SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-K
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1996

                         Commission File Number 0-15454
                       TANGRAM ENTERPRISE SOLUTIONS, INC.
             (Exact name of registrant as specified in its charter)
            Pennsylvania                                23-2214726
         (State or other jurisdiction of    (I.R.S. Employer Identification No.)
          incorporation or organization)

                        11000 Regency Parkway, Suite 401
                              Cary, NC 27511-8504
                    (Address of principal executive offices)
                                 (919) 851-6000
              (Registrant's telephone number, including area code)
          Securities registered pursuant to Section 12(b) of the Act:
                                      None
          Securities registered pursuant to Section 12(g) of the Act:
        Title of class                Name of Each Exchange on Which Registered
Common Stock, $0.01 par value                    Nasdaq Stock Market

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
filing  requirements  for the past 90 days.  Yes X  No ____

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X

     The aggregate market value of shares of common stock held by non-affiliates
on March 21, 1997 (as reported on The Nasdaq  SmallCap Market tier of The Nasdaq
Stock Market under the symbol TESI) was approximately  $13,219,690.

     As of March 21, 1997, there were 15,646,589  shares of the Company's common
stock  outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the  registrant's  definitive  Proxy Statement  relating to its
scheduled 1997 Annual Shareholders Meeting are incorporated by reference in Part
III, Items 10, 11, 12 and 13 of this report.


<PAGE>


                       Tangram Enterprise Solutions, Inc.
                               Index to Form 10-K
                  For the Fiscal Year Ended December 31, 1996

                                     PART I

                                                                         Page
Item 1   -        Business                                                 3

Item 2   -        Properties                                               9

Item 3   -        Legal Proceedings                                        9

Item 4   -        Submission of Matters to a Vote of
                     Security Holders                                      9

                                    PART II

Item 5   -        Market For Registrant's Common Equity
                     and Related Stockholder Matters                      11

Item 6   -        Selected Financial Data                                 12

Item 7   -        Management's Discussion and Analysis of
                    Financial Condition and Results of Operation          13

Item 8   -        Financial Statements and Supplementary
                    Data                                                  17

Item 9   -        Changes in and Disagreements With Accountants
                    on Accounting and Financial Disclosure                17

                                    PART III

Item 10  -        Directors and Executive Officers of
                    the Registrant                                        18

Item 11  -        Executive Compensation                                  18

Item 12  -        Security Ownership of Certain Beneficial
                    Owners and Management                                 18

Item 13  -        Certain Relationships and Related Transactions          18


                                    PART IV

Item 14  -        Exhibits, Financial Statement Schedules, and
                    Reports on Form 8-K                                   19


<PAGE>

                                     PART I

Item 1. Business

General

Tangram Enterprise Solutions, Inc. (the "Company") develops and markets asset
tracking software and software distribution solutions that enable automated
enterprise-wide information system management. The Company markets to Fortune
1000 companies and their foreign equivalents and to government agencies that are
managing heterogeneous enterprises and mission-critical applications.

     The Company was created from the merger of Tangram Systems Corporation
("Tangram Systems") and Rabbit Software Corporation ("Rabbit") in September
1993. Each company had over 10 years of experience in providing software
products in the mainframe connectivity market. The merger permitted the
integration of complementary technologies by combining Tangram Systems'
expertise in the area of wide area networks with Rabbit's open systems
expertise. This base of technology enabled the Company to serve the entire
spectrum of networking environments: wide area, local area, and distributed
networks.

     The following discussion contains forward-looking statements that are
subject to risks and uncertainties. There are several important factors that
could cause actual results to differ materially from those anticipated by the
forward-looking statements contained in the following discussion. Readers should
pay particular attention to the risk factors set forth in this section and in
the section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

 Background and Strategy

     The Company believes that businesses are moving toward an enterprise-wide
computing environment where more desktop personal computers will be
interconnected into large local-area and wide-area networks, as well as the
Internet, and administered by corporate MIS departments. The Company believes
that the continued expansion of heterogeneous computer networks and current
downsizing and rightsizing trends are forcing businesses to seek automated
solutions for tracking and managing their enterprise-wide information technology
("IT") assets. The Company believes this trend will continue and that its new
product, Asset Insight(R) will enable the Company to attain a leading position
in the asset tracking market. While the Company expects the market's shift
toward enterprise and Internet products to continue, there can be no assurance
that the Company's Asset Insight products will be successful or will gain
customer acceptance.

     Historically, the Company focused on the demands of the traditional IBM
customer base with the Open Advantage(R) UNIX SNA products and Arbiter(R). The
Open Advantage(R) UNIX SNA products enable microcomputer users to leverage both
the local capabilities of the microcomputer and the data and software
applications on a mainframe using 3270 emulation. Arbiter software enables
Windows, DOS and OS/2 workstation users to access mainframe data, transfer files
and perform terminal emulation.

     The Company developed its AM:PM(R) software, which provides automatic
software distribution, data distribution and data collection within a
heterogeneous business environment. The AM:PM product line was expanded to
include asset management capabilities. In 1994, the Company released a LAN
version of the software. Building on the need for the tracking and management of
computer assets, a new product, Asset Insight, was launched in 1996. Asset
Insight is the result of marrying the Company's technology base with its base of
enterprise expertise. The result of this development effort was the mid-1996
release of the Asset Insight product and the Asset Insight Internet Subsystem.
The Asset Insight product was designed to enable corporations to proactively
manage their base of distributed assets without disruption to their business.
Asset Insight enables organizations to automatically track and analyze their
entire base of client server computer hardware and software assets across
enterprises.

                                       3


<PAGE>

    The Company maintains an active development program that is expanding the
utility of the Asset Insight product line through strategic alliances, new
product functionality and business subsystems. Product development efforts focus
on providing sophisticated management reports and subsystems that assist
companies in relating their IT asset information to business goals and
opportunities.

     In 1996, the Company was restructured into two separate divisions,
Consulting Solutions and Enterprise Solutions, to better serve the growing needs
of the asset tracking market, while meeting customers' specific requirements in
the area of electronic software distribution. The Consulting Solutions Division
focuses on the traditional lines of business and develops customized solutions
tailored to meet customer requirements. The Enterprise Solutions division
focuses on the asset tracking market and Asset Insight.

     The Company continually evaluates its products and corporate strategy and
has in the past and will in the future undertake organizational changes and
product and marketing strategy modifications that are designed to maximize
market penetration, maximize the use of limited resources and develop new
products and product channels. These organizational changes increase the risk
that objectives will not be met. Further, due to the uncertain nature of any of
these undertakings, there can be no assurance that these efforts will be
successful or that the Company will realize any benefit from these efforts.

Products and Services

Enterprise Solutions

     Asset Insight, launched in mid-1996, delivers business and productivity
solutions that address the needs of major corporations as they manage their
distributed computing asset base. Asset Insight, an information technology asset
tracking product launched in 1996, allows businesses to track changes in their
information technology asset base (including hardware and software), forward
plan technology requirements and optimize end-user productivity. The product
assists in calculating the cost of software and hardware upgrades, identifying
missing hardware components, and resolving desktop problems quickly. Asset
Insight includes an analysis function that enables organizations to make
informed decisions with confidence. Asset data is automatically gathered and
distilled into one-page reports that highlight exceptions, costs and trends.

     The Asset Insight Internet Subsystem, an add-on component to the Asset
Insight product, was also introduced in 1996. With this subsystem, decision
makers can track Internet usage on an enterprise-wide, departmental, and
individual basis. Internet page access, hourly usage, usage byte count, and top
sites accessed can be monitored and tracked over time assisting in the
formulation of Internet usage trends and company Internet policies. Asset
Insight employs an open data repository, using standard relational database
technology that gives corporations access to their data.

Consulting Solutions

     The Consulting Solutions Division offers implementation services to major
corporations designed to facilitate implementation of AM:PM. The Company's
software and services cover both enterprise information systems management and
connectivity. These solutions are designed to facilitate the implementation and
maximize the use of the electronic software distribution and asset tracking
products. Service offerings include project planning, product customization,
custom application development and hands-on training. In addition, the
Consulting Solutions Division continues to offer the traditional line of
products. The AM:PM(R) family of products is a leading automated software
distribution solution, allowing customers to manage heterogeneous computer
resources across an entire enterprise. AM:PM allows companies with thousands of
remote workstations and servers to accomplish tasks unattended. Such tasks
include software distribution, data distribution and collection, and resource
and asset management. AM:PM offers a variety of connectivity options for
workstations, LANs and servers. AM:PM supports numerous operating platforms,
including Solaris, HP-UX, SCO OpenServer, AIX, Windows, Windows NT, Windows 95,
DOS, OS/2, MVS, NetWare and Macintosh, as well as numerous communications
protocols.

                                       4
<PAGE>

    The Consulting Solutions Division also offers the traditional mainframe
connectivity software products that provide access to IBM SNA networks. These
products enable companies to run a range of mainframe interface applications at
high speed on multiple workstation platforms. Arbiter provides a file transfer
capability and PC-to-mainframe connectivity, with an IBM mainframe used as a LAN
file server. The Open Advantage gateway product line provides high-speed 3270
connectivity between mainframes and LANs.

Product Development

     Development resources are allocated between the two Company divisions.
These resources are deployed according to the need for existing product
enhancements and new product development in proportion to existing revenue
streams and market trends. Existing products are enhanced to keep them current
with market requirements and to allow them to support new standards and
environments. New products and subsystems are developed that are complementary
to existing products and that enter new markets.

     Asset Insight is the result of marrying the Company's technology base with
its base of enterprise expertise. The Asset Insight product was designed to
enable corporations to proactively manage their base of distributed assets
without disruption to their business. In order to accomplish this goal, the
Company developed four design criteria: the product must easily interface with
other popular management tools; the product must be accessible to all levels of
management within an organization; the product must support a broad range of
computing platforms; and the product must deliver valuable business information
and not just data. The result of this development effort was the mid-1996
release of the Asset Insight product and the Asset Insight Internet Subsystem.
The Company intends to maintain the Asset Insight design goals throughout the
deployment of new enhancements and subsystems.

     Project teams handle product development from specification, design and
implementation to product release. These project teams operate as autonomous
units and include developers, product managers from marketing, quality control
managers and members of senior management. Each product and enhancement is
submitted through a process that determines the marketability of the product,
revenue potential, development requirements, and support requirements. Critical
technical factors are also considered in determining the viability of an Asset
Insight product or subsystem, such as scaleability, level of automation, ease of
use, support for multiple platforms, and open architecture.

     The majority of the Company's products and associated documentation have
been developed internally. The Company has acquired in the past, and intends to
continue to acquire, certain software technology from others and integrate those
technologies into its product lines. The Company expended $3.4 million for
product development costs in 1996, compared with $3.1 million in 1995 and $3.4
million in 1994. No material expenditures were made in 1996 or 1995 for
acquisition of software technology. During 1994, the Company acquired certain
technology as a result of the purchase of Knozall Systems, Inc. ("Knozall"), an
Arizona-based software development firm specializing in LAN technologies.
Knozall's products provided enhanced functionality to the Company's AM:PM
distributed resource management products; however in March 1996 the Company sold
the asset and liabilities of the LAN division back to its former owner. The
Company retained rights to certain technology developed in the LAN division
since August 1, 1994.

     The Company is devoting substantial resources to the development of its new
product line, Asset Insight, and to additional enhancements of its other product
lines. Due to the inherent uncertainties of software development projects, there
can be no assurance that any products currently being developed by the Company
will be technologically successful, that any resulting project will achieve
market acceptance, or that the Company will be effective in marketing the
product or competing with products currently on the market or those that may be
introduced in the market. As a consequence of the complexity of developing
products for networked operating environments and operating systems using
graphical user interfaces, as well as the Company's emphasis on technical
excellence, the Company has experienced delays in the development and delivery
of its products and is likely to experience such delays in the future.

                                      5
<PAGE>

Maintenance and Support

     The Company offers a comprehensive customer support program on both a fee
and contract basis, with premium programs available to customers who have
extraordinary needs. The Company surveys its customer base to ensure quality of
service. The Consulting Solutions Division also offers project planning, product
installation services, customized application development and hands-on product
training. Other services include 24-hour support coverage for all products,
on-site problem resolution and improved high-speed telecommunication links with
our worldwide customers.

Customers, Sales and Marketing

Customers

     The customer base is composed of large, Fortune 1000 enterprises and
government agencies that are managing heterogeneous enterprises and
mission-critical applications. The Company's customers are located primarily in
North America and Europe and include companies in industrial, institutional and
governmental markets. The Company operates in a single industry and is engaged
in design and sale of software products.

     The Company has historically experienced a certain degree of variability in
its quarterly revenue and earnings patterns. This variability is typically
driven by significant events that impact the recognition of product and
implementation service revenues. Examples of such events include the timing of
major enterprise-wide sales of the new Asset Insight product, "one-time" payment
from existing customers for license expansion rights (required to install on a
larger or an additional computer base), completion and customer acceptance of
significant implementation roll outs and the related revenue recognition. As the
result of one of the aforementioned events, approximately 17% of the Company's
1996 sales were made to a single customer. No single customer accounts for more
than 10 percent of total product revenues in 1995 and 1994.

Sales

     In 1996, the Company converted from a direct sales channel to an indirect
sales organization. Early in the definition of the Asset Insight product, the
Company recognized the need for an alternate channel in order to acquire an
early presence in the market, cover the expected demand for the product, manage
the geographically dispersed nature of the target market, and build a large
number of salespeople in the field. The Company began the implementation by
focusing on a single large reseller, CompuCom Systems, Inc. The reseller agreed
to assist the Company in the development of the indirect channel program. The
efforts with CompuCom have now been duplicated in relationships with Vanstar
Corporation, RMS Technologies, and four regional value-added resellers. The
Company will continue to foster additional relationships of this kind, as well
as relationships with systems integrators, in the future. The VAR channel is
managed out of the corporate headquarters.

     The Company believes that it must continue to develop relationships with
resellers, systems integrators and other third-party vendors that provide
consulting and integration services and delivers products developed for this
market segment. The Company employs an indirect sales force that works closely
with its major resellers and systems integrators to manage the development of
the indirect channel and product implementation.

     Agreements with the resellers and systems integrators are generally
nonexclusive and may be terminated by either party without cause. Such resellers
and systems integrators are not within the control of the Company, are not
obligated to purchase products and may also represent other vendors' lines.
There can be no assurance that these resellers and systems integrators will
continue their current relationships with the Company on the same basis, or that
they will not give higher priority to the sale of other products. Additionally,
there can be no assurance that the Company will be able to obtain adequate
distribution channels for its products in the future.

     The Consulting Solutions division sells through a direct channel. The
primary focus of the direct channel is the Company's AM:PM and related asset
tracking products, which are sold directly to large multi-location firms using a

                                        6
<PAGE>

combination of telesales and in-person contacts at the customer location.
The direct channel for the Consulting Solutions division is managed out of the
corporate headquarters.

     In late 1995, the Company began building its international distribution
channels through a network of independent distributors in major markets outside
North America. All products sold outside North America are sold through
distributors who resell to the end user. The international channel is managed
out of Washington, D.C. The Company currently has international distributors in
Great Britain, Scandinavia, Spain, Germany, Italy, Israel, South Africa,
Australia, Belgium and Venezuela.

Marketing

     During 1996, the Company focused marketing efforts on building the asset
tracking market and educating this market on the Asset Insight product. Initial
efforts in defining the market and creating product awareness have laid the
groundwork for the indirect sales channel efforts. To aid in the market
definition effort, the Company President and CEO has written a book entitled, A
Journey Through Oz, The Business Leader's Road Map to Tracking Information
Technology Assets. This book has been useful in this marketing phase. The
Company will continue to focus on generating interest in order to move the
product through the established sales channel. In cooperation with channel
partners, the Company will move toward more targeted and active promotional
campaigns aimed at Fortune 1000 and government end users throughout North
America and Europe.

     The Company's marketing strategy focuses on positioning its products as
market-driven solutions that leverage customer information systems investments,
assist customers in the migration to new technologies and provide quality
solutions with a superior value-to-price ratio. To ensure that the products
reflect the changing market requirements, all of the Company's product
development efforts are integrated with marketing and other functions in a team
approach (see Product Development).

     Customer requests for enhancements to current products and the development
of new products play a significant role in the Company's product marketing
strategy. Senior management teams make regular customer visits to gain customer
feedback. The Company also conducts regular customer surveys to evaluate overall
customer satisfaction as well as future product needs.

COMPETITION

     When considered within the context of the asset tracking market, the
Company believes that Asset Insight has no current direct competition. Asset
tracking is a new market; to the Company's knowledge, competitors have not yet
entered the market. In the broader market defined as asset management, SMS from
Microsoft Corporation and PC Census from Tally Systems Corporation both have a
marginally competitive position with Asset Insight. In addition, there are a
number of complementary products that have some competitive overlap, including
AssetPro from Asset Software International and Asset Manager from Apsylog.

     The software market is intensely competitive and is subject to rapid
changes in both technology and the strategic direction of major microcomputer
hardware manufactures, software developers and operating systems providers. The
Company believes that its competitiveness depends on its ability to successfully
launch the Asset Insight product line, attain a leading position in the asset
tracking market, enhance its existing products and to offer new products on a
timely basis.

     In the electronic software distribution ("EDS") market, the Company
competes with large software companies that offer systems management solutions,
which include ESD as an ancillary component. The Company is distinquished by its
offering of a fully integrated ESD and asset traking solution, as well as
comprehensive consulting services. Many of the Company's actual and potential
competitors in this market have substantially greater financial, marketing and
technological resources than the Company. The Company believes that the
principal competitive factors in the industry segment are the compatibility of
products with the customers' computer hardware and software, ease of use, price
and the substantial base of technology that is required to join together the
various platforms in today's heterogeneous

                                       7

<PAGE>

enterprises. The quality of documentation, customer support and installation and
the ability of a family of products to work together effectively are additional
factors.

     The Company also competes indirectly with microcomputer hardware
manufacturers that develop their own software products. Further, the Company
competes with other software companies for access to the channels of
distribution. Finally, the Company believes that competition in the industry
will intensify as major software companies, with substantially greater
financial, marketing and technological resources, expand their product lines
into additional product or functional categories.

PRODUCT PROTECTION

     The Company relies on a combination of trade secrets, copyright and
trademark laws, licenses, non-compete agreements and technical measures to
protect its rights in its software products. In addition, the Company has
applied for a patent for its Asset Insight technology. The Company's products
are generally licensed to end users pursuant to a license agreement that
restricts the use of the products to a limited number of control point
processors and/or a designated site or a limited number of nodes. The scope of
legal protection available for the Company's products may vary in certain
foreign countries.

     The Company protects the source code version of its products as a trade
secret and as an unpublished copyrighted work. The Company does not allow the
source code to be distributed to customers for the AM:PM products. The Company
has been required from time to time to enter into source code escrow agreements
with certain customers and distributors for certain of its products. These
agreements require the release of source code only under very limited
circumstances, principally a breach by the Company of its support obligations or
a filing of bankruptcy.

     The Company believes that patent, trade secret and copyright protection is
less significant than factors, such as knowledge, experience of the Company's
personnel, new products, frequent product enhancements, name recognition and
ongoing, reliable product maintenance.

     Asset Insight is a trademark, and AM:PM, Arbiter, Tangram, and the Tangram
puzzle are registered trademarks of Tangram Enterprise Solutions, Inc. Other
products and brand names may be trademarks of their respective holders.

EMPLOYEES

     As of March 21, 1997, the Company employed 127 persons, including 45 in
worldwide marketing, sales and field operations; 64 in product development and
technical support; and 18 in general and administrative. None of the Company's
employees are represented by a labor union. The Company has experienced no work
stoppages and believes that its employee relations are good.

     Competition in recruiting personnel in the software industry is intense.
The Company believes that its future success will depend in part on its ability
to recruit and retain highly skilled management, marketing and technical
personnel.

                                       8

<PAGE>

 Item 2. Properties

     The Company leases all of its facilities. The following table sets forth
summary data on the Company's leased facilities:

<TABLE>
<CAPTION>
<S>                         <C>                       <C>
Location                    Approximate Square Feet             Use                        Lease Expiration

Cary, NC                          49,600               Executive, sales, development,      October 31, 2004
                                                       marketing, customer support, and
                                                       distribution center

Malvern, PA                        7,400               Sales, development, marketing and   February 28, 2000
                                                       customer support

Regional Offices(2)                  400               Sales                               Month-to-month
</TABLE>

Item 3. Legal Proceedings

     There are no material pending legal proceedings to which the Company is a
party or of which any of their property is subject.

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

     None.


                                      9

<PAGE>

Additional Information

     The following information is furnished in this Part I pursuant to
Instruction 3 to Item 401(b) of Regulation S-K:

Executive  Officers of the Registrant

The following persons were executive officers  of the Company at
March 21,  1997:
     Name                      Age     Position

      W.  Christopher Jesse     46      President, Chief Executive Officer
                                        and Director

      Nancy M. Dunn             48      Senior Vice  President,
                                        Tangram Enterprise Solutions, Inc. and
                                        President, Tangram Consulting
                                        Solutions Division

      Steven F. Kuekes           38     Senior Vice President, Chief Technology
                                        Officer and Director

      John N. Nelli              39     Senior Vice President and Chief
                                        Financial Officer

     W. Christopher Jesse has served as President, Chief Executive Officer and a
director of the Company  since  October  1993.  From March 1990 until  September
1993, Mr. Jesse served as President,  Chief Executive  Officer and a director of
Tangram  Systems.

     Nancy M. Dunn served as the  Company's  Vice  President  of Finance,  Chief
Financial Officer and Assistant Secretary since October 1993 and was promoted to
her current  position in January  1997.  Ms.  Dunn served as Vice  President  of
Finance of Tangram  Systems from April 1990 through  September  1993.

     Steven F. Kuekes has served as the Company's  Senior Vice President,  Chief
Technology  Officer and as a director since October 1993. Mr. Kuekes also served
as Vice  President of Enterprise  Computing  Products and Services from November
1994 until December 1995. Mr. Kuekes was a founder of Tangram Systems and served
as Vice  President of Product  Development  and  Technology and as a director of
Tangram Systems from 1988 until September 1993.

     John N.  Nelli  joined  the  Company  as Senior  Vice  President  and Chief
Financial Officer in February 1997.  Before joining the Company,  Mr. Nelli held
various positions at FAC Realty,  Inc., a publicly traded real estate investment
trust,  from February 1995 to January 1997,  including Chief Financial  Officer,
Senior Vice President - Finance,  Chief Accounting  Officer and Treasurer.  From
September 1993 to June 1994, Mr. Nelli served as the Chief Financial  Officer of
Litchfield Theatres,  Ltd., a regional motional picture exhibitor and developer.
Prior to September 1993, Mr. Nelli served as interim President and a director of
Natter Manufacturing,  Inc., a precision sheetmetal  manufacturer,  a company he
joined as Chief  Financial  Officer in 1989.  Mr.  Nelli is a  certified  public
accountant.

                                         10

<PAGE>

                                     PART II
Item 5.  Market For Registrant's Common Equity and Related Stockholder Matters

     (a) The Company's common stock is quoted on The Nasdaq SmallCap Market tier
of The Nasdaq Stock Market under the symbol "TESI".  Prior to June 12, 1996, the
Company's  common  stock was quoted in the  over-the-counter  market in what are
commonly  referred to as the "pink sheets".  The following  table sets forth the
high and low bid  quotations  of the  Company's  common stock from June 12, 1996
through December 31, 1996 as reported on the National  Association of Securities
Dealers,  Automated  Quotations  System  ("Nasdaq"),  and the  high  and low bid
quotations  from January 1, 1995 through June 11, 1996 as provided by the market
makers of the Company's common stock.

         1996                      High             Low

         Fourth Quarter           $8.50            $4.88
         Third Quarter           $13.50            $5.75
         Second Quarter          $17.88            $2.00
         First Quarter            $2.63            $1.25

         1995
         Fourth  Quarter          $2.25            $1.25
         Third Quarter            $2.88            $1.88
         Second  Quarter          $2.63            $0.50
         First  Quarter           $1.19            $0.56

     The high and low bid  quotations  for the  Company's  common  stock for the
period  covered above,  reflect  inter-dealer  prices  without  retail  mark-up,
mark-down or commission and may not necessarily represent actual transactions.

     (b) Holders.  On March 21, 1997, there were approximately  4,000 beneficial
owners of the Company's common stock.

     (c)  Dividends.  Holders of the common  stock are  entitled to receive such
dividends as may be declared by the Company's  Board of Directors.  No dividends
on the common stock have been paid by the Company. The Company intends to retain
all future earnings for the expansion of its business and consequently  does not
presently intend to pay cash dividends on its common stock.


                                       11
<PAGE>

Item 6.  Selected Financial Data

The following  selected financial data of the Company have been derived from the
Company's audited financial statements.  This data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations"  included in Item 7 of this report and with the Company's  financial
statements and the related notes thereto included in Item 8 of this report.
<TABLE>
<CAPTION>

<S>                             <C>         <C>         <C>         <C>         <C>

                                                 Year Ended December 31
                                1996        1995        1994        1993        1992
Summary of                              (In thousands, except per share data)
Operations:

Revenues                        $11,142     $12,538     $12,778     $13,733     $16,767

Net income (loss) (1)              (253)     (1,185)       (599)       (226)      1,271

Net income (loss) per
common share (2)                  (0.02)      (0.08)      (0.04)      (0.06)       0.04

Average common shares
outstanding                      14,811      14,459      14,216       13,942     15,418
</TABLE>

<TABLE>
<CAPTION>


                                                   December 31
                                1996        1995        1994        1993        1992
Financial Position:                               (In thousands)
<S>                             <C>         <C>         <C>         <C>         <C>
Total assets                    $12,946     $12,829     $15,048     $15,787     $15,181

Working capital (deficit)          (855)     (1,381)        (25)      1,568          95

Long-term debt,
including current
portion                             756       1,319        1,472          -       6,594

Shareholders' equity (3)          8,257       8,246        9,368      10,715      2,197

</TABLE>
(1)  One-time charges for purchased research and development expenses
     (associated with the acquisition of Knozall Systems, Inc.) of $1,253, or
     $0.09 per share, are included in the 1994 results, and merger and
     restructuring expenses of $2,500, or $0.18 per share, are included in the
     1993 results.

(2)  Net income (loss) per common share is after dividends on preferred stock of
     $570 and $610 for the years 1993 and 1992, respectively. No dividends were
     paid in 1996, 1995 or 1994.

(3)  The increase in shareholders' equity in 1993 includes the contribution to
     capital of a $5,400 note from the Company to Safeguard and $3,300 of
     additional paid-in capital resulting from the merger.

                                       12
<PAGE>



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

Overview

     Tangram Enterprise Solutions, Inc. (the "Company") provides state-of-
the-art enterprise-wide solutions, including asset tracking and electronic
software distribution for large heterogeneous computing environments,
encompassing mainframe, UNIX-based mini and LAN server platforms. Asset Insight,
an information technology asset tracking product launched in 1996, allows
businesses to track changes in their information technology asset base
(including hardware and software), forward plan technology requirements,
optimize end-user productivity, and calculates the cost of software and hardware
upgrades. AM:PM is the Company's industry leading solution for automated
software distribution, data distribution and collection, and remote resource
management. AM:PM, along with expert consulting services, provides businesses
with solutions to manage an enterprise's heterogeneous and remote information
technology systems. The Company is a member of the Safeguard Scientifics, Inc.
("Safeguard") partnership of companies. Safeguard supports technology-driven
growth companies with an emphasis on information system markets. Safeguard owns
approximately 67% of the Company.

     The Company has historically experienced a certain degree of variability in
its quarterly revenue and earnings patterns. This variability is typically
driven by significant events that impact the recognition of product and
implementation service revenues. Examples of such events include the timing of
major enterprise-wide sales of the new Asset Insight product, "one-time" payment
from existing customers for license expansion rights (required to install on a
larger or an additional computer base), completion and customer acceptance of
significant implementation roll outs and the related revenue recognition.
Fluctuations in the timing and amounts of additional sales and marketing and
general and administrative expenses may also cause profitability to fluctuate
from one quarter to another. Also, during a significant product launching, such
as the Asset Insight product, increases in sales and marketing and general and
administrative expenses will occur prior to the realization of incremental
revenues.

     Since early 1996, the Company has refocused its business on the asset
tracking market and the launch of its new Asset Insight product. The results of
the Company hereafter, and the forward-looking statements contained in the
following discussion, are therefore subject to various risks and uncertainties
relating to the development of the asset tracking business, which may cause the
Company's actual results to differ materially from the results contemplated.
Such uncertainties include the ability of the Company to sell its new Asset
Insight product to major accounts with full enterprise-wide deployment, the
reliability of the Asset Insight product to work in major corporate enterprises,
the possibility of the introduction of superior competitive products, the length
of time required for the Company to realize sufficient revenue from sales of the
product through the reseller sales channel, the ability of the Company to absorb
the increase in sales and marketing expenses and other operational expenses of
launching the Asset Insight product, the length of time required to develop a
sustainable stream of revenue from the sale of the Asset Insight product, the
ability to recruit key technical, sales and marketing personnel and the ability
of the Company to secure adequate financing on reasonable terms or at all.


                                       13
<PAGE>


Results of Operations

Net Revenues

     Total net revenues decreased 11% to $11.1 million in 1996 from $12.5
million in 1995. Product revenues, which include product upgrades and add-ons,
increased 6% in 1996 to $6.5 million from $6.1 million in 1995. Product revenues
of the new Asset Insight product, which was first sold in 1996, contributed $1.4
million of the 1996 product revenues. Revenue from AM:PM and related products
decreased 8% to $1.9 million in 1996 from $2.1 million in 1995. Revenue from
AM:PM and related products represented 30% of total product revenues, down
slightly from 34% in 1995. This decrease was due primarily to the ongoing
reallocation of resources toward the launch of the Asset Insight and the Asset
Insight Internet Subsystem product line. Revenues from the traditional mainframe
product lines, including gateways and Arbiter, decreased 13% to $2.8 million in
1996 from $3.2 million in 1995. This product line represented 44% of 1996
product revenues, down from 53% in 1995. This decline reflects the continued
decrease in overall demand in the connectivity market and the Company's decision
to direct fewer resources towards this product line. LAN product revenues were
not significant in 1996, as a result of the sale of the LAN division in March,
1996.

     Service revenues include software and hardware maintenance contracts,
implementation services, and training and support services not otherwise covered
under maintenance agreements that provide customers with updates and
enhancements developed by the Company and access to the Company's toll-free
telephone support services. Service revenues decreased by 28% to $4.7 million in
1996 from $6.5 million in 1995 primarily as a result of the decline in product
sales and the related decrease demand for high-level consulting skills and
implementation services by users of the mainframe products.

     Total net revenues decreased by 2% to $12.5 million in 1995 from $12.8
million in 1994. Product revenues decreased by 30% to $6.1 million in 1995 from
$8.6 million in 1994 due to lower revenues from the sale of AM:PM and Arbiter
products, as well as decreased revenues from gateway products.

     Service revenues increased by 57% to $6.5 million in 1995 from $4.1 million
in 1994 due principally to higher revenues from consulting and maintenance fees.

Cost of Revenues

     Cost of revenues includes costs principally related to the distribution of
licensed software and hardware products and the amortization of capitalized
software development costs. Cost of revenues also reflects the cost of the
direct labor force, including the associated personnel, travel and subsistence,
and occupancy costs incurred in connection with providing consulting and
maintenance services. As a percentage of total net revenues, cost of revenues
increased to 36% in 1996 from 30% in 1995 due primarily to higher amortization
of deferred development costs. Amortization of deferred development costs in
1996 reflects the accelerated amortization of approximately $287,000 of deferred
development costs of non-strategic products.

     Cost of revenues decreased by 11% to $3.8 million in 1995 from $4.3 million
in 1994 due to changes in product mix resulting from lower gateway product sales
in 1995, as well as lower amortization of deferred development expense. As a
percentage of total net revenues, cost of revenues decreased to 30% in 1995 from
34% in 1994.


Sales and Marketing Expenses

     Sales and marketing expenses decreased 20% to $3.7 million in 1996 from
$4.6 million in 1995. Excluding the cost associated with the LAN division that
was sold in March 1996, total selling and marketing expenses increased 5% in
1996 from 1995 and increased as a percentage of total net revenues to 33% in
1996 from 29% in 1995. These increases were primarily due to the Company's
investment in marketing staff and advertising related to the launching of the



                                       14
<PAGE>

new Asset Insight product. The Company expects this trend to continue into 1997
as it expands its sales and marketing force and product marketing programs to
facilitate the launching of the Asset Insight product.

     Sales and marketing expenses increased by 35% to $4.6 million in 1995 from
$3.4 million in 1994. Excluding sales and marketing expenses of the LAN division
(which was acquired in August 1994), the remaining expenses increased by 13% in
1995 due primarily to the marketing campaign to promote the new UNIX and MVS
versions of AM:PM, as well as the cost of the Consulting Services Group formed
in late 1994 to assist customers with the implementation of the Company's
products.

General and Administrative Expenses

     General and administrative expenses remained relatively unchanged in 1996
from 1995. Excluding the expenses related to the LAN division in both 1995 and
1996, general and administrative expenses increased 8%, and as a percentage of
total net revenues, increased to 23% in 1996 from 20% in 1995. This increase is
the result of the lower overall revenue base and increased expenses for
salaries, professional fees, and other expenses related to building the
infrastructure to support the Asset Insight product rollout. The Company expects
this trend to continue into 1997 as it expands administrative staff and costs
ahead of the anticipated revenue stream from sales of the Asset Insight product.

     General and administrative expenses decreased by 7% to $2.5 million in 1995
from $2.7 million in 1994 due primarily to professional fees in 1994 associated
with the acquisition of the LAN division.

Research and Development

     The Company capitalizes certain software development costs incurred to
enhance the Company's existing software or to develop new software. Certain
software development costs, incurred after technological feasibility of the
product has been established, are capitalized. Such capitalized costs are
amortized on an individual product basis commencing when a product is available
for release. Costs incurred prior to the establishment of technological
feasibility are charged to research and development expense. Gross research and
development costs increased 9% in 1996 to $3.4 million from $3.1 million in
1995. The increase is due to the Company's investment in its new product line,
Asset Insight, and continuing enhancements of its other product lines. The Asset
Insight product line became generally available to customers in mid 1996. Gross
research and development costs increased as a percentage of net revenues from
25% in 1995 to 30% in 1996, for the foregoing reasons. The Company will continue
to commit substantial resources to research and development in the future. Net
research and development expenses decreased by 33% to $1.2 million in 1996 from
$1.8 million in 1995. The decrease was due primarily to the increase in
capitalized software costs related to the development of the new Asset Insight
product in 1996, as well as the decreased expenses resulting from the sale of
the LAN division.

     Net research and development expenses decreased by 11% to $1.8 million in
1995 from $2.1 million in 1994 primarily due to lower development expenditures,
which was partially offset by lower capitalized development costs in 1995
compared to 1994. As a percentage of total net revenues, research and
development expenses decreased to 15% in 1995 from 16% in 1994.


Provision for Income Taxes

     There was no provision for income taxes in 1996 due to current year losses.
The provision for income taxes increased to $878,000 in 1995 from $16,000 in
1994. In 1995, the Company recorded a $878,000 tax provision for a valuation
allowance against a previously recorded deferred tax asset.

     At December 31, 1996, the Company has net operating loss carryforwards for
U.S. federal income tax purposes of approximately $27 million, which are
available to offset future federal taxable income and expire in various amounts
from 1998 through 2011.

                                       15
<PAGE>


Liquidity and Capital Resources

     The Company has funded its operations through cash flow from operations and
borrowings. At December 31, 1996, the Company had cash of $176,000 and a working
capital deficit in the amount of $855,000 compared to a deficit of $1.4 million
at December 31, 1995. The Company has a $5 million unsecured revolving line of
credit with Safeguard. The amount of this line of credit was increased from $1
million to $5 million in February 1997 to finance the cost of rolling out the
new Asset Insight product. Terms of the line of credit require monthly interest
payments at the prime rate plus 1% with principal due thirteen months after date
of demand by Safeguard. At December 31, 1996, the borrowings under the Safeguard
line of credit were $400,000 and have increased to $800,000 as of March 21,
1997. On March 21, 1997, the amount available for borrowing under the line of
credit is $4.2 million.

     In March 1996, the Company sold the assets and liabilities of the LAN
division, acquired in 1994, to its former owner, who was an officer and director
of the Company until the date of sale. In exchange for the cancellation of
$850,000 of a $1 million note due the former owner issued in connection with the
1994 acquisition, the Company transferred all of the net assets of the LAN
division, made a cash payment of $213,000, and issued a $300,000 note due in 24
equal installments. The remaining $150,000 of the $1 million note was converted
into 109,091 shares of Tangram common stock. At December 31, 1996, notes payable
includes the aforementioned promissory note with an outstanding balance of
$188,000. Principal and interest payments are due monthly with interest at 6%.
The note matures in March 1998. In addition, the Company has a loan with a bank
with an outstanding balance of $168,000 at December 31, 1996. Interest and
principal payments are due monthly with interest at the prime rate plus 1/4%.
The loan is collateralized by the assets of the Company and matures in November
1997.

     Net cash provided by operating activities was $2.8 million for the year
ended December 31, 1996. Net cash used in investing activities was $2.9 million
for the year ended December 31, 1996. The primary use of these funds included
$2.2 million for deferred software costs and $501,000 for property and
equipment, principally computer equipment to support the anticipated growth of
the business. Net cash provided by financing reflects $400,000 of borrowings
under the Safeguard line of credit offset by payments of $264,000 towards debt
principal repayment.

     In the past, the Company has generated cash from operating activities to
fund development and finance activities despite its net losses due to
significant levels of depreciation and amortization. However, cash requirements
have increased in 1996 and are forecasted to increase in 1997 due to the
additional expenditures required for the introduction and launching of the Asset
Insight product. As stated above, Safeguard has agreed to assist the Company's
launching of the Asset Insight product by providing a $5 million line of credit
to fund cash requirements. However, the Company anticipates that the line of
credit may not be adequate to meet the new product rollout expenses. As a
result, the Company is pursuing other sources of funds including, but not
limited to, debt or equity financing. However, the Company has no present
understanding, commitment, or agreement with respect to any such transaction.
Accordingly, there can be no assurance that the Company will have access to
adequate debt or equity financing and, if available, it will be under terms and
conditions satisfactory to the Company.

                                       16
<PAGE>



Item 8.  Financial Statements and Supplementary Data

     The consolidated financial statements and schedule filed with this report
appear on pages F-2 through F-19, and are listed on page F-1.

Item 9.  Changes in and Disagreements With Accountants on Accounting and
         Financial Disclosure

     None.

                                       17
<PAGE>

                                    PART III

Incorporated by Reference

     The information called for by Item 10. Directors and Executive Officers of
the Registrant (other than the information concerning executive officers set
forth after Item 4 herein), Item 11. Executive Compensation, Item 12. Security
Ownership of Certain Beneficial Owners and Management and Item 13. Certain
Relationships and Related Transactions is incorporated herein by reference to
the Company's definitive proxy statement for its 1997 Annual Shareholders
Meeting, which is expected to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year to which
this report relates.


                                       18
<PAGE>

                                    PART IV
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a) The following documents are filed as a part of this report:

         (1) Financial Statements

           (i) Report of Independent Auditors........................... F-2

          (ii) Balance Sheets at December 31, 1996 and 1995..............F-3

         (iii) Statements of Operations for the years ended
               December 31, 1996, 1995 and 1994..........................F-4

          (iv) Statements of Shareholders' Equity for the years
               ended December 31, 1996, 1995 and 1994................... F-5

           (v) Statements of Cash Flows for the years ended
               December 31, 1996, 1995 and 1994..........................F-6

          (vi) Notes to Financial Statements.................F-7 through F-17

         (2) Financial Statement Schedules

           (i) Schedule I -Valuation and Qualifying
               Accounts for the years ended
               December 31, 1996, 1995 and 1994..........................F-19

         (3) Exhibits

             See Item 14(c) of this Report.

     (b) Reports on Form 8-K.
         No reports on Form 8-K have been filed by the Registrant during the
         quarter ended December 31, 1996.

     (c) Exhibits
         The following is a list of exhibits required by Item 601 of Regulation
         S-K to be filed as part of this Report. For exhibits incorporated by
         reference, the location of the exhibit in the previous filing is
         indicated in parentheses.


                                       19
<PAGE>



                                 EXHIBIT INDEX

Exhibit
Number     Exhibit Description

2.1         Asset Purchase Agreement dated August 1, 1994 among Knozall Systems,
            Inc. and Tangram Enterprise Solutions, Inc. (6) (Exhibit 2.1)

2.2         Convertible Subordinated Promissory Note dated August, 1994 by and
            between Tangram Enterprise Solutions, Inc. and Knozall Systems, Inc.
            (6) (Exhibit 2.2)

3.1         Articles of Incorporation of the Company, as amended (4) (Exhibit
            3a)

3.2         Articles of Amendment of Rabbit Software Corporation (3) (Exhibit
            3.2)

3.3         Articles of Amendment of the Company (6) (Exhibit 3.3)

3.4         By-Laws of the Company, as amended (4) (Exhibit 3b)

4.1         Designation of Series D Convertible Preferred Shares and Series E
            Redeemable Preferred Shares of Rabbit Software Corporation (3)
            (Exhibit 4.1)

4.2         Form of Certificate evidencing Common Stock, $0.01 par value, of the
            Company (6) (Exhibit 4.2)

4.3**       Amended 1988 Stock Option Plan of the Registrant (5) (Exhibit 4c)

4.4**       Form of Stock Option Agreement under Amended 1988 Stock Option Plan
            (5) (Exhibit 4d)

4.5**       The Company's 1988 Stock Option Plan, as amended (6) (Exhibit 4.5)

10.1*       Agreement of Lease, executed by the Company on December 23, 1996,
            with Rexford LLC

10.2        Agreement of Lease, executed by the Company on February 17, 1986,
            with Morehall Associates Limited Partnership (1) (Exhibit 10m)

10.3        First Amendment to Agreement of Lease, dated June 13, 1986, with
            Morehall Associates Limited Partnership (2) (Exhibit 10i)

10.4        Second Amendment to Agreement of Lease, dated June 1, 1989, with
            Morehall Associates Limited Partnership (2) (Exhibit 10j)

10.5        Third Amendment to Agreement of Lease, dated October 12, 1992, with
            Morehall Associates Limited Partnership (4) (Exhibit 10d)

10.6*       Fourth Amendment to Agreement of Lease, dated January 28, 1997, with
            Morehall Associates Limited Partnership

10.7*       Fifth Amendment to Agreement of Lease, dated March 10, 1997, with
            Morehall Associates Limited Partnership

                                       20
<PAGE>






                                 EXHIBIT INDEX

Exhibit
Number      Exhibit Description

10.8        Administrative Services Agreement with Safeguard Scientifics, Inc.,
            dated December 15, 1985 (1) (Exhibit 10s)

10.9        Stock Purchase Agreement dated December 15, 1994 by and between
            Safeguard Scientifics (Delaware), Inc. and Tangram Enterprise
            Solutions, Inc. (6) (Exhibit 10.9)

10.10       Promissory Note dated December 15, 1994 from Tangram Enterprise
            Solutions, to Safeguard Scientifics (Delaware), Inc. (6) (Exhibit
            10.10)

10.11*      Revolving Note dated June 18, 1996, between the Company and
            Safeguard Scientifics, Inc.

10.12**     Promissory Note dated August 19, 1994, and Pledge Agreement dated
            July 22, 1994, between the Company and Chris Jesse (6) (Exhibit
            10.12)

10.13**     Promissory Note dated August 19, 1994, and Pledge Agreement dated
            July 22, 1994, between the Company and Steve Kuekes (6) (Exhibit
            10.13)

10.14**     Promissory Note dated August 19, 1994, and Pledge Agreement dated
            July 22, 1994, between the Company and Nancy Dunn (6) (Exhibit
            10.14)

10.15**     Promissory Note, Pledge Agreement and Agreement to Transfer or
            Terminate dated January 31, 1995, between the Company and Chris
            Jesse (6) (Exhibit 10.15)

10.16**     Promissory Note and Pledge Agreement dated January 31, 1995, between
            the Company and Steve Kuekes (6) (Exhibit 10.16)

10.17**     Promissory Note, Pledge Agreement and Agreement to Transfer or
            Terminate dated January 31, 1995, between the Company and Nancy Dunn
            (6) (Exhibit 10.17)

10.18**     Memorandum of Agreement Regarding Compensation and Benefits dated
            June 3, 1994 among Safeguard Scientifics, Inc., the Company, Chris
            Jesse, Steven Kuekes and Nancy Dunn (6) (Exhibit 10.18)

10.19**     Employee Non-Disclosure and Non-Competition Agreement dated October
            4, 1993, and First Amendment dated June 3, 1994, between the Company
            and Chris Jesse (6) (Exhibit 10.19)

10.20**     Employee Non-Disclosure and Non-Competition Agreement dated October
            4, 1993, and First Amendment dated June 3, 1994, between the Company
            and Steve Kuekes (6) (Exhibit 10.20)

                                       21
<PAGE>



                                 EXHIBIT INDEX

Exhibit
Number      Exhibit Description

10.21**     Employee Non-Disclosure and Non-Competition Agreement dated October
            4, 1993, and First Amendment dated June 3, 1994, between the Company
            and Nancy Dunn (6) (Exhibit 10.21)

23.1*       Consent of Ernst & Young LLP

23.2*       Consent of KPMG Peat Marwick LLP

27*         Financial Data Schedule

*           Filed herewith.

**          Management contract or compensatory plan or arrangement in which
            directors and/or executive officers of the registrant may
            participate.

(1)         Filed as an exhibit to the Company's Registration Statement on Form
            S-1 (No. 33-9525), and incorporated herein by reference.

(2)         Filed as an exhibit to the Company's Annual Report on Form 10-K for
            fiscal year ended December 31, 1989, and incorporated herein by
            reference.

(3)         Filed as an exhibit to the Company's Current Report on Form 8-K
            dated September 30, 1993, and incorporated herein by reference.

(4)         Filed as an exhibit to the Company's Annual Report on Form 10-K for
            fiscal year ended December 31, 1992, and incorporated herein by
            reference.

(5)         Filed on March 4, 1994, as an exhibit to the Company's Registration
            Statement on Form S-8 (No. 33-76066) and incorporated herein by
            reference.

(6)         Filed as an exhibit to the Company's Annual Report on Form 10-K for
            fiscal year ended December 31, 1994, and incorporated herein by
            reference.

  (d)     See Item 14(a) of this Report.




                                       22
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                               TANGRAM ENTERPRISE SOLUTIONS, INC.

Dated:  March 31, 1997         By: /s/ W.C Jesse
                               W. C. Jesse,
                               President , Chief Executive Officer and Director

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.


Dated:  March 31, 1997         /s/ W.C Jesse
                               W. C. Jesse,
                               President, Chief Executive Officer and Director
                               (Principal Executive Officer)

Dated:  March 31, 1997         /s/ John N. Nelli
                               John N. Nelli,
                               Chief Financial Officer
                               (Principal Financial and Accounting Officer)

Dated:  March 31, 1997         /s/ Charles A. Root
                               Charles A. Root,
                               Chairman of the Board of Directors

Dated:  March 31, 1997         /s/ Steven F. Kuekes
                               Steven F. Kuekes,
                               Senior Vice President ,Chief Technology  Officer
                               and Director

Dated:  March 31, 1997         /s/ John F. Owens
                               John F. Owens,
                               Director

Dated:  March 31, 1997         /s/ Carl G. Sempier
                               Carl G. Sempier,
                               Director

Dated:  March 31, 1997         /s/ Harry Wallaesa
                               Harry Wallaesa,
                               Director

Dated:  March 31, 1997         /s/ Carl Wilson
                               Carl Wilson,
                               Director




                                       23
<PAGE>

                             EXHIBIT INDEX

Except as indicated by footnote, all of the following exhibits were filed with
the Company's Annual Report on Form 10-K, dated December 31, 1996. For exhibits
incorporated by reference, the location of the exhibit in the previous filing
is indicated in parentheses.

Exhibit
Number      Exhibit Description

2.1         Asset Purchase Agreement dated August 1, 1994 among Knozall Systems,
            Inc. and Tangram Enterprise Solutions, Inc. (6) (Exhibit 2.1)

2.2         Convertible Subordinated Promissory Note dated August, 1994 by and
            between Tangram Enterprise Solutions, Inc. and Knozall Systems, Inc.
            (6) (Exhibit 2.2)

3.1         Articles of Incorporation of the Company, as amended (4) (Exhibit
            3a)

3.2         Articles of Amendment of Rabbit Software Corporation (3) (Exhibit
            3.2)

3.3         Articles of Amendment of the Company (6) (Exhibit 3.3)

3.4         By-Laws of the Company, as amended (4) (Exhibit 3b)

4.1         Designation of Series D Convertible Preferred Shares and Series E
            Redeemable Preferred Shares of Rabbit Software Corporation (3)
            (Exhibit 4.1)

4.2         Form of Certificate evidencing Common Stock, $0.01 par value, of the
            Company (6) (Exhibit 4.2)

4.3**       Amended 1988 Stock Option Plan of the Registrant (5) (Exhibit 4c)

4.4**       Form of Stock Option Agreement under Amended 1988 Stock Option Plan
            (5) (Exhibit 4d)

4.5**       The Company's 1988 Stock Option Plan, as amended (6) (Exhibit 4.5)

10.1*       Agreement of Lease, executed by the Company on December 23, 1996,
            with Rexford LLC

10.2        Agreement of Lease, executed by the Company on February 17, 1986,
            with Morehall Associates Limited Partnership (1) (Exhibit 10m)

10.3        First Amendment to Agreement of Lease, dated June 13, 1986, with
            Morehall Associates Limited Partnership (2) (Exhibit 10i)

10.4        Second Amendment to Agreement of Lease, dated June 1, 1989, with
            Morehall Associates Limited Partnership (2) (Exhibit 10j)

10.5        Third Amendment to Agreement of Lease, dated October 12, 1992, with
            Morehall Associates Limited Partnership (4) (Exhibit 10d)

                                       24
<PAGE>


Exhibit
Number      Exhibit Description

10.6*       Fourth Amendment to Agreement of Lease, dated January 28, 1997, with
            Morehall Associates Limited Partnership

10.7*       Fifth Amendment to Agreement of Lease, dated March 10, 1997, with
            Morehall Associates Limited Partnership

10.8        Administrative Services Agreement with Safeguard Scientifics, Inc.,
            dated December 15, 1985 (1) (Exhibit 10s)

10.9        Stock Purchase Agreement dated December 15, 1994 by and between
            Safeguard Scientifics (Delaware), Inc. and Tangram Enterprise
            Solutions, Inc. (6) (Exhibit 10.9)

10.10       Promissory Note dated December 15, 1994 from Tangram Enterprise
            Solutions, to Safeguard Scientifics (Delaware), Inc. (6) (Exhibit
            10.10)

10.11*      Revolving Note dated June 18, 1996, between the Company and
            Safeguard Scientifics, Inc.

10.12**     Promissory Note dated August 19, 1994, and Pledge Agreement dated
            July 22, 1994, between the Company and Chris Jesse (6) (Exhibit
            10.12)

10.13**     Promissory Note dated August 19, 1994, and Pledge Agreement dated
            July 22, 1994, between the Company and Steve Kuekes (6) (Exhibit
            10.13)

10.14**     Promissory Note dated August 19, 1994, and Pledge Agreement dated
            July 22, 1994, between the Company and Nancy Dunn (6) (Exhibit
            10.14)

10.15**     Promissory Note, Pledge Agreement and Agreement to Transfer or
            Terminate dated January 31, 1995, between the Company and Chris
            Jesse (6) (Exhibit 10.15)

10.16**     Promissory Note and Pledge Agreement dated January 31, 1995, between
            the Company and Steve Kuekes (6) (Exhibit 10.16)

10.17**     Promissory Note, Pledge Agreement and Agreement to Transfer or
            Terminate dated January 31, 1995, between the Company and Nancy Dunn
            (6) (Exhibit 10.17)

10.18**     Memorandum of Agreement Regarding Compensation and Benefits dated
            June 3, 1994 among Safeguard Scientifics, Inc., the Company, Chris
            Jesse, Steven Kuekes and Nancy Dunn (6) (Exhibit 10.18)

10.19**     Employee Non-Disclosure and Non-Competition Agreement dated October
            4, 1993, and First Amendment dated June 3, 1994, between the Company
            and Chris Jesse (6) (Exhibit 10.19)

10.20**     Employee Non-Disclosure and Non-Competition Agreement dated October
            4, 1993, and First Amendment dated June 3, 1994, between the Company
            and Steve Kuekes (6) (Exhibit 10.20)

                                       25
<PAGE>

Exhibit
Number      Exhibit Description

10.21**     Employee Non-Disclosure and Non-Competition Agreement dated October
            4, 1993, and First Amendment dated June 3, 1994, between the Company
            and Nancy Dunn (6) (Exhibit 10.21)

23.1*       Consent of Ernst & Young LLP

23.2*       Consent of KPMG Peat Marwick LLP

27*         Financial Data Schedule

*           Filed herewith.

**          Management contract or compensatory plan or arrangement in which
            directors and/or executive officers of the registrant may
            participate.

(1)         Filed as an exhibit to the Company's Registration Statement on Form
            S-1 (No. 33-9525), and incorporated herein by reference.

(2)         Filed as an exhibit to the Company's Annual Report on Form 10-K for
            fiscal year ended December 31, 1989, and incorporated herein by
            reference.

(3)         Filed as an exhibit to the Company's Current Report on Form 8-K
            dated September 30, 1993, and incorporated herein by reference.

(4)         Filed as an exhibit to the Company's Annual Report on Form 10-K for
            fiscal year ended December 31, 1992, and incorporated herein by
            reference.

(5)         Filed on March 4, 1994, as an exhibit to the Company's Registration
            Statement on Form S-8 (No. 33-76066) and incorporated herein by
            reference.

(6)         Filed as an exhibit to the Company's Annual Report on Form 10-K for
            fiscal year ended December 31, 1994, and incorporated herein by
            reference.


                                       26
<PAGE>


                       Tangram Enterprise Solutions, Inc.

                  Years ended December 31, 1996, 1995, and 1994



                                    Contents


Report of Independent Auditors..............................................F-2

Audited Financial Statements

Balance Sheets..............................................................F-3
Statements of Operations....................................................F-4
Statements of Shareholders' Equity..........................................F-5
Statements of Cash Flows....................................................F-6
Notes to Financial Statements...............................................F-7

Additional Financial Information

Schedule I - Valuation and Qualifying Accounts..............................F-19



                                      F-1

<PAGE>








                         Report of Independent Auditors


Board of Directors and Shareholders
Tangram Enterprise Solutions, Inc.

We have audited the balance sheets of Tangram Enterprise Solutions, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity, and cash flows for each of those years. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. The financial statements of Tangram
Enterprise Solutions, Inc. for the year ended December 31, 1994, were audited by
other auditors whose report dated February 23, 1995, expressed an unqualified
opinion on those statements.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tangram Enterprise Solutions,
Inc. as of December 31, 1996 and 1995, and the results of its operations and
cash flows for the years then ended, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.

                                   /s/   Ernst & Young LLP


Raleigh, North Carolina
February 28, 1997



<PAGE>


                       Tangram Enterprise Solutions, Inc.

                                 Balance Sheets
               (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S>                                                                 <C>                           <C>

                                                                                     DECEMBER 31
                                                                               1996                1995
                                                                       -----------------------------------------

 ASSETS
 CURRENT ASSETS:
    Cash and cash equivalents                                                $     176            $     92
    Accounts receivable, net of allowance of $244 and $225 in
      1996 and 1995                                                              2,991               2,853
    Other                                                                          267                 257
                                                                       -----------------------------------------

      Total current assets                                                       3,434               3,202

 PROPERTY AND EQUIPMENT:
    Computer equipment and software                                              1,339               1,299
    Office equipment and furniture                                                 493                 484
    Leasehold improvements                                                          57                  48
                                                                       -----------------------------------------
                                                                                 1,889               1,831
    Less accumulated depreciation and amortization                               1,401               1,553
                                                                       -----------------------------------------
      Total property and equipment                                                 488                 278

 OTHER ASSETS:
    Notes receivable - officers                                                    784                 784
    Deferred software costs, net                                                 3,022               2,595
    Costs in excess of net assets of business acquired, net                      5,145               5,903
    Other                                                                           73                  67
                                                                       -----------------------------------------
      Total assets                                                           $  12,946            $ 12,829
                                                                       =========================================

 LIABILITIES AND SHAREHOLDERS' EQUITY
 CURRENT LIABILITIES:
    Notes payable                                                            $     356            $  1,319
    Accounts payable                                                               590                 531
    Accrued expenses                                                               723                 505
    Deferred revenue                                                             2,620               2,228
                                                                       -----------------------------------------
      Total current liabilities                                                  4,289               4,583

 LONG-TERM DEBT - SHAREHOLDER                                                      400                   -

 SHAREHOLDERS' EQUITY
    Common stock, par value $0.01, authorized 48,000,000 shares, 15,665,363
       issued and 15,633,052 outstanding in 1996 and 14,527,876 issued
       and outstanding in 1995.                                                    157                 145
    Additional paid-in capital                                                  44,729              44,275
    Accumulated deficit                                                        (36,427)            (36,174)
    Treasury stock, at cost, 32,311 shares in 1996                                (202)                  -
                                                                       -----------------------------------------
      Total shareholders' equity                                                 8,257               8,246
                                                                       -----------------------------------------
      Total liabilities and shareholders' equity                             $  12,946            $ 12,829
                                                                       =========================================
</TABLE>

SEE ACCOMPANYING NOTES.

                                      F-3
<PAGE>


                       Tangram Enterprise Solutions, Inc.

                            Statements of Operations
               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
<S>                                                  <C>                 <C>               <C>

                                                                   YEAR ENDED DECEMBER 31
                                                         1996               1995               1994
                                                  ---------------------------------------------------------
                                                  ---------------------------------------------------------

NET REVENUES:
   Product                                           $     6,453         $     6,065       $     8,648
   Services                                                4,689               6,473             4,130
                                                  ---------------------------------------------------------
Total net revenues                                        11,142              12,538            12,778
 Cost of revenues                                          3,992               3,819             4,286
                                                  ---------------------------------------------------------

 Gross profit                                              7,150               8,719             8,492

OPERATING EXPENSES:
   Sales and marketing                                     3,664               4,584             3,389
   General and administrative                              2,543               2,543             2,744
   Research and development                                1,228               1,829             2,055
   Purchased research and development                          -                   -             1,253
                                                  ---------------------------------------------------------
Total operating expenses                                   7,435               8,956             9,441
                                                  ---------------------------------------------------------

LOSS FROM OPERATIONS                                        (285)               (237)             (949)

Other income (expense)                                        32                 (70)              366
                                                  ---------------------------------------------------------

Loss before income taxes                                    (253)               (307)             (583)
Provision for income taxes                                     -                (878)              (16)
                                                  ---------------------------------------------------------

NET LOSS                                             $      (253)        $    (1,185)      $      (599)
                                                  =========================================================

LOSS PER COMMON SHARE                                $     (0.02)        $     (0.08)      $     (0.04)
                                                  =========================================================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
    OUTSTANDING                                           14,811              14,459            14,216
                                                  =========================================================
</TABLE>


SEE ACCOMPANYING NOTES.

                                      F-4
<PAGE>


                       Tangram Enterprise Solutions, Inc.

                       Statements of Shareholders' Equity

                     (IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
<S>                    <C>       <C>      <C>          <C>        <C>        <C>           <C>           <C>


                                                                 ADDITIONAL
                       PREFERRED STOCK          COMMON STOCK      PAID-IN    ACCUMULATED    TREASURY     SHAREHOLDERS'
                     ---------------------  ---------------------
                       SHARES     AMOUNT     SHARES     AMOUNT    CAPITAL      DEFICIT        STOCK         EQUITY
                     ---------------------------------------------------------------------------------------------------

Balance at December    9,091       $ 909   14,237,747     $142     $44,214    $(34,390)      $ (160)      $10,715
   31, 1993

Redemption of         (9,091)       (909)           -        -           -           -            -          (909)
   preferred stock
Exercise of
   stock options           -           -       94,470        1           -           -          160           161
Net loss                   -           -            -        -           -        (599)           -          (599)
                     --------------------------------------------------------------------------------------------------
Balance at December        -           -   14,332,217      143      44,214     (34,989)           -         9,368
   31, 1994

Exercise of
   stock options           -           -      195,659        2          61           -            -            63
Net loss                   -           -            -        -           -      (1,185)           -        (1,185)
                     --------------------------------------------------------------------------------------------------
Balance at December        -           -   14,527,876      145      44,275     (36,174)           -         8,246
   31, 1995

Exercise of
   stock options           -           -    1,028,396       11         305           -         (202)          114
Conversion of debt         -           -      109,091        1         149           -            -           150
Net loss                   -           -            -        -           -        (253)           -          (253)
                     --------------------------------------------------------------------------------------------------
Balance at December        -       $   -   15,665,363     $157     $44,729    $(36,427)      $ (202)      $ 8,257
   31, 1996
                     ==================================================================================================
</TABLE>

SEE ACCOMPANYING NOTES.

                                      F-5

<PAGE>


                       Tangram Enterprise Solutions, Inc.

                            Statements of Cash Flows
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
<S>                                                              <C>             <C>               <C>


                                                                             YEAR ENDED DECEMBER 31
                                                                     1996             1995             1994
                                                                --------------------------------------------------
OPERATING ACTIVITIES
   Net loss                                                        $    (253)      $  (1,185)        $    (599)
   Adjustments to reconcile net loss to net cash
     provided by operating activities:
       Depreciation                                                      281             401               527
       Amortization                                                    2,333           1,818             1,984
       Purchased research and development                                  -               -             1,253
       Decrease in deferred tax assets                                     -             884                 -
       Cash provided by changes in working capital items:
           Accounts receivable                                          (414)            497              (126)
           Other current assets                                           44             (47)              249
           Accounts payable                                               87              40              (260)
           Accrued expenses                                              337             (65)             (457)
           Deferred revenue                                              392            (220)              463
                                                                --------------------------------------------------
Net cash provided by operating activities                              2,807           2,123             3,034

INVESTING ACTIVITIES
   Deferred software costs                                            (2,164)         (1,286)           (1,257)
   Expenditures for property and equipment                              (501)           (178)              (69)
   Repayment of liabilities in connection with sale of
     Knozall Systems                                                    (213)              -                 -
   Acquisition of Knozall Systems                                          -               -              (498)
   Other                                                                   -            (392)             (351)
                                                                --------------------------------------------------
Net cash used in investing activities                                 (2,878)         (1,856)           (2,175)

FINANCING ACTIVITIES
   Net borrowings (repayments) on note payable to shareholder            400            (606)                -
   Net (repayments) borrowings on notes payable                         (264)           (153)              472
   Repayment of capital lease obligations                                (95)            (93)              (84)
   Redemption of preferred stock                                           -               -            (1,516)
   Proceeds from exercise of stock options                               114              63               131
                                                                --------------------------------------------------
Net cash provided by (used in) financing activities                      155            (789)             (997)
                                                                --------------------------------------------------

Net increase (decrease) in cash                                           84            (522)             (138)
Cash and cash equivalents, beginning of year                              92             614               752
                                                                --------------------------------------------------
Cash and cash equivalents, end of year                             $     176       $      92         $     614
                                                                ==================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest                           $      52       $     140         $      52
                                                                ==================================================
Cash paid during the period for income taxes                       $       7       $      18         $      17
                                                                ==================================================
Assumption of note upon redemption of preferred stock              $       -       $       -         $     606
                                                                ==================================================
See Note 5 for discussion of noncash exercise of stock options.
</TABLE>

SEE ACCOMPANYING NOTES.

                                      F-6
<PAGE>


                       Tangram Enterprise Solutions, Inc.

                          Notes to Financial Statements

                                December 31, 1996



1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND DESCRIPTION OF BUSINESS

Tangram Enterprise Solutions, Inc. (the "Company") provides enterprise wide
solutions, including asset tracking and electronic software distribution for
large heterogeneous computing environments, encompassing mainframe, UNIX-based
mini and LAN server platforms. The Company's common stock trades on The Nasdaq
SmallCap Market tier of The Nasdaq Stock Market under the symbol TESI. The
Company is a member of the Safeguard Scientifics, Inc. ("Safeguard") partnership
of companies. Safeguard develops advanced technology - oriented, entrepreneurial
driven companies with an emphasis on information systems markets. Safeguard is
the majority shareholder of the Company holding approximately 67% of the
Company's outstanding common shares.

On August 1, 1994, the Company acquired the assets and certain liabilities of
Knozall Systems, Inc. ("Knozall") for $1,500,000 in cash and notes. The
acquisition was accounted for as a purchase, and the results of operations and
other financial data include the acquired operations of Knozall from the date of
acquisition. As a result of the purchase, the Company incurred non-recurring
charges related to in-process research and development totaling $1,253,000,
which are shown separately on the statement of operations as purchased research
and development costs.

In March, 1996, the Company sold the assets and liabilities of the LAN division,
formerly Knozall Systems, Inc. to its former owner, who was an officer and
director of the Company until the date of sale. In exchange for the cancellation
of $850,000 of a $1 million note due the buyer issued in connection with the
1994 acquisition of Knozall, the Company transferred all of the net assets of
the LAN division, made a cash payment of $213,000, and issued a $300,000 note
due in 24 equal installments. The buyer elected to convert the remaining
$150,000 of the $1 million note into 109,091 shares of Tangram common stock.
In addition, the Company retained rights to certain technology developed in
the LAN division since August 1, 1994.

                                      F-7

<PAGE>


                       Tangram Enterprise Solutions, Inc.

                    Notes to Financial Statements (continued)



1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results can differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents.

REVENUE RECOGNITION

Net product revenues include computer software license fees under perpetual
licensing agreements and revenues from the sale of gateway and other products
which include both hardware and software. Revenues under these licensing
agreements are recognized after the software has been accepted by the customer.
Revenue from the sale of certain other computer hardware including gateway
product is recognized upon shipment.

Net service revenues include implementation service and maintenance and renewal
fees. Revenues for implementation services, which are sometimes sold with
software licenses, are recognized after the customer has accepted the services.
Revenues resulting from renewals of annual licenses are deferred and recognized
over the renewal periods. The Company also recognized revenues from post
contract customer support agreements, including maintenance bundled with
software licenses, ratably over the term of the related agreements.

COST OF REVENUE

Cost of revenues includes cost principally related to the distribution of
licensed software and hardware products and amortization of capitalized software
development costs. Costs of revenues also includes the cost of the direct labor
force, including the associated personnel, travel and subsistence, and occupancy
costs incurred in connection with providing consulting and maintenance services.


                                      F-8
<PAGE>


                       Tangram Enterprise Solutions, Inc.

                    Notes to Financial Statements (continued)



1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SALES AND CONCENTRATION OF CREDIT RISK

The Company operates in a single industry and is engaged in design and sale of
software products. During 1996, approximately 17% of sales were made to the
Company's largest customer.

The Company's principal financial instrument subject to potential concentration
of credit risk is accounts receivable which are unsecured. The Company's
exposure to credit loss in the event that payment from a customer is not
received for revenue recognized equals the net outstanding accounts receivable
balance from that customer.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization of
property and equipment is provided using the straight-line method over estimated
useful lives ranging from two to five years.

INTANGIBLE ASSETS

Intangible assets are amortized by the methods and over the estimated lives as
set forth in Note 2.

INCOME TAXES

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, the liability method is used in accounting for income
taxes and deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities.

LOSS PER SHARE

The loss per common share calculations are based on the weighted average number
of common shares outstanding during each period; including common stock
equivalents (unless antidilutive) which would arise from the exercise of stock
options.

                                      F-9
<PAGE>


                       Tangram Enterprise Solutions, Inc.

                    Notes to Financial Statements (continued)



1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

The Company adopted the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Assets to be
Disposed Of" ("SFAS 121") as of January 1, 1996. The pronouncement requires that
certain long-lived assets, certain identifiable intangibles, and goodwill be
reviewed for potential impairment when circumstances indicate that the carrying
amount of such assets may not be recoverable. Additionally, FAS 121 requires
that certain long-lived assets held for disposition be reported at the lower of
the carrying amount or fair value less any selling costs. The impact of the
adoption of this pronouncement did not have a material effect on the Company's
financial position or on its results of operations.

In 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which gives
companies the option to adopt the fair value method for expense recognition of
employee stock options and other stock-based awards or to continue to account
for such items using the intrinsic value method as outlined under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") with pro forma disclosures of net income and net income per share as
if the fair value method had been applied. The Company has elected to continue
to apply APB 25 for stock options and other stock based awards and has disclosed
pro forma net loss and net loss per share as if the fair value method had been
applied.

RECLASSIFICATIONS

Certain amounts in the 1995 and 1994 financial statements have been reclassified
to conform with 1996 presentation. These reclassifications had no effect on net
loss or shareholders' equity as previously reported.


                                      F-10
<PAGE>


                       Tangram Enterprise Solutions, Inc.

                    Notes to Financial Statements (continued)



2.       INTANGIBLE ASSETS

Intangible assets consist of the following at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
<S>                                      <C>              <C>                <C>           <C>

                                           AMORTIZATION       ESTIMATED
                                              METHOD            LIVES            1996          1995
                                         ----------------- ----------------- ------------- --------------
                                                                   (in thousands)
Excess of costs over net assets of
   business acquired                     Straight-line     10-15 years         $   8,588     $  8,588
Software development costs               Straight-line     3 years                 6,199        4,716
                                                                             ------------- --------------
                                                                                  14,787       13,304
Less accumulated amortization                                                      6,620        4,806
                                                                             ------------- --------------
                                                                               $   8,167     $  8,498
                                                                             ============= ==============

</TABLE>

The Company assesses the recoverability of the excess of costs over net assets
of business acquired based on management's projections of future cash flow of
the respective operations.

The Company capitalizes certain software development costs incurred to enhance
the Company's existing software or to develop new software. Certain software
development costs incurred after technological feasibility of the product has
been established are capitalized. Such capitalized costs are amortized on an
individual product basis commencing when a product is available for release.
Costs incurred prior to the establishment of technological feasibility are
charged to research and development expense.

Research and development costs are comprised of the following as of December 31
(in thousands):
<TABLE>
<CAPTION>
<S>                                                         <C>           <C>           <C>
                                                                1996          1995            1994
                                                            ------------- -------------- ---------------

Research and development costs                              $    3,392      $   3,115      $    3,497

Less - capitalized software development costs                   (2,164)        (1,286)         (1,442)
                                                            ------------- -------------- ---------------
Research and development costs, net                         $    1,228      $   1,829      $    2,055
                                                            ============= ============== ===============

</TABLE>


Included in cost of revenues is amortization of software  development costs of
$1,575,000,  $1,060,000 and $1,226,000 million in 1996, 1995 and 1994,
respectively.


                                      F-11
<PAGE>


                       Tangram Enterprise Solutions, Inc.

                    Notes to Financial Statements (continued)



3.   DEBT

Long-term debt - shareholder represents borrowings of $400,000 under a
$1,000,000 line of credit agreement with Safeguard. The agreement provides for
borrowings at the prime rate plus 1% with payment due thirteen months after the
date of demand. In February 1997, the Company increased its availability under
the line of credit agreement with Safeguard from $1,000,000 to $5,000,000. All
other terms and conditions were unchanged.

In connection with the sale of the LAN division (Knozall) (see Note 1), notes
payable includes a promissory note with an outstanding balance of $188,000 at
December 31, 1996. Principal and interest payments are made monthly with
interest at a rate of 6%. The note matures in March, 1998.

The Company also has a term loan with a bank with an outstanding balance of
$168,000 at December 31, 1996. Interest and principal payments are due monthly
with interest at the prime rate plus 1/4% (8.5% at December 31, 1996). The loan
is collateralized by the assets of the Company and matures in November, 1997.

Total interest expense was $57,000, $158,000 and $34,000 for the years ended
1996, 1995 and 1994, respectively.

4.       LEASES

The Company leases its facilities and certain equipment under several
noncancelable operating lease agreements that expire at various times through
2004. Rental expense under these leases for the years ended December 31, 1996,
1995 and 1994, totaled approximately $751,000, $758,800 and $760,000,
respectively. Future minimum lease payments under noncancelable operating leases
at December 31, 1996 are as follows (IN THOUSANDS):

   1997                            $      699
   1998                                 1,069
   1999                                 1,087
   2000                                   956
   2001                                   924
   Thereafter                           2,580
                                   ----------
                                   $    7,315
                                   ==========

                                      F-12

<PAGE>


                       Tangram Enterprise Solutions, Inc.

                    Notes to Financial Statements (continued)



5.       STOCK OPTIONS

The Company has granted incentive and non-qualified stock options to employees,
directors and other persons, both under and outside of formal option plans. The
number of shares authorized under the plans is 2,400,000. Generally,
outstanding options vest over periods not exceeding 4 years after the date of
grant and expire 10 years after the date of grant. All options granted under the
plans to date have been at prices which have been equal to fair market value
at date of grant. As provided for under the plans, options covering 942,344
shares were exercised in 1996 by tendering 32,311 shares and minimal cash
payments. At December 31, 1996, the Company reserved approximately 2,400,000
shares of common stock for future issuance under the plans.

The Company applies APB 25 and related interpretations in accounting for its
various stock option plans. Had compensation expense been recognized consistent
with SFAS 123, the Company's net loss would have been increased to $561,000, or
$0.04 per share, in 1996 and $1,258,000, or $0.09 per share, in 1995.

The per share weighted average value of stock options issued by the Company
during 1996 and 1995 was $1.67 and $2.04 , respectively, on the dates of grant.
In 1996 and 1995, the assumptions of no dividends, expected volatility range of
116% to 138% in 1996 and 112% to 115% in 1995, and expected lives of 4 and 10
years were used by the Company in determining the fair value of stock options
granted using the Black Scholes option-pricing model. In addition, the
calculations assumed risk-free interest rates of 6.1% to 6.9% in 1996 and 5.8%
to 5.9% in 1995.

Pro forma net loss reflects only options granted in 1996 and 1995. Therefore,
the full impact of calculating compensation expense for stock options under SFAS
123 is not reflected in the pro forma net loss amounts presented above because
compensation expense is reflected over the options' vesting period and
compensation expense for options granted prior to January 1, 1995 is not
considered.

                                      F-13

<PAGE>


                       Tangram Enterprise Solutions, Inc.

                    Notes to Financial Statements (continued)



5.       STOCK OPTIONS (CONTINUED)

Option activity under the Company's plans are summarized below (IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS):
<TABLE>
<CAPTION>
<S>                                      <C>        <C>        <C>         <C>         <C>       <C>


                                               1996                    1995                    1994
                                     ------------------------- ---------------------- ------------------------
                                                   WEIGHTED                WEIGHTED               WEIGHTED
                                                    AVERAGE                AVERAGE                 AVERAGE
                                                   EXERCISE                EXERCISE               EXERCISE
                                       SHARES        PRICE      SHARES      PRICE      SHARES       PRICE
                                     ------------ ------------ ---------- ----------- --------- --------------


Outstanding at beginning of year        2,968         $1.12      2,972       $0.39     1,787         $0.35
Options granted                           350          2.25        347        2.17     1,624          1.50
Options exercised                      (1,028)         0.31       (196)       0.32      (334)         0.48
Options canceled                          (71)         1.93       (155)       1.57      (105)         0.66
                                     ------------ ------------ ---------- ----------- --------- --------------

Outstanding at end of year              2,219         $1.65      2,968       $1.12     2,972         $0.39
                                     ============ ============ ========== =========== ========= ==============

Options exercisable at year-end         1,318
Shares available for future grant         161
</TABLE>


The following summarizes information about the Company's stock options
outstanding at December 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):

<TABLE>
<CAPTION>
<S>                       <C>              <C>                <C>              <C>            <C>


                                       OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                        --------------------------------------------------- --------------------------------
       RANGE OF             NUMBER           WEIGHTED.         WEIGHTED        NUMBER          WEIGHTED
       EXERCISE           OUTSTANDING     AVG. REMAINING    AVG. EXERCISE    EXERCISABLE    AVG. EXERCISE
        PRICES            AT 12/31/96    CONTRACTUAL LIFE       PRICE        AT 12/31/96        PRICE
----------------------- ---------------- ------------------ --------------- -------------- -----------------

        $0.23                  22            4.25 yrs.          $  0.23            22           $ 0.23
    $1.00 - $2.50           2,133            7.62 yrs.             1.51         1,283             1.44
    $5.00 - $6.13              54            9.76 yrs.             6.05            13             6.13
        $10.25                 10            9.58 yrs.            10.25             -               -
                        ---------------- ------------------ --------------- -------------- -----------------

                            2,219            7.65 yrs.          $  1.65         1,318           $ 1.47
                        ================ ================== =============== ============== =================
</TABLE>

6.       RELATED PARTY TRANSACTIONS

During the years ended December 31, 1996, 1995 and 1994, the Company paid
administrative services fees to Safeguard totaling approximately $261,000,
$187,000 and $193,000, respectively. The Company also incurred and paid
Safeguard interest costs under a revolving credit agreement of $6,800, $45,000
and $13,500 in 1996, 1995 and 1994, respectively. In addition, in 1994 the
Company reimbursed Safeguard $135,000 for investment services fees related to a
1992 transaction which Safeguard paid on the Company's behalf.

                                      F-14

<PAGE>


                       Tangram Enterprise Solutions, Inc.

                    Notes to Financial Statements (continued)



6.       RELATED PARTY TRANSACTIONS (CONTINUED)

Under a development agreement between the Company and Safeguard, Safeguard
contracted with the Company for development of an enterprise gateway product and
in a separate agreement granted marketing rights for the technology to the
Company. In 1994 and 1995, the Company elected to use the underlying technology
to improve several product sets rather than market the technology as a single
stand-alone product. In 1995 and 1994, the Company paid $200,000 in royalties to
Safeguard for this technology.

On December 15, 1994, the Company entered into a Preferred Stock Purchase
Agreement with Safeguard to redeem the Series D Preferred Stock held by
Safeguard. Under the terms of the agreement, the Company paid the purchase price
of $909,000 in three equal installments of $303,000 each in December 1994, July
1995 and December 1995.

During 1995 and 1994, the Company made non-recourse, non-interest bearing loans
to certain officers of the Company. The total loans outstanding at December 31,
1996 and 1995, were $784,000. The loans are secured by shares of the Company's
common stock and mature at the end of five years or termination of employment,
whichever occurs first.

7.       INCOME TAXES

The components of income tax expense for the years ended December 31, 1996, 1995
and 1994, consisted of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
<S>                                                 <C>                <C>               <C>

                                                       1996               1995               1994
                                                ----------------------------------------------------------

Current expense (benefit):
   Federal                                           $     -            $     -            $    -
   State                                                   -                 (6)               16
                                                ----------------------------------------------------------

                                                           -                 (6)               16
Deferred expense:
   Federal                                                 -                884                 -
   State                                                   -                  -                 -
                                                ----------------------------------------------------------
                                                           -                884                 -
                                                ----------------------------------------------------------
Total                                                $     -            $   878            $   16
                                                ==========================================================


</TABLE>
                                      F-15


<PAGE>


                       Tangram Enterprise Solutions, Inc.

                    Notes to Financial Statements (continued)



7.       INCOME TAXES (CONTINUED)

The components of net deferred taxes as of December 31 are as follows (IN
THOUSANDS):

                                                      1996               1995
                                              ----------------------------------

Deferred tax assets
   Tax loss carryforwards                       $     9,186        $     8,838
   Tax credit carryforwards                             464                464
   Deferred software costs                              (61)               384
   Purchased research and development                   357                385
   Allowance for doubtful accounts                       83                 77
   Other                                                101                169
                                              ----------------------------------

Total gross deferred tax assets                      10,130             10,317
Valuation allowance                                 (10,130)           (10,317)
                                              ----------------------------------
Deferred tax assets                             $         -        $         -
                                              ==================================

The actual income tax expense for 1996, 1995 and 1994 differs from the
"expected" amount (computed by applying the statutory federal income tax rate of
34% to the loss before income taxes) as follows (IN THOUSANDS):

                                    1996               1995               1994
                               -------------------------------------------------

Computed "expected" tax benefit    $  (86)         $    (108)         $    (198)
Non-deductible amortization           257                257                257
Change in valuation allowance        (187)               724                (44)
Other                                  16                  5                  1
                               -------------------------------------------------
Actual tax expense                  $   -          $     878          $      16
                               =================================================

At December 31, 1996, the Company has net operating loss carryforwards of
approximately $27 million. The net operating loss carryforwards expire in
various amounts from 1998 through 2011. The Tax Reform Act of 1986 contains
provisions that limit the ability to utilize net operating loss carryforwards in
the case of certain events including significant changes in ownership interests.
As there was a significant change in ownership interests (as defined) on June
29, 1989, the Company is limited in its ability to utilize approximately $18
million of net operating loss carryforwards. The annual limitation for the
utilization of these carryforwards is approximately $1.3 million, and any unused
amount can be utilized in subsequent years within the carryforward period.


                                      F-16
<PAGE>


                       Tangram Enterprise Solutions, Inc.

                    Notes to Financial Statements (continued)



7.       INCOME TAXES (CONTINUED)

At December 31, 1996, the Company had available approximately $431,000 and
$33,000 of research and development and investment credit carryforwards,
respectively, which expire in varying amounts from 1997 through 2003.

8.       EMPLOYEE BENEFIT PLAN

The Company has a defined contribution plan [401(k)], under which all full time
employees are eligible to contribute a percentage of their basic compensation to
the plan. The Company does not make matching contributions to the plan.



                                      F-17
<PAGE>















                        Additional Financial Information





                                      F-18

<PAGE>


                       Tangram Enterprise Solutions, Inc.

                 Schedule I - Valuation and Qualifying Accounts

                  Years ended December 31, 1996, 1995, and 1994


<TABLE>
<CAPTION>
<S>                                           <C>                <C>                <C>                <C>

                                                                     ADDITIONS
                                                 BALANCE AT      CHARGED TO COSTS    DEDUCTIONS FROM    BALANCE AT END OF
                                                BEGINNING OF       AND EXPENSES         RESERVES             PERIOD
                                                   PERIOD
                                             ------------------- ------------------ ------------------ --------------------

Year ended December 31, 1996:
  Allowance for doubtful accounts              $     225,000       $      55,500      $      36,400      $     244,100

Year ended December 31, 1995:
  Allowance for doubtful accounts                    262,300             169,000            206,300            225,000

Year ended December 31, 1994:
  Allowance for doubtful accounts                    336,300              82,000            156,000            262,300



</TABLE>


                                      F-19
<PAGE>


<PAGE>