TeamWork and ClassDesigner
are currently double byte enabled, with a localized Japanese version of Teamwork
available for some versions.

RISKS OF INTERNATIONAL OPERATIONS

Approximately 53%, 51%, 52%, and 50%, of Cayenne's revenues during the year
ended December 31, 1997, the six-month transition period ended December 31, 1996
and fiscal 1996, and 1995, respectively, were attributable to international
sales. Approximately 9%, 4%, 7%, and 6%, of Cayenne's revenue during the year
ended December 31, 1997, the six-month transition period ended December 31, 1996
and fiscal 1996, and 1995, respectively, was attributable to sales made to
independent international distributors. Sales in countries in which Cayenne
continues to use independent distributors will remain subject to the
distributors' financial condition and success, which cannot be controlled by
Cayenne.

The Company maintains wholly-owned operating subsidiaries in the following
countries; Germany, United Kingdom, Netherlands, Italy, Singapore, and Spain.
All subsidiaries are selling and marketing organizations, while the Netherlands
subsidiary also conducts product development. The future contribution of sales
from the foreign subsidiaries to Cayenne's results of operations depends on
Cayenne's success in maintaining cost-effective marketing, sales and development
operations (Netherlands) through these subsidiaries. Cayenne's international
sales are denominated primarily in local currencies. Any material adverse effect
on the Company's international business would likely effect the financial
condition of the Company.

Risks inherent in Cayenne's international business generally include exposure to
currency fluctuations, longer payment cycles, greater difficulties in accounts
receivable collection and the requirement of complying with a wide variety of
foreign laws.

CUSTOMERS AND APPLICATIONS

Cayenne's products are used worldwide by systems analysts and engineers in a
wide variety of businesses. Generally, the customers of Groundworks and Terrain
are users of computing environments for data-intensive applications, in the
IS/IT market segment. Customers of Teamwork are developing software to be used
embedded in complex systems, largely in the bid-driven market, but also in the
market-driven segment. Customers of ObjectTeam develop software for a wide
variety of systems and applications, spanning IS/IT, Bid-driven, and
Market-driven segments.

IBM was Cayenne's single largest customer during the year ended December 31,
1997, the transition period ended December 31, 1996 and in each of fiscal 1996
and 1995 when revenue from IBM accounted for 17%, 16%, 15%, and 9% of Cayenne's
total revenue, respectively. Cayenne receives revenue from IBM in the form of
license fees in connection with its own use of Cayenne products, as well as
amounts generated by IBM as a distributor and systems integrator.

CUSTOMER SUPPORT AND SOFTWARE MAINTENANCE

Cayenne believes that high-quality customer service and technical support are
essential competitive factors in its marketplace. Through its training,
consulting, maintenance, and support services, Cayenne is aware of customers'
needs and strives to provide services that will maximize the results achieved by
customers using Cayenne's products. Maintenance, support, and training also
provide valuable feedback that is used to refine, enhance, and develop Cayenne
products.

Customers receive maintenance support from a staff of experienced customer
specialists via a telephone "hot line". In the past, software maintenance and
support were generally provided without extra charge for ninety days following
the initial licensing of a product. The Company has changed this practice and
generally no longer provides maintenance and support without charge. Annual
maintenance contracts are available for a fixed price per copy. Customers with
annual maintenance contracts also receive periodic product upgrades and
feature/function enhancements.


                                       9
<PAGE>   10
TRAINING AND CONSULTING

Cayenne provides conceptual and product-oriented training courses for customers
at education facilities in the United States in Bedford (Massachusetts) and New
York City as well as Turin, Italy; Munich and Wiesbaden, Germany; Delft,
Netherlands and Wokingham, England. Cayenne's international distributors provide
training and consulting to customers in their territories. Courses are also
available to be customized and delivered at customer sites. The Company has
access to training facilities throughout the United States through an
arrangement with a partnering vendor.

The Company provides professional services delivered by experienced consultants.
These offerings are designed to promote customer success in the planning,
implementation, and ongoing use of Cayenne's software products. Cayenne provides
consulting services in the following areas: data warehouse services, object
oriented development, embedded systems, structured analysis and design, data
base design, re-engineering, and package implementations.

MARKETING AND SALES

Cayenne markets its products to Global 2000 companies, government agencies, and
organizations of similar size worldwide that use computers and software for
complex or enterprise-level applications. Cayenne seeks to promote acceptance of
its products among technical personnel, as well as at the management level.
Cayenne markets its products through a direct sales force in the United States
and through wholly-owned subsidiaries in Germany, Italy, the Netherlands,
Singapore, and the United Kingdom. Distributors, agents and other resellers
market Cayenne's products in over 40 other countries.

Cayenne promotes a team selling approach in which telemarketing, corporate
sales, and field sales representatives work together to identify, qualify,
inform, and sell to prospective customers.

In conjunction with its expansion into the client/server and object-oriented
development marketplace and in an effort to promote distribution through
alternate channels, Cayenne is evaluating alternate distribution channels such
as value-added resellers ("VARs") and system integrators worldwide.

Cayenne's marketing program includes advertising, public relations, promotional
materials, direct mail, seminars, analyst briefings, user meetings, trade shows
and telemarketing. The focus of these efforts is to position Cayenne and the
value of Cayenne's solutions to customers as well as industry influencers.
Cayenne's technical personnel frequently participate in industry conferences
that increase customer awareness of Cayenne's products and its technological
innovations. In 1997, Cayenne greatly increased its use of the world wide web
for its marketing efforts, providing collateral, communication, evaluation
products, and purchasing capability to its web site, www.cayennesoft.com.

Cayenne regards its customer service and support organization as an integral
complement to its corporate strategy. Cayenne believes that its reputation for
strong after-sale support has helped the Company achieve additional sales, as
well as contributing to a high level of customer satisfaction.

PRODUCT DEVELOPMENT AND MANUFACTURING

To date, a significant portion of Cayenne's software products have been
developed internally by its employees and consultants. Cayenne has development
staff in Bedford, Massachusetts and in Delft, Netherlands. Cayenne continues to
develop, maintain and enhance certain of Cayenne's products through an agreement
with a development organization in India, allowing Cayenne to realize savings in
development costs while maintaining control over the product development
process. Cayenne supports development and manufacturing for a family of
structured analysis and design and object-oriented products. In developing new
products and enhancements, Cayenne uses an integrated engineering approach that
emphasizes market-driven quality and customer satisfaction. This approach
incorporates the perspectives of customers and functional experts, as well as
personnel in the areas of marketing, sales, software engineering, quality
assurance, documentation, and customer support.

Cayenne's research and development staff has significant expertise in the
technologies bearing on development of software tools, including object oriented
development, personal workstations, graphics, expert systems, database design,
enterprise modeling, systems analysis, code generators, interface design,
operating systems, networks, and language/compiler skills. Cayenne uses its
product set in the design of future product enhancements and in the development
and deployment of the Company's own internal information


                                       10
<PAGE>   11
systems. For example, Cayenne uses ObjectTeam to design future revisions of
ObjectTeam itself. Cayenne uses ClassDesigner to design and develop Terrain.

The products developed and enhancements added by Cayenne are determined by
Cayenne's assessment of market revenue, growth opportunity, and return on
investment, tempered by the technical feasibility of the innovation, and the
need to maintain the highest levels of product quality and customer
satisfaction. Market opportunity is assessed by a combination of direct market
and customer research, by access to opinion leaders in technology, by working
along side customers to define their most productive development methodologies,
and by working with customer development partners to manage projects involving
substantial innovation and requiring supplementary funding.

The Company's future financial performance will depend in part on the successful
development and introduction of new products and enhancements to existing
products, and customer acceptance of these products. Many software companies
have experienced delays in completing the development of new products. There can
be no assurance that the Company will not encounter difficulties that could
delay or prevent the successful introduction and marketing of new and enhanced
versions of its products.

During the year ended December 31, 1997, the six-month transition period ended
December 31, 1996, and in fiscal 1996 and 1995, Cayenne spent $10.3 million,
$5.4 million, $14.4 million, and $17.1 million, respectively, on internal
product development. Also during fiscal 1995, the Company recorded a charge for
purchased research and development of $7.3 million upon the closing of the
acquisition of Westmount Technology B.V.

COMPETITION

The market for application design and development products is highly competitive
and characterized by continual change and improvement in technology. The list of
Cayenne's principal competitors in sales situations depends on several factors
including the solution area, and whether the customer seeks strategic or
tactical solutions.

Cayenne's principal competitor in the modeling and database design market is
LogicWorks, Inc., which offers the ERWin database design product with some data
modeling capabilities built in. It also offers BPWin, a business process
modeling product.

In the Structured technical market, Cayenne's primary competitor is Aonix,
formerly Interactive Development Environments, Inc. ("IDE") which was recently
purchased by Thomson S.A. The product is now called StP (Software thru
Pictures).

In the object-oriented market, Cayenne's primary competitors are Rational
Software (with its Rose product), Platinum Technology (with Paradigm Plus), and
Select Software Tools (with Select/SE). Many other companies produce products
that compete with Cayenne and still others might become competitors in the
future. As Cayenne expands its product line into new solution areas it is
encountering additional competitors. Many of Cayenne's existing and potential
competitors have substantially greater financial, marketing, and technological
resources than Cayenne. Most notable is Rational Software, which holds the
leadership position in the object modeling market, as recently quantified by the
International Data Corporation. Although Cayenne was placed second by
International Data Corporation, its percentage of the object modeling market was
considerably lower than that of Rational Software.

The principal competitive factors that have affected the market for Cayenne's
products include responsiveness to customer needs, product function, product
reliability, product ease of use, product openness, quality of customer training
and support, vendor reputation, relationships with other vendors, and price. A
variety of external and internal events and circumstances could adversely affect
Cayenne's competitive capacity in the future. Cayenne's ability to be
competitive will depend, to a great extent, on performance in product
development and in sales and marketing. To be successful in the future, Cayenne
must respond promptly and effectively to the challenges of technological change
and its competitors' innovations by continually enhancing its own product
offerings and ensuring that the market is aware of the solutions Cayenne offers.

PROPRIETARY RIGHTS PROTECTION

Cayenne relies on a combination of copyright, trade secret, patent and trademark
laws and license agreements to protect its proprietary rights in technology.
Cayenne distributes its products under signed software license agreements that
grant customers a perpetual, non-exclusive license to Cayenne's products subject
to restrictions on copying, disclosure, usage, decompiling and transferability.
The source code for all of Cayenne's products is protected as a trade secret and
as an unpublished copyrighted work. In addition, Cayenne



                                       11
<PAGE>   12
has entered into nondisclosure and invention agreements with each of its key
technical employees. All products are delivered as object code. All products are
protected by a software license module to prevent or reduce the use of illegally
copied products.

Charles W. Bachman has assigned to Cayenne United States Patent 4,631,664,
"Partnership Data Base Management System and Method." This patent covers the
unique internal formats used to store design information in several of Cayenne's
products. Mr. Bachman and other inventors have also assigned to Cayenne patents
with respect to the systems used in certain Cayenne products for dynamically
modeling organizational information systems (United States Patent 5,146,591,
"Dynamic Information Management System Utilizing Entity-Relationship Information
Model in which the Attribute is Independent of an Entity") and for processing
complex information representative of business transactions (United States
Patent 5,179,698, "System for Transforming User Data in Accordance with an
Algorithm Defined by Design Data and for Evaluating the Transformed Data Against
Logical Criteria"). Several additional patents have been granted by the United
States Patent and Trademark Office (the "PTO") pertaining to technology used in
certain Cayenne's products.

Despite the steps taken by Cayenne to protect its proprietary rights, it may be
possible for unauthorized third parties to copy aspects of Cayenne's products,
to develop similar technology independently or to obtain and use information
that Cayenne regards as proprietary. Cayenne believes that, because of the rapid
pace of technological change in the software industry, patent, trade secret and
copyright protection is less significant to Cayenne's competitive position than
factors such as the knowledge, ability and experience of Cayenne's personnel,
new product development, frequent product enhancements, name recognition and
ongoing reliable product maintenance support.

As of the date hereof, Cayenne has not received any claim alleging that any of
Cayenne's products infringes proprietary rights of any third party seeking
indemnification for such an infringement, and Cayenne does not know of any basis
for such a claim. If any such claim were to be asserted, it might involve costly
and protracted litigation. No assurance can be given that Cayenne would be
successful in any such litigation or that, if it were not successful, it would
be able to license the disputed proprietary rights on commercially reasonable
terms.

SEASONALITY AND BACKLOG

The Company's quarterly results are subject to fluctuations resulting from a
variety of factors, including the effects of domestic and international economic
conditions, budgetary considerations and spending patterns of customers, the
Company's sales compensation plan, the timing of large individual orders, new
product introductions, and recognition of fees in connection with license,
development and similar agreements. The Company typically realizes a larger
percentage of its software product license revenues in the second and fourth
quarters of each year, with traditionally its lowest product license revenues
occurring in the third quarter of each year. This seasonality results in part
from budgetary considerations and spending patterns of the Company's customer
base and the Company's sales commission plan, which compensates sales personnel
for achieving or exceeding annual quotas. In addition, a major portion of each
quarter's product license revenues is typically realized in the last month of
the quarter. As a result of the factors discussed above, the Company's operating
results for any one quarter are not necessarily indicative of results for any
future period.

While the length of the sales cycle varies, Cayenne typically does not have a
significant backlog, and substantially all of its product revenues in any
quarter result from sales made in that quarter.

EMPLOYEES

As of February 28, 1998, Cayenne employed 324 people worldwide on a full time
basis. No employees are represented by a labor union. Cayenne has not
experienced any work stoppages and believes its relations with employees are
good. Cayenne believes that its future success will depend in part on its
continued ability to attract and retain highly qualified personnel in a
competitive market for experienced and talented software developers and sales
and marketing personnel.

ITEM 2. PROPERTIES

Cayenne's executive offices, principal research and development facilities, and
principal marketing, customer service and support and production facilities are
located in approximately 93,000 square feet of space in a business park in
Bedford, Massachusetts. Cayenne occupies that space under a lease expiring April
30, 2005. Cayenne maintains its primary sales and support offices in seven
locations


                                       12
<PAGE>   13
in the United States, and its distribution subsidiaries have offices in
Wokingham, England; Wiesbaden and Munich, Germany; Singapore; Madrid, Spain;
Delft, Netherlands; and Florence, Milan, Rome, and Turin, Italy.

Cayenne believes that its current facilities are sufficient for its current
operations and that those facilities will continue to provide adequate space for
Cayenne's operations in the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially effect the
financial position of the Company.

Cayenne has received from Esprit Systems Consulting, Inc. ("Esprit") a Notice of
Intent to Arbitrate, claiming that Cayenne is liable to Esprit for approximately
$1.6 million under an extension to a contract for software training services to
be rendered to Cadre. Esprit subsequently withdrew its Notice of Intent to
Arbitrate, but has stated that it intends to proceed with either arbitration or
litigation. Cayenne believes that the claim is without merit because, among
other things, the contract in question terminated without extension. However,
there can be no assurance as to the claim's future course or likely result.

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

Not Applicable

                                     PART II

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

The following table sets forth, for the periods indicated, the range of high and
low sales prices for the Company's common stock, as reported by the NASDAQ
National Market System. The Company's common stock is traded under the NASDAQ
symbol "CAYN" (formerly "BACH"). These prices reflect interdealer prices,
without retail mark-ups, mark-downs or commissions, and do not necessarily
represent actual transactions. In October 1996, the Company changed its fiscal
year from June 30 to December 31. Accordingly, the transition period only
includes stock prices for the first and second quarters.

<TABLE>
<CAPTION>
                           YEAR ENDED                  TRANSITION PERIOD                 YEAR ENDED
                        DECEMBER 31 1997            ENDED DECEMBER 31, 1996            JUNE 30, 1996
                        ----------------            -----------------------            -------------

                     HIGH             LOW           HIGH             LOW           HIGH                LOW
                   --------       ---------      ---------       ---------      ---------           ------
<S>                <C>            <C>            <C>             <C>            <C>                 <C>
First Quarter      $  5.875       $   3.937      $   7.125       $    4.00      $   7.875           $  5.75
Second Quarter        4.188           3.250         5.6875          3.8125          10.25             4.625
Third Quarter         3.313           2.125             --              --         11.875              8.25
Fourth Quarter        3.438           1.813             --              --          10.00              6.50
</TABLE>

The Company has not declared or paid cash dividends on its common stock and does
not plan to pay cash dividends to its stockholders in the near future. The
Company presently intends to retain any earnings to finance further growth of
its business. As of March 18, 1998, there were 498 stockholders of record of the
Company's common stock.


                                       13
<PAGE>   14
ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere in this
Form 10-K:

STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              TRANSITION   PRIOR
                                          YEAR        YEAR       PERIOD    PERIOD
                                          ENDED       ENDED      ENDED     ENDED
                                        DECEMBER    DECEMBER   DECEMBER  DECEMBER                 YEAR ENDED JUNE 30,
                                           31,        31,        31,        31,
                                          1997       1996       1996       1995        1996        1995        1994        1993
                                        -------    --------    -------    -------    --------    --------    --------    --------
                                                  (UNAUDITED)           (UNAUDITED)
<S>                                     <C>        <C>         <C>        <C>        <C>         <C>         <C>         <C>
Revenues:
   Software license                     $19,474    $ 20,462    $10,131    $15,951    $ 26,282    $ 29,849    $ 36,171    $ 39,780
   Consulting and education
   services                               8,844      11,136      4,684      5,915      12,367      14,306      13,590      13,473
   Maintenance                           21,284      26,032     13,161     14,366      27,237      28,634      27,317      24,245
   Other                                   --          --         --         --          --          --          --           798
                                        -------    --------    -------    -------    --------    --------    --------    --------
     Total revenues                      49,602      57,630     27,976     36,232      65,886      72,789      77,078      78,296
Costs and expenses:
   Cost of revenues

   Cost of software licenses              1,960       3,279      1,521      2,241       3,999       6,105       5,688       4,464
   Cost of consulting and education
   services and maintenance               8,217      10,841      4,975      7,044      12,910      15,953      13,728      13,219
Sales and marketing                      23,636      28,124     12,488     16,978      32,614      37,656      41,375      47,055
Research and development                 10,290      11,902      5,411      7,957      14,448      17,059      20,128      14,790
General and administrative                5,960       7,467      3,307      4,370       8,530       8,062       7,783       9,946
Restructuring and other costs             1,544       7,425      6,300      1,694       2,819       5,483        --         9,744
Charge for purchased
research and development                   --          --         --          158         158       7,300       1,736        --
                                        -------    --------    -------    -------    --------    --------    --------    --------
     Total costs and expenses            51,607      69,038     34,002     40,442      75,478      97,618      90,438      99,218
                                        -------    --------    -------    -------    --------    --------    --------    --------
Loss from operations                     (2,005)    (11,408)    (6,026)    (4,210)     (9,592)    (24,829)    (13,360)    (20,922)
Interest income (expense), net             (215)       (695)      (225)       (77)       (547)        202         485         669
Other income (expense), net                (287)        309        282       (111)        (84)         34          80         273
                                        -------    --------    -------    -------    --------    --------    --------    --------
Loss before provision for income
taxes                                    (2,507)    (11,794)    (5,969)    (4,398)    (10,223)    (24,593)    (12,795)    (19,980)
Provision for income taxes                  726       1,119        399        404       1,124         297         407          94
                                        -------    --------    -------    -------    --------    --------    --------    --------
     Net loss                           $(3,233)   $(12,913)   $(6,368)   $(4,802)   $(11,347)   $(24,890)   $(13,202)   $(20,033)
                                        -------    --------    -------    -------    --------    --------    --------    --------
Dividends on Preferred stock                186        --         --         --          --          --          --          --
                                        -------    --------    -------    -------    --------    --------    --------    --------
     Loss applicable to common
     shareholders:                      $(3,419)   $(12,913)   $(6,368)   $(4,802)   $(11,347)   $(24,890)   $(13,202)   $(20,033)
                                        -------    --------    -------    -------    --------    --------    --------    --------
---------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share    $ (0.19)   $  (0.75)   $ (0.36)   $ (0.32)   $  (0.71)   $  (1.86)   $  (1.06)   $  (1.72)
                                        -------    --------    -------    -------    --------    --------    --------    --------
Weighted average number of common
shares outstanding                       18,410      17,139     17,590     15,103      15,914      13,350      12,484      11,647
                                        -------    --------    -------    -------    --------    --------    --------    --------
</TABLE>


                                       14
<PAGE>   15
BALANCE SHEET DATA
(in thousands)

<TABLE>
<CAPTION>
                                      YEAR    TRANSITION PERIOD
                                      ENDED         ENDED
                                   DECEMBER 31,  DECEMBER 31,            YEAR ENDED JUNE 30,
                                       1997          1996       1996       1995       1994      1993
                                     -------       --------    -------   --------    -------   -------
<S>                                  <C>           <C>         <C>       <C>         <C>       <C>
    Working capital                  $ 2,913       $ (3,940)   $   499   $ (1,638)   $ 8,193   $21,334
    Total assets                      26,324         22,236     34,099     35,384     46,439    62,481
    Long-term obligations                124            106      2,096      2,534       --       2,551
    Preferred Stock                      310           --         --        5,493       --        --
    Stockholders' equity (deficit)     6,021           (655)     2,624     (2,753)    17,336    28,229
</TABLE>

--------------------
     The above tables reflect the results of the combined company. The
     Company's fiscal 1996 results have been combined with Cadre's results for
     the twelve months ended June 30, 1996. The Company's results for fiscal
     1995, 1994 and 1993 have been combined with Cadre's calendar year end
     results for the same period. In this presentation, Cadre's financial data
     for the period July 1, 1995 to December 31, 1995 is included in both the
     periods ended June 30, 1996 and 1995.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Cayenne Software, Inc. (formerly Bachman Information Systems, Inc.) ("Cayenne"
or the "Company"), organized as a corporation in 1983, develops, markets and
supports a comprehensive suite of workgroup-to-enterprise analysis and design
solutions for the practical challenges software developers face every day.
Global 2000 companies and government agencies around the world use Cayenne
products as they develop, implement, and maintain enterprise-wide,
business-critical information systems, such as billing, trading, and customer
support applications, as well as mission-critical technical embedded systems
such as telecommunications switching software, aeronautics, and navigation
systems.

On July 18, 1996, the Company completed its acquisition of Cadre Technologies,
Inc. ("Cadre") under an Agreement and Plan of Merger dated March 25, 1996, by
and among the Company, Cadre and B.C. Acquisition Corp., whereby the Company
acquired all of the outstanding capital stock of Cadre in exchange for 4,716,442
shares of Cayenne common stock (the "merger"). The merger was accounted for as a
pooling-of-interests during the transition period ended December 31, 1996.
Additionally, effective upon the merger the Company changed its name to Cayenne
Software, Inc. The Company acquired Cadre to expand its product offerings to
include structured analysis and design and object-oriented technology as well as
to expand its customer base.

In October 1996, the Company changed its fiscal year end from June 30th to
December 31st. As a result the period from July 1, 1996 through December 31,
1996 was designated as "the transition period." For presentation and comparative
purposes the year ended December 31, 1996 is presented as unaudited and
represents the period from January 1 st to December 31st.

This Annual Report may contain forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors include
without limitation, those set forth below under the caption "Factors That May
Affect Future Results."


                                       15
<PAGE>   16
RESULTS OF OPERATIONS
OVERVIEW

To be competitive in a changing technological market, Cayenne has continued to
develop its own technology as well as acquire technology through acquisition. As
a result of acquiring technology through merger and acquisitions, the Company
has been burdened with larger expense structures. Consequently, it became
necessary to align expense levels with the revenue generated from operations.
Therefore, expenses have been reduced in each of the last three years either
through cost cutting or restructuring activities. Product lines that have not
been in line with the strategic direction of the Company have been dropped.
Dropping certain product lines has also caused revenue to decline. Revenue
generated from new product development and technology has increased over the
past year, but this increase has not offset the decline in revenues from older
product lines. The Company has incurred substantial net losses in the transition
period ended December 31, 1996 and fiscal periods ended June 30, 1996 and 1995.
Although a loss has been recorded in the current year ended December 31, 1997,
the loss has decreased from the levels of the previous two years.

IBM was Cayenne's single largest customer during the year ended December 31,
1997, the transition period ended December 31, 1996 and in the previous fiscal
years ended June 30, 1996 and 1995 when revenue from IBM (including license and
maintenance fees paid by IBM in connection with its own use of Cayenne products,
as well as amounts paid by IBM as a distributor and systems integrator)
accounted for 17%, 16%, 15%, and 9% of Cayenne's total revenue, respectively.

While Cayenne expects its broadened focus will benefit Cayenne in the long-term,
there can be no assurance that the foregoing trends will not materially
adversely affect either the success with which Cayenne develops, supports, and
sells products for use with IBM and IBM-compatible computers and systems or the
extent to which IBM continues to be a customer of Cayenne.

REVENUES

The Company has seen its revenue decline for several years. In general, the drop
in revenue was the result of: 1) the merger of Bachman and Cadre, where some
product lines were dropped in order to better focus development resources, 2)
reduced defense spending which led to consolidation of large defense contractors
where the Company has a large presence in the technical embedded market for its
TeamWork products, and 3) a delay in getting its object oriented products to
market. These three issues have been partially addressed due to the fact the
merger of Bachman and Cadre to form Cayenne is complete, non-producing product
lines have been dropped and the Company's resources are focused on products such
as ObjectTeam. The Company plans to continue to enhance its product offerings
through development efforts, strategic alliances and acquisitions to improve its
competitive position.

The Company's revenues are currently derived from three sources: (i) fees for
the perpetual license of the company's proprietary software products, (ii) fees
from sales of consulting and education services, and (iii) maintenance fees for
maintaining, supporting and providing periodic upgrades of the Company's
software products.

TWELVE MONTHS ENDING DECEMBER 31, 1997 COMPARED TO 1996

SOFTWARE LICENSES. Software license revenue in 1997 was $19.5 million compared
to $20.5 million for 1996. Although there was a drop in revenues of $1.0
million, or 5%, year to year, this compares to the software license revenue
drop from calendar year 1995 to 1996 of 38%. In prior years license revenues
were decreasing in response to two main factors: 1) a transition from mature
OS/2 platform and structured (UNIX) tools to new Windows based and object
oriented tools with sales of the newer products not offsetting the decline in
mature products, and 2) industry consolidation in the technical embedded markets
(military/aerospace) where the Company's structured products on UNIX platforms
had large market presence. While these two factors also contributed to the
software license decline of 5% in 1997, the impact was significantly reduced
from 1996.

Total license revenues in the United States and the United Kingdom declined 3%
and 23%, respectively; the drop in the United Kingdom revenue was mainly
attributable to personnel turnover. Total license revenue in Italy increased 20%
from 1996 to 1997 and is attributable to strong customer acceptance of the
Company's Windows based business modeling and database design products.

CONSULTING AND EDUCATION SERVICES. Consulting and education services revenue was
$8.8 million in 1997 compared to $11.1 million in 1996 for a decrease of $2.3
million. The $2.3 million drop was attributable to: 1) the Company's new
products which



                                       16
<PAGE>   17
are based on Windows NT/95 platforms and are easier to use and therefore require
less training, 2) many of the Company's software licenses were sold into
existing sites where companies use in-house training, and 3) certain Cayenne
product lines that required extensive training are being phased out. Consulting
and education revenue in Italy decreased 17% due mainly to customers
transitioning from mainframe products to Windows based products while in the
United States, where training and consulting revenue dropped 26%, the decline
was due mainly to the selling of licenses to existing customers.

MAINTENANCE. Maintenance revenue for annual maintenance contracts is deferred
and recognized ratably over the term of the agreement. Maintenance revenue for
1997 was $21.3 million compared to $26.0 million for 1996. This was a $4.7
million, or 18% drop. In general, maintenance revenue trends follow software
license revenue trends. Because maintenance revenue is recognized ratably
over the life of the contract, the change in maintenance revenue, year over
year, relative to the change in software license revenue, lags by as much as
year. The 38% decline in software license revenue from calendar 1995 to 1996
resulted in reduced maintenance revenue in 1997.

COST OF REVENUES. The Company's cost of software licenses includes product
packaging, documentation, media and royalties to third parties, as well as the
amortization of capitalized software development costs. Costs of consulting and
education services and maintenance includes personnel, travel and occupancy
costs connected with providing such services.

Cost of software licenses was $2.0 million or 4% of revenue for 1997 compared
with $3.3 million or 6% of revenue in 1996. The $1.3 million decrease in 1997
expenses reflects reduced sales of third party product for which the Company
pays a royalty to resell as well as reduced manufacturing costs through improved
efficiencies. Additionally, amortization related to WindTunnel was $0.2 million
in 1996 compared to $0 in 1997. The Company's determined in June 1996 that the
WindTunnel product was no longer consistent with the Company's objectives.

Cost of consulting, education and maintenance was $8.2 million or 17% of revenue
for 1997 compared with $10.8 million or 19% of revenue in 1996. The $2.6 million
decrease in 1997 correlates to the direct effort of the Company to reduce
training and consulting requirements as reflected in the drop in training and
consulting revenue.

SALES AND MARKETING. Sales and marketing expenses were $23.6 million or 48% of
revenue in 1997 compared with $28.1 million or 49% of revenue in 1996. The $4.5
million decrease in expenses during 1997 reflects reduced marketing expenses
including trade show attendance and advertising together with reduced staffing
in North America and international subsidiary operations.

RESEARCH AND DEVELOPMENT. Cayenne's belief that product and technical leadership
are critical to its success has resulted in a high level of expenditures for
research and development. During 1997, the Company focused the majority of its
research and development efforts on the release of new products and the
refreshing of the existing product lines to prolong their lives. Research and
development expenses were $10.3 million or 21% of revenue in 1997 compared with
$11.9 million or 21% of revenue in 1996. The $1.6 million decrease in expenses
during 1997 reflects reduced staffing as a result of attrition and reduced
software development from third party developers.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $6.0
million or 12% of revenue in 1997 compared with $7.5 million or 13% of revenue
in the 1996. The $1.5 million decrease in expenses during 1997 reflects lower
levels of staffing which were the result of both attrition and the elimination
of redundant positions.

NON-RECURRING COSTS. The Company recorded a non-recurring charge of $1.9 million
in the fourth quarter of 1997 related to management changes and realignment of
the sales organization, moving the corporate headquarters to another facility,
and the write-off of purchased software. Included in the $1.9 million was a
charge of $1.0 million related to management changes and other initiatives taken
to improve sales and operating efficiencies. Also, included in the charge was
$.3 million related to the move of its headquarters and principal facilities
from Burlington to Bedford, Massachusetts. Additionally the Company reviewed its
product strategy and determined that purchased software principally related to
the Westmount acquisition no longer matched the current strategic direction of
the Company. As a result of the subsequent review of the purchased software's
net realizable value the Company recorded a charge of $.6 million to
appropriately reflect the purchased software's net realizable value. During the
quarter ended March 31, 1997 the Company evaluated its restructuring reserve and
determined that amounts provided for in previous restructuring actions were no
longer required. As a result, the Company recorded a benefit of approximately
$.4 million.

During the year ended December 31, 1996 and in conjunction with the contemplated
merger between Cayenne and Cadre, the Company reviewed its product strategy and
determined that several products including WindTunnel were no longer consistent
with


                                       17
<PAGE>   18
the Company's objectives. Accordingly, the Company evaluated the net realizable
value of the related intangible assets and recorded a charge of approximately
$1.1 million principally related to the write-off of the intangible asset
acquired as part of its acquisition of WindTunnel Software, Inc. ("WindTunnel").
(See, also, Note 13 to Notes to Consolidated Financial Statements.) In addition,
the Company recorded a restructuring charge of $6.3 million during year ended
December 31, 1996. Included in the charge was $1.6 million of employee related
termination expenses, $1.3 million of legal, accounting, investment banking and
other professional fees, $1.4 million of facility closure and consolidation
expenses, and $2.0 million of other miscellaneous expenses associated with the
consolidation of the two companies and the company name change.

     EFFECT OF INTERNATIONAL OPERATIONS ON INCOME (LOSS) FROM OPERATIONS

<TABLE>
<CAPTION>
                                                                       TRANSITION      PRIOR
                                               YEAR         YEAR         PERIOD       PERIOD              YEAR
                                               ENDED        ENDED         ENDED        ENDED             ENDED
                                             DECEMBER     DECEMBER      DECEMBER     DECEMBER           JUNE 30,
                                                31,          31,           31,          31,       ---------------------
                                               1997         1996          1996         1995          1996        1995
                                           -----------  -----------   -----------  -----------    ----------  ---------
<S>                                          <C>          <C>           <C>         <C>           <C>        <C>
          INCOME (LOSS) FROM OPERATIONS

          United States                      $  6,663     $ (1,428)     $ (1,239)   $ (3,308)     $ (3,497)  $  (9,419)
          Italy                                  (873)        (868)          113       1,317           336        (540)
          United Kingdom                       (1,345)      (1,809)       (1,194)       (481)       (1,096)     (2,044)
          Rest of World                        (6,450)      (7,303)       (3,706)     (1,738)       (5,335)    (12,826)
                                             $ (2,005)    $(11,408)     $ (6,026)   $ (4,210)     $ (9,592)  $ (24,829)
</TABLE>

Year over year improvement was achieved in the United States operations when the
result was improved from a loss of $(1.4) million to a profit of $6.7 million.
This improvement is attributable to cost containment and expense reduction
measures across all areas of functional spending. In the United Kingdom and rest
of world the revenue decline in 1997 from 1996 was greater than the reduction in
expenses.

OTHER INCOME (EXPENSE), NET. Interest expense decreased in 1997 over 1996
primarily due to the termination of a factoring agreement in 1996 and lower
levels of borrowing. Interest income also declined in 1997 as the cash available
for investment purposes declined during the early portion of 1997. Other income
decreased in 1997 as the Company recorded a currency loss for the year of
$504,000.

PROVISIONS FOR INCOME TAXES. The tax provision for the years ended December 31,
1997 and 1996, was composed primarily of foreign withholding taxes and income
taxes related to the profitability of certain foreign subsidiaries. At December
31, 1997, the Company has a deferred tax asset of approximately $40.0 million
composed principally of net operating loss carryforwards, which was offset fully
by a valuation allowance due to the uncertainty of realization. See note 5 in
the Notes to Consolidated Financial Statements and factors that may effect
future results.

THE SIX MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1996 COMPARED TO 1995

SOFTWARE LICENSES. Software license revenue during the six month transition
period ended December 31, 1996 amounted to $10.1 million compared to $16.0
million for the comparable period of 1995. The $5.9 million or 36% decrease in
license revenues during the transition period resulted primarily from migration
by the Company's customers from structured analysis and mainframe solutions
toward object-oriented and client/server solutions. This migration resulted in a
reduction of revenues from the Company's Analyst and Teamwork products.
Additionally, contraction of federal defense programs led to industry
consolidation, contributing to a reduction in the Company's technical embedded
customer base and specifically reduced revenues from the Company's Teamwork and
Teamwork-related products. As a result, the Company's worldwide revenue
decreased from the comparable six months of the prior year. Also, a series of
significant orders were received in the quarter ended December 31, 1995 from a
major Italian systems integrator for the Company's mainframe based products.
These orders accounted for approximately 15% of total software license revenue
for the six months ended December 31, 1995 and were not duplicated during the
transition period.

Client/server and object-oriented products accounted for 50% of new license
revenue during the six month transition period ended December 31, 1996, compared
to 24% for the comparable period of the prior year. Total license revenues in
the United States and the United Kingdom declined 14% and 31%, respectively, due
to the aforementioned migration trends. Total license revenue in Italy declined
59% during the period primarily due to a series of significant orders booked in
the comparable period of 1995. No similar orders were booked during the
transition period.



                                       18
<PAGE>   19
CONSULTING AND EDUCATION SERVICES. Consulting and education services revenue
during the six month transition period ended December 31, 1996 amounted to $4.7
million compared to $5.9 million for the comparable period of the prior year.
The $1.2 million or 21% decrease in consulting and education service revenues is
attributable to reduced software license revenue, lower customer demand and
reduced staffing in this area. Consulting and education revenue in Italy
increased by $0.2 million or 5%, while United States and United Kingdom revenues
declined by $1.2 million or 57% and $0.2 million or 40% , respectively. Training
courses are offered for each of Cayenne's major products. Typically, consulting
and education revenue follows the trend of software license revenue and,
therefore, consulting and education revenue during the transition period as
compared to the same period ended 1995 has followed the decline in license
revenue experienced in the United States and United Kingdom. The increase in
consulting and education revenue in Italy is attributable to several long-term
consulting contracts signed during fiscal 1996.

MAINTENANCE Maintenance revenue for the six month transition period ended
December 31, 1996 amounted to $13.2 million compared to $14.4 million for the
comparable period of the prior year. Maintenance revenue in Italy and the United
Kingdom increased by $0.5 million and $0.2 million or 54% and 10%, respectively.
Increased maintenance revenue in Italy and the United Kingdom resulted from
increased penetration of international markets in the prior year combined with
an increased portion of the customer base that renewed maintenance contracts.
Maintenance revenue in the United States declined $1.4 million or 17% due to
industry consolidation in the technical embedded market place, and the
aforementioned market place migration to client/server and object-oriented tools
and fewer customers renewing their maintenance contracts on mainframe and
structured analysis tools. Although maintenance revenue from the Company's
client/server and object-oriented tools has not fully offset the decline in
maintenance revenue from its mainframe and structured analysis and design tools
to date, maintenance revenue from those products grew in the transition period
ended December 31, 1996 as compared to the comparable period of the prior year
and the renewal rate has remained relatively constant.

COST OF REVENUES. Cost of software licenses were $1.5 million or 5% of revenue
during the six month transition period ended December 31, 1996 compared with
$2.2 million or 6% of revenue in the comparable period of 1995. The $.7 million
decrease in 1996 expenses reflects reduced sales of third party product for
which the Company pays a royalty to resell as well as reduced manufacturing
costs consistent with lower revenues. Additionally, amortization related to
WindTunnel was $0 in the transition period compared to $.2 million in the same
period of the prior year. This reduction is directly related to the Company's
determination in June, 1996 that the WindTunnel product was no longer consistent
with the Company's objectives.

Cost of consulting, education and maintenance were $5.0 million or 18% of
revenue during the six month transition period ended December 31, 1996 compared
with $7.0 million or 19% of revenue in the comparable period of 1995. The $2.0
million decrease in 1996 expenses generally reflects reduced staffing levels as
a result of Company efforts to better align staffing with demand, attrition and
the merger.

SALES AND MARKETING. Sales and marketing expenses were $12.5 million or 45% of
revenue during the six month transition period ended December 31, 1996 compared
with $17.0 million or 47% of revenue in the comparable period of 1995. The $4.5
million decrease in expenses during the transition period primarily reflects
reduced marketing expenses, including trade show attendance and advertising,
together with reduced staffing in North America and international subsidiary
operations as a result of attrition and the merger.

RESEARCH AND DEVELOPMENT. During the transition period ended December 31, 1996,
the Company focused the majority of its research and development efforts on the
release of new products and the refreshing of the existing product lines to
prolong their lives. Research and development expenses were $5.4 million or 19%
of revenue during the six month transition period ended December 31, 1996
compared with $8.0 million or 22% of revenue in the comparable period of 1995.
The $2.6 million decrease in expenses during the transition period primarily
reflects reduced staffing as a result of attrition and the merger. Additionally,
during the quarter ended June 30, 1996, and in conjunction with the merger, the
Company reviewed its product strategy and determined that several products
including WindTunnel were no longer consistent with the Company's objectives.
These efforts shifted resources toward developing and or refining client/server
and object-oriented products consistent with the Company's objectives.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $3.3
million or 12% of revenue during the six month transition period ended December
31, 1996 compared with $4.4 million or 12% of revenue in the comparable period
of 1995. The $1.1 million decrease in expenses during the transition period
primarily reflects lower levels of staffing which were the result of the merger
and the elimination of redundant positions.


                                       19
<PAGE>   20
NON-RECURRING COSTS. On July 18, 1996, the Company acquired Rhode Island-based
Cadre in a merger transaction accounted for as a pooling of interests. In
conjunction with the merger, and to reflect costs associated with combining the
operations of the two companies, transaction fees, and other costs, the Company
recorded a restructuring charge of $6.3 million during the six month transition
period ended December 31, 1996. Included in the charge was $1.6 million of
employee related termination expenses, $1.3 million of legal, accounting,
investment banking and other professional fees, $1.4 million of facility closure
and consolidation expenses, and $2.0 million of other miscellaneous expenses
associated with the consolidation of the two companies and the company name
change. This compares to a $1.7 million charge recorded in the comparable period
of 1995 related to the Company's acquisition of Westmount Technologies B.V.
("Westmount") which included primarily employee related termination expenses.

EFFECT OF INTERNATIONAL OPERATIONS ON INCOME (LOSS) FROM OPERATIONS

In addition to the factors listed above, the operations of the Company's
international subsidiaries significantly affected results of operations during
the six month transition period ended December 31, 1996 and the comparable
period of 1995.

The loss from operations -- United States and rest of world --was $4.9 million
during the transition period versus $5.0 million compared to the corresponding
period of the prior year due to reduced spending in the sales and marketing,
research and development and general and administrative areas. These savings
were offset by the aforementioned restructuring charge of approximately $5.6
million in the United States and $0.2 million in Rest of World. A similar charge
of $1.7 million was recorded in the comparable period of 1995.

The Company's Italian subsidiary reported income from operations of $0.1 million
during the transition period compared to $1.3 million in the corresponding
period in the prior year. The lower net income is principally due to a series of
significant orders received from a large systems integrator during December
1995, which were not duplicated during the transition period.

The loss from operations in the Company's United Kingdom subsidiary increased
148% during the six month transition period ended December 31, 1996 to $1.2
million compared to the corresponding period in the prior year principally due
to lower software license, and consulting and education revenues during the
period. Additionally, the United Kingdom recorded a restructuring charge of
approximately $0.4 million during the transition period.

OTHER INCOME (EXPENSE), NET. Other income during the six-month transition period
ended December 31, 1996 increased slightly compared to the same period of the
prior year primarily due to lower debt levels combined with reduced interest
rates on outstanding balances.

PROVISION FOR INCOME TAXES. Due to operating losses during the transition period
ended December 31, 1996 and the comparable period of 1995, the tax provision for
those periods is composed primarily of foreign withholding taxes and income
taxes related to the profitability of certain foreign subsidiaries.

TWELVE MONTHS ENDING JUNE 30, 1996 COMPARED TO 1995

SOFTWARE LICENSES. Software license revenue for fiscal 1996 amounted to $26.3
million compared to $29.8 million for fiscal 1995. The $3.5 million or 12%
decrease resulted primarily from migration by the Company's customers from
structured analysis and mainframe solutions toward object-oriented and
client/server solutions. This migration resulted in a reduction of revenues from
the Company's Analyst and Analyst related products. Additionally, contraction of
federal defense programs led to industry consolidation, contributing to a
reduction in the Company's technical embedded customer base, and specifically
reducing revenues from the Company's Teamwork and related products. The decline
was partially offset by a series of significant orders received in the quarter
ended December 31, 1995 from a major Italian systems integrator for the
Company's mainframe based products. These orders accounted for approximately 9%
of total software license revenue for the fiscal year ended June 30, 1996.

Client/server and object-oriented product license revenue accounted for 28% of
license revenue for the year ended June 30, 1996, compared to 16% for the year
ended June 30, 1995. These results reflect the continued market trend in the
United States to migrate from structured and mainframe environments to
object-oriented and client/server environments. The Company's suite of
client/server products was available during the fourth quarter of fiscal 1995
and its own object-oriented products were introduced when the


                                       20
<PAGE>   21
Company acquired Westmount in May 1995. Total license revenues in the United
States and United Kingdom declined 24% and 36%, respectively due to the
aforementioned migration trends. Total license revenue in Italy increased by
100% during fiscal 1996 due to a series of significant orders from a major
systems integrator and increased market penetration.

CONSULTING AND EDUCATION SERVICES. Total consulting and education revenue in
fiscal 1996 amounted to $12.4 million compared to $14.3 million for the
comparable period of the prior year. The $1.9 million or 14% decrease in
consulting and education service revenue is attributable to reduced software
license sales, lower customer demand and reduced staffing. Consulting and
education revenue in Italy increased by $1.0 million or 19%, while United States
and United Kingdom revenues declined by approximately $1.0 million and $1.1
million or 18% and 44%, respectively, for the year ended June 30, 1996 compared
to the prior fiscal year. Training courses are offered for each of Cayenne's
major products. Typically, consulting and education revenue follows the trend of
software license revenue and, therefore, the decline in license revenue
experienced in the United States and United Kingdom has caused the consulting
and education revenue also to decline in fiscal 1996 from fiscal 1995. The
increase in consulting and education revenue in Italy is attributable to
increased demand for the Company's consulting services from its increased
customer base and mainframe sales.

MAINTENANCE Maintenance revenue amounted to $27.2 million compared to $28.6
million for the comparable period of the prior fiscal year. Maintenance revenue
in Italy and the United Kingdom increased by $0.5 million and $0.1 million or
42% and 2%, respectively. The increase in maintenance revenue in Italy and
United Kingdom resulted from increased penetration of the international markets
along with an increase in the portion of the customer base that renewed
maintenance contracts. Maintenance revenue in the United States declined by $0.3
million or 2% primarily from the aforementioned market place migration to
client/server and object-oriented tools and fewer customers renewing their
maintenance contracts on mainframe and structured analysis based tools.
Maintenance revenue, rest of world, declined $1.7 million or 22% due to a
decrease in the portion of customers renewing maintenance contracts and a
decline in new license revenues. The aggressive migration from mainframe and
structured products to client/server and object-oriented products has resulted
in an increased number of customers not renewing their maintenance contracts.
The Company's client/server and object-oriented products were introduced late in
fiscal 1995 and have not offset the declines in mainframe and structured
revenues.

COST OF REVENUE. Costs of software licenses were $4.0 million or 6% of revenue
during fiscal 1996 compared with $6.1 million or 8% of revenue in the comparable
period of fiscal 1995. The $2.1 million decrease in expenses reflects reduced
sales of third party products for which the Company pays a royalty to sell as
well as reduced manufacturing costs consistent with lower revenues. Cost of
software licenses as a percentage of related software license revenue was 15%
and 20% for fiscal 1996 and 1995, respectively.

The cost of consulting, education and maintenance were $12.9 million or 20% of
revenue during fiscal 1996 compared with $16.0 million or 22% of revenue in the
comparable period of fiscal 1995. The $3.1 million decrease in the cost of
consulting, education and maintenance was principally caused by decreased costs
in North America as the Company adjusted staffing levels to more closely align
with demand.

SALES AND MARKETING. Sales and marketing expenses were $32.6 million or 50% of
revenue during fiscal 1996 compared with $37.7 million or 52% of revenue in the
comparable period of 1995. The $5.1 million decrease in sales and marketing
expenses during the year resulted primarily because of reduced marketing
activities and reduced headcount. During the fourth quarter of fiscal 1996, the
Company had increased marketing costs of approximately $0.6 million principally
related to advertising and promotion of the Company's new name and product
strategy. This compares to $0.6 million of costs incurred in fiscal 1995 related
to the launch of the Company's new products together with the Company's user
conference held in September 1994.

RESEARCH AND DEVELOPMENT. In fiscal 1996, the Company focused the majority of
its research and development resources on porting its current products to new
platforms and development of new products targeted at the client/server and
object-oriented markets. Research and development expenses were $14.4 million or
22% of revenue during fiscal 1996 compared with $17.1 million or 23% in the
comparable period of 1995. The $2.7 million decrease in research and development
expenses is due primarily to the restructuring taken by the company in fiscal
1995 to reduce headcount and consolidate facilities. Additionally, reduced
spending on the Company's Paradigm Plus product, which was replaced by
ObjectTeam together with reduced spending on Ellipse and WindTunnel products,
which are no longer considered strategic to the Company, contributed to lower
expenses.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $8.5
million or 13% of revenue during fiscal 1996 compared with $8.1 million or 11%
or revenue in the comparable period of 1995.


                                       21
<PAGE>   22
NON-RECURRING COSTS. During fiscal 1996, and in conjunction with the
contemplated merger between Cayenne and Cadre, the Company reviewed its product
strategy and determined that several products including WindTunnel were no
longer consistent with the Company's objectives. Accordingly, the Company
evaluated the net realizable value of the related intangible assets and recorded
a charge of approximately $1.1 million principally related to the write-off of
the intangible asset acquired as part of its acquisition of WindTunnel Software,
Inc. ("WindTunnel"). (See, also, Note 13 to Notes to Consolidated Financial
Statements.)

In the quarter ended December 31, 1995, formal plans were adopted and approved
by executive management to restructure operations related to the absence of
Windows-based object-oriented products. After the Westmount acquisition, the
Company had planned to introduce and sell object-oriented Windows 95 and
NT-based products during the quarter ended December 31, 1995. When it became
apparent that the product was not going to become available during the quarter,
and as a result revenues would be less than expected, the Company needed to
reduce expenses to an appropriate level. A charge of $1.7 million principally
related to a reduction in force (approximately 47 employees) was recorded in
December 1995.

Following the completion of certain significant development efforts and
associated product introductions, the Company effected a restructuring on
September 29, 1994 to streamline its operations and better align expenses with
revenue. The Company recorded a restructuring charge of $2.0 million during the
three months ended September 30, 1994. The restructuring included a charge of
approximately $1.5 million in termination charges resulting from a 20% reduction
in staff (approximately 70 employees). The restructuring also included
approximately $0.3 million in related facilities expense associated with the
closure of the Company's San Jose, California development facility. The Company
also reorganized the operations of its German subsidiary by reducing its
facilities and staff. As part of the restructuring, the Company also evaluated
the value of certain contracts based on a number of factors including business
plans, budgets, economic projections and market analysis. Based on a review of
these factors, the Company determined to cancel certain contracts. The
termination costs associated with those contracts amounted to approximately $0.2
million and are included in the restructuring charge.

During the quarter ended June 1995, formal plans were adopted and approved by
executive management to restructure operations thereby eliminating redundant
capitalized software development costs and reducing company-wide expenses. The
purpose of the Westmount acquisition was to acquire Westmount's object-oriented
technology, which essentially replaced the Company's existing object-oriented
product line. The redundant software development cost write-off was $0.9 million
and consisted of internally developed and capitalized costs related to the
Company's old product. Additionally, the Company reduced expenses to better
align them with revenues. Restructuring costs during the quarter ended June 1995
amounted to $1.8 million and included the previously mentioned $0.9 million
write off of capitalized software development costs, $0.8 million of employee
related costs and $0.1 million for other costs related to the restructuring. At
December 31, 1996 the Company believes that it has met all obligations with
regard to the restructuring.

CHARGE FOR PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. On May 1, 1995, the
Company acquired Westmount Technology, B.V. ("Westmount") in a transaction
accounted for as a purchase for approximately 679,000 shares of common stock and
185,000 warrants to purchase additional shares. The purchase price was allocated
to assets and liabilities based on their estimated fair values as of the date of
acquisition. The cost in excess of net assets acquired of $8.1 million was
identified as purchased research and development. The software technology was
valued at $0.8 million and the technology in process was valued at $7.3 million.
This technology had not reached technological feasibility and had no future
alternative use, as a result, the technology in process was charged to earnings
during the fourth quarter of fiscal 1995.

EFFECT OF INTERNATIONAL OPERATIONS ON INCOME (LOSS) FROM OPERATIONS

In addition to the factors listed above, the operations of Cayenne's
international subsidiaries significantly affected its results of operations in
fiscal 1996 and 1995.

The loss from United States and Rest of World operations decreased by $13.4
million or 60% to $8.8 million primarily due to charges related to the 1995
acquisition of Westmount combined with reduced headcount and other cost control
measures implemented by the Company. The loss from operations in the United
Kingdom decreased by $0.9 million during fiscal 1996 to $1.1 million primarily
due to headcount reductions and other cost control measures. For fiscal 1996,
Italian operations reported a $0.3 million profit compared to a loss of $0.5
million in fiscal 1995. This increase in profitability of the Italian subsidiary
is attributable to a series of significant orders from a large systems
integrator received during the second quarter of fiscal year 1996.


                                       22
<PAGE>   23
Included in income (loss) from operations in 1996 are $2.8 million of
restructuring and other costs, $2.3 million in the United States and $0.5
million in rest of world. Results for 1995 include $5.5 million of restructuring
and $7.3 million of in-process R&D charges, $4.1 million in the United States,
$0.1 million in Italy, $0.1 million in United Kingdom and $8.5 million in Rest
of World (primarily Netherlands).

OTHER INCOME (EXPENSE), NET

Interest expense, net increased in fiscal 1996 compared to fiscal 1995 primarily
due to increased borrowings under a factoring agreement which was terminated at
the time of the merger and lower levels of average invested cash.

PROVISION FOR INCOME TAXES

Because of the operating losses for fiscal 1996 and 1995, the tax provision for
those periods are composed mostly of foreign withholding taxes and income taxes
related to the profitability of certain foreign subsidiaries.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued (SFAS No. 131)
"Disclosures About Segments of an Enterprise and Related Information", which
will require adoption during the year ended December 31, 1998. This statement
established standards for the way public enterprises report information about
operating segments in annual reports. The Company is in the process of
determining the effect of adoption of this statement on its consolidated
financial statement disclosures.

In October 1997, Statement of Position 97-2, "Software Revenue Recognition"
(SOP 97-2), was issued which provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 97-2
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt the guidelines of SOP 97-2 as of
January 1, 1998 and its adoption is not expected to have a material impact on
the Company's financial results.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1997 the Company's principal sources of liquidity included
cash and cash equivalents aggregating $9.2 million and a secured bank line of
credit in the amount of $5.0 million discussed below. At December 31, 1997, cash
and cash equivalents increased $5.1 million from the previous year ended
December 31, 1996. Cash was principally impacted by the private placement of
$9.9 million of Convertible Preferred Stock which was offset by the decline in
customer maintenance contracts, increased capital spending, and the loss from
operations during the year. The Company's principal long-term cash commitments
are for office space operating leases.

On December 31, 1997, Cayenne had no material commitments for capital
expenditures.

On November 3, 1997, the Company renewed its revolving credit agreement with a
bank to borrow up to $5.0 million in order to extend its term through October 5,
1998 and to amend financial and operating covenants and other provisions of the
agreement. The loan is contingent upon meeting certain financial and operating
covenants at the time of any borrowing and over the life of the loan. The loan
is secured by all of the assets of the Company and any borrowing amounts are
tied to a percentage of qualified accounts receivable outstanding at the time of
any borrowing. The financial covenants, which were amended, include a quarterly
minimum net worth covenant of $5.5 million and liquidity (generally defined as
cash and cash equivalents plus eligible domestic accounts receivable and
eligible international accounts receivable less any indebtedness to the bank) at
the end of each quarter. The Company was in compliance with the covenants as of
December 31, 1997. At December 31, 1997, the borrowing base under the revolving
credit agreement was approximately $3.7 million. The Company had approximately
$2.4 million outstanding against the line of credit at December 31, 1997.

On January 2, 1997, the Company raised approximately $3.0 million in a private
placement of 150,000 shares of Series B Convertible Preferred Stock and the
issuance of 350,000 warrants to purchase the Company's Common Stock. On July 18,
1997, the Company raised approximately $2.0 million in a private placement of
100,000 shares of Series C Convertible Preferred Stock and the issuance of
warrants to purchase 233,332 shares of the Company's Common Stock. On August 28,
1997, the Company raised approximately $5.0 million in a private placement of
250,000 shares of Series D Convertible Preferred Stock and the issuance of
583,332 warrants to purchase the Company's Common Stock. Each share of
Convertible Preferred Stock is entitled to earn dividends at a rate of 5% per
annum, payable upon conversion, in cash or stock, at the option of the Company.
Each share of Convertible Preferred Stock is convertible into shares of Common
Stock at a rate determined by the lower of the average quoted market price of
the common stock for either (i) the ten trading days preceding the date of
issuance or (ii) any five trading days during any period of thirty trading days
before the conversion. All outstanding and unconverted shares of preferred stock
may be converted, at the option of the Company, two



                                       23
<PAGE>   24
years from the date the securities were declared effective and at a specified
conversion price. The warrants issued by the Company in conjunction with the
closing of each of the private placements, are for the purchase of shares of the
Company's Common Stock at exercise prices ranging from 120% to 150% of the price
set forth in clause (i) above and having varying expiration dates from three to
five years. The warrants issued with these offerings were valued at $1,724,000
and are included in additional paid in capital. The shares of Common Stock
underlying the Convertible Preferred stock and warrants are entitled to
registration rights under terms of the registration rights agreement dated for
each of the offering dates. As of December 31, 1997 all shares of the Series B
and 40,000 shares of the Series D Convertible Preferred Stock had been converted
into common stock. All shares of Series C Convertible Preferred Stock were
converted in 1998.

Cash expenditures for restructuring activities were approximately $5.2 million
during the six-month transition period ended December 31, 1996, including $0.5
million related to restructuring effected by Cadre prior to the merger. The
Company currently estimates that cash expenditures for previous restructuring
actions in 1998 will be approximately $0.1 million. Cash expenditures related to
the one time charge taken in 1997 will be approximately $.7 million in 1998. The
Company believes that it has adequately provided for all restructuring actions
taken to date.

With the additional $10.0 million the Company raised in 1997 through the private
placement and with its revolving credit agreement, the Company anticipates that
existing cash balances and funds generated from operations will provide
sufficient cash resources to finance its current operations, and projected
capital expenditures through 1998. Thereafter, the Company's cash requirements
will depend upon the results of future operations, which cannot be foreseen.
There can be no assurance that the Company will be able to meet its loan
covenants, achieve its operating plan and return to profitability, and the
failure to do so may have a material adverse impact on the Company's business
and operations.

FOREIGN CURRENCY

All of Cayenne's foreign sales, other than those of its foreign subsidiaries,
are invoiced and collected in United States dollars. Early in 1997 the dollar
experienced a significant rise in value against other currencies in which the
Company does business. This increase resulted in a foreign currency exposure and
Cayenne recorded a foreign exchange loss for the year ended December 31, 1997 in
the amount of $504,000 (most of the loss was incurred in the first quarter).
Cayenne is trying to mitigate the effect of changes in foreign currency rates by
entering into foreign exchange contracts. On December 31, 1997 the Company held
approximately $2.6 million in foreign exchange contracts. The Company had
experienced no significant gains or losses on foreign currency transactions or
translations during the six-month transition period ended December 31, 1996 or
in fiscal 1996 and 1995. No assurance can be given, however, that it will not
experience such material effects in 1998.

INFLATION

To date, inflation has not had a material impact on Cayenne's revenues or
income.

QUARTERLY PERFORMANCE

Cayenne's revenues vary from quarter to quarter; historically, the largest
portion of Cayenne's revenue has been recognized during the December quarter.
The September quarter is traditionally Cayenne's slowest. Cayenne has also
frequently recognized more revenue in the last month of each quarter than in
either of the preceding two months. Cayenne believes these quarterly and monthly
patterns have been partly attributable to Cayenne's sales commission policies,
which compensate sales personnel for meeting or exceeding annual quotas, and to
the budgeting and purchasing cycles of customers. To the extent that this
pattern continues, the failure to achieve such revenue in the last weeks of the
quarter may result in a adverse material impact on revenue. In addition,
Cayenne's revenue and earnings have fluctuated historically, and may fluctuate
in the future, due to the timing of large individual orders. In the fourth
quarter of 1997 the Company received an order totaling $1.0 million. In the
second quarter of fiscal 1996, the Company had a series of significant orders
from a major systems integrator totaling $2.4 million. The Company completed an
order for approximately $1.1 million from an international customer in the third
quarter of fiscal 1995.

FACTORS THAT MAY AFFECT FUTURE RESULTS



                                       24
<PAGE>   25
From time to time, information provided by the Company or statements made by its
employees may contain "forward-looking" information, as that term is defined in
the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company
cautions investors that there can be no assurance that actual results or
business conditions will not differ materially from those projected or suggested
in such forward-looking statements as a result of various factors, including but
not limited to the following:

Technological Change

The Company's future operating results are dependent on its ability to develop
product and market new and innovative products and services. There are numerous
risks inherent in this complex process, including rapid technological change and
the requirement that the Company bring to market in a timely fashion new
products and services which meet customers' changing needs.

Fluctuations in Operating Results

Historically, the Company has generated a disproportionate amount of its
operating revenues toward the end of each quarter, making precise prediction of
revenues and earnings particularly difficult and resulting in risk of variance
of actual results from those forecast at any time. In addition, the Company's
operating results historically have varied from fiscal period to fiscal period;
accordingly, the Company's financial results in any particular fiscal period are
not necessarily indicative of results for future periods.

Competition

The Company operates in a highly competitive environment and in a highly
competitive industry, which include intense competition for skilled employees.
Because of the complexity of the Company's products, the Company relies heavily
on experienced and skilled employees both in the technical area and the sales
area. The loss of any experienced and skilled employee could impact the
Company's actual operating results or future results of operations.

Risk of Distribution Channels

The Company offers its products and services directly and through indirect
distribution channels. Changes in the financial condition of, or the Company's
relationship with, distributors and other indirect channel partners could cause
actual operating results to vary from those expected.

Economic Uncertainty and Currency Risk

The Company does business worldwide. Global and/or regional economic factors and
potential changes in laws and regulations affecting the Company's business,
including without limitation, currency fluctuations, changes in monetary policy
and tariffs, and federal, state and international laws could impact the
Company's financial condition or future results of operations.

Volatility of Stock Price

The market price of the Company's securities could be subject to fluctuations in
response to quarter to quarter variations in operating results, changes in
analysts' earnings estimates, market conditions in the information technology
industry, as well as general economic conditions and other factors external to
the Company.

Year 2000 Compliance

The Company recognizes the importance of meeting year 2000 compliance for its
software products and internal operations. All of the Company's software
products are year 2000 compliant. The operational issues associated with meeting
year 2000 compliance are being addressed with the installation of a new software
business information system. The new installation is planned to be operational
in all United States and subsidiary locations at or around year-end 1998. The
Company is continuing to assess the impact of year 2000 on its suppliers and
vendors. Problems in meeting year 2000 compliance could impact the Company's
actual operating results or future results of operation.

Significant Customer Risk

Cayenne has several large customers. The loss of any these customers, through
industry consolidation or otherwise, will materially affect operating results.


                                       25
<PAGE>   26
Revenue Risk

The Company's strategy to stem revenue decline is based on the transition from
the Company's OS/2 platform and Structured Unix tools to new windows-based and
object oriented products. If revenues from the OS/2 and Unix products continue
to decline, there can be no assurance that these new products will be accepted
by customers and will generate revenues sufficient to offset any decline.

Litigation Risk

The future course of a current large claim against the Company could impact the
Company's actual operating results or future results of operations.

Industry Consolidation

Many of the Company's competitors have significantly greater financial resources
than the Company. In addition, the trend towards industry consolidation among
the Company's competitors has given these competitors the ability to offer a
wider range of products and services than those available from the Company. This
ability may give these competitors marketing and discounting advantages not
available to the Company.


                                       26
<PAGE>   27
           ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                             CAYENNE SOFTWARE, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                  PAGE
<S>                                                                                <C>
Report of Independent Accountants................................................  28
Report of Independent Accountants................................................  29
Consolidated Balance Sheets as of December 31, 1997 and 1996 and
June 30, 1996....................................................................  30
Consolidated Statements of Operations for the years ended December 31, 1997
and 1996, the transition period from July 1, 1996 to December 31, 1996,
the six-month period ended December 31, 1995 and the years ended
June 30, 1996 and 1995...........................................................  31
Consolidated Statements of Stockholders' Equity (Deficit) for the year ended
December 31, 1997, the transition period from July 1, 1996 to December 31, 1996
and the years ended June 30, 1996, and 1995......................................  32
Consolidated Statements of Cash Flows for the years ended December 31, 1997
and 1996, the transition period from July 1, 1996 to December 31, 1996, the
six-month period ended December 31, 1995 and the years ended
June 30, 1996 and 1995...........................................................  33
Notes to Consolidated Financial Statements.......................................  34
</TABLE>


                                       27
<PAGE>   28
                        REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CAYENNE SOFTWARE, INC.:

We have audited the accompanying consolidated balance sheets of Cayenne
Software, Inc. as of December 31, 1997 and 1996 and June 30, 1996 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year ended December 31, 1997, the six-month period ended
December 31, 1996 and the year ended June 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cayenne Software,
Inc. as of December 31, 1997 and 1996 and June 30, 1996 and the consolidated
results of its operations and its cash flows for the year ended December 31,
1997, the six-month period ended December 31, 1996 and the year ended June 30,
1996, in conformity with generally accepted accounting principles.

The financial statements give retroactive effect to the merger of Cayenne
Software, Inc. and Cadre Technologies Inc. on July 18, 1996, which has been
accounted for as a pooling of interests as described in Note 2 of notes to the
consolidated financial statements. We previously audited and reported on the
consolidated statements of operations, stockholders' equity (deficit) and cash
flows of Cayenne Software, Inc. for the year ended June 30, 1995, prior to their
restatement for the 1996 pooling of interests. The contribution of Cayenne
Software, Inc. to revenues represented 46 percent and to net loss represented 41
percent of the respective restated totals for the year ended June 30, 1995.
Separate financial statements of Cadre Technologies Inc. included in the
restated consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year ended June 30, 1995 were audited and reported on
separately by other auditors. We also audited the combination of the
accompanying consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year ended June 30, 1995, after restatement for
the 1996 pooling of interests, and, in our opinion, such consolidated statements
have been properly combined on the basis described in Note 2 of notes to the
consolidated financial statements.

                                                   /s/ COOPERS & LYBRAND L.L.P.

BOSTON, MASSACHUSETTS
FEBRUARY 18, 1998


                                       28
<PAGE>   29
                        REPORT OF INDEPENDENT ACCOUNTANTS

TO THE STOCKHOLDERS' OF
CADRE TECHNOLOGIES INC.:

We have audited Cadre Technologies Inc. and its subsidiaries' (the "Company")
consolidated statements of operations, stockholders' (deficiency) equity, and
cash flows for the year ended December 31, 1995 (none of which are presented
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Cadre
Technologies Inc. and its subsidiaries for the year ended December 31, 1995 in
conformity with generally accepted accounting principles.

The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations, cash used in operating activities, deficiency in working capital and
stockholders' deficiency raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are outlined in
Note 16. The financial statements do not include any adjustments that might
result from the outcome on this uncertainty.

BOSTON, MASSACHUSETTS                                 /s/ DELOITTE & TOUCHE LLP
FEBRUARY 2, 1996


                                       29
<PAGE>   30
                             CAYENNE SOFTWARE, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          DECEMBER 31, DECEMBER 31,   JUNE 30,
                                                                             1997         1996         1996
                                                                           ---------    ---------    ---------
<S>                                                                        <C>          <C>          <C>
                                  ASSETS
Current assets:
     Cash and cash equivalents                                             $   9,225    $   4,150    $  14,690
     Trade accounts receivable, less allowance for sales returns and
     doubtful accounts                                                        12,200       13,320       12,445
     Prepaid expenses and other current assets                                 1,667        1,375        2,743
                                                                           ---------    ---------    ---------
          Total current assets                                                23,092       18,845       29,878
Property and equipment, less accumulated depreciation and amortization         2,918        2,256        2,723
Capitalized software costs, less accumulated amortization of $0, $266
and $186 at December 31, 1997 and 1996, and June 30, 1996, respectively,        --            534          614
Other assets                                                                     314          601          884
                                                                           ---------    ---------    ---------
Total assets                                                               $  26,324    $  22,236    $  34,099
                                                                           =========    =========    =========

              LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:

     Short term debt                                                       $   2,359    $   2,820    $   3,852
     Accounts payable                                                          2,456        2,363        3,093
     Accrued expenses                                                          1,617        1,422        2,077
     Accrued compensation and benefits                                         3,233        3,415        3,317
     Accrued restructuring and other costs (Note 13)                           1,152        1,703          779
     Income and other taxes payable                                            1,121          909        1,967
     Obligations under capital lease                                             327          561          580
     Deferred revenue                                                          7,914        9,592       13,714
                                                                           ---------    ---------    ---------
          Total current liabilities                                           20,179       22,785       29,379
Convertible long-term debt                                                      --           --          1,789
Obligation under capital lease                                                   124          106          307
Commitments and contingencies (Note 7)
Total stockholders' equity (deficit):

     Series C Convertible Preferred Stock, $1.00 par value;
     (liquidation preference $20.00 per share) 150 shares authorized; 100
     shares outstanding at December 31, 1997                                     100         --           --
     Series D Convertible Preferred Stock, $1.00 par value; (liquidation
     preference $20.00 per share) 300 shares authorized; 210 shares
     outstanding at December 31, 1997                                            210         --           --
     Common stock, $.01 par value; 52,400 shares authorized;
     19,179, 17,695 and 17,225 shares issued and outstanding at
     December 31, 1997 and 1996,
     and June 30, 1996, respectively                                             192          177          172
     Additional paid-in capital                                              113,089      102,935      100,301
     Accumulated deficit                                                    (107,125)    (103,706)     (97,338)
     Accumulated other comprehensive (loss)                                     (445)         (61)        (511)
                                                                           ---------    ---------    ---------
          Total stockholders' equity (deficit)                                 6,021         (655)       2,624
                                                                           ---------    ---------    ---------
Total liabilities and stockholders' equity (deficit)                       $  26,324    $  22,236    $  34,099
                                                                           =========    =========    =========
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                      THE CONSOLIDATED FINANCIAL STATEMENTS


                                       30
<PAGE>   31
                             CAYENNE SOFTWARE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                           TRANSITION     PRIOR
                                                 YEAR        YEAR             PERIOD     PERIOD
                                                 ENDED       ENDED            ENDED       ENDED          YEAR ENDED
                                              DECEMBER 31, DECEMBER 31,    DECEMBER 31, DECEMBER 31,      JUNE 30,
                                                 1997        1996             1996        1995        1996        1995
                                               --------    --------         --------    --------    --------    --------
                                                          (UNAUDITED)                  (UNAUDITED)
<S>                                            <C>         <C>              <C>         <C>         <C>         <C>
Revenues:
     Software license                          $ 19,474    $ 20,462         $ 10,131    $ 15,951    $ 26,282    $ 29,849
     Consulting and education
     services                                     8,844      11,136            4,684       5,915      12,367      14,306
     Maintenance                                 21,284      26,032           13,161      14,366      27,237      28,634
                                               --------    --------         --------    --------    --------    --------
          Total revenues                         49,602      57,630           27,976      36,232      65,886      72,789
Costs and expenses:
     Cost of revenues
     Cost of software licenses                    1,960       3,279            1,521       2,241       3,999       6,105
     Cost of consulting and education
     services and maintenance                     8,217      10,841            4,975       7,044      12,910      15,953
Sales and marketing                              23,636      28,124           12,488      16,978      32,614      37,656
Research and development                         10,290      11,902            5,411       7,957      14,448      17,059
General and administrative                        5,960       7,467            3,307       4,370       8,530       8,062
Non-recurring costs (Note 13)                     1,544       7,425            6,300       1,694       2,819       5,483
Charge for purchased research and
development (Note 2)                               --          --               --           158         158       7,300
                                               --------    --------         --------    --------    --------    --------
Total costs and expenses                         51,607      69,038           34,002      40,442      75,478      97,618
                                               --------    --------         --------    --------    --------    --------
Loss from operations                             (2,005)    (11,408)          (6,026)     (4,210)     (9,592)    (24,829)
Interest income                                     193         455               71         212         596         758
Other income (expense), net                        (287)        309              282        (111)        (84)         34
Interest expense                                    408       1,150              296         289       1,143         556
                                               --------    --------         --------    --------    --------    --------
Loss before provision for income taxes           (2,507)    (11,794)          (5,969)     (4,398)    (10,223)    (24,593)
Provision for income taxes                          726       1,119              399         404       1,124         297
                                               --------    --------         --------    --------    --------    --------
    Net loss                                     (3,233)    (12,913)          (6,368)     (4,802)    (11,347)    (24,890)
Dividends on preferred stock                        186        --               --          --          --          --
                                               --------    --------         --------    --------    --------    --------
Loss applicable to common shareholders           (3,419)    (12,913)          (6,368)     (4,802)    (11,347)    (24,890)
Other comprehensive loss:
Foreign currency translation adjustment            (384)        769              450        (118)        201        (204)
                                               --------    --------         --------    --------    --------    --------
    Comprehensive loss                         $ (3,803)   $(12,144)        $ (5,918)   $ (4,920)   $(11,146)   $(25,094)
                                               --------    --------         --------    --------    --------    --------

Basic and diluted earnings per share           $  (0.19)   $  (0.75)        $  (0.36)   $  (0.32)   $  (0.71)   $  (1.86)
                                               --------    --------         --------    --------    --------    --------
Weighted average number of common
shares outstanding                               18,410      17,139           17,590      15,103      15,914      13,350
                                               --------    --------         --------    --------    --------    --------
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                      THE CONSOLIDATED FINANCIAL STATEMENTS


                                       31
<PAGE>   32
                             CAYENNE SOFTWARE, INC.
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                      FOR THE YEAR ENDED DECEMBER 31, 1997,
                  THE TRANSITION PERIOD ENDED DECEMBER 31, 1996
                   AND THE YEARS ENDED JUNE 30, 1996 AND 1995
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                         ACCUMULATED
                                                                             ADDITIONAL     OTHER                        TOTAL
                                           COMMON STOCK    PREFERRED STOCK    PAID-IN  COMPREHENSIVE    ACCUMULATED   STOCKHOLDERS'
                                         SHARES   AMOUNT   SHARES  AMOUNT     CAPITAL       LOSS          DEFICIT   EQUITY (DEFICIT)
                                         ---------------   ---------------   --------  -------------    ---------   ----------------
<S>                                      <C>       <C>       <C>     <C>     <C>          <C>           <C>            <C>
     Balance, June 30, 1994              12,775    $128             $        $ 81,977     $(508)        $ (64,261)     $ 17,336
Stock options exercised                     331       3                           888                                       891
Issuance of common stock under
Employee Stock Purchase Plan                 35                                    76                                        76
Issuance of warrants in conjunction
with the preferred stock                                                          348                                       348
Proceeds from Section 16(b) profits                                               352                                       352
Repurchase of stock/warrants                 (8)                                  (42)                                      (42)
Issuance of common stock in
acquisition of business                     679       7                         3,373                                     3,380
Currency translation adjustment                                                            (204)                           (204)
Net loss for the year                                                                                     (24,890)      (24,890)
                                         ------    ----     -----   -----    --------     -----         ---------      --------
     Balance, June 30, 1995              13,812     138                        86,972      (712)          (89,151)       (2,753)
Stock options exercised                     311       3                         1,509                                     1,512
Issuance of common stock under
Employee Stock Purchase Plan                 14                                    82                                        82
Conversion of Series A Preferred Stock    1,787      18                         5,475                                     5,493
Exercise of warrants                        187       2                           498                                       500
Issuance of common stock through
private placement                         1,114      11                         5,765                                     5,776
Pooling adjustment (Note 2)                                                                                 3,160         3,160
Currency translation adjustment                                                             201                             201
Net loss for the year                                                                                     (11,347)      (11,347)
                                         ------    ----     -----   -----    --------     -----         ---------      --------
     Balance, June 30, 1996              17,225     172                       100,301      (511)          (97,338)        2,624
Stock options exercised                      95       1                           342                                       343
Issuance of common stock under
Employee Stock Purchase Plan                  9                                    35                                        35
Exercise of warrants                        144       2                           470                                       472
Conversion of convertible long-
term debt                                   222       2                         1,787                                     1,789
Currency translation adjustment                                                             450                             450
Net loss for the period                                                                                    (6,368)       (6,368)
                                         ------    ----     -----   -----    --------     -----         ---------      --------
     Balance, December 31, 1996          17,695     177                       102,935       (61)         (103,706)         (655)
Stock options exercised                      78       1                           173                                       174
Issuance of common stock under
Employee Stock Purchase Plan                 68       1                           193                                       194
Issuance of preferred stock                                   500     500       7,678                                     8,178
Conversion of preferred stock             1,288      13      (190)   (190)        177                                         0
Issuance of common stock in acquisition      50                                   209                                       209
Issuance of warrants in conjunction
with preferred stock                                                            1,724                                     1,724
Currency translation adjustment                                                            (384)                           (384)
Dividends on preferred stock                                                                                 (186)         (186)
Net loss for the year                                                                                      (3,233)       (3,233)
                                         ------    ----     -----   -----    --------     -----         ---------      --------
     Balance, December 31, 1997          19,179    $192       310   $ 310    $113,089     $(445)        $(107,125)     $  6,021
                                         ======    ====     =====   =====    ========     =====         =========      ========
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                      THE CONSOLIDATED FINANCIAL STATEMENTS


                                       32
<PAGE>   33

                             CAYENNE SOFTWARE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                               TRANSITION        PRIOR
                                                     YEAR            YEAR        PERIOD          PERIOD
                                                     ENDED           ENDED        ENDED          ENDED         YEAR ENDED
                                                  DECEMBER 31,     DECEMBER 31, DECEMBER 31,  DECEMBER 31,       JUNE 30,
                                                      1997            1996        1996           1995        1996        1995
                                                     -------        --------    --------       --------    ---------------------
                                                                   (UNAUDITED)                (UNAUDITED)
<S>                                                  <C>            <C>         <C>            <C>         <C>         <C>
Cash flows from operating activities:
   Net loss                                          $(3,233)       $(12,913)   $ (6,368)      $ (4,802)   $(11,347)   $(24,890)
   Adjustments to reconcile net
   loss to net cash used in operating
   activities:
     Charge for purchased research
     and development                                    --              --          --              158         158       7,300
     Depreciation and amortization                     1,754           2,852       1,262          1,552       3,142       4,431
     Write-down of intangible asset                      602             986        --             --           986         945
     Loss on disposal of equipment                      --               211         201           --            10        --
   Change in operating assets
   and liabilities, net of effects of
   acquisitions:
     Trade accounts receivable                         1,120           4,274        (875)        (1,318)      3,831         900
     Prepaid expenses and other current assets          (292)            770       1,368           (164)       (762)        590
     Accrued expenses                                      9            (909)       (655)          (188)       (442)     (2,387)
     Accrued restructuring and other costs              (551)            (10)        924            601        (333)        255
     Accounts payable                                     93          (1,324)       (730)        (1,384)     (1,978)     (1,849)
     Accrued compensation and benefits                  (182)            492          98           (496)       (102)       (639)
     Income and other taxes payable                      212            (629)     (1,058)           377         806         397
     Deferred revenue                                 (1,678)         (3,487)     (4,122)        (2,896)     (2,261)         61
                                                     -------        --------    --------       --------    --------    --------
Net cash used in operating activities                 (2,146)         (9,687)     (9,955)        (8,560)     (8,292)    (14,886)
Cash flows from investing activities:
     Purchases of property and equipment net          (1,783)         (1,177)       (777)          (330)       (730)     (1,506)
     Acquisition of businesses                          --              --          --             --          --          (508)
     Software development costs                         --              --          --             --          --          (420)
                                                     -------        --------    --------       --------    --------    --------
Net cash used in investing activities                 (1,783)         (1,177)       (777)          (330)       (730)     (2,434)
Cash flows from financing activities:
     Proceeds from issuance of common stock, net         356           1,879         850          6,896       7,925         925
     Proceeds from issuance of preferred stock and
     warrants (net of issuance costs)                  9,902            --          --             --          --         5,812
     Proceeds from Section 16(b) profits                --              --          --             --          --           352
     Proceeds from line of credit facility              --             2,821       1,321            600       2,100       3,200
     Proceeds from sale-leaseback transaction           --                54        --              933         987        --
     Proceeds from factoring agreement                  --             9,277          82           --         9,195        --
     Proceeds from repayment of employee loans          --               200         200           --          --          --
     Payments under factoring agreement                 --            (9,902)     (2,431)          --        (7,471)       --
     Payment under line of credit facility              (461)         (2,480)       --             --        (2,480)       (720)
     Payments under capital lease obligations           (696)           (419)       (280)           (30)       (169)       (174)
                                                     -------        --------    --------       --------    --------    --------
Net cash provided by (used in) financing               9,101           1,430        (258)         8,399      10,087       9,395
activities
   Effect of foreign exchange rates on cash
   and cash equivalents                                  (97)            695         450            108         353          93
                                                     -------        --------    --------       --------    --------    --------
Net increase (decrease) in cash and cash
equivalents                                            5,075          (8,739)    (10,540)          (383)      1,418      (7,832)
Adjustment to conform fiscal year of Cadre              --              --          --            2,102       2,102        --
Cash and cash equivalents at beginning of period       4,150          12,889      14,690         11,170      11,170      19,002
                                                     -------        --------    --------       --------    --------    --------
Cash and cash equivalents at end of period           $ 9,225        $  4,150    $  4,150       $ 12,889    $ 14,690    $ 11,170
                                                     =======        ========    ========       ========    ========    ========
</TABLE>

                 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
                      THE CONSOLIDATED FINANCIAL STATEMENTS


                                       33
<PAGE>   34
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements include the accounts of
Cayenne Software, Inc. (formerly Bachman Information Systems, Inc.) ("the
Company" or "Cayenne") and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated from the
consolidated financial statements. The consolidated financial statements and all
financial data contained herein include the accounts of Cadre Technologies Inc.
("Cadre") for all periods presented (Note 2).

In October 1996, the Company changed its fiscal year end from June 30th to
December 31st. As a result the period from July 1, 1996 through December 31,
1996 was designated as "the transition period."

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date(s) of the financial statements and
the reported amounts of revenues and expenses during the reporting period(s).
Actual results could differ from those estimates.

Cayenne organized as a corporation in 1983, develops, markets and supports a
comprehensive suite of workgroup-to-enterprise analysis and design solutions for
the practical challenges software developers face every day.

TRANSLATION OF FOREIGN CURRENCIES

The local currencies of the Company's foreign subsidiaries are predominantly
determined to be the functional currencies. Assets and liabilities of all
foreign subsidiaries are translated at period-end rates of exchange, and income
statement accounts are translated at average rates of exchange. Translation
adjustments are recorded as a separate component of stockholders' equity,
"Accumulated Other Comprehensive Income". Transaction gains and losses,
primarily related to foreign currency denominated intercompany payables and
receivables are included in the results of operations.

FOREIGN EXCHANGE CONTRACTS

Beginning in 1997, the Company enters into foreign exchange contracts to
mitigate the effect of changes in foreign currency rates on the intercompany
payable and receivable positions of Non-U.S. subsidiaries. The contracts are
principally in European currencies and generally have maturities of 120 days or
less. Gains and losses associated with currency rate changes on the contracts
are recorded in results of operations, offsetting losses and gains on the
related assets and liabilities. The cash flows related to the gains and losses
of foreign currency forward contracts are classified in the statement of cash
flows as part of cash flows from operations.

The market risk exposure from forward contracts is assessed in light of the
underlying currency exposures and is limited by the term of the Company's
contracts, generally less than 120 days. Credit risk from forward contracts is
minimized through the placement of contracts with multiple financial
institutions. Forward contracts are revalued monthly by comparing contract rates
to month-end exchange rates. For the year ended December 31, 1997 the Company
recorded a foreign exchange loss of $504,000. For all other periods, the foreign
exchange gain (loss) was immaterial. At December 31, 1997 the Company held
foreign currency contracts of approximately $2.6 million. The fair value of
these forward exchange contracts as of December 31, 1997 approximate the
contract amounts.

REVENUE RECOGNITION

Revenue from product license fees is recognized upon shipment. At the time the
Company recognizes revenue from the sale of software products, no significant
vendor obligations remain and the costs of insignificant support obligations, if
any, are accrued. The Company typically does not grant to its customers a
contractual right to return software products. Accordingly, no provision for
estimated returns is generally recorded at the time of the sale. When approved
by management, however, the Company has accepted returns of certain software
products and has provided an allowance for those specific products. Maintenance
revenue for annual maintenance contracts is deferred and recognized ratably over
the term of agreement. Revenue from consulting and education services is
recognized as the related services are performed.



                                       34
<PAGE>   35
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

ACCOUNTS RECEIVABLE

Accounts receivable are presented net of an allowance for doubtful accounts and
sales returns of approximately $583,000, $820,000 and $868,000 at December 31,
1997 and 1996, and June 30, 1996, respectively. The provisions charged to the
statement of operations were $37,000, $0, $350,000, and $122,000 in the year
ended December 31, 1997, the six month transition period ended December 31, 1996
and the fiscal years ended June 30, 1996 and 1995, respectively, and deductions
against the allowances were $274,000 $48,000, $424,000, and $839,000 in the year
ending December 31, 1997, the six month transition period ended December 31,
1996 and the fiscal years ended June 30, 1996 and 1995, respectively.

COST OF REVENUE

Cost of software licenses includes capitalized software amortization expense and
other costs principally related to the duplication and distribution of licensed
software products. Cost of consulting and education services and maintenance
includes personnel, travel and occupancy costs connected with providing such
services.

DEFERRED REVENUE

Maintenance revenue which is not yet earned is included in deferred revenue.

CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments with maturities of less
than ninety days when acquired. These investments are stated at cost plus
accrued interest, which approximates market value. Included in cash and cash
equivalents at December 31, 1997 and 1996, and June 30, 1996, respectively, are
$0, $700,000 and $699,000 in United States Treasury Securities under agreement
to resell in January 1997, and July 1996, respectively. Treasury securities
purchased under agreements to resell are held in safekeeping by the Company's
bank.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. At disposition, the cost of
property and related accumulated depreciation are removed from the balance sheet
and any gain or loss is included in the statement of operations. Depreciation
and amortization are provided on the straight-line method over the estimated
useful life of the related assets as follows:

 Computer and related equipment....  3 to 5 years
 Equipment under capital lease.....  Shorter of life of lease or useful life
 Office furniture and fixtures.....  5 to 7 years
 Leasehold improvements............  Shorter of life of lease or useful life

SOFTWARE COSTS AND OTHER INTANGIBLE ASSETS

The Company capitalizes certain software costs after technological feasibility
of the product has been established. Costs incurred prior to the establishment
of technological feasibility are charged to research and development expense.
Software costs are amortized, on a product by product basis, ratably over the
estimated economic life of the product (generally two years, five years in the
case of WindTunnel), or the ratio of current gross revenues to total current and
expected future gross revenues of the product, whichever is greater.


                                       35
<PAGE>   36
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

The Company evaluates the net realizable value of capitalized software and other
intangible assets on an ongoing basis relying on a number of factors including
operating results, business plans, budgets and economic projections and
undiscounted cash flows. In addition, the Company's evaluation considers
non-financial data such as market trends, product development cycles and changes
in management's market emphasis.

Costs in excess of net assets of acquired companies are amortized on a
straight-line basis over a ten-year period. Goodwill totaled $581,000 before
accumulated amortization of approximately $296,000, $275,000, and $246,000 at
December 31, 1997 and 1996, and June 30, 1996, respectively.

INCOME TAXES

Deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
temporary differences are expected to reverse. A valuation reserve against
deferred assets is recorded if based upon weighted available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.

BASIC INCOME (LOSS) PER COMMON SHARE

In February 1997, the Financial Accounting Standards Board issued (SFAS No.
128), "Earnings Per Share" which required adoption during the year ending
December 31, 1997. Earnings per share are stated for all periods presented in
accordance with the new guideline. Basic income (loss) per common share is
computed based on the weighted average number of common shares outstanding
during each period. Dilutive common equivalent shares consist of preferred
stock, warrants and stock options (calculated using the treasury stock method).
For the year ended December 31, 1997, the transition period ended December 31
1996, and fiscal years ended June 30, 1996, and 1995, common equivalent shares
are excluded from the diluted earnings per share calculation as they are
antidilutive. Securities that could potentially dilute earnings per share in the
future that were not included in the computation of diluted earnings per share
because they would have been antidilutive were 7,784,000 shares, 3,721,000
shares, 3,247,000 shares, and 5,130,000 shares, for the year ended December 31,
1997, the transition period ended December 31, 1996 and fiscal years ended June
30, 1996 and 1995, respectively.

CONCENTRATIONS OF CREDIT RISK

Financial instruments which potentially subject the Company to concentrations of
credit risk consist of temporary cash investments and trade receivables.

The Company invests its cash in deposits with major banks and in money market
investments and obligations of the United States Government and Federal
agencies. The Company has not experienced any significant losses on its
investments.

Concentrations of credit risk with respect to trade receivables include
receivables from a significant customer (see, also, Note 8.) and are otherwise
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 performs ongoing credit evaluations of its customers and maintains
reserves for potential credit losses. Such losses to date have been within
management's expectations.

COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued (SFAS 130)
"Reporting Comprehensive Income", for fiscal years beginning after December 15,
1997. The Company has elected early adoption of the standard. Comprehensive
income is the term used to describe the change in equity from events or
transactions from non-owners sources. All periods presented have been restated
to reflect the impact of non-owner transactions in the financial statements.


                                       36
<PAGE>   37
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

2. BUSINESS COMBINATIONS

On March 27, 1997, the Company acquired the assets and liabilities of
Multiquest Corporation ("Multiquest") in a transaction accounted for as a
purchase. The Company acquired the assets and liabilities in exchange for 50,000
shares of the Company's common stock. The purchase price for Multiquest was
approximately $209,000 based upon a stock price of 4.1875 (which approximated
the fair market value of the Company's common stock at the closing of the
acquisition). The net tangible assets and liabilities of Multiquest acquired by
the Company were insignificant. The purchase price was allocated to the fair
value of the technology acquired and customer lists. The Company's results
reflect the allocation of the purchase price in accordance with generally
accepted accounting principles and the results of operations reflect the impact
of the acquisition since the closing date. The pro-forma results of Multiquest
prior to the acquisition would be immaterial to the Company's reported results
and are therefore not presented. (See, also note 13.)

On July 18, 1996, the Company completed its acquisition of Cadre Technologies
Inc. ("Cadre") under an Agreement and Plan of Merger dated March 25, 1996, by
and among the Company, Cadre and B.C. Acquisition Corp., whereby the Company
agreed to acquire all of the outstanding capital stock of Cadre in exchange for
4,716,442 shares of Cayenne common stock (the "merger"). The merger has been
accounted for as a pooling-of-interests beginning in the first quarter of the
transition period ended December 31, 1996. Accordingly, all financial data
contained herein include the accounts of Cadre for all periods presented. The
Company's fiscal 1996 results have been combined with Cadre's results for the
twelve months ended June 30, 1996. The Company's results for fiscal 1995 have
been combined with Cadre's calendar year end results for the same period. In
this presentation, Cadre's financial data for the period July 1, 1995 to
December 31, 1995 is included in both the periods ended June 30, 1996 and 1995.
The six month period includes a net loss of $3,160,000. Additionally, effective
upon the merger, the Company changed its name to Cayenne Software, Inc. The
Company acquired Cadre to expand its product offerings to include structured
analysis and design and object-oriented technology and to expand its customer
base.

During the transition period ended December 31, 1996, the Company incurred a
$6.3 million charge to operations to reflect costs associated with combining the
operations of the two companies, transaction fees, and other costs. Included in
the charge is $1.6 million of employee related termination expenses, $1.3
million of legal, accounting, investment banking and other professional fees,
$1.4 million of facility closure and consolidation expenses, and $2.0 million of
other expenses associated with the consolidation of the two companies and the
name change.

On May 1, 1995, the Company acquired Westmount Technology, B.V. ("Westmount") in
a transaction accounted for as a purchase. The Company acquired Westmount for
approximately 679,000 shares of common stock and a warrant to purchase an
additional 185,000 shares. The purchase price for Westmount was approximately
$3.8 million. In conjunction with this transaction, the Company recorded assets
purchased of approximately $8.1 million and liabilities assumed of $4.3 million.
$7.3 million of the recorded assets were attributed to in-process research and
development and was charged to operations during 1995. The software had not
reached technological feasibility and had no future alternative use. In
connection with the purchase of Westmount, a shareholder trust of former
Westmount shareholders granted the Company a $1.6 million subordinated,
convertible loan. The note accrued interest at a simple rate of 10%, payable
annually in arrears. Effective upon the merger and resulting change of control,
the debt and accrued interest were automatically converted into 220,000 common
shares of the Company.



                                       37
<PAGE>   38
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

3. PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                          DECEMBER 31,        DECEMBER 31,        JUNE 30,
                                                              1997                1996              1996
                                                         --------------        ----------         ---------
<S>                                                         <C>                 <C>               <C>
         Computer and related equipment                     $  13,652           $  12,415         $  16,642
         Equipment under capital leases                           721               1,241             1,179
         Office furniture and fixtures                          2,775               2,838             2,745
         Leasehold improvements                                 1,182                 507               506
                                                            ---------           ---------         ---------
                   Total                                       18,330              17,001            21,072
         Less accumulated depreciation and amortization        15,412              14,745            18,349
                                                            ---------           ---------         ---------
                                                            $   2,918           $   2,256         $   2,723
                                                            =========           =========         =========
</TABLE>

Accumulated amortization for equipment under capital leases was $.2 million, $.6
million and $.4 million as of December 31, 1997 and 1996, and June 30, 1996,
respectively. During the year ended December 31, 1997, the transition period
ended December 31, 1996 and fiscal 1996, the Company wrote-off $.3million, $4.4
million and $8 million of fully depreciated assets.

4. CAPITALIZED SOFTWARE COSTS

Amortization expenses for previously capitalized software costs for the year
ended December 31, 1997, the transition period ended December 31, 1996, and
fiscal years ended June 30, 1996 and 1995, was approximately $120,000,
$80,000, $160,000 and $723,000, respectively. The Company also amortized
$456,000 in both periods ended June 30, 1996 and 1995 related to purchased
software acquired in the WindTunnel transaction.

5. INCOME TAXES

     The components of net deferred tax assets were as follows:

<TABLE>
<CAPTION>
                                              DECEMBER 31,    DECEMBER 31,     JUNE 30,
                                                  1997            1996           1996
                                              -----------     -----------      --------
<S>                                           <C>             <C>              <C>
         Deferred tax assets:
         Net operating loss carryforwards     $   32,131      $   29,979       $   27,953
         Tax credit carryforwards                  4,104           3,789            3,619
         Other                                     4,252           5,290            5,050
                                              ----------      ----------       ----------
         Gross deferred tax asset                 40,487          39,058           36,622
         Valuation allowance                     (40,487)        (39,058)         (36,622)
                                              ----------      ----------       ----------
                     Net deferred tax asset   $        0      $        0       $        0
                                              ----------      ----------       ----------
</TABLE>

The entire deferred tax asset has been fully reserved with a valuation allowance
due to the uncertainty of realization. The Company has historically not
generated taxable income sufficient to ensure usage of the deferred tax asset.



                                       38
<PAGE>   39
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

At December 31, 1997, the Company had remaining net operating loss ("NOL")
carryforwards of approximately $81,000,000, including approximately $6,900,000
for international operations, currently available to offset future taxable
income and unused federal tax credits of approximately $4,100,000. If not
utilized, these credits and carryforwards will expire between the years 2001 and
2012. Due to the Company's issuances of stock, the Tax Reform Act of 1986 has
restricted the Company's use of approximately $19,300,000 of its existing NOL
carryforwards.

The provision for income taxes recorded in the year ended December 31, 1997, the
transition period ended December 31, 1996, and the years ended June 30, 1996 and
1995 consisted of the following:

<TABLE>
<CAPTION>
                                                       TRANSITION
                                           YEAR          PERIOD
                                          ENDED          ENDED              YEAR ENDED
                                       DECEMBER 31,   DECEMBER 31,            JUNE 30,
                                           1997           1996          1996           1995
                                           ----           ----          ----           ----
<S>                                        <C>            <C>           <C>           <C>
         Federal                              --             --            --             --
         State                                --             --       $   120             --
         Foreign taxes                     $ 726          $ 399         1,004         $  297
                                           -----          -----       -------         ------
                 Total provision           $ 726          $ 399       $ 1,124         $  297
                                           =====          =====       =======         ======
</TABLE>

The effective tax rates for the year ended December, 31, 1997, the transition
period ended December 31, 1996 and fiscal years ended June 30, 1996 and 1995 are
not meaningful, as the Company was in a net loss position.

6. EMPLOYEE BENEFIT PLANS

The Company has a 401(k) defined contribution plan which is available to all
U.S. employees. The Company made no contributions to the plan during the year
ended December 31, 1997, the transition period ended December 31, 1996 or in the
years ended June 30, 1996, and 1995. Cadre also had a qualified defined
contribution plan and made matching contributions of $0, $213,000 and $213,000
in the transition period ended December 31, 1996 and years ended June 30, 1996,
and 1995.

The Company's 1992 Employee Stock Purchase Plan (the "Plan") permits eligible
employees to purchase up to a maximum of 625 shares of stock quarterly on
October 31, January 31, April 30, and July 31 at a purchase price equal to 85%
of the market price of the Company's common stock on either the first or last
day of each quarterly period, whichever price is lower, through accumulation of
payroll deductions of up to 20% of each participating employee's qualifying
compensation during such quarterly period. The Plan commenced operations on May
1, 1992. At December 31, 1997, 400,000 shares were reserved for issuance under
the Plan of which approximately 259,000 shares have been purchased by employees.



                                       39
<PAGE>   40
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

7. COMMITMENTS AND CONTINGENCIES

The Company leases office space under cancelable and non-cancelable operating
leases. Rent expense for the year ended December 31, 1997, the transition period
ended December 31, 1996 and the fiscal years ended June 30, 1996 and 1995 under
such arrangements totaled $3,795,000, $1,483,000, $4,664,000,and $4,848,000,
respectively.

The Company also leases certain equipment under long-term leases. At December
31, 1997, long-term lease commitments were as follows:

<TABLE>
<CAPTION>
                                                                      EQUIPMENT
                                                        OPERATING      CAPITAL
                                                         LEASES        LEASES
                                                        ---------     ---------
<S>                                                     <C>            <C>
      Year ended December 31, 1998...............       $  2,491       $  289
      Year ended December 31, 1999...............          2,279          190
      Year ended December 31, 2000...............          1,866           24
      Year ended December 31, 2001...............          1,663
      Year ended December 31, 2002...............            114
                                                        --------       ------
           Total.................................       $  8,413          503
                                                        ========
      Less amount representing interest..........                          52
                                                                       ------
      Present value of minimum lease payments....                         451
      Less current portion.......................                         327
                                                                       ------
      Long-term portion..........................                      $  124
                                                                       ======
</TABLE>

The company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially effect the
financial position of the Company.

Cayenne has received from Esprit Systems Consulting, Inc. ("Esprit") a Notice of
Intent to Arbitrate, claiming that Cayenne is liable to Esprit for approximately
$1.6 million under an extension to a contract for software training services to
be rendered to Cadre. Esprit subsequently withdrew its Notice of Intent to
Arbitrate, but has stated that it intends to proceed with either arbitration or
litigation. Cayenne believes that the claim is without merit because, among
other things, the contract in question terminated without extension. However,
there can be no assurance as to the claim's future course or likely result.

8. BUSINESS SEGMENT AND GEOGRAPHIC DATA

The Company operates in one business segment: development, marketing and support
of an integrated suite of software products and services. The Company markets
and services its products in the United States and in foreign countries through
its direct sales organization and distributors (which are independent
representatives). The Company's foreign operations include a research and
development center together with numerous sales and customer service
organizations. Geographic information for the year ended December 31, 1997, the
transition period ended December 31, 1996, and fiscal years ended June 30, 1996
and 1995 was as follows:

<TABLE>
<CAPTION>
                                                                     TRANSITION
                                                       YEAR            PERIOD
                                                       ENDED           ENDED
                                                   DECEMBER 31,     DECEMBER 31,            YEAR ENDED JUNE 30,
                                                      1997              1996             1996               1995
                                                   ----------       ----------        ----------          --------
<S>                                                <C>              <C>               <C>                 <C>
          SALES TO UNAFFILIATED CUSTOMERS

          United States                            $   23,402       $   13,641        $   31,696          $ 36,634
          Italy                                        11,875            6,118            13,937             9,519
          United Kingdom                                5,379            3,108             7,748            10,224
          Rest of World                                 6,798            3,879             7,802            12,274
          Export sales from United States               2,148            1,230             4,703             4,138
          Intra-company transfers                       6,742            2,649            10,278             9,603
          Intra-company eliminations                   (6,742)          (2,649)          (10,278)           (9,603)
                                                   ----------       ----------        ----------          --------
                                                   $   49,602       $   27,976        $   65,886          $ 72,789
                                                   ==========       ==========        ==========          ========
</TABLE>



                                       40
<PAGE>   41
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                      TRANSITION
                                         YEAR          PERIOD
                                         ENDED          ENDED
                                      DECEMBER 31,   DECEMBER 31,      YEAR ENDED JUNE 30,
                                         1997           1996           1996           1995
                                       --------       --------       --------       --------
<S>                                    <C>            <C>            <C>            <C>
INCOME (LOSS) FROM OPERATIONS
United States                          $  6,663       $ (1,239)      $ (3,497)      $ (9,419)
Italy                                      (873)           113            336           (540)
United Kingdom                           (1,345)        (1,194)        (1,096)        (2,044)
Rest of World                            (6,450)        (3,706)        (5,335)       (12,826)
                                       --------       --------       --------       --------
                                       $ (2,005)      $ (6,026)      $ (9,592)      $(24,829)
                                       ========       ========       ========       ========

IDENTIFIABLE ASSETS
United States                          $ 30,185       $ 23,665       $ 36,797       $ 34,449
Italy                                     5,816          6,645          7,894          7,502
United Kingdom                            3,102          3,528          4,428          4,537
Rest of World                             1,871          6,159          4,438          3,989
Eliminations                            (14,650)       (17,751)       (19,458)       (15,093)
                                       --------       --------       --------       --------
                                       $ 26,324       $ 22,236       $ 34,099       $ 35,384
                                       ========       ========       ========       ========
</TABLE>

Revenues from a major customer as a percentage of total revenue for the year
ended December 31, 1997, the transition period ended December 31, 1996, and in
fiscal years ended June 30, 1996 and 1995 were 17%, 16%, 15%, and 9%,
respectively. Included in the results of operations for December 31, 1997 is a
$1.9 million non-recurring charge related to management changes and the
realignment of the sales organization, moving the corporate headquarters to
another facility, and the write-off of purchased software, approximately $1.5
million in the United States, $.2 million in the United Kingdom, and $.1 million
in both Italy and rest of world. During the quarter ended March 31, 1997 the
Company evaluated its restructuring reserve and determined that amounts provided
for in previous restructuring actions were no longer required. As a result, the
Company recorded a benefit of approximately $.4 million in the United States.
Also, included in the results of operations for the transition period ended
December 31, 1996 is $6.3 million of merger and other costs, approximately $5.6
million in the United States, $0.1 million in Italy, $0.5 million in the United
Kingdom, and $0.1 million in rest of world. Additional restructurings during
fiscal 1996 and 1995 together with a $7.3 million write-off of in-process
research and development related to the Westmount purchase adversely impacted
the results of operations. Fiscal 1996 results include charges of $2.8 million
allocated primarily to the United States. Fiscal 1995 results include charges of
$5.5 million of which approximately $4.1 million was allocated to the United
States, $0.1 million to the United Kingdom, $0.1 million to Italy and $1.2
million to rest of world. The $7.3 million write-off related to Westmount was
charged to rest of world operations during 1995.

9. CAPITAL STOCK

The Company has 1,600,000 shares of $1.00 par value "blank check" preferred
stock authorized. Such shares may be issued in one or more future series by the
Board of Directors and, subject to certain limitations so as not to adversely
effect other holders of preferred stock, if any, are to have such rights and
preferences as the Board of Directors establishes before issuance. On November
21, 1994, the Company issued 1,787.073 shares of Series A Convertible Preferred
Stock. In connection with the issuance of the Series A preferred stock, the
Company issued to the Series A preferred stockholders three-year warrants to
purchase 357,415 shares of the Company Common Stock (with Registration Rights)
at an exercise price of $3.28 per share. These warrants were valued at $319,000
and are included in additional paid in capital. As of December 31, 1997, all
shares of Series A Convertible Preferred Stock had been converted to Common
Stock.


                                       41
<PAGE>   42
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

On January 2, 1997, the Company raised approximately $3.0 million in a private
placement of 150,000 shares of Series B Convertible Preferred Stock and the
issuance of 350,000 warrants to purchase the Company's Common Stock. On July 18,
1997, the Company raised approximately $2.0 million in a private placement of
100,000 shares of Series C Convertible Preferred Stock and the issuance of
warrants to purchase 233,332 shares of the Company's Common stock. On August 28,
1997, the Company raised approximately $5.0 million in a private placement of
250,000 shares of Series D Convertible Preferred Stock and the issuance of
583,332 warrants to purchase the Company's Common Stock. Each share of
Convertible Preferred Stock is entitled to earn dividends at a rate of 5% per
annum, payable upon conversion, in cash or stock, at the option of the Company.
Each share of Convertible Preferred Stock is convertible into shares of Common
Stock at a rate determined by the lower of the average quoted market price of
the common stock for either (i) the ten trading days preceding the date of
issuance or (ii) any five trading days during any period of thirty trading days
before the conversion. All outstanding and unconverted shares of preferred stock
may be converted, at the option of the Company, two years from the date the
securities were declared effective and at a specified conversion price. The
warrants issued by the Company in conjunction with the closing of each of the
private placements, are for the purchase of shares of the Company's Common Stock
at exercise prices ranging from 120% to 150% of the price set forth in clause
(i) above and having varying expiration dates from three to five years. The
shares of Common Stock underlying the Convertible Preferred stock and warrants
are entitled to registration rights under terms of the registration rights
agreement dated for each of the offering dates. The warrants issued with these
offerings were valued at $1,724,000 and are included in additional paid in
capital. As of December 31, 1997 all shares of the Series B and 40,000 shares of
the Series D Convertible Preferred Stock had been converted into common stock.

During the year ended December 31, 1997, the transition period ended December
31, 1996 and in fiscal year 1996, the Company received $0, $472,000 and $500,000
in connection with the exercise of warrants. Warrants for 1,504,461 shares of
common stock remain outstanding at December 31, 1997.

10. STOCK OPTIONS

Under the Company's amended 1996 incentive and nonqualified stock option plan
(the "1996 Plan"), incentive stock options can be granted to employees and
consultants entitling them to purchase shares of common stock within one to ten
years from the date of grant at option prices equal to the fair market value at
the date of grant. Nonqualified stock options are generally granted under the
same terms. The vesting period for stock options is generally four years. The
exercise price for incentive stock options may not be less than the fair market
value of the common stock on the date of the grant (or 110% of fair market value
in the case of employees or officers holding 10% or more of the total combined
voting power of all classes of stock of the Company). At December 31, 1997, the
number of shares issuable under the 1996 Plan is 2,000,000.

Employees of the Company currently hold stock options under three additional
plans: the Amended and Restated 1986 Incentive and Non Qualified Stock Option
Plan, the Cadre 1988 Incentive and Non-Statutory Stock Option Plan, and the
Cadre 1989 Non-Statutory Stock Option Plan. For the future, the Company expects
to grant additional options only under the 1996 Plan.


                                       42
<PAGE>   43
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

The Company adopted the disclosure provisions of Financial Accounting Standards
Board (SFAS 123) "Accounting For Stock Based Compensation" in 1996 and has
continued to apply APB Opinion 25 and related Interpretations in accounting for
its plans. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates as calculated
in accordance with SFAS 123, the Company's net loss and earnings per share for
the year ended December 31, 1997, the transition period ended December 31, 1996,
and the year ended June 30, 1996 would have been reduced to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                       TRANSITION
                               YEAR ENDED                PERIOD              YEAR ENDED
                            DECEMBER 31, 1997       DECEMBER 31, 1996       JUNE 30, 1996
                            -----------------       -----------------       ------------
<S>                             <C>                      <C>                  <C>
Net loss - As Reported          $  (3,419)               $  (6,368)           $ (11,347)
Net loss - Pro Forma            $  (4,724)               $  (6,975)           $ (11,568)
Loss Per Share -As Reported     $   (0.19)               $   (0.36)           $   (0.71)
Loss  Per Share - Pro Forma     $   (0.26)               $   (0.40)           $   (0.73)
</TABLE>

The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of effects on reported net income for future years. SFAS 123
does not apply to awards prior to 1996 and additional awards in future years are
anticipated.

The fair value of each stock option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1997 and for both periods in 1996: an expected life of
3.6 years and 5.0 years; expected volatility of 67% in both years; a dividend
yield of 0%; and a risk-free interest rate between (5.2% and 7.8%) and (5.2%.
and 7.6%). All forfeitures of options under the plan are accounted for as they
occur. During 1997 the Company cancelled and reissued stock options previously
granted to employees. Old options were cancelled under all three of the plans
and new options were issued under the 1996 plan in the amount of 576,662 options
at a price of $2.50 and 7,900 options in the amount of $2.75.

In management's opinion existing stock option valuation models do not provide a
reliable single measure of the fair value of employee stock options that have
vesting provisions and are not transferable. In addition, option pricing models
require the input of highly subjective assumptions, including expected stock
price volatility. Management has elected to project expected volatility based
upon the stock's actual historical performance to date.


                                       43
<PAGE>   44
                             CAYENNE SOFTWARE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

     A summary of the status of the Company's stock option plans as of December
31, 1997 and 1996 and June 30, 1996 and 1995 and changes during the years ending
on those dates is presented below:

<TABLE>
<CAPTION>
                                                       WEIGHTED
                                                       AVERAGE
                                            NUMBER      PRICE
                                          OF SHARES   PER SHARE

<S>                                       <C>         <C>
Options outstanding on June 30, 1994...   2,881,606    $  2.68
     Options granted...................     662,052       4.62
     Options exercised.................    (330,518)      2.77
     Options canceled..................    (641,519)      3.18
                                          ---------    -------
Options outstanding on June 30, 1995...   2,571,621       3.04
     Options granted...................     810,973       6.32
     Options exercised.................    (310,870)      3.60
     Options canceled..................    (454,803)      4.50
                                          ---------    -------
Options outstanding on June 30, 1996...   2,616,921       3.73
     Options granted...................   1,239,424       5.51
     Options exercised.................     (95,270)      3.69
     Options canceled..................    (550,803)      5.27
                                          ---------    -------
Options outstanding on Dec. 31, 1996...   3,210,272       4.90
     Options granted...................   2,217,262       2.87
     Options exercised.................     (77,504)      2.31
     Options canceled..................   1,789,631)      4.58
                                          ---------    -------
Options outstanding at Dec. 31, 1997...   3,560,399       3.83
Shares exercisable at Dec. 31, 1997....   1,536,075    $  4.32
</TABLE>



The weighted-average fair value of options granted during for the year ended
December 31, 1997, the six month transition period ended December 31, 1996 and
the fiscal year ended June 30, 1996 was $2.75, $3.39, and $3.94, respectively.

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

<TABLE>
<CAPTION>
                                             OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                                             -------------------                      -------------------
                                      WEIGHTED AVERAGE
                                         REMAINING
       RANGE OF          NUMBER         CONTRACTUAL        WEIGHTED-AVERAGE        NUMBER        WEIGHTED-AVERAGE
  EXERCISE PRICES      OUTSTANDING         LIFE             EXERCISE PRICE       EXERCISABLE      EXERCISE PRICE
  ---------------      -----------         ----             --------------       -----------      --------------
<S>         <C>         <C>                <C>                  <C>                  <C>              <C>
$ 1.20 -    $ 2.56      1,387,020          7.89                 $ 2.47               96,836           $ 1.65
 2.563 -      4.75      1,000,289          3.26                   3.47              798,477             3.49
  4.88 -      6.00        858,740          8.18                   5.54              455,686             5.48
  6.25 -      7.50        308,850          3.93                   6.35              182,501             6.43
  8.75 -      9.19          5,500          8.19                   9.11                2,575             9.09
- ------    ------          -----          ----                   ----                -----             ----
$ 1.20 -    $ 9.19      3,560,399         6.310                 $ 3.83            1,536,075           $ 4.32
</TABLE>



                                       44
<PAGE>   45
                             CAYENNE SOFTWARE, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                   TRANSITION        PRIOR
                                                   YEAR             YEAR             PERIOD         PERIOD
                                                  ENDED             ENDED            ENDED           ENDED            YEAR ENDED
                                               DECEMBER 31,      DECEMBER 31,     DECEMBER 31,    DECEMBER 31,         JUNE 30,
                                                   1997             1996              1996           1995          1996        1995
                                                   ----             ----              ----           ----          ----        ----
<S>                                               <C>              <C>               <C>             <C>          <C>          <C>
Cash Paid For:
   Interest                                       $387             $1,128            $  276          $269         $1,121       $402
   Income taxes                                    620              1,852             1,457            --            395        432
Non Cash Investing and Financing Activities:
   Increase in capital lease obligations           480                142                61            --             81         97
   Conversion of Redeemable Series A
   Preferred Stock                                                  5,493                --            --          5,493         --
</TABLE>


12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                          DECEMBER 31, 1997
                                          FIRST        SECOND          THIRD         FOURTH
                                         QUARTER       QUARTER        QUARTER        QUARTER
                                         -------       -------        -------        -------
<S>                                      <C>           <C>            <C>            <C>
Revenues                                 $13,397       $11,674        $11,348        $13,183
Cost of revenues                           2,697         2,761          2,163          2,556
Income (loss) from operations                475        (1,655)           367         (1,192)
Net income (loss)                            100        (1,873)            61         (1,521)
Basic and diluted earnings per share     $ (0.00)      $ (0.11)       $ (0.00)       $ (0.08)

<CAPTION>
                                            TRANSITION PERIOD
                                                  ENDED
                                            DECEMBER 31, 1996
                                           FIRST         SECOND
                                          QUARTER        QUARTER
                                          -------        -------
<S>                                       <C>            <C>
Revenues                                  $13,198        $14,778
Cost of revenues                            3,279          3,217
Income (loss) from operations              (6,746)           720
Net income (loss)                          (6,860)           492
Basic and diluted earnings per share      $ (0.39)       $  0.03

<CAPTION>
                                                            FISCAL YEAR
                                                           JUNE 30, 1996
                                          FIRST        SECOND          THIRD         FOURTH
                                         QUARTER       QUARTER        QUARTER        QUARTER
                                         -------       -------        -------        -------
<S>                                      <C>           <C>            <C>            <C>
Revenues                                 $16,437       $19,795        $14,832        $14,822
Cost of revenues                           4,790         4,495          4,031          3,593
Income (loss) from operations             (3,220)         (990)        (2,731)        (2,651)
Net income (loss)                         (3,471)       (1,331)        (3,131)        (3,414)
Basic and diluted earnings per share     $ (0.24)      $ (0.08)       $ (0.19)       $ (0.20)
</TABLE>



                                       45
<PAGE>   46
                             CAYENNE SOFTWARE, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

13. NON-RECURRING COSTS

NON-RECURRING COSTS. The Company recorded a non-recurring charge of $1.9 million
in the fourth quarter of 1997 related to management changes and realignment of
the sales organization, costs associated with moving the corporate headquarters
to another facility, and the write-off of purchased software. Included in the
$1.9 million was a charge of $1.0 million related to management changes and
other initiatives taken to improve sales and operating efficiencies. Also,
included in the charge was $.3 million related to the move of its headquarters
and principal facilities from Burlington to Bedford, Massachusetts. Additionally
the Company reviewed its product strategy and determined that purchased software
principally related to the Westmount acquisition no longer matched the strategic
direction of the Company. As a result of the subsequent review of the purchased
software's net realizable value the Company incurred a charge of $.6 million to
appropriately reflect the purchased software's net realizable value. During the
quarter ended March 31, 1997 the Company evaluated its restructuring reserve and
determined that amounts provided for in previous restructuring actions were no
longer required. As a result, the Company recorded a benefit of approximately
$.4 million.

During the transition period ended December 31, 1996, the Company incurred a
$6.3 million charge to operations to reflect costs associated with combining the
operations of the two companies, transactions fees, and other costs. The Board
of Directors of the Company approved a restructuring plan to terminate certain
specified employees and close certain facilities. Such a plan was communicated
to the employees prior to the end of the quarter and such employees were
specifically identified and terminated. Included in the charge was $1.6 million
of employee related termination expenses, $1.3 million of legal, accounting,
investment banking and other professional fees, $1.4 million of facility closure
and consolidation expenses, and $2.0 million of other expenses associated with
the consolidation of the two companies and the name change.

Based on the results of fiscal 1996 and in conjunction with the contemplated
merger with Cadre, the Company reviewed its product strategy and determined that
several products including WindTunnel were no longer consistent with the
Company's objectives. Accordingly, the Company evaluated the net realizable
value of the related intangible assets and recorded a charge of approximately
$1.1 million principally related to the write-off of the intangible asset
acquired as part of its acquisition of WindTunnel. Also during fiscal 1996, the
Company restructured its operations to reduce costs and utilize resources more
effectively.

During 1995, following the Westmount Technology, B.V. acquisition and the
completion of certain significant development efforts and associated product
introduction, the Company restructured its operations and wrote off redundant
software investments. The Company recorded restructuring charges of $2.0
million, $1.8 million and $1.7 million during the quarters ended September 30,
1994, June 30, 1995 and December 31, 1995. The aggregate $5.5 million charge to
operations reflected costs associated with termination benefits, the write off
of redundant software investments and facility restructuring. Included in the
charge is $3.9 million of employee related termination expenses, $0.9 million of
redundant software investments and $0.7 million of facilities and other expenses
associated with the restructuring.

At December 31, 1997, the Company believes that it has adequately provided for
all restructuring actions taken to date.


                                       46
<PAGE>   47
                             CAYENNE SOFTWARE, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                   (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)

14. BORROWINGS

On November 3, 1997, the Company renewed its revolving credit agreement with a
bank to borrow up to $5.0 million and to extend its term through October 5, 1998
and to amend financial and operating covenants and other provisions of the
agreement. The loan is contingent upon meeting certain financial and operating
covenants at the time of any borrowing and over the life of the loan. The loan
is secured by all of the assets of the Company and any borrowing amounts are
tied to a percentage of qualified accounts receivable outstanding at the time of
any borrowing. The loan carries an interest rate at bank prime plus two percent.
The financial covenants, which were amended, include a quarterly minimum net
worth covenant of $5.5 million and liquidity (generally defined as cash and cash
equivalents plus eligible domestic accounts receivable and eligible
international accounts receivable less any indebtedness to the bank) at the end
of each quarter. The Company was in compliance with the covenants as of December
31, 1997. At December 31, 1997, the borrowing base under the revolving credit
agreement was approximately $3.7 million. The Company had approximately $2.4
million, $2.8 million, and $1.5 million outstanding against the line of credit
at December 31, 1997 and 1996, and June 30, 1996, respectively.

On November 6, 1996 and in connection with the renewal of the bank agreement the
Company issued to the bank a three-year warrant to purchase 25,000 shares of the
Company's Common Stock at an exercise price of $4.25 per share.

The Company also had a bank agreement that consisted of a $3.0 million revolving
line loan which was outstanding at June 30, 1995. The loan was collateralized by
general intangibles, accounts receivable and inventory. A new financing
arrangement ("Factoring Agreement") was used to repay the loan of $3.0 million
in 1996. The factoring agreement had a financing limit of $5.6 million based on
qualified accounts receivable. In addition, at June 30, 1996, the Company had
approximately $2.4 million outstanding under the factoring agreement. The
Company repaid the entire amount during the transition period and terminated the
agreement.

15. RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued (SFAS No. 131)
"Disclosures About Segments of an Enterprise and Related Information", which
will require adoption during the year ended December 31, 1998. This statement
established standards for the way public enterprises report information about
operating segments in annual reports. The Company is in the process of
determining the effect of adoption of this statement on its consolidated
financial statement disclosures.

In October 1997, Statement of Position 97-2, "Software Revenue Recognition" (SOP
97-2), was issued which provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 97-2
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt the guidelines of SOP 97-2 as of
January 1, 1998 and its adoption is not expected to have a material impact on
the Company's financial results.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None


                                       47
<PAGE>   48
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

This information will either be incorporated by reference to a proxy statement
filed by the Company not later than 120 days after December 31, 1997 or be
included in an amendment to this Form 10-K within such period.

ITEM 11. EXECUTIVE COMPENSATION

This information will either be incorporated by reference to a proxy statement
filed by the Company not later than 120 days after December 31, 1997 or be
included in an amendment to this Form 10-K within such period.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information will either be incorporated by reference to a proxy statement
filed by the Company not later than 120 days after December 31, 1997 or be
included in an amendment to this Form 10-K within such period.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information will either be incorporated by reference to a proxy statement
filed by the Company not later than 120 days after December 31, 1997 or be
included in an amendment to this Form 10-K within such period.

                                     PART IV

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

(a) (1) FINANCIAL STATEMENTS

     The financial statements filed as part of this report are listed on the
Index to Consolidated Financial Statements on page 27.

(2) FINANCIAL STATEMENT SCHEDULES

     All schedules are omitted, as they are either not required, not applicable
or otherwise included in this Form 10-K.

(3) EXHIBITS

     Documents listed below, except for documents identified by footnotes, are
     being filed as exhibits herewith. Documents identified by footnotes are not
     being filed herewith and, pursuant to Rule 12b-32 of the General Rules and
     Regulations promulgated by the Commission under the Securities Exchange Act
     of 1934 (the "Act") reference is made to such documents as previously filed
     as exhibits with the Commission. The Company's file number under the Act is
     0-19682.

          2.2(3)    Agreement and Plan of Merger by and among Cayenne, BI
                    Acquisition Corp. and WindTunnel Software, Inc. dated April
                    27, 1993

          2.3(8)    Agreement and Plan of Merger among Cayenne, B.C. Acquisition
                    Corp. and Cadre Technologies Inc. dated as of March 25, 1996

          3.1(2)    Amendment to Restated Articles of Organization of Cayenne

          3.2(2)    Restated Articles of Organization of Cayenne

          3.3(1)    Amended and Restated By-Laws of Cayenne

          4.1(1)    Specimen Certificate for Common Stock of Cayenne

          4.3(6)    Form of Warrant Agreement dated as of November 21, 1994 by
                    and among Cayenne and purchasers of Series A Convertible
                    Preferred Stock

          4.4(5)    Warrant Agreement dated as of October 28, 1994 by and
                    between Cayenne and Silicon Valley Bank

          4.5(11)   Series B Convertible Preferred Stock Purchase Agreement
                    dated as of January 2, 1997 between the Company and
                    Southbrook


                                       48
<PAGE>   49
                    International Investments, Ltd.

          4.6(11)   Registration Rights Agreement dated as of January 2, 1997

          4.7(11)   Form of Warrant Agreement dated as of January 2, 1997

          4.8(11)   Warrant Agreement dated as of December 20, 1996 between the
                    Company and Silicon Valley Bank

          4.9(13)   Statement of Rights and Preferences of Series C Convertible
                    Preferred Stock

          4.10(13)  Convertible Preferred Stock Purchase Agreement dated as of
                    July 18, 1997 between the Company and Southbrook
                    International Investments, Ltd.

          4.11(13)  Registration Rights Agreement dated as of July 18, 1997

          4.12(13)  Form of Warrant Agreement dated as of July 18, 1997

          4.13(14)  Statement of Rights and Preferences of Series D Convertible
                    Preferred Stock

          4.14(14)  Convertible Preferred Stock Purchase Agreement dated as of
                    August 28, 1997 between the Company and purchasers of Series
                    D Convertible Preferred Stock

          4.15(14)  Registration Rights Agreement dated as of August 28, 1997

          4.16(14)  Form of Warrant Agreement dated as of August 28, 1997

          10.1(1)   General License and Maintenance Agreement dated January 30,
                    1987 between Cayenne and American Telephone & Telegraph
                    Communications, Inc.

          10.6(2)   Agreement dated as of November 1, 1991, between Cayenne and
                    Cayenne Italia S.r.1., as amended by letter dated December
                    9, 1991 and as further amended by amendment dated December
                    31, 1991

          10.8(1)   Amended and Restated 1986 Incentive and Nonqualified Stock
                    Option Plan of Cayenne


          10.9(2)   1992 Employee Stock Purchase Plan

          10.10(1)  Savings/Retirement Plan and Trust of Cayenne

          10.11(4)  Employment agreement dated as of January 1, 1994 by and
                    between Cayenne and Charles W. Bachman

          10.15(5)  Revolving Credit Agreement and Warrant Agreement dated as of
                    October 28, 1994 by and between Cayenne and Silicon Valley
                    Bank

          10.16(6)  Series A Convertible Preferred Stock Purchase Agreement
                    dated as of November 21, 1994 by and among Cayenne and
                    purchasers of Series A Convertible Preferred Stock

          10.17(6)  Registration Rights Agreement dated as of November 21, 1994
                    by and among Cayenne and purchasers of Series A Convertible
                    Preferred Stock

          10.18(7)  Form of Common Stock Purchase Agreement dated as of
                    September 15, 1995 by and among Cayenne and certain
                    purchasers of Common Stock

          10.19(7)  Form of Registration Rights Agreement dated as of September
                    15, 1995 by and among Cayenne and certain purchasers of
                    Common Stock

          10.22(9)  Amended and Restated Revolving Credit Agreement dated as of
                    June 6, 1996 by and between Cayenne and Silicon Valley Bank

          10.23(11) 1997 Bonus Plan of Cayenne


          10.24(10) Amended 1996 Incentive and Nonqualified Stock Option

          10.25(12) Calendar Year 1997 Bonus Pool of Cayenne

          10.26     Lease between ComputerVision Corporation and Cayenne dated
                    October 1, 1997

          10.27     Amendment as of October 4, 1997 to Revolving Credit
                    Agreement and Warrant Agreement dated as of October 28, 1994
                    by and between Cayenne and Silicon Valley Bank

          10.28     Agreement with Peter J. Boni made as of December 31, 1997

          21.1      List of Subsidiaries of Cayenne

          23.1      Consent of Coopers & Lybrand L.L.P.

          23.2      Consent of Deloitte & Touche LLP

          27.1      Financial Data Schedules

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

          1)        Incorporated by reference to the exhibits filed with
                    Cayenne's Registration Statement on Form S-1, File No.
                    33-43401, as amended.

          2)        Incorporated by reference to the exhibits filed with
                    Cayenne's Registration Statement on Form S-1, File No.
                    33-45841, as amended.

          3)        Incorporated by reference to Cayenne's Registration
                    Statement on Form S-4, File No. 33-62650, as amended.

                                       49
<PAGE>   50
          4)        Incorporated by reference to the exhibits filed with
                    Cayenne's Quarterly Report on Form 10-Q dated May 13, 1994.

          5)        Incorporated by reference to the exhibits filed with
                    Cayenne's Quarterly Report on Form 10-Q dated November 11,
                    1994.

          6)        Incorporated by reference to the exhibits filed with
                    Cayenne's Quarterly Report on Form 10-Q dated February 13,
                    1995, as amended.

          7)        Incorporated by reference to the exhibits filed with
                    Cayenne's Annual Report on Form 10-K, as amended, for the
                    year ended June 30, 1995, File No. 0-19682

          8)        Incorporated by reference to exhibits filed with Cayenne's
                    Registration Statement on Form S-4, File No. 333-6087, as
                    amended.

          9)        Incorporated by reference to exhibits filed with Cayenne's
                    Annual Report on Form 10-K dated September 27, 1996, File
                    No. 0-19682.

          10)       Incorporated by reference to exhibits filed with Cayenne's
                    Proxy Statement dated November 20, 1996

          11)       Incorporated by reference to exhibits filed with Cayenne's
                    Annual Report on Form 10-K dated March 29, 1997, File No.
                    0-19682

          12)       Incorporated by reference to exhibits filed with Cayenne's
                    Quarterly Report on Form 10-Q dated August 14, 1997, File
                    No. 0-19682

          13)       Incorporated by reference from exhibits filed with Cayenne's
                    Registration Statement on Form S-3 filed August, 19, 1997,
                    File No. 333-33917

          14)       Incorporated by reference from exhibits filed with Cayenne's
                    Registration Statement on Form S-3 filed September 26, 1997,
                    File No. 333-36533

(b) REPORTS ON FORM 8-K:

NONE


                                       50
<PAGE>   51
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Bedford,
Commonwealth of Massachusetts on the 30th day of March, 1998.

                                  CAYENNE SOFTWARE, INC.
                                  By: /s/ John  J. Alexander
                                  Interim President and Chief Executive Officer

Pursuant to the requirements of the Securities 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.

          SIGNATURE                      TITLE                     DATE
          ---------                      -----                     ----
/s/ John J. Alexander          Interim President, Chief        March 26, 1998
--------------------------
John J. Alexander              Executive Officer and
                               Chairman of the Board

/s/ Frederick H. Phillips      Vice President, Finance and     March 26, 1998
--------------------------
Frederick H. Phillips          Administration, Treasurer
                               and Chief Financial and
                               Accounting Officer

/s/ R. John Fletcher           Director                        March 27, 1998
--------------------------
R. John Fletcher

/s/                            Director
--------------------------
William H.D. Goddard

/s/ Roland D. Pampel           Director                        March 26, 1998
--------------------------
Roland D. Pampel

/s/ Allyn C. Woodward, Jr.     Director                        March 26, 1998
--------------------------
Allyn C. Woodward, Jr.



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