SYSTEM SOFTWARE ASSOCIATES INC, 10-K405, 1998-01-29

SYSTEM SOFTWARE ASSOCIATES INC
10-K405, 1998-01-29
PREPACKAGED SOFTWARE

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to

COMMISSION FILE NUMBER 0-15322

SYSTEM SOFTWARE ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 36-3144515
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

500 W. MADISON, 32ND FLOOR
CHICAGO, ILLINOIS 60661
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 258-6000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

7% Convertible Subordinated Notes due 2002

Common Stock, par value $0.0033 per Share
(TITLE OF CLASS)

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

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

The aggregate market value of voting stock held by non-affiliates of the
registrant based upon the closing sale price of the stock as reported on the
Nasdaq National Market on January 22, 1998, was $286,429,516.

At January 22, 1998, 46,586,848 shares of the registrant's Common Stock were
outstanding.

DOCUMENT INCORPORATED BY REFERENCE

The registrant's definitive proxy statement for the annual meeting of
stockholders, estimated to be held in March 1998, expected to be filed with
the Commission not later than February 17, 1998, is incorporated by reference
into Part III of this Form 10-K.
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PART I

ITEM 1. BUSINESS

THE COMPANY

System Software Associates, Inc. (the "Company" or "SSA") is a leading
provider of cost-effective business enterprise information systems to the
industrial sector worldwide. The Company's BPCS (Business Planning and Control
System) Client/Server product line provides business process re-engineering
and integration of an enterprise's operations, including multi-mode
manufacturing processes, supply chain management and global financial
solutions. The BPCS Client/Server product line delivers scalability,
interoperability and reconfigurability in a comprehensive product suite to
meet changing market demands. The distributed object computing architecture
("DOCA") of BPCS Client/Server provides the benefits of next generation
technology in conformity with industry standards. The Company markets, sells
and services its products to large and intermediate-sized industrial sector
firms primarily through its own world-wide sales organization and to a much
lesser extent, through a network of over 100 independent software companies
(the "Affiliates"). The Company has strategic relationships with major
computer hardware manufacturers, such as IBM, Hewlett Packard and Digital
Equipment; advanced planning system software companies, such as i2; and major
systems integrators, such as CAP Gemini and the Big Six consulting firms.

INDUSTRY BACKGROUND

Businesses in recent years have been subject to increasing global
competitive pressures, more demanding vendor-customer relationships and
rapidly changing market requirements. As a result of these changes, businesses
are required to manage broadening product portfolios, multi-national
distribution, reduced delivery response times, lower inventory levels and more
complex manufacturing strategies involving global sourcing and assembly from a
network of internal and outsourced manufacturers and suppliers.

These challenges require more streamlined organizations, more efficient
business processes and more effective integration of the entire extended
enterprise, from vendors through the supply chain to distribution channels to
customers and often to a firm's customers' customers. Through a process known
as Business Process Reengineering (BPR), many organizations have begun to
restructure or reengineer their critical business processes and to adopt their
organizational structures to accommodate and exploit rapid changes in the
business environment.

Organizations rely upon enterprise business systems to manage resources
across the enterprise and to integrate such functions as sales management,
order management, component and raw material procurement, inventory
management, manufacturing control, project management, distribution,
transportation, finance and others. Many enterprise systems, however, are
monolithic, legacy systems, which do not support diverse manufacturing
processes. This may force enterprises to maintain business processes that fit
the requirements of the legacy systems, which generally provide limited
flexibility to incorporate changing technologies.

Effective information technology (IT) systems, capable of generating and
disseminating critical information across the extended enterprise, can be a
strategic resource, allowing an organization to respond more rapidly to
changing market and customer needs thereby gaining competitive advantage.
Business computing has evolved from the centralized, mainframe paradigm to
distributed, open client/server and network-centric computing models.
Client/server and network-centric computing distributes computing power and
applications across an organization and provides end-users with access to
company-wide information. Such network-centric computing makes use of object-
oriented architectures which provide enhanced flexibility and decreased
development and maintenance cost through the use of discreet, reusable
portions of software code.

The emergence of client/server and network-centric computing environments,
together with the growing demand for enterprise systems to address changing
business requirements, have created a demand for a new generation of
industrial enterprise systems that are based on object orientation, open
systems and client/server

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platforms which can be implemented rapidly, are flexible and provide a wide
array of applications in order to accommodate changing needs and technologies
and are scaleable to support an organization's growth. These characteristics
ensure that the systems not only support current business processes but also
support continual BPR to accommodate future changes.

SSA SOLUTION

SSA provides business enterprise information systems that deliver agile,
scaleable, interoperable and reconfigurable business solutions.

SSA's BPCS Client/Server software consists of over 60 integrated products
designed for manufacturing, supply chain management and financial
applications, as well as electronic commerce and application development
tools. The Company's products are designed to provide sufficient breadth of
features and application flexibility to appeal to a wide variety of users,
operate in a variety of business environments, and to offer a consistent
WindowsTM look and feel with respect to data entry, information retrieval and
general operation, thereby improving ease of use and shortening training time.
BPCS Client/Server's object architecture, use of semantic messaging gateway
technology and support for the JAVA programming language permits operation in
Internet/Intranet environments, facilitating electronic commerce and
information exchange beyond the enterprise. It also ensures high
interoperability with other industry standard applications.

PRODUCTS

BPCS Client/Server consists of over 60 integrated, century dated products
designed for manufacturing, supply chain management and financial
applications, as well as electronic commerce and application development
tools. BPCS Client/Server operates across a broad array of platforms,
including Hewlett-Packard HP 9000, IBM AS/400, IBM RISC System/6000 and DEC
Alpha servers. The Company's Unix version of BPCS Client/Server software
operates on both Informix and Oracle databases. The entire BPCS Client/Server
product line is available in English, and all, or a significant portion of the
line is available in 19 other languages including Chinese (simplified and
traditional), Dutch, French, German, Italian, Japanese, Korean, Portuguese,
Swedish and Spanish. BPCS Client/Server has been designed to meet localized
regulatory policies and statutory requirements of many countries.

In 1995, the Company commenced a major redesign of its software architecture
and tool set. These efforts resulted in the initial release of BPCS
Client/Server Version 6.0 in April 1996, and the general release of Version
6.0 in September 1996. The Company believes its most recent release of Version
6.0 offers significantly improved functionality, performance and scalability
and that the flexibility of its distributed, object-oriented architecture
represents a significant advantage when compared to other enterprise
applications.

BPCS Client/Server exists as a set of objects, business rules and data
models in an open repository. BPCS Client/Server is then generated from this
repository to any specific execution environment. As a result of this
repository-based generation, SSA and its clients can take advantage of
advances in technology without the need to reengineer BPCS Client/Server.
SSA's DOCA architecture ensures high interoperability with other industry
standard applications. As a result, the Company believes that BPCS
Client/Server can be quickly and easily reconfigured. The BPCS Client/Server
user interface is fully compliant with Microsoft WindowsTM. BPCS Client/Server
uses the full range of client/server modes (topologies), with the allocation
of database, function, and presentation among clients and servers optimized
according to the specific requirements of each application.

The benefits of BPCS Client/Server Version 6.0 include:

. configurable and reconfigurable supply chain management functions,
enabling firms to easily adapt their enterprise system to changing
business practices;

. configurable and reconfigurable enterprise-wide financial functions,
offering similar adaptability as to financial applications;

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. substantially enhanced functionality, including many industry-specific
features to support multi-mode manufacturing; and

. enhanced electronic commerce capabilities to enable buyers and seller to
interact electronically.

The new technology in Version 6.0 includes: semantic messaging used
throughout; full use of the SSA self-defining repository; full use of native
database and operating system functions on each supported platform; full use
of Microsoft WindowsTM desktop standards and capabilities throughout; drag and
drop functionality; and the ability to include other object types, such as
multimedia, in the user interface. The end-user functionality of version 6.0
is identical on all SSA supported platforms and databases.

In addition to BPCS Client/Server, the Company also offers an interoperable,
object-oriented application development tool set which enables the development
of high transaction volume, enterprise-wide object oriented client/server
applications.

PRODUCT DEVELOPMENT

To maintain and enhance the breadth and functionality of its software. SSA
devotes significant resources to research and development. The Company
expended nearly $100.0 million on research and development activities in
fiscal 1996 and over $90.0 million in fiscal 1997. The foregoing amounts
include software development costs which were capitalized in accordance with
Statement of Financial Accounting Standards No. 86.

The Company employs professionals with development skills in the Unix
environment and, in connection with the Company's focus on object-oriented
applications and the development and maintenance of its Version 6.0 product,
the Company employs professionals skilled in the field of object-oriented
development. To enhance its capabilities in application development tool
production, the Company acquired Softwright Systems Limited in 1995. The
Company is also devoting a portion of its research and development effort to
adapt its technology to the Microsoft WindowsTM NT environment.

CLIENTS

BPCS has been installed by over 8,500 clients in more than 25,000 sites in
over 90 countries worldwide, the substantial majority of which comprise the
Company's installed base of AS/400 customers. The target marketplace for BPCS
is large and medium-sized firms in such diverse industries as pharmaceuticals,
chemicals, fabrication and assembly, automotive, electronics, consumer
products, forest products and food and beverage. The Company's clients include
leading firms in those industries.

SALES AND MARKETING

The Company has a balanced global sales strategy to market and sell its
product line and support its clients. Historically, the Company's revenue is
almost equally divided among North America, Europe and the rest of the world.
The Company supports its clients primarily through a worldwide network of
branch offices. The Company markets, sells and services its products through a
distribution network consisting of its own sales and services organization and
a network of over 100 Affiliates and major systems integrators. The Company
has over 50 offices worldwide, with nearly 140 BPCS Client/Server support
centers in over 90 countries.

The Company's BASIS implementation methodology helps to ensure consistent,
successful and rapid implementation of the Company's software. BASIS, which is
built upon SSA's experience with over 8,500 clients implementing worldwide,
provides tools and techniques to address project organization, project
process, project direction and project planning and control.

The Company believes that as a consequence of its global support network and
proven implementation capabilities, SSA is well qualified among business
enterprise software vendors to manage simultaneous multiple

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country, multiple site implementations. By offering these capabilities, SSA
partners with its clients for global information systems.

LICENSING

In almost all cases, software sales are made pursuant to the Company's
Software License Agreement (the "SLA") which is entered into by the client and
SSA. The gross amount of the software license fee is remitted to the Company
and, if applicable, the Company then pays commission to the Affiliate. In
certain small countries outside of the United States, the SLA is entered into
by the client, the Company and the Affiliate. SSA enters into individual,
negotiated contracts with its Major Account clients. The SLA typically
provides for either a single license fee to use the product in perpetuity on a
single computer or licensing the products on the basis of the number of users.
License fees for BPCS Client/Server products typically range from $1,500 to
$150,000 per product.

The Company also charges annual ongoing support fees to clients who desire
product updates and upgrades and "HelpLine" product support through telephonic
and other electronic means. Ongoing support is typically provided to clients
under annual or multi-year maintenance agreements. Occasionally, Affiliates
handle the installation of such product updates and upgrades and receive their
standard commissions on ongoing support fees received from their clients. An
Affiliate may also perform services and provide hardware to its clients for
which the Affiliate bills directly.

COMPETITION

The ERP application software market is highly competitive, rapidly changing
and significantly affected by new product introductions and other market
activities of industry participants. The Company's BPCS Client/Server product
line is targeted at both the market for open systems, client/server ERP
software solutions and the IBM AS/400 ERP market. The Company's current and
prospective competitors offer a variety of products and solutions to address
these markets. The Company's primary competition comes from a large number of
independent software vendors and other sources including (i) companies
offering products that run on UNIX-based systems in a client/server
environment such as Oracle Corporation, Baan Company N.V. and SAP AG, and (ii)
companies offering products that run on AS/400 and other mid-range computers,
including J.D. Edwards. The Company also faces competition from a variety of
other vendors of ERP software, including QAD Inc. In addition, the Company
faces indirect competition from suppliers of custom-developed business
application software that have focused mainly on proprietary mainframe and
minicomputer based systems with highly customized software, such as the
systems consulting groups of major accounting firms and systems integrators.
The Company also faces indirect competition from proprietary systems developed
by the internal MIS departments of large organizations. Competition in SSA's
industry is primarily based on sales ability, quality of the products, breadth
of product line and quality of support. To date, there has been no significant
price competition in this market, but price competition could become a factor
in the future.

PROPRIETARY RIGHTS

SSA regards its application software as proprietary and attempts to protect
it with copyrights, trade secret laws and restrictions on disclosure and
transferring title. Despite these precautions, it may be possible for third
parties to copy aspects of the Company's products or to obtain and use
information which the Company regards as trade secrets without authorization.
Computer software generally cannot be patented and existing copyright laws
afford only limited practical protection. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights in its
products to the same extent as do the laws of the United States.

STAFF

As of January 1, 1998, SSA employed approximately 2,400 people. The
Company's success is highly dependent on its ability to attract and retain
qualified staff members. Competition for staff is intense in the

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software industry. None of the Company's staff members is subject to
collective bargaining agreements, and SSA believes that its relations with its
staff are good.

EXECUTIVE OFFICERS OF THE REGISTRANT

The Company's executive officers are as follows:

ROGER E. COVEY, age 43, founded the Company and served as President and
Chairman of the Board of the Company from its inception in October 1981 until
August 1991, at which time he was elected as Vice-Chairman of the Board. He
was a student from August 1991 until he rejoined the Company in August 1994 as
Vice President--Research & Development and was appointed Chairman of the Board
and Chief Executive Officer on November 1, 1994. Mr. Covey holds a BS degree
from the University of Illinois, an MBA from the University of Chicago, and an
MA in Chinese Art History from the University of Chicago.

WILLIAM M. STUEK, age 55, was appointed President and Chief Operating
Officer on January 5, 1998. Prior to joining the Company, he served in a
variety of sales, marketing and operational management positions with IBM
Corporation. While at IBM, Mr. Stuek served as General Manager of North
American Operations in 1996 and 1997 and prior to that was General Manager of
North American Sales, General Manager of Product Sales for Europe, Middle East
and Africa, and General Manager of Software. Mr. Stuek holds a BS degree from
Colgate University.

RIZ SHAKIR, age 42, joined the Company as Area Vice President--Architecture
in June 1994, and currently serves as Executive Vice President--Research &
Development. Prior to joining the Company, he was CEO of ASIC, a company
specializing in building custom enterprise software solutions based on Object
and Distributed Computing technologies. Mr. Shakir holds a BSc degree from
Imperial College of Science and Technology in London.

JOSEPH J. SKADRA, age 56, was appointed Vice President and Chief Financial
Officer on August 24, 1994. He was employed by Figgie International, Inc. from
1970 to 1994, where he held various operating and financial positions at the
Vice President level. His last position at Figgie International was Senior
Vice President, Finance and Controller. Mr. Skadra holds a BSBA degree from
Case Western Reserve University.

ITEM 2. PROPERTIES

The Company's principal administrative, marketing and technical facilities
are located in Chicago, Illinois and consist of approximately 141,000 square
feet of occupied or committed space, with the option to expand to
approximately 167,000 square feet, subject to a lease terminating in August
2008. The Company also leases office space for its regional headquarters and
branch offices (see Note 12 of Notes to Consolidated Financial Statements).

ITEM 3. LEGAL PROCEEDINGS

On August 20, 1997, the Company terminated its engagement of the managing
underwriter of its then-pending public offering of convertible notes and
concurrently elected not to proceed with its private offering of securities to
a group of private investors led by Bain Capital, Inc. (the "Bain Investors").
On August 27, 1997 in the Superior Court of Massachusetts, certain of the Bain
Investors filed a complaint against the Company, Roger E. Covey, the Company's
Chief Executive Officer, and Hambrecht & Quist LLC, one of the successor
representatives of the underwriters in the public offering. In January 1998,
the Company settled the Bain Investors' lawsuit. Pursuant to the settlement,
the Company paid the Bain Investors approximately $3.65 million and issued to
certain of the Bain Investors warrants to purchase an aggregate of 300,000
shares of the Company's Common Stock, which warrants are exerciseable at
$9.6875 per share, the fair market value as of the date of settlement.

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1997 arising from alleged violations of the Illinois securities laws and
associated statutory and common law. The federal actions allege damages to
persons who purchased the Company's Common Stock during the period from August
22, 1994 through January 7, 1997 arising from alleged violations of the
federal securities laws and associated common laws. The lawsuits name the
Company and several of its officers and directors as defendants, and allege
violations of securities laws, fraud and negligence, stemming from
circumstances which resulted in the restatement of the Company's financial
statements for 1994 and 1995. The complaints do not specify the amounts of
damages sought. The Company has executed a settlement agreement with the class
plaintiffs in the Illinois state court action titled Steinberg v. SSA, 97 CH
287 (the "Settlement"). The presiding judge in the Illinois case approved the
Settlement on September 30, 1997. Pursuant to the settlement, the Company paid
$1.7 million in cash and a director and officer defendant contributed 100,000
shares of Common Stock. Certain individual objectors to the Settlement filed a
Notice of Appeal on October 17, 1997. There can be no assurance that the
Settlement will not be overturned or that it will legally bar the federal
claims described above. In addition, even if the Settlement bars the federal
claims as described above, because the class period of the federal claims is
slightly larger than the class period of the state claim and one defendant was
named in the federal action that was not a defendant in the State action, the
Settlement may not result in the dismissal of the entire federal action. The
failure to achieve a dismissal of either of these actions or the failure to
settle them on sufficiently advantageous terms could have a material adverse
effect on the business, operating results and financial condition of the
Company, although counsel to the Company has given an opinion to the Company
that such adverse effects are highly unlikely.

Since October 1995, the Company has been the subject of a private
investigation by the Securities and Exchange Commission. The Company believes
that the inquiry relates to its revenue recognition policies. The
investigation is ongoing and the Company presently has no basis for
determining when it is likely to conclude. In January 1997, the Company
restated its fiscal 1994 financial statements to reverse $10.0 million in
revenues from a software contract originally recognized in the third quarter
of fiscal 1994. In addition, the Company restated its fiscal 1995 financial
statements to reverse $15.0 million in revenues from two related Latin
American reseller agreements originally recognized in the third and fourth
quarters of fiscal 1995, and $5.0 million in revenues originally recognized in
the third quarter of fiscal 1995 from the last two installments of a four-
installment contract. Commencing with the fourth quarter of 1996, the Company
adopted a more conservative method of accounting for reseller agreements under
which revenue will not be recorded under such contracts until software is sold
to the end user. The adoption of this new method of accounting resulted in the
reversal of approximately $33.8 million in revenues recognized in the first
three quarters of fiscal 1996. The Company is unable to predict at this time
the scope or consequences to the Company of the Commission's investigation, or
whether the actions taken by the Company that are described above address the
issues being investigated by the Commission. There can be no assurance that
such investigation would not have a material adverse effect on the business,
financial condition or results of operations of the Company.

The Company is also subject to other legal proceedings and claims which
arise in the normal course of business. Although the outcome of these
proceedings cannot be determined with certainty, management believes that the
final outcomes of these proceedings should not have a material adverse effect
on the Company's operations or financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

STOCK INFORMATION

PRICE RANGE OF COMMON STOCK AND PUBLIC CONVERTIBLE SUBORDINATED NOTES

The Company's common stock is traded on the Nasdaq National Market under the
symbol SSAX. The following table shows each quarter's high and low closing
prices as reported by Nasdaq.

<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW FISCAL 1996 HIGH LOW
----------- ---- --- ----------- ---- ---
<S> <C> <C> <C> <C> <C>
First Quarter $14.06 $10.00 First Quarter $27.67 $18.63
Second Quarter 10.88 4.13 Second Quarter 25.63 20.50
Third Quarter 9.56 5.63 Third Quarter 24.13 11.63
Fourth Quarter 16.38 8.06 Fourth Quarter 13.38 8.69
</TABLE>

At January 22, 1998 there were approximately 445 holders of record.

The Company's Public Convertible Subordinated Notes are traded on the Nasdaq
SmallCap Market under the symbol "SSAXG". The notes' high and low closing
prices during the fourth quarter of 1997 were $114.50 and $95.00,
respectively.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE
DATA)
------------------------------------
1997 1996 1995 1994 1993
YEAR ENDED OCTOBER 31, ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total revenues............................ $430.5 $340.8 $374.1 $324.3 $263.4
Net income (loss)......................... 1.0 (32.8) 26.6 10.0 23.4
Net income (loss) available for common
stockholders............................. (1.4) (32.8) 26.6 10.0 23.4
Earnings (loss) per share of common stock. (0.03) (0.76) 0.63 0.25 0.57
Dividends declared per common share....... -- 0.10 0.08 0.08 0.08
<CAPTION>
1997 1996 1995 1994 1993
AT OCTOBER 31, ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total assets.............................. $475.4 $384.4 $393.2 $333.1 $280.4
Long-term obligations and Redeemable
Series A Preferred Stock................. 160.0 75.1 33.9 32.7 34.0
</TABLE>

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, certain information
from the consolidated statements of operations as a percentage of total
revenues and the percentage change of such items as compared to the prior
year.

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES PERCENTAGE
YEAR ENDED INCREASE (DECREASE)
OCTOBER 31, OVER PRIOR PERIOD
--------------------- -----------------------
1997 1996
VERSUS VERSUS
1997 1996 1995 1996 1995
----- ----- ----- --------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
License fees............. 70.4% 66.5% 66.8% 33.7% (9.3%)
Client services and
other................... 29.6% 33.5% 33.2% 11.7% (8.1%)
----- ----- ----- --------- ----------
Total revenues......... 100.0% 100.0% 100.0% 26.3% (8.9%)
----- ----- ----- --------- ----------
Costs and expenses:
Cost of license fees..... 17.5% 19.6% 17.4% 12.6% 3.1%
Cost of client services
and other............... 22.8% 26.1% 20.5% 10.4% 15.9%
Sales and marketing...... 20.6% 30.4% 23.4% (14.7%) 18.5%
Research and development. 12.0% 16.0% 10.7% (5.0%) 35.3%
General and
administrative.......... 20.7% 25.1% 17.0% 4.0% 34.6%
Special charges.......... 1.1% -- -- * *
----- ----- ----- --------- ----------
Total costs and
expenses.............. 94.7% 117.2% 89.0% 2.0% 20.0%
----- ----- ----- --------- ----------
Operating income (loss).... 5.3% (17.2%) 11.0% 138.9% (243.1%)
----- ----- ----- --------- ----------
Gain on sale of available-
for-sale securities....... -- 3.8% -- * *
Non-operating income
(expense), net............ (4.9%) (1.7%) (0.1%) 273.7% *
----- ----- ----- --------- ----------
Income (loss) before income
taxes and minority
interest.................. 0.4% (15.1%) 10.9% 103.1% (225.7%)
Provision (benefit) for
income taxes.............. 0.1% (5.5%) 3.8% 103.2% (231.0%)
----- ----- ----- --------- ----------
Net income (loss) before
minority interest......... 0.3% (9.6%) 7.1% 103.0% (222.8%)
Minority interest.......... -- -- -- * *
----- ----- ----- --------- ----------
Net income (loss).......... 0.3% (9.6%) 7.1% 103.0% (223.3%)
Preferred dividends........ 0.6% -- -- * *
----- ----- ----- --------- ----------
Net income (loss) available
for common stockholders... (0.3%) (9.6%) 7.1% 95.7% (223.3%)
===== ===== ===== ========= ==========
</TABLE>
*not meaningful

REVENUES

Total revenues increased 26.3% from 1996 to 1997. All regions of the world,
the Americas, Europe/Middle East/Africa, and Asia Pacific, recorded increased
revenues in 1997. Total revenues decreased 9% from 1995 to 1996. The Americas
recorded higher revenues in 1996 while the Company's other regions were flat
to down.

License Fees. License fees increased 33.7% to $303.0 million in 1997
compared to $226.7 million in 1996, which reflected increasing market
acceptance of Version 6.0, which was released for general availability in the

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fourth quarter of 1996. License fees decreased 9% in 1996 when, despite solid
revenue growth in North America, a sharp decline in Europe/Middle East/Africa
more than offset North Americas favorable results.

Client Services. Client services and other revenues increased 11.7% to
$127.5 million in 1997 from $114.1 million in 1996. The increase in services
revenues is attributable to an increase in the number of billable services
personnel following significant investments in training in open systems and
object skills accompanying the development and release of Version 6.0. Client
services revenues declined 8% in 1996 when compared to 1995 due to lower
productivity caused, in part, by allocation of resources to perform warranty
work and investments in training client services professionals.

COSTS AND EXPENSES

Cost of License Fees. The principal components of cost of license fees are
commissions paid to independent Affiliates, hardware costs, amortization of
capitalized software costs and royalties paid to third parties. Cost of
license fees in 1997, as a percentage of related license fee revenues,
decreased to 24.9% from 29.5% in 1996. The decrease was primarily attributable
to a higher mix of direct channel revenues which have a lower associated cost
of license fees than do indirect channel revenues. In 1995, cost of license
fees was 26%. The change from 1995 to 1996 was due primarily to increased
amortization expense related to capitalized software development costs and
increased warranty costs.

Cost of Client Services and Other. The principal components of cost of
client services and other are salaries and other direct employment costs paid
to the Company's client services personnel and amounts paid to independent
client services professionals. Cost of client services and other as a
percentage of related revenues was 77.1% in 1997 compared to 78% in 1996. The
modest improvement is primarily attributable to increased productivity of
client services personnel and a reduction in warranty work. In 1995, cost of
client services and other was 61.9%. The increase from 1995 to 1996 is
primarily due to lower productivity related to newly hired technical
professionals around the world, in particular those with open systems and
object skills, allocation of resources to perform warranty work, and
investment in training.

Sales and Marketing. Sales and marketing expenses include salaries,
commissions, and other direct employment costs of the Company's sales and pre-
sales professionals, as well as marketing costs, which include advertising,
trade shows, and production of sales brochures. Sales and marketing expenses,
as a percentage of license fee revenues, were 29.2% in 1997 compared to 45.8%
in 1996. The decrease was due to improved productivity of the Company's direct
sales organization and decreased marketing expenditures. In anticipation of
the Company's introduction of its open systems product, the Company hired a
significant number of new sales and pre-sale professionals with skills and
experience in the open systems arena. In late 1996 and early 1997, a number of
these professionals who had not been significantly productive were either
terminated or left the Company. As a result, the Company's sales and marketing
expenses decreased in 1997 when compared to 1996 even though license fees
increased nearly 34% year over year. In 1995, sales and marketing expenses
were 35% of license fee revenues. The higher percentage in 1996 was primarily
due to decreased revenue and increased expenditures to establish worldwide
sales and marketing programs and the development of vertical industry groups
in support of the Company's move into the open systems client/server market.

Research and Development. Total research and development (R&D) expenditures
in 1997 decreased $3.2 million, or 3.3%, to $93.1 million from $96.3 million
in 1996. Research and development spending, related to the development of the
Company's new product line, based upon distributed object computing
technology, peaked during the last half of 1996 and has been declining since
as various projects related to such development wind down. Total research and
development expenditures in 1995 were $61.8 million. The 56% increase from
1995 to 1996 was due to the Company's continuing development of its
distributed object computing technology and enhancement of its existing
products.

The Company capitalizes software development costs once technological
feasibility is established, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86. The Company capitalized $41.4

9
<PAGE>

million of software development costs in 1997 compared to $41.9 million in
1996. The capitalization ratio (capitalized software costs as a percentage of
total R&D expenditures) was 44% for both 1997 and 1996. The capitalization
ratio was 35% in 1995. The increase in the capitalization ratio in 1996 was
due to construction and testing activities related to the Company's
distributed object computing architecture.

The following table sets forth total research and development expenditures
and related capitalized amounts for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER PERCENTAGE
31, CHANGE
---------------------- -------------
1997 1996
VERSUS VERSUS
1997 1996 1995 1996 1995
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Total R&D expenditures................. $ 93.1 $ 96.3 $ 61.8 (3%) 56%
Less amount capitalized................ (41.4) (41.9) (21.6) (1%) 94%
------ ------ ------ ---- ---
Net R&D expenses..................... $ 51.7 $ 54.4 $ 40.2 (5%) 35%
====== ====== ====== ==== ===
</TABLE>

General and Administrative. General and administrative expenses increased
$3.4 million in 1997 to $88.9 million from $85.5 million in 1996 to support
the Company's growth. These expenses include increased facilities and
personnel costs related to acquisitions and increased costs for computer
equipment. When viewed as a percentage of total revenues, however, general and
administrative expenses were 20.7% in 1997 and 25.1% in 1996. In 1995, general
and administrative expenses totaled $63.5 million and 17% of total revenues.
The increase in 1996 over 1995 was primarily due to new facilities to support
the Company's worldwide expansion, increased computer equipment costs and an
increase in the provision for doubtful accounts. The provision for doubtful
accounts was $3.3 million, $9.3 million, and $3.3 million in 1997, 1996 and
1995, respectively.

Special Charges. Two special charges were recorded in 1997. A charge of $1.7
million was recorded in the third quarter of 1997 which relates to the
settlement of the Company's class action lawsuits. A special charge of $3.2
million was recorded in the fourth quarter of 1997 under the terms of an
agreement with an investment group led by Bain Capital which stipulated that
if the Company elected not to proceed with a private offering of securities to
the group, the Company could incur capped liability, if any, of a $3.0 million
break-up fee and expense reimbursement of up to $250 thousand (see Note 12 of
Notes to Consolidated Financial Statements).

Operating Income (Loss). Operating income of $22.9 million in 1997 improved
by $81.7 million when compared to the operating loss of $(58.8) million in
1996 principally due to increased software license fees and lower sales and
marketing expenses. Operating income was $41.1 million in 1995. The change in
operating income (loss) from 1995 to 1996 resulted from reduced total revenues
and an increase in every category of cost and expense in 1996.

Non-operating Income (Expense), Net. Non-operating expense, net consists
primarily of interest expense related to the Company's former Credit Facility,
Senior Notes, Convertible Note and other long-term obligations including the
current 7% Convertible Subordinated Notes issued during the fourth quarter of
1997, and amortization of the value of the former Convertible Note's
beneficial conversion feature, less interest income earned on invested cash.
Non-operating expense, net of $21.3 million in 1997 increased $15.6 million
over 1996 due to higher borrowing levels under the Company's former Credit
Facility, higher interests rates applicable to the former Credit Facility and
Senior Notes, interest on the Company's former Convertible Note, interest on
the current 7% Convertible Subordinated Notes issued during the fourth quarter
of 1997, amortization of the value of the former Convertible Note's beneficial
conversion feature and reduced interest income related to lower cash balances.
In 1995, non-operating expense, net was $200 thousand. The increase from 1995
to 1996 was due to higher borrowing levels under the Company's former Credit
Facility, and increased fees and interest rates related to the Company's
renegotiation of its former borrowing arrangements terms and conditions during
the fourth quarter of 1996.

10
<PAGE>

Income Taxes. The Company's effective tax rate has remained relatively
constant at approximately 36% in 1997, 1996 and 1995. The tax benefit recorded
in 1996 represents federal and state tax refunds received in 1997 and amounts
to be realized through future utilization of net operating loss and tax credit
carryforwards.

Net Income (Loss). In 1997, the Company recorded net income of $1.0 million
compared to a net loss of $(32.8) million in 1996 resulting primarily from
increased software license fee revenues and lower sales and marketing
expenses. In 1995, net income was $26.6 million. The decline from 1995 to 1996
was primarily due to lower software license fees and client services revenues
combined with increased expenses as explained above.

Impact of Inflation. To date, the Company has not experienced any
significant effect from inflation. The Company's major expenses have been
salaries and related costs incurred principally for product development and
enhancements, sales and marketing, and administration. The Company generally
has been able to meet increases in costs by increasing prices of its products
and services.

Foreign Currency Exposures. Sales outside of the United States account for
approximately 60% of the Company's total revenue. The Company's international
sales (with the exception of certain Latin American countries) are
predominately invoiced and paid in foreign currencies. Consequently, the
Company's revenues are impacted by the fluctuation of foreign currencies
versus the U.S. Dollar. The operating income impact of such fluctuations,
however, is offset to the extent expenses of the Company's international
operations are incurred and paid for in local currencies.

The Company generally minimizes the financial impact of foreign currency
exchange transactions through the use of foreign exchange forward contracts,
which generally mature within three months of origination (see Note 4 of Notes
to Consolidated Financial Statements).

ACQUISITIONS, MERGERS AND INVESTMENTS

The Company continues to expand its global coverage and strengthen its
product offerings through various acquisitions, mergers, and investments (see
Notes 2 and 3 of Notes to Consolidated Financial Statements).

During 1996, the Company acquired the remaining 81% and 90% of its domestic
affiliates SSA North Central and SSA Northwest, respectively, the remaining
27% of SSA Iberica in Spain and 100% of Vector Systems, a Canadian affiliate.
In addition, the Company purchased 25% of CS Controlling Software Systeme, a
German software development company.

During 1995, through stock for stock transactions, the Company combined with
three other companies: Softwright Systems Limited, a leading provider of
business technology and systems in Europe specializing in object technology,
multimedia, and other leading edge applications, and two of the Company's
independent Affiliates, SSA Northeast and Priority Systems, Inc. Also during
1995 the Company acquired the remaining 15% minority interest in its
Australian subsidiary, an additional 9% interest in its Affiliate, SSA North
Central, 10% of its Affiliate, SSA Northwest, the BPCS division of a
California Affiliate, Exigent Computer Group, 100% of its Canadian Affiliate,
SSA Ontario, and certain assets of Transtech, Inc., a consulting group.

In July 1995, the Company entered into a strategic alliance relationship
with Harbinger Corporation pursuant to which the Company sold its EDI software
assets to Harbinger and was licensed by Harbinger to market and sell AS/400,
Unix, and PC-based EDI software products. The Company received as
consideration 550,000 shares of Harbinger common stock. In August 1995, the
Company purchased an additional 450,000 shares of Harbinger common stock.
During 1996, the Company sold its shares of Harbinger common stock.

QUARTERLY RESULTS

The following table contains selected unaudited consolidated financial
results by quarter for 1997 and 1996. In management's opinion, this
information reflects all adjustments (which consisted only of normal recurring

11
<PAGE>

adjustments) necessary to present the results fairly when read in conjunction
with the Consolidated Financial Statements and related notes included
elsewhere herein.

<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
QUARTER ENDED QUARTER ENDED
-------------------------------- --------------------------------
JANUARY APRIL JULY OCTOBER JANUARY APRIL JULY OCTOBER
31 30 31 31 31 30 31 31
------- ------ ------ ------- ------- ------ ------ -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 76.6 $ 82.5 $ 72.3 $109.4 $ 92.2 $ 98.1 $114.7 $125.6
Costs and expenses...... 77.0 92.1 106.4 124.1 96.8 94.2 104.9 111.7
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss). (0.4) (9.6) (34.1) (14.7) (4.6) 3.9 9.8 13.9
Gain on sale of
available-for-sale
securities............. -- -- 3.6 9.5 -- -- -- --
Non-operating income
(expense), net......... (0.3) (0.5) (1.2) (3.7) (2.1) (4.9) (4.6) (9.7)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... (0.7) (10.1) (31.7) (8.9) (6.7) (1.0) 5.2 4.2
Provision (benefit) for
income taxes........... (0.3) (3.7) (11.4) (3.2) (2.4) (0.4) 1.9 1.5
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... (0.4) (6.4) (20.3) (5.7) (4.3) (0.6) 3.3 2.7
------ ------ ------ ------ ------ ------ ------ ------
Preferred dividends..... -- -- -- -- -- -- -- 2.4
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)
available for common
stockholders........... $ (0.4) $ (6.4) $(20.3) $ (5.7) $ (4.3) $ (0.6) $ 3.3 $ 0.3
====== ====== ====== ====== ====== ====== ====== ======
Earnings (loss) per
share of common stock.. $(0.01) $(0.15) $(0.47) $(0.13) $(0.10) $(0.01) $ 0.08 $ 0.01
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

The Company has experienced a seasonal pattern in its operating results,
with the fourth quarter typically having the highest revenues and operating
income. The Company believes that fourth quarter revenues are positively
impacted by the Company's sales compensation plans. This factor, which the
Company believes is common in the computer software industry, typically
results in first quarter revenues in any year being lower than revenues in the
immediately preceding fourth quarter. In addition, the Company's European
operations generally provide lower revenues during the summer months as a
result of the generally reduced economic activity in Europe during such time.
This seasonal factor could materially adversely affect third quarter revenues.

The Company has also historically recognized a substantial portion of its
revenues from sales booked and shipped in the last month of a quarter. As a
result, the magnitude of quarterly fluctuations in license fees may not become
evident until late in a particular quarter. If sales forecasted from a
specific customer for a particular quarter are not realized in that quarter,
the Company is unlikely to be able to generate revenues from alternate sources
in time to compensate for the shortfall. As a result, a lost or delayed sale
could have a material adverse effect on the Company's quarterly operating
results. To the extent that significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected. The
Company, historically, operated with little backlog because its products are
generally shipped as orders are received. As a result, revenue from license
fees in any quarter is substantially dependent on orders booked and shipped in
that quarter.

Based upon the factors described above, the Company believes that its
quarterly revenues and operating results are likely to vary significantly in
the future, that period-to-period comparison of its results of operations are
not necessarily meaningful and that, as a result, such comparisons should not
be relied upon as indications of future performance. Moreover, although the
Company's revenues have generally increased in recent periods, there can be no
assurance that the Company's revenues will grow in future periods, at past
rates or at all, or that the Company will be profitable on a quarterly or
annual basis. In future periods, the Company's operating results may be below
the expectations of stock market analysts and investors. In such event, the
price of the Common Stock could be materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

Cash and equivalents at October 31, 1997 totaled $83.3 million. During 1997,
cash and equivalents increased $45.2 million. On September 12, 1997, the
Company successfully completed a public offering of 7% Convertible
Subordinated Notes due 2002, the gross proceeds of which were $138.0 million.
On August 27, 1997, the Company issued a promissory note and warrants to a
Private Investor for $10 million in cash. The

12
<PAGE>

Company and the Private Investor subsequently agreed to exchange the
promissory note and warrants for 10,000 shares of Series A Preferred Stock and
the Private Warrants (see Notes 7 and 8 of Notes to Consolidated Financial
Statements). The Company issued a Convertible Note for $12.0 million on March
27, 1997, to a strategic investor. Subsequent to October 31, 1997, the
strategic investor has elected to convert the note into approximately 3.6
million shares of the Company's Common Stock (see Note 13 of Notes to
Consolidated Financial Statements). From the proceeds of the various
financings described above, the Company repaid its former Credit Facility
($46.4 million) and Senior Notes ($26.0 million) as well as paid costs related
to its former and current borrowings. In 1997, the Company generated $9.6
million from operating activities and used $49.7 million for capital equipment
and software development costs.

The Company utilizes a combination of its own software and custom written
systems necessary for running a software company. SSA believes that there will
be no significant cost associated with ensuring year 2000 compliance of its
internal systems.

Management believes that based upon its anticipated operating results, cash
generated from operations, combined with current working capital and the
proceeds from the Company's various financings as described above, there is
sufficient liquidity to meet the Company's capital requirements for the
foreseeable future.

RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
was issued in February 1997. The Company will be required to adopt the new
standard for the quarter ended January 31, 1998. Early adoption of this
standard is not permitted. The primary requirements of this standard are: (i)
replacement of primary earnings per share with basic earning per share, which
eliminates the dilutive effect of options and warrants; (ii) use of an average
share price in applying the treasury method to compute dilution for options
and warrants for diluted earnings per share; and (iii) disclosure reconciling
the numerator and denominator of earnings per share calculations. The Company
plans to adopt this statement in fiscal year 1998. The effect of applying this
standard is not expected to be significant.

American Institute of Certified Public Accountants Statement of Position 97-
2, "Software Revenue Recognition" (SOP 97-2) was issued in October 1997. SOP
97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997. Therefore, SOP 97-2 will effect transactions entered
into by the Company beginning November 1, 1998. SOP 97-2 addresses various
aspects of the recognition of revenue on software transactions and supersedes
SOP 91-1, the policy currently followed by the Company. SOP 97-2 provides
guidance on software arrangements consisting of multiple elements, evidence of
fair value, delivery of elements, accounting for service elements, and
software arrangements requiring significant production, modification, or
customization of software. The Company is currently evaluating the impact this
statement will have on the Company's consolidated financial statements. The
Company anticipates that only minor modifications to its software arrangements
will be necessary to continue to recognize revenue on a basis consistent with
its current policies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and schedules of the Company are annexed to this
Report as pages F-2 through
F-23. An index to such materials appears on page F-1.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

13
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item with respect to the directors of the
Company is incorporated by reference from the Company's definitive proxy
statement, expected to be filed with the Commission prior to February 13,
1998. Information regarding executive officers is set forth in Part I of this
report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
prior to February 17, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
prior to February 17, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
prior to February 17, 1998.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

a. The financial statements and schedule filed as part of this report are
listed in the accompanying Index to Financial Statements and Schedule. The
exhibits filed or incorporated by reference as part of this report are listed
in the accompanying Index to Exhibits. The Company will furnish a copy of any
exhibit listed to requesting stockholders upon payment of the Company's
reasonable expenses in furnishing those materials.

b. The Company filed two Form 8-Ks in the fiscal quarter ending October 31,
1997. On August 11, 1997, the Company filed a Form 8-K announcing its revenues
for the third fiscal quarter ended July 31, 1997. On August 21, 1997, the
Company filed a Form 8-K announcing its plans to revise its proposed public
and private financing transactions.

14
<PAGE>

SIGNATURES

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

SYSTEM SOFTWARE ASSOCIATES, INC.

January 29, 1998 /s/ Joseph J. Skadra
-----------------------------------
Joseph J. Skadra, Vice President
and
Chief Financial Officer

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/s/ Roger E. Covey Chief Executive Officer and January 29, 1998
____________________________________ Chairman of the Board of
Roger E. Covey Directors (Principal
Executive Officer)

/s/ William M. Stuek President and Chief January 29, 1998
____________________________________ Operating Officer and
William M. Stuek Director

/s/ Joseph J. Skadra Vice President and Chief January 29, 1998
____________________________________ Financial Officer and
Joseph J. Skadra Secretary (Principal
Financial and Accounting
Officer)

/s/ Casey Cowell Director January 29, 1998
____________________________________
Casey Cowell

/s/ Andrew J. Filipowski Director January 29, 1998
____________________________________
Andrew J. Filipowski

/s/ John W. Puth Director January 29, 1998
____________________________________
John W. Puth

/s/ William N. Weaver, Jr. Director January 29, 1998
____________________________________
William N. Weaver, Jr.

</TABLE>

15
<PAGE>

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
(1) Financial Statements:
Independent Auditors Report (KPMG Peat Marwick LLP)................... F-2
Report of Independent Accountants (Price Waterhouse LLP).............. F-3
Consolidated Balance Sheets as of October 31, 1997 and 1996........... F-4
Consolidated Statements of Operations for the years ended October 31,
1997, 1996 and 1995.................................................. F-6
Consolidated Statements of Cash Flows for the years ended October 31,
1997, 1996 and 1995.................................................. F-7
Consolidated Statements of Changes in Stockholders' Equity for the
years ended October 31, 1997, 1996 and 1995.......................... F-8
Notes to Consolidated Financial Statements............................ F-9
(2) Financial Statement Schedule:
The following financial statement schedule is included herein:
Schedule II--Valuation and Qualifying Accounts........................ F-23
All other financial statement schedules are omitted because they are
not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
System Software Associates, Inc.

We have audited the accompanying consolidated balance sheets of System
Software Associates, Inc. and its subsidiaries as of October 31, 1997 and
1996, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the two-year
period ended October 31, 1997. In connection with our audits of the
consolidated financial statements, we have also audited, for the foregoing
periods, the financial statement schedule as listed in the accompanying index.
These consolidated financial statements and the financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and the
financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of System
Software Associates, Inc. and its subsidiaries as of October 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the two-year period ended October 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

/s/ KPMG Peat Marwick LLP

Chicago, Illinois
December 8, 1997

F-2
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of
System Software Associates, Inc.

In our opinion, the consolidated statements of operations, of changes in
stockholders' equity and of cash flows of System Software Associates, Inc. and
its subsidiaries, listed in the accompanying index present fairly, in all
material respects, the results of operations, changes in stockholders' equity
and cash flows for the year ended October 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above. We have
not audited the consolidated financial statements of System Software
Associates, Inc. and its subsidiaries for any period subsequent to October 31,
1995.

/s/ Price Waterhouse LLP

Chicago, Illinois
January 7, 1997, except as to paragraph 3 of Note 12 which is as of January
29, 1997

F-3
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
ASSETS 1997 1996
------ --------- ---------
(IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current Assets:
Cash and equivalents..................................... $ 83.3 $ 38.1
Accounts receivable, less allowance for doubtful accounts
of $16.5 and $16.5...................................... 198.3 163.6
Income taxes receivable.................................. 1.5 4.4
Deferred income taxes.................................... 11.3 10.1
Prepaid expenses and other current assets................ 27.5 25.5
--------- ---------
Total current assets................................... 321.9 241.7
--------- ---------
Property and Equipment:
Data processing equipment................................ 42.0 37.3
Furniture and office equipment........................... 17.5 18.7
Leasehold improvements................................... 10.3 9.0
Transportation equipment................................. 1.3 2.3
--------- ---------
71.1 67.3
Less--Accumulated depreciation and amortization.......... 46.0 39.5
--------- ---------
25.1 27.8
--------- ---------
Other Assets:
Software costs, less accumulated amortization of $89.3
and $61.1............................................... 99.4 82.8
Cost in excess of net assets of acquired businesses, less
accumulated amortization of $11.8 and $8.7.............. 19.7 22.8
Deferred income taxes.................................... 3.9 1.2
Investments in associated companies...................... 1.6 2.2
Miscellaneous............................................ 3.8 5.9
--------- ---------
128.4 114.9
--------- ---------
Total Assets........................................... $ 475.4 $ 384.4
========= =========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-4
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ --------- ---------
(IN MILLIONS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current Liabilities:
Accrued commissions and royalties...................... $ 25.8 $ 26.3
Accounts payable and other accrued liabilities......... 60.6 62.5
Accrued compensation and related benefits.............. 24.7 23.8
Deferred revenue....................................... 49.3 58.8
--------- ---------
Total current liabilities............................ 160.4 171.4
--------- ---------
Long-Term Obligations.................................... 150.8 75.1
--------- ---------
Deferred Revenue......................................... 32.4 27.7
--------- ---------
Deferred Income Taxes.................................... 0.8 --
--------- ---------
Redeemable Series A Preferred Stock, $.01 par value,
convertible, 10,000 shares issued and outstanding
(liquidation preference of $10.0 million)............... 9.2 --
--------- ---------
Stockholders' Equity:
Preferred stock, $.01 par value, 100,000 shares
authorized, none issued or outstanding; 10,000 shares
issued as Series A Preferred Stock.................... -- --
Common stock, $.0033 par value, 250,000,000 and
60,000,000 shares authorized, 42,868,000 and
42,577,000 shares issued.............................. 0.1 0.1
Capital in excess of par value......................... 48.5 32.8
Retained earnings...................................... 77.1 78.5
Cumulative translation adjustment...................... (3.9) (1.2)
--------- ---------
Total stockholders' equity........................... 121.8 110.2
Commitments and Contingencies (Note 12)................ -- --
--------- ---------
Total Liabilities and Stockholders' Equity........... $ 475.4 $ 384.4
========= =========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-5
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
----------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
License fees......................................... $303.0 $226.7 $250.0
Client services and other............................ 127.5 114.1 124.1
------ ------ ------
Total revenues..................................... 430.5 340.8 374.1
------ ------ ------
Costs and Expenses:
Cost of license fees................................. 75.3 66.9 64.9
Cost of client services and other.................... 98.3 89.0 76.8
Sales and marketing.................................. 88.5 103.8 87.6
Research and development............................. 51.7 54.4 40.2
General and administrative........................... 88.9 85.5 63.5
Special charges...................................... 4.9 -- --
------ ------ ------
Total costs and expenses........................... 407.6 399.6 333.0
------ ------ ------
Operating income (loss)................................ 22.9 (58.8) 41.1
------ ------ ------
Gain on sale of available-for-sale securities.......... -- 13.1 --
Non-operating income (expense), net.................... (21.3) (5.7) (0.2)
------ ------ ------
Income (loss) before income taxes and minority
interest.............................................. 1.6 (51.4) 40.9
Provision (benefit) for income taxes................... 0.6 (18.6) 14.2
------ ------ ------
Income (loss) before minority interest................. 1.0 (32.8) 26.7
Minority interest...................................... -- -- (0.1)
------ ------ ------
Net income (loss)...................................... 1.0 (32.8) 26.6
Preferred dividends.................................... 2.4 -- --
------ ------ ------
Net income (loss) available for common stockholders.... $ (1.4) $(32.8) $ 26.6
====== ====== ======
Earnings (loss) per share of common stock.............. $(0.03) $(0.76) $ 0.63
====== ====== ======
Weighted average common and equivalent shares
outstanding........................................... 42.7 43.0 42.2
====== ====== ======
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-6
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
----------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss).................................... $ 1.0 $(32.8) $ 26.6
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and
equipment......................................... 9.3 9.2 7.9
Amortization of other assets....................... 40.8 23.0 17.3
Provision for doubtful accounts.................... 3.3 9.3 3.3
Gain on sale of available-for-sale securities...... -- (13.1) --
Deferred income taxes.............................. (3.1) (14.2) (2.6)
Deferred revenue................................... (2.8) (2.5) 7.3
Minority interest.................................. -- -- 0.1
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable.............................. (42.9) 12.6 (32.3)
Income taxes..................................... 3.4 (14.2) 12.2
Prepaid expenses and other current assets........ (1.9) (2.1) (0.3)
Miscellaneous assets............................. 2.1 2.4 (3.3)
Accrued commissions and royalties................ (0.2) (6.8) 0.3
Accounts payable and other accrued liabilities... (1.0) 8.0 1.0
Accrued compensation and related benefits........ 1.6 -- 1.8
------ ------ ------
Net cash provided by (used in) operating
activities.................................... 9.6 (21.2) 39.3
------ ------ ------
Cash Flows From Investing Activities:
Purchases of property and equipment.................. (4.9) (11.4) (5.3)
Software costs....................................... (44.8) (43.8) (25.1)
Investments and acquisitions, net of cash acquired... -- (4.5) (6.1)
Purchase of available-for-sale securities............ -- -- (5.4)
Proceeds from sale of available-for-sale securities.. -- 23.2 --
Proceeds from sales of assets........................ -- -- 1.7
Other................................................ -- (0.1) 0.3
------ ------ ------
Net cash flows used in investing activities.... (49.7) (36.6) (39.9)
------ ------ ------
Cash Flows From Financing Activities:
Amount borrowed (repaid) under bank line of credit,
net................................................. (46.4) 46.4 --
Repayment of Senior Notes Payable.................... (26.0) -- --
Proceeds from issuance of convertible subordinated
notes............................................... 150.0 -- --
Proceeds from issuance of Redeemable Series A
Preferred Stock..................................... 10.0 -- --
Proceeds from exercise of stock options.............. 1.6 2.1 4.1
Principal payments under other financing obligations. (2.7) (5.7) (3.5)
Dividends paid....................................... -- (4.2) (3.2)
------ ------ ------
Net cash provided by (used in) financing
activities.................................... 86.5 38.6 (2.6)
------ ------ ------
Effect of exchange rate changes on cash................ (1.2) 0.2 0.1
------ ------ ------
Net increase (decrease) in cash and equivalents........ 45.2 (19.0) (3.1)
Cash and equivalents:
Beginning of year.................................... 38.1 57.1 60.2
------ ------ ------
End of year.......................................... $ 83.3 $ 38.1 $ 57.1
====== ====== ======
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-7
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
UNREALIZED
GAIN ON TREASURY
COMMON STOCK CAPITAL IN AVAILABLE- CUMULATIVE STOCK TOTAL STOCK-
------------- EXCESS OF RETAINED FOR-SALE TRANSLATION ------------- HOLDERS'
SHARES AMOUNT PAR VALUE EARNINGS SECURITIES ADJUSTMENT SHARES AMOUNT EQUITY
------ ------ ---------- -------- ---------- ----------- ------ ------ ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance October 31,
1994................... 27.4 $0.1 $20.7 $ 91.8 $ -- $(0.8) (0.4) $(2.5) $109.3
Shares issued upon
exercise of employee
stock options.......... 0.5 4.1 4.1
Tax benefit of stock
options exercised...... 2.8 2.8
Dividends paid--$0.08
per share.............. (3.2) (3.2)
Shares issued in
business combinations.. 0.2 (1.5) 0.3 0.4 2.5 1.3
Unrealized gain on
available-for-sale
securities............. 2.5 2.5
Net income.............. 26.6 26.6
Shares issued in three-
for-two split.......... 14.0
---- ---- ----- ------ ----- ----- ---- ----- ------
Balance October 31,
1995................... 42.1 $0.1 $26.1 $115.5 $ 2.5 $(0.8) -- $ -- $143.4
---- ---- ----- ------ ----- ----- ---- ----- ------
Shares issued upon
exercise of employee
stock options.......... 0.3 2.1 2.1
Tax benefit of stock
options exercised...... 1.2 1.2
Foreign currency
translation adjustment. (0.4) (0.4)
Dividends paid--$0.10
per share.............. (4.2) (4.2)
Shares issued in
business combinations.. 0.2 3.4 3.4
Sales of available-for-
sale securities........ (2.5) (2.5)
Net loss................ (32.8) (32.8)
---- ---- ----- ------ ----- ----- ---- ----- ------
Balance October 31,
1996................... 42.6 $0.1 $32.8 $ 78.5 $ -- $(1.2) -- $ -- $110.2
---- ---- ----- ------ ----- ----- ---- ----- ------
Shares issued upon
exercise of employee
stock options.......... 0.3 1.6 1.6
Tax benefit of stock
options exercised...... 0.5 0.5
Foreign currency
translation adjustment. (2.7) (2.7)
Dividends--Redeemable
Series A Preferred
Stock ($20.00 per
share)................. (0.2) (0.2)
Issuance of warrants.... 2.5 2.5
Beneficial conversion
feature of convertible
subordinated note...... 8.9 8.9
Beneficial conversion
feature of Redeemable
Series A Preferred
Stock.................. 2.2 (2.2) --
Net income.............. 1.0 1.0
---- ---- ----- ------ ----- ----- ---- ----- ------
Balance October 31,
1997................... 42.9 $0.1 $48.5 $ 77.1 $ -- $(3.9) -- $ -- $121.8
==== ==== ===== ====== ===== ===== ==== ===== ======
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-8
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:

Nature of operations

Principles of consolidation

The consolidated financial statements include the accounts of System
Software Associates, Inc. and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Foreign currency translation

The functional currencies for substantially all of the Company's foreign
subsidiaries are their local currencies. The foreign subsidiaries' balance
sheets are translated at the year end rates of exchange and their results of
operations at weighted average rates of exchange for the year. Translation
adjustments resulting from this process are recorded directly in stockholders'
equity and will be included in the determination of net income (loss) only
upon sale or liquidation of the subsidiaries, which is not contemplated at
this time. Foreign exchange transaction gains (losses) aggregating $0.6
million, $(0.4) million, and $(0.7) million are included in general and
administrative expenses for 1997, 1996, and 1995, respectively.

Revenue recognition

The license fees generated and related commissions earned by the independent
Affiliates are included in license fees and cost of license fees,
respectively. Software license fees are recognized, as required by AICPA
Statement of Position 91-1, upon delivery and acceptance of the product by the
end user providing that no significant vendor obligations remain and
collection of the related receivable is probable. Revenues and commissions
from software maintenance and HelpLine agreements are deferred and recognized
ratably over the term of the contract. Client services revenues are recorded
when such services are provided. Concentrations of credit risk with respect to
accounts receivable are limited due to a large customer base and its
geographic dispersion.

The principal components of cost of license fees are commissions paid to
independent Affiliates, hardware costs, amortization of capitalized software
costs, and royalties paid to third parties. The principal components of cost
of client services and other are salaries paid to the Company's client
services personnel and amounts paid to independent client services
professionals. Accrued Affiliate and salesman commissions are not paid until
the related accounts receivable balances have been collected.

F-9
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Property and equipment

Property and equipment are stated at cost. Depreciation is computed using
various methods over the estimated useful lives of the related assets which
range from three to seven years. Leasehold improvements are amortized over the
shorter of the life of the assets or related leases. Gains or losses resulting
from sales or retirements are recorded as incurred, at which time related
costs and accumulated depreciation are removed from the accounts. Maintenance
and repairs are charged to expense as incurred. Depreciation and amortization
of property and equipment was $9.3 million, $9.2 million, and $7.9 million in
1997, 1996, and 1995, respectively.

Software costs

Purchased software is capitalized and stated at cost. The Company
capitalizes software development costs in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86. Amortization of capitalized
costs is computed on a straight-line basis using an estimated useful life of
five years or in proportion to current and anticipated revenues, whichever
provides the greater amortization. Capitalized software costs are summarized
as follows:

<TABLE>
<CAPTION>
OCTOBER 31,
--------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Purchased software........................................ $ 10.6 $ 9.5
Internally developed software............................. 178.1 134.4
------ ------
188.7 143.9
Less--Accumulated amortization............................ (89.3) (61.1)
------ ------
Net capitalized software costs.......................... $ 99.4 $ 82.8
====== ======
</TABLE>

Amortization of capitalized software costs charged to cost of license fees
aggregated $28.2 million, $20.0 million, and $14.9 million during 1997, 1996,
and 1995, respectively.

Research and development

Research and development expenses, principally the design and development of
software products (exclusive of costs capitalized under SFAS No. 86), are
expensed as incurred.

Cost in excess of net assets of acquired businesses

The excess of cost over the fair value of the net identifiable assets of
acquired businesses is amortized on a straight-line basis, typically over a
seven-year period. Amortization expense was $3.1 million, $2.7 million, and
$2.2 million in 1997, 1996, and 1995, respectively.

Fair value of financial instruments

The fair value of cash and equivalents, income taxes payable, receivables,
accounts payable and accrued expenses approximates their carrying values. The
fair value of public convertible subordinated notes using the quoted market
price on October 31, 1997 is $136.6 million. It was not practical to determine
the fair value of Redeemable Series A Preferred Stock, private convertible
subordinated promissory note, and investments in associated companies at
October 31, 1997 as there are no quoted market prices for these instruments.

Derivatives

The Company periodically enters into foreign currency contracts in order to
reduce the impact of certain foreign currency fluctuations. Unrealized gains
and losses on foreign currency contracts are recognized in each reporting
period in the consolidated statement of operations.

F-10
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Stock-based compensation

The Company utilizes the intrinsic value based method of accounting for its
stock-based compensation agreements.

Earnings per share

The loss per share for 1997 and 1996 has been computed using only the
weighted average number of shares outstanding. Earnings per share for 1995 has
been computed using the weighted average number of shares outstanding plus
shares issuable under stock options using the treasury stock method. 1995
share amounts were adjusted for the November 28, 1995 three-for-two stock
split.

Use of estimates

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

Statements of cash flows

For purposes of reporting cash flows, the Company considers highly liquid
investments with an original maturity of three months or less to be cash
equivalents. At October 31, 1997, the Company had $50.2 million invested in
money market funds, auction rate securities, commercial paper, and corporate
bonds. Interest income which is included in the Company's Consolidated
Statements of Operations in non-operating income (expense), net aggregated
$1.3 million, $1.1 million, and $2.0 million during 1997, 1996, and 1995,
respectively. Supplemental information is as follows:

<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
---------------
1997 1996 1995
----- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Non-cash investing and financing activities:
Leases capitalized..................................... $ 1.7 $0.6 --
Liabilities assumed in connection with investments and
acquisitions.......................................... -- $1.2 $8.7
Shares issued in business combinations................. -- $3.4 $1.3
Issuance of common stock purchase warrants............. $ 2.5 -- --
Beneficial conversion features on issuance of note and
preferred stock....................................... $11.1 -- --
Cash paid during the year for:
Interest............................................... $ 8.0 $4.0 $2.2
Income taxes........................................... $ 2.4 $9.5 $5.0
</TABLE>

NOTE 2--BUSINESS COMBINATIONS:

During 1996 and 1995 the Company expanded its global coverage and
strengthened its product offerings through various acquisitions. The Company
made no acquisitions during 1997.

The following table summarizes all acquisitions in 1996 and 1995 which were
accounted for under the purchase method and, accordingly, resulted in
allocations of the purchase prices to the net assets acquired based upon their
estimated fair values as of the acquisition dates. The accompanying
consolidated statements of

F-11
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
operations reflect the results of operations of the acquired companies since
the acquisition dates. Proforma results of operations are not presented as the
acquisitions were not significant. These transactions typically involved the
Company acquiring a majority interest or additional interest in an existing
independent Affiliate.

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
- - --------------------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
. NofTek NW, Inc. (SSA Northwest) (a) . SSA Ontario Corporation
. Castillo Informatica (SSA Iberica) (a) . SSA Services Pty., Ltd. (b)
. Vector Systems Analysis . BPCS Division of Exigent
Computer Group
. SSA North Central (a) . Certain assets of Transtech, Inc.
- - --------------------------------------------------------------------------------------------
Aggregate con- $8.0 $6.5
sideration
- - --------------------------------------------------------------------------------------------
Goodwill $7.2 $6.3
- - --------------------------------------------------------------------------------------------
</TABLE>
(a) Acquired the remaining interests of 90% in SSA Northwest, 27% in SSA
Iberica and 81% in SSA North Central in 1996.
(b) Acquired the remaining 15% interest in SSA Services Pty., Ltd. (SSA
Australia and New Zealand) in 1995.

During 1995, the Company issued 586,000 shares of common stock, with an
aggregate fair value of $21.9 million, for all outstanding common stock of
three companies: Softwright Systems Limited, a leading provider of business
object technology and systems in Europe specializing in object technology,
multimedia, and other leading edge applications, and two of the Company's
independent affiliates, SSA Northeast and Priority Systems, Inc. The
combinations were accounted for as poolings of interest. The results of
operations were included in the Company's consolidated financial statements
from the dates of combinations, as the operations for all periods prior to the
combinations were not material in relation to the Company's consolidated
financial statements.

NOTE 3--INVESTMENTS IN ASSOCIATED COMPANIES:

In July, 1995 the Company entered into a strategic alliance relationship
with Harbinger Corporation pursuant to which the Company sold its EDI software
assets (net book value of $2.3 million) to Harbinger and was granted a license
by Harbinger to market and sell AS/400, Unix, and PC-based EDI software
products (there was no gain or loss recognized on the sale). Minimum royalties
amounting to $1.4 million and $5.8 million were accrued in 1995 and paid by
the Company to Harbinger during 1996. The Company received as consideration
550,000 shares of Harbinger Common Stock and 4,000,000 shares of Harbinger
Zero Coupon Preferred Stock. The Zero Coupon Preferred Stock vests at the rate
of up to 1,000,000 shares per year beginning in 1997 based upon achieving
certain performance targets, and must be redeemed by Harbinger upon vesting
for $1.00 per share in cash or, at the option of the Company, an equivalent
amount of Harbinger Common Stock. In August 1995, the Company purchased an
additional 450,000 shares of Harbinger Common Stock. At October 31, 1995, the
investment in Harbinger Corporation Common Stock was classified as available-
for-sale and reported at its fair value of $14 million. The adjustment to fair
value in 1995 generated a $2.5 million unrealized gain, net of $1.4 million
deferred tax and was excluded from earnings and reported in a separate
component of shareholders' equity. During 1996 the Company sold all of its
shares of Harbinger Common Stock. The proceeds from the sales were $23.2
million, which resulted in a gain of $8.4 million, net of $4.7 million in
taxes.

The Company also owns minority interests in several of its affiliates and
accounts for these investments under the cost method if the Company owns less
than 20% and the equity method if ownership is more than 20% of each
associated company. The Company does not exercise control over the operations
of these companies.

F-12
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--FINANCIAL INSTRUMENTS:

Periodically, the Company uses forward exchange contracts for the primary
purpose of reducing its exposure to fluctuations in foreign currency exchange
rates. The instruments are employed to manage transactional exposure. While
these financial instruments are subject to the risk that market rates may
change subsequent to the acquisition of the financial instrument, such changes
would generally be offset by opposite effects on the items being managed. The
Company's financial instruments typically mature within three months of
origination and are transacted at rates which reflect the market rate at the
date of the contract.

At October 31, 1997, the Company had no forward exchange contracts
outstanding. As of October 31, 1996, the Company had forward contracts for the
purchase and sale of European and other currencies, with purchases totaling
$3.2 million and sales totaling $26.8 million. These contracts matured on or
before November 5, 1996.

NOTE 5--LONG-TERM OBLIGATIONS:

Long-term obligations consist of the following:

<TABLE>
<CAPTION>
OCTOBER 31,
------------
1997 1996
------ -----
(IN
MILLIONS)
<S> <C> <C>
Public convertible subordinated notes....................... $137.1 $ --
Private convertible subordinated note....................... 12.0 --
Multi-bank line of credit................................... -- 46.4
Senior Notes payable........................................ -- 26.0
Notes payable and other obligations......................... 0.5 1.2
Obligations under capital leases............................ 3.4 3.6
------ -----
153.0 77.2
Less--Current maturities.................................... 2.2 2.1
------ -----
$150.8 $75.1
====== =====
</TABLE>

Public Convertible Subordinated Notes

On September 12, 1997, the Company issued $138.0 million principal amount of
convertible subordinated notes due September 15, 2002 bearing interest at 7%
(the "Public Notes"). Interest will be paid March 15 and September 15 of each
year, commencing March 15, 1998. The Public Notes are subordinated to all
existing and future indebtedness of the Company.

The Public Notes are convertible at the holders' option at any time into
shares of common stock of the Company at $18.06 per share, subject to
adjustments in certain events. The Public Notes are redeemable at the option
of the Company after September 20, 2000 in whole, or in part at any time
(103.5% beginning September 20, 2000 and 101.75% from September 20, 2001 and
thereafter) plus accrued and unpaid interest. In the event that a change in
control occurs, each holder of a Public Note may require the Company to
repurchase all or a portion of such holders Public Notes at a price equal to
100% of the principal amount thereof plus accrued and unpaid interest to the
purchase date.

A substantial portion of the net proceeds from the sale of the notes was
used to fund the retirement of the Company's line of credit and Senior Notes
payable.

Private Convertible Subordinated Note

On March 27, 1997, the Company issued a convertible subordinated promissory
note (the "Private Convertible Subordinated Note") to a strategic investor in
the amount of $12.0 million, bearing interest at the prime rate plus 1% and
convertible into common stock of the Company at the lesser of $3.33 per share
or 80%

F-13
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the fair market value of the stock at the time of conversion. The loan
maturity is three years, and the note is not convertible prior to October
1997, except in the event of prepayment. The Private Convertible Subordinated
Note has a beneficial conversion feature because the fair market value of the
Company's stock was in excess of its per share conversion price at the date of
issuance. The value of the beneficial conversion feature of $8.9 million has
been reflected as an increase to capital in excess of par value and was
amortized as interest expense in 1997. The expense is included in the
Company's Consolidated Statement of Operations for the year ended October 31,
1997 in non-operating income (expense), net.

Line of Credit

Prior to its retirement in September 1997, the Company had a $50.0 million,
multi-bank line of credit which bore interest at the Prime Rate or LIBOR plus
a margin. The margin on LIBOR ranged from 3/4% to 3%, and was based on the
cumulative amount borrowed and the leverage ratio of the Company at the time
of the borrowings. The Company was required to pay a commitment fee equal to
1/8% of the unused portion of the commitment. In addition, the agreement
contained certain covenants which the Company was unable to maintain
compliance with during 1996.

In March 1997, in satisfaction of certain amendments to the line, the
Company issued the line's bank group warrants to purchase an aggregate of
500,000 shares of the Company's common stock at an exercise price equal to
$10.32, the common stock's fair market value on the date of issuance. The
warrants are freely transferable and can be exercised at any time within the
five years of the issue date (see Note 8 of Notes to Consolidated Financial
Statements).

During September 1997, borrowings under the line of credit were fully repaid
from a combination of proceeds from the Series A Preferred Stock and the
Public Convertible Subordinated Note offerings. The weighted average interest
rate on outstanding borrowings during 1997 and 1996 were 10.38% and 7.78%,
respectively. Outstanding letters of credit issued against the line of credit
were $.5 million and $1.2 million as of October 31, 1997 and October 31, 1996,
respectively.

Senior Notes Payable

Prior to their retirement in September 1997, the Company had Senior Notes
payable consisting of $4 million senior notes and $22 million senior notes
originally due September 15, 1997 and September 15, 1998, respectively, with
original interest rates of 6.23% and 6.69%, respectively.

The notes contained covenants including minimum net worth, fixed charge
coverage and leverage ratios which, during 1996, the Company was unable to
maintain compliance with and technical defaults occurred. As a result, the
Senior Noteholders were issued warrants to purchase 275,000 shares of the
Company's common stock under the same terms as the warrants issued to the
banks as described in the line of credit note (see Note 8 of Notes to
Consolidated Financial Statements).

In September 1997, the Senior Notes payable were fully repaid from a
combination of proceeds from the Series A Preferred Stock and the Public
Convertible Subordinated Note offerings.

Note Payable and Other Obligations

At October 31, 1997, notes payable and other obligations consist of
commitments made in connection with investments and acquisitions which are due
in 1998.

Capital Lease Obligations

Capital lease obligations represent the present value of future payments
under leases for transportation and data processing equipment. The recorded
cost of these assets aggregated $6.5 million and $5.6 million at October 31,
1997 and 1996, respectively; accumulated amortization thereon aggregated $4.0
million and $3.4 million, respectively. Amortization of assets under capital
leases is included in depreciation and amortization expense.

F-14
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following is a schedule of future minimum lease payments under capital
lease obligations, together with the present value of minimum lease payments
at October 31, 1997:

<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31, (IN MILLIONS) AMOUNT
------------------------------------- ------
<S> <C>
1998............................................................... $2.3
1999............................................................... 1.1
2000............................................................... 0.5
----
Total minimum lease payments....................................... 3.9
Less--Amount representing interest................................. 0.5
----
Present value of minimum lease payments............................ 3.4
Less--Current maturities........................................... 1.7
----
$1.7
====
</TABLE>

Interest expense which is included in the Company's Consolidated Statements
of Operations in non-operating income (expense), net was $9.3 million, $4.7
million, and $2.2 million during 1997, 1996, and 1995, respectively.

NOTE 6--INCOME TAXES:

Deferred income taxes arise from temporary differences between the income
tax basis of assets and liabilities and their reported amounts in the
consolidated financial statements.

Pretax income (loss) from continuing operations was taxed in the following
jurisdictions:

<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
--------------------
1997 1996 1995
----- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Domestic............................................. $ 4.0 $(57.6) $31.4
Foreign.............................................. (2.4) 6.2 9.5
----- ------ -----
$ 1.6 $(51.4) $40.9
===== ====== =====
</TABLE>

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
-------------------
1997 1996 1995
---- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Current:
Federal............................................ $1.6 $ (8.3) $ 8.9
State.............................................. -- (2.8) 0.7
Foreign............................................ 2.1 5.3 7.2
---- ------ -----
3.7 (5.8) 16.8
---- ------ -----
Deferred:
Federal............................................ (2.9) (11.5) (2.8)
State.............................................. (0.2) (0.8) (0.1)
Foreign............................................ -- (0.5) 0.3
---- ------ -----
(3.1) (12.8) (2.6)
---- ------ -----
$0.6 $(18.6) $14.2
==== ====== =====
</TABLE>

F-15
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to taxes incurred on foreign operations, the Company is subject
to and includes foreign taxes on net remittances from foreign Affiliates as a
component in its provision for foreign income taxes. No domestic provision has
been recorded for unremitted earnings of foreign subsidiaries as it is
anticipated that any U.S. income taxes on distributions of earnings not
permanently reinvested will be offset by foreign tax credits.

A reconciliation of taxes based on the federal statutory rate and the
Company's actual provision is as follows:

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------
1997 1996 1995
------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Income tax at the federal statutory rate...... $ 0.5 $ (18.0) $ 14.3
State income taxes, net of federal benefit.... 0.2 (1.3) 0.6
Foreign operating losses...................... 2.9 (0.3) 0.6
Research and development tax credit........... (1.0) (1.2) (1.3)
Meals and entertainment....................... 0.7 1.1 0.4
Other, net.................................... (2.7) 1.1 (0.4)
------- -------- -------
$ 0.6 $ (18.6) $ 14.2
======= ======== =======
</TABLE>

The net deferred tax balance is comprised of (asset) liability:

<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
--------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Revenue (net of commissions) recognized for tax purposes
in advance of financial reporting...................... $ (6.9) $ (3.3)
Capitalization of software costs for financial reporting
purposes............................................... 33.7 24.7
Provision for doubtful accounts......................... (4.6) (5.0)
Rent expense for financial reporting purposes........... (1.1) (1.4)
Expense recognized for financial reporting purposes in
advance of tax......................................... (4.7) (3.0)
Deferred gain........................................... (1.6) (1.6)
Domestic credit carryforwards........................... (1.4) (1.4)
Foreign carryforwards................................... (8.1) (3.6)
Foreign tax credit carryforwards........................ (11.0) (11.0)
Research and development credit carryforwards........... (3.6) (2.6)
Domestic net operating loss carryforwards............... (15.0) (11.7)
Valuation allowance..................................... 13.1 8.3
Other, net.............................................. (3.2) 0.3
------ ------
$(14.4) $(11.3)
====== ======
</TABLE>

At October 31, 1997, the Company has approximately $25.0 million of foreign
net operating loss carryforwards, $40.0 million of domestic net operating loss
carryforwards, and $11.0 million of tax credit carryforwards and $5.0 million
of domestic tax credit carryforwards. At October 31, 1997 and October 31, 1996,
the Company recorded valuation allowances related to those items of $13.1 and
$8.3 million, respectively. The Company recognizes certain deferred tax assets
based upon Management's assessment that these assets will "more likely than
not" be recognized in the future in accordance with SFAS 109, "Accounting for
Income Taxes". This assessment is based primarily on estimates of future
operating results.

Of the $25.0 million of foreign net operating loss carryforwards, $12.7
million expire in varying amounts through the fiscal year ending October 31,
2004 and $12.3 million may be carried forward indefinitely. Of the

F-16
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$40.0 million of domestic net operating loss carryforwards, $31.0 million
expire on October 31, 2011, and $9.0 million expire on October 31, 2012. The
$11.0 million of the foreign tax credit carryforwards expire in varying amounts
through the fiscal year ending on October 31, 2001. Of the $5.0 million of
domestic tax credit carryforwards, $1.4 million expire in varying amounts
through the fiscal year ending on October 31, 2002, and $3.6 million expire in
varying amounts through the fiscal year ending on October 31, 2012.

During 1997, 1996, and 1995 certain employees disposed of shares acquired
through the exercise of stock options that allowed the Company to record
additional compensation expense for tax purposes measured as the difference
between the fair value of the stock and the option price at the date of
exercise. The aggregate tax benefit to the Company of $0.5 million, $1.2
million, and $2.8 million, respectively, has been credited to capital in excess
of par value.

NOTE 7--REDEEMABLE SERIES A PREFERRED STOCK

On August 29, 1997, the Company issued 10,000 shares of Series A Preferred
Stock and 600,000 common stock purchase warrants to a private investor for
$10.0 million. The shares of Series A Preferred Stock have an initial
liquidation preference of $1,000 per share, increasing to $3,500 per share on
or after the earliest of (i) August 22, 2003, (ii) a change in control and
(iii) certain bankruptcy events (such event, a "Trigger Event") (such
liquidation preference as from time to time in effect, the "Liquidation
Price"). The Series A Preferred Stock accrue dividends, payable quarterly in
arrears, at an annual rate of 12% of the Liquidation Price per share, which
increases to 14% of the Liquidation Price per share upon a Trigger Event. The
dividend rate will increase by 4% per annum upon the occurrence and during the
continuance of any payment default or certain other material defaults as
described in the purchase agreement.

The Redeemable Series A Preferred Stock has a beneficial conversion feature
because the fair market value of the Company's stock was in excess of its per
share conversion price at the date of issuance. The value of the beneficial
conversion feature of $2.2 million was recorded as an increase to capital in
excess of par value and a decrease to retained earnings (preferred dividend).

Each share of Series A Preferred Stock is convertible at the holder's option
at any time into 80.4 shares of Common Stock (subject to proportional and
broad-based weighted average anti-dilution).

The Series A Preferred Stock may be redeemed at the option of the holders
thereof at any time (i) on or after August 31, 2003 or (ii) following the
occurrence and continuance of a Redemption Event (as defined below) at a
redemption price equal to the greater of $1,000 per share, plus accrued and
unpaid dividends, or the amount that such holder would have received had such
holder converted the Series A Preferred Stock into Common Stock immediately
prior to the liquidation of the Company. The Series A Preferred Stock may be
redeemed by the Company at any time after the occurrence of a Trigger Event at
a redemption price equal to $3,500 per share, plus accrued and unpaid
dividends.

Upon the occurrence of certain events, including, payment defaults, covenant
defaults in the purchase agreement, cross defaults to acceleration of other
material indebtedness, bankruptcy and a change in control (each, a "Redemption
Event"), the holders of the Series A Preferred Stock may require the Company to
redeem their shares of Series A Preferred Stock at a redemption price equal to
the greater of $1,000 per share, plus accrued and unpaid dividends or the
amount that such holder would have received had such holder converted the
Series A Preferred Stock into Common Stock immediately prior to the liquidation
of the Company.

For so long as at least 2,500 shares of Series A Preferred Stock are
outstanding, the Company must comply with various covenants, including, without
limitation, maintenance of fixed charge coverage ratios on a rolling four-
quarter basis and total debt to capital, and restrictions on mergers,
consolidations, sales of assets, liens, payment of dividends and other
distributions to, and redemptions of, other classes of equity and limitations
on the issuance of additional debt (other than the Public Convertible
Subordinated Notes, up to $40.0 million in additional senior indebtedness and
certain other exceptions). The Series A Preferred Stock cannot be transferred
by the private investor until September 1, 1998.

F-17
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8--COMMON STOCK PURCHASE WARRANTS:

On March 4, 1997, the Company issued 775,000 shares of common stock purchase
warrants ("Warrants") as part of amendments to the Company's Line of Credit
and Senior Notes payable agreements. The Warrants are initially exercisable at
$10.32 per share and may be exercised for five years from the date of
issuance. The fair value of the warrants of $0.9 million was recorded as an
increase to capital in excess of par value and other current assets and is
being amortized over the term of the amendments.

On August 29, 1997, the Company issued 600,000 shares of common stock
purchase warrants (the "Private Warrants") to a private investor in connection
with the Company's issuance of Redeemable Series A Preferred Stock. Each
holder of a Private Warrant is entitled to purchase shares of Common Stock at
an exercise price equal to $15.125 per share, the fair market value at the
date of issuance of the warrants. The Private Warrants are exercisable at any
time until August 22, 2007, but the Private Warrants and the Common Stock
issuable upon the exercise thereof cannot be transferred until September 1,
1998. Following such anniversary, the Private Warrants and underlying Common
Stock are immediately transferable. The fair value of the warrants of $0.8
million was recorded as an increase to capital in excess of par value and a
decrease to Redeemable Series A Preferred Stock which is being accreted as
preferred dividends over six years beginning the date of issuance.

In consideration of certain financial advisory services performed during
1997, the Company agreed to sell to a financial advisor for a nominal amount
warrants to purchase from the Company up to 664,452 shares of Common Stock
(the "Financial Advisor Warrants"). The Financial Advisor Warrants are
initially exercisable at $18.06 per share and may be exercised for a period of
five years commencing on the first anniversary of the issuance of such
warrants. The fair value of the warrants of $0.9 million was recorded as an
increase to capital in excess of par value and a decrease to the Public
Convertible Subordinated Notes which is being accreted as interest expense
over five years beginning the date of issuance.

NOTE 9--STOCK OPTIONS:

The Company has certain stock option plans and a long-term incentive plan
under which options to purchase shares of the Company's common stock, stock
appreciation rights, restricted stock, and cash awards may be granted to key
employees and non-employees of the Company and its Affiliates. In April 1997,
shareholders approved an amendment to the long-term incentive plan, increasing
the aggregate number of common shares to be available for grant to 4,500,000,
from a previous aggregate of 1,800,000, provided the aggregate number of
common shares which may be granted in an one calendar year, to any one key
employee, shall not exceed 200,000 shares. The stock option and long-term
incentive plans provide that an aggregate of 9,056,250 common shares be
available for grant, subject to adjustments for stock splits, stock dividends,
mergers, or other changes in capitalization. Options become exercisable in
varying periods (typically 5 years) and are priced by the Board of Directors,
but may not be less than 50% of the fair market value of the shares at the
date of grant. All options granted during 1997, 1996, and 1995 were granted at
fair market value.

The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had compensation cost for the
Company's stock option plans been determined consistent with FASB Statement of
Financial Accounting Standards No. 123 ("FAS 123"), the Company's net income
(loss) available to common stockholders and earnings (loss) per share of
common stock would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1997 1996
------ ------
(IN MILLIONS,
EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income (loss) available for common
stockholders............................... As Reported $ (1.4) $(32.8)
Pro Forma $ (4.0) $(33.7)
Earnings (loss) per share of common stock... As Reported $(0.03) $(0.76)
Pro Forma $(0.09) $(0.78)
</TABLE>

F-18
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the stock option plans, the exercise price of each option equals the
market price of the Company's common stock on the date of grant. For purposes
of calculating the compensation cost consistent with FAS 123, the fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in fiscal 1997 and 1996: risk free interest rate of 6.3%; expected life
of 5.5 years; expected volatility of 53%; and no dividends are expected to be
paid.

The following is a summary of 1997, 1996, and 1995 stock option activity:

<TABLE>
<CAPTION>
AVAILABLE WEIGHTED AVERAGE
FOR GRANT UNEXERCISED EXERCISABLE EXERCISE PRICE
---------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance, October 31, 1994. 682,762 1,677,460 611,081 $ 7.08
---------- ---------- -------- ------
Granted................... (498,000) 498,000 9.23
Becoming exercisable...... 338,367 6.68
Cancelled................. 154,467 (154,467) 7.62
Exercised................. (497,946) (497,946) 5.93
Reflect three-for-two
stock split.............. 169,615 761,524 225,751
---------- ---------- -------- ------
Balance, October 31, 1995. 508,844 2,284,571 677,253 8.19
---------- ---------- -------- ------
Granted................... (1,468,001) 1,468,001 14.22
Becoming exercisable...... 393,822 7.52
Cancelled................. 1,384,237 (1,384,237) (191,211) 17.71
Exercised................. (275,906) (275,906) 7.64
---------- ---------- -------- ------
Balance, October 31, 1996. 425,080 2,092,429 603,958 8.04
---------- ---------- -------- ------
Authorized................ 2,700,000
Granted................... (3,105,569) 3,105,569 6.36
Becoming exercisable...... 403,679 4.27
Cancelled................. 1,995,296 (1,995,296) (106,289) 9.67
Exercised................. (290,698) (290,698) 5.77
---------- ---------- -------- ------
Balance, October 31, 1997. 2,014,807 2,912,004 610,650 $ 5.50
========== ========== ======== ======
</TABLE>

The weighted-average fair values of options granted during 1997 and 1996 are
$3.46 and $7.85, respectively.

The following table summarizes information about the stock options
outstanding as of October 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
------------------------------ ---------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER OF LIFE EXERCISE NUMBER EXERCISE
PRICES SHARES (YEARS) PRICE EXERCISEABLE PRICE
-------- --------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$1 to 5 2,321,004 8.4 $ 5 610,450 $ 4
$6 to 10 552,000 9.5 8 200 10
$11 to 15 39,000 9.9 14 -- 14
--------- --- --- ------- ---
$1 to 15 2,912,004 8.6 $ 6 610,650 $ 4
========= === === ======= ===
</TABLE>

During 1988, the Board of Directors approved a stockholder rights plan
designed to deter coercive takeover tactics and to prevent an acquirer from
gaining control of the Company without offering a fair price to all of the
Company's stockholders. At that time, the Company declared a distribution of
one right for each share of

F-19
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock outstanding (effected as a stock dividend) to stockholders of
record as of May 5, 1988, and generally to shares issuable under the Company's
stock option plans. Each right entitles the registered holder to purchase from
the Company one share of common stock at a purchase price of $47. Each right
is exercisable ten days after the acquisition of 20% or more of the Company's
voting stock, or the commencement of a tender or exchange offer under which
the offered would own 30% or more of the Company's stock.

In the event of a proposed takeover satisfying certain additional
conditions, the rights could be exercised by all holders other than the
takeover bidder at an exercise price of half of the current market price of
the Company's common stock. This would have the effect of significantly
diluting the holdings of the takeover bidder. These rights expire on May 3,
1998.

NOTE 10--EMPLOYEE STOCK PURCHASE PLANS:

On October 1, 1997 the Company established Qualified and Non-Qualified
Employee Stock Purchase Plans ("Stock Purchase Plans") for all eligible U.S.
employees. An aggregate of 2.0 million shares of the Company's common stock
(subject to adjustments for stock splits, dividends or other relevant changes
in the Company's capitalization) may be sold pursuant to the Stock Purchase
Plans. The Stock Purchase Plans enable employees to purchase, through payroll
deductions, the Company's common stock at the lesser of 90% (subject to
adjustment, but not less than 85%) of the market value on the first day of
each month or the market value on the purchase date.

NOTE 11--FOREIGN INFORMATION:

Information regarding geographic areas for the years ended October 31, 1997,
1996, and 1995 is as follows:

<TABLE>
<CAPTION>
UNITED EUROPE
STATES MIDDLE EAST OTHER ELIMINATIONS TOTAL
------ ----------- ------ ------------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Year Ended October 31, 1997
Sales to unaffiliated
customers.................. $208.8 $160.3 $122.3 $(60.9) $430.5
Operating income............ $ 30.0 $(16.9) $ 9.8 $ 22.9
Identifiable assets......... $304.6 $118.5 $117.3 $(65.0) $475.4
====== ====== ====== ====== ======
Year Ended October 31, 1996
Sales to unaffiliated
customers.................. $164.9 $113.8 $ 95.0 $(32.9) $340.8
Operating income............ $(17.4) $(26.6) $(14.8) $(58.8)
Identifiable assets......... $234.9 $ 98.6 $107.2 $(56.3) $384.4
====== ====== ====== ====== ======
Year Ended October 31, 1995,
Sales to unaffiliated
customers.................. $173.7 $148.1 $ 92.0 $(39.7) $374.1
Operating income............ $ 28.5 $ 9.3 $ 3.3 $ 41.1
Identifiable assets......... $225.2 $130.2 $ 87.3 $(49.5) $393.2
====== ====== ====== ====== ======
</TABLE>

The sales and operating income (loss) amounts reflected above include
intercompany royalties, which are eliminated.

F-20
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
United States sales by geographical areas during the years ended October 31,
1997, 1996, and 1995 are as follows:

<TABLE>
<CAPTION>
FOREIGN
---------------------------------
EUROPE ASIA CANADA
UNITED STATES MIDDLE EAST PACIFIC LATIN AMERICA TOTAL
------------- ----------- ------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Year Ended October 31,
1997................... $151.6 $37.9 $14.7 $4.6 $208.8
Year Ended October 31,
1996................... $143.1 $13.0 $ 4.3 $4.5 $164.9
Year Ended October 31,
1995................... $147.3 $14.3 $ 5.4 $6.7 $173.7
</TABLE>

NOTE 12--COMMITMENTS AND CONTINGENCIES:

The Company leases its office space and certain equipment under
noncancelable operating leases that expire at various dates through 2015. Rent
expense under such leases aggregated approximately $25.4 million, $24.1
million, and $15.7 million during 1997, 1996, and 1995, respectively. Minimum
annual rental commitments under noncancelable operating leases for periods
subsequent to October 31, 1997 are as follows: $21.6 million in 1998, $15.1
million in 1999, $11.9 million in 2000, $9.8 million in 2001, and $9.7 million
in 2002 and $43.8 million in 2003 and thereafter.

On August 20, 1997, the Company terminated its engagement of the managing
underwriter of its then-pending public offering of convertible notes and
concurrently elected not to proceed with its private offering of securities to
a group of private investors led by Bain Capital, Inc. (the "Bain Investors").
On August 27, 1997 in the Superior Court of Massachusetts, certain of the Bain
Investors filed a complaint against the Company, Roger E. Covey, the Company's
Chief Executive Officer, and Hambrecht & Quist LLC, one of the successor
representatives of the underwriters in the public offering. For the year ended
October 31, 1997, $3.2 million was recorded as a special charge in the
Company's Consolidated Statement of Operations related to this lawsuit. In
January 1998, the Company settled the Bain Investors' lawsuit (see Note 13
below).

In January 1997, class action lawsuits against the Company and certain of
its officers were filed in state court in Illinois and in the federal court in
Chicago, Illinois. The state court action alleges damages to persons who
purchased the Company's Common Stock during the period from November 21, 1994
through January 7, 1997 arising from alleged violations of the Illinois
securities laws and associated statutory and common law. The federal actions
allege damages to persons who purchased the Company's Common Stock during the
period from August 22, 1994 through January 7, 1997 arising from alleged
violations of the federal securities laws and associated common laws. The
lawsuits name the Company and several of its officers and directors as
defendants, and allege violations of securities laws, fraud and negligence,
stemming from circumstances which resulted in the restatement of the Company's
financial statements for 1994 and 1995. The complaints do not specify the
amounts of damages sought.

The Company has executed a settlement agreement with the class plaintiffs in
the Illinois state court action titled Steinberg v. SSA, 97 CH 287 (the
"Settlement"). The presiding judge in the Illinois case approved the
Settlement on September 30, 1997. Pursuant to the settlement, the Company paid
$1.7 million in cash and a director and officer defendant contributed 100,000
shares of Common Stock. The $1.7 million is recorded in the Company's
Consolidated Statement of Operations for the year ended October 31, 1997 as a
special charge. Certain individual objectors to the Settlement filed a Notice
of Appeal on October 17, 1997. There can be no assurance that the Settlement
will not be overturned or that it will legally bar the federal claims
described above. In addition, even if the Settlement bars the federal claims
as described above, because the class period of the federal claims is slightly
larger than the class period of the state claim and one defendant was named in
the federal action that was not a defendant in the State action, the
Settlement may not result in the dismissal of the entire federal action. The
failure to achieve a dismissal of either of these actions or the failure to
settle them on sufficiently advantageous terms could have a material adverse
effect on the business, operating results and financial condition of the
Company.

F-21
<PAGE>

SYSTEM SOFTWARE ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 13--SUBSEQUENT EVENTS (UNAUDITED):

During January 1998 the $12.0 million convertible subordinated note was
converted into 3.6 million shares of common stock.

In January 1998, the Company settled the Bain Investors' lawsuit as
described in Note 12. Pursuant to the settlement, the Company paid the Bain
Investors approximately $3.65 million and issued to certain of the Bain
Investors warrants to purchase an aggregate of 300,000 shares of the Company's
Common Stock, which warrants are exerciseable at $9.6875 per share, the fair
market value as of the date of settlement.

F-22
<PAGE>

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED DEDUCTIONS--
BEGINNING OF TO COSTS AND WRITE-OFFS AND BALANCE AT END
PERIOD EXPENSES OTHER ADJUSTMENTS OF PERIOD
------------ ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts
Year-ended October 31,
1997................. $16.5 $ 3.3 $(3.3) $16.5
Year-ended October 31,
1996................. $12.5 $ 9.3 $(5.3) $16.5
Year-ended October 31,
1995................. $10.2 $ 3.3 $(1.0) $12.5
<CAPTION>
BALANCE AT ADDITIONS CHARGED DEDUCTIONS--
BEGINNING OF TO COSTS AND WRITE-OFFS AND BALANCE AT END
PERIOD EXPENSES OTHER ADJUSTMENTS OF PERIOD
------------ ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Accumulated amortization
of software costs
Year-ended October 31,
1997................. $61.1 $28.2 -- $89.3
Year-ended October 31,
1996................. $41.1 $20.0 -- $61.1
Year-ended October 31,
1995................. $26.2 $14.9 -- $41.1
<CAPTION>
BALANCE AT ADDITIONS CHARGED DEDUCTIONS--
BEGINNING OF TO COSTS AND WRITE-OFFS AND BALANCE AT END
PERIOD EXPENSES OTHER ADJUSTMENTS OF PERIOD
------------ ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Accumulated amortization
of intangibles
Year-ended October 31,
1997................. $ 0.9 $ 0.2 -- $ 1.1
Year-ended October 31,
1996................. $ 0.5 $ 0.4 -- $ 0.9
Year-ended October 31,
1995................. $ 0.3 $ 0.2 -- $ 0.5
<CAPTION>
BALANCE AT ADDITIONS CHARGED DEDUCTIONS--
BEGINNING OF TO COSTS AND WRITE-OFFS AND BALANCE AT END
PERIOD EXPENSES OTHER ADJUSTMENTS OF PERIOD
------------ ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Accumulated amortization
of cost in
excess of net assets of
acquired businesses
Year-ended October 31,
1997................. $ 8.7 $ 3.1 -- $11.8
Year-ended October 31,
1996................. $ 6.0 $ 2.7 -- $ 8.7
Year-ended October 31,
1995................. $ 4.3 $ 2.2 $(0.5) $ 6.0
</TABLE>

F-23
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
3.1 Certificate of Incorporation, as amended to date............... (1)
3.2 Amendment to Certificate of Incorporation filed June 6, 1997... (12)
3.3 By-Laws, as amended to date.................................... (2)
3.4 Certificate of Designations for Series A Preferred Stock....... (12)
4.1 Form of Indenture between the Company and Harris Trust and
Savings Bank, as Trustee (12)
4.2 Form of Note (included in Exhibit 4.1)
10.8 Incentive Stock Option Plan.................................... (3)
10.12 Office Lease Northwestern Atrium Center, Chicago, Illinois,
dated July 1, 1987 (the "Chicago Lease")....................... (1)
10.15 Non-Qualified Stock Option Plan................................ (4)
10.16 SSA Incentive Savings Plan effective May 1, 1986 as amended and
restated November 1, 1988...................................... (5)
10.24 Agreement dated August 27, 1990 between the Registrant and
Ameritech Information Systems, Inc. ("Ameritech").............. (6)
10.25 Letter Agreement dated August 27, 1990 among the Registrant,
Ameritech and Northwestern Atrium Center Associates L.P........ (6)
10.31 Long-Term Incentive Plan....................................... (7)
10.38 Letter Agreement dated August 12, 1994 between the Registrant
and Joseph J. Skadra........................................... (9)
10.43 Promissory note dated January 20, 1997, from Joseph J. Skadra
to the Company................................................. (9)
10.44 Agreement dated January 6, 1998 between the Registrant and
William M. Stuek...............................................
21.1 Subsidiaries of the Registrant.................................
23.1 Consent of Price Waterhouse LLP, the Registrant's Previous
Independent Accountants........................................
23.2 Consent of KPMG Peat Marwick LLP, the Registrant's Independent
Auditors.......................................................
27 Financial Data Schedule........................................
</TABLE>
- - --------
(1) Incorporated by reference from the Registrant's Form 10-K Annual Report
for the fiscal year ended October 31, 1987 (File No. 0-1~322).
(2) Incorporated by reference from the Registrant's Form 10-K Annual Report
for the fiscal year ended October 31, 1989.
(3) Incorporated by reference from the Registrant's Form S-l Registration
Statement effective February 12, 1987.
(4) Incorporated by reference from the Registrant's Form S-8 Registration
Statement filed on October 4, 1988 (File No. 33-24516).
(5) Incorporated by reference from the Registrant's Form 10-K Annual Report
for the fiscal year ended October 31, 1988.
(6) Incorporated by reference from the Registrant's Form 10-K Annual Report
for the fiscal year ended October 31, 1990.
(7) Incorporated by reference from the Registrant's Form 10-K Annual Report
for the fiscal year ended October 31, 1991.
(9) Incorporated by reference from the Registrant's Form 10-K Annual Report
for the fiscal year ended October 31, 1994.
(12) Incorporated by reference from the Registrant's Form S-3 Registration
Statement effective September 8, 1997.

<PAGE>

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
the 5th day of January, 1998, by and between System Software Associates, Inc., a
Delaware corporation (the "Employer"), and William Stuek (the "Executive"),
effective upon the joint execution by the Employer and the Executive.

RECITALS
--------

A. The Employer desires that the Executive provide services for the
benefit of the Employer and its affiliates and the Executive desires to accept
such employment with the Employer.

B. The Employer and the Executive acknowledge that the Executive will be a
member of the senior management team of the Employer and, as such, will
participate in creating and implementing the Employer's business plan.

C. In the course of employment with the Employer, the Executive will have
access to certain confidential information that relates to or will relate to the
business of the Employer and its affiliates.

D. The Employer desires that any such information not be disclosed to
other parties or otherwise used for unauthorized purposes.

NOW, THEREFORE, in consideration of the above premises and the following
mutual covenants and conditions, the parties agree as follows:

1. Employment. The Employer shall employ the Executive as its Chief
Operating Officer through October 31, 1998. Effective November 1, 1998, subject
to approval by the Board of Directors of the Employer (the "Board"), the
Executive shall become Chief Executive Officer of the Employer. In addition to
the foregoing, the Employer covenants and agrees that, as soon as reasonably
practicable after January 5, 1998, but in no event later than thirty (30)
calendar days thereafter, the Executive will be elected as a Director of the
Employer. The Executive hereby accepts such employment and positions on the
following terms and conditions.

2. Duties. The Executive shall work for the Employer in a full-time
capacity. The Executive shall, prior to November 1, 1998, have the duties,
responsibilities, powers, and authority customarily associated with the position
of Chief Operating Officer, which duties shall include, but not be limited to,
responsibility for all field-related activities on a worldwide basis, including
all sales, marketing, services and other relationships. Effective November 1,
1998, and during the remaining term of this Agreement, the Executive shall, upon
approval by the Board, have the duties, responsibilities, powers and authority
customarily associated with the position of Chief Executive Officer, which
duties shall include those associated with the position of Chief Operating
Officer and, in addition thereto, responsibility for the overall financial
operations and
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selected research and development activities of the Employer. Prior to November
1, 1998, the Executive shall report to, and follow the direction of, the Chief
Executive Officer of the Employer. In addition to, or in lieu of, the
foregoing, the Executive also shall perform such other and unrelated services
and duties as may be assigned to him from time to time by the Chief Executive
Officer or, after October 31, 1998, by the Board. The Executive shall
diligently, competently, and faithfully perform all duties, and shall devote his
entire business time, energy, attention, and skill to the performance of duties
for the Employer or its affiliates and will use his best efforts to promote the
interests of the Employer. It shall not be considered a violation of the
foregoing for the Executive to serve on corporate, industry, civic, religious,
or charitable boards or committees, so long as such activities do not
significantly interfere with the performance of the Executive's responsibilities
as an employee of the Employer in accordance with this Agreement.

3. Executive Loyalty. The Executive shall devote all of his time,
attention, knowledge, and skill solely and exclusively to the business and
interests of the Employer, and the Employer shall be entitled to all benefits
and profits arising from or incident to any and all work, services, and advice
of the Executive. The Executive expressly agrees that during the term of this
Agreement, he shall not engage, directly or indirectly, as a partner, officer,
director, stockholder, advisor, agent, employee, or in any other form or
capacity, in any other business similar to that of the Employer. The foregoing
notwithstanding, nothing herein contained shall be deemed to prevent the
Executive from investing his money in the capital stock or other securities of
any corporation whose stock or securities are publicly-owned or are regularly
traded on any public exchange, nor shall anything herein contained be deemed to
prevent the Executive from investing his money in real estate.

4. Term of Employment. Unless sooner terminated as hereinafter provided,
this Agreement shall be entered into for a period of five (5) years, commencing
on January 5, 1998 and ending on January 4, 2003.

5. Compensation.

A. Salary. The Employer shall pay the Executive an annual salary of
$500,000, payable in substantially equal installments in accordance with the
Employer's payroll policy from time to time in effect. The Executive's salary
shall be subject to any payroll or other deductions as may be required to be
made pursuant to law, government order, or by agreement with, or consent of, the
Executive.

B. Incentive Bonus. The Executive shall participate in an annual
bonus program which program shall provide the Executive with an opportunity to
achieve a targeted annual bonus of up to $300,000. The actual terms and
conditions of the annual bonus program shall be established by the Employer,
shall be memorialized in a written document to be prepared by the Employer and
which will be incorporated herein by reference, and will provide for the payment
of an annual bonus hereunder if the Employer achieves specified quarterly and
annual earnings targets and if the Executive achieves specified personal
management objectives agreed upon by the Executive and the Board prior to the
beginning of each fiscal year of the Employer.

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For the Employer's fiscal year ending October 31, 1998, the bonus criteria shall
be established on or before April 1, 1998. Any bonus earned hereunder shall be
payable no later than sixty (60) days following the end of the Employer's fiscal
year in which the bonus is earned.

C. Stock Options. Effective on the date hereof, the Employer shall
grant the Executive stock options to purchase three hundred thousand (300,000)
shares of the common stock of the Employer in accordance with and pursuant to
the terms of the Employer's Long-Term Incentive Plan. The grant of such stock
options has been memorialized in the Option Agreement attached hereto as Exhibit
A. Effective upon the Executive's appointment as Chief Executive Officer of the
Employer, the Employer shall grant the Executive stock options to purchase an
additional three hundred thousand (300,000) shares of the common stock of the
Employer in accordance with and pursuant to the terms of the Employer's Long-
Term Incentive Plan. The grant of such stock options will be memorialized in an
option agreement in substantially the form set forth in Exhibit B hereof.

D. Stock Level Bonus. Provided the closing sale price of the
Employer's common stock as reported on the Nasdaq National Market System shall
be equal to or in excess of an average of $50.00 per share, as adjusted for
stock splits, for any one hundred eighty (180) consecutive calendar days during
the period of the Executive's employment (the "Bonus Measurement Period"), the
Executive shall be entitled to a one-time bonus of $5,000,000, such bonus to be
earned only upon the initial attainment of such average during any one hundred
eighty (180) consecutive calendar day period. In addition, the Executive shall
be entitled to such bonus, if it was not otherwise earned, upon a business
combination by the Employer during the period of the Executive's employment with
any corporation or other entity through the adoption of a plan of merger or
consolidation or a sale exchange or through the sale of all or substantially all
of the capital stock or assets of the Employer, if the Board determines that
such business combination results in a value to the Employer that equals or
exceeds $50.00 per share, as adjusted for stock splits. The bonus, if earned,
shall be payable in five (5) equal annual installments of $1,000,000 each, with
the first installment to be paid within thirty (30) days of the expiration of
the Bonus Measurement Period (or the business combination, if applicable) and
the remaining four (4) installments to be paid on the first through fourth
anniversaries of the first payment hereunder. Any installment remaining due
hereunder shall be payable to the Executive regardless of whether the Executive
is employed by the Employer at the time such installment is due and payable.

E. Engagement Bonus. The Executive shall be entitled to receive a
one-time engagement bonus in recognition of his execution of this Agreement and
his resignation from IBM prior to March 31, 1998. The engagement bonus shall be
payable, at the election of the Executive, between January 5, 1998 and April 5,
1998, and shall be equal to the sum of (i) $1,050,000, plus (ii) the
appreciation in the value of the Executive's IBM options (the "IBM Option
Appreciation"). The IBM Option Appreciation shall be equal to twelve thousand
(12,000) multiplied by the excess of the fair market value of a share of IBM
stock at the close of business on January 5, 1998 over $62. The engagement bonus
shall be payable through the issuance of up to one hundred thousand (100,000)
shares of restricted Employer common stock, with the restrictions lapsing in
five (5) equal annual installments of up to 20,000 shares each on

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January 5, 1998 and the following four annual anniversaries thereof or, if
earlier, upon the Executive's termination of employment under Paragraphs 7A, 7C
or 7E. Any amount owed hereunder which exceeds the value of such shares of
Employer common stock (as determined on the date of payment) shall be payable in
a single cash payment on or before April 5, 1998.

F. Other Benefits. During the term of this Agreement, the Employer
shall:

(1) include the Executive in any life insurance, disability
insurance, medical, dental or health insurance, vacation, savings,
pension and retirement plans and other benefit plans or programs
(including, if applicable, any excess benefit or supplemental
executive retirement plans) maintained by the Employer for the benefit
of its executives; and

(2) include the Executive in such perquisites as the Employer
may establish from time to time that are commensurate with his
position and at least comparable to those received by other executives
of the Employer.

6. Expenses. The Employer shall reimburse the Executive for all
reasonable and approved business expenses, provided the Executive submits paid
receipts or other documentation acceptable to the Employer and as required by
the Internal Revenue Service to qualify as ordinary and necessary business
expenses under the Internal Revenue Code of 1986, as amended (the "Code").

7. Termination. Notwithstanding anything in Paragraph 4 of this Agreement
to the contrary, the Executive's services shall terminate upon the first to
occur of the following events:

A. Upon the Executive's date of death or the date the Executive is
given written notice that he has been determined to be disabled by the Employer.
For purposes of this Agreement, the Executive shall be deemed to be disabled if
the Executive, as a result of illness or incapacity, shall be determined to be
disabled in accordance with the terms of the Employer's Long-Term Disability
Plan, as in effect from time to time. A termination of the Executive's
employment by the Employer for disability shall be communicated to the Executive
by written notice and shall be effective on the tenth (10th) calendar day after
receipt of such notice by the Executive, unless the Executive returns to full-
time performance of his duties before such tenth (10th) calendar day.

B. On the date the Employer provides the Executive with written
notice that he is being terminated for "cause." For purposes of this Agreement,
the Executive shall be deemed terminated for cause if the Employer terminates
the Executive after the Executive:

(1) shall have been indicted (or the equivalent thereof) for any
felony including, but not limited to, a felony involving fraud, theft,
misappropriation, dishonesty, or embezzlement;

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(2) shall have committed intentional acts of gross misconduct
that materially impair the goodwill or business of the Employer or
cause material damage to its property, goodwill, or business; or

(3) shall have refused to, or willfully failed to, perform his
material duties hereunder, provided, however, that no termination
under this subparagraph (3) shall be effective unless the Executive
does not cure such refusal or failure to the Employer's satisfaction
as soon as practicable after the Employer gives the Executive written
notice identifying such refusal or failure (and, in any event, within
thirty (30) calendar days after receipt of such written notice).

No act or failure to act on the part of the Executive shall be considered
"willful" unless it is done, or omitted to be done, by the Executive in bad
faith or without reasonable belief that his action or omission was in the best
interests of the Employer. A termination of the Executive's employment for
Cause shall be effected in accordance with the following procedures. The
Employer shall give the Executive written notice ("Notice of Termination for
Cause") of its intention to terminate the Executive's employment for Cause,
setting forth in reasonable detail the specific conduct of the Executive that it
considers to constitute Cause and the specific provision(s) of this Agreement on
which it relies, and stating the date, time and place of the Board Meeting for
Cause. The "Board Meeting for Cause" means a meeting of the Board at which the
Executive's termination for Cause will be considered, that takes place not less
than ten (10) and not more than twenty (20) business days after the Executive
receives the Notice of Termination for Cause. The Executive shall be given an
opportunity, together with counsel, to be heard at the Board Meeting for Cause.
The Executive's termination for Cause shall be effective when and if a
resolution is duly adopted at the Board Meeting for Cause by a majority vote of
the entire membership of the Board (exclusive of the Executive, who shall recuse
himself from such a vote), stating that in the good faith opinion of the Board,
the Executive is guilty of the conduct described in the Notice of Termination
for Cause, and that such conduct constitutes Cause under this Agreement.

C. On the date the Executive terminates his employment for "Good
Reason." For purposes of this Agreement, "Good Reason" means the failure of the
Executive to be appointed Chief Executive Officer of the Employer on or about
November 1, 1998.

D. On the date the Executive terminates his employment for any
reason, other than for the reason set forth in Paragraph 7C, provided that the
Executive shall give the Employer ninety (90) days written notice prior to such
date of his intention to terminate this Agreement.

E. On the date the Employer terminates the Executive's employment for
any reason, other than a reason set forth in Paragraph 7B, provided that the
Employer shall give the Executive ninety (90) days written notice prior to such
date of its intention to terminate this Agreement.

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8. Compensation Upon Termination.

A. If the Executive's services are terminated pursuant to Paragraph
7A, 7B, or 7D, the Executive shall be entitled to his salary through his final
date of active employment, plus any accrued but unused vacation pay. The
Executive also shall be entitled to any benefits mandated under the Consolidated
Omnibus Budget Reconciliation Act of 1985 (COBRA) or required under the terms of
any death, insurance, or retirement plan, program, or agreement provided by the
Employer and to which the Executive is a party or in which the Executive is a
participant, including, but not limited to, any short-term or long-term
disability plan or program, if applicable.

B. If the Executive's services are terminated pursuant to Paragraph
7C or 7E, the Executive shall be entitled to his salary through his final date
of active employment, plus any accrued but unused vacation pay. The Executive
also shall be entitled to the continuation of his current base salary (as set
forth in Paragraph 5A) for a period of twenty-four (24) months or, if lesser,
through the end of the term of this Agreement (the "Salary Continuation
Period"), provided (a) he signs an agreement that releases the Employer from
actions, suits, claims, proceedings and demands related to the period of
employment and/or the termination of employment, and (b) the Employer shall be
permitted to offset from the severance pay hereunder any salary paid to the
Executive during the ninety (90) day written notice period, if the Executive
performs no services during such ninety (90) day written notice period. In
addition, the terms of the stock option awards, and the rights of the Executive
thereunder, shall continue to apply in the event of a termination hereunder. The
Executive also shall be entitled to any benefits mandated under the Consolidated
Omnibus Budget Reconciliation Act of 1985 (COBRA) or required under the terms of
any death, insurance, or retirement plan, program, or agreement provided by the
Employer and to which the Executive is a party or in which the Executive is a
participant.

C. This Paragraph 8 shall not supersede or invalidate any severance
benefit agreement or other benefit plans to which the Executive is a party or in
which the Executive is a participant; provided, however, if a change in control
shall occur (as defined in Section 280G(b)(2)(a)(i) of the Code), and a
determination is made by legislation, regulation, ruling directed to the
Executive or the Employer, or court decision, that the aggregate amount of any
payment made to the Executive hereunder, or pursuant to any plan, program, or
policy of the Employer in connection with, on account of, or as a result of,
such change in control constitutes "excess parachute payments" under the Code
that are subject to the excise tax provisions of Section 4999 of the Code, or
any successor sections thereof, the Executive shall be entitled to receive from
the Employer, in addition to any other amounts payable hereunder, an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed thereon) and any excise tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the excise tax imposed. All determinations required to be made under this
Paragraph 8, including whether and when a Gross-Up Payment is required and the
amount of such Gross-Up Payment and the assumptions to be utilized in arriving
at such determination, shall be made by a certified public accounting firm
designated by the Employer and reasonably acceptable to the

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Executive which is one of the four largest accounting firms in the United States
(the "Accounting Firm"), which shall provide detailed supporting calculations
both to the Employer and the Executive within fifteen (15) business days of the
receipt of notice from the Executive that there has been an excess parachute
payment, or such earlier time as is requested by the Employer. All fees and
expenses of the Accounting Firm shall be borne solely by the Employer. Any
Gross-Up Payment, as determined pursuant to this Paragraph 8 shall be paid by
the Employer to the Executive within five (5) business days of the receipt of
the Accounting Firm's determination. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Employer should have been made ("Underpayment")
consistent with the calculations required to be made hereunder. In the event
that the Employer exhausts its remedies hereunder and the Executive thereafter
is required to make a payment of any excise tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Employer to or for the benefit of the
Executive. The Executive shall notify the Employer in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Employer of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten (10) business days after the Executive is
informed in writing of such claim and shall apprise the Employer of the nature
of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the thirty (30)
day period following the date on which he gives such notice to the Employer (or
such shorter period ending on the date that any payment of taxes with respect to
such claim is due). If the Employer notifies the Executive in writing prior to
the expiration of such period that it desires to contest such claim, the
Executive shall:

(1) give the Employer any information reasonably requested by the
Employer relating to such claim;

(2) take such action in connection with contesting such claim as the
Employer shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an attorney reasonably selected by the Employer;

(3) cooperate with the Employer in good faith in order effectively to
contest such claim; and

(4) permit the Employer to participate in any proceedings relating to
such claim;

provided, however, that the Employer shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any excise tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provision of
this Paragraph 8C, the Employer shall control all proceedings taken in
connection with such

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contest and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the Executive
to pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Employer shall
determine. Notwithstanding anything herein to the contrary, if, after the
receipt by the Executive of an amount advanced by the Employer pursuant to this
Paragraph 8C, the Executive becomes entitled to receive any refund with respect
to such claim, the Executive shall (subject to the Employer's substantial
compliance with the requirements of this Paragraph 8C) promptly pay to the
Employer the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Employer pursuant to Paragraph 8C, a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Employer does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of thirty (30)
days after such determination, then such advance shall be forgiven and shall not
be required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.

9. Protective Covenants. The Executive acknowledges and agrees that
solely by virtue of his employment by, and relationship with, the Employer, he
will acquire "Confidential Information", as hereinafter defined, as well as
special knowledge of the Employer's relationships with its customers and
business brokers, and that, but for his association with the Employer, the
Executive will not have had access to said Confidential Information or knowledge
of said relationships. The Executive further acknowledges and agrees (i) that
the Employer has long term, near-permanent relationships with its customers and
business brokers, and that those relationships were developed at great expense
and difficulty to the Employer over several years of close and continuing
involvement; (ii) that the Employer's relationships with its customers and
business brokers are and will continue to be valuable, special and unique assets
of the Employer and that the identity of its customers and business brokers is
kept under tight security with the Employer and cannot be readily ascertained
from publicly available materials or from materials available to the Employer's
competitors; and (iii) that the Employer has the following protectable interests
that are critical to its competitive advantage in the industry and would be of
demonstrable value in the hands of a competitor: marketing strategies and
research information and benchmarks; and plans, processes, customer networks and
protocols. In return for the consideration described in this Agreement, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and as a condition precedent to the Employer entering into
this Agreement, and as an inducement to the Employer to do so, the Executive
hereby represents, warrants, and covenants as follows:

A. The Executive has executed and delivered this Agreement as his
free and voluntary act, after having determined that the provisions contained
herein are of a material benefit to him, and that the duties and obligations
imposed on him hereunder are fair and reasonable and will not prevent him from
earning a comparable livelihood following the termination of his employment with
the Employer;

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B. The Executive has read and fully understands the terms and
conditions set forth herein, has had time to reflect on and consider the
benefits and consequences of entering into this Agreement, and has had the
opportunity to review the terms hereof with an attorney or other representative,
if he so chooses;

C. The execution and delivery of this Agreement by the Executive does
not conflict with, or result in a breach of or constitute a default under, any
agreement or contract, whether oral or written, to which the Executive is a
party or by which the Executive may be bound;

D. The Executive agrees that, during the time of his employment and
for a period of one (1) year after the termination of the Executive's employment
hereunder for any reason whatsoever or for no reason, whether voluntary or
involuntary, the Executive will not, except on behalf of the Employer, in any
place or venue where the Employer or any affiliate, subsidiary, or division
thereof now conducts or operates, or may conduct or operate, its business prior
to the date of the Executive's termination of employment:

(1) directly or indirectly, contact, solicit or direct any
person, firm, or corporation to contact or solicit, any of the
Employer's customers, prospective customers, or business brokers (as
hereinafter defined) for the purpose of selling or attempting to sell,
any products and/or services that are the same as or similar to the
products and services provided by the Employer to its customers during
the term hereof. In addition, the Executive will not disclose the
identity of any such business brokers, customers, or prospective
customers, or any part thereof, to any person, firm, corporation,
association, or other entity for any reason or purpose whatsoever; and

(2) directly or indirectly, whether as an investor (excluding
investments representing less than five percent (5%) of the common
stock of a public company), lender, owner, stockholder, officer,
director, consultant, employee, agent, salesperson or in any other
capacity, whether part-time or full-time, become associated with any
business involved in the design, manufacture, marketing, or servicing
of products then constituting ten percent (10%) or more of the annual
sales of the Employer; and

(3) solicit or accept if offered to him, with or without
solicitation, on his own behalf or on behalf of any other person, the
services of any person who is an employee of the Employer, nor solicit
any of the Employer's employees to terminate employment with the
Employer, nor agree to hire any employee of the Employer into
employment with himself or any company, individual or other entity;
and

(4) act as a consultant, advisor, officer, manager, agent,
director, partner, independent contractor, owner, or employee for or
on behalf of any of the Employer's business brokers, customers, or
prospective customers (as hereinafter

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defined), with respect to or in any way with regard to any aspect of
the Employer's business and/or any other business activities in which
the Employer engages during the term hereof;

E. The Executive acknowledges and agrees that the scope described
above is necessary and reasonable in order to protect the Employer in the
conduct of its business and that, if the Executive becomes employed by another
employer, he shall be required to disclose the existence of this Paragraph 9 to
such employer and the Executive hereby consents to and the Employer is hereby
given permission to disclose the existence of this Paragraph 9 to such employer;

F. For purposes of this Paragraph 9, "customer" shall be defined as
any person, firm, or entity that purchased any type of product and/or service
from the Employer or is or was doing business with the Employer or the Executive
within the twelve (12) month period immediately preceding termination of the
Executive's employment. For purposes of this Paragraph 9, "prospective customer"
shall be defined as any person, firm, or entity contacted or solicited by the
Employer or the Executive (whether directly or indirectly) or who contacted the
Employer or the Executive (whether directly or indirectly) within the twelve
(12) month period immediately preceding termination of the Executive's
employment for the purpose of having such persons, firms, or entities become a
customer of the Employer. For purposes of this Paragraph 9, "business broker"
shall be defined as any person, firm, or entity who is or was doing business
with the Employer or the Executive or who was contacted or solicited by the
Employer or the Executive (whether directly or indirectly) or who contacted or
solicited the Employer or the Executive (whether directly or indirectly) within
the thirty-six (36) month period immediately preceding termination of the
Executive's employment;

G. The Executive agrees that both during his employment and
thereafter the Executive will not, for any reason whatsoever, use for himself or
disclose to any person not employed by the Employer any "Confidential
Information" of the Employer acquired by the Executive during his relationship
with the Employer. The Executive further agrees to use Confidential Information
solely for the purpose of performing duties with the Employer and further agrees
not to use Confidential Information for his own private use or commercial
purposes or in any way detrimental to the Employer. The Executive agrees that
"Confidential Information" includes but is not limited to: (1) any financial,
business, planning, operations, services, potential services, products,
potential products, technical information and/or know-how, formulas, production,
purchasing, marketing, sales, personnel, customer, broker, supplier, or other
information of the Employer; (2) any papers, data, records, processes, methods,
techniques, systems, models, samples, devices, equipment, compilations,
invoices, customer lists, or documents of the Employer; (3) any confidential
information or trade secrets of any third party provided to the Employer in
confidence or subject to other use or disclosure restrictions or limitations;
and (4) any other information, written, oral, or electronic, whether existing
now or at some time in the future, whether pertaining to current or future
developments, which pertains to the Employer's affairs or interests or with whom
or how the Employer does business. The Employer acknowledges and agrees that
Confidential Information does not include (1)

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information properly in the public domain, or (2) information in the Executive's
possession prior to the date of his employment with the Employer;

H. During and after the term of employment hereunder, the Executive
will not remove from the Employer's premises any documents, records, files,
notebooks, correspondence, computer printouts, computer programs, computer
software, price lists, microfilm, or other similar documents containing
Confidential Information, including copies thereof, whether prepared by him or
others, except as his duty shall require, and in such cases, will promptly
return such items to the Employer. Upon termination of his employment with the
Employer, all such items including summaries or copies thereof, then in the
Executive's possession, shall be returned to the Employer immediately;

I. The Executive recognizes and agrees that all ideas, inventions,
enhancements, plans, writings, and other developments or improvements (the
"Inventions") conceived by the Executive, alone or with others, during the term
of his employment, whether or not during working hours, that are within the
scope of the Employer's business operations or that relate to any of the
Employer's work or projects, are the sole and exclusive property of the
Employer. The Executive further agrees that (1) he will promptly disclose all
Inventions to the Employer and hereby assigns to the Employer all present and
future rights he has or may have in those Inventions, including without
limitation those relating to patent, copyright, trademark or trade secrets; and
(2) all of the Inventions eligible under the copyright laws are "work made for
hire." At the request of and without charge to the Employer, the Executive will
do all things deemed by the Employer to be reasonably necessary to perfect title
to the Inventions in the Employer and to assist in obtaining for the Employer
such patents, copyrights or other protection as may be provided under law and
desired by the Employer, including but not limited to executing and signing any
and all relevant applications, assignments or other instruments. Notwithstanding
the foregoing, pursuant to the Employee Patent Act, Illinois Public Act 83-493,
the Employer hereby notifies the Executive that the provisions of this Paragraph
9 shall not apply to any Inventions for which no equipment, supplies, facility
or trade secret information of the Employer was used and which were developed
entirely on the Executive's own time, unless (1) the Invention relates (i) to
the business of the Employer, or (ii) to actual or demonstrably anticipated
research or development of the Employer, or (2) the Invention results from any
work performed by the Executive for the Employer;

J. The Executive acknowledges and agrees that all customer lists,
supplier lists, and customer and supplier information, including, without
limitation, addresses and telephone numbers, are and shall remain the exclusive
property of the Employer, regardless of whether such information was developed,
purchased, acquired, or otherwise obtained by the Employer or the Executive. The
Executive agrees to furnish to the Employer on demand at any time during the
term of this Agreement, and upon termination of this Agreement, his complete
list of the correct names and places of business and telephone numbers of all of
its customers served by him, including all copies thereof wherever located. The
Executive further agrees to immediately notify the Employer of the name and
address of any new customer, and report all changes of a location of old
customers, so that upon the termination of this Agreement, the Employer will
have a complete list of the correct names and addresses of all of its customers

11
<PAGE>

with which the Executive has had dealings. The Executive also agrees to furnish
to the Employer on demand at any time during the term of this Agreement, and
upon the termination of this Agreement, any other records, notes, computer
printouts, computer programs, computer software, price lists, microfilm, or any
other documents related to the Employer's business, including originals and
copies thereof; and

K. It is agreed that any breach or anticipated or threatened breach
of any of the Executive's covenants contained in this Paragraph 9 will result in
irreparable harm and continuing damages to the Employer and its business and
that the Employer's remedy at law for any such breach or anticipated or
threatened breach will be inadequate and, accordingly, in addition to any and
all other remedies that may be available to the Employer at law or in equity in
such event, any court of competent jurisdiction may issue a decree of specific
performance or issue a temporary and permanent injunction, without the necessity
of the Employer posting bond or furnishing other security and without proving
special damages or irreparable injury, enjoining and restricting the breach, or
threatened breach, of any such covenant, including, but not limited to, any
injunction restraining the Executive from disclosing, in whole or part, any
Confidential Information. In addition to, but not in lieu of, the remedies
contained herein, the Employer and the Executive agree that for purposes of this
Agreement, damages will be difficult to assess and, in recognition thereof, the
Executive shall pay and the Employer shall accept as liquidated damages, and not
as a penalty, the sum of $250,000. The Executive acknowledges the truthfulness
of all factual statements in this Agreement and agrees that he is estopped from
and will not make any factual statement in any proceeding that is contrary to
this Agreement or any part thereof.

10. Notices. Any and all notices required in connection with this
Agreement shall be deemed adequately given only if in writing and (a) personally
delivered, or sent by first class, registered or certified mail, postage
prepaid, return receipt requested, or by recognized overnight courier, (b) sent
by facsimile, provided a hard copy is mailed on that date to the party for whom
such notices are intended, or (c) sent by other means at least as fast and
reliable as first class mail. A written notice shall be deemed to have been
given to the recipient party on the earlier of (a) the date it shall be
delivered to the address required by this Agreement; (b) the date delivery shall
have been refused at the address required by this Agreement; (c) with respect to
notices sent by mail or overnight courier, the date as of which the Postal
Service or overnight courier, as the case may be, shall have indicated such
notice to be undeliverable at the address required by this Agreement; or (d)
with respect to a facsimile, the date on which the facsimile is sent and receipt
of which is confirmed. Any and all notices referred to in this Agreement, or
which either party desires to give to the other, shall be addressed to his
residence in the case of the Executive, or to its principal office in the case
of the Employer.

11. Waiver of Breach. A waiver by the Employer of a breach of any
provision of this Agreement by the Executive shall not operate or be construed
as a waiver or estoppel of any subsequent breach by the Executive. No waiver
shall be valid unless in writing and signed by an authorized officer of the
Employer.

12
<PAGE>

12. Assignment. The Executive acknowledges that the services to be
rendered by him are unique and personal. Accordingly, the Executive may not
assign any of his rights or delegate any of his duties or obligations under this
Agreement. The rights and obligations of the Employer under this Agreement shall
inure to the benefit of and shall be binding upon the successors and assigns of
the Employer.

13. Entire Agreement. This Agreement sets forth the entire and final
agreement and understanding of the parties and contains all of the agreements
made between the parties with respect to the subject matter hereof. This
Agreement supersedes any and all other agreements, either oral or in writing,
between the parties hereto, with respect to the subject matter hereof. No change
or modification of this Agreement shall be valid unless in writing and signed by
the Employer and the Executive. If any provision of this Agreement shall be
found invalid or unenforceable for any reason, in whole or in part, then such
provision shall be deemed modified, restricted, or reformulated to the extent
and in the manner necessary to render the same valid and enforceable, or shall
be deemed excised from this Agreement, as the case may require, and this
Agreement shall be construed and enforced to the maximum extent permitted by
law, as if such provision had been originally incorporated herein as so
modified, restricted, or reformulated or as if such provision had not been
originally incorporated herein, as the case may be. The parties further agree to
seek a lawful substitute for any provision found to be unlawful; provided, that,
if the parties are unable to agree upon a lawful substitute, the parties desire
and request that a court or other authority called upon to decide the
enforceability of this Agreement modify those restrictions in this Agreement
that, once modified, will result in an agreement that is enforceable to the
maximum extent permitted by the law in existence at the time of the requested
enforcement.

14. Headings. The headings in this Agreement are inserted for convenience
only and are not to be considered a construction of the provisions hereof.

15. Execution of Agreement. This Agreement may be executed in several
counterparts, each of which shall be considered an original, but which when
taken together, shall constitute one agreement.

16. Recitals. The recitals to this Agreement are incorporated herein as
an integral part hereof and shall be considered as substantive and not precatory
language.

13
<PAGE>

17. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Illinois, without reference to its
conflict of law provisions. Any and all disputes arising under this Agreement,
other than a dispute arising under Paragraph 9, initially shall be referred by
the parties hereto to non-binding mediation for resolution. If such mediation is
unsuccessful in resolving the dispute (or in the context of Paragraph 9 hereof),
any court action commenced to enforce this Agreement shall have as its sole and
exclusive venue the County of Cook, Illinois.

IN WITNESS WHEREOF, the parties have set their signatures on the date first
written above.

EMPLOYER: EXECUTIVE:

SYSTEM SOFTWARE ASSOCIATES,
INC.,

a Delaware corporation
__________________________________
William Stuek
By:________________________
Its:_______________________

<PAGE>

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>
JURISDICTION OF % VOTING
NAME INCORPORATION STOCK OWNED
---- ------------------- -----------
<S> <C> <C>
SSA Caribbean, Inc............................. Delaware 100.00
SSA Japan Corp................................. Delaware 100.00
SSA Pacific Rim Corp........................... Delaware 100.00
System Software Associates (Japan) LLC......... Delaware 100.00
Priority Systems, Inc.......................... Texas 100.00
Knight Enterprises, Inc........................ Nevada 100.00
Astral Corporation International Corporation... Massachusetts 100.00
SSA Pacific Pty. Ltd........................... Australia 100.00
SSA New Zealand................................ New Zealand 100.00
System Software Associates Limited............. United Kingdom 100.00
SSA Iberica S.A................................ Spain 100.00
SSA Italia S.p.A............................... Italy 100.00
System Software Associates France S.A.......... France 100.00
Solid Beheer B.V............................... The Netherlands 100.00
Solid-csf, B.V................................. The Netherlands 100.00
SOVATA csf, B.V................................ The Netherlands 100.00
System Software Associates (Japan) Co., Ltd.... Japan 100.00
SSA Singapore Pte. Ltd......................... Singapore 100.00
System Software Associates Asia Pacific Pte.
Ltd........................................... Singapore 100.00
Castillio Informatica, S.A..................... Spain 100.00
System Software Associates (FSC), Inc.......... U.S. Virgin Islands 100.00
SSA Nordic AB.................................. Sweden 100.00
System Software Associates (Beijing) Co., Ltd.. China 100.00
SSA Central Europe GmbH........................ Germany 100.00
System Software Associates Inc., de Mexico,
S.A........................................... Mexico 100.00
SSA Brazil..................................... Brazil 100.00
SSA Korea Ltd.................................. Korea 100.00
SSA Software (Malaysia) SDN.BHD................ Malaysia 100.00
SSA Columbia S.A............................... Columbia 100.00
SSA Canada Corporation......................... Canada 100.00
Softwright Systems Limited..................... United Kingdom 100.00
NofTek, N.W., Inc.............................. Oregon 100.00
</TABLE>

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (number 33-14261 and 33-24516 and 333-36777) of System
Software Associates, Inc. and in the Prospectus constituting part of the
Registration Statement on Form S-3 (numbers 33-62207, 33-64551, 333-06647,
333-09463,
333-21561, 333-29355, 333-31271, 333-35195, and 333-35771) of System Software
Associates, Inc. of our report dated January 7, 1997 except as to paragraph 3
of Note 12 which is as of January 29, 1997, appearing on page F-3 of this form
10-K.

/s/ Price Waterhouse LLP
- - ----------------------
Price Waterhouse LLP

Chicago, Illinois
January 26, 1998

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
System Software Associates, Inc.:

We consent to incorporation by reference in the registration statements
(Nos. 33-14621, 333-36777, and 33-24516) on Form S-8 and registration
statements (Nos. 33-62207, 333-06647, 333-09463, 333-21561, 333-29355, 333-
31271, 333-35195, 333-35771 and 33-64551) on Form S-3 of System Software
Associates, Inc. of our report dated December 8, 1997, relating to the
consolidated balance sheets of System Software Associates, Inc. and
subsidiaries as of October 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the two-year period ended October 31, 1997, and the
related schedule, which report appears in the October 31, 1997 annual report
on Form 10-K of System Software Associates, Inc.

/s/ KPMG Peat Marwick LLP

Chicago, Illinois
January 26, 1998

<PAGE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 83,300
<SECURITIES> 0
<RECEIVABLES> 214,800
<ALLOWANCES> 16,500
<INVENTORY> 0
<CURRENT-ASSETS> 321,900
<PP&E> 71,100
<DEPRECIATION> 46,000
<TOTAL-ASSETS> 475,400
<CURRENT-LIABILITIES> 160,400
<BONDS> 150,800
9,200
0
<COMMON> 100
<OTHER-SE> 121,700
<TOTAL-LIABILITY-AND-EQUITY> 475,400
<SALES> 430,500
<TOTAL-REVENUES> 430,500
<CGS> 0
<TOTAL-COSTS> 407,600
<OTHER-EXPENSES> (21,300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,600
<INCOME-TAX> 600
<INCOME-CONTINUING> 1,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,400)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0

</TABLE>