<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 Quarterly Period Ended March 31, 1999


                                       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                      March 31, 1999
     ---------------------                      --------------
     Common Stock, $.01 par value per share        4,990,630 
<PAGE>
 
                            TEMPLATE SOFTWARE, INC.
                                     INDEX
                                     -----
<TABLE>
<CAPTION>
 
<S>                                                                                               <C>
PART I - FINANCIAL INFORMATION                                                                     3
 
ITEM 1. FINANCIAL STATEMENTS                                                                       3
 
CONSOLIDATED BALANCE SHEETS                                                                        3
CONSOLIDATED STATEMENTS OF OPERATIONS                                                              4
CONSOLIDATED STATEMENTS OF CASH FLOWS                                                              6
NOTES TO THE FINANCIAL STATEMENTS                                                                  7
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     8
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                               13
 
PART II - OTHER INFORMATION                                                                       14
ITEM 3.  LEGAL PROCEEDINGS                                                                        14
ITEM 5.  OTHER INFORMATION                                                                        14
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.                                                        14
 
SIGNATURE                                                                                         16
 
</TABLE>

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>
<TABLE>
<CAPTION>

                                                    PART I - FINANCIAL INFORMATION

Item 1.           Financial Statements.

                                               Template Software, Inc. and Subsidiaries
                                                      Consolidated Balance Sheets
                                                        (Amounts in thousands)

                                                           March 31, 1999       December 31, 1998
                                                            (Unaudited)             (Audited)

                                                        --------------------------------------------
<S>                                                       <C>                    <C>    
ASSETS
Current assets:
  Cash and cash equivalents                                           $3,147                $1,831
  Marketable securities                                                7,744                 8,221
  Accounts receivable, net                                            12,581                15,752
  Deferred income taxes                                                2,036                 1,873
  Inventory                                                              371                   358
  Note receivable                                                        538                   500
  Prepaid expenses                                                       843                   732
  Other current assets                                                    81                   109
                                                        --------------------------------------------
    Total current assets                                              27,341                29,376
Property and equipment, net                                            5,310                 5,423
Software development costs, net                                        2,854                 2,601
Goodwill, net                                                         10,084                10,298
Other assets                                                           1,340                 1,367
                                                        ============================================
      Total assets                                                   $46,929               $49,065
                                                        ============================================

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                               $5,718                $6,744
  Current portion of long-term debt                                      377                   451
  Income tax payable                                                      45                    27
  Deferred income                                                      1,041                 1,437
                                                        --------------------------------------------
    Total current liabilities                                          7,181                 8,659
                                                        --------------------------------------------
Long-term liabilities:
  Long-term debt, net of current portion                                  64                    77
  Deferred income taxes                                                  827                   827
  Other long-term liabilities                                            408                   421
                                                        --------------------------------------------
    Total liabilities                                                  8,480                 9,984
                                                        --------------------------------------------

Shareholders' equity:
Common stock                                                              52                    52
Additional paid-in capital                                            36,650                36,619
Deferred compensation                                                  (613)                 (727)
Accumulated other comprehensive income (loss)                          (689)                   154
Retained earnings                                                      3,881                 3,794
Treasury stock                                                         (832)                 (811)
                                                        --------------------------------------------
    Total shareholders' equity                                        38,449                39,081
                                                        --------------------------------------------
                                                        ============================================
      Total liabilities and shareholders' equity                     $46,929               $49,065
                                                        ============================================

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE> 

                                       3
<PAGE>
                   Template Software, Inc. and Subsidiaries
                     Consolidated Statements of Operations
            (Amounts in thousands, except per share and share data)
                                  (Unaudited)

                                             For the Three Months Ended
                                                     March 31,
                                          --------------------------------
                                               1999            1998
                                          -------------------------------
Revenues:
  Products                                      $   2,202      $   1,325
  Services                                         10,261          7,233
                                          -------------------------------
    Total Revenues                                 12,463          8,558
                                          -------------------------------
Cost of revenues:
  Products                                            619            335
  Services                                          7,394          4,484
                                          -------------------------------
    Total cost of revenues                          8,013          4,819
                                          -------------------------------
                                          -------------------------------
Gross profit                                        4,450          3,739
                                          -------------------------------

Operating expenses:
  Selling and marketing                             2,418          2,247
  Product development                                 368            345
  General and administrative                        1,601          1,294
                                          -------------------------------
    Total operating expenses                        4,387          3,886
                                          -------------------------------
Income (loss) from operations                          63          (147)
  Interest income                                      92            152
  Other income                                          3             30
                                          -------------------------------
Net income before income taxes                        158             35
Income tax provision                                   71             54
                                          -------------------------------
Net income (loss)                                $     87      $    (19)
                                          ===============================

Earnings per share - basic                      $    0.02      $    0.00
                                          ===============================
Shares used in computing basic earnings
per share                                       4,982,791      4,864,187
                                          ===============================
Earnings per share - diluted                    $    0.02      $    0.00
                                          ===============================
Shares used in computing diluted
earnings per share                              5,039,671      4,864,187
                                          ===============================

            Consolidated Statements of Comprehensive Income (Loss)
                            (Amounts in thousands)
                                  (Unaudited)

                                             For the Three Months Ended
                                                     March 31,
                                          --------------------------------
                                               1999            1998
                                          -------------------------------
Net income (loss)                                $     87      $    (19)
Foreign currency translation adjustment
                                                    (512)           (90)
Unrealized loss on marketable
  securities, net of taxes                          (331)             --
                                          ===============================
Comprehensive income (loss)                    $    (756)      $   (109)
                                          ===============================

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

<PAGE>
                   Template Software, Inc. and Subsidiaries
                     Consolidated Statements of Cash Flows
                            (Amounts in thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>

                                                                       For the Three Months Ended March 31,
                                                                   -----------------------------------------------
                                                                            1999                  1998
                                                                   ---------------------------------------------
<S>                                                                     <C>                           <C>    

Cash flows provided by operating activities                                       $ 2,338                $  519
                                                                   ---------------------------------------------

Cash flows from investing activities:
  Proceeds from sales and maturities of marketable securities                          --                 3,400
  Purchase of convertible note                                                       (37)
  Capital expenditures and leasehold improvements                                   (317)                 (245)
  Capitalization of software development costs                                      (483)                 (404)
  Issuance of note receivable                                                          --                 (500)
                                                                   ---------------------------------------------
    Net cash (used in) provided by investing activities                             (837)                 2,251
                                                                   ---------------------------------------------

Cash flows from financing activities:
  Revolving credit facility, net                                                     (13)                 (299)
  Note payable, net                                                                  (58)                   225
  Capital lease obligations                                                          (16)                  (15)
   Income tax benefit related to stock options                                          9                   311
   Proceeds from sale of common stock under stock programs                             42                   527
   Purchase of common stock                                                          (20)                    --
                                                                   ---------------------------------------------
     Net cash (used in) provided by financing activities                             (56)                   749
                                                                   ---------------------------------------------
 Effect of exchange rate changes on cash and cash equivalents                       (130)                  (40)
                                                                   ---------------------------------------------
 Net increase in cash and cash equivalents                                          1,316                 3,479
Cash and cash equivalents, beginning of period                                      1,831                 3,425
                                                                   =============================================
Cash and cash equivalents, end of period                                          $ 3,147               $ 6,904
                                                                   =============================================

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>
 
                    Template Software, Inc. and Subsidiaries
                                        
                       Notes to the Financial Statements


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 March 31,
1999 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 Company's 1998 Annual Report on
Form 10-K.  The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the operating results to be expected for the
full year.


Note B  Acquisitions and Strategic Ventures



Precise Connectivity Solutions Ltd.


     On March 30, 1998, the Company entered into a Convertible Note Purchase
Agreement ("Note Agreement") with Precise Connectivity Solutions Ltd.
("Precise"), an Israeli limited corporation, pursuant to which the Company
purchased a Note from Precise for an aggregate purchase price of $500,000 due on
March 30, 1999 with a 9% percent interest rate per annum.  The Note is
convertible at the option of the Company or Precise into that number of fully-
paid, non-assessable shares of Preferred Stock of Precise equal to eight percent
(8%) of the issued and outstanding capital stock of Precise, on a fully-diluted
basis, including such shares of Preferred Stock.

     On March 30, 1999, the Company entered into an agreement with Precise which
modified the payment terms of the Note Agreement to provide for two payments:
$100,000 due no later than April 30, 1999 and the remainder (including all
accrued but unpaid interest) due and payable no later than May 30, 1999.
Additionally, the Company temporarily abstained from exercising its right of
first refusal and conversion option in the Note Agreement unless Precise does
not make the payments in accordance with the payment schedule.


Note C  Recent Accounting Pronouncements


In December 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-9 (SOP 98-9), "Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions".  SOP 98-9 is
effective for all transactions entered into by the Company in fiscal year 1999.
The adopting of this statement is not expected to have a material impact on the
Company's operating results, financial position or cash flows.



Note D - Income Taxes


     The Company's effective tax rate of 45% for the quarter ended March 31,
1999 decreased from 154.7% for the quarter ended March 31, 1998.  The decrease
in the provision was primarily attributable to the increase in taxable profit
while permanent differences remain constant.  In addition, the Company
anticipates the effective tax rate for the year will be 45%.

                                       6
<PAGE>
 
Note E  Earnings Per Share



     Earnings per share is presented in accordance with SFAS No. 128, Earnings
per Share.  Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding during the period.  Diluted earnings per share is computed by
dividing net income available to common shareholders by the weighted average of
common shares outstanding after giving effect to all dilutive potential common
shares that were outstanding during the period.


     The following table reconciles the weighted average number of common shares
outstanding during each period for basic earnings per share with the comparable
amount for diluted earnings per share.

 
                                                  Three Months Ended
                                                 --------------------
                                                      March 31,
                                                      ---------
                                                     1999       1998
                                                ---------  ---------
 
Weighted average shares outstanding  basic      4,982,791  4,864,187
Potential common shares                            56,880         --
                                                ---------  ---------
Weighted average shares outstanding  diluted    5,039,671  4,864,187
                                                =========  =========
 
     The Company did not have any dilutive common shares during the three months
ended March 31, 1998.  Net income (loss) reported was not adjusted for the
computation of basic or diluted earnings per share.


Item 2.                                  Management's Discussion and Analysis of
     Financial Condition and Results of Operations.


Results of Operations



     Revenue.  Total Revenue was $12.5 million for the quarter ended March 31,
1999 compared to $8.6 million for the quarter ended March 31, 1998, an increase
of $3.9 million or 45.6%.  This growth resulted principally from volume
increases in sales of software-related services for customers such as the
National Imagery and Mapping Agency ("NIMA") and BULL.


     Product Revenue was $2.2 million for the quarter ended March 31, 1999
compared to $1.3 million for the quarter ended March 31, 1998, an increase of
$0.9 million or 66.2%.  This increase was primarily attributable to product
sales in connection with the NIMA and Bull engagements.  Services Revenue was
$10.3 million for the quarter ended March 31, 1999 compared to $7.2 million for
the quarter ended March 31, 1998, an increase of $3.0 million or 41.9%. This
increase was primarily attributable to the implementation of the NIMA and Bull
software solutions.

     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 $8.0 million for the quarter ended March 31, 1999 compared to $4.8
million for the quarter ended March 31, 1998, an increase of $3.2 million or
66.3%. This increase was primarily attributable to additional professional staff
hired to perform the increased volume of software services as described above.
Total Cost of Revenue was 64.3% of total revenue for the quarter ended March 31,
1999 compared to 56.3% of total revenue for the quarter ended March 31, 1998.
This percentage increase was primarily attributable to the Company's
implementation of the 

                                       7
<PAGE>
 
NIMA service engagement with third party subcontractors and the integration of a
third party software product with the Company's software products.

     Cost of Product Revenue was $0.6 million for the quarter ended March 31,
1999 compared to $0.3 million for the quarter ended March 31, 1998, an increase
of $0.3 million or 84.8%.  This increase is primarily attributable to an
increase in software amortization associated with the general availability
release of EIT and an increase of royalties associated with an increase in third
party product resales.  Cost of Services Revenue was $7.4 million for the
quarter ended March 31, 1999 compared to $4.5 million for the quarter ended
March 31, 1998, an increase of $2.9 million or 64.9%. This increase resulted
primarily from the cost associated with staffing the growth in services
contracts.  Service Revenue gross margins have decreased due to the use of third
party subcontractors and the provision and integration of a third party software
product on the NIMA contract.  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
because staffing is relatively fixed in the short term.  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
$2.4 million for the quarter ended March 31, 1999 compared to $2.2 million for
the quarter ended March 31, 1998, an increase of $0.2 million or 7.6%.  These
increases resulted primarily from additional expenditures targeted towards
increasing market awareness such as public relations and tradeshows.

     Product Development.  Product Development expenses were $0.4 million for
the quarter ended March 31, 1999, compared to $0.3 million for the quarter ended
March 31, 1998, an increase of $0.1 million or 6.7%.  This increase resulted
primarily from the development of enhancements to the Company's Enterprise
Integration Template(TM) (EIT).

     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 $1.6 million for the quarter ended March 31, 1999
compared to $1.3 million for the quarter ended March 31, 1998 an increase of
$0.3 million or 23.7%. This increase is primarily attributable to increases in
reserves and professional fees.

     Income Tax Provision.  The Income Tax Provision was $0.1 million for the
quarter ended March 31, 1999 unchanged from the quarter ended March 31, 1998.
The Company's effective tax rate of 45% for the quarter ended March 31, 1999 was
a decrease from 154.7% for the three months ended March 31, 1998.  The decrease
in the provision was primarily attributable to the increase in taxable profit
while permanent differences remain constant.  In addition, the Company
anticipates the effective tax rate for the year will be 45%.

                                       8
<PAGE>
 
Liquidity and Capital Resources



     The Company's overall cash and cash equivalents were $3.1 million at March
31, 1999, which is an increase of approximately $1.3 million from $1.8 million
as of December 31, 1998.  The Company's operating activities provided cash of
$2.3 million for the three month period ended March 31, 1999.  During the three
month period ended March 31, 1999, cash flow provided by operating activities
reflected the net income, depreciation and amortization and decrease in accounts
receivable, partially offset by the deferred tax provision and decreases in
accounts payable and accrued liabilities.


     Cash used in investing activities totaled $0.8 million during the three
month period ended March 31, 1999.  During the three months ended March 31, 1999
the Company invested $0.3 million in property and equipment and capitalized $0.5
million in software development costs.

     Cash flow used in financing activities totaled $0.1 million for the three
month period ended March 31, 1999 primarily relating payments on financing
obligations.

     The Company has a line of credit under a Loan and Security Agreement (the
                                                                              
"Loan Agreement") with First Union National Bank , previously Signet Bank, (the
---------------                                                                
"Bank") in the aggregate principal amount of $3.0 million.  As of March 31,
 ----                                                                      
1999, 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. The Loan Agreement bears interest at the LIBOR Market Index Rate
(for the United States Dollar quoted by the British Bankers Association) plus
1.85%.  On August 3, 1998, the Bank issued a letter of credit on the Company's
behalf as a performance guarantee for a German customer in the amount of DEM
1,700,000 (approximately $1.0 million). The Company's French subsidiary
maintains with Banque Hervet an unsecured line of credit for 500,000FF plus an
additional 500,000FF of credit collateralized by 70% of accounts receivable
(approximately $180,000 in aggregate) at an interest rate of 8.3%.  The
Company's Austrian subsidiary maintains a line of credit with Raiffeisen Bank
for 1,000,000ATS (approximately $85,000), collateralized by 100% of accounts
receivable at an interest rate of 5%.  As of March 31, 1999, 856,046FF
(approximately $140,563) was outstanding under the French line of credit and no
amounts were outstanding under the Austrian 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.


Impact of Year 2000 Issue


     The "Year 2000 Issue" is the result of computer programs that were written
using two digits rather than four to define the applicable year.  If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the Year 1900 rather than the
Year 2000.  This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.

     Several of the Company's systems have been confirmed as Year 2000
compliant.  However, the Company is conducting a Year 2000 compliance program to
identify and correct any non-compliant 

                                       9
<PAGE>
 
software or systems that would cause a significant detrimental effect on the
Company. This program is expected to be complete by August 31, 1999. The Company
has identified its Year 2000 risk in four categories: internal administrative
software; internal operational software and embedded chip technology; external
noncompliance by customers and suppliers; and Company products.

     INTERNAL ADMINISTRATIVE SOFTWARE.  All of the Company's internal
administrative software is "off-the-shelf' commercially available software.  The
Company is currently gathering data to assess the impact of the Year 2000 on its
administrative systems such as the accounting and human resources systems.  The
Company's main domestic accounting system has been determined to be non-
compliant and will be replaced with the compliant version of the same software
or, schedule permitting, replaced with new software.  The estimated cost of such
replacement is between $100,000 and $300,000.  The Company expects to be in full
compliance with its internal administrative financial systems before December
31, 1999.  However, if due to unforeseen circumstances, the implementation is
not completed on a timely basis, the Year 2000 could have a material impact on
the operations of the Company.  In the event the Company assesses some risk that
a non-compliant system cannot be implemented before Year 2000, the Company will
develop contingency plans accordingly.

     INTERNAL OPERATIONS SOFTWARE AND EMBEDDED CHIP TECHNOLOGY.  The Company is
currently gathering data to assess the impact of the Year 2000 on its
operational systems such as production systems and communication systems, with
Year 2000 compliance scheduled for August 31, 1999.  The Company believes it can
achieve compliance in this timeframe because all systems involved were bought as
commercial packages and can be replaced by alternatives in short timeframe.  The
Company does not, at this time, have sufficient data to estimate the cost of
achieving Year 2000 compliance for its operational systems. While the Company
does not believe there is any material non-compliance in the production or
communication systems, the Company is in the information-gathering phase.

     EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company is in the
process of identifying and contacting its critical suppliers, service providers
and contractors to determine the extent to which the Company's interface systems
are vulnerable to those third parties' failure to remedy their own Year 2000
issues.  It is expected that full identification will be completed by June 15,
1999.  To the extent that responses to Year 2000 readiness are unsatisfactory,
the Company intends to change suppliers, service providers or contractors to
those who have demonstrated Year 2000 readiness but cannot be assured that it
will be successful in finding such alternative suppliers, service providers and
contractors.  The Company does not currently have any formal information
concerning the Year 2000 compliance status of its customers but has received
indications that most of its customers are working on Year 2000 compliance.  In
the event that any of the Company's significant customers and suppliers do not
successfully and timely achieve Year 2000 compliance, and the Company is unable
to replace them with new customers or alternate suppliers, the Company's
business or operations could be adversely affected.

     COMPANY PRODUCTS.  The Company provides its customers with licensed
software products that are manufactured and developed internally and licensed
software products that are obtained from third party software vendors and
resold.  The following compliance statement covers the Company's internally
produced software products and is provided to the general public on the
Company's website.

                         Year 2000 Compliance Statement
                                        
     The Company recognizes that most customers use Company software products in
business-critical 

                                       10
<PAGE>
 
applications and that customers want to know if its products are "Year 2000
Compliant". The compliance statements below cover the Company's software
products: Foundation Template (including the SNAP Template, Web Component,
Geographic Mapping Component and Process Monitoring Component), Workflow
Template ("WFT"), System Management Template ("SMT") and the Enterprise
Integration Template ("EIT").

Definition:

     There is no single definition of the term "Year 2000 Compliant" that is
generally accepted in the industry.   The Company has created the definition
below which we believe meets the letter and the spirit of a notice of compliance
that meets our customer's requirements.

     A software product is "Year 2000 Compliant" when:  (1) the software product
itself does not fail at or near January 1, 2000 and (2) the software product
provides documented time and date facilities that allow developers to build
software that does not fail at or near January 1, 2000.  The phrase at or near
January 1, 2000 specifically includes treating the Year 2000 as a leap year.

Compliance Statements:

     The Foundation Template (including the SNAP Template, Web Component,
Geographic Mapping Component and Process Monitoring Component) provided by the
Company is Year 2000 Compliant.

     The Workflow Template ("WFT") provided by the Company is Year 2000
Compliant.

     The Systems Management Template ("SMT") provided by the Company is Year
2000 Compliant.

     The Enterprise Integration Template ("EIT") provided by the Company is Year
2000 Compliant.

How Compliance is Achieved:

     The Foundation Template, WFT, SMT and EIT meet the first criterion because
they employ a single module to obtain or provide time and date information.
This module has been extensively tested in many product development cycles and
in many customer solutions.  It handles the Year 2000 as a leap year.

     The Foundation Template, WFT, SMT and EIT meet the second criterion because
they use a common data structure for time and date information.  All time
requests start by getting the operating system time, then developers use one
function to convert operating system time to a single portable SNAP environment
data structure.  Developers use this data structure in applications to obtain
time and date information.   All time and date information is supplied as
integer values.  To provide a portable data structure the conversion algorithm
is different for different operating system environments.  The integer value
returned for `year' is a number representing the number of years since 1900.
The year value can be very large (over 10,000).  The integer value will
increment continuously at the turn of the century and beyond.  The algorithm
used to determine the current year (1900 + year) remains constant before and
after the turn of the century.

     When using Company products that are Year 2000 Compliant it is still
possible for application 

                                       11
<PAGE>
 
developers to introduce code that will make the overall application non-
compliant.

                 End of Company Year 2000 Compliance Statement
                                        
     The Company is in the process of contacting each third party software
vendor whose software products the Company resells regarding Year 2000
compliance of those products.  It is expected that this investigation will be
completed by June 15, 1999 .  In all cases the third party software vendor's
license agreement is passed on to the Customer and the Company is not a party
thereto.  The Company intends to discontinue reselling any third party software
product that is deemed to be Year 2000 non-compliant as the result of this
investigation.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks.  Though the Company faces and manages
other types of risks, such as credit and liquidity risks, the Company's market
risk arises primarily from risks inherent in currency rate movements and from
risk inherent in the Company's marketable securities.  The Company regularly
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures.

     A substantial portion of the Company's revenues are generated from
international operations.  Revenues from foreign subsidiaries and export sales
accounted for 49.0% and 51.9% of the Company's total revenues in fiscal years
1997 and 1998, respectively, or $12.3 million and $21.2 million, respectively.
As a result, the Company is subject to numerous international risks.  These
risks include unexpected changes in regulatory requirements, export limitations
on encryption technologies, tariffs and other trade barriers, political and
economic instability in foreign markets, difficulty in the staffing, management
and integration of foreign operations, longer payment cycles, greater difficulty
in accounts receivable collection, currency fluctuations and potentially adverse
tax consequences.  The uncertainty of the monetary exchange values has caused,
and may in the future cause, some foreign customers to delay new orders or delay
payment for existing orders.  These factors may, in the future, contribute to
fluctuations in the Company's financial condition and results of operations.
The Company believes that the Company's currency exchange risk is mitigated
somewhat by the fact that the Company conducts operations from international as
well as domestic locations, allowing it to minimize the impact of any currency
movements by, for example, paying its German debtors in German deutsche marks.
Although the Company's results of operations have not been materially adversely
affected to date as a result of currency fluctuations, the long-term impact of
currency fluctuations, including any possible effect on the business outlook in
other developing countries, cannot be predicted.

     The fair value of the Company's investments in marketable securities at
March 31, 1999 was $7.7 million.  The Company's investment policy is to manage
its marketable securities portfolio to preserve principal and liquidity while
maximizing the return on the investment portfolio through the full investment of
available funds.  The Company diversifies the marketable securities portfolio by
investing primarily in multiple types of investment-grade securities.  The
Company's marketable securities portfolio is invested primarily in short-term
securities with at least an investment grade rating to minimize interest rate
and credit risk as well as to provide for an immediate source of funds.  The
Company is aware that it has gross unrealized losses of approximately $731,000
from certain of its longer-term marketable securities, and there can be no
assurance that the Company will be able to recoup these losses if realized.
Although changes in interest rates may affect the fair value of the marketable
securities portfolio and cause unrealized gains or losses, such gains or losses
would not be realized 

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<PAGE>
 
unless the investments are liquidated.

                          PART II - OTHER INFORMATION

Item 3.  Legal Proceedings


For a description of certain legal proceedings affecting the Company, see the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File
No. 0-21921).  There have been no subsequent material developments in such legal
proceedings since such report was filed.

Item 5. Other Information.

Changes in Management

On April 29, 1999, the Company announced the appointment of Peter Russo as
Executive Vice President and Chief Financial Officer.  Kimberly Osgood, who
previously served as Chief Financial Officer, will continue with the Company and
support Mr. Russo as Vice President of Finance and Administration upon
commencement of Mr. Russo's employment.

On April 30, 1999, the Company announced that its President and Chief Executive
Officer, E. Linwood Pearce, requested that the Company's Board of Directors to
begin a search for a new Chief Executive Officer.  Mr. Pearce cited personal
reasons for his request.  To support Mr. Pearce's decision, Joseph Fox, Chairman
of the Company's Board of Directors, will serve as Co-Chief Executive Officer
with Mr. Pearce during the period in which the Company searches for a new Chief
Executive Officer.  Mr. Pearce will remain on the Company's Board of Directors.

Item 6.      Exhibits and Reports on Form 8-K.


  (a) The following exhibits are filed herewith:


          Exhibit

          Number           Exhibit Title
          ------           -------------



          10.1      Agreement, dated March 30, 1999, by and between Template
                    Software, Inc. and PCS Precise Connectivity Solutions Ltd.
                    (see agreement for omitted schedules and exhibits).

          10.2      Employment Agreement, dated as of April 30, 1999, between
                    Template Software, Inc. and E. Linwood Pearce.

          10.3      Employment Agreement, dated as of April 27, 1999, between
                    Template Software, Inc. and Peter Russo.


          27.1      Financial Data Schedule for the three month period ended
                    March 31, 1999.


          27.2      Restated Financial Data Schedule for the three month period
                    ended March 31, 1998.


______________
(b)  Reports on Form 8-K

     During the fiscal quarter ended March 31, 1999, the Company did not file
any reports on Form 8-K.

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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:  May 14, 1999          TEMPLATE SOFTWARE, INC.



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

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