UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C. 20549

                           Form 10-KSB
(Mark One)
[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
	For the fiscal year ended December 31, 1996
[ ]	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
	For the transition period from ________ to ________

Commission File Number  0-27138
                        -------  

                   CATALYST INTERNATIONAL, INC.
---------------------------------------------------------------------
           (Name of small business issuer in its charter)

         Delaware                              39-1415889
------------------------------     ----------------------------------
State or other jurisdiction of     I.R.S. Employer Identification No.
incorporation or organization)	

8989 North Deerwood Drive, Milwaukee, Wisconsin	          53223
-----------------------------------------------     -----------------
  (Address of principal executive offices)             (Zip Code)

Issuer's telephone number: (414) 362-6800
                           --------------

Securities registered under Section 12 (g) of the Exchange Act:

Common Stock, $0.10 par value
-----------------------------
     (Title of class)

  Check whether the issuer (1) filed all reports required to be filed 
by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]

  Check if no disclosure of delinquent filers in response to Item 405 
of Regulation S-B is contained in this form, and no disclosure is 
contained, to the best of registrant's knowledge, in definitive proxy 
or information statements incorporated by reference in Part III of 
this Form 10-KSB or any amendment to this Form 10-KSB. [ ]

  State issuer's revenues for its most recent fiscal year. $21,166,722	

  State the number of shares outstanding of each of the issuer's 
classes of common equity, as of March 14, 1997.  6,587,534

As of March 14, 1997, the aggregate market value of the registrant's 
common stock held by non-affiliates was Thirteen Million, Six Hundred 
Eighty Eight Thousand Seven Hundred Thirty Four Dollars ($13,688,734) 
(based upon the closing price of the issuer's common stock on The 
Nasdaq Stock Market on such date).

DOCUMENTS INCORPORATED BY REFERENCE
										Part	Item
1.	Proxy Statement for the 1997 Annual 
	Meeting of Stockholders to be held 
	on April 28, 1997						III	9, 10, 11

Transitional Small Business Disclosure Format (check one):
Yes [ ]; No [X]  
<PAGE>   2

                             PART I

ITEM 1. DESCRIPTION OF BUSINESS.

General

Catalyst International, Inc. ("Catalyst" or the "Company"), 
incorporated in 1982, develops, markets and supports advanced 
warehouse management software solutions. The Company's primary 
product, the Catalyst Warehouse Management System ("Catalyst WMS"), 
is a complete, standard software solution operating in an open system 
environment. Catalyst WMS manages inventory, storage locations, 
people and equipment by controlling all aspects of warehouse 
operations, from receiving and storing (putaway) to order selection 
(picking), loading and shipping. The Company also provides related 
services, including software modification and configuration, project 
management, rapid prototyping, training and implementation support. 
Catalyst WMS is a customer-configurable software solution capable of 
satisfying each customer's unique business objectives and operational 
requirements.  The Company believes that organizations that have 
implemented Catalyst WMS have realized increased customer 
satisfaction, faster turnaround times, reduced labor costs, increased 
space utilization and increased warehouse efficiency.

Warehouse management is complex. With thousands of raw materials and 
finished goods moving through warehouses at any given time, 
inventories, space, labor and equipment must be carefully managed. 
These conditions have led many businesses to seek improvements in 
their supply chain, including investments in software solutions to 
cost-effectively manage their warehouses and enable them to provide 
ongoing customer support and service.

Since 1979, Catalyst has focused its resources on the development and 
enhancement of advanced warehouse management software solutions.  
This focus has allowed the Company to introduce the first 
configurable, standard software solution which captures the best 
practice methodologies used in warehouse operations. Catalyst WMS 
encapsulates a variety of warehouse management strategies that can be 
configured rapidly to meet particular specifications and requirements 
of individual customers by utilizing two key attributes: a standard 
product and a standard implementation.  Once implemented, Catalyst 
WMS can be reconfigured through table-driven parameters by either 
Catalyst or the customer to adjust to changes in operational 
strategies and accommodate ongoing business process reengineering.  
It is not the Company's intention to bid on or enter into license 
agreements with customers who demand significant amounts of 
modifications to the standard product which would result in a custom-
developed system.

Catalyst WMS operates in an open system environment allowing customers 
to use various Unix operating systems, operate on multiple use hardware 
platforms, run on multiple relational database management 


<PAGE>   3

systems ("RDBMSs") (such as Ingres, Oracle, Sybase and Informix), and 
interface with several third-party software applications, such as 
manufacturing resources planning systems ("MRP II"), enterprise 
resource planning systems ("ERP") (such as SAP and Oracle) and 
Distribution Requirements Planning ("DRP") systems (such as Red 
Pepper and PeopleSoft).  Catalyst WMS supports a wide range of 
interfaces to third-party peripherals, such as radio frequency-based 
scanning devices, bar coding devices and host information systems.

The Company's implementation methodology is known as the "CIMPL" 
process--the Catalyst Implementation Management and Plan.  The CIMPL 
process consists of training, business scenario development, 
configuration of the software, a Conference Room Pilot ("CRP"), 
project management and implementation support services.  The CRP is a 
critical element of the Catalyst approach which allows the customer 
to work hands-on with its configured software in a practice 
environment at the Company's headquarters.  The CRP, along with the 
Company's project methodology and training, offers a unique 
opportunity to bring issues to the surface that a customer might face 
in the actual operation of its warehouse, helping to solve potential 
problems prior to live implementation.

The Company believes that Catalyst WMS benefits customers in three 
key areas: improved customer service, operational efficiency and 
capital utilization.  Catalyst WMS should improve customer service by 
reducing fulfillment time and increasing fulfillment accuracy through 
the use of bar code and radio frequency technology to ensure 
inventory accuracy and to provide information and labor guidance in 
real time.  Catalyst WMS should improve the operational efficiency of 
warehouses by increasing labor productivity through efficient 
employee scheduling and reduction of downtime, and by streamlining 
product flow to permit a more efficient turnaround on customer 
orders.  The advanced features of Catalyst WMS improve capital 
utilization of the warehouse by lowering inventory levels, increasing 
inventory turns and warehouse efficiencies and improving space 
utilization.

Strategy

The Company's objective is to continue to be a leading provider of 
warehouse management software solutions and services. To achieve this 
objective, the Company has adopted the following strategies:

Offer Advanced Warehouse Management Solutions. The Company intends to 
continue to focus its resources on offering a configurable, standard 
solution which captures best practice methodologies used in warehouse 
operations. The Company believes that it is well-positioned in the 
market because its standard solution allows it to leverage its 
software over a broad customer base and reduce installation time 
significantly relative to custom-developed solutions.


<PAGE>   4

Provide Superior System Implementation. The Company believes that the 
efficiency of its implementation process allows the Company to 
increase sales to prospective customers seeking standard, configurable 
software solutions and to gain market share relative to 
its competitors. The Company plans to continue to improve its 
differentiated implementation process by further refining the CIMPL 
methodology and Conference Room Pilot in order to shorten and 
simplify the implementation process.

Develop Vertical Markets. Catalyst has customers in several different 
industries, falling into vertical market categories including retail, 
automotive, and consumer packaged goods (manufacturing).  The Company 
believes that the expertise it has developed in each of these markets 
through its customer base provides it with a significant competitive 
advantage in selling to prospective customers where similar 
functionality is required. The Company is presently developing a pre-
configured version of Catalyst WMS to address the specific 
requirements of one such vertical market and may develop pre-
configured versions to address the requirements of other vertical 
markets.

Expand Worldwide Distribution. The Company plans to increase its 
international business by expanding its direct sales force and 
support staff in overseas offices, obtaining agreements for global, 
multi-site installations with multinational customers, and partnering 
with foreign distributors. In 1994, the Company established an office 
in London to sell, service and support Catalyst WMS in international 
markets. The Company opened an office in Rio de Janeiro, Brazil in 
1995 to support South American sales and marketing efforts; this 
office increased its staff in 1996.  The Company opened an office in 
France in 1996. Catalyst WMS has an international interface, is 
available in French, Spanish, Portuguese and Italian, and provides 
export documentation, currency exchange and metric conversion to 
support international distribution.

Leverage Standard Technology. Catalyst WMS is designed to operate in 
an open system environment enabling customers to use various Unix 
operating systems, operate on multiple hardware platforms and RDBMSs 
and interoperate with many third-party software applications, such as 
MRP II, ERP and DRP. The Company intends to continue to utilize its 
industry, customer and supplier relationships to keep abreast of 
emerging standards, protocols and applications programming interfaces 
as such trends are introduced and gain market acceptance.

Products

Catalyst WMS is designed to manage an entire warehouse operation and 
incorporates numerous warehouse strategies to provide maximum 
operating efficiency. The Company also leverages its Catalyst WMS 
product with add-on products such as Flow-Through Support, Decision 
Support System ("Catalyst DSS") and Yard Management System ("Catalyst 
YMS"), and periodic new releases of Catalyst WMS incorporating new 


<PAGE>   5

features. Catalyst WMS interfaces with an organization's current 
material handling equipment and transaction-based systems, such as 
purchasing electronic data interchanges ("EDI"), bar code labeling, 
general ledger, MRP II, ERP and DRP.  Catalyst WMS also utilizes 
radio frequency communications and bar code technology to provide 
real-time control and validation of task completion to ensure 
inventory accuracy.  Catalyst WMS directs employees and material 
handling equipment and manages the inventory, space, radio terminals, 
bar code scanners and printers in the warehouse for maximum 
efficiency.

Catalyst WMS is a comprehensive application that manages the 
receiving, putaway, outbound order processes, picking and general 
warehouse operations. With each warehouse process, Catalyst WMS 
provides a variety of tactical choices which can be configured to a 
particular customer's requirements and which are designed to maximize 
efficiency.

Catalyst WMS Release 6.0, which the Company introduced in the first 
quarter of 1996, introduced native Microsoft Windows graphic user 
interface ("GUI") implementation, which should improve the customers' 
ease of use and offer improved help screen content.  Catalyst WMS 
Release 7.0, which the Company introduced in the first quarter of 
1997, introduced the Warehouse Wizard, a PC-based configuration tool, 
along with a direct interface to Oracle business solutions, new 
functionality for public warehousing and post-pick value added work-
in process ("WIP") procedures.

Modular Products

The Company's Flow-Through Support Module enables warehouses to 
"push" incoming stock directly from receiving to the outbound 
shipping area without storing the items in the warehouse. While sold 
as part of Catalyst WMS, it can be integrated with Catalyst WMS or 
used as a stand-alone product.

Catalyst DSS is a management tool which analyzes warehouse operations 
and allows management to improve the performance and efficiency of 
the warehouse. Catalyst DSS operates in a three-tier architecture, 
Windows NT environment, on an independent server from Catalyst WMS, 
permitting analysis to be performed without affecting the performance 
of Catalyst WMS. Catalyst DSS has a PC-based GUI and allows customers 
to execute various hypothetical scenarios to test potential new 
strategies for effectiveness. Catalyst DSS has two features: Advanced 
Outbound Order Planning and Transaction History Analysis. Advanced 
Outbound Order Planning offers tools for selecting and scheduling the 
picking of orders. Transaction History Analysis allows customers to 
analyze inbound and outbound order flow and identify trends that 
impact the warehouse. This allows management to improve the 
performance of the warehouse operation.


<PAGE>   6

Catalyst YMS is a three-tier, client / server product that optimizes 
productivity in the shipping yard by prioritizing receipts and 
managing inbound and outbound trailers.  Catalyst YMS is available 
both as a stand-alone product and as an add-on to Catalyst WMS. 
Catalyst YMS provides such benefits as real-time knowledge of all 
trailers in the yard and complete control of which loads can be 
stored at any dock or location. Catalyst YMS is also open for 
extendible reporting.

Services and Maintenance

In addition to sales of Catalyst WMS, the Company offers certain 
services and maintenance agreements to its customers. Services 
provided by the Company include software modification and 
configuration, project management, rapid prototyping, training and 
implementation support. Customers are charged for services based on a 
standard fee for each person-day. Maintenance agreements are 
typically sold to customers for a one-year term at the time they 
initially license Catalyst WMS and are available for newly-installed 
software or for renewal on an on-going basis for an existing 
installation. These agreements allow the customer, following 
installation of Catalyst WMS, to receive 24-hour per day, 7-day per 
week assistance with the operation of the software and to obtain on-
line support. Maintenance is not provided as part of the Company's 
license agreement and fees for ongoing maintenance are included in 
the annual fee charged under maintenance agreements.

As a provider of warehouse management software, the Company 
recognizes the importance of offering quality service and support to 
its customers. The Company has several groups responsible for 
offering services and maintenance to ensure customer satisfaction, 
including Implementation Services, Advanced Technologies and Training 
and Customer Service. The Company's Implementation Services Group, 
formerly comprised predominantly of Software Engineering, offers a 
structured implementation methodology (the CIMPL process) which 
typically lasts four to eight months.  The CIMPL process consists of 
training, business scenario development, configuration of the 
software, a CRP, project management and implementation support 
services. The CRP enables the Company and the customer to model 
warehouse management operations and resolve operating issues prior to 
live implementation. The Company's Advanced Technologies Group, 
formerly known as the Product Support Group, is responsible for 
managing and installing operating systems, hardware, networks, 
communication links and RDBMSs.  Catalyst provides training on the 
use, administration and configuration of Catalyst WMS at the Company's 
headquarters. Catalyst employs a "train the trainer" 
approach, and typically several employees of a customer, including 
representatives from operations and information systems departments, 
participate in the training. Catalyst provides in-depth 
documentation, structured training classes and hands-on training with 
the software. The Company's Customer Service Group offers a fully-
staffed Customer Service Response Center 24-hours per day, seven days 
per week.


<PAGE>   7

Customers

The Company's sales cycle has lengthened in the past year and now 
typically ranges from six to nine months and is not seasonal in 
nature.  The Company does not maintain a significant backlog.  
Software license fee revenues for each quarter depend in part on 
sales of software licenses for which implementation began during that 
quarter and on license agreements under implementation that were 
executed in prior quarters.  In the year ended December 31, 1995, the 
Company had two customers which accounted for more than 10% of the 
Company's total revenues and in the year ended December 31, 1996, the 
Company had no customers which accounted for more than 10% of the 
Company's total revenues.  The Company does not believe that the loss 
of any single customer would have a material adverse effect upon the 
Company's business, results of operations or financial condition.  
The Company continues to target customers with warehouses that 
require highly sophisticated warehouse management systems like 
Catalyst WMS and plans through the development of a vertical market 
WMS package as well as an NT-based WMS, to penetrate the mid-tier 
warehouse market.  The Company typically has significant sales in 
each fiscal year to one or more customers due to the cost of Catalyst 
WMS and the associated revenues from professional services and 
maintenance agreements which result in a high percentage of revenue 
attributable to sales to one or more customers.  Although the Company 
has historically relied on the retail, automotive,  and consumer 
packaged goods (manufacturing) markets for a substantial portion of 
its revenues, the Company does not intend to focus only on these 
markets for future sales and does not anticipate that it will be 
dependent on any single market for a substantial portion of its 
sales.

Sales and Marketing

The Company markets and sells its software and services in North 
America, South America and Europe through a direct sales organization 
and is currently exporting its products to France, Italy, Mexico, 
Spain and the United Kingdom. The Company's London office is 
responsible for the sales, support and service of Catalyst WMS in 
certain international markets. In Italy, the Company also employs the 
sales assistance of a distributor that sells and assists in 
implementation and support of Catalyst WMS. The Company opened an 
office in Rio de Janeiro, Brazil in 1995 to support South American 
sales and marketing efforts; this office increased its staff in 1996.  
The Company opened an office in France in 1996.

To support its sales force, the Company conducts comprehensive 
marketing programs which include direct mail, public relations, 
advertising, seminars, trade shows, joint programs with vendors and 
consultants and ongoing customer communication programs. The sales 
cycle begins with the generation of a sales lead or the receipt of a 


<PAGE>   8

request for proposal ("RFP") from a prospective customer, which is 
typically followed by the qualification of the lead or prospect, an 
analysis of the customer's needs, response to the RFP (if solicited by 
the customer), one or more presentations or product demonstrations, a 
visit to a similar or representative warehouse running the Company's 
software system, contract negotiation and commitment. While the sales 
cycle varies substantially from customer to customer, it has 
lengthened in the past year and now is typically six to nine months.

The Company believes that, with over 17 years in the warehouse 
management software business and more than 50 successful installs, it 
has a product that is established, proven and accepted in the 
marketplace. The Company further believes that the level of expertise 
found throughout its organization includes some of the best in its 
industry in design, development and implementation support.  The 
Company has created a team of employees, vendors and consultants who 
are experts and leaders in their respective fields, which allows it to 
provide its customers with a strong resource for products and 
knowledge.  This resource for products and knowledge should help the 
Company's customers stay competitive in their respective industries.

As of December 31, 1996, the sales and marketing organization 
consisted of 21 employees, including 8 field sales representatives. 
The sales staff is based at the Company's headquarters in Milwaukee, 
in the London office and in field sales offices located in Rio de 
Janeiro, Lyon, France, Atlanta, Boston, Dallas and Philadelphia.

Proprietary Rights and Licenses

The Company relies on a combination of contract, copyright, trademark 
and trade secret laws and other measures to protect its proprietary 
information. The Company does not have any patents or patent 
applications. The Company believes that, because of the rapid pace of 
technological change in the computer software industry, trade secret 
and copyright protection are less significant in affecting the 
Company's business, results of operations or financial condition than 
factors such as the knowledge, ability and experience of the Company's 
employees, frequent product enhancements and timeliness and quality of 
support services.  The Company typically sells its products to its 
customers under a perpetual license, which is generally non-
transferable and solely for the customer's internal operations at 
designated sites. The Company makes available site and enterprise 
licenses and source code to certain of its customers. The provision of 
source code may increase the likelihood of misappropriation or other 
misuse of the Company's intellectual property. Under the terms of the 
Company's license agreements, the Company generally owns all 
modifications to its software that are implemented for a customer.   
 
The Company is not aware that its products, trademarks or other 
proprietary rights infringe the property rights of third parties, but 
has not performed any independent investigations to determine whether 
such infringement exists.  As the number of software products in the 


<PAGE>   9

industry increases and the functionalities of these products further 
overlap, the Company believes that software developers may become 
increasingly subject to infringement claims. Any such claims, with or 
without merit, can be time consuming and expensive to defend.  

Product Development

The Company seeks to offer an extensive, integrated product line that 
provides complete warehouse management functionality to warehouses 
worldwide. To effect this strategy, the Company intends to continue 
to introduce new modules and products, and upgrade the functionality 
of and enhance existing products. The Company, through its 
development and support personnel, works closely with its customers 
and prospective customers to determine their requirements and to 
design enhancements and new products to meet their needs. All of the 
Company's product development is performed by its employees.  Product 
development costs were $2.6 million 1995 and $4.5 million in 1996. 
 
The Company is continually enhancing the features and functionality 
of Catalyst WMS and developing new modules and products. Catalyst WMS 
Release 6.0, which the Company introduced during the first quarter of 
1996, introduced native Microsoft Windows GUI implementation, which 
should improve the customer's ease of use and offer improved help 
screen content.  Catalyst WMS Release 7.0, which the Company 
introduced in the first quarter of 1997 introduced the Warehouse 
Wizard, a PC-based configuration tool, along with a direct interface 
to Oracle business solutions, new functionality for public 
warehousing and post-pick value added WIP procedures.  In addition, 
since different industries fall into vertical market categories which 
often require similar functionality, the Company may develop pre-
configured versions of Catalyst WMS to address the specific needs of 
certain such vertical markets.  These pre-configured products would 
be pre-tested and marketed to prospective customers with warehouses 
that do not require a customized software solution.  The Company is 
presently developing the first such package, which should be 
completed and available for sale in 1997.

Competition

The Company has a large number of competitors, including privately 
held companies focused on warehouse management software and several 
competitors that offer a manufacturing software solution of which 
warehouse management is a part.  The competitive factors affecting 
the market for the Company's software and services include: corporate 
and product reputation, features and functionality, vertical market 
expertise, customer configurability, effective and timely 
implementation, availability of products on open computer platforms, 
ability to interface with existing equipment and systems, ability to 
support radio frequency and bar code technology, quality of support 
services, real-time capabilities, RDBMS technology, scalability, 
international capabilities, documentation and training, product 
quality, performance and price. The Company believes that it competes 


<PAGE>   10

effectively with respect to these factors, but there can be no 
assurance that it will continue to do so.

Employees

As of December 31, 1996, the Company had 295 full-time employees 
worldwide.  The Company's employees are not represented by any 
collective bargaining organization.  The Company has never 
experienced a work stoppage and considers its relations with its 
employees to be good.

ITEM 2.  DESCRIPTION OF PROPERTY.

The Company currently leases approximately 62,000 square feet of 
office space which it uses as its corporate headquarters in 
Milwaukee, Wisconsin.  The term of the lease expires in January 2006, 
but the Company has the option to extend such term for an additional 
ten-year period.  The Company leases approximately 6,000 square feet 
of office space in London, England, pursuant to a lease which expires 
in 1999; approximately 200 square meters in Brazil pursuant to a 
lease which expires in 1999 and approximately 25 square meters in 
France pursuant to a lease which expires in 1998.  In addition, the 
Company has short-term leases for its salespeople across the United 
States.  The Company believes that its existing facilities should be 
adequate for its needs through 1997.

ITEM 3.  LEGAL PROCEEDINGS.

The Company is not a party to any material legal proceeding.

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

No matters were submitted to a vote of security holders during the 
fourth quarter of 1996.


<PAGE>   11

                            PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Common Stock is listed on The Nasdaq Stock Market under the 
symbol CLYS.  Since the initial public offering on November 16, 
1995, the Common Stock has traded at a high of $14.00 per share 
and a low of $2.875 per share.

As of February 28, 1997 there were 6,820,934 shares of the 
Company's Common Stock outstanding held by 157 stockholders of 
record and approximately 925 beneficial owners.

The following table represents the high and low price information 
for the Company's Common Stock for each full quarterly period within 
the two most recent fiscal years.

<TABLE>
<CAPTION>
                                      1996                 1995
                                 -------------------------------------
                                 High      Low        High      Low
  <S>                            <C>       <C>        <C>       <C>
  Quarters ended March 31,       $11.375   $7.25      $ 1.25    $ 1.25
  Quarters ended June 30,         12.00     7.75        1.25      1.25
  Quarters ended September 30,    10.875    4.25       10.00     10.00
  Quarters ended December 31,      7.25     4.125      13.00     10.00
</TABLE>

Prices listed above are determined by the over-the-counter market and 
therefore do not reflect broker's fees or commissions.

Source:  The Nasdaq Stock Market.


<PAGE>   12

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following selected financial data should be read in conjunction 
with the financial statements and notes thereto and Management's 
Discussion and Analysis included elsewhere in this Annual Report.

<TABLE> 
<CAPTION>
Years Ended December 31,            1996     1995     1994     1993     1992    
-----------------------------------------------------------------------------
<S>                                 <C>      <C>      <C>      <C>      <C> 
(In thousands, except share data)
Statement of Operations Data:
Revenues:
  Software license fees             $8,132   $10,372  $6,810   $3,131   $ 327
  Services and maintenance          12,902    10,180   7,942    5,180   2,401
  Hardware and other                   132       106   1,426      556   1,355
       Total revenues               21,166    20,658  16,178    8,867   4,083
Operating expenses:
  Cost of software license fees        288       479     471      245     737
  Cost of services and maintenance  12,371     9,369   6,507    4,523   2,403
  Cost of hardware and other             -         4   1,212      336   1,010
  Sales and marketing                5,079     4,499   3,901    1,419     818
  Product development                4,470     2,554   1,411      747       -
  General and administrative         4,287     1,608   1,416    1,287     990
  Write-off of purchased research
        and development/1/           2,002         -       -        -       -
  Restructuring and severance
         costs/2/                      597         -       -        -       -
  Write-off of capitalized software
         development costs/3/            -         -       -        -   1,227
         Total operating expenses   29,095    18,513  14,918    8,557   7,185
Income (loss) from operations       (7,928)    2,145   1,260      310  (3,102)
Other income (expense)                 867       (29)   (138)    (191)   (214)
Income (loss) before provision for
         income taxes               (7,061)    2,116   1,122      119  (3,316)
Provision for income taxes               -       111      49       63       -
Net income (loss)                  $(7,061)   $2,005  $1,073      $56 $(3,316)
Net income (loss) per share/4/      $(0.88)    $0.29   $0.16        -       -
Shares used in computing net
         income (loss) per share     7,996     6,889   6,854        -       -
Balance Sheet Data:
Cash and cash equivalents             $695    $3,730  $1,359   $1,621      $2
Working capital (deficit)           10,457    27,127   3,622     (262) (2,139)
Total assets                        20,199    34,084   8,678    3,262   1,919
Long-term debt, less current
        portion                        132       324     781      986   1,779
Redeemable preferred stock               -         -   5,095        -       -
Total shareholders' equity 
        (deficit)                   14,147    29,251  (1,371)  (2,236) (3,248)
</TABLE> 

/1/See Notes to the Financial Statements, Note 2

/2/See Notes to the Financial Statements, Note 10

/3/During 1992, the Company determined that its original product 
   offering, an earlier, non-standard version of Catalyst WMS, was 
   not generally available for release to customers without 
   modification to meet customers' specifications. Accordingly, all 
   capitalized software development costs related to the Company's 
   original product offering were charged to operations during 1992.

/4/Computed on the basis described in Note 1 of Notes to Financial 
   Statements.  Due to the effect of the recapitalization on the 
   Company's capital structure described in Note 5 of Notes to 
   Financial Statements, per share data for the years ended prior to 
   December 31, 1994 are not comparable to subsequent years and, 
   therefore, have not been presented.


<PAGE>   13
 
Results of Operations

The following table sets forth, for the periods indicated, certain 
statement of operations data as a percentage of total revenues:

<TABLE>
<CAPTION>
Years Ended December 31,                     1996      1995      1994
----------------------------------------------------------------------
<S>                                          <C>       <C>       <C>
Revenues:
 Software license fees                       38.4%     50.2%    42.1%
 Services and maintenance                    61.0      49.3     49.1
 Hardware and other                           0.6       0.5      8.8
     Total revenues                         100.0     100.0    100.0
Operating expenses:
 Cost of software license fees                1.4       2.3      2.9
 Cost of services and maintenance            58.4      45.3     40.2
 Cost of hardware and other                     _         _      7.5
 Sales and marketing                         24.0      21.8     24.1
 Product development                         21.1      12.4      8.7
 General and administrative                  20.3       7.8      8.8
 Write-off of purchased research
     and development                          9.5         _        _
 Restructuring and severance costs            2.8         _        _
     Total operating expenses               137.6      89.6     92.2
Income (loss) from operations               (37.5)     10.4      7.8
Other income (expense)                        4.1      (0.2)    (0.9)
Income (loss) before provision for
     income taxes                           (33.4)     10.2      6.9
Provision for income taxes                      -       0.5      0.3
Net income (loss)                           (33.4)%     9.7%     6.6%
</TABLE>

The following discussion contains statements identified as "the 
Company expects" or "the Company believes" or otherwise stated as the 
Company's predictions for the future, which are forward-looking 
statements and which involve certain risk factors. The Company's 
actual results may differ materially from the results discussed in 
the forward-looking statements. Factors that might cause such a 
difference include, but are not limited to, those herein identified, 
those discussed in the Company's Registration Statement on Form SB-2, 
filed with the SEC and other factors identified from time to time as 
risks in the Company's reports filed with the SEC.

Total Revenues
The Company's revenues are derived from software license fees, 
services and maintenance and hardware sales and other. Total revenues 
increased by 82.5% to $16.2 million in 1994, by 27.7% to $20.7 
million in 1995 and by 2.5% to $21.2 million in 1996. In 1994 and 
1995, the growth in total revenues was a result of the increased 
demand for warehouse management software, the expansion of the 
Company's direct sales force, the growth experienced in multinational 
and international sales and increased marketing efforts. The minimal 
growth in total revenues in 1996 was due primarily to fewer new sales 


<PAGE>   14


of Catalyst WMS as a result of a lengthening of the sales cycle as 
compared to current installations.  The following table sets forth, 
by category, revenues and percentage change year over year for the 
years indicated:
<TABLE> 
<CAPTION> 
                                Net Revenues        Percentage Change
                                (In thousands)       (Year over Year)
<S>                        <C>      <C>      <C>       <C>     <C> 
                              1996     1995    1994     1996    1995
                           -------  -------  ------    -----   -----
Software license fees      $ 8,132  $10,372  $6,810    (21.6)% 52.3%
Services and maintenance    12,902   10,180   7,942     26.7    28.2
Hardware and other             132      106   1,426     25.3   (92.6)
</TABLE> 

International revenues decreased by 9.1% to $3.0 million in 1994, 
increased by 99.3% to $6.0 million in 1995 and decreased by 25.0% to 
$4.5 million in 1996.  International revenues accounted for 18.6%, 
29.0% and 21.2% of total revenues in 1994, 1995 and 1996, 
respectively. The decrease in percentage of total revenues in 1994 
and 1996 was due primarily to the increase in the Company's domestic
sales compared to international sales. The increase in 1995 was due 
to an increase in multinational sales of Catalyst WMS. In November 
1995, the Company opened an office in Rio de Janeiro, Brazil and in 
August 1996, opened an office in Lyon, France. Although the Company 
anticipated revenue growth from international markets in 1996, 
certain of these markets did not perform to their expected potential. 
The Company believes that future international revenues should remain 
constant or increase slightly as a percentage of total revenues.

Software License Fees
Software license fee revenues consist of revenues from software 
license agreements of the Catalyst WMS, related add on products and 
relational database management systems (RDBMS). Software license fee 
revenues increased by 117.5% to $6.8 million in 1994, by 52.3% to 
$10.3 million in 1995 and decreased by 21.6% to $8.1 million in 1996. 
The decrease in software license fee revenues in 1996 was due in 
part, to the fewer number of software licenses sold which resulted 
from a lengthening of the sales cycle and greater competitive 
pressures. During the fourth quarter of 1996, the Company sold its 
first stand-alone Conference Room Pilot (CRP) business which resulted 
in professional service revenues only.  The software license fee 
revenues for these CRP customers should be realized during 1997. The 
Company believes that license fee revenues should increase in the 
future due to increased worldwide sales and marketing efforts and 
continued market acceptance of Catalyst WMS.

Services and Maintenance
Services and maintenance revenues are derived from: (i) software 
modifications, (ii) professional services and (iii) maintenance 
agreements. Services and maintenance revenues increased by 53.3% to 
$7.9 million in 1994, by 28.2% to $10.1 million in 1995 and by 26.7% 
to $12.9 million in 1996. The following table sets forth the 
components of services and maintenance revenues as a percentage of 
total revenues for the years indicated:
<TABLE> 
<CAPTION> 
<S>                                       <C>       <C>       <C> 
                                          1996      1995      1994
                                          ----      ----      ----
Software modifications                    28.6%     23.3%     30.8%
Professional services                     19.6      18.5      14.2
Maintenance agreements                    12.8       7.5       4.1
  Total services and maintenance          61.0%     49.3%     49.1%

</TABLE> 


<PAGE>  15

Software modifications are determined during the CRP and consist 
mainly of host communication and mechanical interfaces. The Company 
believes that while some amount of software modifications will 
continue, the amount of feature modifications will decrease due to 
the increased functionality of each new release of the Catalyst WMS. 
The increase in 1996 was due primarily to a small number of customers 
who required large amounts of specific modifications. The Company 
believes that software modifications as a percentage of total 
revenues will decrease in the future subject to certain large clients 
requesting large modifications.

Professional services revenues are derived from training, technical 
services, performance of the CRP, on-site support, project management 
and implementation services. As the Company continues to improve its 
Catalyst Implementation Methodology and Plan (CIMPL), professional 
services revenues may continue to increase as the Company implements 
new customer sites and current customer multi-site roll outs. The 
increase in 1996 was due to an increased number of active projects, 
consisting of both new and roll-out implementations.

Customers typically enter into a one-year maintenance agreement at 
the time they first license Catalyst WMS and pay for the first year 
of maintenance fees in advance. The increase in 1996 was due 
primarily to new customers installing the Catalyst WMS and current 
customers renewing their maintenance agreement. The Company believes 
that maintenance revenues will increase in the future as more 
Catalyst WMS systems are implemented, resulting in the execution of 
corresponding maintenance agreements along with the renewal of 
current maintenance agreements.

Hardware and Other
Hardware and other revenues consist of products that the Company sold 
to its customers on behalf of other manufacturers, including computer 
hardware, radio frequency equipment and printers. Hardware and other 
revenues increased by 156.5% to $1.4 million in 1994. Of the 1994 
increase, $1.1 million was attributable to one customer's requirement 
that it purchase radio frequency equipment from the Company. Without 
this sale, hardware and other revenues would have decreased by 46.0% 
to $300,000 in 1994. Hardware and other revenues decreased by 92.6% 
to $106,000 in 1995 and increased by 25.3% to $132,000 in 1996. The 
decrease in hardware and other revenues in 1995 was due primarily to 
the Company no longer serving as a value-added reseller for various 
hardware and radio frequency manufacturers. The increase in 1996 was 
due primarily to the sale of products by Information Strategies 
Incorporated (ISI), a company the Company acquired in April 1996. The 
sale of hardware products by ISI has been discontinued and the 
Company believes that it should not receive any significant revenues 
from the sale of hardware in the future.

<PAGE>   16
  
Cost of Software License Fees
Cost of software license fees consists of the amortization of capitalized 
software development costs and cost of third-party licenses sold
by the Company.  The costs to develop Catalyst WMS have been
expensed as incurred since the Company's product development 
efforts have been directed at enhancing and improving the Catalyst 
WMS. The cost of software license fees was $471,000, $479,000 and 
$288,000 in 1994, 1995 and 1996, respectively. In 1994 and 1995, the 
Company capitalized approximately $141,000 of the product development 
cost for its Decision Support System, which it began amortizing in 
the third  quarter of 1995. Cost of software license fees decreased 
as a percentage of software license fee revenues from 6.9% in 1994 to 
4.6% in 1995 and to 3.5% in 1996. This decrease was due primarily to 
the expensing of software development costs for the Catalyst WMS. The 
Company expects to continue to expense the cost of developing new 
releases of the Catalyst WMS and related products and anticipates 
that the cost of software license fees will remain approximately the 
same in relation to total software license fee revenues.

Cost of Services and Maintenance
Cost of services and maintenance consists primarily of personnel 
costs for the performance of software modifications, professional 
services and customer support. Cost of services and maintenance as a 
percentage of total services and maintenance revenues were 81.9%, 
92.0% and 95.9% in 1994, 1995 and 1996, respectively. Cost of 
services and maintenance decreased as a percentage of services and 
maintenance revenues to 81.9% in 1994 due primarily to the reduced 
amount of software modifications and increased amount of professional 
services required by customers. The increase in cost of services and 
maintenance in 1995 and 1996 was primarily attributable to increased 
staffing of the Company's service and support organizations in the 
United States and London in anticipation of continued growth in the 
sales of licenses of Catalyst WMS. In addition, during 1996 the 
Company incurred charges of approximately $550,000 for projected cost 
overruns related to certain projects. The Company's service and 
support organizations consisted of 99, 141 and 171 employees at 
December 31, 1994, 1995 and 1996, respectively. The Company 
anticipates that, while the total number of employees in its service 
and support organization may increase, the future cost of services 
and maintenance as a percentage of services and maintenance revenues 
should decrease as a result of process efficiencies and more
experienced service personnel.

Cost of Hardware and Other
Cost of hardware and other consists primarily of the cost of products 
sold by the Company on behalf of other manufacturers. Cost of hardware 
and other as a percentage of total revenues was 7.5% in 1994, 3.8% in 
1995 and 0% in 1996. The increase in 1994 was the result of $1.0 million 
of costs related to one customer's requirement to purchase 
radio frequency equipment from the Company.  The decrease in 1995 and 
1996 was the result of the Company's termination of its value-added 
reseller agreements with hardware and radio frequency manufacturers.
The Company does not anticipate any significant costs associated with 
hardware and other revenue in the future.


<PAGE>   17
 
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and 
commissions paid to sales personnel along with marketing, promotional 
and travel expenses. Sales and marketing expenses increased 174.9% to 
$3.9 million in 1994, by 15.3% to $4.5 million in 1995 and by 12.9% to 
$5.1 million in 1996. In general, the increase in sales and marketing 
expenses in each of the three years was due to the expansion of the 
Company's sales and marketing staff and increased marketing and 
promotional expenses in the domestic and international markets. During 
1996, the Company opened an office in Lyon, France and increased its 
staff in Rio de Janeiro, Brazil. The Company expensed all 
organizational and start up costs related to those offices as 
incurred. Sales and marketing expenses represented 24.1%, 21.8% and 
24.0% of total revenues in 1994, 1995 and 1996, respectively.  The 
Company anticipates that the amount of its sales and marketing 
expenses may continue to increase in the future as a result of recent 
organizational changes that have led to the introduction of several 
Product Marketing Managers within the sales and marketing department. 
Although the amount of sales and marketing expenses should increase, 
it should remain relatively constant in relation to total revenues. 
The sales and marketing staff consisted of 25, 25 and 33 employees as 
of December 31, 1994, 1995 and 1996, respectively.

Product Development
Product development costs include expenses associated with research 
and development, including costs of engineering personnel and related 
development expenses such as development software tools, training and 
documentation. Product development costs increased by 88.9% to $1.4 
million in 1994, by 81.0% to $2.6 million in 1995 and by 75% to $4.4 
million in 1996. The increase in product development costs were 
primarily due to an increase in the number of software engineers 
employed by the Company to make enhancements to the Catalyst WMS, 
develop related add-on products and research potential future 
products and enhancements. Product development costs represented 
8.7%, 12.4% and 21.1% of total revenues in 1994, 1995 and 1996 
respectively. The increase in 1996 was primarily due to the Company's 
acquisition of ISI in Dallas, Texas. The Dallas operation was 
expected to continue as a research facility and the product 
development staff consisted of 31, 50 and 67 employees as of December 
31, 1994, 1995 and 1996, respectively. The costs associated with the 
operations represented $469,000 for 1996. In December 1996, the 
Company discontinued its research efforts in Dallas, Texas. The Company 
believes that product development costs should decline as a 
percentage of total revenue in the future.

General and Administrative
General and administrative expenses consist primarily of the salaries 
of administrative, executive and finance personnel. General and 
administrative expenses increased by 10% to $1.4 million in 1994, by 
13.6% to $1.6 million in 1995 and by 166.6% to $4.3 million in 1996. 
General and administrative expenses represented 8.8% of total 
revenues in 1994, 7.8% in 1995 and 20.3% in 1996. The decrease in 
general and administrative expenses in 1995 as a percentage of total 
revenue was attributable to the increase in total revenues. In 1996, 


<PAGE>   18
 
the Company began to isolate and account for the costs of its information 
technology and other executive expenses as a part of 
general and administrative expenses. In addition, during the fourth 
quarter of 1996, several one-time and other charges of approximately 
$827,000 were taken including receivable allowances and other 
organizational charges resulting in the increase seen in 1996 in 
general and administrative expenses. The Company's general and 
administrative staff consisted of 12, 12 and 24 as of December 31, 
1994, 1995 and 1996, respectively.  The Company expects that 
administrative expenses may increase as a percentage of total 
revenues in the future, due to current reorganizational changes 
resulting from the change in Senior Management.

Write-off of Purchased Research and Development
The Company incurred a one-time charge of $2.0 million in the second 
quarter of 1996 related to its purchase of ISI. This charge 
represented the purchase of research and development and was 
immediately charged to operations.

Restructuring and Severance Costs
The Company incurred a charge of $597,000 related to its decision to 
close its operations in Dallas, Texas representing lease, severance 
and related office closing expenses. The charges also include a 
negotiated agreement with the Company's former Chief Executive 
Officer. The Company included all costs and payments due under these 
arrangements in 1996.

Other income and expense
Other income and expense consists primarily of interest income and 
interest expense and does not have a material impact on operating 
results. The Company expects other income and expense to remain 
relatively constant in the future due to the interest received from 
the Company's investments of the proceeds from their initial public 
offering.

Income Tax Expense
In 1994 and 1995, the Company's effective income tax rate was 4.4% 
and 5.5%, respectively, and differed from the expected statutory rate 
due to the utilization of net operating loss carryforwards and 
general business credits. In 1996, no income tax expense was recorded 
as the Company incurred a net loss for both financial and income tax 
reporting purposes. No net deferred tax expense was recorded in any 
of the three years as the Company continues to record a valuation 
allowance to reserve for the net deferred tax asset.

Liquidity and Capital Resources
Over the last three years, the Company has funded its operations 
primarily through sales of common and preferred stock, borrowings and 
cash generated from operations. The Company received an aggregate of 
$4.9 million from the sale of preferred stock in 1994. In addition, 
the Company raised approximately $23.6 million from the sale of 
2,000,000 shares of its common stock in an initial public offering in 
November 1995. A portion of the proceeds from the initial
public offering was used to repay two term notes to Bank One, West 
Bend, Wisconsin, N.A. totaling $1.1 million.


<PAGE>   19
 
Net cash used in operating activities was $2.2 million in 1994 and 
$3.3 million in 1996. The Company generated $1.3 million of net cash 
from operating activities in 1995. The decrease in cash flows from 
operations during 1994 was due primarily to an increase in accounts 
receivable and a decrease in the amount of deferred software license 
fees, which were partially offset by increases in net income, 
accounts payable, deferred services and maintenance revenues and 
deferred rent.  The increase in accounts receivable was attributable 
to the increase in total revenues. The increase in cash flows in 1995 
was due to increased net income and deferred services and maintenance 
revenues, which were partially offset by increased accounts 
receivable and accrued liabilities. The decrease in cash flows in 
1996 was due to the Company's net loss including the write-off of 
purchased research and development, which were partially offset by 
decreased accounts receivable, and increase in accounts payable. 
The Company expended $1.3, $1.6 and $2.1 million in 1994, 1995 and 
1996, respectively, for purchases of property and equipment. The 
Company employed 167, 229, and 295 employees as of December 31, 1994, 
1995 and 1996, respectively.  This increase in employees has led to an 
increase in expenses related to equipment, software and furniture. 
The Company relocated its corporate offices to a new building in 
1994, which it leases for a term expiring in 2006. In 1995, the 
Company acquired a phone system under a capital lease. As of December 
31, 1996, the aggregate amount owing under capital leases, including 
interest, was $183,000. The Company did not have any material 
commitments for capital expenditures as of December 31, 1996. The 
Company anticipates making expenditures of approximately $100,000 for 
renovations of its sales and marketing facility within its 
headquarters during the second quarter of 1997.  The Company will 
continue to purchase equipment, software and furniture for new 
employees as needed throughout 1997. Such expenditures will be funded 
from cash flows from operations and the proceeds received by the 
Company in its initial public offering.

During 1996, the Company instituted a stock buy-back program through 
which it purchased 234,132 shares of its common stock at various 
market prices. The aggregate cash used to purchase the stock was $1.2 
million. In November 1996, the Company redeemed 1.2 million shares of 
its common stock from Summit Partners for $5.7 million in cash. In  
January, 1997, the Company redeemed approximately 226,000 shares of 
its common stock as a part of a negotiated agreement between 
the Company and its former Chief Executive Officer. The Company does 
not anticipate purchasing additional shares of its common stock in 
the open market in the future.

As of December 31, 1996, the Company had $695,000 in cash and cash 
equivalents and working capital of $10.5 million, which was generated 
primarily through proceeds from the Company's initial public 
offering.  In addition, the Company has a line of credit (the 
"Revolving Credit Facility") with Bank One, West Bend, Wisconsin of 
$1.0 million. As of December 31, 1996, there were no amounts 
outstanding under the Revolving Credit Facility.


<PAGE>   20
 
Management believes that liquidity provided by cash generated from 
its ongoing operations, the proceeds from the initial public 
offering, as well as borrowings under the Revolving Credit Facility 
will be sufficient to meet the Company's currently anticipated 
working capital and capital expenditure requirements through 1997.

The Company has never paid cash dividends on its Common Stock. The 
Company's policy has been to retain earnings to provide funds for the 
operation and expansion of its business. Accordingly, the Company 
does not anticipate paying any cash dividends in the foreseeable 
future.


<PAGE>   21


ITEM 7. FINANCIAL STATEMENTS.


                                                       Form 10-KSB
                                                       Page Number

Report of Ernst & Young LLP, Independent Auditors           21
Statements of Operations for the years ended December
 31, 1996, 1995 and 1994                                    22
Balance Sheets at December 31, 1996 and 1995              23 - 24
Statement of Stockholders' Equity (Deficit) for
 the years ended December 31, 1996, 1995 and 1994         22 - 23
Statements of Cash Flows for the years ended
 December 31, 1996, 1995 and 1994                         25 - 28
Notes to Financial Statements                             29 - 40


        Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders 
Catalyst International, Inc.

We have audited the accompanying balance sheets of Catalyst 
International, Inc. (the Company) as of December 31, 1996 and 1995, 
and the related statements of operations, stockholders' equity and 
cash flows for each of the three years in the period ended December 
31, 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 financial position of the 
Company at December 31, 1996 and 1995, and the results of its 
operations and its cash flows for each of the three years in the 
period ended December 31, 1996, in conformity with generally accepted 
accounting principles. 


Milwaukee, Wisconsin
January 27, 1997


<PAGE>   22


                         Catalyst International, Inc.

                           Statements of Operations


<TABLE>
<CAPTION>
                                                Years ended December 31,
                                              1996          1995         1994
                                        --------------------------------------
<S>                                     <C>          <C>          <C>
Revenues:                                             
  Software license fees                 $ 8,132,367  $10,372,146  $ 6,810,549
  Services and maintenance               12,901,947   10,180,188    7,942,307
  Hardware and other                        132,408      105,663    1,425,558
                                         -------------------------------------
Total revenues                           21,166,722   20,657,997   16,178,414
                                         -------------------------------------
                                                      
Operating expenses:                                   
  Cost of software license fees              288,220      479,017      470,536
  Cost of services and maintenance        12,371,157    9,368,486    6,507,460
  Cost of hardware and other                       -        4,165    1,212,228
  Sales and marketing                      5,078,557    4,498,774    3,901,159
  Product development                      4,470,304    2,554,165    1,410,967
  General and administrative               4,286,848    1,607,723    1,415,933
  Write-off of purchased research and 
   development costs (Note 2)              2,002,280            -            -
  Restructuring and severance costs
   (Note 10)                                 597,338            -            -  
                                         -------------------------------------
Total operating expenses                  29,094,704   18,512,330   14,918,283
                                         -------------------------------------
Income (loss) from operations             (7,927,982)   2,145,667    1,260,131
                                                      
Other income (expense):                               
  Interest expense                           (67,395)    (133,536)   (152,805)
  Investment income                          948,973      142,028       20,822
  Miscellaneous, net                         (14,703)     (37,741)     (5,794)
                                         -------------------------------------
Total other income (expense)                 866,875      (29,249)   (137,777) 
                                         -------------------------------------
                                                      
Income (loss) before provision for
  income taxes                            (7,061,107)   2,116,418    1,122,354
Provision for income taxes (Note 8)                -      111,000       49,000
                                         -------------------------------------
Net income (loss)                         (7,061,107)   2,005,418    1,073,354
Preferred dividends                                -      437,028      193,896
                                         -------------------------------------
Net income (loss) applicable to
  common stock                           $(7,061,107) $ 1,568,390  $   879,458 
                                         =====================================
                                                      
Net income (loss) per share (Note 1)     $     (0.88) $      0.29  $      0.16
                                         =====================================
                                                      
Shares used in computing net income 
  (loss) per share                         7,995,766    6,889,003    6,854,326
</TABLE> 

See accompanying notes.


<PAGE>   23


                         Catalyst International, Inc.

                                Balance Sheets


<TABLE>
<CAPTION>
                                                 December 31,
                                             1996         1995
                                             ------------------------
<S>                                          <C>          <C>
Assets
Current assets:
  Cash and cash equivalents                  $   694,836  $ 3,729,705
  Short-term investments                       8,626,615   19,883,157
  Accounts receivable, net of allowance for 
   doubtful accounts of $279,174 in 1996       5,978,738    6,834,871
  Refundable income taxes                        212,642       87,500

  Prepaid expenses                               408,338      373,624
                                                  ------------------------
Total current assets                          15,921,169   30,908,857


Equipment and leasehold improvements:  
  Computer hardware and software               3,405,559    2,141,205
  Office equipment                             2,193,919    1,729,759
  Leasehold improvements                         780,407      476,200 
                                              --------------------------
                                               6,379,885    4,347,164
  Less accumulated depreciation and
    amortization                               2,137,625    1,277,390
                                              ------------------------
Total equipment and leasehold improvements     4,242,260    3,069,774


Other assets--                
  Capitalized software development costs,
   net of accumulated amortization of 
   $70,431 in 1996 and $35,216 in 1995            35,216      105,647
                                             ------------------------
Total assets                                 $20,198,645  $34,084,278
                                             ========================
</TABLE> 


<PAGE>   24


                         Catalyst International, Inc.

                                Balance Sheets


<TABLE>
<CAPTION>
                                                   December 31,
                                            1996         1995
                                            ------------------------
<S>                                         <C>          <C>
Liabilities and stockholders' equity                   
Current liabilities:                                   
  Accounts payable                          $ 1,043,333  $ 1,114,045
  Accrued liabilities                         1,022,919      477,438
  Reserve for restructuring and severance
    costs (Note 10)                             597,338            -
  Deferred software license fees                 12,453      296,536
  Deferred services and maintenance           1,663,365    1,769,973       
  Redemption price of common stock (Note 10)  1,073,239            - 
  Current portion of long-term debt (Note 4)     51,047      123,423
                                            ------------------------
Total current liabilities                     5,463,694    3,781,415 

Long-term debt (Note 4)                         131,832      323,886
Deferred services and maintenance               132,195      384,520
Deferred rent (Note 4)                          324,217      343,749 
                                            ------------------------
Total noncurrent liabilities                    588,244    1,052,155
                                            ------------------------
Total liabilities                            6,051,938    4,833,570

Commitments (Note 4)

Stockholders' equity (Notes 5 and 6):
  Common stock, $.10 par value; 25,000,000
   shares authorized; shares issued:
   8,501,217 in 1996 and 8,421,323 in 1995      850,122      842,132
  Additional paid-in capital                 31,074,917   31,123,677      
  Accumulated deficit
  Treasury stock, at cost--1,740,145 shares
   of common stock in 1996 and 300,000
   shares of common stock in 1995            (7,978,885)  (1,050,000)
  Common stock to be redeemed for treasury
   (Note 10)                                 (1,073,239)           -
                                             ------------------------
Total stockholders' equity                   14,146,707   29,250,708
                                             ------------------------ 
Total liabilities and stockholders' equity  $20,198,645  $34,084,278
                                            =========================
/TABLE> 
                
See accompanying notes.                
           
     
<PAGE>   25
 

</TABLE>
<TABLE>
<CAPTION>

                          Catalyst International, Inc.

                      Statements of Stockholders' Equity

                                                               Preferred Stock-        Preferred Stock-
                                    Preferred Stock                Series A                Series B               Common Stock
                                   -------------------      --------------------     --------------------    --------------------
                                   Shares      Dollars      Shares      Dollars      Shares       Dollars    Shares       Dollars
   ----------------------------------------------------------------------------------------------
<S>                                <C>         <C>          <C>         <C>          <C>          <C>        <C>          <C> 
Balances at January 1, 1994         1,089,108  $ 544,554             -  $       -             -   $       -   1,500,000   $150,000
 Issuance costs of redeemable
  preferred stock                           -          -             -          -             -           -           -          -
 Exchange of preferred stock       (1,089,108)  (544,554)    1,965,517    982,759             -           -           -          -
 Exchange for preferred stock
  held by minority interest                 -          -             -          -     1,273,473     636,737           -          -
 Dividends on preferred stock
  ($.0375 per share of Series A
  preferred stock, $.26 per share
  of Series D preferred stock and
  $.023 per share of preferred
  stock)                                    -          -             -          -             -           -           -          -
 Purchase of common stock for
  treasury                                  -          -             -          -             -           -           -          -
 Stock options exercised                    -          -             -          -             -           -     111,501     11,150
  Net income                                -          -             -          -             -           -           -          -
  -----------------------------------------------------------------------------------------------
Balances at December 31, 1994               -          -     1,965,517    982,759     1,273,473     636,737   1,611,501    161,150
 Shares issued in connection with
  initial public offering                   -          -             -          -             -           -   2,000,000    200,000
 Conversion of Series A and B
  preferred stock in connection
  with initial public offering              -          -    (1,965,517)  (982,759)   (1,273,473)   (636,737)  3,238,992    323,899
 Conversion of Series C and D
  redeemable preferred stock in
  connection with initial public
  offering                                  -          -             -          -             -           -   1,525,261     152,526
 Stock options exercised                    -          -             -          -             -           -      35,569       3,557
 Warrants exercised                         -          -             -          -             -           -      10,000       1,000
 Compensation expense on stock
  options                                   -          -             -          -             -           -          -           -

</TABLE>

<TABLE> 
<CAPTION> 
                                                                                        Common Stock
                                       Additional          to be
                                        Paid-in         Accumulated    Treasury Redeemed for 
                                        Capital           Deficit               Stock             Treasury           Total  
                                   --------------------------------------------------------------
<S>                                <C>          <C>          <C>        <C>         <C>   
Balances at January 1, 1994        $ 1,182,296  $(4,112,949) $       -  $        -  $ (2,236,099)
 Issuance costs of redeemable
  preferred stock                      (60,073)           -          -           -       (60,073)
 Exchange of preferred stock          (438,205)           -          -           -             -
 Exchange for preferred stock
  held by minority interest           (448,263)           -          -           -     1,085,000
 Dividends on preferred stock
  ($.0375 per share of Series A
  preferred stock, $.26 per share
  of Series D preferred stock and
  ($.023 per share of preferred
  stock)                                     -     (193,896)         -           -      (193,896)
 Purchase of common stock for
  treasury                                   -            - (1,050,000)          -    (1,050,000)
 Stock options exercised                     -            -          -           -        11,150
  Net income                                 -    1,073,354          -           -     1,073,354   
                                   --------------------------------------------------------------
Balances at December 31, 1994       1,132,281    (3,233,491)(1,050,000)          -    (1,370,564)
 Shares issued in connection with
  initial public offering          23,378,212             -          -           -    23,578,212
 Conversion of Series A and B
  preferred stock in connection
  with initial public offering      1,295,597             -          -           -             -   
 Conversion of Series C and D
  redeemable preferred stock in
  connection with initial public
  offering                          5,292,405             -          -           -     5,444,931
 Stock options exercised                  274             -          -           -         3,831
 Warrants exercised                         -             -          -           -         1,000
 Compensation expense on stock
  options                              24,908             -          -           -        24,908
</TABLE> 


<PAGE>  26
 

                         Catalyst International, Inc.

                      Statements of Stockholders' Equity

<TABLE> 
<CAPTION> 
                                                              Preferred Stock--      Preferred Stock--
                                        Preferred Stock          Series A               Series B              Common Stock
                                       -----------------      -----------------      -----------------     -----------------
                                       Shares    Dollars      Shares    Dollars      Shares    Dollars     Shares    Dollars
                                       ----------------------------------------------------------
<S>                                    <C>       <C>          <C>       <C>          <C>       <C>         <C>       <C>
Dividends on preferred stock
  ($.0445 per share of Series A
   preferred stock and $.9568 per
   share of Series D preferred           -          -           -          -           -          -             -          -
   stock)
   Net income                            -          -           -          -           -          -             -          -
                                       ----------------------------------------------------------
Balances at December 31, 1995            -          -           -          -           -          -     8,421,323    842,132
  Purchase of common stock for           -          -           -          -           -          -             -          -
   treasury
  Common stock to be redeemed for
   treasury (Note 10)                    -          -           -          -           -          -             -          - 
  Stock options exercised                -          -           -          -           -          -        79,894      7,990
  Compensation expense on stock          -          -           -          -           -          -             -          -
   options
  Issuance costs of initial public       -          -           -          -           -          -             -          -
   offering
   Net loss                              -          -           -          -           -          -             -          -
                                       ----------------------------------------------------------
Balances at December 31, 1995            -          -           -          -           -          -    $8,501,217   $850,122
                                       ==========================================================       

                                                                                              Common Stock
                                        Additional                                                To Be                    
                                         Paid-in          Accumulated          Treasury         Redeemed
                                         Capital            Deficit              Stock        for Treasury          Total    
                                       ----------------------------------------------------------
                                        <C>               <C>                  <C>            <C>                   <C>
Dividends on preferred stock
  ($.0445 per share of Series A
   preferred stock and $.9568 per
   share of Series D preferred                   -          (437,028)                 -                  -          (437,028)
   stock)
   Net income                                    -         2,005,418                  -                  -         2,005,418
                                       ----------------------------------------------------------
Balances at December 31, 1995           31,123,677        (1,665,101)        (1,050,000)                 -        29,250,708
  Purchase of common stock for                   -                 -         (6,928,885)                 -        (6,928,885)
   treasury
  Common stock to be redeemed for
   treasury (Note 10)                            -                 -                  -         (1,073,239)       (1,073,239)
  Stock options exercised                    7,757                 -                  -                  -            15,747
  Compensation expense on stock             29,419                 -                  -                  -            29,419
   options
  Issuance costs of initial public         (85,936)                -                  -                  -           (85,936)
   offering
   Net loss                                      -        (7,061,107)                 -                  -        (7,061,107)
                                       ----------------------------------------------------------
Balances at December 31, 1995          $31,074,917       $(8,726,208)       $(7,978,885)       $(1,073,239)      $14,146,707
                                       ==========================================================
</TABLE>


<PAGE>   27

                         Catalyst International, Inc.


                           Statements of Cash Flows

<TABLE>
<CAPTION>

                                                 Years ended December 31,
                                         1996            1995           1994
                                         -------------------------------------------
<S>                                      <C>             <C>            <C>
Operating activities
Net income (loss)                        $ (7,061,107)   $ 2,005,418    $ 1,073,354

Adjustments to reconcile net income
 (loss) to net cash provided by (used
 in) operating activities:
  Depreciation and amortization             1,015,359        672,015        399,052
  Compensation expense on stock options        29,419         24,908              -
   Loss on disposal of equipment and
    leasehold improvements                        574         17,485         15,164
   Provision for restructuring and
    severance costs                           597,338              -              -
   Write-off of purchased research and
    development                             2,002,280              -              -
   Changes in operating assets and
    liabilities:
    Accounts receivable                       949,364     (1,651,403)    (4,387,338)
    Prepaid expenses                          (27,977)      (256,900)         4,323
    Accounts payable                         (129,133)       (47,151)       828,120
    Accrued liabilities                        69,386       (265,957)        31,699
    Income taxes                              (92,191)        64,500       (195,000)
    Deferred software license fees           (284,083)      (191,592)      (398,372)
    Deferred services and maintenance        (358,933)       888,339        158,498
    Deferred rent                             (19,532)        59,247        284,502
                                           -----------------------------------------
Total adjustments                           3,751,871       (686,509)    (3,259,352)
                                           -----------------------------------------  
Net cash provided by (used in) operating 
 activities                                (3,309,236)     1,318,909     (2,185,998)

Investing activities
Purchase of short-term investments       (206,017,668)   (19,883,157)             -
Sales of short-term investments           217,274,210              -              -
Capital expenditures                       (2,094,781)    (1,571,533)    (1,310,603)
Capitalized software development costs              -        (64,125)       (76,738)
Proceeds from fixed asset disposals            12,279         22,115              -
Purchase of Information Strategies, Inc.,
 net of cash acquired of $544 (Note 2)     (1,499,456)             -              -
                                           -----------------------------------------  
Net cash provided by (used in) investing
 activities                                 7,674,584    (21,496,700)    (1,387,341)

Financing activities
Proceeds from long-term debt                        -        500,000        640,000
Payments on long-term debt                   (401,143)    (1,446,838)    (1,131,831)
Net proceeds from sale of preferred stock           -              -      4,939,927
Net proceeds from (costs related to)
 initial public offering of common stock      (85,936)    23,578,212              -
Proceeds from exercise of stock options
 and warrants                                  15,747          4,831         11,150
Dividends paid to preferred stockholders            -        (87,439)       (98,554)
Purchase of common stock for treasury      (6,928,885)             -     (1,050,000)
                                           -----------------------------------------  
Net cash provided by (used in) financing
 activities                                (7,400,217)    22,548,766      3,310,692
                                           -----------------------------------------
</TABLE>

See accompanying notes.


<PAGE>   28

                         Catalyst International, Inc.

                     Statements of Cash Flows (continued)

<TABLE> 
<CAPTION> 

                                                                  Years ended December 31,
                                                               1996           1995         1994
                                                         ---------------------------------------
<S>                                                      <C>             <C>          <C>
Net increase (decrease) in cash and cash equivalents     (3,034,869)     2,370,975      (262,647)
Cash and cash equivalents at beginning of year            3,729,705      1,358,730     1,621,377
                                                          --------------------------------------
Cash and cash equivalents at end of year                 $  694,836     $3,729,705    $1,358,730
                                                         =======================================
Supplemental disclosure:
 Cash paid for interest                                  $   59,566      $ 133,533    $  158,811
 Cash paid for income taxes                                 127,000         46,500       244,000
</TABLE>

                        
Noncash investing and financing activities:
 During 1994, the Company acquired $146,771 of computer hardware and 
a $22,932 prepaid maintenance agreement under a capital lease. Also 
during 1994, the Company issued Series A preferred stock in exchange 
for original preferred stock and issued Series B preferred stock in 
exchange for the preferred stock of a consolidated subsidiary held by 
third parties.

 During 1995, the Company acquired $267,868 of office equipment and 
$116,869 of computer hardware under capital leases. Also during 1995, 
the Company issued common stock in exchange for Series A, B, C and D 
preferred stock in connection with the Company's initial public 
offering of common stock.


See accompanying notes.


<PAGE>  29

                         Catalyst International, Inc.

                         Notes to Financial Statements

                      Three Years Ended December 31, 1996


 
1. Significant Accounting Policies

Business and Concentration of Credit Risk

Catalyst International, Inc. (the Company) develops, markets and 
supports advanced warehouse management software solutions. The 
Company also provides related services, including software 
modification and configuration, project management, rapid 
prototyping, training and implementation support for customers 
throughout the United States and certain foreign countries who meet 
the Company's credit policies. All domestic and international sales 
are denominated in U.S. dollars. The Company performs periodic credit 
evaluations of its customers' financial condition and does not 
require collateral.

Use of Estimates

The preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates 
and assumptions that affect the amounts reported in the accompanying 
financial statements and notes.  Actual results could differ from 
those estimates.

Cash Equivalents

The Company invests excess funds not required for operations in 
highly liquid investments such as money market funds or repurchase 
agreements. These investments are considered cash equivalents for 
financial reporting purposes.

Short-Term Investments

The following is a summary of short-term investments at December 31:

<TABLE> 
<CAPTION> 
                                                 1996
                               --------------------------------------
<S>                            <C>     <C>                <C> 
                                       Gross Unrealized   Estimated
                               Cost     Gains (Losses)    Fair Value
                               --------------------------------------

Corporate debt securities      $8,626,615      $ --        $8,626,615
                               ====================================== 
</TABLE> 


<PAGE>   30

                         Catalyst International, Inc.

                   Notes to Financial Statements (continued)
 
1. Significant Accounting Policies (continued)

<TABLE> 
<CAPTION> 
                                                        1995
                                     -----------------------------------------
<S>                                  <C>        <C>               <C> 
                                                Gross Unrealized    Estimated
                                     Cost        Gains (Losses)     Fair Value
                                     ----------------------------------------- 

Obligations of the U.S. government   $19,883,157        $ --       $19,883,157
                                     =========================================
</TABLE> 
   
The cost of these securities, which are considered as "available-for-
sale" for financial reporting purposes, approximates fair value at 
both December 31, 1996 and 1995. Management determines the 
appropriate classification of debt securities at the time of purchase 
and reevaluates such designation as of each balance sheet date. All 
of the available-for-sale securities are due in less than one year. 
The cost of securities sold is based on the specific identification 
method. There were no realized gains or losses during 1996 or
1995.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are recorded at cost and are 
depreciated on the straight-line basis over their estimated useful 
lives as follows: computer hardware and software: 5 years; office 
equipment: 5 -- 10 years; and leasehold improvements: 10 years.

Capitalized Software Development Costs

In accordance with Statement of Financial Accounting Standards (SFAS) 
No. 86, "Accounting for the Costs of Computer Software to be Sold, 
Leased or Otherwise Marketed," the Company capitalizes costs incurred 
to develop new software products upon determination that 
technological feasibility has been established for the product, 
whereas costs incurred prior to the establishment of technological 
feasibility are charged to expense. When the software product is 
available for general release to customers, capitalization ceases and 
such costs are amortized on a product-by-product basis based on 
current and anticipated future revenue with an annual minimum equal 
to straight-line amortization over the remaining estimated economic 
useful life of the software product.

                                                                             
<PAGE>   31

                         Catalyst International, Inc.

                  Notes to Financial Statements (continued)
 

1. Significant Accounting Policies (continued)

Revenue Recognition

Software License Fees

Software license fees on a customer's initial installation (which may 
include single or multiple sites) are recognized as revenue using the 
straight-line method beginning upon contract execution and ending 
upon the estimated completion date for installation of the software. 
The estimated completion dates are reviewed and revised monthly 
during the contract, and adjustments, if any, are recorded ratably 
through the installation date. Software license fees for sales of 
additional licenses to existing customers are recognized upon 
customer authorization to proceed with the subsequent installation.

In 1996, the Company began selling corporate software license fees 
which provide the customer the ability to install the software at an 
unlimited number of sites, as defined. Such revenue is recognized 
upon delivery of the software as the Company has no remaining 
significant obligations.

Relational database management systems software from third-party 
vendors is utilized by the Company's software product. The Company 
recognizes revenue and the related cost of the database software upon 
billing to the customer.

Services and Maintenance

Software modification fees are recognized as revenue using the 
straight-line method beginning upon definition of the modifications 
required and customer authorization to proceed, and ending upon 
installation. The estimated completion dates are reviewed and revised 
monthly during the contract, and adjustments, if any, are recorded 
ratably through the installation date. Management considers such 
methodology to be the best available measure of progress on these 
contracts and believes such methodology approximates the same results 
which would be obtained under a percentage-of-completion method.

Professional services are recognized as revenue as time and material 
costs are incurred and billed to the customer.

Maintenance fees are prepaid by customers and are recognized as 
revenue ratably over the term of the maintenance agreement, which is 
generally one year.

                                                                              
<PAGE>   32

                         Catalyst International, Inc.

                  Notes to Financial Statements (continued)
 

1. Significant Accounting Policies (continued)

Hardware and Other

Hardware and other revenues are recognized when the units are shipped 
to the customer.

Advertising

Advertising costs are expensed as incurred and amounted to 
approximately $329,000, $325,000 and $367,000 in 1996, 1995 and 1994, 
respectively.

Compensated Absences

In 1995, the Company changed its policy for employees so that 
vacation pay must be used in the same year it is earned. The accrued 
liability at December 31, 1995 was reduced by $228,000 to eliminate 
vacation pay no longer required to be accrued under the new policy.

Income Taxes

Deferred income taxes are provided for temporary differences between 
the financial reporting and income tax basis of assets and 
liabilities and are measured using currently enacted tax rates and 
laws.

Net Income (Loss) Per Common Share

Net income (loss) per common share is computed based on the weighted 
average number of shares of common stock and common stock equivalents 
outstanding for each respective period and assumes the conversion on 
January 1, 1994 and 1995 of all outstanding shares of Series A, B, C  
and D preferred stock into common stock. Net income per common share  
includes the dilutive effect of stock options and warrants calculated 
using the "treasury stock" method (using initial public offering 
(IPO) price per share prior to the effective date of the IPO and  
actual market prices thereafter). Pursuant to Securities and Exchange 
Commission Staff Accounting Bulletin No. 83, common stock sold and 
stock options granted by the Company during the 12 months immediately 
preceding the initial filing of the Registration Statement for the 
IPO have been included as common stock equivalents as if they were 
outstanding for each period presented, whether or not dilutive, 
because the sale or option price per share was below the IPO price
per share.

                                                                              
<PAGE>  33

                         Catalyst International, Inc.

                  Notes to Financial Statements (continued)

 
2. Acquisition of Information Strategies, Inc. ("ISI")

In April 1996, the Company acquired all of the outstanding common
stock of ISI, a Windows NT based software developer, for $1,500,000 
in cash. The acquisition was accounted for as a purchase and, 
accordingly, the purchase price was allocated to the assets acquired 
and liabilities assumed (including bank debt of $136,713) based upon 
fair value at the date of acquisition. The assets acquired included 
purchased research and development costs totaling $2,002,000 which 
were immediately charged to operations. The operating results of ISI 
have been included in the statement of operations since the date of 
acquisition. Pro forma results of operations have not been presented 
because the effects of this acquisition were not significant.

3. Bank Line of Credit

The Company has a $1,000,000 bank line of credit. The line of credit, 
which is due on demand, requires monthly interest payments at the 
bank's prime rate of interest (8.25% at December 31, 1996) plus 0.25% 
and is secured by substantially all of the Company's assets. No 
amounts were outstanding under the line of credit at December 31, 
1996 or 1995.

4. Long-Term Debt and Lease Commitments

Long-term debt consisted of the following at December 31:

<TABLE> 
<CAPTION> 
                                                    1996     1995
                                                 -------------------
<S>                                              <C>       <C> 
Capital lease obligation                         $ 182,879 $ 447,309
Less current portion                               (51,047) (123,423)
                                                 -------------------
                                                 $ 131,832 $ 323,886
                                                 ===================
</TABLE> 

The Company leases a phone system under capital leases requiring 
monthly payments in varying amounts through August 2000 with an 
effective interest rate of 8.327%. At December 31, 1996, the gross 
amount of office equipment recorded under capital leases and related 
accumulated amortization was $268,991 and $96,043, respectively.

The Company also leases its corporate office space under an operating 
lease which extends through January 2006. The Company is recognizing 
rent expense on a straight-line basis which differs from the pattern 
of payments required by the lease. The Company is required to pay 
real estate taxes, maintenance, utilities and insurance on the leased 
building.

                                                                              
<PAGE>   34

                         Catalyst International, Inc.

                  Notes to Financial Statements (continued)


4. Long-Term Debt and Lease Commitments (continued)

At December 31, 1996, future payments under capital and 
noncancellable operating leases were as follows:

<TABLE>
<CAPTION>
                                             Capital    Operating
                                             Leases     Leases
                                            ----------------------
<S>                                         <C>         <C>
         1997                               $ 64,046    $  619,000
         1998                                 64,046       585,000
         1999                                 64,046       611,000
         2000                                 16,358       615,000
         2001                                     --       615,000
         Thereafter                               --     2,264,000
                                            ----------------------
         Total minimum lease obligations     208,496     5,309,000
                                                         =========
         Amounts representing interest        25,617
                                            --------
         Capital lease obligation           $182,879
                                            ========
</TABLE>

Total annual rent expense, including executory costs, on all 
operating leases was approximately $1,183,000, $816,000 and $465,000 
in 1996, 1995 and 1994, respectively.

5. Stockholders' Equity

In November 1996, the Company entered into an agreement with 
affiliated shareholders to redeem all 1,206,013 shares of the 
Company's common stock held by the shareholders at $4.75 per share. 
The redemption agreement terminated any prior stock agreements 
between the Company and the shareholders.

The Company issued 2,000,000 new shares of common stock to the public 
in the IPO and received net proceeds of approximately $23,600,000. In 
connection with the IPO, the Company completed a recapitalization in 
which all outstanding shares of Series A, B, C and D preferred stock 
were converted into an aggregate of 4,764,253 shares of common stock 
and the number of authorized shares of common stock was increased to 
25,000,000.

Series A preferred stock received cumulative annual dividends equal 
to the greater of $.05 per share or the per share amount of dividends 
paid on common stock or Series B preferred stock. Series D preferred 
stock received cumulative annual dividends equal to 10% of the 
original amount paid for such stock. Series B and C preferred stock 
received dividends equal to the greater of dividends declared by the 
Board of Directors or the per share amount of any dividends paid 
on common stock.

                                                                              
<PAGE>   35
                         Catalyst International, Inc.

                   Notes to Financial Statements (continued)
 

5. Stockholders' Equity (continued)

In October 1994, certain venture capital partnerships entered into a 
preferred stock purchase agreement with the Company to purchase 
1,159,880 shares of the Company's Series C preferred stock for 
$1,000,000 and 365,381 shares of the Company's Series D preferred 
stock for $4,000,000.

In April 1994, the Company, pursuant to a Share Exchange Agreement, 
exchanged 1,273,473 shares of the Series B preferred stock for all 
outstanding shares of preferred stock of the former Catalyst 
International, Inc. The Company had previously owned 100% of the 
common stock of the former Catalyst International, Inc. As a result 
of the exchange of preferred stock, the former Catalyst became a 
wholly owned subsidiary of the Company. Catalyst International, Inc. 
 has subsequently merged into its parent. In addition, in April 1994, 
the Company exchanged 1,956,519 shares of Series A preferred stock 
for 1,089,108 shares of the Company's original preferred stock, which 
is no longer authorized for issuance.

6. Stock Options and Warrants

The 1993 Stock Option Plan (the Plan), as amended, provides for 
granting by the Company of up to 3,000,000 incentive stock options 
and/or nonqualified stock options to employees. Each option entitles 
the holder to purchase one share of common stock at the specified 
option price. The option term is ten years. With certain exceptions, 
options vest 20% on the first anniversary of either the date of 
employment or the date of grant and then ratably over the following 
48 months. At December 31, 1996, 954,909 options are available for 
grant under the Plan. For all options granted to date, the exercise 
price was equal to the market price (or estimated fair value prior 
to going public) of the underlying stock on the date of grant. No 
expense was recognized relating to the option grants in 1996.

                                                                              
<PAGE>   36

                         Catalyst International, Inc.

                   Notes to Financial Statements (continued)


 
6. Stock Options and Warrants (continued)

The following table summarizes information with respect to the 
Company's stock option plan for the three years ended December 31, 
1996:

<TABLE> 
<CAPTION> 

                                 Number of          Weighted Average
                                 Shares        Option Price Per Share
                                 ------------------------------------
<S>                                <C>                     <C> 
Outstanding at January 1, 1994            -                $   -
Granted                             733,500                $0.15
Exercised                          (111,501)               $0.10
Canceled                            (60,508)               $0.10
                                 ------------------------------------
Outstanding at December 31, 1994    561,491                $0.17
Granted                             946,750                $8.40
Exercised                           (35,569)               $0.11
Canceled                            (80,220)               $2.18
                                 ------------------------------------
Outstanding at December 31, 1995  1,392,452                $2.84
Granted                             740,600                $7.09
Exercised                           (79,894)               $0.20
Canceled                           (235,031)               $7.41
                                 ------------------------------------
Outstanding at December 31, 1996  1,818,127                $5.75
                                 ====================================
</TABLE>
 
As of December 31, 1996, the range of exercise prices on outstanding 
options was $0.10 to $13.00 per share, and the remaining contractual 
lives ranged from 7 to 10 years. The number of options exercisable at 
December 31, 1996, 1995 and 1994 were 254,386 and 177,030, 
respectively.

The Company has elected to follow Accounting Principles Board Opinion 
No. 25, "Accounting for Stock Issued to Employees," in accounting for 
its employee stock option plan. Had the Company accounted for its 
employee stock option plan based upon the fair value at the grant 
date for options granted under the plan, based on the provisions of 
Statement of Financial Accounting Standards No. 123, "Accounting for 
Stock-Based Compensation" (SFAS No. 123), the Company's pro forma net 
income (loss) and pro forma net income (loss) per share would have 
been as follows (for purposes of pro forma disclosures, the estimated 
fair value of the options is amortized to expense over the options' 
vesting period):

                                            1996           1995
                                        -------------------------- 
Pro forma net income (loss)             $(7,517,865)    $1,464,855
Pro forma net income (loss) per share        $(0.94)    $0.21

                                                                              
<PAGE>   37
 
                         Catalyst International, Inc.

                   Notes to Financial Statements (continued)


The weighted average grant date fair values used in the above pro 
forma disclosures were $3.09 and $2.94 per share for 1996 and 1995 
option grants, respectively. It should be noted that the effects of 
applying SFAS No. 123 for providing pro forma disclosure may not be 
indicative of future amounts until the new rules are applied to all 
outstanding, nonvested awards (i.e., the above pro forma amounts give 
effect to 1995 and 1996 grants only).

6. Stock Options and Warrants (continued)

As required by SFAS No. 123, the Company has determined the pro forma 
information as if the Company had accounted for stock options granted 
since January 1, 1995 under the SFAS No. 123 fair value method. For 
grants made prior to the Company becoming a public company, the 
minimum value method was used to estimate the fair value of the 
options. For grants made after the Company's initial public offering 
in November 1995, the Black-Scholes method was used.  With the 
exception of volatility (which is ignored in the case of the minimum
value method), the following weighted-average assumptions were used 
for 1996 and 1995, respectively: risk-free interest rates of 6.3%-
1996 and 6.1%-1995; dividend yields of 0%; expected common stock 
market price volatility factors of 0.529; and a weighted-average 
expected life of the option of five years.

In April 1996, the Company modified 726,100 employee stock options 
granted in 1995 and 1996. The modifications included reducing the 
exercise price to the market price of the underlying stock as of the 
modification date ($8.50 per share), extending the term to ten years 
after the modification date, and resetting the five-year vesting 
period.

During July 1994, the Company issued warrants to each of two parties 
to purchase 5,000 shares of common stock exercisable at any time at 
$.10 per share. The warrants were exercised in September 1995. In 
addition, in November 1995 the Company issued a warrant to purchase 
10,000 shares of common stock at $13.00 per share. The warrant term 
is 10 years and vests at 20% one year after date of grant and then 
ratably over the following 48 months.

The Company has reserved 2,783,036 shares of common stock at December 
31, 1996, to provide for the exercise of outstanding stock options 
and warrants and the granting of stock options.

7. Retirement Plan

The Company sponsors an employee savings and retirement plan in which 
all employees over 21 years of age with one month of service are 
eligible to participate. Participants can elect to defer up to 15% of 
their compensation in accordance with Section 401(k) of the Internal 
Revenue Code. The Company, at its discretion, can match up to 100% of 
the employees' contributions. Company contributions to the plan were 
approximately $78,000, $51,000 and $36,000 in 1996, 1995 and 1994, 
respectively.

                                                                              
<PAGE>   38
 
                         Catalyst International, Inc.

                   Notes to Financial Statements (continued)



8. Income Taxes

The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>

                                             Years ended December 31,
                                        1996            1995           1994
                                   ------------------------------------------
      <S>                          <C>              <C>             <C>
      Current:
       Federal                     $         -      $ 101,000        $ 25,000
       State                                 -         10,000          24,000
                                   ------------------------------------------
                                             -        111,000          49,000

      Deferred                       2,010,000        616,000         363,000
      Change in valuation reserve   (2,010,000)      (616,000)       (363,000)
                                   -------------------------------------------
                                    $        -      $ 111,000       $  49,000
                                   ===========================================
</TABLE> 
                        
The provision for income taxes differs from the statutory U.S. 
federal income tax rate due to the following:

<TABLE> 
<CAPTION> 
                                              Years ended December 31,
                                       1996          1995            1994
                                    ----------------------------------------
      <S>                           <C>            <C>           <C> 
      Provision (benefit) at U.S.
       statutory rate               $(2,401,000)   $ 720,000     $  382,000
      State income taxes (benefit),                   
       net of federal tax                     -        7,000         12,000
      General business credits         (105,000)           -         (4,000) 
      Change in valuation allowance   2,010,000     (616,000)      (363,000)  
      Nondeductible expenses
       (nontaxable income)              495,000       (2,000)        24,000
      Other                               1,000        2,000         (2,000)
                                    ---------------------------------------- 
                                    $         _    $ 111,000     $   49,000
                                    ========================================
</TABLE> 

At December 31, 1996, the Company had net operating loss 
carryforwards of $5,490,000 and $5,818,000 for federal and Wisconsin 
income tax purposes, respectively, which expire between 2007 and 
2011. Of these net operating loss carryforwards, $964,000 were 
created by deductions from the exercise of nonqualified stock options 
during 1996 and 1995. The tax benefit realized upon the use of net 
operating loss carryforwards in future years related to such 
deductions will be credited directly to additional paid-in capital. 
At December 31, 1996, the Company had general business credit 
carryforwards of $424,000 and $177,000 for federal and Wisconsin

                                                                              
<PAGE>   39
 

                         Catalyst International, Inc.

                   Notes to Financial Statements (continued)



income tax purposes, respectively, which expire from 2006 through 
2009. At December 31, 1996, the Company had $61,000 of alternative
minimum tax (AMT) credits which do not expire. Annual limitations on 
the use of these loss and credit carryforwards due to changes in 
ownership are not expected to materially impact the Company.

The tax effects of temporary differences between financial reporting 
and income tax bases of assets and liabilities were as follows:


<TABLE> 
<CAPTION> 
                                           Years ended December 31,
                                               1996          1995
                                          --------------------------
<S>                                       <C>             <C> 
Deferred tax assets:            
 AMT and general business credits         $    602,000    $  707,000
 Net operating loss carryforwards            2,170,000        76,000
 Deferred revenues                             247,000       291,000 
 Intercompany deferred license fees                  -       217,000
 Accrued compensation and restructuring        267,000        33,000
 Deferred rent                                 126,000       134,000  
 Allowance for doubtful accounts               109,000             -
 Other                                          32,000        16,000
                                          --------------------------
                                             3,553,000     1,474,000
Deferred tax liabilities:               

 Depreciation                                 (172,000)      (88,000)        
 Capitalized software costs                    (14,000)      (41,000)
 Other                                         (43,000)      (31,000)
                                          ---------------------------
                                              (229,000)     (160,000)
                                          ---------------------------
Net deferred tax assets                      3,324,000     1,314,000
Valuation allowance                         (3,324,000)   (1,314,000)
                                          ---------------------------
                                           $         -   $         -
                                          ===========================
</TABLE> 

The valuation allowance at December 31, 1996 and 1995, was provided 
because of uncertainty, based on the Company's historical operating 
results, with respect to realization of deferred tax assets.

9. Segment Disclosure and Major Customers

The Company operates in one industry segment. Sales to individual 
customers that exceeded 10% of revenues in each year ending December 
31 were as follows: 1995: two customers - 15% and 13% of revenues, 
respectively; and 1994: two customers - 17% and 10% of revenues, 
respectively. There were no sales to individual customers that 
exceeded 10% of revenues in 1996.


<PAGE>   40

                         Catalyst International, Inc.

                   Notes to Financial Statements (continued)

 
9. Segment Disclosure and Major Customers (continued)

International revenues accounted for 21%, 29% and 19% of total 
revenues in 1996, 1995 and 1994, respectively. Revenues by geographic 
area for the years ended December 31, 1996, 1995 and 1994, were as 
follows:

                                      Years ended December 31,
                                  1996          1995         1994
                               --------------------------------------
       North America           $16,681,142   $14,660,341  $13,170,488 
       International             4,485,580     5,997,656    3,007,926
                               --------------------------------------
                               $21,166,722   $20,657,997  $16,178,414
                               ====================================== 

10. Restructuring and Severance Costs

In December 1996, the Company initiated a restructuring plan to close 
its division in Dallas, Texas. Shutdown of this facility is expected 
to be completed by the end of the first quarter of 1997. In 
connection with the restructuring, six employees at the facility have 
been or will be terminated. Estimated employee termination costs of 
$234,318 have been accrued at December 31, 1996.  Additional costs of 
$113,020 associated with the restructuring have also been accrued at 
December 31, 1996. These costs primarily relate to the termination of 
a facility lease in Dallas which runs through February 1998, and 
other costs to shut down the division.

The Company, based upon a decision by the Board of Directors in 
December 1996, entered into a termination agreement with its former 
president and chief executive officer.  Severance costs of $250,000 
have been accrued at December 31, 1996.  In conjunction with the 
termination agreement, the Company agreed to repurchase 225,945 
shares of the Company's stock held by this individual at $4.75 per 
share.  These shares were purchased for the treasury on January 7, 
1997.


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

None.

<PAGE>   41

                           Part III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS

The Company incorporates by reference herein the information 
contained under the caption "Election of Directors" on page 2 of the 
Proxy Statement for the 1997 Annual Meeting of Stockholders and 
"Executive Officers" on page 6 of the Proxy Statement for the 1997 
Annual Meeting of Stockholders.

Departure of Chief Financial Officer.  As of March 12, 1997, Lisa K. 
Sanregret is no longer employed by the  Company as its Chief 
Financial Officer.  Ms. Sanregret also held the title of Vice 
President of Finance and Administration.  The Company has commenced a 
search for a replacement Chief Financial Officer; in the interim, Mr. 
McGowan will assume Ms. Sanregret's responsibilities as Chief 
Financial Officer.

ITEM 10. EXECUTIVE COMPENSATION.

The Company incorporates by reference herein the information 
contained under the caption "Executive Compensation" on pages 7 
through 9 of the Proxy Statement for the 1997 Annual Meeting of 
Stockholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
MANAGEMENT.

The Company incorporates by reference herein the information 
contained under the caption "Security Ownership of Certain Beneficial 
Owners" on pages 4 and 5 of the Proxy Statement for the 1997 Annual 
Meeting of Stockholders.

<PAGE>   42

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

                           EXHIBIT INDEX

Exhibit
Number	Description
---------------------------------------------------------------------
3.1		Form of Amended and Restated Certificate of
            Incorporation, incorporated by reference to Exhibit 3.1
	       of the Company's Registration Statement on Form SB-2 (No. 
            33-97522C) (the "Registration Statement").
3.2		Form of Amended and Restated By-Laws, incorporated by 	
            reference to Exhibit 3.2 of the Registration Statement.
10.1		1993 Stock Option Plan of Catalyst USA, Inc.,
            incorporated by reference to Exhibit 10.1 of the
            Registration Statement.*
10.2		Employment Agreement dated August 1, 1992 between the 
            Company and James Stowers, incorporated by reference to 
            Exhibit 10.3 of the Registration Statement.*
10.3		1995 Management Bonus Plan, incorporated by reference	to 
            Exhibit 10.4 of the Registration Statement.*
11		Statement re: Computation of Per Share Earnings.
21		Subsidiaries.
23		Consent of Ernst & Young, LLP.
27		Article 5 Financial Data Schedule.

				
*  Represents management contract or compensation plan or 
arrangements required to be filed as an Exhibit to the Form 10-KSB.

REPORTS ON FORM 8-K.

One report on Form 8-K was filed during the fourth quarter of 1996.  
On a report on Form 8-K dated December 3, 1996, the Company disclosed 
that it announced on November 29, 1996 that the Company had entered 
into a definitive agreement to redeem approximately 1.2 million 
shares of its Common Stock from Summit Ventures III, L.P. and Summit 
Investors II, L.P. of Boston in a privately-negotiated transaction.

<PAGE>   43

                           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 City of Milwaukee, State of Wisconsin, on March 26, 1997.


				Catalyst International, Inc.


				By: /s/ Sean P. McGowan
				    --------------------------------------	
					Sean P. McGowan
					President and Chief Operating 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 stated:


/s/ Douglas B. Coder                       Date: March __, 1996
Douglas B. Coder
Chairman of the Board
(Principal Executive Officer)

/s/ Sean P. McGowan                        Date: March __, 1996
Sean P. McGowan
President, Chief Operating Officer
 and Acting Chief Financial Officer
(Principal Accounting Officer)

/s/ Roy J. Carver                           Date: March __, 1996
Roy J. Carver, Director

/s/ Vaemond H. Crane                        Date: March __, 1996
Vaemond H. Crane, Director

/s/ James F. Goughenour                     Date: March __, 1996
James F. Goughenour, Director
/s/ Terrence L. Mealy                       Date: March __, 1996
Terrence L. Mealy, Director


<PAGE>   44


                            Exhibit 11


<TABLE>
<CAPTION>

        STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS

					                 Year ended December 31,        
						               1996         1995

<S>                                       <C>            <C>
Average shares outstanding..............    7,995,766     2,151,082
Conversion of options and warrants (a)..            -       271,674
Conversion of preferred stock (b).......            -     4,162,177
Stock, options and warrants issued
  within one year of initial filing (c).            -       304,070
 Total..................................    7,995,766     6,889,003

Net income (loss) applicable to 
  common stock..........................  $(7,061,107)   $1,568,390
Dividends on preferred stock............            -       437,028
                                          $(7,061,107)   $2,005,418
  
Net income (loss) per share of 
  common stock..........................       $(0.88)        $0.29
</TABLE>
		
	(a)  Computed using the "treasury stock" method
	(b)  Computed using the "if-converted" method
	(c)  Computed in accordance with Staff Accounting Bulletin
           No. 83

<PAGE>   45

                         Exhibit 21


           Subsidiaries of Catalyst International, Inc.


Name: Catalyst WMS International, Limited
Jurisdiction of Incorporation: United Kingdom
Status: Inactive and in Good Standing
Name: Catalyst do Brasil Disbtribuidora de Software Ltda.
Jurisdiction of Incorporation: Brazil
Status: Active and in Good Standing

Name: Information Strategies Incorporated
Jurisdiction of Incorporation: State of Texas
Status: Inactive and in Good Standing


<PAGE>   46

                           Exhibit 23



       Consent of Ernst & Young LLP, Independent Auditors


We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-1394) pertaining to the 1993 Stock Option Plan of 
Catalyst USA, Inc. of our report dated January 27, 1997, with respect to 
the financial statements of Catalyst International, Inc. included in this 
Annual Report (Form 10-KSB) for the year ended December 31, 1996.

			

Milwaukee, WI            						ERNST & YOUNG LLP
March 24, 1997


<PAGE>   47

Exhibit 27

ARTICLE 5 FINANCIAL DATA SCHEDULE
(amounts in thousands, except per share amounts)

Period type						 12 mos.
Fiscal year end				December 31, 1996
Period end				 	December 31, 1996

Cash								$   695
Securities							  8,626
Receivables						  5,979
Allowances							    279
Inventory								 -
Current assets						 15,921
PP&E								  6,380
Depreciation						  2,138
Total assets						 20,199
Current liabilities					  5,464
Bonds									 -
Preferred mandatory						 -
Preferred								 -
Common							    850
Other SE							 13,297
Total liability and equity				 20,199
Sales								 21,167
Total revenues						 21,167
CGS								 12,659
Total costs						 29,095
Other expenses						      -
Loss provision							 -
Interest expense							67
Loss pretax						 (7,061)
Income tax								 -
Income continuing						 -
Discontinued							 - 
Extraordinary							 -
Changes								 -
Net loss							 (7,061)
EPS primary						   (.88)
EPS diluted						   (.88)