FORTE SOFTWARE INC \DE\, 10-Q, 1998-11-16

FORTE SOFTWARE INC \DE\
10-Q, 1998-11-16
PREPACKAGED SOFTWARE

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-Q
(Mark One)

/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.

For the quarterly period ended September 30, 1998
------------------

/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.

For the transition period from _____ to_____

Commission file number: 0-27838

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

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

<TABLE>
<S> <C>
Delaware 94-3131872
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>

1800 Harrison Street
Oakland, California 94612
(510) 869-3400
(Address, including zip code, of Registrant's principal
executive offices and telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

Yes X No
--- ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

<TABLE>
<S> <C>
Common Stock, $0.01 par value 20,009,863
(Class of common stock) (Shares outstanding at November 2, 1998)
</TABLE>

<PAGE>

FORTE SOFTWARE, INC.
FORM 10-Q QUARTERLY REPORT
QUARTER ENDED SEPTEMBER 30, 1998

Table of Contents

PART I FINANCIAL INFORMATION

<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
Item 1. Financial Statements

Condensed Consolidated Balance Sheet
At September 30, 1998 and March 31, 1998 3

Condensed Consolidated Results of Operations
For the Three and Six Months Ended September 30, 1998 and 1997 4

Condensed Consolidated Statement of Cash Flow
For the Six Months Ended September 30, 1998 and 1997 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10

Part II OTHER INFORMATION

Item 1. Legal Proceedings 27

Item 5. Other Information 27

Item 6. Exhibits, Financial Statement Schedules and Reports on Form 8-K 27

Signatures 28
</TABLE>

2
<PAGE>

PART 1.
ITEM 1. FINANCIAL STATEMENTS

FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS; UNAUDITED)

<TABLE>
<CAPTION>
------------------------------
September 30, March 31,
1998 1998
-------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,849 $ 13,358
Short-term investments 14,087 20,802
Accounts receivable, net 19,967 20,277
Prepaid expense and other current assets 2,644 1,635
-------- --------
Total current assets 50,547 56,072

Equipment and leasehold improvements, net 6,250 7,416
Other assets 1,319 250
-------- --------
Total assets $ 58,116 $ 63,738
-------- --------
-------- --------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,550 $ 1,530
Accrued expenses and other liabilities 8,686 11,503
Deferred revenue 9,887 12,312
Current portion of capital lease obligations 277 695
-------- --------
Total current liabilities 21,400 26,040

Capital lease obligations, due after one year 123 123
Deferred revenue 72 265
Commitments
Stockholders' equity:
Common stock 199 195
Additional paid-in capital 67,974 66,851
Accumulated deficit (31,677) (29,663)
Foreign currency translation adjustments 25 (73)

Total stockholders' equity 36,521 37,310
-------- --------
Total liabilities and stockholders' equity $ 58,116 $ 63,738
-------- --------
-------- --------
</TABLE>

See accompanying notes to Condensed Consolidated Financial Statements.

3
<PAGE>

FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)

Gross profit 13,232 12,808 26,220 23,284

Operating expenses:
Sales and marketing 8,035 10,752 18,064 20,009
Product development and engineering 3,872 3,667 8,017 6,713
General and administrative 1,272 1,907 2,689 3,454
------- -------- ------- -------
Total operating expenses 13,179 16,326 28,770 30,176
------- -------- ------- -------
Operating income (loss) 53 (3,518) (2,550) (6,892)
Interest income, net 360 515 745 1,068
------- -------- ------- -------
Income (loss) before income taxes 413 (3,003) (1,805) (5,824)
Provision (benefit) for income taxes 81 (20) 209 (595)
------- -------- ------- -------
Net income (loss) $ 332 $ (2,983) $(2,014) $(5,229)
------- -------- ------- -------
------- -------- ------- -------

Net income (loss) per share---basic $ 0.02 $ (0.15) $ (0.10) $ (0.27)
------- -------- ------- -------
------- -------- ------- -------
Net income (loss) per share---diluted $ 0.02 $ (0.15) $ (0.10) $ (0.27)
------- -------- ------- -------
------- -------- ------- -------
Shares used in per share calculation
Basic 19,870 19,296 19,778 19,200
------- -------- ------- -------
------- -------- ------- -------
Diluted 20,864 19,296 19,778 19,200
------- -------- ------- -------
------- -------- ------- -------
</TABLE>

4
<PAGE>

See accompanying notes to Condensed Consolidated Financial Statements.

5
<PAGE>

FORTE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(IN THOUSANDS; UNAUDITED)

<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,014) $ (5,229)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,144 1,879
Changes in operating assets and liabilities:
Accounts receivable 316 659
Prepaid expenses and other assets (983) (1,172)
Accounts payable 1,026 (441)
Accrued expenses and other liabilities (2,817) (1,300)
Deferred revenue (2,618) (1,463)
-------- --------
Net cash used in operating activities (4,946) (7,067)
-------- --------

INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements (978) (2,628)
Purchases of short-term investments (6,599) (5,492)
Maturities of short-term investments 13,400 3,350
Loan to officer (1,095) -
-------- --------
Net cash provided by (used in) investing activities 4,728 (4,770)
-------- --------

FINANCING ACTIVITIES
Reduction in capital lease obligations (418) (493)
Proceeds from issuance of common stock 1,127 1,576
-------- --------
Net cash provided by financing activities 709 1,083
-------- --------
Increase (decrease) in cash and cash equivalents 491 (10,754)
Cash and cash equivalents at beginning of period 13,358 35,103
-------- --------
Cash and cash equivalents at end of period $ 13,849 $ 24,349
-------- --------
-------- --------
</TABLE>

See accompanying notes to Condensed Consolidated Financial Statements.

6
<PAGE>

FORTE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring accruals,
which in the opinion of management are necessary to fairly present the
Company's consolidated financial position, results of operations, and cash
flow for the periods presented. These condensed consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements as included in the Company's Annual Report
on Form 10-K for the year ended March 31, 1998. Certain information and
footnote disclosures normally included in audited financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the Securities and Exchange Commission
rules and regulations. The condensed consolidated results of operations for
the three and six month periods ended September 30, 1998 are not necessarily
indicative of the results that may be expected for entire fiscal year ending
March 31, 1999. The March 31, 1998 condensed consolidated balance sheet was
derived from audited consolidated financial statements, but does not include
all disclosures required by generally accepted accounting principles.

NOTE 2. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed using the weighted
average number of shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common
shares plus the dilutive effect of outstanding stock options using the
"treasury stock" method. The following table shows the computation of basic
and diluted net income (loss) per share.

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- ---------------------
1998 1997 1998 1997
------ ------- ------- -------
(in thousands, except per Share data)
<S> <C> <C> <C> <C>
Net income (loss) $ 332 $(2,983) $(2,014) $ (5,229)
------- ------- ------- --------
Shares used in computing basic net
income (loss) per share 19,870 19,296 19,778 19,200
Effect of diluted securities (If their
inclusion would not be antidilutive) 994 - - -
------- ------- ------- --------
Shares used in computing diluted net
income (loss) per share 20,864 19,296 19,778 19,200
------- ------- ------- --------
------- ------- ------- --------
Basic $ 0.02 $ (0.15) $ (0.10) $ (0.27)
------- ------- ------- --------
------- ------- ------- --------
Diluted $ 0.02 $ (0.15) $ (0.10) $ (0.27)
------- ------- ------- --------
------- ------- ------- --------
</TABLE>

7
<PAGE>

FORTE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)

NOTE 3. SHORT-TERM INVESTMENTS

As of September 30, 1998, all short-term investments were classified
as available-for-sale securities pursuant to the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Available-for-sale securities are stated at
estimated fair market value. Differences between the estimated fair market
value and cost were not material.

The following is a summary of the Company's investments and a
reconciliation of the Company's investments to the condensed consolidated
balance sheet at September 30, 1998 (in thousands).

<TABLE>
<CAPTION>
Estimated
Fair
Value
--------
<S> <C>
Commercial Paper $ 8,137
Treasury Notes 2,082
Medium Term Notes 7,865
Corporate Notes 3,776
Money Market Funds 6
-------

Total investments $21,866
-------
-------
</TABLE>

<TABLE>
<CAPTION>
Estimated
Fair
Value
--------
<S> <C>
Cash equivalents $ 7,779
Short-term investments 14,087
-------

Total investments 21,866

Cash 6,070
-------

Total cash, cash equivalents and
short-term investments $27,936
-------
-------
</TABLE>

8
<PAGE>

FORTE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(UNAUDITED)

NOTE 4. LOAN TO OFFICER

In August and September 1998, the Company loaned one of its executive
officers a promissory note for $1.1 million. This non-recourse note is
collateralized at 140 percent of the loan value in shares of the Company's
common stock owned by this individual, and is due and payable to the Company
in August 2000 at an interest rate of seven and one-half percent per annum.
Amount is classified in other assets in the Company's Condensed Consolidated
Balance Sheet. In October 1998, a $0.2 million payment was received and
applied against this loan balance.

NOTE 5. REPRICING OF STOCK OPTIONS

In August 1998, the Company offered all employees the choice to
exchange options to purchase shares of the Company's common stock for new
options with an exercise price of $4.125 per share. All options that were
exchanged continued to vest under the original terms of the option grant,
except that no options were exercisable for a period of nine months from the
exchange date.

NOTE 6. REVENUE RECOGNITION

Effective April 1, 1998, the Company adopted the American Institute of
Certified Public Accountants Statement of Position No. 97-2, "Software
Revenue Recognition," ("SOP 97-2") which supercedes SOP 91-1. SOP 97-2
addresses software revenue recognition matters primarily from a conceptual
level and detailed implementation guidelines have not been issued.

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition," which defers for one
year the application of certain provisions of SOP 97-2. These provisions
limit what is considered vendor-specific objective evidence of the fair value
of the various elements in a multiple-element arrangement. All other
provisions of SOP 97-2 remain in effect.

NOTE 7. COMPREHENSIVE INCOME

Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS 130").
SFAS 130 requires certain revenues, expenses, gains or losses that, prior to
adoption, were reported separately in stockholders' equity and excluded from
net income (loss) to be included in other comprehensive income (loss). The
Company has evaluated the impact of comprehensive income components on the
Company's financial statements and has determined that the amounts are
immaterial to the financial statements taken as a whole.

9
<PAGE>

NOTE 8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") which
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. In addition,
SFAS 131 establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company will comply with
the requirements of SFAS 131 in its annual consolidated financial statements
for the year ending March 31, 1999.

In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). The Company is required to adopt this statement for
its fiscal year ending March 31, 2001. SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. The
Company is not currently able to determine the effect, if any, that adoption
will have on its consolidated financial position, results of operations or
cash flow.

10
<PAGE>

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

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING
STATEMENTS WHICH REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE
EVENTS AND FINANCIAL PERFORMANCE. IN THIS REPORT, THE WORDS "ANTICIPATE,"
"BELIEVES," "EXPECTS," "INTENDS," "FUTURE," AND OTHER SIMILAR EXPRESSIONS
IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN
"BUSINESS RISKS" BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.

The following table sets forth certain unaudited condensed
consolidated results of operations data as a percentage of total revenue for
the three and six months ended September 30, 1998 and 1997.

<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
License fees 47.2% 56.7% 46.5% 55.6%
Maintenance and services 52.8 43.3 53.5 44.4
------- ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
------- ----- ----- -----
------- ----- ----- -----
Cost of revenue:
Cost of license fees 0.6 1.0 0.9 0.7
Cost of maintenance and services 27.9 25.8 27.6 26.9
------- ----- ----- -----
Total cost of revenue 28.5 26.8 28.5 27.6
------- ----- ----- -----
Gross profit 71.5 73.2 71.5 72.4
Operating expense:
Sales and marketing 43.4 61.5 49.3 62.2
Product development and engineering 20.9 20.9 21.9 20.9
General and administrative 6.9 10.9 7.3 10.7
------- ----- ----- -----
Total operating expense 71.2 93.3 78.5 93.8

Operating income (loss) 0.3 (20.1) (7.0) (21.4)
------- ----- ----- -----
Interest income, net 1.9 2.9 2.0 3.3
------- ----- ----- -----
Income (loss) before income taxes 2.2 (17.2) (5.0) (18.1)

Provision (benefit) for income taxes 0.4 (0.1) 0.5 (1.8)
------- ----- ----- -----
Net income (loss) 1.8% (17.1)% (5.5)% (16.3)%
------- ----- ----- -----
------- ----- ----- -----
</TABLE>

11
<PAGE>

REVENUE

The Company's total revenue consists of license fees for its Forte
Application Environment and related products, as well as associated
maintenance and services revenue. The Company licenses software under
non-cancelable license agreements and provides services including
maintenance, training and consulting. License fees revenue is recognized when
a non-cancelable license agreement has been signed, the product has been
shipped, the fees are fixed and determinable, and collectibility is
reasonably assured. License fees revenue from distributors is generally
recognized as sales to end users are reported, the product is shipped and
collectibility is reasonably assured. Fees for services are charged
separately from the license of the Company's software products. Maintenance
revenue consists of fees for ongoing support and product updates and is
recognized ratably over the term of the contract, which is typically twelve
months. Revenue from training is recognized upon completion of the related
training class. Consulting revenue is recognized as the services are
performed. Allowances for credit risks and for estimated future sales returns
are provided for upon product shipment. Returns to date have not been
material. Actual credit losses and returns may differ from the Company's
estimates and such differences could be material to the consolidated
financial statements.

The Company's license agreements typically require the payment of a
nonrefundable, one-time license fee for a license of perpetual term.
Customers make separate payments for annual maintenance and other services.
The Company can terminate the license agreement only upon a material breach
by the other party, provided that the breach is not cured within a specified
cure period.

The Company's total revenue increased 6 percent to $18.5 million for
the quarter ended September 30, 1998 from $17.5 million for the same prior
year quarter and increased 14 percent to $36.7 million for the six months
ended September 30, 1998 from $32.2 million for the same period in the prior
year. International revenue was essentially flat at $7.7 million for the
quarter ended September 30, 1998, as compared to $7.8 million for the same
quarter in the prior year. International revenue increased 23 percent to
$17.2 million for the six months ended September 30, 1998 from $14.0 million
in the same prior year period. The international revenue increase was due to
increased license, maintenance and services revenue as a result of the
Company's continued expansion of its international sales organization.
Further, international revenue contributed 42 percent of total revenue for
the quarter ended September 30, 1998, as compared to 45 percent of total
revenue in the same prior year quarter and contributed 47 percent for the six
months ended September 30, 1998, as compared to 44 percent for the same prior
year period. United States revenue increased by 12 percent to $10.8 million
for the quarter ended September 30, 1998 from $9.7 million in the same prior
year quarter and increased by 7 percent to $19.4 million for the six months
ended September 30, 1998 from $18.2 for the same period in the prior year.
Significant growth in domestic maintenance and service revenue contributed to
the increase.

LICENSE FEES REVENUE. The Company's license fees revenue decreased
12 percent to $8.7 million for the quarter ended September 30, 1998 from $9.9
million for the same quarter in the prior year and decreased by 5 percent to
$17.1 million for the six months ended September 30, 1998 from $17.9 million
for the same prior year period. License fees revenue increased

12
<PAGE>

sequentially by 5 percent from $8.3 million for the first quarter ended June
30, 1998. The Company believes that United States license fees revenue has
been impacted by a slowdown in the overall market for enterprise application
development software. The Company believes the market slowdown resulted from
several factors, including but not limited to (1) a diversion of customer
resources from enterprise application development to the Year 2000 Issue, (2)
a general shortage of qualified programmers and a shift of available
programming resources from corporate users to systems integrators, (3) market
confusion caused by the complex and rapidly changing mix of alternative
technologies for enterprise application development, and (4) the increased
availability and popularity of packaged software applications. The Company
believes market factors have resulted in a progressively longer and more
complex sales cycle for the Company's products.

The Company believes that companies in its target market have
significantly shifted from building internal enterprise applications to using
system integrators to develop and deploy their enterprise applications. Also
see "Product Concentration; Impact of Market Factors," "Risks Associated with
the Year 2000 Issue," "Dependence on Key Personnel," and "Competition" in the
section entitled "Business Risks."

MAINTENANCE AND SERVICES REVENUE. The Company's services revenue
increased 29 percent to $9.8 million for the quarter ended September 30, 1998
from $7.6 million for the same quarter in the prior year and increased 37
percent to $19.6 million for the six months ended September 30, 1998 from
$14.3 million for the same period in the prior year. The increase in total
maintenance and services revenue was primarily a result of the growing
installed base in the Company's software products and the associated increase
in demand for maintenance, training and consulting services. Services revenue
as a percentage of total revenue may vary between periods as a result of
changes in demand for the Company's services and changes in the rate of
growth of license fees revenue.

INTERNATIONAL REVENUE. International revenue includes all revenue
other than from the United States. International revenue includes sales from
the Company's direct sales organizations in Europe, Canada and Australia and
export sales through distributors and resellers in Europe, Asia and other
areas of the world. Direct sales through the Company's European, Canadian and
Australian subsidiaries totaled $5.4 million and $12.2 million for the
quarter and six months ended September 30, 1998, respectively, as compared to
$5.0 million and $9.3 million for the quarter and six months ended September
30, 1997, respectively. The table below sets forth the Company's export sales
data from the United States for the quarter and six months ended September
30, 1998 and 1997.

<TABLE>
<CAPTION>
--------------------------------- -------------------------------
(in thousands) (in thousands)
Three months ended September 30, Six months ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total export revenue $2,341 $2,756 $ 4,971 $ 4,744
Total direct revenue 5,357 5,046 12,247 9,267
Total International $7,698 $7,802 $ 17,218 $ 14,011
--------------------------------- -------------------------------
</TABLE>

13
<PAGE>

The increase in international revenue for the six months ended
September 30, 1998, as compared to the same period in the prior year,
reflects growing direct sales presence in Europe through the Company's
international direct sales organization, partially offset by lower revenue in
Asia and Canada. The economic crises in Asia has not had a material impact on
the Company's revenue. Revenue from Asian markets were less then 5 percent of
total revenue for each of the periods presented. The Company expects that
international license and related maintenance and services revenue will
continue to account for a significant portion of its total revenue in the
future. The Company believes that in order to increase sales opportunities
and market share, it will be required to continue expanding its international
sales organization. The Company has committed and continues to commit
significant management time and financial resources to developing direct and
indirect international sales and support channels. There can be no assurance,
however, that the Company will be able to maintain or increase international
market demand for Forte and related products. To the extent that the Company
is unable to do so in a timely manner, the Company's international sales will
be limited, and the Company's business, operating results and financial
condition would be materially and adversely affected.

COST OF REVENUE

COST OF LICENSE FEES REVENUE. Cost of license fees revenue consists
primarily of royalties paid to third-party vendors, product packaging,
documentation and production. Cost of license fees revenue was $112,000 and
$346,000 for the quarter and six months ended September 30, 1998,
respectively, as compared to $171,000 and 240,000 for the quarter and six
months ended September 30, 1997, respectively. The increase for the first six
months of fiscal 1998, as compared to the same period in the prior year, was
primarily due to royalties paid to third-party vendors. Additionally, cost of
license fees revenue varies as a percentage of license fees revenue because
costs of media production and product packaging have not been material and
have been expensed as incurred. Such costs are dependent on the number of new
releases in a given quarter.

COST OF MAINTENANCE AND SERVICES REVENUE. Cost of maintenance and
services revenue consists primarily of personnel-related and facilities costs
incurred in providing customer support, training and consulting services, as
well as third-party costs incurred in providing training and consulting
services. Cost of maintenance and services revenue was $5.2 million and $10.1
million for the quarter and six months ended September 30, 1998,
respectively, representing 53 percent and 52 percent of maintenance and
services revenue, respectively. Cost of maintenance and services revenue was
$4.5 million and $8.6 million for the quarter and six months ended September
30, 1997, respectively, representing 60 percent of maintenance and services
revenue for each of those periods. The decrease in cost of maintenance and
services revenue for the quarter and six months ended September 30, 1998 as a
percentage of maintenance and services revenue was primarily attributable to
improved economies of scale of the technical support center and increased
productivity from training, support and consulting personnel. The Company
does not expect its cost of maintenance and services revenue to continue to
materially decrease as a percentage of maintenance and services revenue. The
cost of services as a percentage of services revenue may vary between periods
due to the mix of services provided by the Company and the extent to which
external contractors are used to provide those services.

OPERATING EXPENSES

14
<PAGE>

SALES AND MARKETING. Sales and marketing expense consists primarily
of salaries, commissions and bonuses earned by sales and marketing personnel,
field office expenses, travel and entertainment, promotional expenses and
advertising. Sales and marketing expense decreased to $8.0 million for the
quarter ended September 30, 1998 from $10.8 million for the same quarter in
the prior year. Sales and marketing expenses also decreased to $18.1 million
for the six months ending September 30, 1998 from $20.0 million for the same
period in the prior year. These decreases were the result of a
re-organization of the Company's US sales organization. The direct sales
organization was reduced to reflect the Company's anticipated medium-term
revenue opportunities, and the partner channel organization is being
emphasized to leverage this distribution channel. The re-organization was
completed in the quarter ended September 30, 1998 and did not result in a
significant charge to expense for severance and other costs associated with
the re-organization. Sales and marketing expense represented 43 percent and
49 percent of total revenue for the quarter and six months ended September
30, 1998, respectively, and represented 61 percent and 62 percent of total
revenue for the quarter and six months ended September 30, 1997,
respectively. The Company anticipates that sales and marketing expense will
decrease as a percentage of revenue over the next several quarters.

PRODUCT DEVELOPMENT. Product development expense consists primarily
of salaries and other personnel-related expense, and depreciation of
development equipment. The Company believes that a significant level of
investment for product development is required to remain competitive. Product
development expense increased to $3.9 million and $8.0 million for the
quarter and six months ended September 30, 1998, respectively, from $3.7
million and $6.7 million for the quarter and six months ended September 30,
1997, respectively. This increase was primarily attributable to additional
hiring of product development personnel. Product development expense
represented 21 percent and 22 percent of total revenue for the quarter and
six months ended September 30, 1998, respectively, as compared to 21 percent
for each of the comparable periods in the prior year. The Company anticipates
that it will continue to devote substantial resources to product development
activities. All costs incurred in the research and development of software
products, and enhancements to existing software products have been expensed
as incurred; accordingly, cost of license fees revenue includes no
amortization of capitalized software development costs.

GENERAL AND ADMINISTRATIVE. General and administrative expense
consists of costs for the Company's human resources, finance, information
technology and general management functions. General and administrative
expense decreased to $1.3 million and $2.7 million for the quarter and six
months ended September 30, 1998, respectively, from $1.9 million and $3.5
million for the quarter and six months ended September 30, 1997,
respectively. General and administrative expense represented 7 percent of
total revenue for both the quarter and six months ended September 30, 1998,
respectively, as compared to 11 percent for both the quarter and six months
ended September 30, 1997, respectively. The reduction in general and
administrative expense from prior year was primarily the result of the sublet
of excess office space and the reduction in the number of employees in this
functional area. The Company believes that its general and administrative
expense will increase in dollar amount in the future as a result of the
expansion of the Company's administrative staff to support its growing
operations.

PROVISION FOR INCOME TAXES. There was no provision for federal or
state income taxes for the quarter and six month periods ended September 30,
1998 and September 30, 1997,

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respectively, as the Company incurred net operating losses, and there can be
no assurance that the Company will realize the benefit of the net operating
loss carryforwards. The Company's recorded income tax expense in fiscal 1999
represents foreign income tax withholdings on certain license fees paid to
the Company by foreign licensees.

RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE. The Year 2000 Issue is
the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.

The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing, and implementation.
At present, the Company is nearly complete with regards to the assessment of
all systems that could be significantly affected by the Year 2000, including
the Company's products, its internal Information Technology, supplier and
service provider compliance and operating equipment with embedded chips or
software (e.g. laptop computers). The Company has substantially completed the
remediation phase and expects to complete this phase of the process by its
fiscal first quarter beginning April 1, 1999. Further, the Company plans to
begin the testing phase during this same quarter and will begin any required
implementations subsequent to the completion of the testing phase.

The costs incurred in addressing the Year 2000 problem are being
expensed as incurred in compliance with generally accepted accounting
principles. None of these costs are expected to materially impact the results
of operations in any one period. Funding of these costs will come from the
Company's normal working capital.

<PAGE>

The Company believes that its products are fully Year 2000
compliant. All Forte products use four digit years for all internal
manipulations and representations. In addition, for customers who require the
storage and manipulation of two digit years, the Company's current products
provide the ability to specify a range of years for comparison and
calculation. For example, the customer may specify that the years 0-39 are
interpreted as 2000-2039 and the years 40-99 are interpreted as 1940-1999.
Using this feature, a customer can save on the amount of data stored and
manipulated by the Company. The Company regularly runs regression tests on
its software, including tests for the above functionality at the rollover to
theYear 2000. Based on the above, it is not expected that the Company's
products will be adversely affected by date changes in the year 2000.
However, there can be no assurance that the Company's products contain, or
will contain all features and functionality considered necessary by
customers, distributors, resellers and system integrators to be Year 2000
compliant.

The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase enterprise application software
products such as those offered by the Company. Conversely, Year 2000 issues
may cause other companies to accelerate purchases of application development
and deployment software to replace non-Year 2000 compliant applications,
causing a short-term increase in demand for the Company's products. There is
no assurance that such an increase in demand will be realized, or that
companies will resume application development if and when they resolve their
Year 2000 issues. Either of the foregoing could have a material adverse
effect upon the Company's business, operating results and financial condition.

The Company has queried its significant suppliers and service
providers that do not share information systems with the Company. To date,
the Company is not aware of any supplier or service provider with a Year 2000
Issue that would materially impact the Company's business, operating results
or financial condition. However, the Company has no means of ensuring that
suppliers and service providers will be Year 2000 ready. The inability of
suppliers and service providers to complete their Year 2000 resolution
process in a timely fashion could materially impact the Company. The effect
of non-compliance by any of the Company's suppliers or service providers is
not determinable.

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The Company has prepared a draft contingency plan for certain critical
applications and expects to have a finalized draft in the near future. This
business recovery plan discusses classified disasters and provides a list of
priorities including, for example, customer service, billing and invoicing, and
engineering.

Although the Company is not aware of any material operational issues or
costs associated with preparing its internal systems for the Year 2000, there
can be no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems, which include
third-party software and hardware technology. Management of the Company believes
it has an effective program in place to resolve the Year 2000 Issue in a timely
manner. However, disruptions in the economy generally resulting from Year 2000
issues could also materially adversely affect the Company. The Company could be
subject to litigation for computer systems product failure, for example,
equipment shutdown or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations and investments in furniture
and equipment through an initial public offering of common stock on March 11,
1996 with net proceeds of $34.3 million. The Company used cash of $4.9
million in operating activities for the six months ended September 30, 1998,
as compared to cash used in operating activities of $7.1 million for the same
prior year period. The net cash used in operating activities during the six
months ended September 30, 1998 resulted primarily from the net loss for the
period, an increase in prepaid expenses and other assets, and decreases in
accrued expenses and other liabilities, and deferred revenue, partially
offset by an increase in accounts payable.

The Company's investing activities consisted of the purchases of
interest-bearing securities representing a shift from cash equivalents to
short-term investments, as well as purchases of property and equipment, and a
loan to an officer of the Company. Capital expenditures were $1.0 million for
the six months ended September 30, 1998 compared to $2.6 million for the six
months ended September 30, 1997. Capital expenditures consisted of purchases
of computer equipment and office furniture. For the six months ended
September 30, 1997, the Company was in the process of expanding its
headquarter offices, and thus incurred significant leasehold improvement and
furniture addition expenditures compared to the six months ended September
30, 1998. At September 30, 1998, the Company did not have any material
commitments for capital expenditures.

At September 30, 1998, the Company had $27.9 million in cash and
cash equivalents, and short-term investments and $29.1 million in working
capital. The Company believes that its existing cash and cash equivalents,
and short-term investments will be adequate to meet its cash needs for at
least the next 12 months. Thereafter, the Company may require additional
funds to support its working capital requirements or for other purposes and
may seek to raise such additional funds through public or private equity
financings or from other sources. There can be no assurance that additional
financing will be available at all or that, if available, such financing will
be obtainable on terms favorable to the Company and would not be dilutive.

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<PAGE>

BUSINESS RISKS

IN EVALUATING THE COMPANY'S BUSINESS, READERS SHOULD CAREFULLY
CONSIDER THE BUSINESS RISKS DISCUSSED IN THIS SECTION IN ADDITION TO THE
OTHER INFORMATION PRESENTED IN THIS QUARTERLY REPORT ON FORM 10-Q. THIS
REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVES," "EXPECTS,"
"INTENDS," "FUTURE," AND OTHER SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW, THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED.

LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES. The Company
was founded in February 1991 and first shipped product in August 1994. After
achieving profitability from December 1995 through March 31, 1997, the
Company incurred net losses for each subsequent quarter through the quarter
ended June 30, 1998. The Company showed a modest profit for the quarter ended
September 30, 1998. At September 30, 1998, the Company had an accumulated
deficit of $31.7 million. A substantial portion of the accumulated deficit is
due to the deployment of significant resources to the Company's product
development, sales and marketing organizations. The Company expects to
continue to devote substantial resources in these areas and as a result will
need to significantly increase revenue to return to profitability. There can
be no assurance that any of the Company's business strategies will be
successful or the Company will be profitable in any future quarter or period.

POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; UNCERTAINTY
OF FUTURE OPERATING RESULTS; SEASONALITY. The Company's quarterly operating
results have varied significantly in the past and are likely to vary
significantly in the future, depending on factors such as the size and timing
of significant orders and their fulfillment, demand for the Company's
products, changes in pricing policies by the Company or its competitors, the
number, timing and significance of product enhancements and new product
announcements by the Company and its competitors, the ability of the Company
to develop, introduce and market new and enhanced versions of the Company's
products on a timely basis, the rate of adoption and use of the Company's
products by third-party system integrators and value added resellers, changes
in the level of operating expenses, changes in the Company's sales incentive
plans, budgeting cycles of its customers, customer order deferrals due to
intervening information technology projects of a higher priority such as, the
Year 2000 Issue, or in anticipation of enhancements or new products offered
by the Company or its competitors or other causes, the cancellation of
licenses during the warranty period or non-renewal of maintenance agreements,
product life cycles, software bugs and other product quality problems,
personnel changes, changes in the Company's strategy, the level of
international expansion, seasonal trends, and general domestic and
international economic and political conditions, among others. A significant
portion of the Company's total revenue has been, and the Company believes
will continue to be, derived from a limited number of orders placed by large
organizations, and the timing of such orders and their fulfillment has caused
and could continue to cause material fluctuations in the Company's operating
results, particularly on a quarterly basis. In addition, competition for
sales personnel is intense, and there can be no assurance that the Company
can retain its existing sales personnel or that it can attract, assimilate
and retain highly qualified sales

19
<PAGE>

personnel in the future. The timing of the Company's hiring of new sales
personnel and the rate at which new sales people become productive could also
cause material fluctuations in the Company's quarterly operating results. Due
to the foregoing factors, quarterly revenue and operating results are
difficult to forecast. Revenue is also difficult to forecast because the
market for distributed enterprise application development software is rapidly
evolving, and the Company's sales cycle, from initial evaluation to purchase
and the provision of support services, is lengthy and varies substantially
from customer to customer. Product orders are typically shipped shortly after
receipt of the order, and consequently, order backlog at the beginning of any
quarter has in the past represented only a small portion of that quarter's
total revenue. As a result, license fees revenue in any quarter is
substantially dependent on orders booked and shipped in that quarter. Due to
all of the foregoing, revenue for any future quarter is not predictable with
any significant degree of accuracy. Accordingly, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future
performance. The prior revenue growth experienced by the Company should not
be considered indicative of future revenue growth, if any, or of future
operating results. Failure by the Company, for any reason, to increase total
revenue would have a material adverse effect on the Company's business,
operating results and financial condition.

To achieve its quarterly revenue objectives, the Company is
dependent upon obtaining orders in any given quarter for shipment in that
quarter. Furthermore, the Company has often recognized a substantial portion
of its revenue in the last month, or even weeks or days, of a quarter. The
Company's expense levels are based, in significant part, on the Company's
expectations as to future revenue and are therefore relatively fixed in the
short term. If revenue levels fall below expectations, net income or loss is
likely to be disproportionately adversely affected because a proportionately
smaller amount of the Company's expense varies with its revenue. There can be
no assurance that the Company will be able to maintain profitability on a
quarterly or annual basis in the future. Due to all the foregoing factors, it
is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially and
adversely affected.

The operating results of many software companies reflect seasonal
trends, and the Company expects to be affected by such trends in the future.

The Company has prepared a draft contingency plan for certain critical
applications and expects to have a finalized draft in the near future. This
business recovery plan discusses classified disasters and provides a list of
priorities including, for example, customer service, billing and invoicing, and
engineering.

PRODUCT CONCENTRATION; IMPACT OF MARKET FACTORS. All of the
Company's revenue has been attributable to sales of Forte and related
products and services. The Company currently expects Forte and related
products and services to account for all or substantially all of the
Company's future revenue. As a result, factors adversely affecting the
pricing of or demand for Forte and related products, such as competition or
technological change, could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's future
financial performance will depend, in significant part, on the successful
development, introduction and customer acceptance of new and enhanced
versions of Forte and related products. There can be no assurance that the
Company will continue to be successful in marketing the Forte product,
related products or other products. The Company's prior revenue growth should
not be considered indicative of future revenue growth, as there can be no
assurance that the market for Forte and related products, or the market for
products used in the development, deployment and management of distributed
applications, will continue to grow. Recently, industry analysts and
competitors have

<PAGE>

noted that market demand in the enterprise application development sector
appears to be slowing, and predicted that the prior success achieved by that
sector may not continue in future periods, due to a variety of factors
including but not limited to (1) a diversion of customer resources from
enterprise application development to the Year 2000 Issue and other higher
priority information technology projects, (2) a general shortage of qualified
programmers and a shift of available programming resources from corporate
users to systems integrators, (3) market confusion caused by the complex and
rapidly changing mix of alternative technologies for enterprise application
development, and (4) the increased availability and popularity of packaged
software applications. Additionally, recent instability in the economies and
financial markets in the Asia-Pacific region, which had previously been
regarded as a potentially strong source of revenue growth for enterprise
software vendors, has introduced additional uncertainty concerning the
sector. If the market for Forte and related products or enterprise
application development products used in the development, deployment and
management of distributed applications fails to grow, or grows more slowly
than the Company currently anticipates, the Company's business, operating
results and financial condition would be materially and adversely affected.

DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant degree upon the continuing contributions of its key management,
sales, marketing, software development and customer support personnel, and its
ability to attract and retain such highly-skilled personnel. The loss of key
personnel could materially and adversely affect the Company. Competition for
qualified personnel is intense, particularly in the sales and software
development areas, and there can be no assurance that the Company can retain its
existing personnel or that it can attract, assimilate and retain additional
highly qualified personnel in the future. The timing of the Company's hiring of
new sales personnel and the rate at which new sales people become productive
could also cause material fluctuations in the Company's quarterly operating
results. The Company has at times experienced and continues to experience
difficulty in recruiting and retaining qualified personnel. The Company has
experienced significant turnover in its North America sales organization during
fiscal year 1998 and the first two quarters of fiscal 1999. Competitors and
others have in the past and may in the future attempt to recruit the Company's
employees. Failure to attract and retain key personnel could have a material
adverse effect on the Company's business, operating results and financial
condition.

RISKS ASSOCIATED WITH EXPANDING DISTRIBUTION. To date, the Company has
sold its products through its direct and indirect sales force, systems
integrators, distributors and value added resellers. The Company's customers and
potential customers often rely on third-party system integrators and value added
resellers to develop and deploy distributed applications. The Company's ability
to achieve significant revenue growth in the future will depend in large part on
its success in recruiting, training and retaining sufficient sales personnel and
establishing and maintaining relationships with distributors, resellers and
systems integrators. Although the Company is currently investing, and plans to
continue to invest significant resources to maintain and selectively expand its
sales force and to develop relationships with third-party distributors,
resellers and systems integrators, the Company has at times experienced and
continues to experience difficulty in recruiting and retaining qualified sales
personnel and in establishing necessary third-party relationships. There can be
no assurance that the Company will be able to successfully hire, train and
retain needed sales personnel or develop and maintain sufficient third-party
relationships, or that such efforts will result in an increase in revenue. Any
failure by the

21
<PAGE>

Company to maintain a sufficiently large and trained sales force and continue
to establish other distribution channels would materially and adversely affect
the Company's business, operating results and financial condition.

COMPETITION. The market for distributed software used in the
development, deployment and management of distributed applications is intensely
competitive and characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and rapidly changing customer
requirements. Distributed applications that can be developed and deployed using
the Company's Forte environment can also be implemented by integrating a
combination of application development tools and more powerful server
programming techniques such as stored procedures in relational databases and C
or C++ programming, along with networking and database middleware to connect the
various components. As such, the Company effectively experiences its primary
competition from potential customers' decisions to pursue this type of approach
as opposed to utilizing an application environment such as Forte. As a result,
the Company must continuously educate existing and prospective customers, and
third-party systems integrators on whom prospective customers are increasingly
relying for expertise, on the advantages of the Company's products over the
approach of integrating a combination of products. There can be no assurance
that these customers, potential customers or systems integrators will perceive
sufficient value in the Company's products to justify purchasing or recommending
them.

The Company has also experienced and expects to continue to experience
increased competition from a number of vendors that market software products
specifically targeted for building distributed applications. Actual and
potential competitors include: providers of application development software,
such as Compuware/Uniface, Dynasty Technologies, Inc., International Business
Machines Corporation, Microsoft Corporation, NAT Systems, Inc., Oracle
Corporation, Seer Technologies, Inc., Sterling Software, Inc., and the Powersoft
unit of Sybase, Inc.; web-based development tools targeting production
enterprise Internet applications; middleware companies advocating a
middleware-centric approach to building enterprise applications; developers of
packaged applications and application components, templates and frameworks; and
integration software vendors.

Many of these competing vendors have or will have significantly greater
financial, technical, marketing and other resources than the Company, and may be
able to respond more quickly to new or emerging technologies. Also, many current
and potential competitors have greater name recognition and more extensive
customer bases that could be leveraged, thereby gaining market share to the
Company's detriment. The Company expects to face additional competition as other
established and emerging companies enter the distributed application development
market and new products and technologies are introduced. Increased competition
could result in price reductions, fewer customer orders, reduced gross margins
and loss of market share, any of which could materially and adversely affect the
Company's business, operating results and financial condition. In addition,
current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third-parties, thereby
increasing the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among current and new competitors may emerge and rapidly gain
significant market share. Such competition could materially and adversely affect
the Company's ability to sell additional licenses and maintenance

22
<PAGE>

and support renewals on terms favorable to the Company. Further, competitive
pressures could require the Company to reduce the price of Forte licenses and
related products and services, which could materially and adversely affect the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, and the failure to do so would have a material adverse
effect upon the Company's business, operating results and financial condition.

The principal competitive factors affecting the market for Forte are
ease of application development, deployment and management functionality and
features, product architecture, product performance, reliability and
scaleability, product quality, price and customer support. The Company believes
it presently competes favorably with respect to each of these factors. However,
the Company's market is still evolving and there can be no assurance that the
Company will be able to compete successfully against current and future
competitors and the failure to do so successfully will have a material adverse
effect upon the Company's business, operating results and financial condition.

NEW ACCOUNTING STANDARDS. Statement of Position ("SOP") 97-2, "Software
Revenue Recognition," as amended by Statement of Position 98-4, was issued in
October 1997 and addresses software revenue recognition matters. The SOP
supersedes SOP 91-1 and is effective for transactions entered into for fiscal
years beginning after December 15, 1997. The Company was required to adopt this
SOP in its first quarter of fiscal year 1999 and restatement of prior financial
statements was prohibited. Based upon interpretation of SOP 97-2, the Company
believes its current revenue recognition policies and practices are materially
consistent with the SOP. However, implementation guidelines for this standard
have not yet been issued and a wide range of potential interpretations are being
discussed by the accounting profession. Once available, such implementation
guidance could lead to unanticipated changes in the Company's current revenue
accounting practices, and such changes could materially and adversely affect the
Company's future revenue and operating results.

Such implementation guidance may necessitate substantial changes in the
Company's business practices in order for the Company to continue to recognize a
substantial portion of its license fees revenue upon delivery of its software
products. Such changes may reduce demand, extend sales cycles, increase
administrative costs and otherwise adversely affect operations. In addition, the
Company may be put at a competitive disadvantage relative to foreign based
competitors not subject to U.S. generally accepted accounting principles.

LENGTHY SALES CYCLE. The Company's products are typically used to
develop applications that are critical to a customer's business, and the
purchase of the Company's products is often part of a customer's larger business
process reengineering initiative or implementation of distributed computing. As
a result, the license and implementation of the Company's software products
generally involves a significant commitment of management attention and
resources by prospective customers. Accordingly, the Company's sales process is
often subject to delays associated with a long approval process that typically
accompanies significant initiatives or capital expenditures. In addition, there
are a large number of alternative methods or technologies to develop
applications which can require significant time for potential customers to
evaluate, and implementation of a favorable decision to license the Company's
products may be subject to delay due to higher priority projects such as Year
2000 compliance. For these and other reasons, the sales cycle associated with

23
<PAGE>

the license of the Company's products is often lengthy and subject to a number
of significant delays over which the Company has little or no control. There can
be no assurance that the Company will not experience these and additional delays
in the future. Therefore, the Company believes that its quarterly operating
results are likely to vary significantly in the future.

RISK ASSOCIATED WITH NEW VERSIONS AND NEW PRODUCTS; RAPID TECHNOLOGICAL
CHANGE. The software market in which the Company competes is characterized by
rapid technological change, frequent introductions of new products, changes in
customer demands and evolving industry standards. The introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. For example, the Company's
customers have adopted a wide variety of hardware, software, database,
networking and Internet-based platforms, and as a result, to gain broad market
acceptance, the Company has had to support Forte on many of such platforms. The
Company's customers use the Company's proprietary development language to
develop applications using the Company's products, and customers may desire to
utilize other widely-used programming languages to develop Internet-based and
other distributed applications. The Company's future success will depend upon
its ability to address the increasingly sophisticated needs of its customers by
supporting existing and emerging hardware, software, programming language,
database, networking and Internet-based platforms and by developing and
introducing enhancements to Forte, related products and new products on a timely
basis that keep pace with such technological developments and emerging industry
standards and changing customer requirements. There can be no assurance that the
Company will be successful in developing and marketing enhancements to Forte and
related products that respond to technological change, evolving industry
standards or changing customer requirements, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements or that such enhancements will
adequately meet the requirements of the marketplace and achieve any significant
degree of market acceptance. The Company has in the past experienced delays in
the release dates of enhancements to Forte. If release dates of any future Forte
enhancements or new products are delayed or if when released they fail to
achieve market acceptance, the Company's business, operating results and
financial condition would be materially and adversely affected. In addition, the
introduction or announcement of new product offerings or enhancements by the
Company or the Company's competitors may cause customers to defer or forgo
purchases of current versions of Forte and related products, which could have a
material adverse effect on the Company's business, operating results and
financial condition.

LIMITED DEPLOYMENT; DEPENDENCE ON SYSTEM INTEGRATORS AND VALUE ADDED
RESELLERS. The Company first shipped Forte in August 1994. To date, only a
limited number of the Company's customers have completed the development and
deployment of distributed applications using Forte and related products. If any
of the Company's customers are not able to successfully develop and deploy
distributed applications with Forte and related products, the Company's
reputation could be damaged, which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
Company expects that a significant percentage of its future revenue will be
derived from sales to existing customers. If existing customers have difficulty
deploying applications built with Forte and related products or for any other
reason are not satisfied with Forte products, the Company's business, operating
results and financial condition would be materially and adversely affected. The
Company's customers and potential customers often rely on third-party system
integrators and value added resellers to develop and deploy distributed

24
<PAGE>

applications. If the Company is unable to adequately train a sufficient number
of system integrators and value added resellers or if, for any reason, a large
number of such integrators and value added resellers adopt a product or
technology other than Forte, the Company's business, operating results and
financial condition would be materially and adversely affected.

RISK OF SOFTWARE DEFECTS. Software products as internally complex as
Forte and related products frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. The Company
introduced Release 2.0 of Forte in November 1995, Release 3.0 of Forte in August
in 1997 and the initial release of Forte Conductor in September 1997. Despite
extensive product testing by the Company, the Company has discovered software
errors in its releases after their introduction. Although the Company has not
experienced material adverse effects resulting from any such defects or errors
to date, there can be no assurance that, despite testing by the Company and by
current and potential customers, defects and errors will not be found in current
versions, new versions, new product or enhancements to existing products after
commencement of commercial shipments, resulting in loss of revenue or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.

PRODUCT LIABILITY. The Company markets Forte to customers for the
development, deployment and management of distributed applications. The
Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in the Company's license agreements may not be effective as a result of existing
or future federal, state or local laws or ordinances, or unfavorable judicial
decisions. Although the Company has not experienced any product liability claims
to date, the sale and support of Forte by the Company may entail the risk of
such claims, which are likely to be substantial in light of the use of Forte in
business-critical applications. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Revenue from foreign
subsidiaries and export sales accounted for 42 percent and 45 percent of the
Company's total revenue for the quarters ended September 30, 1998 and 1997,
respectively. The Company currently has international sales offices located in
Australia, Belgium, Canada, France, Germany, Holland, Switzerland, and the
United Kingdom which have generated substantially all direct international
revenue recognized by the Company to date. The Company believes that in order to
increase sales opportunities and regain profitability, it will be required to
continue to expand its international operations. The Company has committed, and
continues to commit, significant management time and financial resources to
developing direct and indirect international sales and support channels. There
can be no assurance, however, that the Company will be able to maintain or
increase international market demand for Forte and related products. To the
extent that the Company is unable to do so in a timely manner, the Company's
international sales will be limited, and the Company's business, operating
results and financial condition would be materially and adversely affected.

International operations are subject to inherent risks, including the
impact of possible recessionary environments in economies outside the United
States, costs of localizing products for

25
<PAGE>

foreign markets, longer accounts receivable collection periods and greater
difficulty in accounts receivable collection, unexpected changes in regulatory
requirements, difficulties and costs of staffing and managing foreign
operations, reduced protection for intellectual property rights in some
countries, potentially adverse tax consequences, and political and economic
instability. There can be no assurance that the Company or its distributors or
resellers will be able to sustain or increase international revenue from
licenses or from maintenance and service, or that the foregoing factors will
not have a material adverse effect on the Company's future international
revenue and, consequently, on the Company's business, operating results and
financial condition. The Company's direct international revenue is generally
denominated in local currencies. The Company does not currently engage in
hedging activities. Revenue generated by the Company's distributors and
resellers are generally paid to the Company in United States dollars. Although
exposure to currency fluctuations to date has been insignificant, there can be
no assurance that fluctuations in currency exchange rates in the future will
not have a material adverse impact on revenue from international sales and thus
the Company's business, operating results and financial condition.

PROPRIETARY RIGHTS, RISKS OF INFRINGEMENT AND SOURCE CODE RELEASE. The
Company relies primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company also believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a technology
leadership position. The Company seeks to protect its software documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. The Company currently has one issued United States patent
that expires in 2012 and corresponding patent applications pending in Canada,
Australia, Japan and several member countries within the European Patent
Organization. There can be no assurance that the Company's patent will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications, whether or not being currently challenged
by applicable governmental patent examiners, will be issued with the scope of
the claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology or design around the patents owned by the Company.
The Company has obtained registration of the FORTE trademark in six countries
and has trademark registration applications pending in numerous additional
countries. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights as fully as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights in the United
States or abroad will be adequate or that competition will not independently
develop similar technology. The Company has entered into source code escrow
agreements with a limited number of its customers and resellers requiring
release of source code in certain circumstances. Such agreements generally
provide that such parties will have a limited, non-exclusive right to use such
code in the event that there is a bankruptcy proceeding by or against the
Company, if the Company ceases to do business or if the Company fails to meet
its support obligations. In addition, Digital Equipment Corporation ("Digital")
and Mitsubishi Corporation ("Mitsubishi") each currently

26
<PAGE>

possess copies of Forte source code for certain limited purposes, subject to
the terms of separate written agreements each company has entered into with the
Company. Digital has an option to purchase a non-exclusive, fully-paid license
of the Forte source code. Digital's option becomes exercisable if the Company
is acquired and the acquiror fails to agree to assume the Company's contractual
obligations to Digital. The provision of source code may increase the
likelihood of misappropriation by third parties.

The Company is not aware that it is infringing any proprietary rights
of third-parties. There can be no assurance, however, that third-parties will
not claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
would be materially and adversely affected.

The Company relies upon certain software that it licenses from
third-parties, including software that is integrated with the Company's
internally developed software and used in Forte to perform key functions. There
can be no assurance that these third-party software licenses will continue to be
available to the Company on commercially reasonable terms. The loss of, or
inability to maintain, any such software licenses could result in shipment
delays or reductions until equivalent software could be developed, identified,
licensed and integrated which would materially and adversely affect the
Company's business, operating results and financial condition.

VOLATILITY OF STOCK PRICE. The Company's Common Stock has experienced
significant price volatility and such volatility may occur in the future.
Factors, such as announcements of the introduction of new products by the
Company or its competitors and quarter-to-quarter variations in the Company's
operating results, as well as market conditions in the technology and emerging
growth company sectors, may have a significant impact on the market price of the
Company's Common Stock. Further, the stock market has experienced extreme
volatility that has particularly affected the market prices of equity securities
of many high technology companies and that often has been unrelated or
disproportionate to the operating performance of such companies. These market
fluctuations may adversely affect the price of the Common Stock.

EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF RIGHTS
PLAN, CERTIFICATE OF INCORPORATION, DELAWARE LAW AND CERTAIN AGREEMENTS. The
Company's Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions, including voting and conversion rights of such shares, without
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making it more
difficult for a third-party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
Preferred

27
<PAGE>

stock. Further, the Company has adopted a stockholder rights plan that, in
conjunction with certain provisions of the Company's Certificate of
Incorporation and of Delaware law, could delay or make more difficult a merger,
tender offer, or proxy contest involving the Company.

28
<PAGE>

PART II

ITEM 1. LEGAL PROCEEDINGS

The Company is not aware of any pending or threatened litigation that
could have a material adverse effect upon the Company's business, operating
results or financial condition.

ITEM 5. OTHER INFORMATION

STOCKHOLDER PROPOSALS

Proposals of stockholders intended to be presented at the Company's 1999
annual meeting of stockholders must be received at the Company's principal
executive offices not later than March 17, 1999 in order to be included in
the Company's proxy statement and form of proxy relating to the 1999 annual
meeting. Pursuant to new amendments to Rule 14a-4(c) of the Securities
Exchange Act of 1934, as amended, if a stockholder who intends to present a
proposal at the 1999 annual meeting of stockholders does not notify the
Company of such proposal on or prior to May 27, 1999, then management proxies
would be allowed to use their discretionary voting authority to vote on the
proposal when the proposal is raised at the annual meeting, even though there
is no discussion of the proposal in the 1999 proxy statement. The Company
currently believes that the 1999 annual meeting of stockholders will be held
during the second week of August 1999.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27.1 Financial data schedule.
10.16 Full-recourse Promissory Note with Martin J. Sprinzen.
10.17 Stock Pledge Agreement with Martin J. Sprinzen.
10.18 Separation and Release Agreement with James Wambach.
10.19 Severance Agreement with Jay Shiveley.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K have been filed during the quarter ended
September 30, 1998.

29
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, as amended,
the Registrant has duly caused this Report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Oakland,
State of California, on this 13th day of November, 1998.

FORTE SOFTWARE, INC.

By: /s/ BOB L. COREY

Bob L. Corey

SENIOR VICE PRESIDENT, FINANCE AND
ADMINISTRATION, CHIEF FINANCIAL OFFICER
AND SECRETARY

<PAGE>

EXHIBIT 10.16

FULL-RECOURSE PROMISSORY NOTE

$1,300,000 August 6, 1998

FOR VALUE RECEIVED, the undersigned Borrower promises to pay to the
order of FORTE SOFTWARE, INC, ("COMPANY"), at its office located at 1800
Harrison Street, Oakland CA 94612, the aggregate principal amount outstanding
hereunder (as specified from time to time on Exhibit A hereto), which principal
amount shall in no event exceed ONE MILLION THREE HUNDRED THOUSAND UNITED
STATES DOLLARS (U.S. $1,300,000), plus interest accrued on the unpaid
principal, upon the terms and conditions specified below.

Borrower may request the making of loans by Company pursuant to the
terms of this Note and in an aggregate principal amount not to exceed one
million three hundred thousand United States dollars ($1,300,000) by giving at
least 7 days written notice to the Company's Chief Financial Officer specifying
the business day on which Borrower requests Company to make the particular loan
("Funding Date") and the aggregate principal amount of the particular loan
("Loan Amount") to be made on such date. Each Funding Date and Loan Amount
shall be reflected on Exhibit A.

Borrower acknowledges and agrees that on August 6, 1998, Company loaned
Borrower an aggregate principal amount of TWO HUNDRED AND ONE THOUSAND AND
SEVEN UNITED STATES DOLLARS ($201,007).

Borrower further acknowledges and agrees that on August 14, 1998, Company
loaned Borrower an additional aggregate principal amount of FIVE HUNDRED AND
FIFTY THOUSAND UNITED STATES DOLLARS ($550,000).

1. TERM. The aggregate principal balance of this Note, together
with interest accrued and unpaid to date, shall be due and payable at the close
of business on August 6, 2000; provided, however, that Borrower shall have the
right to extend the payment due date until close of business on August 6, 2002,
upon written notice to Company on or before August 6, 2000.

2. RATE OF INTEREST. Interest shall accrue under the Note on any
unpaid principal balance at the rate of seven and one-half percent (7.5%) per
annum, compounded annually.

3. PREPAYMENT. Prepayment of principal and interest may be made at
any time without penalty.

4. EVENTS OF ACCELERATION. The entire unpaid principal sum and
unpaid interest under this Note shall become immediately due and payable upon:

(a) The date when the Borrower ceases to be employed by the
Company;

(b) The failure of the Borrower to pay when due the principal
balance and accrued interest on this Note and the continuation of such
default for more than thirty (30) days;

1
<PAGE>

(c) The insolvency of the Borrower, the commission of an act of
bankruptcy by the Borrower, the execution by the Borrower of a general
assignment for the benefit of creditors, or the filing by or against
the Borrower of a petition in bankruptcy or a petition for relief
under the provisions of the federal bankruptcy act or another state or
federal law for the relief of debtors and the continuation of such
petition without dismissal for a period of ninety (90) days or more;

(d) The occurrence of a material event of default under the
Stock Pledge Agreement(s) securing this Note or any obligation secured
thereby; or

(e) Borrower's failure to maintain the Required Security Value
in accordance with Section 5 below.

5. SECURITY. Payment of this Note shall be secured by Stock Pledge
Agreement(s) to be executed and delivered by the Borrower and covering shares of
the Company's Common Stock with a fair market value equal to at least one
million eight hundred and twenty thousand US dollars ($1,820,000) (the "Required
Security Value"). On the first day of each calendar quarter, Borrower shall
execute and deliver additional Stock Pledge Agreements as necessary to maintain
the Required Security Value based on the fair market value of the Company's
Common Stock as of such date. Notwithstanding the foregoing, the Borrower,
shall remain personally liable for payment of this Note, and assets of the
Borrower, in addition to the collateral under the Stock Pledge Agreement(s), may
be applied to the satisfaction of the Borrower's obligations hereunder.

6. COLLECTION. If action is instituted to collect this Note, the
Borrower promises to pay all reasonable costs and expenses (including reasonable
attorney's fees) incurred in connection with such action.

7. WAIVER. No previous waiver and no failure or delay by the
Company or the Borrower in acting with respect to the terms of this Note or the
Stock Pledge Agreement shall constitute a waiver of any breach, default or
failure of condition under this Note, the Stock Pledge Agreement or the
obligations secured thereby. A waiver of any term of this Note, the Stock
Pledge Agreement or of any of the obligations secured thereby must be made in
writing and signed by a duly authorized officer of the Company and shall be
limited to the express terms of such waiver.

The Borrower hereby expressly waives presentment and demand for payment at
such time as any payments are due under this Note.

8. CONFLICTING AGREEMENTS. In the event of any inconsistencies
between the terms of this Note and the terms of any other document related to
the loan evidenced by the Note, the terms of this Note shall prevail.

9. GOVERNING LAW. This Note shall be construed in accordance with
the laws of the State of California.

By: ____________________

2
<PAGE>

Martin J. Sprinzen

EXHIBIT A

Funding Date Loan Amount Aggregate Principal Amount Outstanding
- ------------ ----------- --------------------------------------
<S> <C> <C>
August 6, 1998 $201,007 $201,007

August 14, 1998 $550,000 $751,007

September 23, 1998 $344,000 $1,095,007

October 12, 1998 ($200,000) $895,007

</TABLE>

<PAGE>

EXHIBIT 10.17

STOCK PLEDGE AGREEMENT

In order to secure payment of the promissory note dated August 6, 1998
(the "Note") payable to Forte Software, Inc., a Delaware corporation (the
"Company"), at its principal offices in the principal amount of up to one
million three hundred thousand dollars ($1,300,000), which Note the Borrower
delivered in connection with a loan extended to the Borrower by the Company, the
Borrower hereby grants the Company a security interest in, and assigns,
transfers and pledges to the Company, the following securities and other
property:

THE 383,158 SHARES OF THE COMPANY'S COMMON STOCK (THE "COMMON STOCK") DELIVERED
TO AND DEPOSITED WITH THE COMPANY AS COLLATERAL FOR THE NOTE; AND

ANY AND ALL NEW, ADDITIONAL OR DIFFERENT SECURITIES OR OTHER PROPERTY
SUBSEQUENTLY DISTRIBUTED WITH RESPECT TO THE SHARES IDENTIFIED IN SUBSECTION (a)
ABOVE THAT ARE TO BE DELIVERED TO AND DEPOSITED WITH THE COMPANY PURSUANT TO THE
REQUIREMENTS OF SECTION 3 OF THIS AGREEMENT; AND

ANY AND ALL OTHER PROPERTY AND MONEY THAT IS DELIVERED TO OR COMES INTO THE
POSSESSION OF THE COMPANY PURSUANT TO THE TERMS AND PROVISIONS OF THIS
AGREEMENT; AND

THE PROCEEDS OF ANY SALE, EXCHANGE OR DISPOSITION OF THE PROPERTY AND SECURITIES
DESCRIBED IN SUBSECTION (a), (b) OR (c) ABOVE.

All securities, property and money to be assigned to, transferred to and pledged
with the Company shall be herein referred to as the "Collateral" and shall be
accompanied by one or more stock power assignments properly endorsed by the
Borrower. The Company shall hold the Collateral in accordance with the
following terms and provisions:

WARRANTIES. THE BORROWER HEREBY WARRANTS THAT THE BORROWER IS THE OWNER OF THE
COLLATERAL AND HAS THE RIGHT TO PLEDGE THE COLLATERAL AND THAT THE COLLATERAL IS
FREE FROM ALL LIENS, ADVANCE CLAIMS AND OTHER SECURITY INTERESTS (OTHER THAN
THOSE CREATED HEREBY).

RIGHTS AND POWERS. THE COMPANY MAY, WITHOUT OBLIGATION TO DO SO, EXERCISE ONE
OR MORE OF THE FOLLOWING RIGHTS AND POWERS WITH RESPECT TO THE COLLATERAL:

ACCEPT IN ITS DISCRETION, BUT SUBJECT TO THE APPLICABLE LIMITATIONS OF
SECTION 7, OTHER PROPERTY OF THE BORROWER IN EXCHANGE FOR ALL OR PART OF THE
COLLATERAL AND RELEASE COLLATERAL TO THE BORROWER TO THE EXTENT NECESSARY TO
EFFECT SUCH EXCHANGE, AND IN SUCH EVENT THE MONEY, PROPERTY OR SECURITIES
RECEIVED IN THE EXCHANGE SHALL BE HELD BY THE COMPANY AS SUBSTITUTE SECURITY FOR
THE NOTE AND ALL OTHER INDEBTEDNESS SECURED HEREUNDER;

PERFORM SUCH ACTS AS ARE NECESSARY TO PRESERVE AND PROTECT THE COLLATERAL AND
THE RIGHTS,

1
<PAGE>

POWERS AND REMEDIES GRANTED WITH RESPECT TO SUCH COLLATERAL BY THIS
AGREEMENT; AND

TRANSFER RECORD OWNERSHIP OF THE COLLATERAL TO THE COMPANY OR ITS NOMINEE AND
RECEIVE, ENDORSE AND GIVE RECEIPT FOR, OR COLLECT BY LEGAL PROCEEDINGS OR
OTHERWISE, DIVIDENDS OR OTHER DISTRIBUTIONS MADE OR PAID WITH RESPECT TO THE
COLLATERAL, BUT ONLY IF THERE EXISTS AT THE TIME AN OUTSTANDING EVENT OF DEFAULT
UNDER SECTION 8 OF THIS AGREEMENT.

Any action by the Company pursuant to the provisions of this Section 2 may be
taken without notice to the Borrower. Expenses reasonably incurred in
connection with such action shall be payable by the Borrower and form part of
the indebtedness secured hereunder, as provided in Section 9.

So long as there exists no event of default under Section 8 of this
Agreement, the Borrower may exercise all shareholder voting rights and be
entitled to receive any and all regular cash dividends paid on the Collateral.
Accordingly, until such time as an event of default occurs under this Agreement,
all proxy statements and other shareholder materials pertaining to the
Collateral shall be delivered to the Borrower at the address indicated below.

Any cash sums that the Company may receive in the exercise of its
rights and powers under this Section 2 shall be applied to the payment of the
Note and any other indebtedness secured hereunder, in such order of application
as the Company deems appropriate. Any remaining cash shall be paid over to the
Borrower.

DUTY TO DELIVER. ANY NEW, ADDITIONAL OR DIFFERENT SECURITIES THAT MAY NOW OR
HEREAFTER BECOME DISTRIBUTABLE WITH RESPECT TO THE COLLATERAL BY REASON OF (i)
ANY STOCK DIVIDEND, STOCK SPLIT OR RECLASSIFICATION OF THE CAPITAL STOCK OF THE
COMPANY OR (ii) ANY MERGER, CONSOLIDATION OR OTHER REORGANIZATION AFFECTING THE
CAPITAL STRUCTURE OF THE COMPANY SHALL, UPON RECEIPT BY THE BORROWER, BE
PROMPTLY DELIVERED TO AND DEPOSITED WITH THE COMPANY AS PART OF THE COLLATERAL
HEREUNDER. SUCH SECURITIES SHALL BE ACCOMPANIED BY ONE OR MORE PROPERLY
ENDORSED STOCK POWER ASSIGNMENTS.

CARE OF COLLATERAL. THE COMPANY SHALL EXERCISE REASONABLE CARE IN THE CUSTODY
AND PRESERVATION OF THE COLLATERAL BUT SHALL HAVE NO OBLIGATION TO INITIATE ANY
ACTION WITH RESPECT TO, OR OTHERWISE INFORM THE BORROWER OF, ANY CONVERSION,
CALL, EXCHANGE RIGHT, PREEMPTIVE RIGHT, SUBSCRIPTION RIGHT, PURCHASE OFFER OR
OTHER RIGHT OR PRIVILEGE RELATING TO OR AFFECTING THE COLLATERAL; PROVIDED,
HOWEVER, THAT THE COMPANY WILL NOTIFY THE BORROWER OF ANY SUCH RIGHTS OF THE
BORROWER TO PROTECT AGAINST ADVERSE CLAIMS OR TO PROTECT THE COLLATERAL AGAINST
THE POSSIBILITY OF A DECLINE IN MARKET VALUE. THE COMPANY SHALL NOT BE
OBLIGATED TO TAKE ANY ACTION WITH RESPECT TO THE COLLATERAL REQUESTED BY THE
BORROWER UNLESS THE REQUEST IS MADE IN WRITING AND THE COMPANY DETERMINES THAT
THE REQUESTED ACTION WILL NOT UNREASONABLY JEOPARDIZE THE VALUE OF THE
COLLATERAL AS SECURITY FOR THE NOTE AND OTHER INDEBTEDNESS SECURED HEREUNDER.

The Company may at any time release and deliver all or part of the Collateral to
the Borrower, and the receipt thereof by the Borrower shall constitute a
complete and full acquittance for the Collateral so released and delivered. The
Company shall accordingly be discharged from any further liability or
responsibility for the Collateral, and the released Collateral shall no longer
be subject to the provisions of this Agreement. However, any and all releases
of the Collateral shall be effected in compliance with the applicable
limitations of Section 7(a) and (c).

2
<PAGE>

PAYMENT OF TAXES AND OTHER CHARGES. THE BORROWER SHALL PAY, PRIOR TO THE
DELINQUENCY DATE, ALL TAXES, LIENS, ASSESSMENTS AND OTHER CHARGES AGAINST THE
COLLATERAL, AND IN THE EVENT OF THE BORROWER'S FAILURE TO DO SO, THE COMPANY MAY
AT ITS ELECTION PAY ANY OR ALL OF SUCH TAXES AND CHARGES WITHOUT CONTESTING THE
VALIDITY OR LEGALITY THEREOF. THE PAYMENTS SO MADE SHALL BECOME PART OF THE
INDEBTEDNESS SECURED HEREUNDER AND, UNTIL PAID, SHALL BEAR INTEREST AT THE
MINIMUM PER ANNUM RATE, COMPOUNDED ANNUALLY, REQUIRED TO AVOID THE IMPUTATION OF
INTEREST INCOME TO THE COMPANY AND COMPENSATION INCOME TO THE BORROWER UNDER THE
FEDERAL TAX LAWS.

TRANSFER OF COLLATERAL. IN CONNECTION WITH THE TRANSFER OR ASSIGNMENT OF THE
NOTE (WHETHER BY NEGOTIATION, DISCOUNT OR OTHERWISE), THE COMPANY MAY TRANSFER
ALL OR ANY PART OF THE COLLATERAL, AND THE TRANSFEREE SHALL THEREUPON SUCCEED TO
ALL THE RIGHTS, POWERS AND REMEDIES GRANTED THE COMPANY HEREUNDER WITH RESPECT
TO THE COLLATERAL SO TRANSFERRED. UPON SUCH TRANSFER, THE COMPANY SHALL BE
FULLY DISCHARGED FROM ALL LIABILITY AND RESPONSIBILITY FOR THE TRANSFERRED
COLLATERAL.

RELEASE OF COLLATERAL. PROVIDED (i) ALL INDEBTEDNESS SECURED HEREUNDER (OTHER
THAN PAYMENTS NOT YET DUE AND PAYABLE UNDER THE NOTE) SHALL AT THE TIME HAVE
BEEN PAID IN FULL OR CANCELLED AND (ii) THERE DOES NOT OTHERWISE EXIST ANY EVENT
OF DEFAULT UNDER SECTION 8, THE PLEDGED SHARES OF COMMON STOCK, TOGETHER WITH
ANY ADDITIONAL COLLATERAL THAT MAY HEREAFTER BE PLEDGED AND DEPOSITED HEREUNDER,
SHALL BE RELEASED FROM PLEDGE AND RETURNED TO THE BORROWER IN ACCORDANCE WITH
THE FOLLOWING PROVISIONS:

UPON PAYMENT OR PREPAYMENT OF PRINCIPAL UNDER THE NOTE, TOGETHER WITH PAYMENT OF
ALL ACCRUED INTEREST TO DATE, ONE OR MORE SHARES OF COMMON STOCK HELD AS
COLLATERAL HEREUNDER SHALL (SUBJECT TO THE LIMITATION OF SUBSECTION (d) BELOW)
BE RELEASED TO THE BORROWER WITHIN THREE DAYS AFTER SUCH PAYMENT OR PREPAYMENT.
THE NUMBER OF SHARES TO BE SO RELEASED SHALL BE EQUAL TO THE NUMBER OBTAINED BY
MULTIPLYING (i) THE TOTAL NUMBER OF SHARES OF COMMON STOCK HELD UNDER THIS
AGREEMENT AT THE TIME OF THE PAYMENT OR PREPAYMENT BY (ii) A FRACTION, THE
NUMERATOR OF WHICH SHALL BE THE AMOUNT OF THE PRINCIPAL PAID OR PREPAID AND THE
DENOMINATOR OF WHICH SHALL BE THE UNPAID PRINCIPAL BALANCE OF THE NOTE
IMMEDIATELY PRIOR TO SUCH PAYMENT OR PREPAYMENT. IN NO EVENT, HOWEVER, SHALL
ANY FRACTIONAL SHARES BE RELEASED.

ONE OR MORE SHARES OF COMMON STOCK HELD AS COLLATERAL HEREUNDER SHALL (SUBJECT
TO THE LIMITATION OF SUBSECTION (d) BELOW) BE RELEASED TO A STOCKBROKER
DESIGNATED IN WRITING BY THE BORROWER AND ACCEPTABLE TO THE COMPANY FOR THE SOLE
PURPOSE OF EFFECTING AN IMMEDIATE SALE OF THE RELEASED SHARES, PROVIDED THAT
SUCH STOCKBROKER AGREES TO FORWARD ANY PROCEEDS (UP TO THE BALANCE OF PRINCIPAL
AND INTEREST DUE UNDER THE NOTE) DIRECTLY TO THE COMPANY TO BE USED TO SATISFY
THE NOTE.

ANY ADDITIONAL COLLATERAL THAT MAY HEREAFTER BE PLEDGED AND DEPOSITED WITH THE
COMPANY (PURSUANT TO THE REQUIREMENTS OF SECTION 3) WITH RESPECT TO THE SHARES
OF COMMON STOCK PLEDGED HEREUNDER SHALL BE RELEASED AT THE SAME TIME THE
PARTICULAR SHARES OF COMMON STOCK TO WHICH THE ADDITIONAL COLLATERAL RELATES ARE
TO BE RELEASED IN ACCORDANCE WITH THE APPLICABLE PROVISIONS OF SUBSECTION (a) OR
(b) ABOVE. UNDER NO CIRCUMSTANCES, HOWEVER, SHALL ANY SHARES OF COMMON STOCK OR
ANY OTHER COLLATERAL BE RELEASED IF PREVIOUSLY APPLIED TO THE PAYMENT OF ANY
INDEBTEDNESS SECURED HEREUNDER.

3
<PAGE>

IN NO EVENT SHALL ANY SHARES OF COMMON STOCK BE RELEASED PURSUANT TO THE
PROVISIONS OF SUBSECTIONS (a), (b) AND (c) ABOVE IF, AND TO THE EXTENT, THE FAIR
MARKET VALUE OF THE COMMON STOCK AND ALL OTHER COLLATERAL THAT WOULD OTHERWISE
REMAIN IN PLEDGE HEREUNDER AFTER SUCH RELEASE IS EFFECTED WOULD BE LESS THAN THE
UNPAID BALANCE OF THE NOTE (PRINCIPAL AND ACCRUED INTEREST).

EVENTS OF DEFAULT. THE OCCURRENCE OF ONE OR MORE OF THE FOLLOWING EVENTS SHALL
CONSTITUTE AN EVENT OF DEFAULT UNDER THIS AGREEMENT:

THE FAILURE OF THE BORROWER TO PAY THE PRINCIPAL AND ACCRUED INTEREST WHEN DUE
UNDER THE NOTE;

THE FAILURE OF THE BORROWER TO PERFORM A MATERIAL OBLIGATION IMPOSED UPON THE
BORROWER BY REASON OF THIS AGREEMENT; OR

THE BREACH OF ANY WARRANTY OF THE BORROWER CONTAINED IN THIS AGREEMENT.

Upon the occurrence of any such event of default, the Company may, at its
election, declare the Note and all other indebtedness secured hereunder to be
immediately due and payable and may exercise any or all of the rights and
remedies granted to a secured party under the provisions of the California
Uniform Commercial Code (as now or hereafter in effect), including (without
limitation) the power to dispose of the Collateral by public or private sale or
to accept the Collateral in full payment of the Note and all other indebtedness
secured hereunder.

Any proceeds realized from the disposition of the Collateral pursuant
to the foregoing power of sale shall be applied first to the payment of
reasonable expenses incurred by the Company in connection with the disposition,
then to the payment of the Note and finally to any other indebtedness secured
hereunder. Any surplus proceeds shall be paid over to the Borrower. However,
in the event such proceeds prove insufficient to satisfy all obligations of the
Borrower under the Note, then the Borrower shall remain personally liable for
the resulting deficiency.

OTHER REMEDIES. THE RIGHTS, POWERS AND REMEDIES GRANTED TO THE COMPANY AND THE
BORROWER PURSUANT TO THE PROVISIONS OF THIS AGREEMENT SHALL BE IN ADDITION TO
ALL RIGHTS, POWERS AND REMEDIES GRANTED TO THE COMPANY AND THE BORROWER UNDER
ANY STATUTE OR RULE OF LAW. ANY FORBEARANCE, FAILURE OR DELAY BY THE COMPANY OR
THE BORROWER IN EXERCISING ANY RIGHT, POWER OR REMEDY UNDER THIS AGREEMENT SHALL
NOT BE DEEMED TO BE A WAIVER OF SUCH RIGHT, POWER OR REMEDY. ANY SINGLE OR
PARTIAL EXERCISE OF ANY RIGHT, POWER OR REMEDY UNDER THIS AGREEMENT SHALL NOT
PRECLUDE THE FURTHER EXERCISE THEREOF, AND EVERY RIGHT, POWER AND REMEDY OF THE
COMPANY AND THE BORROWER UNDER THIS AGREEMENT SHALL CONTINUE IN FULL FORCE AND
EFFECT, UNLESS SUCH RIGHT, POWER OR REMEDY IS SPECIFICALLY WAIVED BY AN
INSTRUMENT EXECUTED BY THE COMPANY OR THE BORROWER, AS THE CASE MAY BE.

COSTS AND EXPENSES. ALL REASONABLE COSTS AND EXPENSES (INCLUDING REASONABLE
ATTORNEYS FEES) INCURRED BY THE COMPANY IN THE EXERCISE OR ENFORCEMENT OF ANY
RIGHT, POWER OR REMEDY GRANTED IT UNDER THIS AGREEMENT SHALL BECOME PART OF THE
INDEBTEDNESS SECURED HEREUNDER AND SHALL CONSTITUTE A PERSONAL LIABILITY OF THE
BORROWER PAYABLE IMMEDIATELY UPON DEMAND AND BEARING INTEREST UNTIL PAID AT THE
COMPANY'S BANK INTEREST RATE THEN BEING EARNED BY THE COMPANY ON ITS

4
<PAGE>

DEPOSITS.

APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA AND SHALL BE BINDING UPON THE
EXECUTORS, ADMINISTRATORS, HEIRS AND ASSIGNS OF THE BORROWER.

ARBITRATION. ANY CONTROVERSY BETWEEN THE PARTIES HERETO INVOLVING THE
CONSTRUCTION OR APPLICATION OF ANY TERMS, COVENANTS OR CONDITIONS OF THIS
AGREEMENT OR THE NOTE, OR ANY CLAIMS ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE NOTE, OR THE BREACH HEREOF OR THEREOF, WILL BE SUBMITTED TO AND
SETTLED BY FINAL AND BINDING ARBITRATION IN OAKLAND, CALIFORNIA, IN ACCORDANCE
WITH THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION THEN IN EFFECT, AND
JUDGMENT UPON THE AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED IN ANY COURT
HAVING JURISDICTION THEREOF. IN THE EVENT OF ANY ARBITRATION UNDER THIS
AGREEMENT OR THE NOTE, THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER FROM
THE LOSING PARTY REASONABLE EXPENSES, ATTORNEYS' FEES AND COSTS INCURRED THEREIN
OR IN THE ENFORCEMENT OR COLLECTION OF ANY JUDGMENT OR AWARD RENDERED THEREIN.
THE "PREVAILING PARTY" MEANS THE PARTY DETERMINED BY THE ARBITRATOR TO HAVE MOST
NEARLY PREVAILED, EVEN IF SUCH PARTY DID NOT PREVAIL IN ALL MATTERS, NOT
NECESSARILY THE ONE IN WHOSE FAVOR A JUDGMENT IS RENDERED.

SEVERABILITY. IF ANY PROVISION OF THIS AGREEMENT IS HELD TO BE INVALID UNDER
APPLICABLE LAW, THEN SUCH PROVISION SHALL BE INEFFECTIVE ONLY TO THE EXTENT OF
SUCH INVALIDITY, AND NEITHER THE REMAINDER OF SUCH PROVISION NOR ANY OTHER
PROVISIONS OF THIS AGREEMENT SHALL BE AFFECTED THEREBY.

IN WITNESS WHEREOF, this Agreement has been executed by the Borrower on this
____ day of August, 1998.

------------------------------------
Martin J. Sprinzen

Agreed to and Accepted by:

FORTE SOFTWARE, INC.

By:___________________________

Title:________________________

Dated: ________ ___, _____

<PAGE>

EXHIBIT 10.18

SEPARATION AND RELEASE AGREEMENT

This Separation and Release Agreement (the "Agreement") is made and entered into
by and between James Wambach ("Mr. Wambach") and Forte Software, Inc., a
Delaware Corporation (the "Company"), as of the date that this Agreement is
executed (the "Effective Date").

In consideration of the mutual promises and covenants contained herein,
it is hereby agreed by and between the parties hereto as follows:

1. RESIGNATION OF EMPLOYMENT. The parties agree that Mr. Wambach
has tendered his resignation and his employment with the Company shall terminate
effective July 24, 1998 ("Separation Date").

2. ACCRUED SALARY AND PAID TIME OFF. Except as specifically
provided in Section 5 below, Mr. Wambach acknowledges that the Company has paid
to him all accrued salary, all accrued retroactive pay, all earned bonuses and
commissions and all unused and accrued vacation earned prior to the Separation
Date and reimbursed to him all Employee Stock Purchase Plan contributions made
prior to the Separation Date, subject to tax withholdings as required by law.
In addition, Mr. Wambach acknowledges receipt of all compensation due him under
any stock option plans of the Company.

3. EXPENSE REIMBURSEMENTS. The Company will reimburse Mr. Wambach
for all reasonable business expenses incurred through the Separation Date. Such
expenses will be submitted within one week from the Separation Date and
reimbursed by the Company within 10 working days.

4. HEALTH COVERAGE. Mr. Wambach acknowledges that all insurance
benefits provided by the Company cease on the Separation Date. Mr. Wambach
further acknowledges that he is aware that he is eligible, to the extent
permitted by law and by the Company's group health insurance policies, upon
termination of his employment, to continue his health insurance benefits under
the federal COBRA law at his own expense (except as provided below) and, later,
to convert to an individual policy if he wishes.

5. ADDITIONAL PAYMENTS AND OPTION VESTING.

a. The Company agrees to make the following payments, subject to
tax withholding as required by law, to Mr. Wambach:

i) Company shall pay Mr. Wambach eighty thousand dollars
($80,000) on the Effective Date of this Agreement; and

ii) if both Tom McDoniel and Keith Morton remain employees
of the

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Company through the 3 month period following the Effective Date of this
Agreement, Company shall pay Mr. Wambach an additional forty-five thousand
dollars ($45,000) ("Second Payment") within 30 days of such 3 month period. If,
however, both of Messrs. McDoniel and Morton do not remain Company employees for
such 3 month period, the Second Payment is payable only if the Company
determines, in its reasonable discretion, that Mr. Wambach made every possible
effort to secure their retention.

iii) Company will reimburse Mr. Wambach for his
COBRA-related health insurance benefit payments until the first to occur of
(A) six months from the Separation Date; or (B) Mr. Wambach's coverage under
another health plan in connection with his employment with or retention by
another company.

b. The Company agrees to pay Mr. Wambach any bonus or commissions
earned for the first quarter of fiscal year 1999, under the compensation plan in
effect as of the Separation Date, within a reasonable time after calculation of
same by Company.

c. The Company agrees that Mr. Wambach's two January 20, 1997
option grants and his July 15, 1998 option grant under the Company's 1996 Stock
Option Plan ("Option Plan") shall continue vesting for 3 months from the
Separation Date and, thereafter, shall terminate in accordance with the Option
Plan. Other than as provided in the preceding sentence, no further vesting
shall occur under any of Mr. Wambach's stock options following the Separation
Date and such options shall terminate in accordance with their terms.

d. Mr. Wambach acknowledges and agrees that the Company has made
no representations to him regarding the tax consequences of any amounts received
by him pursuant to this Agreement. Mr. Wambach agrees to pay federal or state
taxes which are required by law to be paid with respect to this Agreement.

6. OTHER COMPENSATION OR BENEFITS. Mr. Wambach acknowledges that,
except as provided herein, he will not receive any additional compensation or
benefits from the Company after the Separation Date.

7. FURTHER ASSISTANCE TO THE COMPANY. As further consideration for
the payments and promises of the Company described herein, until August 15,
1998, Mr. Wambach agrees to act as a consultant to Forte by, INTER ALIA, fully
assisting the Company, upon request, in: a) the completion of licensing deals
with Forte customers with which Mr. Wambach was or is familiar; b) in completing
the planned reorganization of the North American Sales organization.

8. COMPANY PROPERTY. Mr. Wambach represents and warrants to the
Company that as of the Effective Date of this Agreement, he will have returned
to the Company all Company documents (and all copies thereof) and other Company
property which he has had in his possession at any time, including, but not
limited to: Company files, notes, records, computer-recorded information,
financial information, business plans and forecasts, computers, telephones or
other equipment, tangible property, credit cards, entry cards, and keys.

9. PROPRIETARY INFORMATION OBLIGATIONS. Nothing in this Agreement
shall be construed to terminate or in any way diminish the obligations of Mr.
Wambach to the Company pursuant to

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<PAGE>

his written Proprietary Information and Inventions Agreement, effective as of
the commencement of his employment with the Company. Mr. Wambach acknowledges
that he continues to be bound by the terms of that Agreement.

10. RELEASE OF CLAIMS.

a. Except as otherwise set forth in this Agreement, Mr. Wambach hereby
releases, acquits and forever discharges the Company, its officers, directors
and employees of and from any and all claims, liabilities, demands, causes of
action, costs, expenses, attorneys fees, damages, indemnities and obligations of
every kind and nature, in law, equity or otherwise, known and unknown, suspected
and unsuspected, disclosed and undisclosed, arising out of or in any way
connected with the Company's employment of Mr. Wambach or the termination of
that employment, including without limitation all wrongful discharge actions;
all actions arising under the Americans with Disabilities Act, Age
Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964,
California Fair Employment and Housing Act, ERISA or any similar statute in
effect in any other state which may be held applicable; all actions for breach
of contract or the covenant of good faith and fair dealing; all actions based in
tort or contract law; and any and all claims for compensation, wages, bonuses,
severance pay, stock options, commissions, vacation pay, or reimbursement for
expenses, attorney's fees and costs. It is expressly understood by Mr. Wambach
that among the various rights and claims being waived in this release are those
arising under the Age Discrimination in Employment Act of 1967 (29 U.S.C.
Section 621. et seq.).

b. Mr. Wambach agrees that the Company's obligations under
this Agreement shall constitute an accord and satisfaction and a full and
complete settlement of his claims, shall constitute the entire amount of
monetary consideration provided to him under this Agreement, and that he will
not seek any further compensation for any other claimed damage, costs or
attorneys' fees in connection with the matters encompassed in this Agreement
unless in connection with the Company's breach of this Agreement.

c. Mr. Wambach represents that he has not filed any complaint,
claims or actions against the Company, its officers, agents, directors,
supervisors, employees or representatives with any state, federal or local
agency or court and that he will not do so at any time hereafter unless arising
from the Company's breach of this Agreement. Mr. Wambach will not file,
commence, voluntarily aid in any way, prosecute or cause to be filed, commenced
or prosecuted against the Company any action or proceeding arising from any
claims released by this Agreement.

d. Mr. Wambach hereby relinquishes any employment rights he
might have with the Company.

11. SECTION 1542 WAIVER. Mr. Wambach acknowledges that he has read
and understands Section 1542 of the Civil Code of the State of California which
reads as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

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<PAGE>

Mr. Wambach hereby expressly waives and relinquishes all rights and benefits
under that section and any law or legal principle of similar effect in any
jurisdiction with respect to the release granted in this Agreement, included but
not limited to any jurisdiction in the United States.

12. NON-SOLICITATION. For a period of one (1) year following the
Effective Date of this Agreement, Mr. Wambach shall not directly or indirectly,
for himself or any other business, solicit or recommend solicitation of the
services or otherwise hire anyone employed by the Company while Mr. Wambach was
employed by the Company or employed by the Company during the period of one (1)
year following the Effective Date of this Agreement. Should this provision be
violated, in addition to any other remedies available to the Company, the
Company will be entitled to a full refund of the amounts paid by Company under
paragraph 5 of this Agreement.

13. CONFIDENTIALITY. Mr. Wambach shall keep the terms (including
payments to Mr. Wambach related to Company's retention of Messrs. McDoniel
and Morton) and monetary settlement amount of this Agreement completely
confidential, and shall not disclose such to any other person directly or
indirectly. As an exception to the foregoing Mr. Wambach may disclose the
terms and monetary settlement amount of this Agreement to his attorney, tax
advisor, accountant and immediate family (defined as and limited to spouse
and children) who shall be advised of its confidentiality. Should any of the
foregoing individuals disclose the terms and/or monetary settlement amount of
this Agreement to any other person, such shall be considered an indirect
disclosure in breach of this provision for which Mr. Wambach shall be liable.

Mr. Wambach represents and warrants that as of the Effective Date of
this Agreement, he has not disclosed any term of this Agreement to any third
party in violation of this Section

14. DISPARAGING COMMENTS. Mr. Wambach and his immediate family
(defined as and limited to spouse and children) shall not make negative or
disparaging comments about the Company, its officers or employees, to any
current or prospective employees, suppliers, customers or investors of the
Company. The Company and its officers, directors and agents shall not make
negative or disparaging comments about Mr. Wambach to any current or
prospective employer, employees, suppliers, or customers of Mr. Wambach. The
Company will respond to requests for information about Mr. Wambach's employment
and the end of such employment only with his dates of service and positions
held.

15. REFUND. If the Company has a reasonable belief that Section(s)
12, 13 and/or 14 have been violated, in addition to any other remedies available
to the Company, the Company will be relieved of all obligations and/or
continuing obligations to Mr. Wambach created by Section 5 of this Agreement and
entitled to a refund of all payments made hereunder.

16. NO ADMISSION. This Agreement and compliance with this Agreement
shall not be construed as an admission by any party of any liability whatsoever,
or as admission by any party of any violation of the rights of any person,
violation of any order, law, statute, duty or contract whatsoever. The Company
specifically disclaims any liability to Mr. Wambach for any alleged violation
of the rights of Mr. Wambach, or for any alleged violation of any order, law,
statute,

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<PAGE>

duty or contract whatsoever.

17. BINDING EFFECT. This Agreement shall be binding upon the parties
hereto and upon their heirs, administrators, representatives, executors,
successors, and assigns, and shall inure to the benefit of said parties and each
of them and to their heirs, administrators, representatives, executors,
successors, and assigns. Mr. Wambach expressly warrants that he has not
transferred to any person or entity any rights or causes of action, or claims
released by this Agreement.

18. APPLICABLE LAW. This Agreement shall be deemed to have been
entered into and shall be construed and enforced in accordance with the laws of
the State of California as applied to contracts made and to be performed
entirely within California.

19. ENTIRE AGREEMENT. This Agreement constitutes the complete, final
and exclusive agreement between the parties with respect to the subject matter
hereof. This Agreement is executed without reliance upon any promise, warranty
or representation, written or oral, by any party or any representative of any
party other than those expressly contained herein. Each party has carefully
read this Agreement, has been afforded the opportunity to be advised of its
meaning and consequences by his or its respective attorney. This Agreement
cannot be modified except in a writing signed by both Mr. Wambach and a duly
authorized officer of the Company.

20. SEVERABILITY. If any provision of this Agreement is determined to
be invalid or unenforceable by a court of law, in whole or in part, this
determination will not affect any other provision of this Agreement.

21. ACCEPTANCE.

a. Mr. Wambach has up to forty-five (45) days from his initial
receipt of this Agreement to accept the terms of this Agreement, although Mr.
Wambach may accept it at any time within those 45 days. Mr. Wambach is advised
to consult an attorney about this Agreement.

b. To effectively accept this Agreement, Mr. Wambach must date, sign
and return two originals of this Agreement to the Company's Vice President of
Human Resources. Following such acceptance, Mr. Wambach shall have an
additional seven (7) days in which to revoke such acceptance. To revoke, Mr.
Wambach must send to the Company's Vice President of Human Resources a
written statement of revocation. If Mr. Wambach does not revoke, the eighth
(8th) day after Mr. Wambach's acceptance shall be the "Effective Date" of
this Agreement.

c. Mr. Wambach warrants that he has read and fully understands this
Agreement; that he has had the opportunity to consult with and has in fact
consulted with legal counsel of his own choosing and had the terms of this
Agreement fully explained to him; that he is not executing this Agreement in
reliance on any promises, representations or inducements other than those
contained herein; and that he is executing this Agreement voluntarily, free
of any duress or coercion.

The parties have duly authorized and caused this Agreement to be executed
as follows:

<PAGE>

EXHIBIT 10.19

SEVERANCE AGREEMENT

This Severance Agreement (hereinafter referred to as "Agreement") is made
and entered into by and between Jay Shiveley (hereinafter referred to as
"Shiveley"), and Forte Software, Inc. (hereinafter referred to as "Company")
effective July 9, 1997 ("Effective Date").

WHEREAS, Shiveley's employment with the Company terminated effective
September __, 1997 ("Separation Date");

WHEREAS, Shiveley and the Company desire to settle fully and finally any
and all claims of Shiveley arising out of Shiveley's employment with the Company
and his termination therefrom;

NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained and other good and valuable consideration, receipt of which is
hereby acknowledged, and to avoid unnecessary litigation, it is hereby agreed by
and between the parties as follows:

1. In consideration for this Agreement, the Company shall:

a. Pay to Shiveley the gross amount of Eighty-Seven Thousand, Five
Hundred Dollars and No Cents ($87,500.00). Said amount shall be paid in equal
installments by normal payroll check, less legally required withholdings as in
effect for Shiveley on July 9, 1997, on normal pay days between the July 9,
1997, and December 31, 1997. Such installment net amounts shall be paid to
Shiveley by check made payable to "Jay Shiveley." Said checks shall be mailed
to Shiveley at his address last known to the Company. Shiveley acknowledges
receipt of all installments due prior to the Separation Date.

b. Continue to December 31, 1997 Shiveley's medical insurance as
existing and provided by the Company on July 9, 1997. After this date, Shiveley
may continue medical insurance benefits at his own cost under COBRA terms and
conditions. As of the Effective Date, Shiveley shall not be eligible for any
other employee benefits from Company, including life insurance and participation
in Company's 401(k) plan.

c. Amend (by this Agreement) Shiveley's outstanding stock option
agreements dated January 11, 1995 ("January Agreement") and February 15, 1995
("February Agreement") so that (i) on December 31, 1997, he will accrue the
right to exercise an additional 2806 shares under the January Agreement and 8419
under the February Agreement, which shares must be exercised on or prior to the
date of Shiveley's execution of this Agreement; and (ii) on June 30, 1998, he
will accrue the right to exercise an additional 2806 shares under the January

1
<PAGE>

Agreement and 8419 under the February Agreement, which shares must be exercised
on or prior to the date of Shiveley's execution of this Agreement. No further
vesting shall occur under any of Shiveley's stock options following the
Effective Date of this Agreement, and such options shall terminate following the
Separation Date in accordance with their terms. The January Agreement and
February Agreement are further amended to allow Shiveley to exercise such
options prior to vesting pursuant to the attached "Early Exercise Stock Purchase
Agreement" dated August __, 1997, between Shiveley and Company. The $15,000.75
associated with such early exercise must be paid at the time of exercise.

d. Pay to Shiveley the gross amount of Thirteen Thousand, Four
Hundred, Fifty-One Dollars and Fifty-Three Cents ($13,461.53) as sabbatical pay.
Said amount, less legally required withholdings as in effect for Shiveley on the
termination date of Shiveley's employment, shall be paid to Shiveley by check
made payable to "Jay Shiveley." Said checks shall be mailed to Shiveley at his
address last known to the Company.

e. Pay to Shiveley $16,753 in accrued salary, unused and accrued
vacation, commissions and bonuses owing Shiveley up to and including July 9,
1997 pursuant the terms of the plans in effect for Shiveley on July 9, 1997.
Said amount, less legally required withholdings as in effect for Shiveley on the
termination date of Shiveley's employment, shall be paid to Shiveley by check
made payable to "Jay Shiveley." Said check shall be mailed to Shiveley at his
address last known to the Company. Shiveley acknowledges that, upon such
payment, the Company will have paid to him all accrued salary, commissions,
bonuses and all unused and accrued vacation earned prior to the date of
Shiveley's termination.

f. Allow Shiveley to purchase the equipment listed on Exhibit A
attached hereto for the amounts set forth therein (approximately the book value
recorded by the Company for such equipment). This amount will be paid by
reducing the amount actually paid to Shiveley under this Agreement.

g. Shiveley agrees that the foregoing and the Company's other
obligations under this Agreement shall constitute an accord and satisfaction and
a full and complete settlement of his claims, shall constitute the entire amount
of monetary consideration provided to him under this Agreement, and that he will
not seek any further compensation for any other claimed damage, costs or
attorneys' fees in connection with the matters encompassed in this Agreement
unless in connection with the Company's breach of this Agreement.

h. Shiveley acknowledges and agrees that the Company has made no
representations to him regarding the tax consequences of any amounts received by
him pursuant to this Agreement. Shiveley agrees to pay federal or state taxes
which are required by law to be paid with respect to this Agreement.

2. Shiveley represents that he has not filed any complaint, claims or
actions against the Company, its officers, agents, directors, supervisors,
employees or representatives with any state, federal or local agency or court
and that he will not do so at any time hereafter unless arising from the
Company's breach of this Agreement.

3. Shiveley hereby agrees that all rights he may have under section 1542
of the Civil

2
<PAGE>

Code of the State of California are hereby waived by him. Section 1542
provides as follows:

"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him
must have materially affected his settlement with the
debtor."

4. Notwithstanding the provisions of section 1542 of the Civil Code of
the State of California, except for (i) obligations under this Agreement, (ii)
stock option and proprietary information and inventions agreements between
Shiveley and the Company, (iii) the terms of the Company's retirement plans in
which Shiveley was participating on July 9, 1997; and (iv) the terms of the
Indemnification Agreement between Shiveley and Company dated February 21, 1996
as provided for therein ("Continuing Agreements"), Shiveley without limitation
hereby irrevocably and unconditionally releases and forever discharges the
Company, its officers, agents, directors, supervisors, employees,
representatives, successors and assigns, and all persons acting by, through,
under, or in concert with any of them from any and all charges, complaints,
claims, causes of action, debts, sums of money, controversies, agreements,
promises, damages and liabilities of any kind or nature whatsoever, both at law
and equity, known or unknown, suspected or unsuspected (hereinafter referred to
as "claim" or "claims"), arising from conduct occurring on or before the date of
this Agreement, including without limitation any claims incidental to or arising
out of Shiveley's employment with the Company or the termination thereof. It is
expressly understood by Shiveley that among the various rights and claims being
waived in this release are those arising under the Age Discrimination in
Employment Act of 1967 (29 U.S.C. Section 621. et seq.). This provision is
intended by the parties to be all encompassing and to act as a full and total
release of any claim, whether specifically enumerated herein or not, that
Shiveley might have or has had, that exists or ever has existed on or to the
date of this Agreement.

5. The parties understand the word "claim" or "claims" to include without
limitation all actions, claims and grievances, whether actual or potential,
known or unknown, related, incidental to or arising out of Shiveley's employment
with the Company and the termination thereof. All such claims, including
related attorneys' fees and costs, are forever barred by this Agreement and
without regard to whether those claims are based on any alleged breach of a duty
arising in contract or tort; any alleged unlawful act, any other claim or cause
of action; and regardless of the forum in which it might be brought.

6. Shiveley will not file, commence, voluntarily aid in any way,
prosecute or cause to be filed, commenced or prosecuted against the Company any
action or proceeding arising from any claims released by this Agreement.

7. Each of the Company and Shiveley will keep the terms and monetary
settlement amount of this Agreement completely confidential, and shall not
disclose such to any other person directly or indirectly. As an exception to
the foregoing Shiveley may disclose the terms and monetary settlement amount of
this Agreement to Shiveley's attorney, tax advisor, accountant and immediate
family (defined as and limited to spouse and children) who shall be advised of
its confidentiality. Should any of the foregoing individuals disclose the terms
and/or monetary settlement amount of this Agreement to any other person, such
shall be considered an indirect disclosure in breach of this provision for which
Shiveley shall be liable. As an

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<PAGE>

additional exception to the foregoing Company may disclose the terms and
monetary settlement amount of this Agreement to its attorneys, tax advisors,
accountants, auditors officers, directors and employees as well as other third
parties with a need for such information and who shall be advised of its
confidentiality. Notwithstanding the foregoing, Shiveley and the Company may
make such disclosures of the terms and monetary settlement amount of this
Agreement as are required by law or as necessary for legitimate enforcement or
compliance purposes. In the event that either party is required by law to make
any portion of the terms or monetary settlement amount of this Agreement public
record, the other party shall be free to disclose such portion without breach
of this Section 7 and without liability to the other party.

8. Each of the Company and Shiveley agrees that the failure to comply
with the terms of paragraph 7 above shall amount to a material breach of this
Agreement which will subject the breaching party to liability for all damages
the other party might incur. In the event of such a breach, the non-breaching
party will be entitled to all legal and equitable remedies available, including,
but not limited to, injunctive relief.

9. Shiveley hereby relinquishes any employment rights he might have with
the Company.

10. Shiveley confirms his confidentiality obligations under his existing
proprietary information and inventions agreement with the Company. Shiveley
represents that he has complied with his obligations under the proprietary
information and inventions agreement to deliver the Company's documents, data,
proprietary information and property to the Company.

11. Shiveley and his immediate family (defined as and limited to spouse
and children) shall not make negative or disparaging comments about the Company,
its officers or employees, to any current or prospective employees, suppliers,
customers or investors of the Company. Should this provision be violated, in
addition to any other remedies available to the Company, the Company will be
relieved of all obligations and/or continuing obligations to Shiveley created by
subparagraphs a, b and c of paragraph 1 of this Agreement. The Company and its
officers, directors and agents shall not make negative or disparaging comments
about Shiveley to any current or prospective employer, employees, suppliers, or
customers of Shiveley. The Company will respond to requests for information
about Shiveley's employment and its termination only with his dates of service
and positions held.

12. For a period of one (1) year following the Effective Date this
Agreement, Shiveley shall not directly or indirectly, for himself or any other
business, solicit or recommend solicitation of the services or otherwise hire
anyone employed by the Company while Shiveley was employed by the Company or
employed by the Company during the period of one (1) year following the
Effective Date of this Agreement. Should this provision be violated, in
addition to any other remedies available to the Company, the Company will be
relieved of all obligations and/or continuing obligations to Shiveley created by
subparagraphs a, b and c of paragraph 1 of this Agreement.

13. For a period of six (6) months following the Effective Date of this
Agreement, Shiveley shall not accept employment with, become employed by and/or
perform any work for

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<PAGE>

Net Dynamics, Kiva Software, Nat Systems, Weblogic and/or Sterling Software,
whether or not for compensation. Should this provision be violated, in
addition to any other remedies available to the Company, the Company will be
relieved of all obligations and/or continuing obligations to Shiveley created
by subparagraphs a, b and c of paragraph 1 of this Agreement.

14. Until July 31, 1998, Shiveley agrees to act as a consultant to Forte
by, INTER ALIA, assisting Forte, upon request, in the completion of licensing
deals with Forte customers with which Shiveley was or is familiar.

15. This Agreement and compliance with this Agreement shall not be
construed as an admission by any party of any liability whatsoever, or as
admission by any party of any violation of the rights of any person, violation
of any order, law, statute, duty or contract whatsoever. The Company
specifically disclaims any liability to Shiveley for any alleged violation of
the rights of Shiveley, or for any alleged violation of any order, law,
statute, duty or contract whatsoever. The Company specifically disclaims any
liability to Shiveley for any alleged violation of the rights of Shiveley, or
for any alleged violation of any order, law, statute, duty or contract on the
part of the Company or their employees or agents.

16. The parties hereto represent and acknowledge that in executing this
Agreement they do not rely and have not relied upon any representation or
statement made by any of the parties or by any of the parties' agents, attorneys
or representatives with regard to the subject matter or effect of this Agreement
or otherwise, other than those specifically stated in this written Agreement.

17. This Agreement shall be binding upon the parties hereto and upon their
heirs, administrators, representatives, executors, successors, and assigns, and
shall inure to the benefit of said parties and each of them and to their heirs,
administrators, representatives, executors, successors, and assigns. Shiveley
expressly warrants that he has not transferred to any person or entity any
rights or causes of action, or claims released by this Agreement.

18. Should any provision of this Agreement be declared or be determined by
any court of competent jurisdiction to be illegal, invalid, or unenforceable,
the legality, validity and enforceability of the remaining parts, terms or
provisions shall not be effected thereby and said illegal, unenforceable, or
invalid term, part or provision shall be deemed not to be a part of this
Agreement.

19. Except for the Continuing Agreements, all of which shall remain in
full force and effect and are unaffected by this Agreement except as specified
in this Agreement, this Agreement sets forth the entire agreement between the
parties hereto and fully supersedes any and all prior agreements and
understandings, written or oral, between the parties hereto pertaining to the
subject matter hereof. This Agreement may only be amended or modified by a
writing signed by the parties hereto. Any waiver of any provision of this
Agreement shall not constitute a waiver of any other provision of this Agreement
unless expressly so indicated otherwise.

20. This Agreement shall be interpreted in accordance with the plain
meaning of its

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<PAGE>

terms and not strictly for or against any of the parties hereto.

21. This Agreement is made and entered into in the State of California,
and shall in all respects be interpreted, enforced and governed by and under the
laws of the State of California. Any dispute arising between Shiveley and the
Company pertaining to the formation, validity, interpretation, effect or alleged
breach of this Agreement (hereinafter referred to as "Arbitrable Dispute") will
be submitted to binding arbitration in Alameda County, California. The parties
agree to submit any such dispute to binding arbitration pursuant to the
Employment Dispute Resolution Rules of the American Arbitration Association
within six (6) months of the date on which the complaining party first becomes
aware of the alleged violation of the Agreement. Any such claims not presented
within six (6) months shall be deemed waived. Except as provided in
paragraph 21 below, the parties agree that such arbitration shall be the
exclusive remedy for any Arbitrable Dispute arising out of this Agreement, and
hereby expressly waive any right they have or may have to a jury trial of any
dispute arising out of this Agreement. In making the Arbitrator's award, the
Arbitrator shall have no power to add to, delete from, or modify the terms of
this Agreement, or to construe implied terms or covenants herein, the parties
being in agreement that no such implied terms or covenants are intended. In
reaching the Arbitrator's decision, the Arbitrator shall adhere to relevant law
and applicable legal precedent, and shall have no power to vary therefrom. At
the time of issuing the Arbitrator's award, the Arbitrator shall, in the award
or separately, make specific findings of fact, and set forth such facts in
support of the Arbitrator's decision, as well as the reasons and basis for the
Arbitrator's opinion. Should the Arbitrator exceed the jurisdiction or
authority here conferred, any party aggrieved thereby may file a petition to
vacate, amend or correct the award so rendered in a court of competent
jurisdiction.

22. Notwithstanding the provisions of paragraph 21, the provisions of
paragraph 21 shall not restrict the right of the Company or Shiveley to file an
action in court seeking legal and/or equitable relief for an alleged violation
of the provisions of paragraphs 7, 8, 10, 11, 12 and/or 13 of this Agreement.
For an alleged violation of the foregoing paragraphs, the non-breaching party
at its election may pursue relief through the arbitration provisions of
paragraph 21 or through legal action filed in court.

23. The Company shall continue to provide to Shiveley the assistance
previously provided in filing any Form 4 and Form 5 under Section 16 of the
Securities Exchange Act of 1934 required after termination of his employment.
The Company represents that Shiveley is not subject to any "trading window" or
other Company policy which would restrict his ability to buy or sell Company
stock.

24. This Agreement may be executed in counterparts and each counterpart,
when executed, shall have the efficacy of a second original. Photographic or
facsimile copies of any such signed counterparts may be used in lieu of the
original for any said purpose.

For Jay Shiveley:

Dated: By:

6
<PAGE>

Jay Shiveley

For Forte Software, Inc.:

Dated: By:

EXHIBIT A

1. Digital Litebook TS31D ("D" or "0"): $2298.81

2. Digital docking station TSR1: $273.00

3. ViewSonic 17GS monitor: $597.33

4. Brother Intellifax-1250 fax: $292.42

5. HP Desk Jet340 portable printer: $322.49

6. HP Laser Jet5L: $292.42

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,849
<SECURITIES> 14,087
<RECEIVABLES> 19,967
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,547
<PP&E> 6,250
<DEPRECIATION> 0
<TOTAL-ASSETS> 58,116
<CURRENT-LIABILITIES> 21,400
<BONDS> 0
0
0
<COMMON> 199
<OTHER-SE> 36,322
<TOTAL-LIABILITY-AND-EQUITY> 58,116
<SALES> 36,668
<TOTAL-REVENUES> 36,668
<CGS> 10,448
<TOTAL-COSTS> 39,218
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (745)
<INCOME-PRETAX> (1,805)
<INCOME-TAX> 209
<INCOME-CONTINUING> (2,014)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,014)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)

</TABLE>