STOCKREPORTS		 Rational Software Corporation NASDAQ Symbol RATL
19-JUL-97 Industry:
Computer (Software & Services)		 Summary: This company develops, markets and supports a comprehensive solution for developing and managing complex software systems.

Recent Price 18.56
52 Wk Range 42.63 - 11.75		 Yield Nil
12-Mo. P/E NM

Quantitative Evaluation:
Outlook (1 Lowest - 5 Highest)
1-
Fair Value
9.48
Risk
HIGH
Earn/Div Rank
C
Technical Evaluation:
BEARISH since 03/97
Rel. Strength Rank (1 Lowest - 99 Highest)
54
Insider Activity
NA

Business Profile 24-MAR-97

Losses in FY 96 (Mar.) and the first nine months of FY 97 largely reflected substantial charges for acquired in-process research and development associated with recent acquisitions. The company's most significant recent acquisition was the February 1997 purchase of SQA, Inc., the leader in automated testing of Windows client/server applications, in exchange for about 7 million common shares. RATL anticipates that costs associated with this transction will contribute to an operating loss and a net loss for the fourth quarter and all of FY 97. Revenues continue to grow strongly, on increased customer acceptance of the company's products.

Operation Review 24-MAR-97

Revenues in the nine months ended December 31, 1996, advanced 35%, year to year, reflecting higher product revenue attributable to continued strong acceptance of object modeling tools and new versions of products for C/C++ application construction; consulting revenues also rose strongly. Margins widened, aided by a shift to higher-margin product sales and by lower product R&D and sales and marketing expenses as a percentage of revenues. Results in each period were penalized by significant charges for acquired in-process R&D, but despite substantially higher charges in the FY 97 period ($17.7 million, versus $8.7 million), the net loss narrowed to $4,167,000 ($0.12 a share, on 19% more shares), from $8,700,000 ($0.26).

Stock Performance 18-JUL-97n

In the past 30 trading days, RATL's shares have declined 0.67%, compared to a 7% rise in the S&P 500. Average trading volume for the past five days was 2,565,180 shares, compared with the 40-day moving average of 1,316,589 shares.

Key Stock Statistics

Dividend Rate/Share Nil
Shs. outstg. (M) 47.7
Avg. daily vol. (M) 1.414
Tang. Bk. Value/Share 5.05
Beta 1.51
Shareholders 1,000
Market cap. (B) $0.885
Inst. holdings 77%
Value of $10,000 invested 5 years ago:$ 44,994

Fiscal Year Ending Mar. 31

Revenue (Million $)
1998 1997 1996 1995 1994 1993
Q1 42.93 27.46 19.76 16.98 -- 5.22
Q2 NA 28.62 21.64 17.73 35.50 5.89
Q3 NA 32.26 24.00 18.61 17.00 6.60
Q4 NA 40.29 25.70 19.58 17.80 5.58
Year NA 145.4 91.11 72.90 70.34 23.29

Earning Per Share ($)
1998 1997 1996 1995 1994 1993
Q1 0.16 0.11 0.05 0.02 -- 0.05
Q2 NA 0.13 0.07 0.05 0.05 0.06
Q3 NA -0.34 -0.35 0.06 -0.03 0.06
Q4 NA -0.89 0.10 0.06 -0.59 Nil
Year NA -0.98 -0.13 0.19 -0.57 0.18

Dividend Data
Amount ($) Date Decl. Ex-Div. Date Stock of Record Payment Date
2-for-1 Jul. 23 Sep. 11 Aug. 27 Sep. 10 '96

Business Summary 24-MAR-97

Rational Software Corp. develops, markets and supports a comprehensive solution for developing and managing complex software systems. It provides an integrated family of tools that spans the critical phases of the software development process. These products are used with industry-standard hardware platforms and operating systems. In addition, RATL provides a full range of technical consulting, training and support services.

The product family includes the Rational Rose product line, for graphical object-oriented development; Rational Apex, to enforce the software architecture and manage development teams; and the VADS product line, to develop, debug and deliver high-performance embedded and client/server applications. Each of these tools is available on a stand-alone basis, or integrated with the company's other tools, and each is supported by RATL's consulting services. Consulting arrangements focus on software architecture and development processes, and the successful adoption of object-technology, regardless of programming language.

As of March 31, 1996, over 30,000 licenses of the company's products had been sold to more than 1,500 customers worldwide, including AT&T, Boeing and Smith Barney. In recent years, exports accounted for 36% of total revenues. In October 1995, RATL bought a 54% interest in Objectory AB, a provider of object-oriented business and software engineering solutions.

The company introduced Rational Rose for Java in May 1996, providing software developers with capabilities that simplify the development process and improve application quality. RATL also announced a Java extension that allows seamless integration of Java with C/C++ code. In October 1996, Rational acquired, for $23 million cash, Microsoft Visual Test, a software quality automation tool that allows users to create tests for any size or type of application. The company also formed a business alliance with Microsoft consisting of cross-licensing arrangements and certain joint development projects and marketing programs.

Important Developments

Feb. '97 RATL acquired SQA, Inc., the leader in automated testing of Windows client/server applications, in exchange for about 7 million common shares. Separately, it purchased Requisite, Inc., a leading provider of requirements-managment software tools and training, for $8.5 million. In March 1997, RATL acquired Sweded-based SoftLab AB, a leading provider of software-engineering tools and services, for $9.5 million.

Capitalization

Long Term Debt: None (12/96).

Per Share Data ($)
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Tangible Bk. Val. NA 1.53 0.48 0.26 1.68 1.64 1.29 1.17 0.90 0.69
Cash Flow NA 0.02 0.36 -0.38 0.36 0.22 0.22 0.29 0.29 0.08
Earnings -0.98 -0.13 0.19 -0.57 0.18 0.19 0.12 0.22 0.19 0.02
Dividends Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil
Payout Ratio Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil
Cal. Yrs. 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Prices - High 44 1/4 12 5 1/8 7 1/2 7 3/4 4 1/2 3 1/4 3 1/2 2 7/8 3 3/4
- Low 8 3 5/8 2 1/16 3 1/2 4 1/8 1 1/2 1 1/2 2 1/16 1 1/4 1 1/8
P/E Ratio - High NM NM 28 NM 43 23 27 15 15 NM
- Low NM NM 11 NM 23 8 13 9 6 NM

Income Statement Analysis (Million $)
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Revs. NA 91.1 72.9 70.3 23.3 19.2 13.3 11.4 9.5 6.4
Oper. Inc. NA 8.7 8.1 1.0 5.5 3.6 1.7 2.1 2.0 1.2
Depr. NA 4.6 4.5 4.8 1.9 1.0 0.9 0.6 0.7 0.4
Int. Exp. NA NA NA NA 0.2 0.2 0.2 0.2 0.1 0.2
Pretax Inc. NA -3.0 5.1 -13.4 3.2 2.3 1.1 1.9 1.5 0.1
Eff. Tax Rate NA NM 8.00% NM 37% 28% 12% 4.30% 1.50% NM
Net Inc. NA -4.0 4.7 -13.8 2.0 1.7 1.0 1.8 1.5 0.1

Balance Sheet & Other Fin. Data (Million $)
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Cash NA 52.6 10.5 13.7 11.4 9.4 5.0 4.8 2.9 0.9
Curr. Assets NA 78.1 30.0 30.0 20.6 15.0 9.1 8.6 5.8 2.7
Total Assets NA 85.7 38.0 39.3 27.2 21.2 14.7 13.8 11.1 8.5
Curr. Liab. NA 32.6 22.2 28.1 6.8 5.5 3.6 3.4 2.5 2.0
LT Debt NA Nil 0.6 3.0 0.6 0.7 0.6 0.8 1.5 1.0
Common Eqty. NA 50.9 12.1 6.5 17.4 14.5 10.4 9.3 7.0 5.3
Total Cap. NA 50.9 12.7 9.5 18.4 15.6 11.0 10.1 8.4 6.3
Cap. Exp. NA 2.8 3.2 5.3 0.5 1.5 1.1 1.1 0.4 0.0
Cash Flow NA 0.6 9.2 -9.0 3.9 2.7 1.9 2.4 2.2 0.5

Curr. Ratio NA 2.4 1.3 1.1 3.0 2.7 2.5 2.5 2.3 1.4
% LT Debt of Cap. NA Nil 5.1 31.5 3.5 4.5 5.5 7.9 17.2 16.7
% Net Inc.of Revs. NA NM 6.4 NM 8.7 8.7 7.6 15.7 15.7 1.2
% Ret. on Assets NA NM 12.0 NM 7.8 8.9 7.0 14.3 15.1 0.8
% Ret. on Equity NA NM 50.2 NM 11.8 12.8 10.1 21.8 24.1 1.8

Data as orig. reptd.; bef. results of disc. opers. and/or spec. items. Per share data adj. for stk. divs. as of ex-div. date. E-Estimated. NA-Not Available. NM-Not Meaningful. NR-Not Ranked.

Office---2800 San Tomas Expressway, Santa Clara, CA 95051-0951. Tel--(408) 496-3600. Website--http://www.rational.com Chrmn & CEO--P. D. Levy. Pres--M. T. Devlin. SVP, COO, CFO & Secy--R. T. Bond. Dirs--J. S. Campbell, D. H. Case III, L.G. Denend, M. T. Devlin, P. D. Levy, J. E. Montague, R. H. Nordin, A. R. Schleicher. Transfer Agent & Registrar--First Interstate Bank of California, SF. Incorporated--in Delaware in 1982. Empl-- 533. S&P Analyst: Adam Penn


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