<PAGE>   1
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

     (MARK ONE)

     |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
    FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 1996 OR
     | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

     COMMISSION FILE NUMBER 0-20059

                          ----------------------------

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

        DELAWARE                                       04-2818132
    (State or other jurisdiction of                    (I.R.S. Employer
    incorporation or organization)                     Identification No.)

    50 WASHINGTON STREET                                    01581-1021
    WESTBORO, MASSACHUSETTS                                 (Zip Code)
   (Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:            (508) 366-3888

                          ----------------------------

    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
       ---        --- 

    The number of shares outstanding of each of the registrant's classes of
common stock as of:

    DATE                CLASS                             OUTSTANDING SHARES
September 29, 1996      Common stock, $.01 par value               8,308,424


The index to the Exhibits appears on page 14

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                                       1
<PAGE>   2

                              VMARK SOFTWARE, INC.

                                    FORM 10-Q

                    FOR THE QUARTER ENDED SEPTEMBER 29, 1996

                                TABLE OF CONTENTS

                                                          PAGE NUMBERING IN
                                                     SEQUENTIAL NUMBERING SYSTEM
                                                     ---------------------------

PART I  FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

        Condensed Consolidated Balance Sheets as of
        September 29, 1996 and December 31, 1995                      3
                                                                     
        Condensed Consolidated Statements of Operations              
        for the three and nine months ended September 29, 1996       
        and October 1, 1995                                           4
                                                                     
        Condensed Consolidated Statements of Cash Flows for the      
        nine months ended September 29, 1996 and October 1, 1995      5
                                                                     
        Notes to Condensed Consolidated Financial Statements          6
                                                                     
Item 2. Management's Discussion and Analysis of Financial             9
        Condition and Results of Operations                          
                                                                     
PART II OTHER INFORMATION                                            
                                                                     
Item 1. Legal Proceedings                                             15
                                                                     
Item 6. Exhibits and Reports on Form 8-K                              15
                                                                     
        Signatures                                                    16
                                                                   

                                       2
<PAGE>   3



PART I   FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
                              VMARK SOFTWARE, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<CAPTION>
                                                   SEPTEMBER 29,  DECEMBER 31,
                                                       1996           1995
                                                   -------------  ------------
<S>                                                   <C>           <C>    
ASSETS 
CURRENT ASSETS:
  CASH AND EQUIVALENTS                                $12,994       $12,267
  ACCOUNTS RECEIVABLE - NET                            14,851        15,468
  INCOME TAX RECEIVABLE                                   952         3,464
  PREPAID EXPENSES AND OTHER                            3,438         2,355
  DEFERRED INCOME TAXES - CURRENT                       1,869         1,749
                                                      -------       -------
    TOTAL CURRENT ASSETS                               34,104        35,303
                                                      -------       -------

PROPERTY AND EQUIPMENT - NET                           14,490        15,253
                                                      -------       -------

LONG-TERM ASSETS:
  INTANGIBLE ASSETS - NET                               7,099         8,055
  DEFERRED INCOME TAXES - LONG-TERM                     3,221         3,221
  OTHER LONG-TERM ASSETS                                1,440         1,521
                                                      -------       -------
    TOTAL LONG-TERM ASSETS                             11,760        12,797
                                                      -------       -------

TOTAL ASSETS                                          $60,354       $63,353
                                                      =======       =======

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  LINE OF CREDIT                                      $ 1,462       $     -
  ACCOUNTS PAYABLE, ACCRUED EXPENSES AND CURRENT
   PORTION OF LONG-TERM DEBT                            8,303        10,115
  ACCRUED MERGER AND RESTRUCTURING COSTS                  706         1,286
  DEFERRED REVENUE                                      5,482         5,514
                                                      -------       -------
    TOTAL CURRENT LIABILITIES                          15,953        16,915
                                                      -------       -------

LONG-TERM LIABILITIES:
  OBLIGATIONS UNDER CAPITAL LEASES                      9,074         9,271

STOCKHOLDERS' EQUITY:
  COMMON STOCK AND OTHER CAPITAL                       38,283        37,167
  COST OF TREASURY STOCK                               (2,956)            -
                                                      -------       -------
    TOTAL STOCKHOLDERS' EQUITY                         35,327        37,167
                                                      -------       -------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $60,354       $63,353
                                                      =======       =======
</TABLE>




                                       3

<PAGE>   4
<TABLE>
                      VMARK SOFTWARE, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<CAPTION>
                                                      THREE MONTHS ENDED           NINE MONTHS ENDED
                                                      ------------------           -----------------
                                                 SEPTEMBER 29,    OCTOBER 1,   SEPTEMBER 29,  OCTOBER 1,
                                                      1996           1995         1996           1995
                                                 ---------------------------   -------------------------
<S>                                                  <C>           <C>           <C>           <C>    
REVENUE:
  SOFTWARE                                           $ 8,150       $ 7,360       $26,475       $27,953
  SERVICES AND OTHER                                   8,538         8,197        25,907        23,207
                                                     -------       -------       -------       -------

    TOTAL REVENUE                                     16,688        15,557        52,382        51,160
                                                     -------       -------       -------       -------

COSTS AND EXPENSES:
  COSTS OF SOFTWARE                                    1,321         1,244         3,657         3,920
  COSTS OF SERVICES AND OTHER                          4,628         4,268        13,756        11,905
  SELLING AND MARKETING                                6,349         6,237        19,640        19,499
  PRODUCT DEVELOPMENT                                  2,216         2,532         6,890         7,616
  GENERAL AND ADMINISTRATIVE                           1,858         2,621         5,559         6,085
  MERGER INTEGRATION AND RESTRUCTURING COSTS               -             -         2,125         6,882
  LITIGATION AND SETTLEMENT COSTS                          -             -             -           499
                                                     -------       -------       -------       -------

    TOTAL COSTS AND EXPENSES                          16,372        16,902        51,627        56,406
                                                     -------       -------       -------       -------

INCOME (LOSS) FROM OPERATIONS                            316        (1,345)          755        (5,246)

OTHER EXPENSE - NET                                     (129)         (282)         (331)         (258)
                                                     -------       -------       -------       -------

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES          187        (1,627)          424        (5,504)

PROVISION (CREDIT) FOR INCOME TAXES                       56          (553)          459        (1,354)
                                                     -------       -------       -------       -------

NET INCOME (LOSS)                                    $   131       $(1,074)      $   (35)      $(4,150)
                                                     =======       =======       =======       =======

NET INCOME (LOSS) PER COMMON SHARE                   $  0.02       $ (0.13)      $  0.00       $ (0.52)
                                                     =======       =======       =======       =======

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING                          8,363         8,067         8,099         7,984
                                                     =======       =======       =======       =======

</TABLE>


                                       4

<PAGE>   5

<TABLE>
                      VMARK SOFTWARE, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<CAPTION>
                                                                     NINE MONTHS ENDED
                                                                     -----------------
                                                                SEPTEMBER 29,   OCTOBER 1,
                                                                     1996          1995
                                                                   --------      --------
<S>                                                                <C>           <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS                                                           $   (35)      $(4,150)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
 CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
 DEPRECIATION AND AMORTIZATION                                       4,621         4,878
 COMPENSATION EXPENSE                                                   14             -
 DEFERRED INCOME TAXES                                                (120)       (1,945)
 INCREASE (DECREASE) IN CASH FROM:
   CURRENT ASSETS                                                    1,900         1,719
   CURRENT LIABILITIES                                              (2,550)       (2,286)
                                                                   -------       -------
   CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                   3,830        (1,784)
                                                                   -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:
EXPENDITURES FOR PROPERTY AND EQUIPMENT - NET                       (1,399)       (2,681)
EXPENDITURES FOR INTANGIBLE ASSETS AND SOFTWARE COSTS               (1,525)       (3,386)
DECREASE (INCREASE) IN CASH SURRENDER VALUE OF OFFICERS' LIFE
 INSURANCE AND DEPOSITS AND OTHER                                       81          (269)
                                                                   -------       -------
   CASH USED IN INVESTING ACTIVITIES                                (2,843)       (6,336)
                                                                   -------       -------

CASH FLOWS FROM FINANCING ACTIVITIES:
BORROWINGS (REPAYMENTS) UNDER LINE-OF-CREDIT                         1,462        (1,250)
SALE OF COMMON STOCK                                                 1,496         1,352
REPURCHASE OF COMMON STOCK                                          (2,956)            -
ISSUANCE OF NOTE PAYABLE                                                 -           579
REPAYMENTS UNDER CAPITAL LEASE AND OTHER OBLIGATIONS                  (192)         (149)
                                                                   -------       -------
     CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                  (190)          532
                                                                   -------       -------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                (70)            1
                                                                   -------       -------

INCREASE (DECREASE) IN CASH AND EQUIVALENTS                            727        (7,587)

CASH AND EQUIVALENTS, BEGINNING OF PERIOD                           12,267        16,017
                                                                   -------       -------
CASH AND EQUIVALENTS, END OF PERIOD                                $12,994       $ 8,430
                                                                   =======       =======
</TABLE>


                                       5
<PAGE>   6

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have
     been prepared by the Company pursuant to the rules and regulations of the
     Securities and Exchange Commission regarding interim financial reporting.
     Accordingly, they do not include all of the information and footnotes
     required by generally accepted accounting principles for complete financial
     statements and should be read in conjunction with the audited financial
     statements included in the Company's Annual Report to Stockholders for the
     year ended December 31, 1995.

     In the opinion of management, the accompanying unaudited condensed
     consolidated financial statements have been prepared on the same basis as
     the audited consolidated financial statements and include all adjustments,
     consisting only of normal recurring adjustments, necessary for a fair
     presentation of the interim periods presented. The operating results for
     the interim periods presented are not necessarily indicative of the results
     which would be expected for the full year.

2.   Income (Loss) Per Common Share

     Income (loss) per common share is computed using the weighted average
     number of common and common equivalent shares outstanding during each
     period presented. Common stock equivalents consist of stock options
     converted using the treasury stock method and are included in the
     calculation only if dilutive.

3.   Income Taxes

     The Company provides for income taxes at the end of each interim period
     based on the estimated effective tax rate for the full fiscal year for each
     tax reporting corporate entity. Cumulative adjustments to the tax provision
     are recorded in the interim period in which a change in the estimated
     annual effective rate is determined.

     The Company has approximately $16,500,000 of available net operating loss
     carryforwards. The carryforwards arising from domestic losses expire
     through 2009, while those relating to foreign losses are available
     indefinitely. The loss carryforwards cannot be applied against income
     generated in a trade or business significantly different from that which
     gave rise to the carryforwards. Because of United States ("US") tax
     regulations, utilization of US losses in any one year will be subject to
     certain limitations.

                                       6
<PAGE>   7



4.   Restructuring

     In the quarter ended June 30, 1996, the Company recorded restructuring
     costs totaling $2,125,000. This charge was associated with the downsizing
     of ObjectStudio-related activities and included employee severance and
     benefits, moving and facility consolidation costs, and the write-off of
     certain capitalized software costs.

     In connection with the merger with Easel Corporation, the Company recorded
     a one-time charge in the quarter ended June 30, 1995 for merger-related
     costs of $6,882,000. Included in these costs were legal, investment banking
     and accounting fees associated with the transaction, employee severance
     expense, and costs associated with combining the operations of the
     previously separate companies.

5.   Preferred Share Purchase Rights

     On June 6, 1996, the Company's Board of Directors declared a dividend of
     one purchase right (a "Right") for every outstanding share of the Company's
     common stock. The Rights were distributed on June 12, 1996 to holders of
     record as of that date. Each Right entitles the holder to purchase from the
     Company one one-thousandth of a share of Series A Junior Preferred Stock at
     a price of $75 per one one-thousandth of a share, subject to adjustments in
     certain events. The Rights will be exercisable only if a person or group
     acquires 15% or more of the outstanding shares of the Company's common
     stock or announces a tender offer, the consummation of which would result
     in such person or group owning 30% or more of the Company's common stock.
     If a person or group (other than the Company and its affiliates) acquires
     15% or more of the Company's outstanding common stock, each Right (other
     than Rights held by such person or group) will entitle the holder to
     receive shares of Common Stock, or in certain circumstances, cash,
     property, or other securities of the Company, having a market value of two
     times the exercise price of the Right. Also if the Company were acquired in
     a merger or other business combination, or if more than 50% of its assets
     or earning power were sold, each holder of a Right would be entitled to
     exercise such Right and thereby receive common stock of the acquiring
     company with a market value of two times the exercise price of the Right.
     Furthermore, at any time after a person or group acquires more than 15% of
     the outstanding stock, but prior to the acquisition of 50% of such stock,
     the Board of Directors may, at its option, exchange all or a part of the
     Rights at an exchange ratio of one share of Common Stock for each Right.
     The Company will be entitled to redeem the Rights at $.01 per Right,
     subject to adjustment in certain events, at any time on or prior to the
     tenth day after public announcement that a 15% or greater position has been
     acquired by any person or group. The Rights expire on June 12, 2006. The
     Company has 10,000,000 shares of $.01 par value preferred stock authorized
     for issuance, of which 15,000 shares have been designated by the Board of
     Directors as Series A Junior Preferred Stock.


                                       7
<PAGE>   8



6.   Litigation

     The Company is a defendant, together with certain of its officers, in two
     actions filed in October 1995 in the U.S. District Court for the District
     of Massachusetts. Those actions have been consolidated through the filing
     of a Consolidated Amended Complaint (the "Complaint"). The plaintiffs
     allege in the Complaint that the Company and certain of its officers,
     during July through October 1995, made certain untrue statements and failed
     to disclose certain information regarding the Company's prospective
     financial performance in violation of Section 10(b) of the Securities
     Exchange Act of 1934 and Rule 10b-5 thereunder and that such statements and
     omissions artificially inflated the market prices of the Company's stock.
     The plaintiffs purport to bring the actions on behalf of certain classes of
     stockholders and seek damages in unspecified amounts. The Company has
     denied the allegations in its answer to the Complaint and the proceeding is
     now in the early stages of discovery. Based upon its review to date,
     management of the Company believes that the actions are without merit and
     plans to oppose them vigorously.

                                       8
<PAGE>   9




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

                              VMARK SOFTWARE, INC.
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATION

RESULTS OF OPERATIONS
<TABLE>

The following table sets forth certain data as a percentage of total revenue for
 the three and nine months ended September 29, 1996 and October 1, 1995.

<CAPTION>
                                               Three Months Ended             Nine MonthsEnded
                                               ------------------             ----------------
                                             September 29,  October 1,    September 29,  October 1,
                                                  1996         1995           1996          1995
                                                  ----         ----           ----          ----
<S>                                              <C>          <C>            <C>           <C>  
Revenue:                                                                                 
  Software                                        48.8%        47.3%          50.5%         54.6%
  Services and other                              51.2         52.7           49.5          45.4
                                                 -----        -----          -----         -----
    Total revenue                                100.0        100.0          100.0         100.0
                                                 -----        -----          -----         -----
                                                                                          
Costs and expenses:                                                                       
  Costs of software                                7.9          8.0            7.0           7.7
  Costs of services and other                     27.7         27.4           26.3          23.3
  Selling and marketing                           38.1         40.1           37.5          38.1
  Product development                             13.3         16.3           13.2          14.9
  General and administrative                      11.1         16.8           10.6          11.9
  Merger integration and restructuring costs       -            -              4.0          13.4
                                                                                          
  Litigation and settlement costs                  -            -              -             1.0
                                                 -----        -----          -----         -----
    Total costs and expenses                      98.1        108.6           98.6         110.3
                                                 -----        -----          -----         -----
                                                                                          
Income (loss) from operations                      1.9%        (8.6)%          1.4%        (10.3)%
                                                 =====        =====          =====         =====
</TABLE>
                                                                              

REVENUE

The Company's total revenue increased 7% to $16,688,000 in the third quarter of
1996 from $15,557,000 in the third quarter of 1995 and increased 2% to
$52,382,000 in the first nine months of 1996 as compared to $51,160,000 in the
first nine months of 1995. Software revenue for the third quarter of 1996
increased by 11% to $8,150,000, representing 49% of total revenue, from
$7,360,000, or 47% of total revenue in the third quarter of 1995. This increase
is due principally to higher revenues from UniVerse and Object Studio products,
primarily in the US market. European sales of software licenses declined in the
third quarter of 1996 as compared to the third quarter of 1995. Software revenue
in the first nine months of 1996 decreased by 5% to $26,475,000, representing
51% of total revenue, from $27,953,000, representing 55% of total revenue, in
the first nine months of 1995. The decrease in software revenue in the
nine-month period is due primarily to a continued decline in sales of the ESL
product line, a flattening in sales of the Company's UniVerse database products,
and a progressive decline in European sales in the year-to-date figures.

                                       9
<PAGE>   10



Services and other revenue, consisting of consulting, training, and maintenance,
continued to grow with 4% and 12% increases in the quarter and nine months ended
September 29, 1996, respectively, as compared to the quarter and nine months
ended October 1, 1995. Services and other revenue decreased slightly as a
percentage of total revenue to 51% in the third quarter of 1996 from 53% in the
third quarter of 1995. This decrease is due to modest growth quarter over
quarter, offset by the increase in license revenue previously discussed. In the
first nine months of 1996, services and other revenue increased to 50% of total
revenue compared to 45% in the first nine months of 1995. The increase in
services and other revenue in the nine- month period was a result of the Company
entering into several large consulting contracts to provide on-site engagement
services in the first half of the year as well as the continued expansion of the
Company's customer maintenance and training base.

COSTS OF SOFTWARE

Costs of software, which consist of amortization of technology licenses and
capitalized software, product royalties, product documentation, packaging, media
and production costs, remained at approximately 16% to 17% of license revenue in
the third quarter of 1996 and 1995 and remained at approximately 14% of license
revenue for each of the nine-month periods presented. The increase in costs as a
percentage of software revenue in the third quarter of each year when compared
to year-to-date figures is due to the fact that the Company's license revenue
generally declines in its third quarter periods, particularly in international
markets, while the cost of license revenue is relatively fixed.

COSTS OF SERVICES AND OTHER

Costs of services and other, which consist of consulting, training, and other
customer support service costs, increased 8% to $4,628,000 for the third quarter
and increased 16% to $13,756,000 for the first nine months of 1996 as compared
to the same periods of the prior year. Costs of services and other as a
percentage of services and other revenue increased slightly to 54% and 53% for
the quarter and nine months ended September 29, 1996, respectively, compared to
52% and 51% for the comparable periods in 1995. The profit margin associated
with services and other revenue decreased slightly in 1996 due to a change in
the mix of services and other revenue. A higher percentage of the increase in
services and other revenue in 1996 is comprised of training and consulting
revenue which typically has a lower profit margin than revenue derived from
customer maintenance support.

SELLING AND MARKETING

Selling and marketing expenses, which consist primarily of sales organization
costs and marketing programs, increased slightly in the third quarter and first
nine months of 1996 by 2% and 1%, respectively. The costs as a percentage of
total revenue remain at approximately 38% for all periods presented with the
exception of the third quarter of 1995, when the costs were 40% of total
revenue. This inconsistency in the third quarter of 1995 is a result of the drop
in revenues in that period and the fixed nature of a portion of the costs. While
the year to date costs have remained constant as a percentage of revenues, cost
savings associated with changes in sales management in the first nine months of
1996 have been reinvested in selling and marketing efforts associated with new
product offerings as well as an increase in marketing and promotional activities
in international markets.

                                       10
<PAGE>   11



PRODUCT DEVELOPMENT

Product development expenses, which consist primarily of salaries and related
benefits of development personnel and facility costs, decreased 12% to
$2,216,000 in the third quarter of 1996 and decreased 10% to $6,890,000 in the
first nine months of 1996, as compared to the same periods of the prior year.
Product development expenses as a percentage of revenue were 13% of revenue for
the quarter and nine months ended September 29, 1996 compared to 16% of revenue
for the third quarter of 1995 and 15% of revenue for the first nine months of
1995. This decrease in spending is due primarily to cost savings associated with
the consolidation of facilities and reduction of headcount after release of
Object Studio 5.0 that occurred during the second quarter of 1996 as well as
economies of scale realized in connection with the merger of Easel Corporation
into VMARK.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include the costs of finance, human
resources, legal, information systems, and administrative departments of the
Company. General and administrative expenses decreased 29% to $1,858,000 in the
third quarter of 1996 and decreased 9% to $5,559,000 in the nine months ended
September 29, 1996, as compared to the same periods of 1995. The cost savings in
the comparable quarterly periods reflects efficiencies gained from the
restructuring which occurred in the second quarter of 1996, as well as the
implementation of cost cutting procedures by management throughout 1996. This
decrease is partially offset in the comparable nine month periods as a result of
an increase in the bad debt provision and significant investments in internal
management information systems throughout 1996. General and administrative
expenses decreased to 11% of revenue for both the third quarter and first nine
months of 1996, compared to 17% and 12% of revenue for the comparable periods of
the previous year, respectively.

NON-RECURRING ITEMS

In the quarter ended June 30, 1996, the Company recorded restructuring costs
totaling $2,125,000. This charge was associated with the downsizing of
ObjectStudio-related activities and included employee severance and benefits,
moving and facility consolidation costs, and the write-off of certain
capitalized software costs. The charge was recorded pursuant to a formal plan
adopted and announced in May 1996.

In the second quarter of 1995, the Company recorded $6,882,000 for merger
integration and acquisition costs associated with the merger with Easel
Corporation. The Company also recorded $499,000 in litigation and settlement
costs in the second quarter of 1995 which included the reimbursement of legal
costs in excess of of the initial estimate associated with a judgement against
the Company in the fourth quarter of 1994 and settlement expenses to resolve
certain disagreements with two customers of the former Easel Corporation.

INCOME TAXES

The Company recorded provisions for income taxes of $56,000 and $459,000 for the
third quarter and first nine months of 1996 respectively compared to credits of
$553,000 and $1,354,000 for the same periods in 1995. The large effective tax
rate in 1996 is a result of nondeductible losses generated overseas.


                                       11
<PAGE>   12

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations to date primarily through sales of equity
securities and positive cash flow from operations. As of September 29, 1996 the
Company had $12,994,000 in cash and cash equivalents and $18,151,000 in working
capital. The Company has a revolving line of credit with a bank under which the
Company may borrow up to the lesser of $5,000,000 or 80% of eligible domestic
accounts receivable, conditioned upon meeting certain financial covenants,
including maintaining specified levels of quarterly earnings, tangible net
worth, working capital and liquidity. The line of credit also limits the
Company's ability to pay dividends. As of September 29, 1996 the Company's
eligible accounts receivable exceeded that required to access fully the
revolving line of credit. The Company also has a share repurchase line of credit
with the same bank under which the Company may borrow up to $5,000,000 to be
used solely to make open market repurchases of the Company's common stock. At
September 29, 1996, there was $1,462,000 of borrowings outstanding under the
share repurchase line of credit facility.

The Company believes that its available cash, anticipated cash generated from
operations based upon its operating plan, and amounts available under its credit
facilities will be sufficient to finance the Company's operations and meet its
foreseeable cash requirements at least for the next twelve months.

During the first quarter of 1996, the Company, together with a third-party
leasing company, initiated a leasing program available to current and potential
customers. Under the program, customers are able to purchase VMARK products
through operating and capital leases with a third party lessor. All sales under
this program are subject to the Company's normal revenue recognition policies
and are made without recourse to the Company. This leasing program continued in
the quarter ended September 29, 1996 and sales under the program in the third
quarter totaled approximately $2,600,000. During the nine months ended September
29, 1996, sales under the program totaled approximately $6,500,000.

During the third quarter of 1996, the Company entered into an agreement with the
same leasing company to finance the Company's purchase of $1,000,000 in external
software licenses through a leasing transaction. The financed amount is payable
in equal monthly installments over a one year period.

FACTORS AFFECTING FUTURE RESULTS

The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control. The following discussion
highlights some of these risks.

The Company has experienced fluctuations in quarterly results and anticipates
such fluctuations in the future. Quarterly fluctuations may be caused by
numerous factors including timing of customer orders, adjustments of delivery
schedules to accommodate customer or regulatory requirements, timing and level
of international sales, mix of products sold, and timing of level of
expenditures for sales, marketing and new product development. The Company
generally ships its products upon receipt of orders and maintains no significant
backlog. A substantial portion of 

                                       12
<PAGE>   13

the Company's costs and expenses, including costs of personnel and facilities,
cannot be easily reduced. If short-term demand for the Company's products
declines, the Company's results of operations for that quarter would be
adversely affected. Accordingly, the results of any one quarter may not be
indicative of the operating results for future quarters.

The Company currently derives a substantial portion of its total revenue from
its core database product uniVerse. Accordingly, the Company's future results
will depend, to a significant extent, on continued market acceptance of these
products. Any factor adversely affecting the market for this product would have
a material adverse effect of the Company's business and financial results.

The market for the Company's products is characterized by ongoing technological
developments and changes in customer requirements and industry standards. If the
Company is unable to develop and introduce new products or enhancements in a
timely manner in response to changing market conditions or customer requirements
or if errors are found in products after commercial shipments, the Company's
business and results of operations will be adversely affected.

Approximately 40% of the Company's total revenue for the first nine months of
fiscal 1996 was attributable to international sales made through international
subsidiaries. Because a substantial portion of the Company's total revenue is
derived from such international operations, which are conducted in foreign
currencies, changes in the value of those currencies relative to the United
States dollar may affect the Company's results of operations and financial
position. The Company engages in certain currency-hedging transactions intended
to reduce the effect of fluctuations of foreign currency exchange rates on the
Company's results of operations. However, there can be no assurance that such
hedging transactions will materially reduce the effect of fluctuations on such
results. If, for any reason, exchange or price controls or other restrictions on
the conversion of foreign currencies were imposed, the Company's business could
be adversely affected. Other potential risks inherent in the Company's
international business generally include longer payment cycles, greater
difficulties in accounts receivable collection and the burdens of complying with
a wide variety of foreign laws and regulations.

The market for application development software is intensely competitive. The
Company competes with many companies offering alternative solutions to the needs
addressed by the Company's products. Many of these competitors may have greater
financial, marketing, or technical resources than the Company and may be able to
adapt more quickly to new or emerging technologies and standards or changes in
customer requirements or to devote greater resources to the promotion and sale
of their products than the Company.

CAUTIONARY STATEMENT

When used anywhere in the Form 10-Q and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimated", "project", or "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements," which speak only
as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those earnings presently anticipated or projected. Such
risks and 

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<PAGE>   14

uncertainties are set forth above and in Part 1 of the Company's Annual Report
on Form 10-K for the year ended December 31, 1995. The Company specifically
declines any obligation to release publicly the result of any revisions which
may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.

                                       14
<PAGE>   15



PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a defendant, together with certain of its officers, in two
actions initially filed in October 1995 in the U.S. District Court in the
District of Massachusetts. Those actions have been consolidated through the
filing of a Consolidated Amended Complaint (the "Complaint"). The plaintiffs
allege in the Complaint that the Company and certain of its officers, during
July through October 1995, made certain untrue statements and failed to disclose
certain information regarding the Company's prospective financial performance in
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder and that such statements and omissions artificially inflated the
market prices of the Company's stock. The plaintiffs purport to bring the
actions on behalf of certain classes of stockholders and seek damages in
unspecified amounts. The Company has denied the allegations in its answer to the
Complaint and the proceeding is now in the early stages of discovery. Based upon
its review to date, management of the Company believes that the actions are
without merit and plans to oppose them vigorously.

ITEM 2. NONE

ITEM 3. NONE

ITEM 4. NONE

ITEM 5. NONE.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a)  Exhibits

             27  Financial Data Schedule

        (b)  Reports on Form 8-K:

             The Company did not file a report on Form 8-K during the quarter 
             ended September 29, 1996.

                                       15
<PAGE>   16



                                   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.

                                          VMARK Software, Inc.
                                          (Registrant)
Dated:  November 11, 1996

                                          -------------------------------------
                                          Robert M. Morrill
                                          President and Chief Executive Officer
                                          and Chairman
                                          (principal executive officer)




Dated:  November 11, 1996

                                          -------------------------------------
                                          Charles F. Kane
                                          Vice President of Finance and
                                          Chief Financial Officer,
                                          (principal finance and accounting
                                           officer)


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