<PAGE>   1



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


                                    FORM 10-Q


FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997

(mark one)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

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

For the transition period from _______________ to __________________

                         Commission File Number 0-23852

                      PROJECT SOFTWARE & DEVELOPMENT, INC.
             (Exact name of registrant as specified in its charter)

       MASSACHUSETTS                                        04-2448516
(State or other jurisdiction                              (I.R.S employer
 incorporation or organization)                        identification number)


                  100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730
          (Address of principal executive offices, including zip code)
                         (formerly at 20 University Road
                              Cambridge, MA. 02138)


                                 (781) 280-2000
              (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


Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 9,883,231 shares of common stock, $.01 par value per share, as
of January 31, 1998.






                                       1
<PAGE>   2

                      PROJECT SOFTWARE & DEVELOPMENT, INC.
                                   10-Q INDEX

PAGE
----

PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS                                             PAGE

           
           Consolidated Balance Sheets as of December 31, 1997                3
           (unaudited) and September 30, 1997.

           Consolidated Statements of Operations (unaudited)                  4
           for the three months ended December 31, 1997 and 1996.

           Consolidated Statements of Cash Flows (unaudited)                  5
           for the three months ended December 31, 1997 and 1996.

           Notes to Consolidated Financial Statements.                        6

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                  9
           CONDITION AND RESULTS OF OPERATIONS

PART II.   OTHER INFORMATION

ITEM 5.    OTHER INFORMATION                                                 17
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K                                  18

           SIGNATURE                                                         20




                                      2

<PAGE>   3

                      PROJECT SOFTWARE & DEVELOPMENT, INC.
                           CONSOLIDATED BALANCE SHEETS




<TABLE>
<CAPTION>
                                     ASSETS                         DECEMBER 31,  SEPTEMBER 30,
                                                                       1997          1997
                                                                    -----------   ------------
  (IN THOUSANDS,EXCEPT SHARE DATA)                                  (UNAUDITED)
<S>                                                                  <C>            <C>     

Current assets:
  Cash and cash equivalents                                          $ 24,776       $ 25,964
  Marketable securities                                                38,581         38,299
  Accounts receivable, trade, less allowance
   for doubtful accounts of $2,254 at December 31,
   1997 and $2,286 at September 30, 1997, respectively                 23,384         24,021
  Prepaid expenses                                                      3,052          1,877
  Other assets                                                          1,439          1,244
  Deferred income taxes                                                 1,806          1,806
                                                                     --------       --------
    Total current assets                                               93,038         93,211
                                                                     --------       --------

Property and equipment, net                                             8,948          7,322
Computer software costs, net                                              653             --
Goodwill, net                                                           1,354          1,447
Deferred income taxes                                                     219            214
Other assets                                                               52             45
                                                                     --------       --------
    Total assets                                                     $104,264       $102,239
                                                                     ========       ========


                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                                    $  8,494       $  9,809
 Accrued compensation                                                   3,110          4,494
 Income taxes payable                                                   4,909          3,678
 Deferred revenue                                                       9,452          9,750
 Deferred income taxes                                                    268            394
                                                                     --------       --------
   Total current liabilities                                           26,233         28,125
                                                                     --------       --------

Deferred income taxes                                                     334             12
Deferred rent                                                              21             12
Deferred revenue                                                           97            120

Commitments and contingencies

Preferred stock, $.01 par value;1,000,000 authorized,
 none issued and outstanding                                               --             --
Common stock, $.01 par value;15,350,000 authorized;
issued and outstanding 9,882,721 and 9,856,474 for December 31,
1997 and September 30, 1997, respectively                                  99             99
Additional paid-in capital                                             48,533         48,163
Retained earnings                                                      29,613         26,108
Cumulative translation adjustment                                        (685)          (629)
Net unrealized gain on marketable securities                               19            229
                                                                     --------       --------
    Total stockholders' equity                                         77,579         73,970
                                                                     --------       --------

    Total liabilities and stockholders' equity                       $104,264       $102,239
                                                                     ========       ========
</TABLE>





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





                                        3

<PAGE>   4
                      PROJECT SOFTWARE & DEVELOPMENT, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED
                                                            DECEMBER 31,
                                                    ----------------------------
                                                        1997            1996
                                                        ----            ----
<S>                                                 <C>              <C>        

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenues:
     Software                                       $    11,143      $    13,673
     Support and services                                13,967            9,706
                                                    -----------      -----------
              Total revenues                             25,110           23,379
                                                    -----------      -----------

Cost of revenues:
     Software                                               604              633
     Support and services                                 6,586            5,288
                                                    -----------      -----------
              Total cost of revenues                      7,190            5,921
                                                    -----------      -----------

Gross margin                                             17,920           17,458

Operating expenses:
     Sales and marketing                                  8,081            7,339
     Product development                                  2,684            2,492
     General and administrative                           2,340            2,521
                                                    -----------      -----------
              Total operating expenses                   13,105           12,352
                                                    -----------      -----------

Income from operations                                    4,815            5,106

     Interest income (expense), net                         734              459
     Other income (expense), net                             15               58
                                                    -----------      -----------

Income before income taxes                                5,564            5,623

Provision for income taxes                                2,059            2,094
                                                    -----------      -----------

Net income                                          $     3,505      $     3,529
                                                    ===========      ===========

Net income per share, basic                         $      0.36      $      0.36
                                                    -----------      -----------
Net income per share, diluted                       $      0.35      $      0.35
                                                    -----------      -----------

 Shares used to calculate net income per share
      Basic                                           9,864,535        9,708,322
      Diluted                                        10,042,325       10,127,886


</TABLE>





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



                                        4


<PAGE>   5
                       PROJECT SOFTWARE & DEVELOPMENT, INC
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED  THREE MONTHS ENDED
                                                              DECEMBER 31,       DECEMBER  31,
                                                                 1997               1996
                                                           -----------------  ------------------
                                                                      (IN THOUSANDS)
<S>                                                            <C>               <C>     

 Cash flows from operating activities:
   Net income                                                  $  3,505          $  3,529
   Adjustments to reconcile net income to net
     cash provided by operating activities:
     Depreciation and amortization                                  849               761
     Loss on sale and disposal of property
       and equipment                                                 29                19
     Amortization of discount on marketable securities              379
     Deferred rent                                                    9               (17)
     Deferred taxes                                                 190              (357)
     Changes in operating assets and liabilities
       Accounts receivable                                          299               675
       Prepaid expenses                                          (1,182)              130
       Other assets                                                (211)             (337)
       Accounts payable                                          (1,256)           (1,147)
       Accrued compensation                                      (1,349)           (2,369)
       Income taxes payable                                       1,245             2,315
       Deferred revenue                                            (246)           (1,163)
                                                               --------          --------
 Net cash provided by operating activities                        1,882             2,418
                                                               --------          --------

 Cash flows from investing activities:
     Acquisitions of property and equipment                      (2,381)           (1,406)
     Additions to computer software costs                          (679)              (37)
     Purchase of marketable securities                          (36,164)          (18,739)
     Sale of marketable securities                               35,673            18,551
                                                               --------          --------
Net cash used in investing activities                            (3,551)           (1,631)
                                                               --------          --------

 Cash flows from financing activities:
     Payments on leased equipment                                    --                 2
     Proceeds from exercise of stock options
      including related tax benefit                                 370               231
                                                               --------          --------
 Net cash provided by financing activities                          370               233
                                                               --------          --------

 Effect of exchange rate changes on cash                            111               (34)
                                                               --------          --------


 Net (decrease) increase in cash and cash equivalents            (1,188)              986

 Cash and cash equivalents, beginning of period                  25,964             9,097
                                                               --------          --------

 Cash and cash equivalents, end of period                      $ 24,776          $ 10,083
                                                               ========          ========

</TABLE>



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



                                        5

<PAGE>   6

                      PROJECT SOFTWARE & DEVELOPMENT, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

A.     BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the
accounts of Project Software & Development, Inc. (PSDI) and its majority-owned
subsidiaries (collectively, the "Company"), as of December 31, 1997 and have
been prepared by the Company in accordance with generally accepted accounting
principles for interim reporting and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. All intercompany accounts and transactions have
been eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
those of a normal recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated. The results of operations for the periods
presented herein are not necessarily indicative of the results of operations to
be expected for the entire fiscal year, which ends on September 30, 1998, or for
any other future period.

These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended September
30, 1997 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on December 29, 1997.

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

B.     INCOME PER SHARE

Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is computed by dividing income available to common
shareholders by the weighted average common shares outstanding plus additional
common shares that would have been outstanding if dilutive potential common
shares had been issued. For purposes of this calculation, stock options are
considered common stock equivalents in periods in which they have a dilutive
effect.



                                       6
<PAGE>   7


Basic and diluted earnings per share are calculated as follows:

<TABLE>
<CAPTION>

                                                   Three months ended       Three months ended 
Basic EPS                                           December 31, 1997        December 31, 1996
----------------------------------------------------------------------------------------------
<S>                                                        <C>                      <C>       
Net income                                                 $3,504,810               $3,528,827
Weighted average common shares outstanding                  9,864,535                9,708,322
Basic income per share                                     $     0.36               $     0.36

<CAPTION>
                                                   Three months ended       Three months ended 
Diluted EPS                                         December 31, 1997        December 31, 1996
----------------------------------------------------------------------------------------------
Net income                                                 $ 3,504,810             $ 3,528,827
Weighted average common shares outstanding                   9,864,535               9,708,322
Common stock equivalents                                       177,790                 419,564
                                                           -----------             -----------
  Total diluted shares                                      10,042,325              10,127,886

Diluted income per share                                   $      0.35             $      0.35

</TABLE>

C.     ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128) is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 replaces APB Opinion No. 15, Earnings Per Share.
SFAS 128 simplifies the computation of EPS by replacing the presentation of
primary EPS with a presentation of basic EPS. It requires dual presentation of
basic and diluted EPS by entities with complex capital structures. The Company
adopted SFAS 128 per the effective date for the periods ended after December 15,
1997.

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) is effective for fiscal years beginning after December 15,
1997. SFAS 130 requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. The Company will adopt SFAS 130 in fiscal year ended
September 30, 1999.

Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131) is effective for financial
statements for periods beginning after December 15, 1997. This statement will
change the way companies report annual financial statements and requires them to
report selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues, and its major customers. The Company will adopt SFAS 131 in
the fiscal year ended September 30, 1998.


                                       7
<PAGE>   8

D.     COMPUTER SOFTWARE COSTS

Internally developed software costs capitalized were $675,000 for the three
months ended December 31, 1997. There were no software costs capitalized in the
three months ended December 31, 1996. Amortization expense was $22,000 and
$127,000 for the three months ended December 31, 1997 and 1996, respectively.
Software costs are amortized on a straight-line basis over the estimated useful
or market life of the software (generally, one to two years).

E.     SUBSEQUENT EVENTS

On February 6, 1998, the Company acquired the stock of A.R.M. Group Inc.,
Ontario, Canada for the sum of $9.5 million in cash, stock and assumed
liabilities. A.R.M. Group Inc. was a privately-held organization that had built
an electronic commerce network focused on reducing the transaction costs of
Maintenance Repair Operations products for buyers, distributors and
manufacturers. The acquisition will be accounted for as a purchase. Also, in
connection with the acquisition, the Company will expense approximately $9
million for in-process research and development charges, which will be expensed
in the second quarter of its fiscal year.






























                                       8
<PAGE>   9


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

OVERVIEW

The Company develops, markets and supports applications software used by
businesses, government and other organizations to improve the productivity of
facilities, plants and production equipment. The Company's revenues are derived
primarily from two sources: software licenses and fees for services, including
support contracts and training and consulting services. The Company has
experienced a significant shift in the sources of its revenues as a result of
its decision to concentrate its resources on the development and marketing of
enterprise-wide asset maintenance management systems operating in a
client/server environment.

The Company released MAXIMO, its first client/server product, in 1991, and
released P/X, its second client/server product, in 1992. In the fiscal year
ended September 30, 1997, revenues from client/server software accounted for 95%
of software revenues, of which 99% was attributable to the client/server
versions of MAXIMO. The Company acquired Maintenance Automation Corporation
("MAC") on March 1, 1996. MAC is a developer of maintenance management software
for the single-user, PC LAN segment.

In fiscal 1996, the Company introduced a new suite of MAXIMO products: MAXIMO
Enterprise, MAXIMO Workgroup and MAXIMO ADvantage. MAXIMO Enterprise, a new
version of which was released in March 1996, is a client/server product, which
runs on Oracle7 and SYBASE platforms and is intended for the high function, high
usage segment of the maintenance management market. MAXIMO Workgroup, released
in July 1996, is also a client/server product and runs on SQLBase and Oracle
Workgroup and is intended for the mid-range segment of the maintenance
management market.

In March 1997, the Company released a new SQL Server version of MAXIMO
Enterprise and MAXIMO Workgroup for the Microsoft SQL Server database. The new
SQL Server version is available for Windows NT servers, including NT 3.5.1 and
NT 4.0, supporting Windows 95, Windows 95B, all Windows 3.x systems, and NT
3.5.1 and NT 4.0 clients.

In August 1997, the Company released MAXIMO Analyzer, a new business
intelligence tool. MAXIMO Analyzer provides detailed information allowing users
to rapidly pose multiple questions and assess responding data to make critical
business decisions.

In September 1997, the Company released the MAXIMO Mobile Application Suite, a
mobile and paperless work management system. MAXIMO Mobile Application Suite is
a set of new integrated MAXIMO modules which install directly onto hand-held
computers and utilize bar coding technology to ensure compliance with 



                                       9
<PAGE>   10

procedures and automation of routine and preventive practices for maintenance
engineers.

The product acquired as a result of the acquisition of MAC on March 1, 1996,
MAXIMO ADvantage, is intended for the lowerend maintenance market. MAXIMO
ADvantage supports Microsoft Access for the single user, PC LAN segment. The
Company incurred significant additional and unexpected costs in developing a new
release of MAXIMO ADvantage due to a delay in excess of six months in completing
the new release of this product. The delay was necessary to meet both the
quality expectations and functionality demanded by the Company. Further
affecting MAXIMO ADvantage sales was the delay in availability of a CD-Rom based
multi-media evaluation kit. This evaluation kit generally became available in
December 1996. In March 1997, the Company released the first significant version
of MAXIMO ADvantage since the acquisition of Maintenance Automation Corporation.
The Company has not realized any significant revenues from this new release
despite opening a new tele-sales operation in Atlanta in March 1997.
Accordingly, expenses related to this product have been reduced to a level
commensurate with the lower revenue expectations. The unexpected costs and
shortfalls in expected revenues resulted in net operating losses of $1,420,000,
and $1,203,000 for MAC for fiscal 1997 and 1996, respectively.

The sources of the Company's revenues from support and services have also
shifted since the introduction of the Company's new generation of client/server
products. Revenues from support and services relating to the Company's MAXIMO
products have increased, while those relating to the Company's P/X and mainframe
and other project management software have declined.

The Company experienced an increase in the average selling price of its MAXIMO
client/server software licenses during fiscal 1997. The Company attributes this
increase in part to licenses of a version of MAXIMO for use with the ORACLE and
SYBASE database management systems. These client/server versions of MAXIMO have
a higher entry price and are typically implemented in configurations involving a
larger number of users, for whom additional license fees are paid. Larger
software license contracts, if any, may have a significant impact on revenues
for any quarter and could therefore result in significant fluctuations in
quarterly revenues and operating results.

Revenues from licenses of P/X have declined sharply, dropping to $551,000 of
total license revenues in the fiscal year ended 1997. The Company no longer
actively markets the P/X product as a stand alone solution. Revenues from
licenses of mainframe and other project management software have also declined
sharply, dropping to less than 1% of total license revenues in the fiscal year
ended 1997. The Company no longer actively markets its mainframe and other
project management software products, although it provides technical support and
other services to their installed customer base.




                                       10
<PAGE>   11

The Company's revenues attributable to its operations outside the United States
are a significant portion of total revenues. The Company expects that
international revenues will continue to be a significant percentage of total
revenues. As the percentage of the Company's total revenues which are derived
from international operations and are conducted in foreign currencies grows,
changes in the values of these foreign currencies relative to the United States
dollar will affect the Company's results of operations, and may contribute to
fluctuations in the Company's results of operations. The functional currencies
of the Company's international subsidiaries include the pound sterling, the
French franc, the German deutschemark, the Thai baht, the Dutch guilder, the
Indian rupee, the Japanese yen, the Swedish krona, and the Australian and
Canadian dollars, each of which has fluctuated significantly in relation to the
United States dollar. In addition, the Company is exposed to potential losses as
a result of transactions giving rise to accounts receivable in currencies other
than the United States dollar or the functional currencies of its international
subsidiaries. When the value of a foreign currency in which the accounts
receivable of the Company are denominated changes between the date the account
receivable is recorded and the date on which it is settled, the resulting gain
or loss is recorded as a foreign currency transaction adjustment. The Company
recorded a foreign currency transaction gain of $1,400 and $57,000 for the three
months ended December 31, 1997 and 1996, respectively. The Company may in the
future undertake currency hedging, although there can be no assurance that
hedging transactions, if entered into, would materially reduce the effects of
fluctuations in foreign currency exchange rates on the Company's results of
operations.

To date, inflation has not had a material impact on the Company's financial
results. There can be no assurance, however, that inflation will not adversely
affect the Company's financial results in the future.





                                       11
<PAGE>   12

RESULTS OF OPERATIONS


THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED 
DECEMBER 31, 1996

REVENUES

<TABLE>
<CAPTION>
                                       Three Months       CHANGE %      Three Months
(in thousands)                       Ended 12/31/97                   Ended 12/31/96
------------------------------------------------------------------------------------
<S>                                         <C>             <C>              <C>    

Software licenses                           $11,143         (18.5)%          $13,673
Percentage of total revenues                  44.4%                             58.5%

Support and services                        $13,967          43.9 %          $ 9,706
Percentage of total revenues                  55.6%                             41.5%

Total revenues                              $25,110           7.4 %          $23,379

</TABLE>

The growth in total revenues is generated from the Company's MAXIMO software and
related support and services. A significant portion of the Company's total
revenues are derived from operations outside the United States. Revenues from
sales outside the United States increased 6.8% to $11.0 million or 43.8% of
total revenues for the three months ended December 31, 1997, compared to $10.3
million or 44.0% of total revenues for the three months ended December 31, 1996.

Revenues from licenses of MAXIMO and from related support and services increased
9.9% to $24.5 million or 97.6% of total revenues for the three months ended
December 31, 1997 compared to $22.3 million or 95.3% of total revenues for the
three months ended December 31, 1996.

Revenues from licenses of P/X and from related support and services decreased
37.9% to $504 thousand or 2.0% of total revenues for the three months ended
December 31, 1997 compared to $811 thousand or 3.5% of total revenues for the
three months ended December 31, 1996. The decline in P/X revenues is
attributable to the Company's declining focus on selling and marketing this
product.

The decrease in software license revenues is attributable to the lengthening of
the sales cycle experienced by the Company with respect to its Enterprise
product. The Company believes that the expansion or lengthening of the sales
cycle can be attributed to a number of factors, including but not limited to,
the timing of new product releases by the Company and its competitors, which has
resulted in more demonstrations and competitive analysis by potential customers
and the linkage by customers of the selection of a maintenance management system
with the selection of an ERP system. Another factor that may have contributed to
the decrease 



                                       12
<PAGE>   13


in software license revenues is that the Company has not been adequately focused
on the lower, mid-price segment of the client/server market. The Company
believes that this will be addressed with the release of MAXIMO 4.0 in March
1998 and the subsequent development of an appropriate distribution channel
targeted at this segment of the market. Lastly, the Company believes that a
13(d) filed by one of the directors of the Company concerning the potential sale
of the Company may have also adversely affected sales for the quarter. The
Company implemented a Stockholder Rights Plan on February 2, 1998 to address
this issue. (See Item 6. Exhibits and Reports on Form 8-K.)

The increase in support and services revenues is attributable to increases in
both MAXIMO support contracts and consulting services. Consulting services
continue to be a larger percentage of total revenues due to additional service
demands in connection with large scale implementations of the Company's MAXIMO
product.

COST OF REVENUES

<TABLE>
<CAPTION>
                                       Three Months       CHANGE %      Three Months
(in thousands)                       Ended 12/31/97                   Ended 12/31/96
------------------------------------------------------------------------------------
<S>                                         <C>             <C>              <C>    

Software licenses                            $  604         (4.6)%           $  633
Percentage of software licenses                 5.4%                            4.6%

Support and services                         $6,586         24.5%            $5,288
Percentage of support and services             47.2%                           54.5%

Total cost of revenues                       $7,190         21.4%            $5,921
Percentage of total revenues                   28.6%                           25.3%

</TABLE>

Cost of software revenues consists of the amortization of capitalized software,
royalties paid to vendors of third party software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping. The decrease in the cost of software revenues is due
primarily to lower amortization expense for capitalized development costs offset
by royalties paid to third party vendors for software.

Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities. The increase in the cost of
support and services and the decrease in the margins is attributable to
extensive use of third-party consultants contracted to perform services for the
Company and the timing of hiring permanent employees. The Company utilizes the
services of third party consultants in order to meet the backlog of services,
when necessary.





                                       13
<PAGE>   14


OPERATING EXPENSES

<TABLE>
<CAPTION>
                                       Three Months       CHANGE %      Three Months
(in thousands)                       Ended 12/31/97                   Ended 12/31/96
------------------------------------------------------------------------------------
<S>                                         <C>             <C>              <C>    

Sales and marketing                         $8,081          10.1%            $7,339
Percentage of total revenues                  32.2%                            31.4%

Product development                         $2,684           7.7%            $2,492
Percentage of total revenues                  10.7%                            10.7%

General and administrative                  $2,340         (7.2)%            $2,521
Percentage of total revenues                   9.3%                            10.8%

</TABLE>


The increase in sales and marketing expenses in the three months ended December
31, 1997 is primarily due to increases in the number of sales personnel and
travel and lodging expenses. The increase as a percentage of revenues for the
three months ended December 31, 1997 is attributable to an increase in sales and
marketing personnel without the commensurate increase in sales of software
licenses.

The increase in product development expenses in the three months ended December
31, 1997 is primarily due to the engagement of additional employees and third
party consultants who worked on the new client/server releases of MAXIMO. Beta
versions of the Company's new release of MAXIMO 4.0 were shipped to
approximately 25 customers participating in the beta program during the
quarter. Capitalization of software costs were $675 thousand for the three
months ended December 31, 1997. There were no internal software costs
capitalized in the three months ended December 31, 1996. The increase as a
percentage of revenues for the three months ended December 31, 1997 is
attributable to the investment in both new releases of the current version of
MAXIMO and the research for a new MAXIMO-architected application.

The decrease in general and administrative expenses for the three months ended
December 31, 1997 is primarily due to a decrease in bad debt expenses, as there
was no bad debt recorded in the three months ended December 31, 1997. Partially
offsetting the reduction of bad debt expenses in the three months ended December
31, 1997 was an increase in legal fees.






                                       14
<PAGE>   15

NON-OPERATING EXPENSES

<TABLE>
<CAPTION>
                                       Three Months       CHANGE %      Three Months
(in thousands)                       Ended 12/31/97                   Ended 12/31/96
------------------------------------------------------------------------------------
<S>                                         <C>             <C>              <C>    

Interest income(expense),net               $734           60.0 %            $459
Other income (expense),net                  $15          (74.1)%            $ 58

</TABLE>


The increase in interest income for the three months ended December 31, 1997 is
attributable to interest earned on increased cash equivalents from cash flow
generated from operations and accounts receivable collections. The days sales
outstanding were greatly improved from 105 days at December 31, 1996 to 84 days
at December 31, 1997.

PROVISION FOR INCOME TAXES

The Company's effective tax rates were 37.0% and 37.2% for the three months
ended December 31, 1997 and 1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1997, the Company had cash and cash equivalents and
marketable securities of approximately $63.4 million and working capital of
$66.8 million. Cash provided by operations for the three months ended December
31, 1997 was $1.9 million, generated primarily by income earned for the period
and depreciation, and cash generated by accounts receivable collections, offset
by prepaid royalties paid to third party software vendors. Cash used in
investing activities totaled $3.6 million, primarily for improvements related to
the relocation of the Company's corporate headquarters in December 1997. Cash
provided by financing activities was $370 thousand, generated by proceeds from
exercises of employee stock options.

As of December 31, 1997, the Company's principal commitments consisted primarily
of an office lease for its headquarters. The Company leases its facilities and
certain equipment under non-cancelable operating lease agreements that expire at
various dates through November 2003. The Company relocated its corporate
headquarters in December 1997. The Company's expenditures for construction and
leasehold improvements in connection with the relocation were $2.2 million. It
also spent $1.3 million on furniture, fixtures and equipment, most of which was
capitalized in fiscal 1997.

On February 6, 1998, the Company used a portion of its cash to acquire the
assets and liabilities of A.R.M. Group Inc. for the sum of $7 million dollars.
Additional costs of this purchase combination, including the assumption of the
liabilities of A.R.M. Group Inc., will equal approximately $2.5 million dollars.



                                       15
<PAGE>   16

The Company believes that its current cash balances combined with cash flow from
operations will be sufficient to meet its working capital and capital
expenditure requirements through at least December 31, 1998.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY

The Company generally ships its product upon receipt of orders and maintains no
significant backlog. As a result, revenues from license fees in any quarter are
substantially dependent on orders booked and shipped in that quarter. A delay in
or loss of orders can cause significant variations in quarterly operating
results. In addition, the Company's revenues and operating results have
fluctuated historically, due to the number and timing of product introductions
and enhancements, the budgeting and purchasing cycles of customers and the
timing of large orders, the timing of product shipments and the timing of
marketing and product development expenditures. Large software license contracts
may have a significant impact on revenues for any quarter and could therefore
result in significant fluctuations in quarterly revenues and operating results.
The Company's revenues and income from operations typically grow at a lower rate
or decline in the first quarter of each fiscal year. In addition, revenues are
typically higher in the fourth quarter than in other quarters of the year,
reflecting the Company's fiscal year end and a sales commission policy that
bases rewards on achievement of annual quotas. As a result of these factors, the
Company has experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results.

Forward-looking statements of the Company are subject to the risk that
assumptions made by management of the Company concerning future general economic
conditions such as recession, inflation, interest rates, tax rates, consumer
spending and credit and other future condition having an impact on software
markets and the Company's business may prove to be incorrect. Adverse changes in
such future economic conditions could have an adverse effect on the Company's
business.

FACTORS AFFECTING FUTURE PERFORMANCE

Further information on factors that could affect the Company's business and
financial results are included in the exhibits to the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on December 29,
1997.



















                                       16
<PAGE>   17
                           Part II. OTHER INFORMATION

ITEM 5.  OTHER INFORMATION

       On February 6, 1998, the Company acquired the assets and liabilities of
the A.R.M. Group Inc.(See Liquidity and Capital Resources)















                                       17
<PAGE>   18
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

       (a)    Exhibits

       3.1    Amended and Restated Articles of Organization of the Company
              (included as Exhibit 3.3 to the Company's Registration Statement
              on Form S-1, Registration No. 33-76420, and incorporated herein by
              reference)

       3.2    Restated By-Laws of the Company, as amended (included as Exhibit
              3.2 to the Company's Annual Report on Form 10-K for the fiscal
              year ended September 30, 1996, File No. 0-23852, and incorporated
              herein by reference)

       4.     Instruments Defining the Rights of Security-Holders

              4.1    Specimen certificate for the Common Stock of the Company
              (included as Exhibit 4.1 to the Company's Registration Statement
              on Form S-1, Registration No. 33-76420, and incorporated herein by
              reference)

              4.2    Article 4B of the Amended and Restated Articles of
              Organization of the Company (included as Exhibit 4.1 to the
              Company's Registration Statement on Form S-1, Registration No.
              33-76420, and incorporated herein by reference)

              4.3    Rights Agreement dated as of January 27, 1998, between
              Project Software & Development, Inc. and BankBoston, N.A. as
              Rights Agent (included as Exhibit 4(a) to the Company's Current
              Report on Form 8-K dated February 2, 1998, File No. 0-23852, and
              incorporated herein by reference)

              4.4    Form of Certificate of Designation of Series A Junior
              Participating Preferred Stock of Project Software & Development,
              Inc. (included as Exhibit 4(b) to the Company's Current Report on
              Form 8-K dated February 2, 1998, File No. 0-23852, and
              incorporated herein by reference)

              4.5    Form of Rights Certificate (included as Exhibit 4(c) to the
              Company's Current Report on Form 8-K dated February 2, 1998, File
              No. 0-23852, and incorporated herein by reference)

       11.1   Statement re computation of per share earnings




                                       18
<PAGE>   19

       27.    Financial Data Schedule

       (b)           Reports filed on Form 8-K

                     The Company filed a current report on Form 8-K on February
                     2, 1998 with respect to the adoption of a stockholder
                     rights plan.











                                       19
<PAGE>   20


                                   SIGNATURES

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.




                                        PROJECT SOFTWARE & DEVELOPMENT, INC.


Date:        FEBRUARY 13, 1998          By: /s/ Paul D. Birch
                                            ------------------------------------
                                            Paul D. Birch
                                            Authorized Officer
                                            Executive Vice President Finance &
                                            Administration, Chief Financial
                                            Officer and Treasurer
                                            (Principal Financial Officer)

















                                       20
<PAGE>   21

                                  EXHIBIT INDEX

EXHIBIT
NO.       DESCRIPTION                                                      PAGE
---       --------------------------------------------------------------   ----

3.1       Amended and Restated Articles of Organization of the Company
          (included as Exhibit 3.3 to the Company's Registration
          Statement on Form S-1, Registration No. 33 -76420, and
          incorporated herein by reference)

3.2       Restated By-Laws of the Company, as amended(included as
          Exhibit 3.2 to the Company's Annual Report on Form 10-K for
          the fiscal year ended September 30, 1996, commission File
          No. 0-23852) and incorporated herein by reference)

4.1       Specimen certificate for the Common Stock of the Company
          (included as Exhibit 4.1 to the Company's Registration
          Statement on Form S-1, Registration No. 33-76420, and
          incorporated herein by reference)

4.2       Article 4B of the Amended and Restated Articles of
          Organization of the Company (included as Exhibit 4.1 to the
          Company's Registration Statement on Form S-1, Registration
          No. 33-76420, and incorporated herein by reference)

4.3       Rights Agreement dated as of January 27, 1998, between
          Project Software & Development, Inc. and BankBoston, N.A. as
          Rights Agent (included as Exhibit 4(a) to the Company's
          Current Report on Form 8-K dated February 2, 1998, File No.
          0-23852,and incorporated herein by reference)

4.4       Form of Certificate of Designation of Series A Junior
          Participating Preferred Stock of Project Software &
          Development, Inc. (included as Exhibit 4(b) to the Company's
          Current Report on Form 8-K dated February 2, 1998, File
          No. 0-23852,and incorporated herein by reference)

4.5       Form of Rights Certificate (included as Exhibit 4(c) to the Company's
          Current Report on Form 8-K dated February 2, 1998, File No.
          0-23852,and incorporated herein by reference)

11.1      Statement re computation of per share earnings

27.1      Financial Data Schedule