TCSI CORP, 10-Q, 1997-11-13

TCSI CORP
10-Q, 1997-11-13
COMPUTER INTEGRATED SYSTEMS DESIGN

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<PAGE>

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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 0-19377
-------

TCSI CORPORATION
(Exact name of Registrant as specified in its charter)

NEVADA 68-0140975
- --------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)

1080 Marina Village Parkway, Alameda, CA 94501
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip code)

Telephone number (510) 749-8500
--------------

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___

As of November 3, 1997, there were 21,941,871 shares of common stock of the
Registrant outstanding.

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<PAGE>

TCSI CORPORATION

FORM 10-Q

INDEX

Page No.
PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL INFORMATION

Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1997 and 1996 (Unaudited) . . . . . . . . . . . 3

Consolidated Balance Sheets at September 30, 1997 (Unaudited)
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . 4

Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (Unaudited) . . . . . . . . . . . 5

Notes to Consolidated Financial Information(Unaudited). . . . . . . . 6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 10

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . 27

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS . . . . . . . 29

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . 30

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<PAGE>

TCSI CORPORATION

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Information

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
1997 1996 1997 1996
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Services $ 9,239 $ 8,835 $ 26,097 $ 34,380
Software licensing fees 518 950 2,998 8,504
-------- -------- --------- ---------
Total services and licensing fees 9,757 9,785 29,095 42,884
Equipment, non-telecom -- -- -- 7,270
-------- -------- --------- ---------
Total revenues 9,757 9,785 29,095 50,154
-------- -------- --------- ---------

Costs, expenses, and special items:
Services 5,617 8,666 15,899 21,618
Equipment, non-telecom -- -- -- 6,810
Product development 1,408 2,078 4,221 4,569
Selling, general, and administrative 4,287 5,993 13,161 17,175
Non-recurring special items -- 3,334 1,088 3,334
-------- -------- --------- ---------
Total costs, expenses, and special items 11,312 20,071 34,369 53,506
-------- -------- --------- ---------

Loss from operations (1,555) (10,286) (5,274) (3,352)

Interest income 808 719 2,286 1,665
-------- -------- --------- ---------
Loss before income taxes (747) (9,567) (2,988) (1,687)

Benefit from income taxes (254) (3,061) (1,015) (540)
-------- -------- --------- ---------

Net Loss $ (493) $ (6,506) $ (1,973) $ (1,147)
-------- -------- --------- ---------
-------- -------- --------- ---------

Loss per share $ (0.02) $ (0.31) $ (0.09) $ (0.06)
-------- -------- --------- ---------
-------- -------- --------- ---------

Shares used in calculation of loss per share 21,730 21,027 21,510 20,285
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>

The accompanying notes are an integral part of this financial information.

-3-

<PAGE>

TCSI CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35,274 $ 30,880
Investments in marketable securities 16,373 14,352
Receivables 11,062 12,522
Other receivables 1,773 2,042
Deferred income taxes 1,731 2,178
Other current assets 990 2,308
--------- ---------
Total current assets 67,203 64,282

Furniture, equipment, and leasehold improvements, net 10,303 9,234
Non-current investments in marketable securities -- 7,375
Non-current deferred income taxes 2,478 5,000
Other non-current assets 748 1,284
--------- ---------
Total assets $ 80,732 $ 87,175
--------- ---------
--------- ---------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accruals $ 2,619 $ 7,263
Accrued compensation and related costs 2,638 4,705
Income taxes 1,210 1,597
--------- ---------
Total current liabilities 6,467 13,565
--------- ---------

Shareholders' equity:
Preferred shares, $0.01 par value; 5,000 shares
authorized; none outstanding -- --
Common shares, $0.10 par value; 75,000 shares
authorized; 21,885 shares issued and
outstanding - 1997(21,219 - 1996) 2,189 2,122
Additional paid-in capital 48,536 45,939
Retained earnings 23,576 25,549
Foreign currency translation adjustments (121) --
Unrealized gain on investments 85 --
--------- ---------
Total shareholders' equity 74,265 73,610
--------- ---------
Total liabilities and shareholders' equity $ 80,732 $ 87,175
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of this financial information.

-4-

<PAGE>

TCSI CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (1,973) $ (1,147)
Adjustments to reconcile net loss to net cash provided
by (used in) operations:
Depreciation and amortization 2,816 2,327
Deferred income taxes (104) (2,100)
Changes in:
Receivables 1,460 2,555
Other receivables (269) (5,270)
Other current assets 1,318 (887)
Accounts payable and other accruals (2,073) (650)
Accrued compensation and related costs (2,067) 2,417
Income taxes 2,686 1,422
--------- ---------
Net cash provided by (used in) operating
activities 1,794 (1,333)
--------- ---------
INVESTMENT ACTIVITIES
Capital expenditures (5,918) (4,665)
Purchase of marketable securities (13,061) (22,816)
Maturity and sale of marketable securities 18,500 11,011
Decrease (increase) in other non-current assets 536 (1,217)
--------- ---------
Net cash provided by (used in) investing activities 57 (17,687)
--------- ---------
FINANCING ACTIVITIES
Issuance of common shares -- 25,845
Proceeds from exercise of options 2,135 3,469
Proceeds from employee stock purchase plan 529 --
--------- ---------
Net cash provided by financing activities 2,664 29,314
--------- ---------
Effect of foreign currency exchange rate changes on
cash and cash equivalents (121) --
--------- ---------
Net increase in cash and cash equivalents 4,394 10,294

Cash and cash equivalents at beginning of period 30,880 16,946
--------- ---------
Cash and cash equivalents at end of period $ 35,274 $ 27,240
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (refund received) for income taxes, net $ (3,598) $ 934
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of this financial information.

-5-

<PAGE>

TCSI CORPORATION

NOTES TO CONSOLIDATED FINANCIAL INFORMATION (Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial information has been
prepared by TCSI Corporation ("TCSI" or the "Company") in accordance with
generally accepted accounting principles for interim financial statements
and pursuant to the rules of the Securities and Exchange Commission for
Form 10-Q. Accordingly, certain information and footnotes required by
generally accepted accounting principles for complete financial statements
have been omitted. It is the opinion of management that all adjustments
considered necessary for a fair presentation have been included, and that
all such adjustments are of a normal and recurring nature. Operating
results for the periods presented are not necessarily indicative of the
results that may be expected for any future periods. For further
information, refer to the audited financial statements and footnotes
included in the Company's 1996 Annual Report on Form 10-K.

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

2. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES

The Company accounts for its marketable securities under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Management determines the appropriate
classification of investments and debt securities at the time of purchase
and reevaluates such designation as of each balance sheet date.
Investments are classified as held-to-maturity when the Company has the
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. Investments not classified as
such are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of shareholder's equity. Realized and
unrealized gains and losses from investments have been insignificant to the
results of operations and financial position of the Company.

3. RECEIVABLES AND CREDIT RISK

Receivable balances are primarily from large, credit-worthy customers
in the telecommunications industry and are unsecured. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company does not anticipate any significant default from a
customer's inability to make a payment for products and/or services
received. Reserves are maintained for potential credit losses.

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<PAGE>

TCSI CORPORATION

Receivables balances are as follows:

(In thousands) September 30, December 31,
1997 1996
------------- ------------
Billed receivables $11,462 $10,433
Unbilled receivables -- 2,489
Reserve for doubtful accounts (400) (400)
------- -------
$11,062 $12,522
------- -------
------- -------

4. FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS

Furniture, equipment, and leasehold improvements are stated at cost.
Depreciation is provided for furniture and equipment in amounts sufficient
to relate the cost of depreciable assets to operations over their estimated
service lives of five years and three years, respectively, utilizing the
straight-line method. Amortization is provided for leasehold improvements
in amounts sufficient to relate the cost over the shorter of the term of
the related office lease or ten years utilizing the straight-line method.

Furniture, equipment, and leasehold improvements balances are as
follows:

(In thousands) September 30, December 31,
1997 1996
------------- ------------
Computer and lab equipment $ 13,884 $ 12,856
Furniture and fixtures 3,639 3,307
Leasehold improvements 6,719 4,194
--------- ---------
24,242 20,357
Less accumulated depreciation and
amortization (13,939) (11,123)
--------- ---------
$ 10,303 $ 9,234
--------- ---------
--------- ---------

5. INCOME TAXES

The effective tax rate used in the calculation of the income tax
benefit for both the three and nine months ended September 30, 1997 and
1996 was 34 percent and 32 percent, respectively. In determining its
effective tax rate for the quarter, the Company used its estimated
effective tax rate for the year. To the extent there are differences
between planned and actual net income, the components thereof, or changes
in the tax laws effecting the Company, the effective tax rate could change.

At September 30, 1997, the Company had approximately $4.2 million of
deferred tax assets. Included in this balance is approximately $0.7
million associated with stock options. In the event these stock option
related deferred tax assets are not entirely realized, the unrealized
balance would be reversed to shareholders' equity. Realization of the
remaining deferred tax assets is dependent upon the Company generating
sufficient taxable income in future years to obtain the benefit from the
reversal of temporary differences and from tax credit carry forwards.

-7-

<PAGE>

TCSI CORPORATION

6. STOCK BASED COMPENSATION

The Company grants stock options for a fixed number of shares to
employees, consultants, and directors with an exercise price equal to the
fair value of the shares at the date of grant. The Company accounts for
stock option grants in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and, accordingly, recognizes no compensation
expense for the stock option grants.

7. PER SHARE INFORMATION

Earnings per share is computed using the weighted average number of
shares outstanding and dilutive common stock equivalents from the Company's
stock option plans, calculated using the treasury stock method. Such
common stock equivalents are excluded from the loss per share calculation
as their effect is anti-dilutive for the three and nine month periods
ended September 30, 1997.

In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which must be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact
is expected to result in no change in primary earnings (loss) per share for
the three and nine months ended September 30, 1997 and 1996. The impact of
Statement 128 is not expected to be material.

8. LITIGATION

On November 4, 1996, a purported class action complaint was filed in
the Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company, certain of its
officers and directors, and certain underwriters (the "Copperstone State
Action"). The complaint in the Copperstone State Action alleges that
during a purported class period of October 11, 1995 - September 25, 1996,
defendants made materially false and misleading statements concerning the
Company's business condition and prospects, in violation of California law.
The plaintiffs in the Copperstone State Action seek damages of an
unspecified amount. On April 7, 1997, the Superior Court entered an order
sustaining the demurrers of all defendants to all causes of action. On
June 2, 1997, plaintiffs filed an amended complaint alleging a cause of
action for violation of California Corporations law. On June 23, defendants
(other than the underwriter defendants) demurred to the remaining cause of
action. That demurrer is pending. On July 23, 1997, plaintiffs
voluntarily dismissed the underwriter defendants without prejudice.

-8-

<PAGE>

TCSI CORPORATION

violated California law, and were unjustly enriched. The plaintiff in
the Tinkler Derivative Action seeks damages of an unspecified amount. On
July 1, 1997, the Superior Court entered an order sustaining the
Company's demurrer. On July 21, 1997, plaintiff filed an amended
complaint alleging identical causes of action. On August 11, 1997,
defendants filed a demurrer to the amended complaint. That demurrer is
pending.

On September 24, 1997, a purported class action complaint was filed in
the United States District Court for the Northern District of California by
Copperstone and Siciliano against the Company and certain of its officers
and directors (the "Copperstone Federal Action"). The Copperstone Federal
Action contains virtually identical factual allegations as the Copperstone
State Action, and alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and SEC Rule 10b-5. The plaintiffs in the
Copperstone Federal Action also seek damages of an unspecified amount.

On May 16, 1997, Atmel Corporation made a claim under the TCSI/Atmel
Corporation Purchase Agreement dated November 14, 1996, asserting that TCSI
breached certain representations and warranties in connection with the
licensing of its embedded software product lines to Atmel Corporation.
Pursuant to the Purchase Agreement, $1,000,000 of the sale price was
escrowed to be available for claims arising from the transaction.
Recently, Atmel has asserted that its damages exceed $3,000,000.
Management disputes this claim and intends to initiate an arbitration
proceeding to obtain the release of the $1,000,000 escrow fund.

No trial in any of these actions is scheduled. The Company believes
it has meritorious defenses to all of these actions, and intends to defend
each of them vigorously. In the opinion of management, resolution of these
litigations is not expected to have a material adverse effect on the
financial position of the Company. However, depending on the amount and
timing, an unfavorable resolution of any of these matters could materially
affect the Company's future results of operation or cash flows in a
particular period.(*)

- ----------------------------
(*) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. The Company strongly
encourages review of the section entitled "Factors Affecting Operating Results
and Market Price of Stock" commencing on page 17 for a discussion of factors
that could affect future performance.

-9-

<PAGE>

TCSI CORPORATION

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

IN ADDITION TO HISTORICAL INFORMATION CONTAINED HEREIN, THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTAINS FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN ARE SUBJECT TO CERTAIN FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS.
SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN
THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996.

OVERVIEW

TCSI Corporation provides integrated software products and services for
the global telecommunications industry. Since its inception in 1983, a
significant portion of the Company's revenues has been earned from
telecommunications service providers and equipment manufacturers. Since
1993, the Company's revenues have resulted primarily from sales of related
object-oriented software products and services. During the second half of
1996, the Company divested its non-telecom product lines by licensing its
embedded software product lines and terminating its final
transportation-related development agreement. As a result, the Company has
focused on offering software solutions to the telecommunications industry.

The Company provides services to customers under level-of-effort and
fixed price contracts. Service revenues are recognized on the percentage-of
completion method based on the percentage of contract costs incurred in
relation to total estimated contract costs. Changes to total estimated
contract costs, if any, are recognized in the period such changes are
determined. The scope and size of many of the Company's system solutions are
large and complex, typically requiring delivery over several quarters. From
time to time, customers have established payment milestones which can be
achieved only after completion of the related services. In some cases,
customers have disputed fees charged for services provided. The Company may
write off receivable amounts if such disputes cannot be resolved.
Additionally, a significant portion of the Company's revenues and operating
income has been, and is expected to continue to be, derived from software
licensing fees from a limited number of customers. The Company recognizes
revenues from software licensing fees only after delivery of software
products and if there are no remaining significant post-delivery obligations.
The Company recognizes revenues from software licensing fees with significant
post-delivery obligations associated with the related services contract on a
percentage of completion basis.

-10-
<PAGE>

TCSI CORPORATION

The licensing and implementation of the Company's software products
generally involves a significant commitment of resources by prospective
customers. As a result, the Company's sales process is subject to delays
associated with lengthy approval processes typically accompanying such
significant capital expenditures. Accordingly, the Company is substantially
dependent on its customers' decisions as to the timing and level of
expenditures and resource commitments. The variability in the timing of such
expenditures could cause material fluctuations in the Company's business,
operating results, and financial condition. In this regard, the consistency
of the Company's 1996 and 1997 quarterly results have been adversely affected
by customer delays in the purchase of software licenses.

A substantial portion of the Company's revenues are derived from the sale
of the Company's software products and services to major telecommunications
service providers and equipment manufacturers. Due to the complex nature of
the advanced element, network, and service management systems being
developed, successful deployment of these systems often contains significant
technological risks. The Company has in the past relied and will in the
future rely on its development and implementation expertise. Additionally,
development and implementation of these systems often occurs over several
quarters. There exists the risk that a change in the customer's technology or
business strategy during such lengthy development and implementation periods
may cause early termination of the project or discontinuance of future
phases. In this regard, the Company has experienced and expects to continue
to experience fluctuations in revenues and operating results on a quarterly
basis due to termination, cancellation, or non-renewal of agreements.

Management believes that revenue growth is highly dependent upon the
development and enhancement of software products that meet market needs.
Prior to 1996, the Company's product development was primarily funded by
customers as part of the development of software applications for such
customers. The Company typically retained certain rights to developed
software products. In certain circumstances, however, the Company agreed to
restrict its use of such products to certain markets and during certain time
periods. During 1996, the Company began funding a larger portion of its
product development costs. Management intends to target product development
spending at levels consistent with other software companies. Furthermore,
management expects that from time to time it may acquire businesses,
products, or technologies to enhance the Company's current product offerings.
To date, the Company has not consummated any such acquisitions and the
Company has no current agreements to effect any such acquisitions. The
failure to successfully evaluate, negotiate, and effect such an acquisition
could have a material adverse effect on the Company's business, operating
results, and financial condition.

-11-
<PAGE>

TCSI CORPORATION

RESULTS OF OPERATIONS

REVENUES. The Company generates revenues from the sale of its software
products and related services to the telecommunications industry. For the
three and nine months ended September 30, 1997 and 1996, revenues were as
follows:

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
TOTAL COMPANY REVENUES: 1997 1996 1997 1996
-------- -------- ------ --------
Services $ 9,239 $ 8,835 $26,097 $34,380
Software licensing fees 518 950 2,998 8,504
Equipment, non-telecom -- -- -- 7,270
-------- -------- ------- -------
Totals $ 9,757 $ 9,785 $29,095 $50,154
-------- -------- ------- -------
-------- -------- ------- -------

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
TELECOM REVENUES: 1997 1996 1997 1996
-------- -------- ------ --------
Services $ 9,239 $ 7,686 $26,035 $27,907
Software licensing fees 518 921 2,577 5,583
-------- -------- ------- -------
Totals $ 9,757 $ 8,607 $28,612 $33,490
-------- -------- ------- -------
-------- -------- ------- -------

Total company revenues for the three months ended September 30, 1997 were
$9.8 million, relatively unchanged from the same period in 1996. For the
nine months ended September 30, 1997, the Company's total revenues decreased
42 percent to $29.1 million from $50.2 million for the comparable 1996
period. The decline in total revenues for the nine months period is
primarily due to $16.7 million of revenues generated for the nine months
ended September 30, 1996 by non-telecom business units which were
discontinued in late 1996. Total telecom revenues for the three months ended
September 30, 1997 increased 13 percent to $9.8 million from $8.6 million for
the same three months in 1996. For the nine months ended September 30, 1997,
total telecom revenues declined to $28.6 million from $33.5 million for the
same period in 1996, a 15 percent decrease. The decline in telecom revenues
is primarily attributable to a 54 percent decline in telecom software
licensing fees for the nine months ended September 30, 1997 as a result of
delayed system deployments in North America. The Company expects software
licensing fees to continue at rates below the 1996 levels in the near term
and to vary from period to period.*

- --------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. The Company
strongly encourages review of the section entitled "Factors Affecting
Operating Results and market price of Stock" commencing on page 17 for a
discussion of factors that could affect future performance.

-12-
<PAGE>

TCSI CORPORATION

The following summarizes revenues by geographic location:

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
-------- ------ ------ --------
TOTAL COMPANY:
North America 18% 54% 26% 60%
The Pacific Rim 58 36 49 29
Europe 24 10 25 11
----- ----- ----- -----
100% 100% 100% 100%
----- ----- ----- -----
----- ----- ----- -----

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
-------- ------ ------ --------
TELECOM:
North America 18% 56% 25% 53%
The Pacific Rim 58 32 49 30
Europe 24 12 26 17
----- ----- ----- -----
100% 100% 100% 100%
----- ----- ----- -----
----- ----- ----- -----

Telecom revenues from the Pacific Rim and Europe increased to $8.0
million for the three months ended September 30, 1997 compared to $3.8
million for the comparable 1996 period. For the nine months ended September
30, 1997, such revenues increased 38 percent to $21.5 million from $15.5
million for the same period in 1996. The increase is attributable to
continued relationships with existing customers, particularly through the
company's partner in Japan, resulting in revenues from follow-on contracts
signed earlier this year. Telecom revenues from North America for the three
months ended September 30, 1997 declined 64 percent to $1.7 million compared
to $4.8 million in 1996. For the nine months ended September 30, 1997 and
1996 telecom revenues decreased 60 percent to $7.2 million from $18.0
million, respectively. The decline in telecom revenues in North America is
the result of low North American based telecom bookings during 1996 and
delayed deployments in 1997, as the Company generally realizes services
revenues involving design, development, testing, and deployment over a twelve
to eighteen month period. The Company expects the geographical mix of
revenues to vary from period to period as it responds to global buying habits
and develops relationships with new and existing partners and channels.*

To date, a significant portion of revenues has been concentrated among a
limited number of customers. For the three months ended September 30, 1997,
the concentration of

- --------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. The Company
strongly encourages review of the section entitle "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 17 for a
discussion of factors that could affect future performance.

-13-
<PAGE>

TCSI CORPORATION

revenue from the Company's five largest telecom customers decreased to 70
percent from 77 percent for the same period in 1996. The concentration of
revenue from the Company's five largest telecom customers for the nine months
ended September 30, declined slightly to 64 percent in 1997 from 66 percent
in 1996. The top three customers represented 32, 12, and 10 percent of
total revenues for the three months ended September 30, 1997, and 25, 13, and
10 percent of total revenues for the nine months ended September 30, 1997.
There can be no assurance that such customers will continue to place orders
with the Company which equal or exceed the comparable levels for prior
periods.* See "Factors Affecting Operating Results and Market Price of Stock
- - Customer Concentration."

DIRECT COSTS OF SERVICES. The Company incurs direct costs in the
development and deployment of its customer's software solutions. The major
components of direct costs are employee compensation, subcontractor fees,
training costs, and other billable direct costs, including travel expenses.
Direct costs also include an allocation for benefits, facilities, and
depreciation. Costs of services declined 35 percent to $5.6 million for the
three months ended September 30, 1997 from $8.7 million for the same period
in 1996. For the nine months ended September 30, costs of services decreased
26 percent to $15.9 million in 1997 from $21.6 million in 1996. The decrease
for the three and nine month periods is primarily attributable to the
divestiture of the Company's non-telecom business units in late 1996. As a
percentage of services revenues, costs of services were 61 percent for the
three months ended September 30, 1997 compared to 98 percent for the same
period in 1996. For the nine months ended September 30, costs of services as
a percentage of services revenues were 61 percent in 1997 and 63 percent for
the comparable period in 1996. In the second half of 1996, the Company's
costs of services were affected by increased investments in the completion of
a number of North American telecom software solutions. Such customer-related
investments have been reduced in the first half of 1997 resulting in lower
direct costs of services.

PRODUCT DEVELOPMENT. Product development includes employee compensation,
subcontractor fees, training costs, and other product development costs,
including an allocation for benefits, facilities, and depreciation. For the
three months ended September 30, the Company invested $1.4 million or 14
percent of revenues on internally funded product development in 1997 compared
with $2.1 million or 21 percent of revenues in 1996. For the nine months
ended September 30, 1997, such investments were $4.2 million or 15 percent of
revenues and $4.6 million or 9 percent of revenues for the comparable 1996
period. In 1996, product development costs included two major upgrades of
the Company's SolutionCore product as well as non-telecom product development
costs from its divested business units. In 1997, the funds have been used
primarily for the development of the Company's SolutionCore-TM- product,
which includes the fifth release of Object Services Package (OSP) and new
releases of related development tools. The Company expects to continue to
invest in SolutionCore, as well as its new components-based applications,
SolutionSuites-TM-, throughout 1997.

- --------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. The Company
strongly encourages review of the section entitled "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 17 for a
discussion of factors that could affect future performance.

-14-
<PAGE>

TCSI CORPORATION

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling expenses include
sales and marketing employee compensation, promotional material, trade shows,
travel, and facilities expenses. General and administrative costs include
compensation costs related to executive management, finance, and
administrative personnel along with the other administrative costs including
recruiting, legal and accounting fees, insurance, and bad debt expense. For
the three months ended September 30, 1997, selling, general, and
administrative expenses decreased 28 percent to $4.3 million from $6.0
million for the same period in 1996. For the nine months ended September 30,
selling, general, and administrative expenses declined 23 percent to $13.2
million in 1997 from $17.2 million in 1996. As a percentage of revenue,
selling, general, and administrative expense was 44 percent for the three
months ended September 30, 1997 compared to 61 percent of revenue in 1996.
The decrease is due to the discontinuance of non-telecom business units in
late 1996, as well as the Company's business resizing decisions taken over
the past twelve months. For the nine months ended September 30, selling,
general, and administrative expense was 45 percent of revenue in 1997 and 34
percent of revenue for the comparable 1996 period. The increase is primarily
attributed to the decline in revenues for the nine months ended September 30,
1997 compared to 1996.

NON-RECURRING SPECIAL ITEMS. The Company incurred an expense of $1.1
million in the first half of 1997 resulting from an adjustment to the
market-value of equipment held for resale related to the termination of a
non-telecom contract in the third quarter of 1996. In addition, in the third
quarter of 1996, the Company recorded an expense of $3.3 million to cover the
costs associated with the termination of a non-telecom contract. The Company
concluded the sale of the equipment in the third quarter of 1997.

INCOME TAXES. The Company records income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The Company's effective tax rate was 34 percent and 32 percent for
the three and nine months ended September 30, 1997 and 1996, respectively.
The Company realized a tax benefit of $0.3 million for the quarter ended
September 30, 1997 compared to a tax benefit of $3.1 million in 1996. For
the nine months ended September 30, the Company realized a tax benefit of
$1.0 million in 1997 compared to a tax benefit of $0.5 million in 1996.

EARNINGS PER SHARE (EPS). Shares used in the calculation of earnings
(loss) per share increased to 21.7 million for the three months ended
September 30, 1997 compared to 21.0 million for the same period in 1996. For
the nine months ended September 30, shares used in the calculation of
earnings (loss) per share increased to 21.5 million in 1997 from 20.3 million
in 1996. The increase in shares in 1997 was due to option exercises and
employee stock purchases related to the Company's employee stock purchase
plan. The calculation of earnings (loss) per share for both periods in 1997
and both periods in 1996 exclude unexercised option shares as such shares
would be anti-dilutive as a result of the net losses for the periods.

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<PAGE>

TCSI CORPORATION

LIQUIDITY AND CAPITAL RESOURCES

For the nine months ended September 30, 1997, net cash generated from
operating activities was $1.8 million compared to net cash used in operating
activities of $1.3 million for the same period in 1996. The increase in cash
generated from operations is primarily due to a reduction in the Company's
accounts receivable, other receivables and other current assets. In the
first period of 1996, accounts receivable balances included a significant
amount related to transportation and wireless business units that were
discontinued. In addition, in 1996 the Company's other receivables included
$4.9 million related to the termination of a contract with a transportation
customer. The Company also had $2.0 million of equipment held for sale
related to this contract included in other current assets in 1996. As in the
past, the Company's operating cash flows in the future may be affected by
fluctuating receivable balances. The Company's receivables are primarily
from large, credit-worthy customers and, as a result, the Company does not
anticipate any significant default from a customer's inability to make a
payment for products and/or services received.* Also included in cash from
operating activities is $4.0 million in income tax refunds received in 1997
resulting from prior year net operating loss carrybacks.

Cash provided by financing activities declined $26.7 million to $2.7
million for the nine months ended September 30, 1997 compared to the same
period in 1996. In early 1996, the Company raised funds through a follow-on
public offering, realizing net proceeds of approximately $25.8 million.

For the nine months ended September 30, 1997, cash generated by
investment activities was less than $0.1 million compared to $17.7 million
used in investment activities for the comparable 1996 period. Net cash from
investing activities for the 1997 period was a result of net decreases in
purchases/maturities of investments, a reduction in non-current assets and
increases in capital expenditures. In 1997, the nine month period included
the purchase of $13.1 million of marketable securities and $18.5 million of
maturities of marketable securities compared to the purchase of $22.8 million
of marketable securities and $11.0 million of maturities in the comparable
1996 period. A decline in the other non-current assets balance in 1997 also
contributed to the reduction in net cash used in investing activities. For
the nine months ended September 30, 1996, such balances included a
non-current customer receivable and the non-current portion of an employee
note receivable. In addition, the net decrease in cash used in such
investment activities also included $5.9 million of cash used for capital
expenditures and leasehold improvements during the nine months ended
September 30, 1997 compared to $4.7 million of cash used for capital
expenditures for the comparable 1996 period. The increase in capital
expenditures is primarily related to the consolidation of the Company's
facilities in northern California and the Company's new facilities in the
United Kingdom. The Company expects such expenditures to be significantly
lower in the near term.* The Company currently has no significant commitments
for capital expenditures, although management intends to support operational
needs as necessary.

- --------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. The Company
strongly encourages review of the section entitled "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 17 for a
discussion of factors that could affect future performance.

-16-
<PAGE>

TCSI CORPORATION

FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK

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

POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS

The Company has experienced and expects to continue to experience
significant fluctuations in revenues and operating results on an annual or
quarterly basis as a result of a number of factors, many of which are beyond
the control of the Company. These factors include the cancellation,
modification, or non-renewal of service, license, or maintenance agreements;
the size and timing of significant customer engagements and license fees; the
relative proportion of services and software licensing fees; personnel
changes; capital spending patterns of the Company's customers; concentration
of the Company's customers; the lengthy sales cycles of the Company's
products and services; industry acceptance of the Company's products and
services; changes in operating expenses; new product introductions and
product enhancements by the Company or its competitors; the ability of the
Company to develop, introduce, and market new products and product
enhancements on a timely basis; changes in pricing policies by the Company or
its competitors; regulatory changes, currency fluctuations, and general
economic factors. These factors are difficult to forecast, and these or other
factors could have a material adverse effect on the Company's business,
operating results, and financial condition.

Historically, a significant portion of the Company's operating income has
been derived from software licensing fees from a limited number of customers.
Variability in the timing of such license fees has caused and may continue to
cause material fluctuations in the Company's business, operating results, and
financial condition. The Company's products and services generally require
significant capital expenditures by customers as well as the commitment of
resources to implement, monitor, and test the Company's enhancements to such
customers systems. Accordingly, the Company is substantially dependent on its
customers' decisions as to the timing and level of such expenditures and
resource commitments. In addition, the Company typically realizes a
significant portion of license revenues in the last weeks or even days of a
quarter. As a result, the magnitude of quarterly fluctuations may not become
evident until late in, or after the close of, a particular quarter. The
Company's expenses are based in part on the Company's expectations as to
future revenue levels and to a large extent are fixed in the short-term. If
revenues do not meet expectations, the Company's business, operating results,
and financial condition are likely to be materially adversely affected. In
particular, because only a small portion of the Company's expenses varies
with revenues, net income may be disproportionately affected by a reduction
in revenues. As a result, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and
should not be relied upon as indications of future performance. Due to the
foregoing factors, it is likely that in some future period the Company's
revenues or operating results will be below the expectations of public market
analysts and investors. In such event the price of the Company's common stock
could be materially adversely affected.

-17-
<PAGE>

TCSI CORPORATION

LENGTHY SALES AND IMPLEMENTATION CYCLES

The Company's products are typically intended for use in applications
that may be critical to a customer's business. The licensing and
implementation of the Company's software products generally involves a
significant commitment of resources by prospective customers. As a result,
the Company's sales process is often subject to delays associated with
lengthy approval processes that typically accompany significant capital
expenditures. For these and other reasons, the sales cycles associated with
the license of the Company's products is often lengthy (averaging
approximately nine to twelve months) and subject to a number of significant
delays over which the Company has little or no control. In addition, the
Company does not recognize service revenues until the services are rendered.
The time required to implement the Company's products can vary significantly
with the needs of its customers and is generally a process that extends for
several months. Because of their complexity, larger implementations may take
multiple quarters to complete. From time to time the Company has provided
services to implement certain large projects, and, although no contractual
basis exists for the customer to do so, certain customers have delayed
payment of a portion of service fees and in some cases have disputed the fees
charged. There can be no assurance the Company will not experience additional
delays or disputes regarding payment in the future, particularly if the
Company receives orders for large, complex installations. Therefore, the
Company believes that its quarterly and annual operating results and
financial condition are likely to vary significantly in the future.

ACCEPTANCE OF THE COMPANY'S PRODUCTS; PRODUCT DEVELOPMENT RISKS

A substantial portion of the Company's revenues are derived from the sale
of the Company's products and services which provide software solutions to
major corporations in the worldwide telecom services and equipment
industries. Although many telecom companies currently seek to integrate their
business operation systems and network operation systems, there can be no
assurance that these or other service providers will continue to seek the
integration of such systems or that such companies will use the Company's
products. Due to the complex nature of the advanced element, network, and
service management systems developed by the Company, the Company has in the
past relied and will in the future rely on its development and implementation
expertise. The Company continues to develop distributed object software
products that reduce the customization necessary to fully integrate
customers' systems. There can be no assurance, however, that the Company
will continue to successfully develop and market such products or, if
successful, that the revenue from such products will compensate for any
concurrent loss of development and implementation service revenues. The
failure by the Company to successfully develop and market such products and
technologies would have a material adverse effect on its business, operating
results, and financial condition.

-18-
<PAGE>

TCSI CORPORATION

Revenues attributable to the Company's distributed object software
products and services have in the past accounted for and are expected to
continue to account for a substantial majority of the Company's revenues.
Accordingly, the Company's future business, operating results, and financial
condition are significantly dependent upon the continued market acceptance of
distributed object software products and services in general and the
Company's portfolio of products and services in particular. There can be no
assurance that distributed object technology will continue to achieve market
acceptance or that the Company will be successful in developing, introducing,
or marketing improvements to its distributed object products. Moreover, the
life cycle of distributed object products is difficult to estimate due in
large part to the recent emergence of many of the Company's markets, the
effect of future product enhancements, and competition. A decline in the
demand for distributed object technology as a result of new or existing
competing technologies, or other factors would have a material adverse effect
on the Company's business, operating results, and financial condition.

Prior to 1996, the Company's product development was primarily funded by
customers as part of the development of software applications for such
customers. The Company typically retained certain rights to developed
software products. In certain circumstances, however, the Company agreed to
restrict its use of such products to certain markets and during certain time
periods. Management believes that continued revenue growth is highly
dependent upon the development and enhancement of software products that meet
market needs. Prior to 1996, internally funded product development costs were
nominal. Management intends to target product development spending at amounts
consistent with other software companies. There can be no assurance, however,
that such funding will result in the successful introduction of new products.

CUSTOMER CONCENTRATION

To date, a significant portion of the Company's revenues have been
concentrated among a limited number of customers. In particular, the Company
anticipates that, in 1997, a large portion of revenues will be derived from
contracts negotiated through a large equipment manufacturer in Asia. The
Company anticipates that it will continue to experience significant customer
concentration. There can be no assurance that such customers or any other
customers will in the future continue to place orders with the Company which
equal or exceed the comparable levels for prior periods. In addition, the
Company's customers typically designate one individual to procure network
management software. If any of such individuals were terminated, transferred,
or replaced, the Company would be vulnerable to cancellation of an order if,
for example, the Company's competitors had pre-existing relationships with
such individual's replacement. As a result of these factors, the Company's
business, operating results, and financial condition could be materially
adversely affected.

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<PAGE>

TCSI CORPORATION

PRODUCT DEFECTS

The Company provides complex software products for major corporations.
The development and enhancement of such complex software entails substantial
risks of product defects. The Company has in the past identified software
defects in certain of its products. There can be no assurance that errors
will not be found in existing or new products or releases after commencement
of commercial licensing, which may result in delay or loss of revenue, loss
of market share, failure to achieve market acceptance, or may otherwise
adversely impact the Company's business, operating results, and financial
condition.

IMPLEMENTATION RISKS

As characteristic of companies providing software solutions to the
telecommunications industry, the complexities involved in implementing the
Company's software solutions entail risks of performance failures. In some
cases the Company has agreed to accept some financial responsibility, in the
form of negotiated penalty amounts, should the Company's products not meet
specifications or cause customer system downtime. There can be no assurance
that the Company will not encounter delays or other difficulties due to such
complexities. Because the Company's customer base consists of a relatively
limited number of customers, the reputational harm resulting from product
defects or implementation errors would be damaging to the Company. Any such
occurrence could have a material adverse effect upon the Company's business,
operating results, and financial condition.

INTERNATIONAL SALES

Revenues outside of North America accounted for 82 percent and 74 percent
of the Company's total revenues for the three and nine months ended September
30, 1997, respectively. The Company expects that international revenues will
continue to account for a significant portion of its total revenue in future
periods. The Company intends to penetrate additional international markets
and to further expand its existing international operations. The Company's
international business involves a number of inherent risks, including longer
receivables collection periods and greater difficulty in accounts receivable
collection, difficulty in staffing and managing foreign operations, a longer
sales cycle than with domestic customers, potentially unstable political and
economic conditions, language barriers, cultural differences in the conduct
of business, seasonality due to the slowdown in European business activity
during the Company's third fiscal quarter, unexpected changes in regulatory
requirements, including a slowdown in the rate of privatization of telecom
service providers, reduced protection for intellectual property rights in
some countries, potentially adverse tax consequences, tariffs, and other
trade barriers. In addition, access to foreign markets is often difficult due
to the established relationships between government owned or controlled
communications companies and local suppliers of communications products.
There can be no assurance the Company will be able to successfully penetrate
such foreign markets. In addition, there can be no assurance that the Company
will be able to sustain or increase revenue derived from international
licensing and services or that the foregoing factors will not have a material
adverse effect on the Company's future international business, and
consequently, on the Company's business, operating results, and financial
condition.

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<PAGE>

TCSI CORPORATION

International sales also entail risks associated with currency
fluctuations. The Company has attempted to reduce the risk of fluctuations in
currency exchange rates associated with international revenue by pricing its
products and services in United States dollars whenever possible. The
Company, however, generally pays the expenses of its international operations
in local currencies and generally does not engage in hedging transactions
with respect to such obligations. Upward fluctuations in currency exchange
rates could cause the Company's products to become relatively more expensive
to foreign customers, leading to a reduction in sales or profitability.
Furthermore, future international activity may result in foreign currency
denominated sales, and, in such event, gains and losses on the conversion to
U.S. dollars of accounts receivable and accounts payable arising from
international operations may contribute to fluctuations in the Company's
operating results. In order to reduce the risk of exchange rate losses from
foreign currency denominated sales, the Company may engage in hedging
transactions. There can be no assurance that such hedging transactions will
not have a material adverse effect on the Company's business, operating
results, and financial condition.

DEPENDENCE ON TELECOMMUNICATIONS CARRIERS; GOVERNMENT REGULATION

The Company's principal customers are concentrated among major telecom
carriers, including regional bell operating companies ("RBOCs"). Such
companies operate within the telecom industry, which has recently been
characterized by intense competition in the development of new technology,
equipment, and customer services. The Company believes that large telecom
carriers have become increasingly cautious in making significant capital
expenditures, due in part to increased competition from smaller, rapidly
developing alternative carriers, decreasing prices for telecom services and
equipment, and regulatory rate structures that have become less dependent on
the level of carriers' capital expenditures. These and other factors have in
the past and may in the future cause such customers to experience significant
fluctuations in capital expenditures for network management software
solutions.

The telecom industry is subject to extensive regulation in the United
States and other countries, and the Company's customers generally must
receive regulatory approvals in conducting their businesses. Although the
telecom industry has recently been characterized by government deregulation,
there can be no assurance that deregulatory trends will continue or that
reregulation will not occur. Government regulatory policies are likely to
continue to have a major impact on the Company's ability to attract and
retain customers. For example, regulatory authorities may continue to oversee
the pricing of new and existing telecom services, which, in turn impact
carriers' ability to make significant capital expenditures. The enactment by
federal, state, or foreign governments of new laws or regulations or change
in the interpretation of existing regulations could adversely affect the
Company's customers, and thereby affect the Company's business, operating
results, and financial condition.

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<PAGE>
TCSI CORPORATION

COMPETITION

The Company offers products and services in the evolving markets for
telecom network management software and distributed object technology.
Competition in this market is intense and is characterized by rapidly
changing technologies, evolving industry standards, changing regulatory
requirements, frequent new product introductions, and rapid changes in
customer requirements. To maintain and improve its competitive position, the
Company must continue to develop and introduce, in a timely and
cost-effective manner, new services, products, and product features that keep
pace with competitive offerings by telecom companies and independent software
vendors, technological developments, and emerging industry standards in the
development of software solutions. The principal competitive factors in the
Company's market are quality, performance, price, customer support, corporate
reputation, and product features such as scalability, interoperability,
functionality, customizability, and ease of use.

The Company's current and prospective competitors offer a variety of
solutions to address telecom software needs. The Company faces competition in
each of the three functional areas the Company believes are necessary for the
delivery of complete network management software solutions: development
environments, and turnkey applications and custom services. Because certain
of the Company's competitors focus only on one of these functional areas,
such competitors may be in a position to develop competitive products
targeted solely at the segment they serve. These competitors include major
communications service providers, RBOCs, systems integrators, and equipment
manufacturers, each of which has substantially greater financial,
manufacturing, technical, marketing, distribution, and other resources,
greater name recognition, and longer-standing relationships with customers
than does the Company. Furthermore, many of the Company's current and
potential customers continuously evaluate whether to design, develop, and
support internally the software solutions provided by the Company, thereby
obviating the need for relying on an outside vendor, such as the Company.
There can be no assurance that the Company's current or potential competitors
will not develop products comparable or superior to those developed by the
Company or adapt more quickly than the Company to new technologies, evolving
industry standards, new product introductions, or changing customer
requirements.

-22-

<PAGE>

TCSI CORPORATION

RAPID TECHNOLOGICAL CHANGE; NEED TO MANAGE PRODUCT TRANSITIONS

The market for the Company's products is characterized by rapidly
changing technologies, evolving industry standards, changing regulatory
environments, frequent new product introductions, and rapid changes in
customer requirements. The introduction of products embodying new
technologies and the emergence of new industry standards and practices can
render existing products obsolete and unmarketable. As a result, the life
cycles of the Company's products are difficult to estimate. This poses
substantial risks for the Company because the Company's products and software
solutions typically have lengthy development and sales cycles. The Company's
future success will depend on its ability to enhance its existing products
and to develop and introduce, on a timely and cost-effective basis, new
products and product features that keep pace with technological developments
and emerging industry standards and address the evolving needs of its
customers. There can be no assurance that the Company will be successful in
developing and marketing new products or product features that respond to
technological change or evolving industry standards, that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction, and marketing of these new products and features,
or that its new products or product features will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company
is unable, for technological or other reasons, to develop and introduce
enhancements of existing products or new products in a timely manner, the
Company's business, operating results, and financial condition will be
materially adversely affected.

The Company's products are designed to operate on a variety of hardware
and software platforms and with a variety of databases employed by its
customers in their networks. The Company must continually modify and enhance
its products to keep pace with changes in hardware and software platforms and
database technology. As a result, uncertainties related to the timing and
nature of new product announcements, introductions or modifications by
systems vendors, particularly Sun Microsystems, Inc. and Hewlett Packard
Company, and by vendors of relational database software, particularly Oracle
Corporation, Sybase, Inc., and Informix Corporation, could materially
adversely impact the Company's business, operating results, and financial
condition. In addition, the failure of the Company's products to operate
across the various existing and evolving versions of hardware and software
platforms and database environments employed by consumers would have a
material adverse effect on the Company's business, operating results, and
financial condition.

The introduction or announcement of products by the Company or one or
more of its competitors embodying new technologies, or changes in industry
standards or customer requirements, could render the Company's software
products and solutions obsolete or unmarketable. The introduction of new or
enhanced versions of its products requires the Company to manage the
transition from older products in order to minimize disruption in customer
ordering. There can be no assurance that the introduction or announcement of
new product offerings by the Company or one or more of its competitors will
not cause customers to defer licensing of existing Company products or
engaging the Company's services. Any deferral of license or service revenues
could have a material adverse effect on the Company's business, operating
results, and financial condition.

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<PAGE>

TCSI CORPORATION

PROTECTION OF INTELLECTUAL PROPERTY

The Company's success and ability to compete is dependent in part upon
its proprietary software technology. The Company relies on a combination of
patent, trade secret, copyright and trademark laws, nondisclosure and other
contractual agreements, and technical measures to protect its proprietary
rights. To date, the Company has patents and patents pending related to its
telecom products. The Company expects to continue to file patent applications
where it believes it is appropriate to protect its proprietary technologies.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain
and use information that the Company regards as proprietary. There can be no
assurance that the steps taken by the Company to protect its proprietary
technology will prevent misappropriation of such technology, and such
protections may not preclude competitors from developing products with
functionality or features similar to the Company's products. In addition,
effective patent, copyright, trademark, and trade secret protection may be
unavailable or limited in certain foreign countries. The failure of the
Company to protect its proprietary information could have a material adverse
effect on the Company's business, operating results, and financial condition.

While the Company believes that its products and trademarks and their use
by customers does not infringe upon the proprietary rights of third parties,
there can be no assurance that the Company will not receive future
communications from third parties asserting that the Company's products or
their use by customers infringe, or may infringe, the proprietary rights of
such third parties. The Company expects that software product developers will
be increasingly subject to infringement claims as the numbers of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, including
meritless claims, could result in costly, time-consuming litigation, and
diversion of technical and management personnel. In the event any third party
were to make a valid claim and a license were not made available on
commercially reasonable terms, or if the Company were unable to develop
non-infringing alternative technology, the Company's business, operating
results, and financial condition could be materially adversely affected.

In addition, certain of the Company's customers regard the solutions
provided by the Company to be proprietary to such customers and may attempt
to prohibit the Company from using or otherwise benefiting from certain of
the advances made in developing such solutions. Although the Company intends
to increasingly standardize its integration solutions through the use of
object-oriented software products, there can be no assurance that the
prohibition or restrictions imposed by certain customers of the use of
certain intellectual property will not adversely affect the Company's
business, operating results, and financial condition.

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<PAGE>

TCSI CORPORATION

The Company relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. There
can be no assurance that these third party software licenses will continue to
be available to the Company on commercially reasonable terms or that such
licenses will not be terminated. Although the Company believes that
alternative software is available from other third-party suppliers, the loss
of or inability to maintain any of these software licenses or the inability
of the third parties to enhance their products in a timely and cost-effective
manner could result in delays or reductions in product shipments by the
Company until equivalent software could be developed internally or
identified, licensed, and integrated, which would have a material adverse
effect on the Company's business, operating results, and financial condition.

DEPENDENCE ON KEY PERSONNEL

The Company's future growth and success depends to a significant extent
on the ability to attract and retain qualified managerial, sales, and
software engineering personnel. The Company has at times experienced and
continues to experience difficulty in attracting and retaining qualified
personnel. The Company's future success will also depend on the ability of
its current and future management personnel to operate effectively, both
independently and as a group. The Company has recently experienced a change
in and temporary loss of executive management personnel. Competition for the
hiring of such personnel in the software industry is intense, and there can
be no assurance that the Company will be successful in locating candidates
with appropriate qualifications. Failure to attract and retain key personnel
could have a material adverse effect on the Company's business, operating
results, and financial condition.

RISKS ASSOCIATED WITH ACQUISITIONS

The Company from time to time evaluates potential acquisitions of
complementary businesses, products, and technologies. To support its growth
plans, the Company may acquire companies that have a significant installed
base of products not yet offered by the Company, have strategic distribution
channels or customer relationships, or otherwise present opportunities which
management believes enhance the Company's competitive position. Such
acquisitions would subject the Company to numerous risks, including risks
associated with the integration into the Company of new employees and
technology. Moreover, the negotiation and acquisition of such transactions
involve the diversion of substantial management resources and the evaluation
of such opportunities requires substantial diversion of engineering and
technological resources. In addition, transactions involving the issuance by
the Company of common stock or other securities could result in immediate and
substantial dilution to the Company's existing shareholders, large one-time
write-offs, or the creation of goodwill or other intangible assets that could
result in amortization expenses. To date, the Company has not consummated an
acquisition transaction. The failure to successfully evaluate, negotiate, and
effect acquisition transactions could have a material adverse effect on the
Company's business, operating results, and financial condition.

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<PAGE>

TCSI CORPORATION

POTENTIAL VOLATILITY OF STOCK PRICE

The market price of the shares of the Company's common stock has been and
is likely to continue to be highly volatile and may be significantly affected
by factors such as actual or anticipated fluctuations in the Company's
business, operating results, and financial condition, announcements of
technological innovations, new products, or new contracts by the Company or
its competitors, developments with respect to proprietary rights, adoption of
new accounting standards affecting the software industry, general market
conditions, and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stocks of technology
companies. These types of broad market fluctuations may adversely affect the
market price of the Company's common stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been initiated against such company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect upon the
Company's business, operating results, and financial condition. In this
regard, in late 1996, two class action lawsuits on behalf of certain of the
Company's shareholders were filed against the Company and various of its
officers and directors. In late September 1997, a third class action lawsuit
was filed in U.S. Federal Court on behalf of certain shareholders against the
Company and various of its officers and directors. The suits allege
violations of state securities laws during 1995 and 1996. Management believes
that the lawsuits are without merit and is contesting them.

-26-

<PAGE>

TCSI CORPORATION

Item 1. Legal Proceedings

On November 4, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company, certain of its officers
and directors, and certain underwriters (the "Copperstone State Action").
The complaint in the Copperstone State Action alleges that during a purported
class period of October 11, 1995 - September 25, 1996, defendants made
materially false and misleading statements concerning the Company's business
condition and prospects, in violation of California law. The plaintiffs in
the Copperstone State Action seek damages of an unspecified amount. On April
7, 1997, the Superior Court entered an order sustaining the demurrers of all
defendants to all causes of action. On June 2, 1997, plaintiffs filed an
amended complaint alleging a cause of action for violation of California
Corporations law. On June 23, defendants (other than the underwriter
defendants) demurred to the remaining cause of action. That demurrer is
pending. On July 23, 1997, plaintiffs voluntarily dismissed the underwriter
defendants without prejudice.

On November 20, 1996, a purported derivative action complaint was filed
in the Superior Court of the State of California, Alameda County, by Mike
Tinkler against the Company's Board of Directors (the "Tinkler Derivative
Action"). The complaint in the Tinkler Derivative Action also names the
Company as a nominal defendant. The complaint in the Tinkler Derivative
Action alleges that as a result of the facts alleged in the Copperstone State
Action, defendants breached their fiduciary duties to the Company, violated
California law, and were unjustly enriched. The plaintiff in the Tinkler
Derivative Action seeks damages of an unspecified amount. On July 1, 1997,
the Superior Court entered an order sustaining the Company's demurrer. On
July 21, 1997, plaintiff filed an amended complaint alleging identical causes
of action. On August 11, 1997, defendants filed a demurrer to the amended
complaint. That demurrer is pending.

On September 24, 1997, a purported class action complaint was filed in
the United States District Court for the Northern District of California by
Copperstone and Siciliano against the Company and certain of its officers and
directors (the "Copperstone Federal Action"). The Copperstone Federal Action
contains virtually identical factual allegations as the Copperstone State
Action, and alleges violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. The plaintiffs in the Copperstone
Federal Action also seek damages of an unspecified amount.

On May 16, 1997, Atmel Corporation made a claim under the TCSI/Atmel
Corporation Purchase Agreement dated November 14, 1996, asserting that TCSI
breached certain representations and warranties in connection with the
licensing of its embedded software product lines to Atmel Corporation.
Pursuant to the Purchase Agreement, $1,000,000 of the sale price was escrowed
to be available for claims arising from the transaction. Recently, Atmel has
asserted that its damages exceed $3,000,000. Management disputes this claim
and intends to initiate an arbitration proceeding to obtain the release of
the $1,000,000 escrow fund.

-27-

<PAGE>

TCSI CORPORATION

No trial in any of these actions is scheduled. The Company believes it
has meritorious defenses to all of these actions, and intends to defend each
of them vigorously. In the opinion of management, resolution of these
litigations is not expected to have a material adverse effect on the
financial position of the Company. However, depending on the amount and
timing, an unfavorable resolution of any of these matters could materially
affect the Company's future results of operation or cash flows in a
particular period.

-28-

<PAGE>

TCSI CORPORATION

Item 4. Submission of Matters to Vote of Security Holders

In connection with the consent mailing of TCSI Corporation dated July 16,
1997 the following matters were voted upon and approved by the
shareholders:

A proposal to amend the Company's 1991 Stock Incentive Plan to increase to
750,000 the maximum number of shares subject to option awards which may be
awarded to any participant in a fiscal year was approved by the
shareholders. The following votes were cast as to such proposal: For:
14,244,855; Against: 333,101; Abstain: 5,300.

A proposal to grant stock options to Dr. Ram A. Banin under the 1991 Plan
to acquire 500,000 shares of Common Stock at an exercise price equal to
$5.8876 per share was approved by the shareholders. The following votes
were cast as to such proposal: For: 14,219,790; Against: 357,616; Abstain:
5,850.

A proposal to authorize and direct the officers of the Company to take all
actions necessary to carry out the intent of the foregoing resolutions was
approved by the shareholders. The following votes were cast as to such
proposal: For: 14,297,183; Against: 280,773; Abstain: 5,300.

-29-

<PAGE>

TCSI CORPORATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits Required by Item 601 of Regulation S-K.

Exhibit Number Document Description
----------------------------------------------------------------------
----------------------------------------------------------------------

10.30 Amendment to TCSI Corporation 1991
Stock Incentive Plan, dated May 30,
1997, increasing the maximum number
of options which may be awarded in a
fiscal year.

11.1 Statement re: computation of per share
earnings

27 Financial Data Schedule

(b) Reports on Form 8-K filed in the third quarter of 1997.

(i) Press release dated August 1, 1997, "TCSI Announces Management
Change"

(ii) Press release dated July 30, 1997, "TCSI and IONA Technologies
Form Alliance to Develop Next Generation Telecommunication
Software Solutions; New Product Integration Provides TCSI
Customers With Full CORBA 2.0 Capabilities"

(iii) Press release dated July 17, 1997, "TCSI Corporation Reports
Second Quarter Results"

-30-

<PAGE>

TCSI CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.

TCSI Corporation
--------------------------------------------
(Registrant)

November 13, 1997 /s/ Ram A. Banin
- ------------------------------ --------------------------------------------
Date Ram A. Banin, President and Chief Executive
Officer, and Acting Chief Financial Officer

-31-

<PAGE>
TCSI CORPORATION

EXHIBIT 10.30
AMENDMENT TO TCSI CORPORATION
1991 STOCK INCENTIVE PLAN
(May 30, 1997)

WHEREAS, Section 5.3 of the 1991 Stock Incentive Plan, as amended (the
"Plan"), permits amendment of the Plan by the Board of Directors of TCSI
Corporation (the "Company");

WHEREAS, the following amendments to the Plan will become effective upon
approval by the shareholders of the Company;

NOW, THEREFORE, the Plan is amended to read as set forth below:

1. Article I, Section 1.8 of the Plan is amended by adding the following
new section:

"1.8. Limitation on Number of Shares Underlying Options Awards Made
Under the Plan to Any One Participant. To the extent required by
applicable Regulations promulgated under Section 162(m) of the Code, the
maximum number of shares of common stock subject to Option Awards that may
be granted to any one Participant under the Plan in any fiscal year is
750,000, inclusive of all Options that have been canceled, surrendered, or
repriced."

-32-

<PAGE>
TCSI CORPORATION

EXHIBIT 11.1

STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS)

COMPUTATION OF SHARES USED IN PER SHARE CALCULATIONS

Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Weighted average shares of common stock 21,730 21,027 21,510 20,285

Common stock equivalents -- -- -- --
--------- --------- --------- --------

Shares used in calculation of earnings (loss)
per share 21,730 21,027 21,510 20,285
--------- --------- --------- --------
--------- --------- --------- --------

Net loss $ (493) $(6,506) $(1,973) $(1,147)
--------- --------- --------- --------
--------- --------- --------- --------

Loss per share $ (0.02) $ (0.31) $ (0.09) $ (0.06)
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>

-33-

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENT AS OF SEPTEMBER 30, 1997 OF TCSI CORPORATION AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 35,274
<SECURITIES> 16,373
<RECEIVABLES> 12,835
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 67,203
<PP&E> 10,303
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,732
<CURRENT-LIABILITIES> 6,467
<BONDS> 0
0
0
<COMMON> 2,189
<OTHER-SE> 72,076
<TOTAL-LIABILITY-AND-EQUITY> 80,732
<SALES> 0
<TOTAL-REVENUES> 29,095
<CGS> 0
<TOTAL-COSTS> 34,369
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,988)
<INCOME-TAX> (1,015)
<INCOME-CONTINUING> (1,973)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,973)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)

</TABLE>