<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549
                             --------------------

                                   FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
     For the Quarter Ended August 31, 1997

                                      OR

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

     For the Transition Period from _____ to _____

                        Commission file number 0-21921

                            TEMPLATE SOFTWARE, INC.
            (Exact name of registrant as specified in its charter)

               Virginia                                     52-1042793
    (State or other jurisdiction of                     (I.R.S. Employer
    incorporation or organization)                     Identification No.)

        45365 VINTAGE PARK PLAZA
           Dulles, Virginia                                    20166
(Address of principal executive offices)                     (Zip code)

                                (703) 318-1000
             (Registrant's telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months  (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                        YES  X            NO 
                            ---              ---
     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

                                              Outstanding at
  Class of Common Stock                       August 31, 1997
  ---------------------                       ----------------
  Common Stock, $.01 par value per share      4,602,383
<PAGE>
 
                            TEMPLATE SOFTWARE, INC.
                                     INDEX
                                     -----
                                        
PART I - FINANCIAL INFORMATION                                            Page
------------------------------                                            ----

Item 1. Financial Statements                                                

        Consolidated Balance Sheets                                         3

        Consolidated Statements of Operations                               4
                                              
        Consolidated Statements of Cash Flows                               5
                                              
        Notes to the Consolidated Statements                                6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
        AND RESULTS OF OPERATIONS.                                          8

PART II - OTHER INFORMATION
---------------------------

ITEM 2. Changes in Securities.                                             10
                                             
ITEM 6. Exhibits and Reports on Form 8-K.                                  11
                                             
        Signatures                                                         12
        ----------                           
                                             
Exhibit Index                                                              13


     This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
---------------                                                              
amended (the "Exchange Act"), which are intended to be covered by the safe
              ------------                                                
harbors created thereby.  Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, the
ability of the Company to develop its products, as well as general market
conditions, competition and pricing.  Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this Form 10-Q
will prove to be accurate.  In light of the significant uncertainties inherent
in the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.

                                       2
<PAGE>
 
                                     PART I
                             FINANCIAL INFORMATION
                             ---------------------

ITEM 1.  FINANCIAL STATEMENTS.

                    TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                             (AMOUNTS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                             AUGUST 31, 1997   NOVEMBER 30, 1996
                                                                                   (AUDITED)
                                                            -------------------------------------
<S>                                                         <C>                  <C>     
ASSETS
Current assets:
  Cash and cash equivalents                                       $ 9,307                 $ 8,397
  Marketable securities                                             8,299                       -
  Accounts receivable, net                                          7,479                   2,887
  Other current assets                                                910                     878
                                                            -------------------------------------
    Total current assets                                           25,995                  12,162
Property and equipment, net                                         2,043                     924
Software development costs, net                                     1,372                     718
Goodwill and other assets                                          13,257                     181
                                                            -------------------------------------
      Total assets                                                $42,667                 $13,985
                                                            =====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities:
  Accounts payable and accrued expenses                          $  3,941                  $1,975
  Current portion of long-term debt                                   195                     142
  Income taxes payable                                                352                     567
  Deferred income                                                   1,309                     469
                                                            -------------------------------------
    Total current liabilities                                       5,797                   3,153
                                                            -------------------------------------
Long-term liabilities:
  Long-term debt, net of current portion                              890                     357
  Other long-term liabilities                                         567                     432
                                                            -------------------------------------
    Total liabilities                                               7,254                   3,942
                                                            -------------------------------------
Shareholders' equity:
Series A Convertible Preferred Stock, $0.01 par value                   -                       5
Common Stock, $0.01 par value                                          46                      22
Additional paid-in capital                                         32,946                   9,110
Foreign currency translation                                          (10)                      -
Retained earnings                                                   2,431                     906
                                                            -------------------------------------
    Total shareholders' equity                                     35,413                  10,043
                                                            -------------------------------------
      Total liabilities and shareholders' equity                  $42,667                 $13,985
                                                            =====================================
</TABLE>

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

                                       3
<PAGE>
 
                   TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
 
                                                 FOR THE  THREE                 FOR THE NINE MONTHS
                                             MONTHS ENDED AUGUST 31,              ENDED AUGUST 31,
                                          ------------------------------    -------------------------
                                                1997           1996              1997          1996
                                          ------------------------------    ------------------------- 
<S>                                         <C>            <C>                 <C>            <C>  
Revenues:                                                 
  Products                                    $1,929          $  189           $ 4,654         $1,046
  Services                                     5,579           3,704            11,383          8,571
    Total Revenues                             7,508           3,893            16,037          9,617
                                          ------------------------------    ------------------------- 
Cost of revenues:                                                                               
  Products                                       657             214             1,020            601
  Services                                     3,177           1,816             6,342          4,439
                                          ------------------------------    -------------------------  
    Total cost of revenues                     3,834           2,030             7,362          5,040
                                          ------------------------------    -------------------------  
Gross profit                                   3,674           1,863             8,675          4,577
                                         -------------------------------    -------------------------  
Operating expenses:                                                                             
  Selling and marketing                        1,800             543             3,913          1,594
  Product development                            310             287               946            649
  General and administrative                     851             341             1,988          1,137
                                         -------------------------------    -------------------------   
    Total operating expenses                   2,961           1,171             6,847          3,380
                                         -------------------------------    -------------------------   
Income from operations                           713             692             1,828          1,197
  Interest expense                               (33)            (11)              (62)           (33)
  Other income                                   205               6               686             11
                                         -------------------------------    -------------------------  
Net income before income taxes                   885             687             2,452          1,175
Income tax provision                             347             262               927            449
                                         -------------------------------    -------------------------  
Net income                                    $  538          $  425           $ 1,525         $  726
                                         ===============================    ========================= 
 Earnings per common share and common                      
 share equivalents                             $0.09           $0.09             $0.26          $0.16
                                         ===============================    ========================= 
 Weighted average number of common share                   
 and common equivalents outstanding        6,238,798       4,651,702         5,790,609      4,656,558
                                         ===============================    ========================= 
</TABLE>

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

                                       4
<PAGE>
 
                   TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (AMOUNTS IN THOUSANDS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
 
                                                                                           FOR THE NINE MONTHS ENDED AUGUST 31,
                                                                                          -------------------------------------- 
                                                                                                 1997              1996
                                                                                          -------------------------------------- 
<S>                                                                                       <C>                    <C>
Cash flows provided by (used in) by operating activities                                      $ (3,387)           $1,457  
                                                                                          -------------------------------------- 

Cash flows from investing activities:
  Net purchases of marketable securities                                                        (8,276)                -
  Capital expenditures                                                                            (690)             (112)
  Capitalization of software development costs                                                    (844)             (260)
  Acquisition of new businesses, net of cash acquired                                           (7,331) `              -
                                                                                          -------------------------------------- 
    Net cash used in investing activities                                                      (17,141)             (372)        
                                                                                          -------------------------------------- 
Cash flows from financing activities:
  Payments on revolving credit facility, net                                                        38              (161)
  Payments on note payable                                                                        (105)              (92)
  Payments on capital lease obligations                                                            (37)                -
  Proceeds from issuance of capital stock, net of issuance costs                                21,552                28
                                                                                          -------------------------------------- 
    Net cash provided by (used in) financing activities                                         21,448              (225)
                                                                                          -------------------------------------- 
Effect of exchange rate changes on cash and cash equivalents                                       (10)                -
                                                                                          -------------------------------------- 
Net increase in cash and cash equivalents                                                          910               860
Cash and cash equivalent, beginning of period                                                    8,397                63
                                                                                          -------------------------------------- 
Cash and cash equivalents, end of period                                                         9,307               923
Marketable securities, end of period                                                             8,299                 0
                                                                                          -------------------------------------- 
Cash, cash equivalents and marketable securities, end of period                               $ 17,606            $  923  
                                                                                          ====================================== 
Noncash investing and financing activities:
  Retirement of treasury stock:
    Cash A Common Stock                                                                       $      -            $   14
    Preferred Stock                                                                           $      -            $   54
  Conversion of 500,000 shares Series A Convertible Preferred
  Stock to 500,000 shares of Common Stock                                                     $      5            $    -
  Common Stock issued in connection with acquisition                                          $  1,207            $    -

</TABLE>

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

                                       5
<PAGE>
 
                            TEMPLATE SOFTWARE, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                AUGUST 31, 1997

Note A -- Basis of Presentation

     In the opinion of management, the accompanying unaudited consolidated
financial statements of Template Software, Inc. and subsidiaries (the "Company")
                                                                       -------  
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the Company's consolidated financial position as of August 31,
1997, and the results of operations and cash flows for the periods indicated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted.  It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the nine months ended August 31, 1997
are not necessarily indicative of the operating results to be expected for the
full year.  Earnings per common share and common share equivalents are presented
on the face of the Statement of Operations and represent primary earnings per
share. Dual presentation of primary and fully diluted earnings per share has not
been made because the differences are insignificant.

NOTE B - ACQUISITIONS

KRYSTAL INGENIERIE S.A.

     On March 4, 1997, the Company consummated its acquisition of all of the
issued and outstanding capital stock of Krystal Ingenierie S.A. ("Krystal"), a
                                                                  -------     
corporation organized under the laws of the Republic of France.  The Krystal
acquisition was consummated pursuant to a Stock Purchase Agreement dated as of
February 19, 1997, with Alain Kuhner ("Kuhner"), whereby the Company agreed to :
                                       ------                                   
(1) exchange an aggregate of 48,064 shares of the Company's common stock (the
"Common Stock") for 2,500 shares of Krystal held by Kuhner, representing all of
-------------                                                                  
the issued and outstanding capital stock of Krystal; and (2) exchange an
aggregate of 45,686 additional shares of the Company's Common Stock for certain
indebtedness of Krystal owed to Kuhner in the aggregate amount of FF 3,914,331.
($677,179 at March 4, 1997).  Concurrently with the closing of the Krystal
acquisition, Krystal's name was formally changed to Template Software S.A.  The
acquisition was accounted for as a purchase which totaled $1,207,031 excluding
$1,045,067 of assumed liabilities.  The excess of the purchase price over the
fair value of the net tangible assets acquired of $2,043,451 was allocated to
goodwill and will be amortized over its estimated useful life of 10 years.

MILESTONE SOFTWARE GmbH AND MILESTONE SOFTWARE G.m.b.H.

     On June 27, 1997, the Company acquired all of the issued and outstanding
equity interests of milestone software GmbH, a German limited liability company
("Milestone"), which included 34% of the issued and outstanding equity interests
  ---------                                                                     
of milestone software, G.m.b.H., an Austrian corporation ("Milestone-Austria"),
                                                           -----------------   
from Milestone's three owners, Klaus Dieter Jansen ("Jansen"), Heinz-Dieter
                                                     ------                
Dietrich ("Dietrich") and NeSBIC III, C.V., for an aggregate cash purchase price
           --------                                                             
of DM 12,000,000 ($6,970,800 at June 27, 1997).  An additional 10% interest of
Milestone-Austria was acquired from Dietrich and Jansen in exchange for 90,000
shares of the Company's Common Stock.  The acquisition which totaled $8,564,236
excluding $4,152,868 of assumed liabilities was accounted for as a purchase.
The excess of the purchase price over the fair value of the net tangible assets
acquired of $10,377,843 was allocated to goodwill and is expected to be
amortized over its estimated useful life of 15 years.  The

                                       6
<PAGE>
 
final allocation of the purchase price is subject to the completion of
management's due diligence, however, that allocation is not expected to differ
materially from the initial allocation.

     The acquisition agreement also provides for the Company to issue additional
shares of Common Stock with a market value of $1,014,000 to Dietrich and Jansen
at various dates if certain profit objectives are attained over the 17 month
period commencing July 1, 1997.  If the profit objectives are attained, the
number of shares that will be issued will be based upon the lowest closing
market price per share on the five days surrounding the issue dates.

NOTE C - NEW ACCOUNTING PRONOUNCEMENTS

     The Financial Accounting Standards Board has issued Statement of Financial
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123").  SFAS
                                                               --------         
123 allows companies which grant stock options to choose to either continue the
current accounting treatment under Accounting Principles Bulletin Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), or adopt a new set of
                                                 ------                         
fair value accounting rules for recognizing compensation expense related to
stock awards.  Companies continuing under APB 25 must measure option values and
disclose the pro forma effects that the new fair value accounting would have on
earnings, if recorded.  The Company has determined that it will continue the
current accounting treatment under APB 25 and will provide pro forma disclosures
as of November 30, 1997 for the effect the new fair value accounting rule would
have on earnings, if adopted.

     The Financial Accounting Standards Board has also issued Statements of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
                                                               --------         
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS").  SFAS 128 is effective for financial statements for
                     ---                                                       
periods ending after December 15, 1997.  The Company believes that the adoption
of SFAS 128 will not have a material effect on the financial statements.  Had
FAS 128 been effective for the third quarter of 1997, basic EPS would have been
$0.12 and $0.39, respectively, for the three and nine months ended August 31,
1997.  Diluted EPS would have been $0.09 and $0.26, respectively, for the three
and nine months ended August 31, 1997.

NOTE D - INCOME TAXES

     The Company's effective tax rate of 39% for the quarter ended August 31,
1997 was higher than the effective tax rate of 38% for the quarter ended August
31, 1996, primarily as a result of a German tax rate that was higher than the
effective tax rate of the Company prior to the German acquisition.  It is
anticipated that the effective tax rate will increase in the near term as a
result of the acquisition of Milestone.

     The Company's recognized a tax benefit of approximately $1,017,000 from
disqualifying dispositions of stock options for the nine months ended August 31,
1997. The benefit is the difference between the market value of the stock issued
at the time of exercise and the option price tax effected at the Company's
effective tax rate.  This benefit was first applied to federal and state income
taxes payable with the remainder recorded as a deferred tax asset.  In
accordance with APB 25, the tax benefit is credited directly to additional paid
in capital.

                                       7
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                                 OF OPERATIONS.

Results of Operations

     Revenue.  Total Revenue was $7.5 million for the quarter ended August 31,
1997 compared to $3.9 million for the quarter ended August 31, 1996, an increase
of $3.6 million or 92.9%.  Total Revenue for the nine month period ended August
31, 1997 was $16.0 million compared to $9.6 million for the nine month period
ended August 31, 1996, an increase of $6.4 million or 66.8%.  This growth
resulted principally from volume increases in sales of both software-related
services and software licenses due to the Company's shift in emphasis toward
selling complete solutions and additional revenue realized from the
consolidation of two months of operations of the German entities acquired this
quarter.

     Product Revenue was $1.9 million for the quarter ended August 31, 1997
compared to $0.2 million for the quarter ended August 31, 1996, an increase of
$1.7 million or 920.6%.  For the nine month period ended August 31, 1997,
Product Revenue was $4.7 million compared to $1.0 million for the nine month
period ended August 31, 1996, an increase of $3.6 million or 344.9%.  This
increase was primarily attributable to the sale of development and deployment
licenses associated with new contract engagements coupled with an increase in
order size, as well as additional product revenue resulting from the
consolidation of two months of the newly acquired German entities.  Services
Revenue was $5.6 million for the quarter ended August 31, 1997 compared to $3.7
million for the quarter ended August 31, 1996, an increase of $1.9 million or
50.6%.  Services Revenue was $11.4 million for the nine month period ended
August 31, 1997, compared to $8.6 million for the nine month period ended August
31, 1996, an increase of $2.8 million or 32.8%.  This increase for both the
three month period and the nine month period was primarily attributable to the
implementation of larger scale client engagements for complete solutions.
Contracts for complete solutions obtained by the Company through its direct
sales force typically contain a larger service component than those obtained
through the Company's distributors, value added resellers and systems
integrators, as the Company is engaged to develop a customized solution in
addition to providing software products.

     Cost of Revenue.  Total Cost of Revenue consists primarily of salaries and
related benefits for personnel, and also includes an allocated portion of rent,
building services and computer equipment services and expenses.  Total Cost of
Revenue was $3.8 million for the quarter ended August 31, 1997 compared to $2.0
million for the quarter ended August 31, 1996, an increase of $1.8 million or
88.9%.  Total Cost of Revenue was $7.4 million for the nine month period ended
August 31, 1997 compared to $5.0 million for the nine month period ended August
31, 1996, an increase of $2.3 million or 46.1%.  This increase was primarily
attributable to additional professional staff hired and or added through
acquisition to perform the increased volume of software services.  Total Cost of
Revenue was 51.1% of total revenue for the quarter ended August 31, 1997
compared to 52.1% of total revenue for the quarter ended August 31, 1996.  For
the nine month period ended August 31, 1997, total cost of revenue decreased to
45.9% of total revenue compared to 52.4% for the comparable period last year.
This percentage decrease was primarily attributable to the Company's increase in
product revenue with related higher gross margin.

     Cost of Product Revenue was $0.7 million for the quarter ended August 31,
1997 compared to  $0.2 million for the quarter ended August 31, 1996, an
increase of $0.4 million or 207%.  Cost of Product Revenue was $1.0 million for
the nine months ended August 31, 1997 compared to $0.6 million for the same
period last year, an increase of $0.4 million or 69.7%.  The Cost of Product
Revenue increased in the quarter ended August 31, 1997 due to the consolidation
of the Cost of Product Revenue from the 

                                       8
<PAGE>
 
newly acquired German operation where the cost of product revenue consisted
primarily of royalties to third party software vendors which are higher than the
Company's cost of its products. Cost of Services Revenue was $3.2 million for
the quarter ended August 31, 1997 compared to $1.8 million for the quarter ended
August 31, 1996, an increase of $1.4 million or 74.9%. Cost of Services Revenue
was $6.3 million for the nine month period ended August 31, 1997, compared to
$4.4 million for the nine month period ended August 31, 1996, an increase of
$1.9 million or 42.9%. This increase resulted primarily from the cost associated
with staffing the growth in services contracts. Because such staffing is
relatively fixed in the short term, if any of the Company's engagements were to
be terminated on short notice, the Company would be unable to reduce Cost of
Services Revenue commensurate with the associated decrease in Services Revenue.
Any such termination would have a material adverse effect on the Company's
business, operating results and financial condition.

     Selling and Marketing.  Selling and marketing expenses consist primarily of
expenses related to sales and marketing personnel, advertising, promotion, trade
show participation and public relations.  Selling and marketing expenses were
$1.8 million for the quarter ended August 31, 1997 compared to $0.5 million for
the quarter ended August 31, 1996, an increase of $1.3 million or 231.5%.
Selling and marketing expenses were $3.9 million for the nine month period ended
August 31, 1997, compared to $1.6 million for the nine month period ended August
31, 1996, an increase of $2.3 million or 145.5%.  This increase resulted
primarily from the Company's strategic shift toward direct sales, expenditures
related to expanding market awareness of the Company's products and services,
expenditures related to market research relating to potential new industry
templates and the consolidation of two months sales and marketing expenditures
of the newly acquired German entity.  The Company anticipates that selling and
marketing expenses will increase in the near future due to the shift in sales
and marketing strategy.

     Product Development.  Product development expenses were $0.3 million for
the quarter ended August 31, 1997 unchanged from the quarter ended August 31,
1996.  Product development expenses were $0.9 million for the nine month period
ended August 31, 1997, compared to $0.6 million for the nine month period ended
August 31, 1996, an increase of $0.3 million or  45.8%.  This increase resulted
primarily from the development of enhancements to the Company's visual
development tools and Release 8.0 of the Company's Foundation Template.  Product
development expenses in the three-month period ended August 31, 1997 and August
31, 1996, and the nine month periods ended August 31, 1997 and August 31, 1996,
included offsets of $0.05 million, $0.1 million, $0.3 million and $0.3 million,
respectively, as a result of the Company's participation in a Federal Technology
Reinvestment Program.  The offsets generated by this program ended in the third
quarter of 1997.

     General and Administrative.  General and administrative expenses include
costs of corporate services functions including accounting, human resources and
legal services, as well as the corporate executive staff.  General and
administrative expenses were $0.9 million for the quarter ended August 31, 1997
compared to $0.3 million for the quarter ended August 31, 1996 an increase of
$0.5 million or 149.6%.  General and administrative expenses were $2.0 million
for the nine month period ended August 31, 1997, compared to $1.1 million for
the nine month period ended August 31, 1996, an increase of $0.9 million or
74.8%.  This increase is primarily attributable to an increase in corporate
administrative staff and the goodwill amortization for Krystal, the French
subsidiary acquired in March 1997 and Milestone, the German subsidiary acquired
in June 1997.

     Income Tax Provision.  The provision for income taxes was $0.3 for the
quarter ended August 31, 1997 unchanged from  the quarter ended August 31, 1996.
The provision for income taxes for the nine months ended August 31, 1997 was
$0.9 million compared to $0.4 million in the comparable period last year.  This
increase was attributable to the Company's greater pretax profit level in the
three-month 

                                       9
<PAGE>
 
and nine month period ended August 31, 1997. The Company's effective tax rate of
39% for the quarter ended August 31, 1997 was higher than the effective tax rate
of 38% for the quarter ended August 31, 1996, primarily as a result of a German
tax rate that was higher than the effective tax rate of the Company prior to the
German acquisition. The effective tax rate for the nine months ended August 31,
1997 and August 31, 1996 was 38% due to the blending of the European tax rates.
It is anticipated that the effective tax rate will increase in the near term as
a result of the newly acquired German operation.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's overall cash and cash equivalents were $9.3 million at August
31, 1997, which is an increase of approximately $0.9 million from $8.4 million
as of November 30, 1996.  During the three month period ended August 31, 1997,
the Company financed its operations from available working capital.  The
Company's operating activities used cash of $3.4 million for the nine month
period ended August 31, 1997.  During the nine month period ended August 31,
1997, cash flow used by operating activities reflected an increase in accounts
receivable and deferred income tax assets and decreases in accounts payable and
accrued expenses which were partially offset by the net income and an increase
in deferred income.

     Cash used in investing activities totaled $17.1 million during the nine
month period ended August 31, 1997 relating primarily to investment in short-
term, investment grade marketable securities with maturities of less than one
year and the cash outlay for the acquisition of the German entity.

     Cash flow provided from financing activities totaled $21.4 million for the
nine month period ended August 31, 1997 primarily relating to the net proceeds
from the initial public offering of the Company's Common Stock.

     The Company has a line of credit under a Loan and Security Agreement (the
"Loan Agreement") with Signet Bank (the "Bank") in the aggregate principal
---------------                          ----                             
amount of $3.0 million.  As of August 31, 1997, there were no amounts
outstanding under this line of credit.  The Company has been in compliance with
all financial and non-financial covenants of the Loan Agreement.  In addition,
the Company's French subsidiary maintains an unsecured line of credit with
Banque Hervet for 500,000FF for overdraft protection at an interest rate of
8.3%.  As of August 31, 1997, 231,629FF ($38,000) was outstanding under this
line of credit.

     The Company believes its cash balances, cash generated from operations and
borrowings available under its line of credit, will satisfy the Company's
working capital and capital expenditure requirements for at least the next
twelve months.  In the longer term, the Company may require additional sources
of liquidity to fund future growth.  Such sources of liquidity may include
additional equity offerings or debt financings.  There are no assurances that
such sources of financing will be available to the Company and if they are, that
they will be sufficient to meet the Company's liquidity needs at such time.

                          PART II - OTHER INFORMATION

Item 2.    Changes in Securities.

Use of Proceeds

     In the Company's Registration Statement on Form S-1 (Registration No. 
333-17063) effective January 28, 1997, 1,400,000 shares of Common Stock were
registered for the account of the Company 

                                       10
<PAGE>
 
and 700,000 shares of Common Stock were registered for the accounts of selling
security holders with an aggregate offering price of $16.00 per share
registered. The expenses incurred for the Company's account in connection with
the issuance and distribution of the securities were $1,568,000 of underwriting
discounts and commissions and $1,053,371 of other expenses for a total expense
of $2,621,371. The net offering proceeds for the account of the Company were
$19,778,629. From the effective date of the Registration Statement, through the
end date of the period covered by this report, the Company used $7,330,928 to
acquire other businesses, $8,276,293 to purchase temporary investments in
marketable securities and $4,171,408 remains unused as cash and cash
equivalents. There has not been a material change in the use of proceeds
described in the Company's prospectus.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K.

  (a) The following exhibits are filed herewith:

      Exhibit
      Number    Exhibit Title
      ------    -------------
      
      3.1*      Articles of Incorporation
      
      3.2*      By-laws

     11         Statement regarding computation of per share earnings

     27         Financial Data Schedule
______________
*  Incorporated by reference to exhibit of the same number to the Company's
Registration Statement on Form S-1 (Registration No. 333-17063), originally
filed with the Securities and Exchange Commission on November 27, 1996.

  (b)  Reports on Form 8-K

     On July 14, 1997, the Company filed a report on Form 8-K regarding the
acquisition of all of the issued and outstanding equity interests of Milestone,
which included 34% of the issued and outstanding equity interests of Milestone-
Austria, from Milestone's three owners, Jansen, Dietrich and NeSBIC III, C.V.,
for an aggregate cash purchase price of DM 12,000,000.  An additional 10%
interest of Milestone-Austria was acquired from Dietrich and Jansen in exchange
for 90,000 shares of the Company's Common Stock.

     The foregoing information is qualified in its entirety by reference to the
complete text of the Form 8-K filed on July 14, 1997.

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<PAGE>
 
SIGNATURE
---------

     Pursuant to the requirements 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.

Dated:    October 15, 1997        TEMPLATE SOFTWARE, INC.



                              By: /s/ Kimberly E. Osgood
                                  ------------------------
                                 Kimberly E. Osgood
                                 Chief Financial Officer and
                                 Chief Accounting Officer

                                                                                
                                                                                

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