<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 June 30, 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                         August 10, 1999
        ---------------------                         ---------------
Common Stock, $.01 par value per share                   4,896,330
<PAGE>

                            TEMPLATE SOFTWARE, INC.

                                     INDEX
                                     -----

<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S>                                                                          <C>
Item 1.  Financial Statements.                                                3

Consolidated Balance Sheets                                                   3

Consolidated Statements of Operations                                         4

Consolidated Statements of Comprehensive Income (Loss)                        4

Template Software, Inc. and Subsidiaries                                      5

Consolidated Statements of Cash Flows                                         5

Notes to the Financial Statements                                             6

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations.                                 7

Item 3.  Quantitative and Qualitative Disclosures About Market Risk          12

PART II - OTHER INFORMATION                                                  13

Item 1.  Legal Proceedings                                                   13

Item 4.  Submission of Matters to a Vote of Security Holders                 14

Item 5.  Other Information.                                                  15

Item 6.  Exhibits and Reports on Form 8-K.                                   15

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>

                        PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements.

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

<TABLE>
<CAPTION>
                                                    June 30, 1999     December 31, 1998
                                                     (Unaudited)          (Audited)
                                                    -----------------------------------
ASSETS
Current assets:
<S>                                                    <C>                  <C>
  Cash and cash equivalents                            $ 1,163              $ 1,831
  Marketable securities                                  6,265                8,221
  Accounts receivable, net                              12,503               15,752
  Deferred income taxes                                  3,556                1,873
  Note receivable                                           --                  500
  Prepaid expenses                                       1,196                  732
  Other current assets                                      72                  486
                                                       -------              -------
    Total current assets                                24,755               29,395
Property and equipment, net                              5,124                5,423
Software development costs, net                          3,087                2,601
Goodwill, net                                            8,837               10,298
Other assets                                             1,539                1,367
                                                       -------              -------
      Total assets                                     $43,342              $49,084
                                                       =======              =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                $ 6,498              $ 6,791
  Current portion of long-term debt                        224                  451
  Deferred income                                          863                1,437
                                                       -------              -------
    Total current liabilities                            7,585                8,679
                                                       -------              -------
Long-term liabilities:
  Long-term debt, net of current portion                   116                   76
  Deferred income taxes                                  1,119                  827
  Other long-term liabilities                              445                  421
                                                       -------              -------
    Total liabilities                                    9,265               10,003
                                                       -------              -------

Shareholders' equity:
Common stock                                                52                   52
Additional paid-in capital                              36,607               36,619
Deferred compensation                                     (453)                (727)
Accumulated other comprehensive income (loss)           (1,102)                 154
Retained earnings                                          130                3,794
Treasury stock                                          (1,157)                (811)
                                                       -------              -------
    Total shareholders' equity                          34,077               39,081
                                                       -------              -------
      Total liabilities and shareholders' equity       $43,342              $49,084
                                                       =======              =======
</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 and share data)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                               For the Three Months                  For the Six Months
                                                   Ended June 30,                       Ended June 30,
                                       --------------------------------     --------------------------------
                                               1999              1998             1999                1998
                                       --------------------------------     --------------------------------
<S>                                      <C>                 <C>              <C>                 <C>
Revenues:
  Products                               $    1,195          $    2,568       $    3,397          $    3,893
  Services                                    8,623               7,680           18,884              14,913
                                         ----------          ----------       ----------          ----------
    Total Revenues                            9,818              10,248           22,281              18,806
                                         ----------          ----------       ----------          ----------
Cost of revenues:
  Products                                      464                 418            1,083                 753
  Services                                    7,241               4,796           14,635               9,280
                                         ----------          ----------       ----------          ----------
    Total cost of revenues                    7,705               5,214           15,718              10,033
                                         ----------          ----------       ----------          ----------
Gross profit                                  2,113               5,034            6,563               8,773
                                         ----------          ----------       ----------          ----------

Operating expenses:
  Selling and marketing                       2,661               2,561            5,079               4,808
  Product development                           543                 322              911                 667
  General and administrative                  4,046               1,516            5,647               2,810
                                         ----------          ----------       ----------          ----------
    Total operating expenses                  7,250               4,399           11,637               8,285
                                         ----------          ----------       ----------          ----------
Income (loss) from operations                (5,137)                635           (5,074)                488
  Interest expense                               81                 171              173                 323
  Other income                                   (4)                129               (1)                159
                                         ----------          ----------       ----------          ----------
Net income (loss) before income taxes        (5,060)                935           (4,902)                970
Income tax provision (benefit)               (1,309)                296           (1,238)                350
                                         ----------          ----------       ----------          ----------
Net income (loss)                        $   (3,751)         $      639       $   (3,664)         $      620
                                         ==========          ==========       ==========          ==========
Earnings (loss) per share - basic            $(0.75)              $0.13           $(0.74)              $0.12
                                         ==========          ==========       ==========          ==========
Shares used in computing basic
 earnings (loss) per share                4,968,866           5,081,191        4,976,030           4,975,739
                                         ==========          ==========       ==========          ==========
Earnings (loss) per share - diluted          $(0.75)              $0.11           $(0.74)              $0.11
                                         ==========          ==========       ==========          ==========
Shares used in computing diluted
 earnings (loss) per share                4,968,866           5,870,448        4,976,030           5,880,690
                                         ==========          ==========       ==========          ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                               For the Three Months                  For the Six Months
                                                   Ended June 30,                       Ended June 30,
                                         ------------------------------       ------------------------------
                                               1999              1998             1999                1998
                                         ------------------------------       ------------------------------
<S>                                      <C>                 <C>              <C>                 <C>
Net income (loss)                        $   (3,751)         $      639       $   (3,664)         $      620

Foreign currency
 translation adjustment                        (245)                 32             (757)                (58)

Unrealized loss on marketable
 securities, net of taxes                      (168)                 --             (499)                 --
                                         ----------          ----------       ----------          ----------
Comprehensive income (loss)              $   (4,164)         $      671       $   (4,920)         $      562
                                         ==========          ==========       ==========          ==========
</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 Six Months Ended June 30,
                                                                     ---------------------------------
                                                                           1999            1998
                                                                     ---------------------------------
<S>                                                                     <C>             <C>
Cash flows used in operating activities                                 $    (296)      $  (1,152)
                                                                        ---------       ---------

Cash flows from investing activities:
  Proceeds from sales and maturities of marketable securities               1,265           8,400
  Purchase of convertible note                                                 --            (500)
  Proceeds from note receivable                                               500              --
  Capital expenditures and leasehold improvements                            (533)         (2,631)
  Capitalization of software development costs                               (945)           (801)
  Acquisition costs, net of cash acquired                                      --             (57)
                                                                        ---------       ---------
    Net cash provided by investing activities                                 287           4,411
                                                                        ---------       ---------

Cash flows from financing activities:
  Revolving credit facility, net                                             (155)             65
  Note payable, net                                                            --             169
  Capital lease obligations                                                   (30)            (13)
  Income tax benefit related to stock options                                   9             602
  Proceeds from sale of common stock under stock programs                      79             812
  Purchase of common stock                                                   (346)             --
                                                                        ---------       ---------
    Net cash provided by (used in) financing activities                      (443)          1,635
                                                                        ---------       ---------
Effect of exchange rate changes on cash and cash equivalents                 (216)            (71)
                                                                        ---------       ---------
Net increase (decrease) in cash and cash equivalents                         (668)          4,823
Cash and cash equivalents, beginning of period                              1,831           3,425
                                                                        ---------       ---------
Cash and cash equivalents, end of period                                $   1,163       $   8,248
                                                                        =========       =========
</TABLE>

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

                                       5
<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 June 30,
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 six months ended June 30, 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. 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. On April 26, 1999, Precise repaid
$106,721 of the Note to the Company, and on May 27, 1999, Precise repaid all
remaining amounts outstanding under the Note.

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." The
provisions of this SOP that extend the deferral of the application of certain
passages of SOP 97-2 are effective December 15, 1998. All other provisions of
this SOP are effective for transactions entered into in fiscal years beginning
after March 15, 1999. Earlier adoption is permitted as of the beginning of
fiscal years or interim periods for which financial statements or information
have not been issued. Retroactive application of the provisions of this SOP are
prohibited. The adoption of SOP 98-9 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 26% for the quarter ended June 30, 1999
decreased from 32% for the quarter ended June 30, 1998. The Company's effective
tax rate of 25% for the six month period ended June 30, 1999 decreased from 36%
for the six month period ended June 30, 1998. These decreases in effective tax
rates are primarily attributable to the lower tax rates applicable to losses in
foreign jurisdictions, the effect of the permanent differences relative to the
Company's profit/loss and the establishment of valuation allowances for deferred
tax assets attributable to net operating losses.

                                       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.

<TABLE>
<CAPTION>
                                                  Three Months Ended     Six Months Ended
                                                 --------------------  --------------------
                                                       June 30,              June 30,
                                                 --------------------  --------------------
                                                   1999       1998       1999       1998
                                                 ---------  ---------  ---------  ---------
<S>                                              <C>        <C>        <C>        <C>
Weighted average shares outstanding - basic      4,968,866  5,081,191  4,976,030  4,975,739
Potential common shares                                 --    789,257         --    904,951
                                                 ---------  ---------  ---------  ---------
Weighted average shares outstanding - diluted    4,968,866  5,870,448  4,976,030  5,880,690
                                                 =========  =========  =========  =========
</TABLE>

     The Company did not have any dilutive common shares during the three and
six month periods ended June 30, 1999. 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 $9.8 million for the quarter ended June 30, 1999
compared to $10.2 million for the quarter ended June 30, 1998, a decrease of
$0.4 million or 4.2%. This decrease was primarily attributable to a decrease in
product revenue in Europe. Total Revenue for the six month period ended June 30,
1999 was $22.3 million compared to $18.8 million for the six month period ended
June 30, 1998, an increase of $3.5 million or 18.5%. 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 $1.2 million for the quarter ended June 30, 1999
compared to $2.6 million for the quarter ended June 30, 1998, a decrease of $1.4
million or 53.5%. For the six month period ended June 30, 1999, Product Revenue
was $3.4 million compared to $3.9 million for the six month period ended June
30, 1998, a decrease of $0.5 million or 12.7%. This decrease was primarily
attributable to the decrease in product revenue in Europe. The Company believes
that penetration into the German enterprise integration market has not occurred
primarily because German companies are spending their information technology
budgets on Year 2000 remediations and SAP implementations. The Company has
realigned its sales strategy in Germany to penetrate the market with lighter
products (i.e., products that have less functionality and complexities) that are
related to the enterprise application integration market. As such, the Company
has chosen to resell Vision Jade and Visual Edge in an effort to accustom the
German customer base to the Company's products and then penetrate that market
with the Company's other products. Services Revenue was $8.6 million for the
quarter ended June 30, 1999 compared to $7.7 million for the quarter ended June
30, 1998, an increase of $0.9 million or 12.3%. Services Revenue was $18.9
million for the six month period ended June 30, 1999, compared to $14.9 million
for the six month period ended June 30, 1998, an increase of $4.0 million or
26.6%. This

                                       7
<PAGE>

increase was primarily attributable to the continued 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 $7.7 million for the quarter ended June 30, 1999 compared to $5.2
million for the quarter ended June 30, 1998, an increase of $2.5 million or
47.8%. Total cost of revenue was $15.7 million for the six month period ended
June 30, 1999 compared to $10.0 million for the six month period ended June 30,
1998, an increase of $5.7 million or 56.7%. This increase was primarily
attributable to additional professional staff hired and added through
acquisition to perform the increased volume of software services. Total Cost of
Revenue was 78.5% of total revenue for the quarter ended June 30, 1999 compared
to 50.9% of total revenue for the quarter ended June 30, 1998. For the six month
period ended June 30, 1999, total cost of revenue was 70.5% of total revenue for
the six months ended June 30, 1999 compared to 53.3% for the comparable period
during 1998. This percentage increase was partially attributable to the
Company's implementation of the NIMA service engagement with third party
subcontractors and the integration of a third party software product with the
Company's software products. Additionally, certain contracts in Germany incurred
very low margins and technical personnel trained in the Company's technology in
France and Germany were under-utilized. As a result of these issues, the Company
implemented a reduction in force in Europe, primarily Germany, during the
quarter in order to more closely align the Company's European cost structure
with its related revenue. Additionally as a result of these issues, the Company
initiated an internal quality control review process for contracts and project
management in Germany in an effort to improve contract margins.

     Cost of Product Revenue was $0.5 million for the quarter ended June 30,
1999 compared to $0.4 million for the quarter ended June 30, 1998, an increase
of $0.1 million or 11.0%. Cost of Product Revenue was $1.1 million for the six
months ended June 30, 1999 compared to $0.8 million for the quarter ended June
30, 1998, an increase of $0.3 million or 43.8%. The Cost of Product Revenue
increased in the three month and six month periods ended June 30, 1999 primarily
due to an increase in software amortization associated with the general
availability release of EIT. Cost of Services Revenue was $7.2 million for the
quarter ended June 30, 1999 compared to $4.8 million for the quarter ended June
30, 1998, an increase of $2.4 million or 51.0%. Cost of Services Revenue was
$14.6 million for the six month period ended June 30, 1999, compared to $9.3
million for the six month period ended June 30, 1998, an increase of $5.3
million or 57.7%. This increase resulted primarily from the cost associated with
staffing the growth in services contracts. The Company believes that Service
Revenue gross margins have decreased due to the use of third party
subcontractors, the provision and integration of a third party software product
on the NIMA contract and the low service margins and under-utilization of the
technical staff in Germany. 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
$2.7 million for the quarter ended June 30, 1999 compared to $2.6 million for
the quarter ended June 30, 1998, an increase of $0.1 million or 3.9%. Selling
and marketing expenses were $5.1 million for the six month period ended June 30,
1999, compared to $4.8 million for the six month period ended June 30, 1998, an
increase of $0.3 million or 5.6%. These increases resulted primarily from
additional expenditures targeted towards increasing market awareness including
public relations activities and tradeshows. The Company is hiring additional
sales personnel primarily in the United States and anticipates its selling and
marketing expenses will increase in the near future.

     Product Development. Product Development expenses were $0.5 million for the
quarter ended

                                       8
<PAGE>

June 30, 1999, compared to $0.3 million for the quarter ended June 30, 1998, an
increase of $0.2 million or 68.6%. Product development expenses were $0.9
million for the six month period ended June 30, 1999, compared to $0.7 million
for the six month period ended June 30, 1998, an increase of $0.2 million or
36.6%. This increase resulted primarily from the development of enhancements to
the Company's Enterprise Integration Template (EIT) and the writedown of
peripheral product development efforts that were not strategic to the Company's
enterprise application integration focus.

     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 $4.0 million for the quarter ended June 30, 1999
compared to $1.5 million for the quarter ended June 30, 1998 an increase of $2.5
million or 166.9%. General and administrative expenses were $5.6 million for the
six month period ended June 30, 1999, compared to $2.8 million for the six month
period ended June 30, 1998, an increase of $2.8 million or 101.0%. This increase
is primarily attributable to the recognition of an impairment loss to the
goodwill associated with the Company's French acquisition of approximately $1.0
million, costs associated with the reduction in force in Europe in the quarter
and increases in personnel due to the higher level of revenues during the six
months ended June 30, 1999 compared to the same period in 1998 . As the result
of the Company's ongoing evaluation of the carrying value of its long-lived
assets, in the three month period ended June 30, 1999, the Company determined
that the sales pipeline in the French operations did not improve as originally
anticipated; therefore, the Company recognized an impairment loss equal to the
unamortized balance of the goodwill associated with the acquisition of the
French operation.

     Income Tax (Benefit) Provision. The Income Tax Benefit was $1.3 million for
the quarter ended June 30, 1999 compared to an Income Tax Provision of $0.3
million for the quarter ended June 30, 1998. The Income Tax Benefit for the six
months ended June 30, 1999 was $1.2 million compared to an Income Tax Provision
of $0.4 million for the six month period ended June 30, 1998. The Company's
effective tax rate was 26% for the quarter ended June 30, 1999 compared to 32%
for the quarter ended June 30, 1998. The Company's effective tax rate was 25%
for the six month period ended June 30, 1999 compared to 36% for the six month
period ended June 30, 1998. These decreases in effective tax rates are primarily
attributable to the lower tax rates applicable to losses in foreign
jurisdictions, the effect of the permanent differences relative to the Company's
profit/loss and the establishment of valuation allowances for deferred tax
assets attributable to net operating losses.

Liquidity and Capital Resources

     The Company's overall cash and cash equivalents were $1.2 million at June
30, 1999, which is a decrease of approximately $0.6 million from $1.8 million as
of December 31, 1998. The Company's operating activities used cash of $0.3
million for the six month period ended June 30, 1999. During the six month
period ended June 30, 1999, cash flow used in operating activities reflected the
net loss, the deferred tax provision and the decrease in deferred income,
partially offset by depreciation and amortization and the decrease in accounts
receivable.

     Cash provided by investing activities totaled $0.3 million during the six
month period ended June 30, 1999. During the six months ended June 30, 1999 the
Company invested $0.5 million in property and equipment and capitalized $0.9
million in software development costs. Additionally, the Company sold $1.3
million of marketable securities for working capital and Precise repaid its $0.5
million note to the Company in full.

     Cash flow used in financing activities totaled $0.4 million for the six
month period ended June 30, 1999 primarily relating to the Company's re-purchase
of common stock in conjunction with its stock buy-back program.

                                       9
<PAGE>

     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 June 30, 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 June 30, 1999, no amounts were outstanding under the
French or Austrian lines 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 operating activities. Such sources of liquidity may
include additional equity offerings or debt financings. There can be 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 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 new compliant 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

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<PAGE>

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 reviewing the state of readiness of its critical suppliers and
service providers 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. This exercise includes compliance inquiries and reviews that will
continue throughout 1999. To the extent that responses to Year 2000 readiness
are unsatisfactory, the Company intends to change suppliers or service providers
to those who have demonstrated Year 2000 readiness but cannot be assured that it
will be successful in finding such alternative suppliers and service providers.
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 applications and that customers want to know if the Company's
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.

                                       11
<PAGE>

     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 developers to introduce code that will make the overall
application non-compliant.

                 End of Company Year 2000 Compliance Statement

     The Company has investigated each third party software vendor whose
software products the Company resells regarding Year 2000 compliance of those
products. The Company has determined that all of the third party products it
currently resells are Year 2000 compliant based upon the representations of the
respective third party software vendor. 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.

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%, 51.9% and 46.1% of the Company's total revenues in fiscal
years 1997 and 1998 and the six months ended June 30, 1999, respectively, or
$12.3 million, $21.2 million and $10.3 million, respectively. As a result, the
Company is subject to numerous international market-based risks (as well as
risks related specifically to these international operations, which are
discussed elsewhere in this report). 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

                                       12
<PAGE>

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
June 30, 1999 was $6.3 million. The Company's marketable securities portfolio is
invested in short-term securities with at least an investment grade rating to
minimize interest rate and credit risk as well as provide an immediate source of
funds with a market value of $2.9 million as of June 30, 1999 and in long-term
federally backed zero coupon bonds with a market value of $3.4 million as of
June 30, 1999. In this regard, the Company has gross unrealized losses of
approximately $1.0 million from its longer-term marketable securities as of June
30, 1999, and there can be no assurance that the Company will be able to recoup
these losses if realized. The Company has filed an arbitration claim with the
National Association of Securities Dealers against Merrill Lynch Pierce Fenner &
Smith with respect to certain of these issues. See "Part II -- Item 1 - Legal
Proceedings." As a general matter, 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 unless the investments are
liquidated.

                          PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

     The Company has entered into a settlement agreement with Automated
Financial Systems, Inc. ("AFS") regarding an action that the Company had filed
that has been pending since December 23, 1998. A description of the basis of
this action is contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 0-21921). As part of the settlement, AFS
has agreed to pay the Company $260,000 in cash by no later than August 19, 1999
and has agreed to dismiss its counterclaims against the Company. In the event
that AFS does not pay such amount by August 19, 1999, the Company has retained
the right to refile its lawsuit against AFS.

     On June 30, 1999, the Company filed a claim with the National Association
of Securities Dealers for arbitration against Merrill Lynch Pierce Fenner &
Smith ("Merrill Lynch") seeking compensatory damages of $950,000 plus attorney's
fees and lost income resulting from advice rendered by Merrill Lynch to
purchase, and the failure of Merrill Lynch to divest at the Company's
instruction, the Company's portfolio of zero coupon long-term bonds. The Company
expects that the arbitration will be completed by the end of 1999. The Company
cannot predict the outcome of this arbitration proceeding. If the Company is not
successful in this arbitration, there could be a material adverse effect on the
Company's business, results of operations and financial condition.

     On July 15, 1999, the Company filed an action against Manugistics, Inc.
("Manugistics") in the United States District Court for the Eastern District of
Virginia, seeking compensatory damages of approximately $1,250,000 resulting
from breach of certain representations contained in a license agreement for
Manugistics-developed software that the Company had attempted to incorporate
into a project that the Company is committed to delivering to an agency of the
federal government. Manugistics has filed a counterclaim against the Company,
asserting breach of contract, breach of

                                       13
<PAGE>

alleged settlement, and wrongful hiring. Discovery has commenced in the action.
No trial date has been set for this action, and the Company cannot currently
predict the outcome of this litigation. If the Company is not successful in
pursuing these claims, there could be a material adverse effect on the Company's
business, results of operations and financial condition.

     In addition, the Company is and may from time to time be involved in
ordinary routine litigation incidental to its business. Other than as described
above, the Company is not aware of any pending or threatened litigation that
could have a material adverse effect on the Company's business, results of
operations or financial condition

Item 4.  Submission of Matters to a Vote of Security Holders

     The Company held its annual meeting of shareholders (the "Annual Meeting")
on May 12, 1999, in Reston, Virginia.  At the Annual Meeting, the following
actions of the shareholders of the Company were taken:

     (a)The shareholders of the Company voted to reelect two Class III directors
of the Company, as follows:

<TABLE>
<CAPTION>
                                     VOTES
                                     -----
     DIRECTORS                 FOR          WITHHELD
     ---------                 ---          --------
    <S>                       <C>          <C>
    E. Linwood Pearce         3,728,348    93,635
    Dr. Duane Adams           3,760,434    61,099
</TABLE>

     Following the Annual Meeting, (i) the following individuals continued as
Class I directors of the Company, with a term expiring at the 2000 annual
meeting of shareholders of the Company: Joseph M. Fox and Dr. Alan B. Salisbury
and (ii) the following individuals continued as Class II directors of the
Company, with a term expiring at the 2001 annual meeting of shareholders of the
Company: Andrew B. Ferrentino and Dr. Gerhard Barth.

     (b)The shareholders of the Company voted to approve an amendment to the
Company's 1996 Equity Incentive Plan (the "1996 Plan"), under which the number
of shares of the Company's Common Stock subject to the 1996 Plan would be
increased from 2,500,000 to 2,750,000, as follows:

          FOR            AGAINST         ABSTENTIONS
          ---            -------         ------------
          3,168,727      637,902         15,354


     (c)The shareholders of the Company voted to approve the selection of
PricewaterhouseCoopers LLP as the Company's independent auditors for fiscal year
1999, as follows:

          FOR            AGAINST         ABSTENTIONS
          ---            -------         ------------
          3,805,404      1,500           15,079

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<PAGE>

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 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 NMA201-98-C-0089, dated September 30, 1998,
               Modification PZ0001, dated November 30, 1998 and Modification
               PZ0002 dated December 31, 1998, by and between Template Software,
               Inc. and National Imagery and Mapping Agency .


     27.1      Financial Data Schedule for the six month period ended June 30,
               1999.

     27.2      Restated Financial Data Schedule for the six month period ended
               June 30, 1998.

______________
(b) Reports on Form 8-K

During the fiscal quarter ended June 30, 1999, the Company did not file any
reports on Form 8-K.

                                       15
<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:  August 13, 1999                 TEMPLATE SOFTWARE, INC.



                                        By:  /s/ Peter Russo
                                             Peter Russo
                                             Executive Vice President and
                                             Chief Financial Officer

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