AUGMENT SYSTEMS INC
SB-2/A, 1997-05-09
COMPUTER INTEGRATED SYSTEMS DESIGN
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     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1997
                                                      REGISTRATION NO. 333-21401
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------
                                 AMENDMENT NO. 3
                                       TO
                                    Form SB-2
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                                ----------------
                              AUGMENT SYSTEMS, INC.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
                                ----------------
    


            DELAWARE                                          04-3089539  
  (STATE OR OTHER JURISDICTION                                 (I.R.S.    
      OF INCORPORATION OR                                      EMPLOYER   
          ORGANIZATION)                                     IDENTIFICATION
                                      7373                       NO.)     
                          (PRIMARY STANDARD INDUSTRIAL
                           CLASSIFICATION CODE NUMBER)
                                ----------------
                                 2 ROBBINS ROAD
                         WESTFORD, MASSACHUSETTS 01886
                                 (508) 392-8626
   (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
                               PLACE OF BUSINESS)
             LORRIN G. GALE, PRESIDENT AND CHIEF EXECUTIVE OFFICER
                             AUGMENT SYSTEMS, INC.
                                 2 ROBBINS ROAD
                         WESTFORD, MASSACHUSETTS 01886
                                 (508) 392-8626
           (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
                                ----------------
                                   COPIES TO:
         MICHAEL A. HICKEY, ESQ.                    DAVID ALAN MILLER, ESQ.
          WARNER & STACKPOLE LLP                     PETER M. ZIEMBA, ESQ. 
             75 STATE STREET                       GRAUBARD MOLLEN & MILLER
       BOSTON, MASSACHUSETTS 02109                     600 THIRD AVENUE    
TEL: (617) 951-9000  FAX: (617) 951-9151           NEW YORK, NEW YORK 10016
                                                   TEL: (212) 818-8800 FAX:
                                                        (212) 818-8881     
                                ----------------

    APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:  As soon as
practicable after the effective date of this Registration Statement.

    If any  securities  being  registered  on this Form are to be  offered  on a
delayed or continuous  basis  pursuant to Rule 415 under the  Securities  Act of
1933, check the following box: [x]

    If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]

    If this Form is filed to  register  additional  securities  for an  offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list  the  Securities  Act  registration  statement  number  of the  earlier
effective registration statement for the same offering: [ ]

    If this Form is a  post-effective  amendment  filed  pursuant to Rule 462(c)
under the  Securities  Act,  check the following box and list the Securities Act
registration  statement number of the earlier effective  registration  statement
for the same offering: [ ]

                      CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
  TITLE OF EACH CLASS             AMOUNT              PROPOSED MAXIMUM         PROPOSED MAXIMUM             AMOUNT OF
OF SECURITIES TO BE                TO BE               OFFERING PRICE              AGGREGATE              REGISTRATION
      REGISTERED                REGISTERED            PER SECURITY(1)         OFFERING PRICE(1)                FEE
<S>                             <C>                   <C>                     <C>                         <C>

- ------------------------------------------------------------------------------------------------------------------------
Common Stock, par
value $.01 per
share(2)                         2,070,000                 $  5.50                $11,385,000              $ 3,450.00
- ------------------------------------------------------------------------------------------------------------------------
Warrants to purchase
one share of Common
Stock(3)                         2,070,000                 $  0.15                $   310,500              $    94.09
- ------------------------------------------------------------------------------------------------------------------------
Common Stock issuable
upon exercise of
Warrants(3)                      2,070,000                 $  6.60                $13,662,000              $ 4,140.00
- ------------------------------------------------------------------------------------------------------------------------
Underwriter's Purchase
Option(4)                                1                 $100.00                $       100                  --
- ------------------------------------------------------------------------------------------------------------------------
Common Stock issuable
upon exercise of
Underwriters' Purchase
Option                             180,000                 $ 9.075                $ 1,633,500              $   495.00
- ------------------------------------------------------------------------------------------------------------------------
Warrants issuable upon
exercise of
Underwriter's Purchase
Option(4)                          180,000                 $0.2475                $    44,550                  --
- ------------------------------------------------------------------------------------------------------------------------
Common Stock
underlying Warrants
issuable upon exercise
of Underwriters'
Purchase Option                    180,000                 $  6.60                $ 1,188,000              $   360.00
- ------------------------------------------------------------------------------------------------------------------------
   Total Registration
     Fee(5)                                                                                                $ 8,539.09
========================================================================================================================
</TABLE>
(1)  Estimated  solely  for the  purpose of  determining  the  registration  fee
     pursuant to Rule 457 under the Securities Act of 1933.
(2)  Includes  270,000  shares of Common Stock which the  Underwriters  have the
     option to purchase from the Registrant to cover over-allotments, if any.
(3)  Includes  270,000  Warrants  which  the  Underwriters  have the  option  to
     purchase from the Registrant to cover over-allotments, if any.
(4)  Pursuant to Rule 457(g), no registration fee is payable.
(5)  $8,600.01 has been paid previously.


                                -----------------
Pursuant to Rule 416, there are also being registered hereby such indeterminate
number of additional  shares of Common Stock as may be issued as a result of the
antidilution provisions of the Warrants and the Underwriters' Purchase Option.
                                -----------------
THE REGISTRANT HEREBY AMENDS THIS  REGISTRATION  STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT  SHALL FILE
A FURTHER  AMENDMENT THAT SPECIFICALLY  STATES THAT THIS REGISTRATION  STATEMENT
SHALL  THEREAFTER  BECOME  EFFECTIVE  IN  ACCORDANCE  WITH  SECTION  8(A) OF THE
SECURITIES  ACT OF  1933  OR  UNTIL  THE  REGISTRATION  STATEMENT  SHALL  BECOME
EFFECTIVE  ON SUCH  DATE  AS THE  SECURITIES  AND  EXCHANGE  COMMISSION,  ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================

INFORMATION   CONTAINED  HEREIN  IS  SUBJECT  TO  COMPLETION  OR  AMENDMENT.   A
REGISTRATION  STATEMENT  RELATING  TO THESE  SECURITIES  HAS BEEN FILED WITH THE
SECURITIES  AND EXCHANGE  COMMISSION.  THESE  SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION  STATEMENT  BECOMES
EFFECTIVE.  THIS  PROSPECTUS  SHALL  NOT  CONSTITUTE  AN  OFFER  TO  SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE  SECURITIES
IN ANY STATE IN WHICH SUCH OFFER,  SOLICITATION  OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.







   
                    SUBJECT TO COMPLETION, DATED MAY 9, 1997
    

PROSPECTUS
                                                                [LOGO]    
AUGMENT SYSTEMS, INC.


1,800,000 SHARES OF COMMON STOCK AND
1,800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS

All of the  1,800,000  shares of common  stock  ("Common  Stock") and  1,800,000
Redeemable Common Stock Purchase Warrants ("Warrants") offered hereby (together,
the  "Securities")  are  being  sold by  Augment  Systems,  Inc.  ("Company"  or
"Augment").  Each  Warrant  entitles  the holder to purchase one share of Common
Stock for $6.60 during the four-year period commencing one year from the date of
this  Prospectus.  The  Company  may  redeem  the  Warrants,  once  they  become
exercisable,  at a price of $.01 per  Warrant  on not less  than 30 days'  prior
written notice if the last sale price of the Common Stock has been at least 150%
of the then-current  exercise price of the Warrants (initially $9.90) for the 20
consecutive trading days ending on the third day prior to the date on which such
notice is given. See "Description of Securities."


Prior to this  Offering,  there has been no public market for the Securities and
there can be no assurance that any such market will develop.  See "Underwriting"
for  information  relating to the factors  considered in determining the initial
public  offering price of the Securities and the exercise price of the Warrants.
The Company has applied for  quotation  of the Common  Stock and Warrants on the
Nasdaq SmallCap Market under the symbols "AUGS" and "AUGSW," respectively.

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

THE SECURITIES  OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND  SUBSTANTIAL  DILUTION AND SHOULD BE  CONSIDERED  ONLY BY INVESTORS  WHO CAN
AFFORD THE LOSS OF THEIR  ENTIRE  INVESTMENT.  SEE "RISK  FACTORS" AT PAGE 6 AND
"DILUTION" AT PAGE 12 HEREOF.

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

THESE  SECURITIES  HAVE NOT BEEN APPROVED OR  DISAPPROVED  BY THE SECURITIES AND
EXCHANGE  COMMISSION OR ANY STATE  SECURITIES  COMMISSION NOR HAS THE SECURITIES
AND  EXCHANGE  COMMISSION  OR ANY STATE  SECURITIES  COMMISSION  PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>

========================================================================================================
                                                               PRICE        UNDERWRITING      PROCEEDS
                                                                 TO        DISCOUNTS AND         TO
                                                               PUBLIC     COMMISSIONS(1)     COMPANY(2)
- --------------------------------------------------------------------------------------------------------
<S>                                                         <C>           <C>                <C>
Per Share                                                      $5.50           $.495           $5.005
- --------------------------------------------------------------------------------------------------------
Per Warrant                                                     $.15           $.0135          $.1365
- --------------------------------------------------------------------------------------------------------

Total(3)                                                    $10,170,000       $915,300       $9,254,700
========================================================================================================

</TABLE>

(1)  Does not include a 3%  nonaccountable  expense  allowance which the Company
     has agreed to pay to the Underwriters.  The Company has also agreed to sell
     the Underwriters an option to purchase up to 180,000 shares of Common Stock
     and/or 180,000 Warrants  ("Underwriters' Purchase Option") and to indemnify
     the Underwriters against certain liabilities,  including  liabilities under
     the Securities Act of 1933.
     See "Underwriting."
(2)  Before   deducting   expenses   payable  by  the  Company,   including  the
     nonaccountable expense allowance, estimated at approximately $805,700.
(3)  The Company has granted the Underwriters an option,  exercisable  within 45
     business  days  from  the date of this  Prospectus,  to  purchase  up to an
     additional  270,000 shares of Common Stock and/or  270,000  Warrants on the
     same  terms  as set  forth  above,  solely  for  the  purpose  of  covering
     over-allotments,  if any. If such  over-allotment  option is  exercised  in
     full, the total Price to Public, Underwriting Discounts and Commissions and
     Proceeds  to  Company  will be  $11,695,500,  $1,052,595  and  $10,642,905,
     respectively. See "Underwriting."


The Securities are being offered by the  Underwriters on a firm commitment basis
subject  to prior  sale,  when,  as, and if  delivered  to and  accepted  by the
Underwriters and subject to the approval of certain legal matters by counsel and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or  modify  the  Offering  and to reject  any  order in whole or in part.  It is
expected that delivery of certificates  representing the Securities will be made
against payment therefor at the offices of GKN Securities Corp. in New York City
on or about ___________ , 1997.


GKN SECURITIES CORP.                                      LAIDLAW EQUITIES, INC.

          , 1997





[LOGO]  AUGMENT






               [ILLUSTRATION DEPICTING AUGMENT LOCAL AREA NETWORK]





   
    OFFERS AND SALES IN CALIFORNIA MAY BE MADE ONLY TO ACCREDITED  INVESTORS WHO
MEET A  SUITABILITY  STANDARD OF EITHER (A) $65,000  GROSS ANNUAL  INCOME AND AN
EXCLUSIVE  NET  WORTH  (NET  WORTH  EXCLUSIVE  OF  HOME,  HOME  FURNISHINGS  AND
AUTOMOBILES)  OF NOT  LESS  THAN  $250,000  OR (B) AN  EXCLUSIVE  NET  WORTH  OF
$500,000.

    OFFERS AND SALES IN NEW JERSEY  MAY BE MADE ONLY TO  INVESTORS  WHO MEET THE
FOLLOWING  SUITABILITY  STANDARDS:  EITHER (A) INDIVIDUAL GROSS ANNUAL INCOME IN
EXCESS OF $100,000 AND AN EXCLUSIVE NET WORTH (NET WORTH EXCLUSIVE OF HOME, HOME
FURNISHINGS AND AUTOMOBILES) OF NOT LESS THAN $250,000;  OR (B) AN EXCLUSIVE NET
WORTH OF $500,000.
    

Certain persons  participating in this Offering may engage in transactions  that
stabilize, maintain or otherwise affect the prices of the Securities,  including
over-allotment,  stabilizing transactions, syndicate short covering transactions
and penalty bids. For a description of these activities, see "Underwriting."

Macintosh(R) is a registered trademark of Apple Computer, Inc. and Windows NT(R)
is a registered trademark of Microsoft Corp.





                               PROSPECTUS SUMMARY

   
     The  following  summary is qualified  in its entirety by reference  to, and
should  be read in  conjunction  with,  the more  detailed  information  and the
financial  statements  (including the notes thereto) appearing elsewhere in this
Prospectus.  Each  prospective  investor is urged to read this Prospectus in its
entirety.  Unless  otherwise  indicated,  the information in this Prospectus has
been adjusted to reflect a  .637434-for-1  reverse  stock split  effective as of
October 30, 1996 and a 3-for-4  reverse  stock split  effective  as of April 24,
1997. Certain terms used in this Prospectus are defined in greater detail in the
Glossary appearing on page G-1 of this Prospectus.
    

                                   THE COMPANY

     Augment Systems, Inc., a development stage company,  designs,  develops and
sells high-end super server products designed to move large image and data files
rapidly and efficiently  over computer  networks.  The Company's  initial target
markets are the electronic publishing industry and the Internet/Intranet market.
Shipments of the Company's initial products,  high-end  Macintosh(R)-based super
servers,  commenced  in February  1997.  To date the  Company  has shipped  four
systems and anticipates  recognizing revenue from its initial shipments in April
1997.  The Company  plans to introduce  in the fourth  quarter of 1997 a Windows
NT(R)-based  super  server  targeted  to meet the  growing  demand  for  Windows
NT-based high performance  Internet/Intranet World Wide Web ("World Wide Web" or
"WEB")  servers and a super  server  system  designed to support  multi-platform
networks comprised of Macintosh, Windows NT and UNIX-based workstations.

     Electronic  publishing,  whether  involving the preparation of high quality
color printed documents in print shops,  service bureaus and internal  corporate
publishing  departments  or  interactive  documents  on  the  Internet/Intranet,
requires  massive  amounts of disk  storage  and the  movement of large data and
image files over networks. The Company's technology has been designed to support
multi-platform environments and is specifically aimed at increasing the transfer
speed of large image and data files over networks. The Company believes that its
products are also well-suited for other markets that require rapid and efficient
movement of large image and data files over  networks,  such as medical  imaging
and geophysical imaging systems ("GIS").

     The Company's super server systems perform the file management function and
high speed  interconnects  outside of the processor  running the core  operating
system. This unique approach produces significant  improvements in file transfer
speeds  and  enables  the server  system to  maintain  compatibility  with Apple
Computer,  Inc.  ("Apple") and Microsoft Corp.  ("Microsoft")  operating systems
while running different  application  software.  The Company's servers have been
designed to incorporate  extensive  scalable  internal  storage  complemented by
automatic tape back-up and archiving  capabilities.  In addition,  the Company's
server systems augment existing  networks with a fibre channel  arbitrated loop,
estimated by the Company to be up to 20 times faster than conventional  Ethernet
networks.  The Company  believes  that users of its server  systems can retrieve
files over their networks two to three times faster than from their hard drives.
The Company also believes that the  multi-platform  design and scalable  storage
capacity of its super server  systems will allow users to upgrade easily without
expensive outlays for new operating systems and hardware.

     The Company  intends to sell its products in the electronic  publishing and
Internet/Intranet  markets  through a direct sales force and through value added
resellers  ("VARs"),  system  integrators and original  equipment  manufacturers
("OEMs").  The Company also intends to work with OEMs to private  label and sell
its products in other markets requiring rapid transfer of large data files.

     The Company was  incorporated in Delaware in 1990 to develop and distribute
fiber optic printed circuit boards in the publishing and printing  markets.  The
Company  funded the fiber  optic  printed  circuit  board  business  principally
through a combination  of debt and equity  financings.  The fiber optic products
had limited  success and in 1994 the Company  began  phasing out the fiber optic
operations and began the transition  into a systems  integration and engineering
consulting  business.  In 1995 the Company made a further strategic shift in its
business  operation into the server market.  Since October 1995, the Company has
been operating as a development  stage company and has been engaged  principally
in research and development,  recruitment of personnel and financing activities.
The  Company's  executive  offices  are  located  at 2 Robbins  Road,  Westford,
Massachusetts 01886 and its telephone number is (508) 392-8626.


                                       3



                                  THE OFFERING

<TABLE>
<CAPTION>
  <S>                           <C>
 Securities Offered               1,800,000 shares of Common Stock and 1,800,000
                                  Warrants. Each Warrant entitles the registered
                                  holder to purchase  one share of Common  Stock
                                  for  $6.60   during   the   four-year   period
                                  commencing  one  year  from  the  date of this
                                  Prospectus.   The   Company   may  redeem  the
                                  Warrants,  once they become exercisable,  at a
                                  price of $.01 per  Warrant on not less than 30
                                  days'  prior  written  notice if the last sale
                                  price of the  Common  Stock  has been at least
                                  150% of the then current exercise price of the
                                  Warrants   (initially   $9.90)   for   the  20
                                  consecutive  trading  days ending on the third
                                  day prior to the date on which such  notice is
                                  given. See "Description of Securities."

  Common Stock Outstanding
  Prior to the Offering           2,913,319 shares

  Common Stock to be Outstanding
  After the Offering              4,713,319 shares

  Proposed Nasdaq SmallCap
  Market Symbols                  Common Stock:    AUGS
                                  Warrants:        AUGSW

</TABLE>

                                 USE OF PROCEEDS

    The Company intends to apply approximately $3,756,000 of the net proceeds of
this Offering to repay  outstanding  indebtedness,  approximately  $1,170,000 to
sales and marketing activities,  approximately $1,430,000 to product development
and  approximately   $340,000  to  acquire  capital  equipment.   The  remaining
$1,753,000 will be used for working capital and general corporate purposes.  See
"Use of Proceeds."

                                  RISK FACTORS

    The  Securities  offered  hereby  involve a high degree of risk,  including,
without limitation, the risk that the Company's products will not be accepted in
the marketplace;  the risk that the Company will not be successful in developing
future products; the risk of rapid technological changes in the server industry;
the  Company's  limited  operating  history,  history of losses and  accumulated
deficit;  the Company's need for additional capital;  and the highly competitive
nature of the server  industry.  An investment in the Securities  offered hereby
should be  considered  only by investors who can afford the loss of their entire
investment. See "Risk Factors."



                                       4




                          SUMMARY FINANCIAL INFORMATION

    The  summary  financial  information  set forth  below is  derived  from the
financial statements of the Company appearing elsewhere in the Prospectus.  This
information  should  be read in  conjunction  with  such  financial  statements,
including the notes thereto.

<TABLE>
<CAPTION>
                                                        
                                                        
                                                         YEAR ENDED                 SIX MONTHS    
                                                          JUNE 30,              ENDED DECEMBER 31,     CUMULATIVE PERIOD FROM
                                                    -------------------       ---------------------      OCTOBER 1, 1995 TO
                                                    1995          1996          1995         1996         DECEMBER 31, 1996
                                                    ----          ----          ----         ----         -----------------
<S>                                              <C>           <C>           <C>          <C>             <C>
Revenues                                         $   --        $   --        $  --        $  --              $  --
Operating expenses:
   Research and development                          --          1,388,149      155,575     1,526,384          2,914,533
   General and administrative                        39,273         90,274      387,150     1,083,267          1,132,878
   Selling and marketing                             --            --             9,500       490,735            490,735
                                                  ---------      ---------    ---------     ---------          ---------
Total operating expenses                             39,273      1,478,423      552,225     3,100,386          4,538,146
                                                  ---------      ---------    ---------     ---------          ---------
Other income (expense), net                          --            (26,059)      25,284      (115,899)          (141,958)
                                                  ---------      ---------    ---------     ---------         ---------
Loss from continuing operations                     (39,273)    (1,504,482)    (526,941)   (3,216,285)        (4,680,104)
Loss from discontinued operations                  (361,582)        (7,182)      (7,182)     --                 --
                                                  ---------      ---------    ---------     ---------          ---------
Net loss                                         $ (400,855)   $(1,511,664)  $ (534,123)  $(3,216,285)       $(4,680,104)
                                                 ==========    ===========   ==========   ===========        =========== 
Net loss per share:
   Loss for continuing operations                      (.02)          (.51)        (.19)         (.93)             (1.47)
   Loss from discontinued operations                   (.17)       --            --           --                --
                                                  ---------      ---------    ---------     ---------          ---------
Net loss per share                               $     (.19)   $      (.51)  $     (.19)  $      (.93)       $     (1.47)
                                                  =========      =========    =========     =========          =========
Weighted average number of shares of Common Stock
  and common stock equivalents outstanding        2,170,878      2,950,492    2,862,246     3,452,740         3,190,648
                                                  =========      =========    =========     =========         ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31, 1996
                                                                      ---------------------------------------------------
                                                                                                          PRO FORMA
                                                                       ACTUAL      PRO FORMA(1)(2)   AS ADJUSTED(1)(2)(3)
                                                                       ------      ---------------   --------------------
<S>                                                                  <C>           <C>               <C>
   
BALANCE SHEET DATA:
Working capital (deficit)                                            $(1,303,035)    $  (750,285)        $ 7,129,713
Total assets                                                           1,679,053       3,900,418           8,287,863
Total liabilities                                                      2,532,417       4,342,917           1,264,544
Accumulated deficit                                                   (7,059,213)     (7,059,213)         (7,952,524)
Stockholders' equity (deficit)                                       $  (853,364)    $  (442,499)        $ 7,023,319
</TABLE>
    

- --------

(1) Reflects the  issuance in February  1997 of units  consisting  of short term
    promissory  notes with an aggregate face value of $2,375,000 and warrants to
    purchase  605,625  shares of Common  Stock in a  private  placement  and the
    repayment  of a short term  advance of  $575,000.  Reflects  the exercise in
    March 1997 of a warrant to purchase  47,807 shares of the  Company's  Common
    Stock at $1.507 per share.

   
(2) Reflects the issuance in April and May of 1997 of long-term promissory notes
    in the aggregate principal amount of $400,000.

(3) Reflects the receipt of  approximately  $8,449,000  in net proceeds from the
    sale of the  Securities  offered hereby and the  application  thereof to the
    repayment of  approximately  $3,606,000 of short term  promissory  notes and
    long term  convertible  promissory  notes and  related  accrued  interest of
    $20,875 as of  December  31,  1996,  and  amortization  of debt  discount of
    $548,252 and a charge of $345,059 for deferred financing costs.

    Unless otherwise indicated,  all shares, per-share and financial information
set forth  herein  assumes no exercise of (i) the  Underwriters'  over-allotment
option; (ii) the Warrants;  (iii) the Underwriters'  Purchase Option; (iv) stock
options to purchase up to 429,650 shares of Common Stock  outstanding  under the
Company's  1995 Stock Option Plan ("Stock  Option  Plan");  (v) stock options to
purchase up to 170,350  shares of Common  Stock  which may be granted  under the
Company's Stock Option Plan; (vi) the holders' right to convert outstanding long
term convertible promissory notes and accrued interest into approximately 13,600
shares of Common Stock; and (vii) other  outstanding  warrants to purchase up to
969,884 shares of Common Stock.
    


                                       5



                                  RISK FACTORS

    The Securities  offered hereby are  speculative and involve a high degree of
risk.  Accordingly,  in analyzing an investment in the  Securities,  prospective
investors  should carefully  consider,  along with the other matters referred to
herein,  the following  risk factors.  No investor  should  participate  in this
Offering unless such investor can afford a complete loss of his investment.

    Market  Acceptance.  The Company's initial target markets are the electronic
publishing  industry and the  Internet/Intranet  market.  The Company's  initial
products,   which  were  first   shipped  in   February   1997,   are   high-end
Macintosh-based  super servers targeted at the electronic  publishing  industry.
The Company plans to introduce a Windows  NT-based  version of its server system
during  the  fourth  quarter  of 1997  that  is  specifically  tailored  for the
Internet/Intranet and to support multi-platform networks comprised of Macintosh,
Windows NT and UNIX-based workstations.  The Company's success is dependent upon
its ability to gain market  acceptance of its  products,  which will depend upon
the ability of the Company to  demonstrate  the  advantages of its products over
other  technology  offered by other  companies.  The  failure of the  Company to
penetrate  its target  markets  would have a material  adverse  effect  upon its
operations and prospects. See "Business--Competition."

    No Assurance of Successful  Future  Product  Development;  Rapid  Technology
Change;  Technological  Obsolescence;  Introduction of New Products. The Company
has not yet completed the development of its Windows NT-based server product nor
has  the  Company   developed  the  hardware  and  software  needed  to  support
multi-platform  networks  comprised  of  Macintosh,  Windows  NT  or  UNIX-based
workstations.  If the Company is unsuccessful in developing these products, then
the Company's sales and operations will be adversely  affected.  There can be no
assurance  that  any of the  Company's  future  products  will  be  successfully
developed or, if developed,  will be successfully marketed. The server market is
characterized  by extensive  research and  development  and rapid  technological
change resulting in product life cycles of 18 to 24 months. The Company's future
success  will  depend in large part on the  Company's  ability  to  develop  and
introduce new products that keep pace with technological  developments,  achieve
market  acceptance  and respond to  customer  requirements  that are  constantly
evolving.  Development  by  others of new or  improved  products,  processes  or
technologies may make the Company's  products or proposed  products  obsolete or
less competitive. The Company will be required to devote substantial efforts and
financial  resources  to  enhance  its  existing  products  and to  develop  new
products.  Any failure by the Company to  anticipate  or respond  adequately  to
technological  developments and customer  requirements or any significant delays
in product development or introduction could result in a loss of competitiveness
or could materially and adversely affect the Company's  operating  results.  See
"Business--Research and Development."

    Limited Operating  History;  History of Losses and Accumulated  Deficit;  No
Assurance of Significant  Revenues or Operating  Profit;  Independent  Certified
Public  Accountants'  Qualified  Report. To date, the Company has not recognized
any revenues from product sales and has experienced significant operating losses
since inception.  As of December 31, 1996, the Company's accumulated deficit was
approximately   $7,059,000,   its  working  capital  deficit  was  approximately
$1,303,000 and its stockholders' deficit was approximately $853,000. The Company
expects  to incur  substantial  additional  costs,  including  costs  related to
ongoing research and development  activities,  resulting in operating losses for
at least the next 12 months  following  the  completion  of this  Offering.  The
Company's ability to achieve  significant revenue and profitability is dependent
on successful  marketing of its existing  products and successful  completion of
the  development  of its  future  Windows  NT-based  server  and  multi-platform
products,  of which  there can be no  assurance.  The  report  of the  Company's
independent   certified  public   accountants  with  respect  to  the  financial
statements  of the  Company  for the year ended  December  31,  1996  contains a
paragraph regarding the Company's ability to continue as a going concern.  Among
the  factors  cited  by the  auditors  as  raising  substantial  doubt as to the
Company's  ability  to  continue  as a going  concern  is that the  Company  has
incurred recurring operating losses and is dependent on the net proceeds of this
Offering or obtaining financing by alternative means to continue its operations.
See  "Management's  Discussion  and Analysis of Financial  Condition and Plan of
Operation,"  the  Financial  Statements of the Company and the notes thereto and
the Report of Independent Certified Public Accountants included herein.


                                       6



    Need for Additional Capital.  The Company's future capital requirements will
depend on many factors, including cash flow from operations,  continued progress
in its research and development  programs,  competing  technological  and market
developments  and the  Company's  ability to market its  products  successfully.
Although  the  Company  believes  that the  proceeds  of this  Offering  will be
sufficient to continue its operations for the 12 months following the completion
of this  Offering,  there can be no assurance that this will be the case. To the
extent that the funds  generated by this Offering are  insufficient  to fund the
Company's  activities,  it will be necessary to raise  additional  funds through
other equity or debt financings. There can be no assurance that the Company will
be able to obtain  additional  funding on terms favorable to the Company,  if at
all.  If adequate  funds are not  available,  there would be a material  adverse
affect  on the  Company's  ability  to  continue  its  operations.  See  "Use of
Proceeds" and "Management's  Discussion and Analysis of Financial  Condition and
Plan of Operation."

    Competition. The high-end super server market is highly competitive. Many of
the  Company's   competitors,   including   Sun   Microsystems   Inc.   ("Sun"),
Hewlett-Packard Co.  ("Hewlett-Packard"),  International Business Machines Corp.
("IBM"), Apple, Digital Equipment Corporation and Silicon Graphics Inc. ("SGI"),
have significantly greater market recognition and greater financial,  technical,
marketing and human resources than the Company. The Company's competitors can be
expected to continue to improve the design and performance of their products and
to introduce new products with competitive price-to-performance characteristics.
Competitive  pressures  often  necessitate  price  reduction which can adversely
affect  operating  results.  Although the Company believes that it presently has
certain  technical and other advantages over its  competitors,  maintaining such
advantages  will require a continued  high level of investment by the Company in
research and development and sales and marketing. There can be no assurance that
the Company will have  sufficient  resources to continue to make such investment
or that the Company will be able to make the technological advances necessary to
maintain such competitive advantages. There can be no assurance that the Company
will  be  able to  compete  successfully  against  existing  competitors  or new
entrants to the marketplace. See "Business--Competition."

    Dependence  on  Suppliers  and  Manufacturers.  The  Company  will  rely  on
independent  high-volume  manufacturers  for the  production of its  components,
which may result in reliance on a single source or a limited group of suppliers.
Although the Company believes that there are a number of  manufacturers  capable
of  producing  the  hardware  components,   any  delays  in  obtaining  hardware
components  on a timely  basis  could  have a  material  adverse  effect  on the
Company's sales and operations.  The Company  currently  depends upon Toshiba as
its sole source supplier of customized  Application Specific Integrated Circuits
("ASICs").  The Company has no contract with Toshiba requiring Toshiba to supply
the Company with ASICs.  The Company's  inability to obtain the customized ASICs
would have a material adverse effect on its business. Furthermore, a significant
increase in the price of one or more of these  components could adversely affect
the  Company's   results  of  operations.   See   "Business--Manufacturing   and
Suppliers."

    Dependence  on  Proprietary  Technology  of Others.  The  Company's  current
products  incorporate  technology  licensed  from  Radius,  Inc.  ("Radius"),  a
publicly-held   company  that  manufactures   Macintosh   controller  cards  and
accessories.  The license is exclusive  except as to Radius,  which has retained
rights to its  technology.  If the Company  fails to sell the minimum  number of
units required to be sold pursuant to the Radius  agreement for two  consecutive
calendar  quarters,  Radius may  license the  technology  to other  parties.  In
addition, if the Company fails to fulfill its other obligations under the Radius
agreement,  including its obligation to pay royalties,  Radius may terminate the
license.  The Company's  current  products  also  incorporate  certain  critical
technology licensed from Polybus Systems Corporation ("Polybus"). If the Company
fails to fulfill its  obligations  under the Polybus  agreement,  including  its
obligation to pay royalties, Polybus may license the technology to third parties
in the publishing market. See "Business -- Technology."

    Dependence  on  Proprietary  Know-how  and Trade  Secrets;  Lack of Patented
Technology;  Risk of Infringement.  The Company relies on unpatented proprietary
know-how   and  trade   secrets,   and  employs   various   methods,   including
confidentiality  agreements with employees,  consultants and marketing partners,
to protect its trade secrets and know-how.  There can be no assurance,  however,
that the Company  will be able to  maintain  the  confidentiality  of any of its
proprietary  technology,  know-how  or trade  secrets,  or that  others will not
independently  develop  substantially  equivalent  technology.  The  failure  or
inability to protect  these rights could have a material  adverse  effect on the
Company's  results of operations.  Moreover,  there 


                                       7




can be no assurance  that the Company's  proposed  products will not infringe on
the rights of others. The Company may be forced to expend substantial  resources
if the Company is required to defend against any such infringement  claims.  The
Company also may desire or be required to obtain  licenses  from others in order
to develop  new  products  or  applications  for its  products.  There can be no
assurance  that such  licenses will be  obtainable  on  commercially  reasonable
terms,  if at all, that the patents  underlying  such licenses will be valid and
enforceable  or  that  the  proprietary  nature  of  the  unpatented  technology
underlying such licenses will remain proprietary. "See Business--Technology."

   
    Significant  Portion of Proceeds  Used to Satisfy  Indebtedness;  Benefit to
Insiders.  Approximately  $3,756,000,  or 44.5%, of the net proceeds received by
the Company from this  Offering will be used to repay  outstanding  indebtedness
and  related  interest,  and,  therefore,  will  not  be  available  for  future
operations.  Approximately $52,000 of such amount will be paid to the Stanley A.
Young Family Limited  Partnership,  of which Stanley A. Young, a director of the
Company, is a partner.  Approximately  $1,753,000, or 20.8%, of the net proceeds
of the Offering  has been  allocated  to working  capital and general  corporate
purposes.  Included in this amount are accrued  consulting fees of approximately
$67,250  payable  to Young  Management  Group,  Inc.,  of which  Mr.  Young is a
majority stockholder. See "Use of Proceeds" and "Certain Transactions."

    Related Party Transactions;  Possible Conflicts of Interest. The Company has
engaged in certain transactions with certain of its directors, and is a party to
a consulting  agreement  with an affiliate  of one of its  directors  which will
continue  after  the  consummation  of this  Offering.  Ownership  interests  of
directors  of the  Company in  entities  providing  services  to the  Company or
service as a director of both the Company and such  entities  could  create,  or
appear to create,  potential  conflicts  of  interest.  All future  transactions
between the Company and any of its officers,  directors,  principal stockholders
or  affiliates  will be  approved by a committee  of the Board of  Directors,  a
majority of the members of which shall be independent directors, or, if required
by law,  a majority  of  disinterested  directors,  and will be on terms no less
favorable  to the Company  than could be obtained in arm's  length  transactions
from unaffiliated third parties. See "Certain Transactions."
    

    Dependence on Chief Executive  Officer;  Dependence on Qualified  Personnel.
The  Company  relies on the  efforts of Lorrin  Gale,  its  President  and Chief
Executive Officer. Although the Company has entered into an employment agreement
with Mr.  Gale  expiring on December  31, 1998 and has  obtained a "key  person"
insurance  policy  on his life in the  amount  of  $1,000,000,  under  which the
Company will be the beneficiary, the loss of the services of Mr. Gale could have
a material adverse effect on the Company.  Additionally,  the ability to attract
and retain other highly competent executives, professionals, sales personnel and
other employees is critical to the ongoing  success of the Company.  The Company
has not  experienced  any  difficulties  in attracting  and retaining  qualified
personnel,  although  there can be no assurance  that it will not encounter such
problems in the future. See "Management."

    Immediate and Substantial Dilution. The existing stockholders of the Company
acquired their  respective  equity interests at prices  substantially  below the
offering prices in this Offering.  Purchasers of the Common Stock offered hereby
will incur an immediate and substantial  dilution of approximately  74% of their
investment  in the  Common  Stock  because  the net  tangible  book value of the
Company's Common Stock after this Offering will be approximately $1.49 per share
as compared with the initial public  offering price of $5.65 per share of Common
Stock attributing no value to the Warrant.  Accordingly,  to the extent that the
Company incurs losses, the public investors will bear a disproportionate risk of
such losses. See "Dilution."

   
    Broad  Discretion in  Application  of Proceeds.  The Company will have broad
discretion  regarding  how and when the proceeds of this  Offering  allocated to
working  capital and general  corporate  purposes  (approximately  $1,753,000 or
20.8% of the net  proceeds)  will be  applied  and will  use a  portion  of such
proceeds to pay salaries, including salaries of its executive officers. See "Use
of Proceeds."

    No Prior Market; No Assurance of Market Development;  NASDR Investigation of
Managing  Underwriter.  There has been no prior market for the Company's  Common
Stock or Warrants,  and there can be no assurance  that a public  market for the
Common  Stock or  Warrants  will  develop or be  sustained  after the  Offering.
Although the Company has applied for  quotation of the Common Stock and Warrants
on the Nasdaq  SmallCap  Market  ("Nasdaq"),  there can be no assurance  that an
active  trading  market in the  Common  Stock or  Warrants  will  develop  or be
maintained.  In order to continue to be quoted on Nasdaq


                                       8



after the  Offering,  the Company must  satisfy  certain  maintenance  criteria,
including an additional  obligation imposed by Nasdaq to have five market makers
for the  Common  Stock and  Warrants.  The  failure  to meet  these  maintenance
criteria  in the future may result in the  Common  Stock and  Warrants  becoming
ineligible  for quotation on Nasdaq and trading,  if any, of the Common Stock or
Warrants would thereafter be conducted on the OTC Bulletin Board. As a result of
such  ineligibility  for  quotation,  an investor may find it more  difficult to
dispose  of, or to obtain  accurate  quotations  as to the market  value of, the
Common Stock. See "Underwriting."

    NASD Regulation,  Inc.  ("NASDR") recently conducted an investigation of GKN
Securities Corp. ("GKN"), the managing  underwriter of this Offering.  The NASDR
staff informed GKN that a District Business Conduct Committee has authorized the
filing  of  a  complaint  against  GKN,  members  of  GKN's  senior  management,
supervisory  personnel  and current  and former  brokers.  GKN expects  that the
complaint  will  allege  that  it  violated  the  anti-fraud  provisions  of the
Securities Exchange Act of 1934 ("Exchange Act") and the fair pricing provisions
of the NASDR Conduct Rules by charging  excessive markups in the sale of certain
warrants it underwrote and for which it acted as a market maker. GKN understands
that the NASDR  staff will allege that the  aggregate  amount of such  excessive
markups was approximately $1.1 million.  GKN anticipates that the complaint will
seek  monetary   restitution   from  GKN  to  its  customers  and  monetary  and
non-monetary  sanctions and other relief  against GKN and  individuals.  GKN has
advised the Company that, while there can be no assurance,  GKN does not believe
that the pendency or  resolution of this NASDR matter will affect its ability to
complete the  underwriting  of this Offering or to act as a market maker for the
Company's securities after the Offering.

    Penny  Stock  Regulations;  Illiquid  Securities.  The  regulations  of  the
Securities and Exchange Commission ("Commission") promulgated under the Exchange
Act require  additional  disclosure  relating to the market for penny  stocks in
connection  with  trades  in any  stock  defined  as a penny  stock.  Commission
regulations  generally  define a penny stock to be an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. Unless
an exception is available,  those regulations require the delivery, prior to any
transaction  involving a penny stock,  of a disclosure  schedule  explaining the
penny stock market and the risks  associated  therewith and impose various sales
practice  requirements on broker-dealers  who sell penny stocks to persons other
than established customers and accredited investors (generally institutions). In
addition, the broker-dealer must provide the customer with current bid and offer
quotations for the penny stock,  the compensation of the  broker-dealer  and its
salesperson in the transaction and monthly account statements showing the market
value  of  each  penny  stock  held  in  the   customer's   account.   Moreover,
broker-dealers  who recommend such securities to persons other than  established
customers  and  accredited  investors  must make a special  written  suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction  prior to sale. If the Company's  securities become subject to the
regulations  applicable to penny stocks,  the market liquidity for the Company's
securities  could be severely  affected.  In such an event,  the  regulations on
penny stocks  could limit the ability of  broker-dealers  to sell the  Company's
securities  and thus the ability of purchasers  of the  Company's  securities to
sell their securities in the secondary market.
    

    Arbitrary  Offering  Price;  Volatility of Stock Price.  The public offering
price of the Common Stock and  Warrants  and the exercise  price of the Warrants
were established by negotiation between the Company and the Underwriters and may
not be  indicative  of prices that will  prevail in the trading  market.  In the
absence of an active trading market, purchasers of the Common Stock and Warrants
may experience substantial  difficulty in selling their securities.  The trading
prices of the Company's  Common Stock and Warrants are expected to be subject to
significant  fluctuations  in  response to  variations  in  quarterly  operating
results,  changes in analysts'  earnings  estimates,  general  conditions in the
computer and publishing  industries and other  factors.  In addition,  the stock
market is subject to price and volume fluctuations that affect the market prices
for  companies  and that are  often  unrelated  to  operating  performance.  See
"Description of Securities" and "Underwriting."

    Common Stock Eligible for Future Sale;  Registration  Obligations.  Sales of
the Company's  Common Stock in the public market after this Offering by existing
stockholders and by holders of outstanding  options and warrants could adversely
affect the market price of the Common Stock. The Company has agreed to register,
no later than 13 months after the  effective  date of this  Offering,  1,871,998
shares of issued and outstanding Common Stock and approximately 13,600 shares of
Common


                                       9




   
Stock  issuable  upon the  conversion  of  outstanding  principal of and accrued
interest on certain long term convertible promissory notes. In connection with a
consulting agreement with Young Management Group, Inc. ("Young  Management"),  a
Company founded by Stanley A. Young, a director of the Company,  the Company has
agreed  to use its best  efforts  to  register  179,279  shares  of  issued  and
outstanding  Common  Stock  as part of any  registration  of  securities  by the
Company,  subject to the  discretion  of the  managing  underwriter,  if any, to
exclude such shares from  registration.  In addition,  the Company has agreed to
register  warrants to purchase  678,310  shares of Common  Stock and the 678,310
shares of Common Stock underlying these warrants no later than 12 months and one
day  after the date of this  Prospectus.  If the  shares  and  warrants  are not
registered within 12 months and one day after the date of this Prospectus,  then
the Company shall use its best efforts to register  these shares and warrants as
part of any other  registration  of securities by the Company until November 30,
2002.  The Company has also  agreed to use its best  efforts to register  47,807
shares of Common Stock issued pursuant to the exercise of a warrant,  as well as
the shares  underlying  warrants to purchase in the aggregate  269,608 shares of
Common Stock as part of any  registration of securities by the Company,  subject
to the  discretion of the managing  underwriter,  if any, to exclude such shares
from  registration.  In addition,  the Company has agreed to register the shares
underlying  warrants to purchase up to 21,966 shares of Common Stock issued to a
placement agent in connection with a private placement  completed in May 1996 no
later than 13 months after the  effective  date of this  Offering.  See "Certain
Transactions" and "Shares Eligible for Future Sale."

    Effect of Outstanding Options and Warrants.  Immediately after the Offering,
assuming full exercise of the Underwriters'  over-allotment  option, the Company
will have  outstanding  warrants  to purchase an  aggregate  of up to  3,039,884
shares of Common Stock.  This amount includes  2,070,000  shares  underlying the
Warrants  and  969,884  shares  underlying  warrants  outstanding  prior to this
Offering with exercise  prices between $1.507 per share and $4.125 per share. In
addition,  there will be  outstanding  stock  options  granted  pursuant  to the
Company's  Stock Option Plan to purchase an aggregate of  approximately  429,650
shares of Common Stock at exercise prices ranging from $1.507 per share to $5.50
per  share  and  the  Underwriters'   Purchase  Option  pursuant  to  which  the
Underwriters  have the right to acquire up to 180,000 shares of Common Stock for
$9.075 per share and 180,000  Warrants for $.2475 per  Warrant.  The exercise of
any  such   outstanding   Warrants,   other  warrants,   stock  options  or  the
Underwriters'  Purchase  Option  will  dilute the  percentage  ownership  of the
Company's  stockholders,  and any sales in the  public  market  of Common  Stock
underlying such Warrants,  other warrants,  stock options and the  Underwriters'
Purchase  Option may adversely  affect  prevailing  market prices for the Common
Stock.  Moreover,  the  terms  upon  which  the  Company  will be able to obtain
additional equity capital may be adversely  affected,  since the holders of such
outstanding  securities  can be  expected  to  exercise  them at a time when the
Company would, in all likelihood,  be able to obtain any needed capital on terms
more  favorable  to the  Company  than those  provided in such  Warrants,  other
warrants,   stock   options  and  the   Underwriters'   Purchase   Option.   See
"Management--Stock   Option  Plan,"  "Certain  Transactions,"   "Description  of
Securities" and "Underwriting."
    

    Potential  Adverse  Effects of Issuance of  Preferred  Stock;  Anti-takeover
Provisions.  The  Company  is  authorized  to issue up to  2,000,000  shares  of
preferred  stock,  $.01 par value  ("Preferred  Stock").  Preferred Stock may be
issued in one or more series,  the terms of which may be  determined at the time
of issuance by the Board of Directors,  without further action by  stockholders,
and may  include  voting  rights  (including  the  right to vote as a series  on
particular matters), preferences as to dividends and liquidation, conversion and
redemption  rights and sinking fund provisions.  No Preferred Stock is currently
outstanding  and the  Company  has no present  plans for the  issuance  thereof.
Issuance of such Preferred  Stock,  depending upon the rights,  preferences  and
designations thereof, may have the effect of delaying, deterring or preventing a
change in control of the Company,  or could result in the dilution of the voting
power of the Common Stock  purchased  in this  Offering.  In  addition,  certain
"anti- takeover" provisions of the Delaware General Corporation Law, among other
things,  may  restrict  the  ability of the  stockholders  to effect a merger or
business  combination or to obtain control of the Company.  See "Descriptions of
Securities--Preferred Stock" and "--Delaware Law."

    Possible  Influence of Directors and Officers.  The Company's  directors and
executive  officers  and  certain  of their  affiliates  will  beneficially  own
approximately  15.8% of the  Company's  outstanding  shares of Common Stock upon
completion of this Offering.  Accordingly,  these  stockholders  acting together


                                       10




   
will have the  ability to  influence  corporate  actions  requiring  stockholder
approval,  including the election of the Company's directors.  See "Management,"
"Principal Stockholders" and "Description of Securities."
    

    No  Dividends.  The Company has never paid any cash  dividends on its Common
Stock. The Board of Directors  anticipates  that for the foreseeable  future the
Company's earnings, if any, will be retained for use in the business and that no
cash dividends will be paid on the Common Stock. See "Dividend Policy."

    Current  Prospectus  and State Blue Sky  Registration  Required  to Exercise
Warrants.  The  Company  will be able to issue  shares of its Common  Stock upon
exercise of the Warrants only if there is then a current prospectus  relating to
such Common Stock and only if such Common Stock is qualified  for sale or exempt
from  qualification  under applicable state securities laws of the jurisdictions
in which the various holders of the Warrants reside.  The Company has undertaken
to file and keep current a prospectus which will permit the purchase and sale of
the Common Stock underlying the Warrants, but there can be no assurance that the
Company will be able to do so.  Although the Company  intends to seek to qualify
for sale the shares of Common Stock  underlying  the Warrants in those states in
which the  securities  are to be offered,  no  assurance  can be given that such
qualification  will  occur.  The  Warrants  may be deprived of any value and the
market for the  Warrants  may be limited if a current  prospectus  covering  the
Common Stock issuable upon the exercise of the Warrants is not kept effective or
if such  Common  Stock is not  qualified  or exempt  from  qualification  in the
jurisdictions   in  which  the  holders  of  the  Warrants   then  reside.   See
"Underwriting."

    Potential  Adverse  Effect of  Redemption  of Warrants.  The Warrants may be
redeemed by the Company with the prior written  consent of the  Underwriters  at
any time that they are exercisable at a redemption  price of $.01 per Warrant on
not less than 30 days' prior written notice if the last sale price of the Common
Stock  has  been  at  least  150% of the  then-exercise  price  of the  Warrants
(initially  $9.90)  for the 20  consecutive  trading  days  ending  on the third
trading day prior to the date of the notice of redemption.  Notice of redemption
of the  Warrants  could force the holders to exercise  the  Warrants and pay the
exercise  price at a time when it may be  disadvantageous  for them to do so, to
sell the Warrants at the current market price when they might  otherwise wish to
hold  the  Warrants,   or  to  accept  the  redemption   price  which  would  be
substantially  less  than  the  market  value  of the  Warrants  at the  time of
redemption. See "Description of Securities--Warrants."


                                       11




                                    DILUTION

    The difference between the initial public offering price per share of Common
Stock (attributing no value to the Warrants) and the pro forma net tangible book
value per share of Common Stock after this Offering constitutes the dilution per
share of Common Stock to investors in this Offering. Net tangible book value per
share is  determined  by dividing  the net tangible  book value (total  tangible
assets less total  liabilities)  by the number of  outstanding  shares of Common
Stock.  As of December  31,  1996,  based on  2,913,319  shares of Common  Stock
outstanding pro forma at December 31, 1996,  which includes  2,865,512 shares of
Common Stock outstanding at December 31, 1996, and 47,807 shares of Common Stock
issued in March 1997 upon the  exercise  of a warrant  for 47,807  shares of the
Company's  Common Stock,  the Company had a pro forma net tangible book value of
$(877,429)  or  approximately  $(.30) per share of Common  Stock.  After  giving
effect to the sale of the Securities offered hereby (less underwriting discounts
and estimated expenses of this Offering) and the application of the net proceeds
therefrom,  the pro forma net  tangible  book value at that date would have been
$7,023,319,  or  approximately  $1.49 per share.  This  represents  an immediate
increase in net tangible book value of approximately $1.79 per share to existing
stockholders  and an  immediate  dilution  of  approximately  $4.16 per share or
approximately 74% to investors in this Offering.

    The following table illustrates the per share dilution without giving effect
to operating results of the Company subsequent to December 31, 1996.

<TABLE>
<CAPTION>
      <S>                                                                  <C>     <C>          
         Public offering price of the Common Stock                                   $ 5.65
        
          Net tangible book value before Offering                            $(.36)
          Increase attributable to pro forma adjustments before Offering       .06
                                                                               ---
           Pro forma net tangible book value before Offering                  (.30)
           Increase attributable to investors in this Offering               $1.79
                                                                             -----
        Pro forma net tangible book value after Offering                               1.49
                                                                                       ----
        Dilution to investors in this Offering                                       $ 4.16
                                                                                     ======
</TABLE>

    The following table summarizes the number and percentage of shares of Common
Stock  purchased from the Company,  the amount and  percentage of  consideration
paid,  and the  average  price per share paid by  existing  stockholders  and by
investors pursuant to this Offering.

<TABLE>
<CAPTION>
                                             
                                             
                                               SHARES PURCHASED     TOTAL CONSIDERATION    AVERAGE
                                               ----------------     -------------------     PRICE
                                              NUMBER    PERCENT      AMOUNT     PERCENT   PER SHARE
                                              ------    -------      ------     -------   ---------
<S>                                         <C>         <C>       <C>           <C>       <C>
Existing Stockholders                       2,913,319     61.8%   $ 6,616,714     39.4%     $2.27
Investors in this Offering                  1,800,000     38.2     10,170,000     60.6      $5.65
                                            ---------     ----     ----------     ----      
  Total                                     4,713,319    100.0%   $16,786,714    100.0%
                                            =========    =====    ===========    ===== 
</TABLE>

    The  foregoing  analysis  assumes  no  exercise  of  outstanding  options or
warrants.  In the  event  any  such  options  or  warrants  are  exercised,  the
percentage  ownership of the  investors in this Offering will be reduced and the
dilution per share of Common Stock to investors in this Offering may increase.

                                       12



                                 USE OF PROCEEDS

    The net  proceeds to the  Company  from the sale of the  Securities  offered
hereby,  after  deducting  underwriting  discounts and commissions and estimated
expenses payable by the Company in connection with this offering,  are estimated
to be approximately  $8,449,000 ($9,791,440 if the Underwriters'  over-allotment
option is  exercised  in full).  The Company  intends to apply the net  proceeds
approximately as follows:


<TABLE>
<CAPTION>
 APPLICATION OF PROCEEDS                                     AMOUNT      PERCENT
 -----------------------                                     ------      -------
<S>                                                        <C>            <C>
Repayment of debt                                          $3,756,000      44.5%
Product development                                         1,430,000      16.9
Sales and marketing                                         1,170,000      13.8
Capital expenditures                                          340,000       4.0
Working capital and general corporate purposes              1,753,000      20.8
                                                            ---------      ----
  Total                                                    $8,449,000     100.0%
                                                           ==========     ===== 
</TABLE>

   
    Approximately  $3,756,000  of  the  net  proceeds  will  be  used  to  repay
$3,585,000 of outstanding  short term promissory  notes,  $21,000 of outstanding
long term convertible promissory notes and approximately $150,000 of interest on
such  promissory  notes  accrued  as of the  date  of this  Offering,  including
repayment of principal and interest of approximately $52,000 owed to the Stanley
A. Young Family  Limited  Partnership,  of which Stanley A. Young, a director of
the Company, is a partner.  See "Certain  Transactions." The $3,585,000 of short
term  promissory  notes bear  interest  at 12% per annum and are due and payable
upon  the  closing  of this  Offering.  As of the date of this  Prospectus,  the
Company has outstanding long term convertible  promissory notes in the principal
amount  of  $62,248  which  bear  interest  at 10% per  annum.  These  long term
convertible  promissory  notes plus accrued  interest are to be repaid:  (i) one
third  upon  the  completion  of this  Offering;  (ii) one  third  on the  first
anniversary of the closing of this  Offering;  and (iii) one third on the second
anniversary  of the closing of this  Offering,  unless  converted  prior to such
date.  The net  proceeds  from  these  borrowings  were  used  to  fund  product
development  and  engineering,  marketing  activities and working  capital.  See
"Management's  Discussion  and  Analysis  of  Financial  Condition  and  Plan of
Operation."
    

    Approximately  $1,430,000  of the net proceeds  will be used to continue the
development of the Company's  server products to increase their  performance and
capabilities, and to develop a Windows NT-based server and a super server system
to  support  networks   comprised  of  Macintosh,   Windows  NT  and  UNIX-based
workstations.  Included in this amount are salaries for product  development and
engineering personnel aggregating approximately $1,000,000.

    Approximately  $1,170,000  of the net  proceeds  will be used to  develop  a
direct sales and marketing organization, including the establishment of regional
sales offices in the United States, Europe and the Far East, and for promotional
activities,  trade  shows and  sales  materials.  Included  in this  amount  are
salaries for marketing and sales personnel aggregating approximately $750,000.

    Approximately  $340,000 of the net proceeds will be used for the purchase of
capital  equipment,   including  test  equipment,   sales  office  demonstration
equipment and personal computers.

    The balance of the net  proceeds of this  Offering  will be used for working
capital and general corporate purposes including, among other things, payment of
expenses  incurred  or to be  incurred  by the  Company in  connection  with its
operations,  costs  associated  with  additional  inventory,  payment of general
corporate  expenses,   including  salaries  of  officers,  and  the  payment  of
approximately  $67,250 in accrued  consulting  fees payable to Young  Management
Group, Inc., a corporation of which Stanley A. Young, a director of the Company,
is the majority  stockholder.  See "Certain  Transactions."  If the Underwriters
exercise  the  Underwriters'  over-allotment  option in full,  the Company  will
realize additional net proceeds of approximately $1,342,440, which will be added
to the Company's working capital.


                                       13



    Based on its  current  operating  plan,  the  Company  anticipates  that the
proceeds of the Offering,  together with existing  resources and cash  generated
from  operations will be sufficient to satisfy the Company's  contemplated  cash
requirements for at least 12 months.  There can be no assurance,  however,  that
the Company's cash requirements during this period will not exceed its available
resources or that these funds will be sufficient  to meet the  Company's  longer
term cash  requirements  for  operations.  In the event the  Company's  plans or
assumptions  change or prove to be  inaccurate,  or the proceeds of the Offering
together  with  cash  generated  from  future  revenues,  if  any,  prove  to be
insufficient  to fund  operations (due to  unanticipated  expenses,  problems or
other factors), the Company may find it necessary and/or advisable to reallocate
some  of the  proceeds  within  the  above-described  categories  and  therefore
management will have significant discretion regarding how and when such proceeds
will be applied.

    Proceeds not immediately  required for the purposes  described above will be
invested in United States  government  securities,  short term  certificates  of
deposit,   money   market   funds  or  other   investment   grade   short   term
interest-bearing investments.


                                       14



                                 CAPITALIZATION

    The following table sets forth the short term debt and capitalization of the
Company: (i) at December 31, 1996; (ii) pro forma to reflect certain significant
transactions  occurring  subsequent to December 31, 1996; and (iii) pro forma as
adjusted to reflect the issuance and sale of the  Securities  offered hereby and
the application of the estimated net proceeds therefrom. See "Use of Proceeds."


<TABLE>
<CAPTION>
                                                                            AS OF DECEMBER 31, 1996
                                                                  ---------------------------------------------
                                                                                                    PRO FORMA
                                                                  ACTUAL     PRO FORMA(1)(2)     AS ADJUSTED(3)
                                                                  ------     ---------------     --------------
<S>                                                            <C>           <C>                 <C>
   
Short term debt:
  Short term advance                                           $   575,000      $  --              $   --
                                                                 ---------        ---------         ----------      
  Short term promissory notes                                    1,051,248        3,036,748            --
                                                                 ---------        ---------         ----------      
  Current portion of obligations under capital leases               19,013           19,013             19,013
                                                                    ------           ------             ------
Long term debt:
  Long term promissory notes                                        62,248          462,248            441,498
                                                                    ------          -------            -------
  Obligations under capital leases, less current portion            27,530           27,530             27,530
                                                                    ------           ------             ------
Stockholders' equity:
  Preferred Stock, par value $.01 per share; 2,000,000 shares
   authorized, no shares issued and outstanding                    --               --                 --
  Common Stock, par value $.01 per share; 30,000,000 shares
   authorized; 2,865,512 shares issued and outstanding, actual;
   2,913,319 shares issued and outstanding, pro forma; 4,713,319
   shares issued and outstanding, pro forma as adjusted             28,655           29,133             47,133
  Additional paid-in capital                                     6,177,194        6,587,581         14,928,710
  Accumulated deficit                                           (7,059,213)      (7,059,213)        (7,952,524)
                                                                ----------       ----------         ---------- 
     Total stockholders' equity (deficit)                         (853,364)        (442,499)         7,023,319
                                                                  --------         --------          ---------
        Total capitalization                                   $   881,675      $ 3,103,040        $ 7,511,360
                                                               ===========      ===========        ===========
</TABLE>
    

- --------

(1)  Reflects the issuance in February  1997 of units  consisting  of short term
     promissory notes with an aggregate face value of $2,375,000 and warrants to
     purchase  605,625  shares of Common  Stock in a private  placement  and the
     repayment  of a short-term  advance of  $575,000.  Reflects the exercise in
     March 1997 of a warrant to purchase 47,807 shares of Common Stock at $1.507
     per share.

   
(2)  Reflects  the  issuance  in April and May of 1997 of  long-term  promissory
     notes in the aggregate principal amount of $400,000.

(3)  Reflects the receipt of  approximately  $8,449,000 in net proceeds from the
     sale of the Securities  offered hereby and the  application  thereof to the
     repayment of  approximately  $3,606,000 of short term promissory  notes and
     long term  convertible  promissory  notes and related  accrued  interest of
     $20,875 as of December  31, 1996,  and  amoritization  of debt  discount of
     $548,252 and a charge of $345,059 for deferred financing costs.
    

                              DIVIDEND POLICY

    The Company  has never  declared  or paid any cash  dividends  on its Common
Stock and it is currently the intention of the Company not to pay cash dividends
on its Common Stock in the foreseeable  future.  Management  intends to reinvest
earnings,  if any, in the development  and expansion of the Company's  business.
Any future  declaration of cash dividends will be at the discretion of the Board
of  Directors  and will  depend  upon the  earnings,  capital  requirements  and
financial  position  of the  Company,  general  economic  conditions  and  other
pertinent factors.


                                       15



                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                    FINANCIAL CONDITION AND PLAN OF OPERATION

    The discussion  and analysis  below should be read in  conjunction  with the
Financial  Statements  of the  Company  and the  Notes to  Financial  Statements
included elsewhere in this Prospectus.

INTRODUCTION

    The Company was  incorporated in 1990 to develop and distribute  fiber optic
printed circuit boards in the publishing and printing  markets.  The fiber optic
products had limited  success and in fiscal 1994 the Company  began  phasing out
the fiber optic  operations and began the transition into a systems  integration
and  engineering  consulting  business.  In  1995  the  Company  made a  further
strategic shift in its business  operation into the server market. In connection
therewith,  the Company  acquired the rights to server  technology  developed by
Radius.  Since  October  1995,  the Company has been  operating as a development
stage  company and has been engaged  principally  in research  and  development,
recruitment  of personnel and financing  activities.  The Company has engaged in
limited  marketing  activities  and did not  commence  shipments  of its initial
products, which are high-end Macintosh-based super servers, until February 1997.
To date the Company has shipped four systems and anticipates recognizing revenue
from its initial shipments in April 1997.

    For the periods October 1, 1995 to December 31, 1996, the Company incurred a
cumulative net loss of  approximately  $4,680,000.  Since December 31, 1996, the
Company has continued to incur losses and  anticipates  that it will continue to
incur  significant  losses  until,  at  the  earliest,   the  Company  generates
sufficient revenues to offset the substantial  up-front capital expenditures and
operating costs  associated with  developing and  commercializing  its products.
From  October  1,  1995  through   December  31,  1996,  the  Company   expended
approximately $2,915,000 on research and development.

    The initial  target market for the Company's  super server is the electronic
publishing  industry,  both for the creation and preparation of printed material
(prepress) and for electronic publishing via the Internet/Intranet.  The Company
believes that its products are also  well-suited for additional  markets such as
medical imaging and GIS. Each of these markets  requires the rapid and efficient
movement  of large  image and data files over  networks.  The  Company  plans to
introduce  during 1997 a Windows  NT-based  server  targeted to meet the growing
demand for high  performance  Windows  NT-based  Internet/Intranet  WEB servers.
Additionally,  the Company plans to introduce  during 1997 a super server system
designed to support a multi-platform network comprised of Macintosh,  Windows NT
and UNIX-based workstations.

PLAN OF OPERATION

    The Company  requires the proceeds of this Offering to continue  development
efforts  on  product  enhancements  and new  products,  to  commence  full scale
marketing of its products, including opening sales offices in the United States,
Europe  and  the  Far  East,  and  to  fund  inventory  purchases  and  accounts
receivable,  as well as other working capital expenditures.  The Company expects
that these efforts will require  significant  up-front  expenditures  which will
result in losses for the foreseeable  future.  The Company  anticipates  that it
will require  approximately  $3,756,000 of the proceeds of this Offering for the
repayment of outstanding debt, approximately $1,170,000 to establish a marketing
and sales  organization  and to promote the  Company's  products,  approximately
$1,430,000 for product  development  efforts,  and approximately  $1,753,000 for
working capital and general corporate  purposes.  During the next 12 months, the
Company  estimates  that it  will  expend  approximately  $340,000  for  capital
equipment, including hardware and software purchases. See "Use of Proceeds." The
Company's  management believes that the net proceeds of this Offering,  together
with existing  resources and cash generated from operations,  will be sufficient
to fund the  Company's  operations  for the next 12  months.  The  Company  may,
however,  attempt to  supplement  its cash position  through bank  financing for
working capital and lines of credit for capital equipment leasing.

    The  Company  currently  has  46  full-time  employees  and  12  independent
contractors  and plans to hire an additional  50 full-time  employees in various
capacities  during the 12 months  following the  consummation  of this Offering.
Additional  personnel  may be  required  depending  on  the  level  of  business


                                       16



activity.  The Company  expects,  however,  to continue its current  practice of
utilizing independent  consultants on an as-needed basis rather than exclusively
hiring additional full-time employees. See "Business--Employees."

   
    The Company has funded its operations  since October 1995 principally from a
combination of debt and equity financings  totalling  approximately  $8,110,000.
From October 1995 through April 1996, the Company issued convertible  promissory
notes in the aggregate principal amount of approximately $864,000. Approximately
$802,000 of the  principal  balance of these notes plus  accrued  interest  were
converted into shares of Common Stock in November 1996 at a conversion  price of
$4.00 per share.  In December 1996 and February  1997,  the Company raised gross
proceeds of  $3,585,000 in a private  placement of  promissory  notes and common
stock purchase warrants. The promissory notes bear interest at 12% per annum and
are to be repaid from the proceeds of this Offering. In addition, from September
1995 through  August 1996,  the Company  issued  1,653,623  shares of its Common
Stock for approximately  $3,372,000 in gross proceeds. In each of April 1997 and
May 1997 the Company  issued to Venture  Management  Consultants,  LLC, of which
Fred Chanowski,  a director of the Company, is a 20% member, a promisory note in
the principal  amount of $200,000 in consideration  for $200,000.  The promisory
notes both bear interest at 18% per annum with interest and principal payable at
maturity on May 31, 1998 and June 30, 1998, respectively.
    

    The  Company is in the  development  stage,  and as such,  success of future
operations  is  subject  to a  number  of  risks  described  elsewhere  in  this
Prospectus.  As a  result  of the  Company's  recurring  losses,  the  Company's
auditors  have  expressed  substantial  doubt  about the  Company's  ability  to
continue  as a going  concern.  The  Company's  ability to  continue  as a going
concern is dependent  upon the  anticipated  net proceeds  from this Offering or
obtaining financing by alternative means. The accompanying  financial statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.

NEW ACCOUNTING STANDARDS

    Effective July 1, 1996, the Company  adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based  Compensation." The Company will continue to account
for stock-based  compensation  for employees under  Accounting  Principles Board
Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. The
Company has  disclosed the pro forma net loss and per share amounts in the notes
to the financial statements using the  fair-value-based  method beginning in the
period ending December 31, 1996, with comparable  disclosures for the year ended
June 30, 1996.

    Statement of Financial  Accounting  Standards ("SFAS") No. 121,  "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," issued by the Financial Accounting  Standards Board ("FASB"),  is effective
for financial statements for fiscal years beginning after December 15, 1995. The
new standard  establishes  new guidelines  regarding when  impairment  losses on
long-lived  assets,  which include plant and equipment and certain  identifiable
intangible  assets and goodwill,  should be recognized and how impairment losses
should be measured. The Company does not expect the adoption of this standard to
have a material effect on its financial position or results of operations.


                                       17




                                    BUSINESS

GENERAL

    Augment Systems,  Inc., a development stage company,  designs,  develops and
sells high-end super server products designed to move large image and text files
rapidly and efficiently  over computer  networks.  The Company's  initial target
markets are the electronic publishing industry and the Internet/Intranet market.
Shipments of the Company's initial products,  high-end  Macintosh(R)-based super
servers,  commenced  in February  1997.  To date the  Company  has shipped  four
systems and anticipates  recognizing revenue from its initial shipments in April
1997.  The Company  plans to introduce  in the fourth  quarter of 1997 a Windows
NT-based super server  targeted to meet the growing demand for Windows  NT-based
high  performance  Internet/Intranet  WEB  servers  and a  super  server  system
designed to support multi-platform  networks comprised of Macintosh,  Windows NT
and UNIX-based workstations.

    Electronic  publishing,  whether  involving the  preparation of high quality
color printed documents in print shops,  service bureaus and internal  corporate
publishing  departments  or  interactive  documents  on  the  Internet/Intranet,
requires  massive  amounts of disk  storage  and the  movement of large text and
image files over networks. The Company's technology has been designed to support
multi-platform environments and is specifically aimed at increasing the transfer
speed of large image and data files over networks. The Company believes that its
products are also well-suited for other markets that require rapid and efficient
movement of large image and data files over  networks,  such as medical  imaging
and GIS.

    The Company's  super server products  perform the file management  functions
and high speed interconnects outside of the processor running the core operating
system. This unique approach produces significant  improvements in file transfer
speeds and enables the server  system to maintain  compatibility  with Apple and
Microsoft operating systems while running different  application  software.  The
Company's servers have been designed to incorporate  extensive scalable internal
storage of up to 100 gigabytes ("GBs") with Redundant Array of Independent Disks
("RAID")  complemented  by 96  GBs  of  automatic  tape  back-up  and  archiving
capabilities.  In  addition,  the  Company's  server  systems  augment  existing
networks with a fibre channel arbitrated loop, estimated by the Company to be up
to 20 times faster than  conventional  Ethernet  networks.  The Company believes
that users of its server  systems can retrieve  files over their networks two to
three times faster than from their hard drives.  The Company also  believes that
the  multi-platform  design and  scalable  storage  capacity of its super server
systems will allow users to upgrade  easily  without  expensive  outlays for new
operating systems and hardware.

INITIAL TARGET MARKETS

 ELECTRONIC PUBLISHING

    Electronic  publishing,  whether  involving the  preparation of high quality
printed  documents  in print  shops,  service  bureaus  and  internal  corporate
publishing  departments or interactive documents on the World Wide Web, requires
massive  amounts of disk  storage and the ability to transfer  large  amounts of
data quickly.  Consequently,  the  electronic  publishing  market is continually
searching for solutions to improve network performance, central storage, and the
management and movement of large image files.  Powerful centralized file servers
generally  yield  higher   production   efficiencies   than  networks  that  use
distributed files.

    Color  prepress  is the  publishing  industry  term  for  the  graphic  arts
processes  required to design and prepare  press film or plates for high quality
multi-color printing. Traditional color prepress operations involve large-format
cameras,  masks, color filters, and special films and manual cutting,  placement
and photo retouching performed by highly skilled technicians.

    The publishing  industry is rapidly  changing due to the availability of new
technology ranging from fundamental changes in the printing process which enable
low  volume  print  runs  and  fast  turn-around,  to the  explosive  growth  of
electronic  publishing driven by the  Internet/Intranet  and the World Wide 


                                       18




Web. The process in today's color prepress  industry is almost entirely  digital
and electronic,  using color scanners,  high-powered  computer  editing systems,
digital image processing, and computer-controlled output directly to paper, film
or a printing plate.

    Modern digital color prepress operations involve multiple users manipulating
very large data files using specialized  software running on powerful  computing
systems.  General  purpose desktop and server  technology  available on the open
market cannot meet all of the user's needs. The Company's products  specifically
address the industry  need for  high-volume,  production-line  data handling and
effective  job  process  management.   The  Company's  products,  which  combine
high-performance  interconnect  technology  and a  scalable  server,  have  been
optimized for the production flow of large data files.

    The Company's initial products are Macintosh-based high-end servers targeted
at the Macintosh user community.  Apple currently dominates  specialized markets
such as high-end publishing, graphic design, prepress production, video editing,
imaging and  education.  Users who have made  significant  investments  in Apple
equipment  need to gain the benefits of a client  server model while  preserving
file integrity,  which is not currently  provided by Apple. The Company believes
that Apple's  introduction of UNIX-based file servers has provided a significant
market  opportunity for the Company's  Macintosh- based servers,  which preserve
file integrity and do not require proficiency in UNIX. The Company believes that
its  server  products  will  provide  solutions  sought  by the  Macintosh  user
community by eliminating  bottlenecks of large file transfer and by centralizing
files and data. The Company  believes that  Macintosh-networked  systems tend to
use distributed files because of inadequate end-to-end throughput and the users'
inability or reluctance to execute Macintosh  applications using other operating
systems.  The Company also  believes that its server  provides a true  Macintosh
solution with a  price-to-performance  ratio equal to or better than  UNIX-based
super servers.

INTERNET/INTRANET

    The  Internet  evolved  from a  network  developed  in the 1970s by the U.S.
Advanced  Research  Projects  Agency.  For many  years use of the  Internet  was
limited and, even when released from government  control,  it was initially slow
to  come  into  widespread  use due to its  obscure  and  difficult-to-use  user
interface that had evolved for the low bandwidth networks that were available to
early  designers.  The growth in the use and popularity of the Internet  started
with the  introduction  of the World Wide Web. The WEB is a means of  publishing
documents on the Internet in a fashion that makes them  interactive and provides
a user interface needed for the network.

    The use of the WEB both for  Internet  and  Intranet  access is  growing  at
phenomenal  rates.  The Company  believes that this trend will continue into the
foreseeable  future with the WEB  becoming the  dominant  means of  distributing
information  both within  companies  and on wide area  networks,  including  the
Internet.  At the same  time  that the  number  of users of this  technology  is
exploding, the complexity of the information is increasing. The use of graphics,
video,   audio,  and  imaging  information  within  WEB  pages  is  pushing  the
requirements for bandwidth and disk storage for WEB servers to higher levels.

    There are currently three platforms for Internet WEB servers:  UNIX, Windows
NT and  Macintosh.  The current  installed  base is largely  UNIX  systems,  but
Windows NT is rapidly increasing in popularity.

    The Company's initial server will support the Macintosh WEB server software.
The Company  believes that its product will be popular as a WEB server in market
segments in which  Macintosh  is popular.  The Company  believes  that the great
majority of WEB servers  installed in the foreseeable  future  however,  whether
from Microsoft,  Netscape or others,  will most likely be Windows NT-based.  The
introduction of the Company's Window NT-based WEB server is intended to coincide
with what the Company  believes  will be an  extraordinary  demand for very high
performance,  scalable  systems  to meet the  requirements  of the  market.  The
Company believes that it will be well positioned with a unique solution that can
cost-effectively meet the demands of that market.

TECHNOLOGY

    The  Company's  technology  incorporates  (i)  end-to-end  high-speed  fiber
connectivity,   (ii)  a  superior  disk  storage  subsystem,  (iii)  centralized
input/output  ("I/O") services for multiple  processors and (iv) file management
software  in a server  product  tuned to  transfer  large  files over a network.
Independent


                                       19




plug-in processors are key elements in the Company's servers, making it possible
to expand the capacity of each server to meet a wide range of needs. Support for
different  processor  types and operating  system  environments  allows users to
choose among many application software packages. This modular hardware structure
supports incremental  expansion and component  technology  upgrades,  largely by
using standard products from major industry suppliers.

    The Company's super servers include a high speed file system that appears to
the desktop applications as a local hard drive, but can provide shared access of
up to 100 GBs of data  (expandable to more than a terabyte)  complemented  by 96
GBs of automatic  tape  back-up and  archiving  capabilities,  and speeds two to
three times faster than a local hard drive. The Company's super servers move the
file  management  function  and the  high  speed  interconnects  outside  of the
processor  running the core  operating  system.  This unique  approach  produces
significant  improvements  in file transfer speeds and enables the server system
to maintain  compatibility  with Apple and  Microsoft  operating  systems  while
running different application software.

    The Company's  server includes a RAID controller  driven by customized ASICs
chips that provide both high  performance and  reliability.  The I/O devices and
disk  storage  can  be  partitioned   among  several  plug-in   processors,   or
alternatively,  specific  devices  can be  reserved  for  control  by any single
processor. Operating the disk array in RAID mode does not require any additional
software  support in the client  computers;  it is handled  transparently by the
file system control processor.  Access to the server is provided by an operating
system device driver in each desktop  machine.  The user's local area network is
complemented with a one gigabit/second  fibre channel arbitrated loop to provide
data  transfers  between  the server  and the  desktop  systems  at speeds  that
significantly exceed local disk transfer rates.

    Each  server  contains  (i)  an  embedded  I/O  control  processor,  (ii)  a
hardware-assisted  parallel  disk  array,  (iii)  two  NuBus-90  backplanes  for
application  and  network  processors  and (iv) a power  supply,  in a  deskside
low-boy cabinet.  The server supports up to 30 internal 3.5" disks in a parallel
array, two serial ports and a separate SCSI connected to the Macintosh  console.
Each  backplane  supports up to six I/O control  processors.  The parallel  disk
array can operate as five  independent  SCSI  interfaces  or in parallel  RAID 3
configurations.

    The  Company's  server  systems  include  proprietary  software and hardware
developed by the Company, hardware and software components manufactured by third
party vendors, proprietary software and hardware technology licensed from Radius
and proprietary software technology licensed from Polybus.

    On September 27, 1995, the Company obtained a worldwide  license from Radius
to use certain of Radius'  technology in its products.  The license is exclusive
except as to Radius,  which has  retained  rights to its  technology.  Under the
agreement with Radius,  the royalties  payable by the Company  initially are the
greater of $1,500 per unit or two percent of the purchase price per unit for the
first 200 units,  declining in  increments  based on the number of units sold to
the greater of $750 per unit or one percent of the purchase price per unit after
1001  units are sold.  Royalties  will be paid  until  the  cumulative  total of
royalties paid equals $10,000,000 at which time the Company will have a royalty-
free license.  If the Company fails to sell the minimum number of units required
to be sold pursuant to the agreement for two consecutive calendar quarters,  the
technology  may be  licensed  to other  parties.  In  addition,  the Company has
granted  to  Radius  an  irrevocable,   perpetual,   non-exclusive,   worldwide,
royalty-free  license to any  modifications to the Radius technology made by the
Company.

    The Company entered into a Development and License Agreement dated August 1,
1996  with  Polybus  pursuant  to which the  Company  obtained  an  irrevocable,
perpetual,  worldwide,  nonexclusive  (except  as to  publishing  for  which the
license is exclusive)  license to a high speed file manager  software package in
consideration  for  royalty  payments.  The  royalties  payable  by the  Company
pursuant to the Development and License  Agreement are initially $800 per server
and $400 per  workstation,  declining  in  increments  based  upon the number of
systems sold to $50 per server and $25 per  workstation  until the first 100,000
systems are sold by the  Company.  No  royalties  are payable  after the Company
sells 100,000 systems. The initial term of the Development and License Agreement
is 25 years and the agreement  may be  terminated  sooner by Polybus only in the
event of a payment default by the Company.  Upon  termination of the Development
and License Agreement,  Polybus may license the software to third parties in the
publishing market.


                                       20





PRODUCTS

    The Company's initial  products,  the AFX 410 and AFX 210, provide optimized
Macintosh client support via a fibre channel  arbitrated loop. The fibre channel
interconnect  is  expected  to  deliver  up  to  10-20   MBytes/sec  per  client
workstation.  This is two to  three  times  the  file  transfer  rate  currently
available from a user's local hard drive and 20 times faster than local Ethernet
networks.

    The  server's  file   management   system  is  designed  to  accelerate  and
efficiently  administer  the  movement  of large  image  and text  files  over a
network.  The server  incorporates an extensive scalable internal storage system
(up to 100 GBs RAID sub-system)  supporting  on-line data equivalent to 150 CDs.
The base  price of this  Macintosh-based  server  is less than  $80,000  and the
Company expects the average configuration to sell for approximately $130,000.

    The  server's  architecture  has  multi-platform  capabilities  so as to not
become obsolete as new CPUs,  operating systems and other emerging  technologies
become  popular.  The initial focus on the Macintosh  operating  system and user
interface will provide  familiarity  and ease of use for color  prepress  shops,
while the server's  independent  plug in processor  capability and parallel RAID
technology overcome the performance weaknesses in the Macintosh desktop systems.
In addition,  the plug-in modular  architecture of the system allows the user to
expand or upgrade easily, avoiding early platform obsolescence.

    A third product,  the AFX 410 NT, based on the  architecture  of the AFX 410
server,  will be designed for the  Internet/Intranet  server market. The Company
plans to introduce the AFX 410 NT during 1997.  This system will include Windows
NT running on multiple Pentium Pro processors.  The Windows NT server is rapidly
becoming the platform of choice for WEB servers. The Company believes that there
will be two distinct  advantages for using the Company's  super server:  it will
manage  the  sharing  of  files  across  the  cluster  of  NT  systems  and  its
architecture makes predictive WEB page caching possible.

PRODUCT FEATURES

    The Company designs its server products to provide the following features:

<TABLE>
<CAPTION>
               FEATURE                                            BENEFIT
               -------                                            -------
<S>                                          <C>
TrueWindows  NT  and   Macintosh   Super       100% compatibility   with   Apple    and  
  Server-- The Company's server will use         Microsoft, insuring compatibility with 
  Windows  NT or  Macintosh  O/S  as the         the  vast  array of  commercial  third 
  user visible operating environment.            party   applications   available   for 
                                                 Macintosh O/S and Windows NT.          

                                                                                            
Server   to   Workstation  Solution--The       Performance bottlenecks are addressed by  
  Company delivers end to end throughput         a single  vendor,  and  users  are not 
  to  the  user   desktop   for  maximum         required   to   integrate   their  own 
  performance.                                   systems.                               
                                                                                          
HighSpeed--The       Company's    unique       Reduces idle time  waiting for downloads 
  architecture   and  high   speed  file         and  improves  productivity.  Even the 
  system  allow its  servers  to deliver         largest  of  files  is   available  in 
  files  to the  desktop  up to 20 times         seconds.   Large   files  can  now  be 
  faster than today's local networks and         centralized       without       losing 
  two to three  times  faster  than from         performance.                           
  local hard drive.                                                                     
                                                                                          
                                                                                            
Scalability--Up to  100  GBs  of storage        Users  may   upgrade  their  systems  as   
  capacity  in a  single  box,  and  the          required  with minimal  disruption  to   
  ability   to    cascade    boxes   for          operations.                              
  additional  capacity.  Both processors                                                     
  and  disks  may be added  as  required                                                     
  without major system reconfigurations.                                                     
                                                                                               
                                                                                               
Integral Tape Backup System--The servers        Easy and  quick  backup   and    archive   
  include an integral tape backup system          capabilities  of all or any portion of   
  (hardware   and   software)  for  file          the central  file  system.  No special   
  backup and archiving.                           setup or  integration  required on the   
                                                  part of the user.             
</TABLE>

SALES AND MARKETING

    The  Company  plans to  advertise  its  products in trade  publications,  to
participate in trade shows and conferences, to conduct direct mail campaigns and
to publish  and  disseminate  product  literature.  The  initial  focus of these
activities  will  be the  color  prepress  and  Internet/Intranet  markets.  The
Company's


                                       21




marketing   department  will  be  responsible  for  product  planning,   product
positioning,  pricing,  customer training and overall promotion of the Company's
products through industry press coverage, advertising exposure and participation
in industry trade shows.

    The Company  plans to employ a direct  sales  force that  focuses on product
sales  to end  users in North  America.  The  Company  plans to  establish  four
regional  sales  offices  in the  United  States.  Because  the  success  of the
Company's  direct sales  efforts will be dependent in part upon a  sophisticated
analysis of a customer's  networking  requirements,  the Company will complement
its direct sales force in North America with system engineers who have expertise
in hardware,  software and networking  solutions.  In the future, as the Company
expands its marketing efforts in the publishing and  Internet/Intranet  markets,
the  Company  may  utilize  a  multi-tiered   distribution   strategy  including
distributors  and VARs,  system  integrators and OEMs. The Company also plans to
sell its products to OEMs in both the medical imaging and GIS markets.

    The Company plans to establish sales offices in Japan and in Europe and will
primarily focus its sales efforts in these areas on distributors, VARs and third
party  integrators  who  can  effectively  evaluate  and  support  a  customer's
networking requirements.

    The Company also plans to develop relationships with independent vendors who
will  encourage  their  customers to purchase the  Company's  server  systems in
conjunction  with their products on the basis that overall  systems  performance
will be enhanced.  This sales method will be  especially  beneficial to software
vendors promoting workflow  management and database  management who can leverage
the  performance of the Company's  server  products as a complement to improving
overall workflow of information.

CUSTOMER SERVICE AND SUPPORT

    The  Company's  corporate  philosophy  is based on a commitment  to customer
satisfaction  and  product  quality.  The  Company  does not  plan to  recognize
revenues on system sales to end users until system performance has been accepted
by  the   customer   based  on   measurement   against   pre-defined   published
specifications.

    The Company plans to provide customer training, installation and integration
support,  and  maintain  systems  sold  directly  to end users in North  America
through an  internal  systems  integration  organization.  Unlike  other  server
companies  in  the  industry,   the  Company's   customer  support  and  systems
integration  organization  will support  various  equipment  and software in the
customer  sites  and  provide  consulting  and  integration  services  on a wide
spectrum of  equipment.  The Company is currently  building  its direct  support
organization  and will  complement its direct  service and support  organization
with nationwide and European third party service  organizations  as the business
expands.

    Users that purchase the Company's products through indirect channels will be
serviced  by  the  Company's   direct  support   organization   as  well  as  by
distributors,  VARs or OEMs.  The Company plans to provide  direct access to the
Company's  service  and  support  organization  through  a  toll-free  telephone
hotline. The Company plans to staff its technical support center 24 hours a day,
365  days  a  year,  with  highly  trained  and  experienced  technical  support
engineers.

    The Company plans to warrant all of its server  products  against defects in
material and workmanship for 90 days.  During the warranty  period,  the Company
will  repair or  replace,  within two days,  any server  component(s)  which the
Company  identifies as containing defects which do not prevent the continued use
of the server.  For defects that do prevent the continued use of the server, the
Company will  attempt to repair or replace the  identified  defective  component
within 24 hours. The Company plans to offer service and maintenance contracts to
its customers.

MANUFACTURING AND SUPPLIERS

    The Company's manufacturing operations, located in Westford,  Massachusetts,
consist of product  assurance,  quality  control of  materials,  components  and
subassemblies,  final  assembly and system test.  The Company relies on numerous
high-quality  ISO 9002 class vendors  located in New England for the manufacture
of mechanical  subsystems and printed  circuit boards.  This strategy  minimizes
capital  investment and overhead  expenditures and provides the Company with the
ability to increase  production  to meet  market  demand.  As volumes  increase,
consideration  will be given to outsourcing with low cost vendors in the midwest
and Pacific Rim countries.


                                       22




    Although the Company  generally  uses standard  parts and components for its
products,  a number of key components used in the Company's current products are
currently available or purchased from single source suppliers.  These components
include disk drives,  microprocessors  and ASICs. The Company  currently depends
upon Toshiba as its sole source supplier of customized ASICs. The Company has no
contract with Toshiba  requiring  Toshiba to supply the Company with ASICs. As a
precaution,  the Company  carries  extra  inventory of some of its single source
components,  including the Toshiba ASICs, to provide  additional time to develop
an  alternate  source or  redesign  the  component,  if  necessary.  The lack of
sufficient  quantities of single source components,  or the inability to develop
alternative  sources for these items,  could result in delays or  reductions  in
product  shipments  which would have a material  adverse affect on the Company's
results of  operations.  The  Company  intends to design its future  products to
minimize the need to rely on single source suppliers for key components.

RESEARCH AND DEVELOPMENT

    The market for the Company's products is characterized by extensive research
and development and rapid  technological  advances in both hardware and software
development,   resulting  in  frequent   introductions  of  new  products.   The
introduction  of products  embodying  new  technology  and the  emergence of new
industry  standards can render existing products obsolete and unmarketable.  The
Company  believes that the speed of  technological  advancement  in its industry
requires a  significant  investment  in  research  and  development  in order to
maintain  its  competitive  position.   The  Company  will  continue  to  invest
substantially in product development as it believes that its future success will
depend upon its  ability to develop,  manufacture  and market new  products  and
enhancements to existing  products on a cost-effective  and timely basis. In the
fiscal year ended June 30, 1996 and the six months ended  December 31, 1996, the
Company  expended  approximately  $1,388,000 and  $1,526,000,  respectively  for
research and development expenses.

COMPETITION

    The Company faces substantial  competition from the manufacturers of several
different  types  of  products  used  as  file  servers.   The  Company  expects
competition  to  intensify  as more  companies  enter the market and compete for
market  share.  In  addition,  companies  currently  in the server  market  will
continue to change product  offerings in order to capture  further market share.
Many of these companies have substantially greater financial resources, research
and development  staffs,  manufacturing,  marketing and distribution  facilities
than the Company.  The Company believes that an important  competitive factor in
its market is network  server  performance  measured in terms of overall  system
throughput and expressed as a function of megabytes per second of data to client
desktop  computers.  However,  equally  important are other  factors,  including
product reliability,  availability,  scalability,  upgradability, price, overall
cost of ownership and technical  service and support.  The Company's  ability to
compete  will  depend,  among  other  factors,  upon its  ability to  anticipate
industry trends,  invest in product  research and  development,  and effectively
manage the introduction of new products into targeted markets.

    The Company believes that there are no servers  available today that provide
high-performance,   high-capacity   file  service  and  a   Macintosh-compatible
application environment. The Apple Workgroup Servers are aimed at a lower market
tier, with lower performance and limited expansion capability.  Apple's "shiner"
series  of  servers  provide  higher  performance  than its  workgroup  servers,
however,  the  operating  system  used is UNIX  based and  requires  specialized
training to operate.

    Other  servers  in the  prepress  and  video  market  fall into one of three
categories:  (i) proprietary  operating software systems, (ii) high-end personal
computer  architecture  systems or (iii)  larger  UNIX-based  systems.  "Server"
products  offered by the  traditional  color  prepress  suppliers are most often
dedicated I/O device servers,  rather than general purpose servers. For example,
the Scitex  Whisper  series of servers are an integral  part of the  proprietary
Scitex environment,  with few and limited external client services.  The Company
believes  that its  servers  compare  well on a price and  features  basis,  and
outperform the proprietary operating software systems by a significant amount in
end to end  throughput.  More  importantly,  in the color prepress  market,  the
Company believes that its server is the only true Macintosh solution.


                                       23




    Specialized  super  servers  provide  some  fault  tolerance   features  and
"hot-swap"  disk  capability,  along  with some  multiprocessor  support.  These
features lead to premium entry prices and high-priced  expansion options.  While
the  systems  are well suited to the  typical  NetWare  environment  (many users
needing occasional access to medium or small files),  they are not optimized for
handling very large files and  high-bandwidth  networks.  The Company's  servers
have the  distinct  advantage  of being able to handle  very large files on high
bandwidth  networks.  The Company's  current  servers are also  Macintosh-based,
provide  superior input and output  performance  and allow a user to upgrade its
server  without  incurring  significant  expense  for new  operating  systems or
hardware.

    There is also a wide variety of mid-range and high-end  servers  provided by
SGI, Sun and Apple which use Unix-based  operating systems. The Company believes
that its servers  compete  directly on entry  price,  price to  performance  and
scalability,  while offering the preferred  Macintosh or Windows NT (expected in
1997) environments and ease of use.

EMPLOYEES
   
    As  of  April  30,  1997,  the  Company  employed  46  full-time  employees.
Approximately 20 of these employees are involved in research and development, 12
in sales and service,  2 in marketing,  8 in manufacturing  and 4 in finance and
general  administration.  In addition,  the Company has retained 12  independent
contractors  on  a  consulting  basis  who  support  engineering  and  marketing
functions.  To date, the Company  believes it has been  successful in attracting
and  retaining  skilled and  motivated  individuals.  Competition  for qualified
management  and  technical  employees is intense in the computer  industry.  The
Company's  success  will  depend in large part upon its  ability to  continue to
attract and retain qualified employees. The Company has never experienced a work
stoppage  and  its  employees  are  not  covered  by a  collectively  bargaining
agreement. The Company believes that it has good relations with its employees.
    

FACILITIES

    The  Company  has  a   three-year   lease   expiring  in  October  1998  for
approximately  19,400  square feet of space in  Westford,  Massachusetts,  which
currently  accommodates  the Company's  headquarters,  development,  production,
administrative,  and  financial  functions.  The monthly  rent is  $16,750.  The
Company  intends to lease an additional  9,000 square feet in the same facility.
The  Company  also has a lease  expiring  in August  2000 for a second  facility
consisting  of  approximately  2,000  square feet of office  space in San Diego,
California  for a monthly  base rent of  approximately  $2,300.  The facility is
currently used for  engineering  support for  development  of  Internet/Intranet
technology and products.  The Company  believes that its facilities are adequate
to meet its current  business  requirements  and that  suitable  facilities  for
expansion  will be available,  if necessary,  to  accommodate  further  physical
expansion of corporate  operations and for additional sales and support offices,
at comparable rates.

LEGAL PROCEEDINGS

   
    In November 1996 a lawsuit was filed against the Company in Suffolk Superior
Court  (Massachusetts)  by an executive  recruitment agency alleging a breach of
contract and seeking  damages in the amount of $50,000.  In connection  with the
lawsuit,  one of the Company's  bank accounts has been attached in the amount of
$50,000 pending the resolution of this matter.
    


                                       24




                                   MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

    The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
 NAME                                               AGE                POSITION
 ----                                               ---                --------
<S>                                                  <C>  <C>
Lorrin G. Gale                                       55   President, Chief Executive Officer
                                                            and Chairman of the Board
Duane A. Mayo                                        45   Chief Financial Officer, Treasurer,
                                                            Secretary and Director
Fred L. Chanowski                                    46   Director
Chappell Cory III                                    52   Director
Gregory M. Millar                                    40   Director
Stanley A. Young                                     69   Director
</TABLE>

    LORRIN G. GALE  co-founded  the Company in May 1990.  He has served as Chief
Executive Officer and Chairman of the Board since its inception and as President
since July 1994.  In August 1981, he co-founded  Massachusetts  Computer  Corp.,
serving as Vice President of Engineering  from August 1981 through June 1986 and
as General Manager for end-user  business from July 1986 through  December 1987.
From January 1988 through May 1990, Mr. Gale was a private investor.

    DUANE A. MAYO has served as Vice  President  of Finance  and  Administration
since March 1995 and as a  director,  Chief  Financial  Officer,  Secretary  and
Treasurer  since May 1995.  From April 1993 through  February 1995, he served as
Chief  Financial   Officer  for   Xerographic   Laser  Images   Corporation,   a
publicly-held   company  involved  in  development  of  resolution   enhancement
technology. From April 1988 to April 1993, Mr. Mayo was Corporate Controller for
Howtek,  Inc., a publicly-held  company and supplier of desktop scanners for the
color prepress marketplace.

    FRED L.  CHANOWSKI  has served as a director of the Company since June 1996.
Mr. Chanowski is a Managing Member of Alpha Ventures LLC, a venture capital fund
he founded in 1996,  and a partner in  Venture  Management  Consultants,  LLC, a
management  consulting  firm he founded  in January  1997.  From  December  1988
through  June 1996,  Mr.  Chanowski  was a  telecommunications  and  information
technology consultant.  Mr. Chanowski was the President, Chief Executive Officer
and owner of  Telecommunications  Management Corp., a management consulting firm
specializing  in the  areas of  telecommunications  and  information  management
technology, from November 1975 until its sale to Computer Task Group in December
1988.

    CHAPPELL  CORY III  co-founded  the  Company in May 1990 and has served as a
director since its inception and served as President until July 1994. Since July
1994,  Mr.  Cory  has  been the  General  Manager,  CDA  Division,  of  Analogic
Corporation, a publicly-held company and supplier of precision data acquisition,
conversion and signal processing equipment.

    GREGORY M.  MILLAR has served as a director  of the  Company  since  October
1995.  Since January 1989, Mr. Millar has been Vice President of Engineering and
Chief  Technology  Officer  of  Radius,  Inc.,  a  publicly-held   company  that
manufactures Macintosh controller cards and accessories.

    STANLEY A. YOUNG has served as a director  of the  Company  since June 1995.
Mr. Young has been a consultant and venture  capital  investor for the past five
years and has been a principal  of Young  Management  Group,  Inc., a management
consulting  firm,  since its  inception  in March 1994.  Mr.  Young  serves as a
director  on  the  boards  of the  following  publicly-held  companies:  Jetform
Corporation, Andyne Computer, Inc. and Cable-SAT Systems, Inc.


                                       25



KEY EMPLOYEES

    ROBERT S.  ALFORD has served as Vice  President  of  Engineering  since July
1995.  From January 1990 through June 1995, Mr. Alford was Vice President of AGE
Logic Inc., a supplier of X Server software for personal computers, X Terminals,
and embedded applications.

    LAWRENCE  D.  BEAUPRE has served as Vice  President  of  Manufacturing  on a
part-time  basis  from March 1995 to July 1996 and on a  full-time  basis  since
August  1996.  He  co-founded  QuadTech,   Inc.,  a  manufacturer  of  precision
measurement  and  calibration  instruments  in March  1991,  serving as its Vice
President of Operations and Chief Operating Officer from April 1991 through June
1995 and as a consultant from July 1995 to August 1996.

COMMITTEES

    The Board of Directors  has an audit  committee  comprised of Chappell  Cory
III, Gregory Millar and Stanley Young and a compensation  committee comprised of
Chappell Cory III, Gregory Millar,  Stanley Young and Fred Chanowski.  The Audit
Committee reviews the results and scope of the audit and other services provided
by the Company's independent  accountants.  The Compensation Committee makes all
compensation  decisions  regarding the  compensation  of executive  officers and
administers the Stock Option Plan.

TERM OF OFFICE

    All directors hold office until the next annual meeting of  stockholders  of
the Company and until their successors have been duly elected and qualified. The
executive  officers are appointed  annually by, and serve at the  discretion of,
the Board of Directors.

DIRECTOR COMPENSATION

    The Company's directors do not receive compensation for serving on the Board
of Directors,  however,  the Company  reimburses  directors for travel  expenses
incurred to attend Board meetings.

EXECUTIVE COMPENSATION

    The following table sets forth, for the fiscal year ended June 30, 1996, the
annual compensation,  including salary,  bonuses and certain other compensation,
paid by the  Company  to its  Chief  Executive  Officer.  None of the  Company's
executive  officers  received  cash  compensation  in excess of  $100,000 in the
fiscal year ended June 30, 1996.

<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------
                                       ANNUAL COMPENSATION   LONG-TERM COMPENSATION
- ------------------------------------------------------------------------------------
    NAME AND PRINCIPAL POSITION         YEAR      SALARY     RESTRICTED STOCK AWARD
- ------------------------------------------------------------------------------------
 <S>                                   <C>       <C>         <C>
   
 Lorrin G. Gale                       1996     $55,862           $3,173(1)
  Chairman, President and Chief       1995           0           $1,877(2)  
  Executive Officer                   1994           0                0    
                       
    

</TABLE>
- ----------
(1)  In July 1995, the Company issued 151,735 shares of restricted  Common Stock
     valued  at  $.021  per  share to Mr.  Gale in  consideration  for  services
     rendered.

(2)  In June 1995, as part of a recapitalization, the Company issued to Mr. Gale
     89,747 shares of restricted  Common Stock valued at $.021 per share in lieu
     of payment of accrued  compensation  of $454,843 for the period  commencing
     June 1992  through  March 1995 and in lieu of repayment of $55,000 of loans
     payable to Mr.  Gale,  as well as in exchange  for all shares of  preferred
     stock and common stock then held by Mr. Gale. See "Certain Transactions."


                                       26




EMPLOYMENT CONTRACTS

    Effective  as of  January  1,  1997,  the  Company  entered  into a two-year
employment agreement with Mr. Gale. Pursuant to such contract,  Mr. Gale will be
paid a base salary of $125,000 and has been granted  incentive  stock options to
purchase up to 75,000 shares of Common Stock.  Options to purchase 15,000 shares
of Common  Stock  vested  upon the  execution  of the  agreement  and options to
purchase  30,000  shares of Common  Stock  vest on each of the first and  second
anniversaries of the agreement.  All options have an exercise price of $4.00 per
share. Pursuant to his employment agreement, Mr. Gale agrees not to compete with
the Company during the term of his employment and for one year thereafter.

STOCK OPTION PLAN

    In July 1995,  the Company  adopted  its 1995 Stock  Option Plan (the "Stock
Option Plan") under which the Company may grant  incentive  stock options within
the  meaning of Section 422 of the  Internal  Revenue  Code of 1986,  as amended
("Code"),  and stock options not intended to qualify as incentive stock options.
Stock options may be granted under the Stock Option Plan to employees, officers,
directors,   consultants  and  advisors  of  the  Company.  Options  granted  to
non-employee directors and consultants must be non-qualified stock options only.

    The Stock Option Plan is administered by the  Compensation  Committee of the
Board of Directors  or successor  committee.  Subject to the  provisions  of the
Stock Option Plan,  the  Compensation  Committee (or the Board of Directors) has
the  authority to determine  (i) to whom options will be granted,  (ii) the time
when  options may be  granted,  (iii) the number of shares to be covered by each
option, (iv) when the option becomes exercisable,  (v) the exercise price of the
option (which price, in the case of incentive  stock options,  shall not be less
than the fair market value of the Common  Stock on the date of the grant,  or in
the case of incentive  stock options  granted to employees who own,  directly or
indirectly,  more than 10% of the total combined  voting power of all classes of
stock of the  Company,  110% of the fair market value of the Common Stock on the
date of grant) and (vi) any  restrictions  on sale and  repurchase  rights which
shall be placed on shares purchased upon exercise of an option.

    Incentive  stock  options  may not be  granted at a price less than the fair
market  value of the shares at the grant date (or less than 110% of fair  market
value in the case of  employees  or  officers  holding 10% or more of the voting
stock) while the  nonqualified  options may be granted at a price  determined by
the Board of Directors except that, pursuant to the Company's agreement with the
Underwriters,  no  options  will be granted at a price less than 85% of the fair
market  value of the shares at the date of the grant.  All grants as of June 30,
1996 were at fair market value or greater.  The options generally vest 10% after
30 days from the date of grant  and the  balance  ratably  over a period of four
years.  Incentive  stock options  granted under the plan expire not more than 10
years  from the  date of  grant  and not  more  than  five  years in the case of
incentive stock options granted to an employee or officer holding 10% or more of
the voting  stock of the  Company.  All options not  exercised at the end of the
vesting period automatically expire. The aggregate number of shares which may be
granted under this plan may not exceed 600,000 shares.

    Payment of the option  exercise price may be made in cash,  shares of Common
Stock, a combination  of cash and Common Stock or by any method  approved by the
Board of  Directors  consistent  with the  purposes of the Stock Option Plan and
applicable rules and regulations,  without  limitation,  Section 422 of the Code
and  Rule  16b-3  under  the  Exchange  Act.   Options  are  not  assignable  or
transferable except by will or the laws of descent and distributions.

    As of the date of this  Prospectus,  42  employees  held options to purchase
429,650 shares of Common Stock under the Stock Option Plan.

STOCK OPTION GRANTS

    No stock options were granted to Lorrin G. Gale during the fiscal year ended
June 30, 1996, and at June 30, 1996, Mr. Gale did not own any stock options.  As
of January 1, 1997,  Mr. Gale was granted  options to purchase  75,000 shares of
Common Stock. See "Management--Employment Contracts."


                                       27




                             PRINCIPAL STOCKHOLDERS

    The  following  table sets forth  certain  information  with  respect to the
beneficial  ownership of the capital stock of the Company as of the date of this
Prospectus  for (i) each person who is known by the Company to own  beneficially
5% or more of the  outstanding  shares  of its  Common  Stock;  (ii) each of the
directors  and  executive  officers of the Company;  and (iii) all directors and
officers as a group.  Unless  otherwise  indicated,  the address for  directors,
executive   officers  and  5%   stockholders   is  2  Robbins  Road,   Westford,
Massachusetts 01886.

<TABLE>
<CAPTION>
                                                                                     PERCENTAGE           
                                                                                     ----------
                                                          NUMBER OF SHARES        BEFORE     AFTER
DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS:       BENEFICIALLY OWNED(1)   OFFERING   OFFERING
- --------------------------------------------------       ---------------------   --------   --------
<S>                                                      <C>                     <C>        <C>
Lorrin G. Gale                                               261,206(2)             8.9%       5.5%
Duane A. Mayo                                                105,176                3.6%       2.2%
Fred L. Chanowski                                            162,398(3)             5.5%       3.4%
Chappell Cory III                                             39,100                1.3%         *
Gregory M. Millar                                             11,952                  *          *
Stanley A. Young                                             180,362(4)             6.1%       3.8%
Hamburger Bank                                               657,354(5)            22.6%      13.9%
  Alstertor 9
  Hamburg 20095                                          
  Germany                                                
M.M. Warburg & Co.                                           346,605(6)            11.9%       7.4%
  Ferdinandstrasse 75
  Hamburg 20095                                    
  Germany
All directors and executive officers as a group
  (6 persons)(2)(3)(4)                                       760,194               25.3%      15.8%
</TABLE>

- ----------
 *  Less than 1%

(1)  Pursuant to the rules of the Securities and Exchange Commission,  shares of
     Common Stock which an individual or group has a right to acquire  within 60
     days  pursuant  to the  exercise  of options or  warrants  are deemed to be
     outstanding  for the purpose of computing the percentage  ownership of such
     individual  or  group,  but are not  deemed  to be  beneficially  owned and
     outstanding  for the purpose of computing the  percentage  ownership of any
     other person shown in the table.

(2)  Includes  15,000 shares of Common Stock issuable upon exercise of incentive
     stock options.

(3)  Includes  29,880 shares of Common Stock issuable upon exercise of warrants.
     Also  includes  77,540  shares of Common Stock and 11,952  shares of Common
     Stock  issuable  upon exercise of warrants  owned by Alpha  Ventures LLC of
     which Mr. Chanowski is a founder and Managing Member.

(4)  Includes  (i) 56,915  shares of Common  Stock and  23,904  shares of Common
     Stock  issuable  upon  exercise  of  warrants  held by the Stanley A. Young
     Irrevocable  Trust; (ii) 47,456 shares of Common Stock and 12,750 shares of
     Common  Stock  issuable  upon  exercise of warrants  held by the Stanley A.
     Young Family  Limited  Partnership;  and (iii) 9,107 shares of Common Stock
     held by Mr. Young's wife, as to which Mr.
     Young disclaims beneficial ownership.

(5)  In June 1996 and July 1996,  Hamburger  Bank  purchased  334,653  shares of
     Common Stock and 322,701 shares of Common Stock,  respectively,  for $2.093
     per  share in a  private  placement.  The  Company  has been  advised  that
     Hamburger Bank has no affiliation  with M.M. Warburg & Co. nor does it have
     any relationship with any officers or directors of the Company.

(6)  In June 1996 and July 1996, M.M. Warburg & Co. purchased  215,134 shares of
     Common Stock and 131,471 shares of Common Stock,  respectively,  for $2.093
     per share in a private  placement.  The Company has been  advised that M.M.
     Warburg & Co. has no  affiliation  with Hamburger Bank nor does it have any
     relationship with any officers or directors of the Company.


                                       28




                              CERTAIN TRANSACTIONS

   
    In June 1995,  as part of a  recapitalization,  the  Company  issued  89,747
shares of  Common  Stock  valued  at $.021  per share to Lorrin  Gale in lieu of
payment of $454,843 of accrued compensation and $55,000 of loans payable, and in
exchange for 15,787 shares of preferred  stock and 11,840 shares of common stock
held by Mr.  Gale.  Also as part of this  recapitalization,  the Company  issued
39,100 shares of Common Stock valued at $.021 per share to Chappell Cory in lieu
of payment of $214,231 of accrued compensation and $7,255 of loans payable.
    

    In July 1995,  the Company  issued  151,735 shares of Common Stock valued at
$.021 per share to Mr. Gale and 105,176  shares of Common  Stock valued at $.021
per share to Duane Mayo for services rendered.

   
    In July 1995,  the Company  entered into a consulting  agreement  with Young
Management  Group,  Inc. ("Young  Management"),  a company founded by Stanley A.
Young, who  subsequently  became a director of the Company in September 1995. In
consideration for consulting services, the Company agreed to pay consulting fees
of $7,000 per month, plus out-of-pocket  expenses,  of which $3,000 per month is
being deferred until completion of an initial public offering,  and sold 179,279
shares  of  Common  Stock  at a price of $.021  per  share to Young  Management.
Consulting  fees expensed in connection  with this  agreement  during the fiscal
year  ended June 30,  1996 were  approximately  $85,000,  of which  $56,000  was
accrued and unpaid at June 30, 1996. Consulting fees expensed in connection with
this agreement during the six months ended December 31, 1996 were $42,000 and an
aggregate  of $67,250 was accrued and unpaid at  December  31,  1996.  In August
1996, Young Management  transferred all of its shares of Common Stock to certain
affiliates of Young Management, including the Stanley A. Young Irrevocable Trust
and the Stanley A. Young Family Limited Partnership.
    

    In May 1996, the Stanley A. Young  Irrevocable Trust was issued a promissory
note in the principal  amount of $100,000  (which was  subsequently  repaid) and
warrants to purchase  23,904  shares of Common  Stock with an exercise  price of
$1.507 per share in connection with a private  placement,  and in February 1997,
the  Stanley  A.  Young  Family  Limited  Partnership  was  issued  in a private
placement,  promissory  notes in the aggregate  principal  amount of $50,000 and
warrants to purchase 12,750 shares of Common Stock at an exercise price equal to
either (i)  $1.333  per share or,  (ii) if the  Company  consummates  an initial
public  offering by a certain  date,  either  one-half or  three-fourths  of the
offering price of a share of the Common Stock in the initial public offering. In
November  1995,  Stanley A. Young  Irrevocable  Trust and Mr.  Young's wife each
purchased  3,787  shares of Common Stock at a price of $1.507 per share and were
each  issued a  convertible  promissory  note in the amount of  $19,297.50  in a
private  placement.  In  November  1996,  Stanley  A.  Young  Irrevocable  Trust
converted  the  principal  balance and  accrued  interest on its note into 5,320
shares of Common Stock and Mr. Young's wife converted the principal  balance and
accrued interest on her note into 5,320 shares of Common Stock.

    In May 1996, the Company issued to Fred L. Chanowski,  in consideration  for
consulting  services  rendered,  a warrant to  purchase  up to 23,904  shares of
Common  Stock at an exercise  price of $1.507 per share.  Also in May 1996,  the
Company  issued  to Mr.  Chanowski,  in  consideration  for a  $25,000  loan,  a
promissory note in the principal amount of $25,000 plus a warrant to purchase up
to 5,976 shares of Common Stock at $1.507 per share.

   
    In October 1996, the Company issued to Mr. Chanowski 19,123 shares of Common
Stock in  consideration  for consulting  services  rendered.  Mr. Chanowski also
purchased 23,904 shares of Common Stock for $50,000 in October 1996 in a private
placement.  Mr.  Chanowski  paid the $50,000  purchase  price by converting  the
$25,000 promissory note issued to him in May 1996 and by investing an additional
$25,000 in cash.  Mr.  Chanowski is a 6.675% member in Alpha  Ventures LLC which
holds  77,540  shares of the  Company's  Common  Stock and  warrants to purchase
11,952  shares of Common  Stock.  In April 1997,  the Company  issued to Venture
Management Consultants, LLC ("Venture Management"),  of which Mr. Chanowski is a
20%  member,   a  promissory  note  in  the  principal  amount  of  $200,000  in
consideration for $200,000.  The promissory note bears interest at 18% per annum
with  interest and  principal  payable at maturity on May 31, 1998. In May 1997,
the Company also issued to Venture Management a promissory note in the principal
amount of $200,000 in  consideration  for $200,000.  The  promissory  note bears
interest at 18% per annum with  interest  and  principal  payable at maturity on
June 30, 1998.
    

    The  Company has adopted a policy by  resolution  of the Board of  Directors
whereby all future transactions between the Company and its officers, directors,
principal  stockholders  or  affiliates  will be approved by a committee  of the
Board of  Directors,  a majority of the  members of which  shall be  independent
directors,  or, if required by law, a majority of disinterested  directors,  and
will be on terms no less  favorable  to the  Company  than could be  obtained in
arm's length transactions from unaffiliated third parties.


                                       29



                            DESCRIPTION OF SECURITIES

    The authorized capital stock of the Company is 32,000,000 shares, consisting
of 30,000,000  shares of Common Stock,  $.01 par value per share,  and 2,000,000
shares of  Preferred  Stock,  $.01 par value per  share.  As of the date of this
Prospectus,  there were 2,913,319 shares of Common Stock  outstanding held by 96
shareholders.  Upon the  completion  of this  Offering  there will be  4,713,319
shares of Common Stock  outstanding.  No shares of Preferred Stock are currently
outstanding.

COMMON STOCK

    The  holders  of shares of Common  Stock are  entitled  to one vote for each
share held of record on all matters to be voted on by stockholders.  There is no
cumulative  voting with  respect to the election of  directors,  with the result
that the  holders  of more  than 50% of the  shares  voted  can elect all of the
directors  then being  elected.  The  holders of Common  Stock are  entitled  to
receive  dividends  when,  as and if declared by the Board of  Directors  out of
funds legally available  therefor.  In the event of liquidation,  dissolution or
winding up of the  Company,  the holders of Common  Stock are  entitled to share
ratably in all assets remaining available for distribution to them after payment
of  liabilities  and after  provision has been made for each class of stock,  if
any, having preference over the Common Stock. Holders of shares of Common Stock,
as such, have no redemption,  preemptive or other subscription rights, and there
are  no  conversion  provisions  applicable  to  the  Common  Stock.  All of the
outstanding  shares of Common Stock are, and the shares of Common Stock  offered
hereby, when issued and paid for as set forth in this Prospectus, will be, fully
paid and nonassessable.

PREFERRED STOCK

    Preferred Stock may be issued in one or more series,  the terms of which may
be determined at the time of issuance by the Board of Directors, without further
action by  stockholders,  and may include voting rights  (including the right to
vote as a  series  on  particular  matters),  preferences  as to  dividends  and
liquidation,  conversion and redemption  rights and sinking fund provisions.  No
Preferred  Stock is currently  outstanding  and the Company has no present plans
for the issuance  thereof.  The issuance of any Preferred Stock could affect the
rights of the holders of Common Stock,  and  therefore,  reduce the value of the
Common Stock and make it less likely that holders of Common Stock would  receive
a premium for the sale of their shares of Common Stock. In particular,  specific
rights granted to future holders of Preferred Stock could restrict the Company's
ability to merge with or sell its assets to a third party.

WARRANTS

    Each Warrant entitles the registered holder thereof to purchase one share of
Common  Stock at a price of $6.60  per  share,  at any time  during  the  period
commencing  one year from the date hereof and expiring on the fifth  anniversary
of the date of this Prospectus.

    Unless extended by the Company at its  discretion,  the Warrants will expire
at 5:00  p.m.,  New York  time,  on the  fifth  anniversary  of the date of this
Prospectus.  In the event a holder of Warrants  fails to exercise  the  Warrants
prior to their expiration,  the Warrants will expire and the holder thereof will
have no further rights with respect to the Warrants.

    The Company may, with the prior written consent of the Underwriters,  redeem
the outstanding Warrants,  once they become exercisable,  at a price of $.01 per
Warrant on not less than 30 days' prior written notice if the last sale price of
the Common  Stock has been at least 150% of the then current  exercise  price of
the Warrants (initially $9.90) for the 20 consecutive trading days ending on the
third day prior to the date on which such notice is given.  The Warrants will be
exercisable  until the close of business on the date fixed for  redemption.  The
Warrants  will be issued in  registered  form under a warrant  agreement  by and
among the Company and  Continental  Stock Transfer & Trust  Company,  as warrant
agent.  Reference is made to said warrant  agreement (which has been filed as an
exhibit to the registration  statement of which this Prospectus is a part) for a
complete  description  of the terms and  conditions  of the  Warrants  contained
therein (the  description  herein  contained  being qualified in its entirety by
reference thereto).

  
                                       30



    The exercise price and number of shares of Common Stock or other  securities
issuable on  exercise  of the  Warrants  are  subject to  adjustment  to protect
against   dilution   in  the   event   of  a  stock   dividend,   stock   split,
recapitalization,  reorganization,  merger or  consolidation  of the  Company or
other  similar  event.  No  assurance  can be given that the market price of the
Common Stock will exceed the  exercise  price of the Warrants at any time during
the exercise period.

    No  Warrant  will be  exercisable  unless  at the time of the  exercise  the
Company has filed with the Commission a current  prospectus  covering the shares
of Common Stock issuable upon exercise of such Warrant and such shares have been
registered or qualified to be exempt under the  securities  laws of the state of
residence of the holder of such Warrant. Although the Company has undertaken and
intends  to have all  shares so  qualified  for sale in those  states  where the
Securities  are being  offered  and to  maintain a current  prospectus  relating
thereto  until  the  expiration  of the  Warrants,  subject  to the terms of the
Warrant Agreement, there can be no assurance that the Company will be able to do
so.

    A holder of Warrants will not have any rights,  privileges or liabilities as
a stockholder of the Company prior to the exercise of the Warrants.  The Company
is required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the Warrants.

OTHER SECURITIES

   
    The Company has two outstanding  long term  convertible  promissory notes in
the  aggregate  principal  amount of  $62,248  held by two  persons  which  bear
interest  at 10% per annum and which  are  secured  by all of the  assets of the
Company.  These long term convertible promissory notes plus accrued interest are
to be repaid: (i) one third upon the completion of this Offering; (ii) one third
on the first anniversary of the closing of this Offering; and (iii) one third on
the second  anniversary of the closing of this Offering,  unless converted prior
to such date.  Simultaneously with the closing of this Offering,  the holders of
the notes have the right to convert  outstanding  principal and accrued interest
into shares of Common Stock at a price equal to the price of the Common Stock in
this Offering.  At any time following the closing of this Offering,  any portion
of the  principal and interest may be converted at a price equal to the price of
the Common Stock in this Offering plus $1.33 per share. However, if the price of
the Common  Stock is at least $4.00 above the price of the Common  Stock in this
Offering for a period of 10  consecutive  trading days,  the Company may convert
any remaining  principal  and accrued  interest into shares of Common Stock at a
price  equal to the price of the Common  Stock in this  Offering  plus $1.33 per
share.

    The Company has outstanding  warrants held by 24 warrant holders to purchase
in the aggregate  291,574 shares of Common Stock at exercise prices ranging from
$1.507 per share to $4.00 per share,  which  expire  between  November  1999 and
December  2001.  The Company also has  outstanding  warrants  held by 43 warrant
holders to purchase an aggregate of 678,310  shares of Common Stock,  339,155 of
which  have an  exercise  price of $2.75 per share and  339,155 of which have an
exercise price of $4.125 per share, and all of which expire in December 2000.
    

    The exercise price and number of shares of Common Stock or other  securities
issuable  upon  exercise  of  the  warrants  described  herein  are  subject  to
adjustments  in the event of a stock  dividend,  stock split,  recapitalization,
reorganization, merger or consolidation of the Company or other similar event.

   
    In  connection  with certain  private  placement  offerings of the Company's
securities,  the Company has agreed to  register,  no later than 13 months after
the effective date of this Offering,  1,871,998 shares of issued and outstanding
Common Stock and  approximately  13,600 shares of Common Stock issuable upon the
conversion of outstanding principal of and accrued interest on certain long term
convertible  promissory notes. The Company has agreed to use its best efforts to
register  179,279 shares of Common Stock issued in connection  with a consulting
agreement with Young  Management and 47,807 shares issued in connection with the
exercise of a warrant as part of any  registration of securities by the Company,
subject to the discretion of the managing  underwriter,  if any, to exclude such
shares  from  registration.  In  addition,  the  Company  has agreed to register
warrants to purchase  678,310  shares of Common Stock and the 678,310  shares of
Common Stock underlying these warrants no later than 12 months and one day after
the date of this  Prospectus.  If the shares  and  warrants  are not  registered
within 12 months and one day after the date of this Prospectus, then the Company
shall use its best efforts to register  these shares and warrants as part


                                       31





of any other  registration of securities by the Company until November 30, 2002.
The  Company  has also  agreed to use its best  efforts to  register  the shares
underlying  warrants to purchase in the aggregate 269,608 shares of Common Stock
as part  of any  registration  of  securities  by the  Company,  subject  to the
discretion  of the  managing  underwriter,  if any, to exclude  such shares from
registration.  Finally,  the  Company  has also  agreed to  register  the shares
underlying  warrants to purchase up to 21,966 shares of Common Stock issued to a
placement agent in connection with a private placement  completed in May 1996 no
later than 13 months after the effective date of this Offering.
    

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

    As permitted by the Delaware General Corporation Law ("DGCL"), the Company's
Certificate of  Incorporation,  as amended,  limits the personal  liability of a
director or officer to the Company for monetary  damages for breach of fiduciary
duty of care as a director.  Liability is not  eliminated  for (i) any breach of
the director's duty of loyalty to the Company or its stockholders,  (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law,  (iii)  unlawful  payment of  dividends or stock  purchases or
redemptions  pursuant to Section 174 of the DGCL, or (iv) any  transaction  from
which the director derived an improper personal benefit.

    The Company's  Certificate of  Incorporation  provides that the Company will
indemnify  directors  and  officers,  and may  indemnify its employees and other
agents, to the fullest extent permitted by law.  Indemnified parties are covered
in all cases except where such  indemnification  is  prohibited by law, or where
the conduct of the  indemnified  party (i)  constitutes  willful  misconduct  or
recklessness,  or (ii) is based upon receipt by the  indemnified  representative
from the  Company of a personal  benefit to which the  indemnified  party is not
legally entitled.  The Company may pay the expenses incurred in good faith by an
indemnified party, against an undertaking by the indemnified party to repay such
expenses  if it is  ultimately  determined  that  the  indemnified  party is not
entitled to indemnification.  The Company also maintains liability insurance for
its  directors  and  officers.  At present,  there is no pending  litigation  or
proceeding  involving  any director,  officer,  employee or agent of the Company
where the  Company  anticipates  indemnification  will be  required.  Insofar as
indemnification  for  liabilities  arising  under  the  Securities  Act  may  be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions,  or otherwise, the Company has been advised that in
the opinion of the Commission such  indemnification  is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

DELAWARE LAW

    The  Company  is  subject  to  Section  203 of the DGCL  which  prevents  an
"interested  stockholder" (defined in Section 203, generally, as a person owning
15% or more of a  corporation's  outstanding  voting  stock) from  engaging in a
"business combination" with a publicly held Delaware corporation for three years
following  the date such person became an interested  stockholder,  unless:  (i)
before such person became an interested  stockholder,  the board of directors of
the  corporation  approved the  transaction in which the interested  stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation  of the  transaction  that resulted in the  interested  stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the  corporation  outstanding at the time the transaction
commenced (subject to certain exceptions); or (iii) following the transaction in
which such person became an interested stockholder,  the business combination is
approved  by the board of  directors  of the  corporation  and  authorized  at a
meeting of  stockholders  by the  affirmative  vote of the holders of 66% of the
outstanding  voting  stock  of the  corporation  not  owned  by  the  interested
stockholder. A "business combination" includes mergers, stock or asset sales and
other   transactions   resulting  in  a  financial  benefit  to  the  interested
stockholder.

    The provisions of Section 203 of the DGCL could have the effect of delaying,
deferring or preventing a change in control of the Company.

TRANSFER AGENT AND REGISTRAR

    The transfer agent and registrar for the Company's Common Stock and Warrants
is Continental Stock Transfer & Trust Company, New York, New York.


                                       32



                         SHARES ELIGIBLE FOR FUTURE SALE

   
    Upon completion of this Offering,  the Company will have 4,713,319 shares of
Common Stock  outstanding,  not including  shares of Common Stock  issuable upon
exercise of stock options, the Warrants,  the Underwriters'  Purchase Option and
other warrants and assuming no exercise of the over-allotment  option granted to
the  Underwriters or options  outstanding  under the Stock Option Plan. Of these
outstanding shares, the 1,800,000 shares sold to the public in this Offering may
be  freely  traded  without  restriction  or  further   registration  under  the
Securities Act of 1933  ("Securities  Act"),  except that any shares that may be
held by an  "affiliate" of the Company (as that term is defined in the rules and
regulations   under  the  Securities  Act)  may  be  sold  only  pursuant  to  a
registration  under  the  Securities  Act  or  pursuant  to  an  exemption  from
registration  under the Securities Act including the exemption  provided by Rule
144  adopted  under  the  Securities  Act. 

    The 2,913,319 shares of Common Stock  outstanding  prior to the date of this
Prospectus are "restricted securities" as that term is defined in Rule 144 under
the Securities Act ("Restricted  Shares"),  and may not be sold unless such sale
is registered under the Securities Act, or is made pursuant to an exemption from
registration  under the Securities Act, including the exemption provided by Rule
144. Of such shares,  4,847 are  currently  available  for sale pursuant to Rule
144,  234,191 will be available  for sale pursuant to Rule 144 on June 30, 1997,
597,594  will be  available  for sale  pursuant  to Rule  144 on July 15,  1997,
1,019,167 will be available for sale pursuant to Rule 144 commencing on or about
August 15, 1997,  1,009,713 will become  available for sale pursuant to Rule 144
commencing  August 21, 1997 through  December  1997 and 47,807 will be available
for sale pursuant to Rule 144 commencing on March 7, 1998.

    All of the officers and directors of the Company and all other holders of 2%
or more of the  Company's  Common Stock or warrants or options to  purchase,  or
other  securities  convertible  into, 2% or more of the  Company's  Common Stock
immediately  prior to this  Offering  have agreed that for a period of 13 months
from the date of this  Prospectus they will not sell any of their shares without
the consent of GKN  Securities  Corp.  ("GKN").  In addition,  all purchasers of
shares of the Company's  Common Stock in a private  placement  from June 1996 to
October 1996 and certain  shareholders who coverted promissory notes into shares
of Common  Stock from August 1996 to October  1996 have agreed that for a period
of 12 months  from the date of this  Prospectus  they will not sell any of these
shares without the consent of GKN.  Therefore,  of the 234,191 shares  available
for sale  pursuant to Rule 144 on June 30, 1997,  128,847  shares cannot be sold
without  the  consent  of GKN for a period  of 13  months  from the date of this
Prospectus.  Of the 597,594  shares  available  for sale pursuant to Rule 144 on
July 15, 1997,  400,333  shares  cannot be sold without the consent of GKN for a
period of 13 months from the date of this  Prospectus.  Of the 1,019,167  shares
available for sale pursuant to Rule 144  commencing on or about August 15, 1997,
850,597  shares and 131,471 shares cannot be sold without the consent of GKN for
a  period  of 13  months  and 12  months,  respectively  from  the  date of this
Prospectus,  of the  1,009,713  shares  available  for sale pursuant to Rule 144
commencing  August 21, 1997 through  December  1997,  649,735 shares and 155,376
shares  cannot be sold  without the consent of GKN for a period of 13 months and
12  months,  respectively,  from the date of this  Prospectus  and of the 47,807
shares  available for sale pursuant to Rule 144  commencing  March 7, 1998,  all
47,807  shares  cannot be sold  without  the  consent  of GKN for a period of 13
months  from the date of this  Prospectus.  None of the 4,847  shares  currently
available  for sale  pursuant to Rule 144 will  require the consent of GKN to be
sold since none of these shares are held by the Company's  officers or directors
or other  holders of 2% or more of the  Company's  Common  Stock or  warrants or
options to purchase,  or other  securities  convertible  into, 2% or more of the
Company's Common Stock immediately prior to this Offering.
    

    In  general,  under Rule 144 as  currently  in  effect,  a  stockholder  (or
stockholders  whose  shares  are  aggregated)  who has  beneficially  owned  any
Restricted  Shares for at least one year  (including  a  stockholder  who may be
deemed to be an affiliate of the Company),  will be entitled to sell, within any
three-month  period,  that  number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks  preceding the
date on which notice of such sale is given to the Commission,  provided  certain
public  information,  manner of sale and notice  requirements  are satisfied.  A
stockholder who is deemed to be an affiliate of the Company,  including  members
of the Board of Directors and senior management of the Company,  will still need
to comply with the restrictions and requirements of Rule 144, other than the one
year


                                       33




holding period requirement, in order to sell shares of Common Stock that are not
Restricted Securities,  unless such sale is registered under the Securities Act.
A stockholder (or stockholders whose shares are aggregated) who is deemed not to
have been an  affiliate of the Company at any time during the three month period
preceding a sale by such stockholder,  and who has beneficially owned Restricted
Shares for at least two years,  will be entitled to sell such shares  under Rule
144 without regard to the volume limitations described above.
                                  
    In  addition,  any  employee,  officer or director of or  consultant  to the
Company  who  purchased  his or her shares  pursuant  to a written  compensatory
benefit  plan or contract  may be entitled to rely on the resale  provisions  of
Rule 701 under the Securities Act ("Rule 701").  Rule 701 permits  affiliates to
sell their shares which are subject to Rule 701 under Rule 144 without complying
with the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates  may sell Rule 701 shares in reliance on Rule 144 without  having
to comply with the public information, volume limitation or notice provisions of
Rule 144. In both  cases,  a holder of Rule 701 shares is required to wait until
90 days  after  the date of this  Prospectus.  There are  currently  outstanding
options to  purchase  429,650  shares of the  Company's  Common  Stock under the
Company's  Stock Option Plan.  The shares  issued upon exercise of these options
may be sold pursuant to the provisions of Rule 701.

    No  predictions  can be made of the effect,  if any,  that  future  sales of
shares or the  availability  of shares  for sale will have on the  market  price
prevailing from time to time. Nevertheless,  sales of substantial amounts of the
Common Stock in the public market could  adversely  affect the then-  prevailing
market price.

   
    In  connection  with certain  private  placement  offerings of the Company's
securities,  the Company has agreed to  register,  no later than 13 months after
the effective date of this Offering,  1,871,998 shares of issued and outstanding
Common Stock and  approximately  13,600 shares of Common Stock issuable upon the
conversion of outstanding principal of and accrued interest on certain long term
convertible  promissory  notes. In connection  with a consulting  agreement with
Young  Management,  the Company  has agreed to use its best  efforts to register
179,279  shares  of  issued  and  outstanding   Common  Stock  as  part  of  any
registration  of  securities  by the Company,  subject to the  discretion of the
managing  underwriter,  if any, to exclude  such shares  from  registration.  In
addition, the Company has agreed to register warrants to purchase 678,310 shares
of Common Stock and the 678,310 shares of Common Stock underlying these warrants
no later  than 12 months and one day after the date of this  Prospectus.  If the
shares and  warrants are not  registered  within 12 months and one day after the
date of this Prospectus, then the Company shall use its best efforts to register
these shares and warrants as part of any other registration of securities by the
Company  until  November 30,  2002.  The Company has also agreed to use its best
efforts to register the shares underlying  warrants to purchase in the aggregate
269,608 shares of Common Stock as part of any  registration of securities by the
Company,  subject to the  discretion  of the  managing  underwriter,  if any, to
exclude such shares from registration.  Finally,  the Company has also agreed to
register  the shares  underlying  warrants to  purchase  up to 21,966  shares of
Common Stock issued to a placement agent in connection with a private  placement
completed in May 1996 no later than 13 months after the  effective  date of this
Offering.
    

                                       34




                                  UNDERWRITING

    GKN   Securities   Corp.  and  Laidlaw   Equities,   Inc.   (together,   the
"Underwriters")  have  agreed,  subject  to  the  terms  and  conditions  of the
Underwriting  Agreement, to purchase on a firm commitment basis from the Company
a total of 1,800,000 shares of Common Stock and 1,800,000 Warrants.  Each of the
Underwriters  has agreed to purchase one half of such shares of Common Stock and
Warrants.

    The obligations of the  Underwriters  under the  Underwriting  Agreement are
subject to  approval  of certain  legal  matters by counsel  and  various  other
conditions precedent,  and the Underwriters are obligated to purchase all of the
shares of Common Stock and Warrants  offered by this Prospectus  (other than the
shares of  Common  Stock  and  Warrants  covered  by the  over-allotment  option
described below), if any are purchased.

    The  Underwriters  have  advised the Company  that they propose to offer the
Securities to the public at the initial public  offering prices set forth on the
cover  page of this  Prospectus  and to  certain  dealers  at that  price less a
concession  not in excess of $ per share of Common Stock and $ per Warrant.  The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share of Common Stock and $ per Warrant to certain other dealers. After
this Offering,  the offering price and other selling terms may be changed by the
Underwriters.

    The  Company  has  agreed to  indemnify  the  Underwriters  against  certain
liabilities,  including  liabilities  under the Securities  Act. The Company has
also agreed to pay to the Underwriters an expense  allowance on a nonaccountable
basis equal to 3% of the gross proceeds  derived from the sale of the Securities
offered by this Prospectus  (including the sale of any Securities subject to the
Underwriters'  over-allotment  option),  $60,000 of which has been paid to date.
The Company also has agreed to pay all expenses in  connection  with  qualifying
the  Securities  offered  hereby for sale  under the laws of such  states as the
Underwriters  may  designate  and  registering  this  Offering with the National
Association of Securities Dealers,  Inc., including fees and expenses of counsel
retained for such purposes by the Underwriters.

    The Company has granted to the Underwriters an option, exercisable within 45
business  days from the date of this  Prospectus,  to purchase  at the  offering
price, less underwriting discounts and the nonaccountable expense allowance,  up
to an aggregate  of 270,000  additional  shares of Common  Stock and/or  270,000
additional Warrants for the sole purpose of covering over-allotments, if any.

    The Company has engaged the  Underwriters  on a  non-exclusive  basis as its
agents for the  solicitation of the exercise of the Warrants.  To the extent not
inconsistent  with the  guidelines of the NASD and the rules and  regulations of
the  Commission,  the Company has agreed to pay the  Underwriters  for bona fide
services  rendered  a  commission  equal to 5% of the  exercise  price  for each
Warrant  exercised  after  one  year  from the  date of this  Prospectus  if the
exercise was solicited by the  Underwriters.  In addition to soliciting,  either
orally or in writing,  the  exercise of the  Warrants,  such  services  may also
include   disseminating   information,   either   orally  or  in   writing,   to
warrantholders about the Company or the market for the Company's securities, and
assisting in the processing of the exercise of Warrants. No compensation will be
paid to the  Underwriters in connection with the exercise of the Warrants if the
market price of the underlying shares of Common Stock is lower than the exercise
price,  the  Warrants  are held in a  discretionary  account,  the  Warrants are
exercised in an unsolicited transaction,  the warrantholder has not confirmed in
writing that the Underwriters  solicited such exercise or the arrangement to pay
the commission is not disclosed in the prospectus  provided to warrantholders at
the time of exercise. In addition, unless granted an exemption by the Commission
from  Regulation  M under the Exchange  Act,  while  soliciting  exercise of the
Warrants, the Underwriters will be prohibited from engaging in any market-making
activities  or  solicited  brokerage  activities  with  regard to the  Company's
securities  unless the Underwriters have waived their right to receive a fee for
the exercise of the Warrants.

    In  connection  with this  Offering,  the  Company has agreed to sell to the
Underwriters  for an  aggregate  of $100,  the  Underwriters'  Purchase  Option,
consisting  of the right to purchase  up to an  aggregate  of 180,000  shares of
Common Stock and/or  180,000  Warrants.  The  Underwriters'  Purchase  Option is
exercisable initially at a price of $9.075 per share and $0.2475 per Warrant for
a  period  of  four  years  commencing  one  year  from  the  date  hereof.  The
Underwriters'  Purchase  Option  may  not  be  transferred,  sold,  assigned  or
hypothecated


                                       35



during  the one year  period  following  the date of this  Prospectus  except to
officers of the  Underwriters  and the  selected  dealers and their  officers or
partners.  The  Underwriters'  Purchase  Option  grants to the  holders  thereof
certain  "piggyback"  and  demand  rights for  periods of seven and five  years,
respectively,  from the date of this Prospectus with respect to the registration
under the Securities Act of the securities directly and indirectly issuable upon
exercise of the Underwriters' Purchase Option.

    Pursuant to the Underwriting Agreement,  all of the officers,  directors and
all  other  stockholders  owning  2% or  more  of  the  Company's  Common  Stock
immediately  prior  to  this  Offering  (who  hold  in the  aggregate  1,977,377
outstanding  shares of Common Stock) have agreed not to sell any of their shares
of Common  Stock  until 13 months from the date of this  Prospectus  without the
consent of GKN. In addition,  the  Underwriting  Agreement  provides that, for a
period of three years from the date of this Prospectus,  GKN will have the right
to send a representative to observe each meeting of the Board of Directors.  GKN
has  not  yet  selected  such  representative.  GKN  has  also  been  granted  a
preferential right for a period of 18 months from the date of this Prospectus to
purchase or to sell for the account of any of the Company's officers,  directors
or stockholders owning 5% or more of the Company's  outstanding Common Stock any
securities  to be sold pursuant to Rule 144 adopted  under the  Securities  Act.
These  sellers must consult with GKN  regarding  any such offering and offer GKN
the opportunity to purchase or sell any such securities.

    Prior to this  Offering,  there  has been no  public  market  for any of the
Company's securities. Accordingly, the offering prices of the Securities and the
terms of the Warrants have been  determined by  negotiation  between the Company
and the  Underwriters  and do not bear any  relation  to  established  valuation
criteria.  Factors  considered in determining such prices and terms, in addition
to prevailing market conditions,  included an assessment of the prospect for the
industry in which the Company will  compete,  the Company's  management  and the
Company's capital structure.

    The Underwriters  may engage in  over-allotment,  stabilizing  transactions,
syndicate  short  covering  transactions  and penalty  bids in  accordance  with
Regulation  M under  the  Exchange  Act.  Over-allotment  involves  sales by the
underwriting syndicate in excess of the offering size, which creates a syndicate
short position.  Stabilizing transactions permit bids to purchase the Securities
so long as the  stabilizing  bids do not exceed a specified  maximum.  Syndicate
short  covering  transactions  involve  purchases of the  Securities in the open
market after the  distribution  has been  completed in order to cover  syndicate
short  positions.  Penalty  bids  permit the  Underwriters  to reclaim a selling
concession  from a selling group member when the Securities  originally  sold by
such  selling  group  member  are   repurchased   in  the  open  market  by  the
Underwriters.   Such   stabilizing   transactions,   syndicate   short  covering
transactions  and  penalty  bids may cause the  prices of the  Securities  to be
higher than they would otherwise be in the absence of such  transactions.  These
transactions  may be effected on the Nasdaq SmallCap Market or otherwise and, if
commenced, may be discontinued at any time.

   
    From December 1996 to February  1997,  the  Underwriters  acted as placement
agents  in  connection  with  the  private  placement  of  units  consisting  of
promissory  notes with an  aggregate  face value of  $3,375,000  and warrants to
purchase an  aggregate of 914,188  shares of Common Stock (of which  warrants to
purchase 235,878 shares of Common Stock were subsequently  cancelled),  and were
paid  commissions of approximately  $337,500 (10%) and a nonaccountable  expense
allowance of $101,250 (3%).
    

                                  LEGAL MATTERS

    The validity of the  securities  hereby  offered will be passed upon for the
Company by Warner & Stackpole  LLP,  Boston,  Massachusetts.  Graubard  Mollen &
Miller,  New York,  New York,  has  served as  counsel  to the  Underwriters  in
connection with this Offering.

                                     EXPERTS

    The  financial  statements  of the  Company  in this  Prospectus  and in the
Registration  Statement  have been  audited  by BDO  Seidman,  LLP,  independent
certified  public  accountants,  to the extent and for the  periods set forth in
their report (which  contains an explanatory  paragraph  regarding the Company's
ability to continue as a going concern)  appearing  elsewhere  herein and in the
Registration  Statement,  and are included in reliance  upon such reports  given
upon the authority of said firm as experts in auditing and accounting.


                                       36




                              AVAILABLE INFORMATION

    The  Company  has filed a  Registration  Statement  on Form SB-2,  including
amendments  thereto,   relating  to  the  Securities  offered  hereby  with  the
Commission.  This  Prospectus,   which  constitutes  part  of  the  Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto.  Statements  contained in this
Prospectus as to the contents of any contract or other document  referred to are
not necessarily  complete and in each instance  reference is made to the copy of
such  contract  or  other  document  filed  as an  exhibit  to the  Registration
Statement,  each  such  statement  being  qualified  in  all  respects  by  such
reference.  For  further  information  with  respect  to  the  Company  and  the
securities offered hereby,  reference is made to such Registration Statement and
the exhibits thereto. Following the effectiveness of the Registration Statement,
the Company will be subject to the informational  requirements of the Securities
Exchange Act of 1934, as amended,  and in accordance  therewith the Company will
file  periodic  reports,   proxy  statements  and  other  information  with  the
Commission.  The  Registration  Statement,  reports,  proxy statements and other
information filed in accordance with the requirements of the Exchange Act may be
inspected without charge at the public reference facilities of the Commission at
450 Fifth Street, N.W., Washington,  D.C. 20549; 7 World Trade Center, New York,
New York, 10048; and Northwest Atrium Center, 500 West Madison Street,  Chicago,
Illinois  60661-2511.  Copies of such  material may be obtained  from the Public
Reference  Section of the Commission upon the payment of certain fees prescribed
by the Commission. The Commission maintains a Web site (http://www.sec.gov) that
contains  reports,  proxy  and  information  statements  and  other  information
regarding issuers that file electronically with the Commission.

    The  Company  intends  to  furnish  its  stockholders  with  annual  reports
containing  financial  statements  audited and reported upon by its  independent
auditors  after the end of each year,  commencing  with the fiscal  year  ending
December 31, 1997, and will make  available  such other periodic  reports as the
Company may determine to be appropriate or as may be required by law.


                                       37





                              AUGMENT SYSTEMS, INC.
                        (A Development Stage Enterprise)
                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                    PAGE
<S>                                                                               <C>
Report of Independent Certified Public Accountants                                   F-2

Financial Statements:

     Balance sheets as of June 30, 1995 and 1996 and December 31, 1996               F-3

     Statements of  operations  for the years ended June 30, 1995 and 1996,  the
       cumulative  period from  October 1, 1995 to December 31, 1996 and the six
       months ended December 31, 1995 and 1996                                       F-4

     Statements of  stockholders'  deficit for the years ended June 30, 1995 and
       1996 and the six months ended December 31, 1996                               F-5

     Statements of cash flows for the years  ended June 30,  1995 and 1996,  the
       cumulative  period from  October 1, 1995 to December 31, 1996 and the six
       months ended December 31, 1995 and 1996                                       F-6

     Notes to financial statements                                                F-7 to F-18
</TABLE>


                                      F-1




               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To The Board of Directors
 Augment Systems, Inc.
 Westford, Massachusetts

    We have audited the accompanying balance sheets of Augment Systems,  Inc. (a
Development Stage Enterprise) as of June 30, 1995 and 1996 and December 31, 1996
and the related statements of operations,  stockholders' deficit, and cash flows
for the years ended June 30, 1995 and 1996 and the six months ended December 31,
1996.  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 audits.

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

    In our opinion,  the financial  statements referred to above present fairly,
in all material  respects,  the financial  position of Augment Systems,  Inc. (a
Development  Stage  Enterprise) at June 30, 1995 and 1996 and December 31, 1996,
and the  results of its  operations  and its cash flows for the years ended June
30, 1995 and 1996 and the six months ended December 31, 1996 in conformity  with
generally accepted accounting principles.

    The  Company is in the  development  stage,  and as such,  success of future
operations is subject to a number of risks. The Company has incurred substantial
losses since  inception  and there is a  substantial  doubt about the  Company's
ability to continue as a going concern.  The Company's  ability to continue as a
going  concern is dependent  upon the  anticipated  net proceeds from a proposed
initial  public  offering or obtaining  financing by  alternative  means.  These
matters are further discussed in Note 1. The accompanying  financial  statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.



                                         BDO SEIDMAN, LLP


   
Boston, Massachusetts
February 20, 1997, except for
  Note 15 which is as
  of May 8, 1997
    




                                      F-2






                             AUGMENT SYSTEMS, INC.
                     (A Development Stage Enterprise)
                              BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                  JUNE 30,                          
                                                                                           ----------------------       DECEMBER 31,
                                                                                             1995          1996             1996
                                                                                             ----          ----             ----
<S>                                                                                      <C>           <C>            <C>

                                                      ASSETS                        
Current Assets:
   Cash (Note 2)                                                                    $     2,348       $   889,898       $   452,753
   Inventories (Note 2)                                                                    --              47,642           589,351
   Prepaid expenses (Note 9)                                                               --             107,300            97,500
                                                                                    -----------       -----------       -----------
       Total current assets                                                               2,348         1,044,840         1,139,604
Property and equipment, net (Notes 2, 3 and 9)                                           18,033           205,688           348,889
Other assets, net (Note 2)                                                                 --             147,874           190,560
                                                                                    -----------       -----------       -----------
       Total assets                                                                 $    20,381       $ 1,398,402       $ 1,679,053
                                                                                    ===========       ===========       ===========
                                         LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Demand notes payable (Note 4)                                                    $   105,218       $      --         $      --
   Accounts payable                                                                      63,930           186,434           601,274
   Accrued expenses (Note 5)                                                             39,456           338,052           196,104
   Due to stockholder (Note 10)                                                           5,400            18,900              --
   Short term promissory notes (Note 6)                                                    --                --           1,051,248
   Short term advance (Note 7)                                                             --                --             575,000
   Convertible promissory notes (Note 8)                                                   --             425,000              --
   Current portion of obligations under capital leases (Notes 3 and 9)                     --              13,400            19,013
                                                                                    -----------       -----------       -----------
       Total current liabilities                                                        214,004           981,786         2,442,639
Convertible promissory notes (Note 8)                                                      --             864,276            62,248
Obligations under capital leases, less current portion (Notes 3 and 9)                     --              19,244            27,530
                                                                                    -----------       -----------       -----------
       Total liabilities                                                                214,004         1,865,306         2,532,417
                                                                                    -----------       -----------       -----------
Commitments (Note 9)
Stockholders' deficit (Notes 4, 6, 8, 10, 12, 13 and 15):
   Preferred stock, $.01 par value; 2,000,000 shares authorized; none
     issued                                                                                --                --                --
   Common stock, $.01 par value; 30,000,000 shares authorized; 239,038,
     1,700,425 and 2,865,512 shares issued and outstanding                                2,390            17,004            28,655
   Additional paid-in capital                                                         2,135,251         3,359,020         6,177,194
   Deficit                                                                           (2,331,264)       (3,842,928)       (7,059,213)
                                                                                    -----------       -----------       -----------
       Total stockholders deficit                                                      (193,623)         (466,904)         (853,364)
                                                                                    -----------       -----------       -----------
       Total liabilities and stockholders' deficit                                  $    20,381       $ 1,398,402       $ 1,679,053
                                                                                    ===========       ===========       ===========
</TABLE>


              See accompanying notes to financial statements.

                                      F-3





                             AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                      YEAR ENDED              SIX MONTHS ENDED
                                                       JUNE 30,                 DECEMBER 31,
                                                  -------------------        --------------------         CUMULATIVE
                                                                                                          PERIOD FROM
                                                                                                      OCTOBER 1, 1995 TO
                                                  1995         1996          1995           1996       DECEMBER 31, 1996
                                                  ----         ----          ----           ----       -----------------
                                                                          (UNAUDITED)                     (UNAUDITED)
<S>                                            <C>          <C>           <C>           <C>            <C>
Operating expenses:
   Research and development expenses (Note 2)  $   --       $ 1,388,149   $  155,575   $  1,526,384      $  2,914,533
   General and administrative expenses             39,273        90,274      387,150      1,083,267         1,132,878
   Selling and marketing expenses                  --           --             9,500        490,735           490,735
                                               ----------  ------------   ----------   ------------       ----------- 
       Total operating expenses                    39,273     1,478,423      552,225      3,100,386         4,538,146
       Operating loss                             (39,273)   (1,478,423)    (552,225)    (3,100,386)       (4,538,146)
                                               ----------  ------------   ----------   ------------       ----------- 
Other income (expense):
   Other income, net                               --            25,284       25,284        --                 25,284
   Interest expense (Note 6)                       --           (51,343)      --           (115,899)         (167,242)
                                               ----------  ------------   ----------   ------------       ----------- 
       Total other income (expense), net           --           (26,059)      25,284       (115,899)         (141,958)
                                               ----------  ------------   ----------   ------------       ----------- 
Loss from continuing operations                   (39,273)   (1,504,482)    (526,941)    (3,216,285)       (4,680,104)
Discontinued operations (Note 1):              ----------  ------------   ----------   ------------       ----------- 
   Loss from operations                          (361,582)       (7,182)      (7,182)       --                --
                                               ----------  ------------   ----------   ------------       ----------- 
   Loss from discontinued operations             (361,582)       (7,182)      (7,182)       --                --
                                               ----------  ------------   ----------   ------------       ----------- 
Net loss (Notes 2 and 11)                      $ (400,855)  $(1,511,664)  $ (534,123)  $ (3,216,285)      $(4,680,104)
                                               ==========   ===========   ==========   ============       =========== 
Loss per share of common stock (Note 2):
   Loss from continuing operations             $     (.02)  $      (.51)  $     (.19)  $       (.93)      $     (1.47)
   Loss from discontinued operations                 (.17)       --           --             --                --
                                               ----------   -----------   ----------   ------------       ----------- 
Net loss per share of common stock             $     (.19)  $      (.51)  $     (.19)  $       (.93)      $     (1.47)
                                               ----------   -----------   ----------   ------------       ----------- 
Weighted average number of shares of common
  stock and common stock equivalents 
  outstanding                                   2,170,878     2,950,492    2,862,246      3,452,740         3,190,648
                                               ==========   ===========   ==========   ============       =========== 
</TABLE>


              See accompanying notes to financial statements.

                                      F-4





                             AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                       STATEMENTS OF STOCKHOLDERS' DEFICIT
                           (NOTES 4, 6, 8, 12 AND 13)

<TABLE>
<CAPTION>

                                 PREFERRED STOCK        COMMON STOCK                                 TREASURY STOCK     
                                ----------------      ---------------   ADDITIONAL               -----------------        TOTAL     
                                                                         PAID-IN                                      STOCKHOLDERS'
                               SHARES   AMOUNT     SHARES     AMOUNT     CAPITAL       DEFICIT      SHARES    AMOUNT     DEFICIT    
                               ------   ------     ------     ------     -------       -------      ------    ------     -------    
                                                                                                                      
<S>                            <C>       <C>        <C>        <C>       <C>          <C>            <C>       <C>      <C>
Balance, June 30, 1994          426,257  $  4,263    226,713   $  2,267  $   778,986  $(1,930,409)    --    $    --    $(1,144,893)
Issuance of Common Stock in
  exchange for certain
  liabilities and all
  outstanding preferred stock
  and common stock             (426,257)  (4,263)     12,325       123    1,356,265       --          --        --       1,352,125
Net loss                          --       --         --         --          --          (400,855)    --        --        (400,855)
                               --------  -------    --------    ------    ---------    -----------  --------  ------   -----------
Balance, June 30, 1995            --       --        239,038     2,390    2,135,251    (2,331,264)    --        --        (193,623)
Issuance of common stock to new
  management                      --       --        525,883     5,259        5,741       --          --        --          11,000
Issuance of common stock in
  exchange of consulting
  services                        --       --        193,554     1,936        6,314       --          --        --           8,250
Issuance of common stock in
  exchange of inventories         --       --         22,565       226       33,772       --          --        --          33,998
Issuance of common stock in
  exchange of back rent           --       --          3,346        33        5,008       --          --        --           5,041
Purchase of treasury stock        --       --         --         --          --           --         (3,346)   (7,000)      (7,000)
Conversion of demand
  promissory notes and accrued
  interest into common stock      --       --         21,912       219       32,781       --          --        --          33,000
Issuance of common stock in
  connection with private
  placements                      --       --        697,473     6,975    1,147,119       --          --        --       1,154,094
Retirement of treasury stock      --       --         (3,346)      (34)      (6,966)      --          3,346     7,000        --
Net loss                          --       --         --         --          --        (1,511,664)    --        --      (1,511,664)
                               --------  -------    --------    ------    ---------    -----------  --------  ------   -----------
Balance, June 30, 1996            --       --      1,700,425    17,004    3,359,020    (3,842,928)    --        --        (466,904)
Issuance of common stock in
  connection with private
  placements                      --       --        609,546     6,095    1,103,155       --          --        --       1,109,250
Conversion of convertible
  promissory notes into common
  stock                           --       --        107,567     1,076      223,924       --          --        --         225,000
Issuance of common stock to
  employees                       --       --          7,172        72       14,940       --          --        --          15,012
Issuance of common stock in
  exchange of consulting
  services                        --       --         47,490       475       98,937       --          --        --          99,412
Issuance of common stock in
  connection with private
  placements                      --       --        239,037     2,390      432,610       --          --        --         435,000
Conversion of convertible
  promissory notes and accrued
  interest into common stock      --       --        218,374     2,184      737,353       --          --        --         739,537
Conversion of debt to existing
  stockholder into common stock   --       --          4,725        47       18,853       --          --        --          18,900
Issuance of common stock in
  exchange of consulting
  services                        --       --          2,888        29       11,521       --          --        --          11,550
Purchase of treasury stock        --       --         --         --          --           --        (71,712)     (956)        (956)
Retirement of treasury stock      --       --        (71,712)     (717)        (239)      --         71,712       956        --
Issuance of warrants
  associated with short term
  promissory notes                --       --         --         --         177,120       --          --        --         177,120
Net loss                          --       --         --         --          --        (3,216,285)    --        --      (3,216,285)
                               --------  -------    --------    ------    ---------    -----------  --------  ------   -----------
Balance, December 31, 1996        --     $  --     2,865,512   $28,655   $6,177,194   $(7,059,213)    --     $  --       $(853,364)
                               ========  =======   ==========   =======   =========    ===========  ========  ======   ===========
</TABLE>


              See accompanying notes to financial statements.

                                       F-5







                             AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                            STATEMENTS OF CASH FLOWS
                                    (NOTE 14)


<TABLE>
<CAPTION>

                                                                                         SIX MONTHS
                                                             YEAR ENDED                    ENDED
                                                              JUNE 30,                  DECEMBER 31,
                                                        --------------------      -----------------------        CUMULATIVE
                                                                                                                 PERIOD FROM
                                                                                                             OCTOBER 1, 1995 TO
                                                         1995          1996          1995          1996       DECEMBER 31, 1996
                                                         ----          ----          ----          ----       -----------------
                                                                                 (UNAUDITED)                     (UNAUDITED)
<S>                                                    <C>         <C>           <C>           <C>            <C>
Cash flows from operating activities:
   Net loss                                            $(400,855)  $(1,511,664)   $(534,123)   $(3,216,285)      $(4,680,104)
   Adjustments to reconcile net loss to net cash used
     for operating activities:
       Depreciation and amortization                      25,473        56,539        1,456        119,798           173,203
       Compensation paid in common stock                  --            19,250       19,250        125,974           130,474
       Changes in operating assets and liabilities:
        Inventories                                       --           (13,644)      (6,822)      (541,709)         (555,353)
        Prepaid expenses                                  --          (107,300)      --              9,800           (97,500)
        Other assets                                      --           (11,079)      (9,145)           150           (10,929)
        Accounts payable                                 (20,860)      152,829       78,036        414,840           568,340
        Accrued expenses                                 390,359       312,768       96,626        (70,460)          227,264
                                                         -------       -------       ------        -------           -------
          Net cash used for operating activities          (5,883)   (1,102,301)    (354,722)    (3,157,892)       (4,244,605)
                                                         -------       -------       ------        -------           -------
Cash flows from investing activities:
   Purchase of property and equipment                     (4,664)     (182,463)      --           (179,359)         (361,822)
                                                         -------       -------       ------        -------           -------
          Net cash used for investing activities          (4,664)     (182,463)      --           (179,359)         (361,822)
                                                         -------       -------       ------        -------           -------
Cash flows from financing activities:
   Proceeds from issuance of common stock                 --         1,154,094       99,232      1,544,250         2,698,344
   Proceeds from issuance of convertible promissory
     notes                                                --         1,177,602      385,940        --              1,177,602
   Proceeds from noninterest bearing loans from
     stockholder                                           5,400        13,500       10,108        --                 13,500
   Proceeds from issuance of short-term promissory notes  --           100,000      150,000      1,011,560         1,011,560
   Proceeds from short-term advance                       --           --            --            575,000           575,000
   Proceeds from issuance of warrants associated with
     short-term promissory notes                          --           --            --            177,120           177,120
   Payments on capital lease obligations                  --              (739)                     (8,317)           (9,056)
   Payments on convertible promissory notes               --           --            --           (200,000)         (200,000)
   Payments on promissory notes                           --          (100,000)      --            --               (100,000)
   Purchase of treasury stock                             --            (7,000)      --               (956)           (7,956)
   Deferred financing costs                               --          (165,143)     (50,172)      (108,680)         (273,823)
   Deferred registration costs                            --           --            --            (89,871)          (89,871)
                                                         -------       -------       ------        -------           -------
          Net cash provided by financing activities        5,400     2,172,314      595,108      2,900,106         4,972,420
                                                         -------       -------       ------        -------           -------
Net increase (decrease) in cash                           (5,147)      887,550      240,386       (437,145)          365,993
Cash, beginning of period                                  7,495         2,348        2,348        889,898            86,760
                                                         -------       -------       ------        -------           -------
Cash, end of period                                    $   2,348  $    889,898   $  242,734    $   452,753        $  452,753
                                                       =========   ===========    =========    ===========        ==========
</TABLE>


              See accompanying notes to financial statements.

                                      F-6







                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                          NOTES TO FINANCIAL STATEMENTS
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

1. ORGANIZATION, BUSINESS AND PROPOSED INITIAL PUBLIC OFFERING

    Augment  Systems,   Inc.,   formerly  Augment  Systems   Incorporated   (the
"Company"),  a development stage company,  designs,  develops and sells high-end
super server  products  designed to move large image and text files  rapidly and
efficiently over computer networks. The Company's initial target markets are the
electronic  publishing  industry and the  Internet/Intranet  market. The Company
expects to commence  sales of its  initial  products,  high-end  Macintosh-based
super  servers in April 1997.  The Company  plans to introduce in 1997 a Windows
NT-based super server  targeted to meet the growing demand for Windows  NT-based
high  performance  Internet/Intranet  World Wide Web servers and a super  server
system  designed to support  multi-platform  networks  comprised  of  Macintosh,
Windows NT and UNIX-based workstations.

    The Company was  incorporated in 1990 to develop and distribute  fiber optic
printed circuit boards in the publishing and printing  markets.  The fiber optic
products had limited  success and in fiscal 1994 the Company  began  phasing out
the fiber optic  operations and began the transition into a systems  integration
and engineering  consulting business. In 1995 the Company made a strategic shift
in its business operation into the server market.  Accordingly,  operations have
been accounted for as discontinued for the periods through September 30, 1995.

    Since October 1995, the Company has been engaged principally in research and
development,  recruitment of personnel and financing activities. The Company has
engaged in limited  marketing  activities and has not generated any revenues and
does not expect to generate revenues until April 1997. The Company is considered
to be in the development  stage,  and as such,  success of future  operations is
subject  to a number of risks  similar to those of other  companies  in the same
stage  of  development.  Principal  among  these  risks  are the  risk  that the
Company's  products will not be accepted in the  marketplace;  the risk that the
Company will not be successful in developing future products;  the risk of rapid
technological  changes in the server industry;  the Company's  limited operating
history,  history of losses and  accumulated  deficit;  the  Company's  need for
additional capital; and the highly competitive nature of the server industry.

    The Company has incurred  substantial  losses since  inception  and has been
engaged  primarily in product  development.  The Company has funded these losses
through the private  placement of convertible  promissory notes and common stock
aggregating  approximately  $5,300,000  during the year ended December 31, 1996.
There is  substantial  doubt about the Company's  ability to continue as a going
concern.  The Company is dependent  upon the  anticipated  net  proceeds  from a
proposed initial public offering or obtaining financing by alternative means.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Fiscal Year

    In October  1996 the  Company  changed its fiscal  year-end  from June 30 to
December 31.

 Estimates and Assumptions

    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

 Cash Equivalents

    The Company considers all highly liquid investments with a maturity of three
months  or less  when  purchased  to be  cash  equivalents.  There  were no cash
equivalents at June 30, 1995 and 1996, and December 31, 1996.

                                    F-7



                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

 Inventories

    Inventories are stated at the lower of cost (first-in, first-out) or market.

 Property and Equipment

    Property and equipment are recorded at cost.  Depreciation is computed using
the  straight-line  method over the estimated useful lives of the related assets
ranging from three to five years.  Property  held under  capital lease are being
amortized over the lesser of the lease term or their estimated useful lives.

 Other Assets

    Other  assets  included   deferred   financing  costs  of  $108,680  net  of
accumulated  amortization of $21,736 at December 31, 1996,  related to the Short
Term Promissory  Notes discussed in Note 6. These costs are being amortized over
5 months, which is the estimated time between the debt issuance and the proposed
initial public offering.

    As of December 31,  1996,  the Company has  incurred  registration  costs of
$89,871 in connection with the proposed public  offering.  These costs have been
deferred and upon consummation of the proposed public offering,  will be charged
against the equity raised or expensed if the public offering is not successful.

 Research and Development

    Research and development costs are expensed as incurred.

    In  accordance  with  Statement of Financial  Accounting  Standards  No. 86,
"Accounting for the Costs of Computer  Software To Be Sold,  Leased or Otherwise
Marketed," the Company will capitalize software development costs incurred after
technological  feasibility of the software  development  projects is established
and the  realizability  of such capitalized  costs through future  operations is
expected if such costs become material.  To date, all of the Company's costs for
research  and  development  of  software  have been  charged  to  operations  as
incurred, as the amount of software development costs incurred subsequent to the
establishment of technological feasibility has been immaterial.

Income Taxes

    Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."

 Financial Instruments

    The  estimated  fair value of the  Company's  financial  instruments,  which
include accounts  payable,  related party accounts,  and convertible  promissory
notes, approximate their carrying value.

 Stock Options

    Effective July 1, 1996, the Company  adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based  Compensation".  The Company has elected to continue
to account for stock options at intrinsic  value with  disclosure of the effects
of fair value  accounting  on net income and  earnings  per share on a pro forma
basis. See Note 13 for required disclosures.

                                    F-8



                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

 Net Loss Per Share of Common Stock

    Net loss  per  share  of  common  stock is  computed  by  dividing  net loss
applicable  to common  stockholders  by the  weighted  average  number of shares
outstanding  during each period  presented,  as adjusted  for the effects of the
application of Securities and Exchange  Commission Staff Accounting Bulletin No.
83 ("SAB No. 83").  Pursuant to SAB No. 83, common  stock,  common stock options
and warrants  issued within one year of the initial  public  offering at a price
(or exercise or conversion  price) less than the initial  public  offering price
(estimated  at $5.50 per  share)  are  treated as  outstanding  for all  periods
presented. Net loss per share is computed using the treasury stock method, under
which the number of shares  outstanding  reflects an assumed use of the proceeds
from the issuance of such shares and from the assumed  exercise of such options,
to  repurchase  shares of the  Company's  common  shares at the  initial  public
offering price.  Common stock  equivalents  issued prior to this period have not
been included since their effect would be anti-dilutive.

 Effect of Accounting Pronouncements Not Adopted

    Statement of Financial  Accounting  Standards No. 121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of,"
issued by the Financial  Accounting  Standards  Board is effective for financial
statements for fiscal years  beginning after December 15, 1995. The new standard
establishes  new  guidelines  regarding  when  impairment  losses on  long-lived
assets,  which include plant and equipment and certain  identifiable  intangible
assets,  should be recognized and how impairment losses should be measured.  The
Company does not expect the adoption of this standard to have a material  effect
on its financial position or results of operations.

 Interim Financial Statements

    The  financial  statements  for the six months  ended  December 31, 1995 are
unaudited but, in the opinion of management, reflect all adjustments, consisting
only of normal recurring  adjustments,  necessary for a fair  presentation.  The
interim  financial  statements are not necessarily  indicative of the results of
operations for the full fiscal year.

3. PROPERTY AND EQUIPMENT

    Property and equipment consists of the following:
<TABLE>
<CAPTION>
                                                            JUNE 30,         
                                                            --------          DECEMBER 31,
                                                         1995       1996         1996
                                                         ----       ----         ----
<S>                                                    <C>        <C>          <C>
Equipment                                              $115,693   $309,231     $490,665
Furniture and fixtures                                    --        22,308       39,395
Leasehold improvements                                    --         --           3,054
                                                         ------    -------      -------
                                                        115,693    331,539      533,114
Less accumulated depreciation and amortization           97,660    125,851      184,225
                                                         ------    -------      -------
Property and equipment, net                            $  18,033  $205,688     $348,889
                                                       =========  ========     ========
</TABLE>

    Property held under capital  leases is included in property and equipment as
follows:

<TABLE>
<CAPTION>
                                                          JUNE 30,      
                                                          --------        DECEMBER 31,
                                                       1995       1996        1996
                                                       ----       ----        ----
<S>                                                    <C>       <C>          <C>
Equipment                                               $  --     $33,383    $55,599
Less accumulated amortization                              --         564      6,122
                                                        ------    -------    -------
Net property held under capital leases                  $  --     $32,819    $49,477
                                                        ======    =======    =======
</TABLE>

                                    F-9



                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

4. DEMAND PROMISSORY NOTES


    Demand  promissory  notes at June 30, 1995  represented  notes issued during
1991 to two venture  funds:  Massachusetts  Technology  Development  Corporation
("MTDC") and First Stage Capital Limited Partnership ("First Stage").  The notes
bore  interest of 10 percent per annum.  In January  1996,  MTDC and First Stage
converted  the  outstanding  $105,218  demand  promissory  notes and  $39,456 of
accrued interest into $111,674 of convertible  promissory notes (see Note 8) and
21,912 shares of the Company's common stock at $1.507 per share.


5. ACCRUED EXPENSES

    Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                            JUNE 30,        
                                                            --------        DECEMBER 31,
                                                        1995       1996         1996
                                                        ----       ----      ----------
<S>                                                    <C>       <C>          <C>
Payroll and related taxes                              $  --     $135,869     $  --
Consulting                                               --        89,186       94,669
Interest                                                39,456     47,108       20,875
Other                                                    --        65,889       80,560
                                                       -------   --------     --------
Total accrued expenses                                 $39,456   $338,052     $196,104
                                                       =======   ========     ========
</TABLE>

6. SHORT TERM PROMISSORY NOTES


    In December  1996, the Company  completed a private  placement of 24.2 units
consisting of (i) a Class A promissory  note in the principal  amount of $25,000
bearing interest,  payable at maturity,  at the rate of 12 percent per annum due
and payable on the earlier  of: (a) the  closing of an initial  public  offering
("IPO") of the Company's Common Stock; (b) November 30, 1997; or (c) the sale by
the Company of  substantially  all of its assets,  or upon the sale or merger of
the Company;  (ii) a Class A warrant to purchase 6,375 shares of Common Stock at
an exercise  price of one-half the offering price of the Common Stock in an IPO,
provided that the IPO is completed by May 31, 1997;  otherwise  $1.33 per share;
(iii) a Class B  promissory  note in the  principal  amount of  $25,000  bearing
interest,  payable at  maturity,  at the rate of 12 percent  per annum,  due and
payable on the earlier  of: (a) the closing of an IPO, if such IPO is  completed
by May  31,  1997;  (b)  May  31,  1998;  or (c)  the  sale  by the  Company  of
substantially all of its assets, or upon the sale or merger of the Company;  and
(iv) a Class B warrant to purchase  6,375  shares of Common Stock at an exercise
price of  three-fourths  of the  offering  price of the Common  Stock in an IPO,
provided that the IPO is completed by May 31, 1997;  otherwise  $1.33 per share.
Proceeds,  net of financing costs of $130,000,  were  $1,080,000.  In accordance
with the provisions of Accounting  Principles Board Opinion No. 14,  "Accounting
for Convertible  Debt and Debt Issued with Stock Purchase  Warrants,"  ("APB No.
14") the Company allocated gross proceeds of $198,440, net of financing costs of
$21,320,  to the  detachable  warrants and gross  proceeds of  $1,011,560 to the
Class A and Class B promissory notes  ($1,210,000  face value).  The discount on
the debt is being  amortized over 5 months,  which is the estimated time between
the debt  issuance  and the proposed  initial  public  offering.  During the six
months ended December 31, 1996, the Company charged interest expense for $39,688
of  amortization on the debt discount.  Upon completion of the proposed  initial
public  offering,  the Company would record interest  expense of $158,752 on the
unamortized  debt  discount  and  record  $86,944  on the  unamortized  deferred
financing costs at December 31, 1996.


7. SHORT TERM ADVANCE

    In December 1996,  the Company  received a short-term  non-interest  bearing
advance of $575,000 from an unaffiliated third party.

                                   F-10



                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

8. CONVERTIBLE PROMISSORY NOTES


    In May, 1996, the Company issued  $425,000 of convertible  promissory  notes
that bore interest at the rate of 10 percent per annum. In July, 1996,  $200,000
of these notes were repaid and in September  1996,  $225,000 of these notes were
converted into 107,567 shares of the Company's  common stock in accordance  with
the notes.

    In  addition,  at June 30,  1996,  the Company had  outstanding  $752,602 of
convertible  promissory  notes  issued to various  stockholders  of the  Company
during  September 1995 and May 1996 in connection with a private  placement,  as
well as $111,674 of convertible  promissory notes issued (collectively  referred
to as the "Notes") to MTDC and First Stage in connection  with the conversion of
demand  promissory  notes  issued in 1991 (See Note 4). The Notes  mature  three
years from date of issue and bear  interest of 10 percent  per annum  payable at
maturity or upon the earlier of redemption or conversion.  Simultaneous with the
closing of the proposed public offering any portion of the principal and accrued
interest of the Notes may be  converted  to common  stock at the election of the
holder at a price equal to the offering price of the proposed  public  offering.
Following  the  proposed  public  offering,  any  portion of the  principal  and
interest of the Notes not so  converted  may be  converted  at the option of the
holder at the offering price plus $1.33 per share.  However, if the price of the
common  stock is at least $4.00 above the initial  public  offering  price for a
period of 10  consecutive  trading  days,  the  Company  may  convert any of the
remaining  principal  and  accrued  interest at a price equal to $1.33 per share
above the initial public offering  price. On November 30, 1996,  $802,018 of the
outstanding convertible promissory notes and $71,488 of accrued interest, net of
financing costs of $133,969, were converted into 218,374 shares of the Company's
Common Stock at a conversion rate of $4.00 per share.


9. COMMITMENTS

 Leases

    The Company leases  equipment and its facility under  operating  leases that
expire  through August 2000.  Rent expense under these  agreements for the years
ending June 30,  1995 and 1996 and the six months  ended  December  31, 1995 and
1996 were $14,095, $97,049, $24,569 and $116,524, respectively. In addition, the
Company leases certain equipment under capital leases that continue through July
2000.  Future  minimum  payments,  by year and in the  aggregate,  under capital
leases and noncancelable operating leases with initial or remaining terms of one
year or more consisted of the following at December 31, 1996:

<TABLE>
<CAPTION>
                                                               CAPITAL   OPERATING
YEAR ENDED DECEMBER 31,                                         LEASES     LEASES
- -----------------------                                         ------     ------
<S>                                                            <C>        <C>
1997                                                           $24,176    $232,164
1998                                                            17,390     196,530
1999                                                             9,820      30,662
2000                                                             4,171      19,904
                                                                 -----      ------
Total minimum lease payments                                    55,557    $479,260
Less amount representing interest                                9,014    ========
                                                                 -----
Present value of minimum lease payments                         46,543
Less current portion                                            19,013
                                                                ------
Long-term portion                                              $27,530
                                                               =======
</TABLE>

                                   F-11



                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

9. COMMITMENTS -- (CONTINUED)

 License Agreements


    On September 27, 1995, the Company obtained a worldwide license from Radius,
Inc.  ("Radius")  to use  certain of Radius'  technology  in its  products.  The
license is  exclusive  except as to  Radius,  which has  retained  rights to its
technology.  Under the  agreement  with  Radius,  the  royalties  payable by the
Company  initially  are the  greater  of $1,500  per unit or two  percent of the
purchase price per unit for the first 200 units,  declining in increments  based
on the  number of units sold to the  greater of $750 per unit or one  percent of
the purchase  price per unit after 1001 units are sold.  Royalties  will be paid
until the cumulative  total of royalties  paid equals  $10,000,000 at which time
the Company will have a royalty-free  license.  If the Company fails to sell the
minimum  number of units  required to be sold  pursuant to the agreement for two
consecutive calendar quarters,  the technology may be licensed to other parties.
In  addition,  the  Company  has  granted to Radius an  irrevocable,  perpetual,
non-exclusive,  worldwide,  royalty-free  license  to any  modifications  to the
Radius technology made by the Company.


    The Company entered into a Development and License Agreement dated August 1,
1996 with Polybus Systems Corporation  ("Polybus") pursuant to which the Company
obtained  an  irrevocable,  perpetual,  worldwide,  nonexclusive  (except  as to
publishing  for which the  license  is  exclusive)  license to a high speed file
manager software package in consideration  for royalty  payments.  The royalties
payable by the Company  pursuant to the  Development  and License  Agreement are
initially  $800 per server and $400 per  workstation,  declining  in  increments
based upon the number of systems sold to $50 per server and $25 per  workstation
until the first  100,000  systems  are sold by the  Company.  No  royalties  are
payable  after the  Company  sells  100,000  systems.  The  initial  term of the
Development  and  License  Agreement  is 25  years  and  the  agreement  may  be
terminated  sooner by  Polybus  only in the event of a  payment  default  by the
Company. Upon termination of the Development and License Agreement,  Polybus may
license the software to third parties in the publishing  market.  As of December
31, 1996, the Company made advances of $97,500 pursuant to the agreement.

 Employment Contract


    Effective  as of January  1,  1997,  the  Company  entered  into a two- year
employment  agreement with Mr. Gale, the Company's President and Chief Executive
Officer.  Pursuant  to such  contract,  Mr.  Gale will be paid a base  salary of
$125,000 and has been granted  incentive  stock options to purchase up to 75,000
shares of Common Stock. Options to purchase 15,000 shares of Common Stock vested
upon the  execution of the  agreement  and options to purchase  30,000 shares of
Common  Stock  vest  on  each  of the  first  and  second  anniversaries  of the
agreement.  All options have an exercise  price of $4.00 per share.  Pursuant to
his employment agreement, Mr. Gale agrees not to compete with the Company during
the terms of his employment and for one year thereafter.


10. RELATED PARTY TRANSACTIONS


    The amounts due to stockholder consist of  noninterest-bearing  loans to the
Company.  In December 1996 the loans were converted into 4,725 shares of Commons
Stock.

    In July 1995,  the Company  entered into a consulting  agreement  with Young
Management Group, Inc. ("Young Management"), a company founded by Stanley Young,
who  subsequently  became a director of the Company in September  1995. Upon the
signing of the  agreement,  the Company sold  179,279  shares of common stock at
$.021  per share to Young  Management.  In  addition,  the  Company  agreed to a
consulting fee of $7,000 per month, plus out-of-pocket expenses, of which $3,000
per month would be deferred until


                                   F-12



                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

10. RELATED PARTY TRANSACTIONS -- (CONTINUED)

completion of an initial public offering. Consulting fees expensed in connection
with  this  agreement  during  the six  months  ended  December  31,  1996  were
approximately  $42,000 and an  aggregate  of $67,250 was accrued at December 31,
1996. In August 1996, Young  Management  transferred all of its shares of Common
Stock to certain affiliates of Young Management,  including the Stanley A. Young
Irrevocable Trust and the Stanley A. Young Family Limited Partnership.


    In May 1996, the Stanley A. Young  Irrevocable Trust was issued a promissory
note in the principal  amount of $100,000  (which was  subsequently  repaid) and
warrants to purchase  23,904  shares of Common  Stock with an exercise  price of
$1.507 per share in connection  with a private  placement,  and in January 1997,
the  Stanley  A.  Young  Family  Limited  Partnership  was  issued  in a private
placement,  promissory  notes in the aggregate  principal  amount of $50,000 and
warrants to purchase 12,750 shares of Common Stock at an exercise price equal to
either (i) $1.33 per share or, (ii) if the Company consummates an initial public
offering  ("IPO") by a certain date,  either  one-half or  three-fourths  of the
offering  price of a share of the Common  Stock in the IPO.  In  November  1995,
Stanley A. Young  Irrevocable  Trust and Mr. Young's wife each  purchased  3,787
shares of Common  Stock at a price of  $1.507  per share and were each  issued a
convertible promissory note in the amount of $19,297 in a private placement.  In
November  1996,  Stanley A. Young  Irrevocable  Trust  converted  the  principal
balance and accrued  interest on its note into 5,320  shares of Common Stock and
Mr.  Young's wife  converted the principal  balance and accrued  interest on her
note into 5,320 shares of Common Stock.

    In May 1996, the Company issued to Fred L. Chanowski,  in consideration  for
consulting  services  rendered,  a warrant to  purchase  up to 23,904  shares of
Common  Stock at an exercise  price of $1.507 per share.  Also in May 1996,  the
Company  issued  to Mr.  Chanowski,  in  consideration  for a  $25,000  loan,  a
promissory note in the principal amount of $25,000 plus a warrant to purchase up
to 5,976 shares of Common Stock at $1.507 per share.

    In October 1996, the Company issued to Mr. Chanowski 19,123 shares of Common
Stock in  consideration  for consulting  services  rendered.  Mr. Chanowski also
purchased 23,904 shares of Common Stock for $50,000 in October 1996 in a private
placement.  Mr.  Chanowski  paid the $50,000  purchase  price by converting  the
$25,000 promissory note issued to him in May 1996 and by investing an additional
$25,000 in cash.  Mr.  Chanowski is a 6.125% member in Alpha  Ventures LLC which
holds  77,540  shares of the  Company's  Common  Stock and  warrants to purchase
11,952  shares of Common  Stock at an exercise  price of $1.507 per share.  (See
Note 15.)


11. INCOME TAXES

    Deferred  income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes.

    At June 30, 1995, the Company had no deferred tax assets or liabilities.  At
June 30, 1996, the Company had a gross  deferred tax asset of $440,000,  related
to a net  operating  loss  carryforward,  for  which a  valuation  allowance  of
$440,000 was  recorded.  The Company had no deferred  tax  liability at June 30,
1996. The increase in the deferred tax asset valuation allowance of $440,000 was
attributable  to the increase in the deferred asset related to the net operating
loss  carryforward.  At December 31, 1996,  the Company had a gross deferred tax
asset of $1,700,000,  related to a net operating loss carryforward,  for which a
valuation allowance of $1,700,000 was recorded.  The Company had no deferred tax
liability at December 31, 1996. The increase in the deferred tax asset valuation
allowance of $1,260,000 was  attributable  to the increase in the deferred asset
related to the net operating loss carryforward.

                                   F-13



                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

11. INCOME TAXES -- (CONTINUED)

    Due to operating  losses  generated,  there is no provision  for federal and
state income taxes for the years ended June 30, 1995 and 1996 and the six months
ended December 31, 1996.

    The difference  between the effective tax rate and the United States federal
rate of 34 percent for the years ended June 30, 1995 and 1996 and the six months
ended December 31, 1996 relates to the limitations applicable to the recognition
of tax benefits from the net operating losses.

    At December 31, 1996, the Company had a net operating loss  carryforward for
federal income tax purposes of  approximately  $4,300,000 which expires in 2011.
Net operating loss  carryforwards are subject to review and possible  adjustment
by the  Internal  Revenue  Service  and may be  limited  in the event of certain
cumulative changes in the ownership interests of significant stockholders over a
three  year  period  in  excess  of 50  percent.  As a result  of the  change in
ownership of the Company in June 1995, the ultimate utilization of the Company's
net  operating  losses were  substantially  eliminated as of June 30, 1995. As a
result of the changes in  ownership of the Company in June 1996 and December 31,
1996, the annual  utilization of the Company's net operating losses are expected
to be limited.  The Company may experience an additional  change in ownership in
excess of 50 percent upon completion of the proposed public offering which would
place further limitations on the utilization of net operating losses.

12. CAPITAL STOCK

 Preferred Stock

    During 1990, the Company issued 426,257 shares of preferred stock to several
venture funds and the initial founders of the Company.  In May 1995 as part of a
restructuring of the capital  structure of the Company,  the preferred stock was
converted into common stock.  In July 1995, the Board of Directors'  approved an
increase in the number of  authorized  shares of  preferred  stock from  593,602
shares to 2,000,000 shares.

    The preferred stock may be issued in one or more series,  the terms of which
may be  determined  at the time of issuance by the Board of  Directors,  without
further action by  stockholders,  and may include voting rights,  preferences to
dividends and  liquidation,  conversion and  redemption  rights and sinking fund
provisions.

 Common Stock


    In order to attract  new funding to support the  proposed  development  of a
server  product,  in May  1995,  the  Board  of  Directors  recommended  and the
stockholders  approved a  reorganization  pursuant to which the  Company  issued
4,903  shares of Common  Stock in  exchange  for 426,257  shares of  outstanding
preferred stock and 226,713 shares of outstanding  common stock and the issuance
of 234,135  shares of its Common  Stock in exchange  for  $1,280,596  in accrued
salaries  and $71,529 of expenses  payable to current  and former  officers  and
employees. These obligations had accrued starting in fiscal year ended June 1992
through  March 1995.  Since the Company had negative net worth,  no  anticipated
revenues,  total  assets  of  approximately  $12,000  and total  liabilities  of
approximately $1,500,000 all current and former employees accepted shares of the
Company's Common Stock valued at $.013 per share in lieu of payment.

    From September 1995 through April 1996, the Company issued 147,686 shares of
its Common Stock at a price of $1.507 per share in a private placement of Common
Stock and convertible  promissory  notes (see Note 8). Proceeds net of financing
costs of $48,824 were  $173,594.  From May 1996  through June 1996,  the Company
issued  549,787  shares of its Common  Stock at a price of $2.093 per share in a
private placement. Proceeds net of financing costs of $169,500 were $980,500.


                                   F-14



                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

12. CAPITAL STOCK -- (CONTINUED)


    In January 1996, demand promissory notes and accrued interest were converted
into 21,912  shares of the  Company's  Common Stock and  convertible  promissory
notes  (see Note 4). In  addition,  during the year  ended  June 30,  1996,  the
Company  issued  219,465  shares of its Common  Stock as payment for  consulting
services, inventories and back rent.


    In July 1996,  the Board of Directors  approved an increase in the number of
authorized shares of Common Stock from 2,000,000 shares to 15,000,000 shares.


    Between  July 1996 and  September  1996,  the  Company  completed  a private
placement of 609,546  shares of its Common Stock at a price of $2.093 per share.
Proceeds net of financing costs of $165,750, were $1,109,250.

    In  September  1996,  the Company  issued  7,172  shares of Common  Stock to
employees  in lieu of cash  payments  for services  rendered.  In  addition,  in
October 1996,  the Company  issued 47,490 shares of Common Stock in lieu of cash
payments for consulting  services  rendered.  In connection with the issuance of
this Common Stock, the Company recorded compensation of $114,424, during the six
months ended December 31, 1996, at a price of $2.093 per share.

    In October 1996, the Company completed a private placement of 239,037 shares
of its Common  Stock at a price of $2.093 per share.  Proceeds  net of financing
costs of $65,000,  were $435,000.  In addition the Company  reclassified  71,712
shares from treasury stock to authorized but unissued Common Stock.

    In October 1996, the Board of Directors  declared a .637434-for-one  reverse
stock split of the Company's Common Stock and approved an increase in the number
of  authorized  shares of common  stock  from  15,000,000  shares to  30,000,000
shares.  All  common  stock,  common  stock  options  and per share  information
disclosed  in the  financial  statements  and notes have been  adjusted  to give
effect for this stock split.

    On November  30, 1996,  the Company  converted  $802,018 of the  outstanding
convertible promissory notes and $71,488 in accrued interest into 218,374 shares
of the Company's  Common Stock at a conversion rate of $4.00 per share (see Note
8).

    At December  31, 1996,  9,338  shares of Common Stock were  reserved for the
conversion of  convertible  promissory  notes,  304,588 shares were reserved for
issuance  under  outstanding  stock options and 647,930 shares were reserved for
issuance under warrants.


 Warrants


   
    From November 1995 to May 1996,  the Company issued (i) warrants to purchase
in the aggregate  244,059  shares of Common Stock at an exercise price of $1.507
per share,  of which 21,514 have an expiration  date four years from the date of
issuance  and  222,545  have an  expiration  date  five  years  from the date of
issuance;  and (ii) warrants (to a placement  agent) to purchase an aggregate of
21,966  shares of  Common  Stock at a price of  $1.507  per  share and  expiring
between  November 22, 2000 and May 31, 2001. In July 1996,  the Company issued a
warrant to purchase  23,904 shares of Common Stock at an exercise price equal to
one half of the price of the  shares of Common  Stock in the  Company's  initial
public  offering  and  with an  expiration  date  five  years  from  the date of
issuance.  In October  1996,  the Company  issued a warrant to  purchase  11,952
shares  of Common  Stock at an  exercise  price of $2.093  per share and with an
expiration  date five years from the date of  issuance.  In December  1996,  the
Company issued a warrant to purchase 37,500 shares of the Company's Common Stock
at an exercise  price of $4.00 per share and with an expiration  date five years
from the date of issuance. From December 1996 through February 1997, the Company
issued warrants to purchase in the
    


                                   F-15



                           AUGMENT SYSTEMS, INC.
                     (A DEVELOPMENT STAGE ENTERPRISE)
                NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
    (INFORMATION  WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
  CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS
                                UNAUDITED)

12. CAPITAL STOCK -- (CONTINUED)


   
aggregate  914,188  shares of Common  Stock,  457,094 of which have an  exercise
price of $2.75 per share and  457,094 of which have an  exercise  price equal of
$4.125 per share.  These  warrants are  exercisable  for a period of three years
commencing on December 30, 1997.
    


13. STOCK OPTION PLAN

    In July 1995,  the Company  adopted its 1995 Stock Option  Plan.  Under this
plan, the Board of Directors,  at their  discretion,  can issue either incentive
stock options or nonqualified  options to employees and nonqualified  options to
consultants, directors or other nonemployees.


    Incentive  stock  options  may not be  granted at a price less than the fair
market  value of the shares at the grant date (or less than 110% of fair  market
value in the case of  employees  or  officers  holding 10% or more of the voting
stock) while the  nonqualified  options may be granted at a price  determined by
the Board of Directors  except that the Company has agreed with the Underwriters
not to grant any  nonqualified  options  at a price  lower  than 85% of the fair
market  value of the shares at the date of the grant.  All grants as of December
31, 1996 were at fair market value or greater.  The options  generally  vest 10%
after 30 days from the date of grant and the  balance  ratably  over a period of
four years.  Incentive stock options granted under the plan expire not more than
10 years  from the date of grant  and not more  than  five  years in the case of
incentive stock options granted to an employee or officer holding 10% or more of
the voting  stock of the  Company.  All options not  exercised at the end of the
vesting period automatically expire. The aggregate number of shares which may be
granted under this plan may not exceed 600,000 shares.

    During the year ended June 30, 1996, the Company granted 207,965 options, at
exercise  prices ranging from $1.507 to $2.093 per share.  During the six months
ended December 31, 1996, the Company  granted 125,788 options at exercise prices
ranging  from $2.093 to $4.00 per share and 29,165  options  were  cancelled  at
prices ranging from $1.507 to $4.00 per share. As of December 31, 1996,  304,588
options were  outstanding  at exercise  prices  ranging from $1.507 to $4.00 per
share, 63,404 options were exercisable at exercise prices ranging from $1.507 to
$4.00 per share and 295,412  options were available for future grant. On January
1, 1997, the Company  granted,  to the President and Chief Executive  Officer of
the  Company,  options  to  purchase  up to 75,000  shares  of  Common  Stock in
connection with a key employment agreement (see Note 9).

    Effective  January 1, 1996,  the Company  adopted the provisions of SFAS No.
123,  "Accounting  for  Stock-Based  Compensation".  The  Company has elected to
continue to account for stock options at intrinsic  value with disclosure of the
effects of fair value  accounting  on net income and earnings per share on a pro
forma basis.  Had  compensation  costs for the stock option plan been determined
using the fair value method, the Company's pro forma net loss and loss per share
would have been  $1,515,730 and $.51,  respectively  for the year ended June 30,
1996 and  $3,229,974 and $.93,  respectively,  for the six months ended December
31, 1996. Pro forma  compensation  cost may not be  representative of that to be
expected in future years.

    The Company has computed the pro forma  disclosures  required under SFAS No.
123 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The
weighted  average  assumptions  used for the  year  ended  June 30,  1996 are as
follows:  risk free interest rate ranging from 5.7% to 6.52%,  expected dividend
yield of 0% and expected option life of 28 to 34 months; and expected volatility
of 30%. The weighted average  assumptions used for the six months ended December
31, 1996 are as follows:  risk free  interest  rate  ranging from 5.98% to 6.4%,
expected  dividend yield of 0% and expected option life of 28 to 29 months;  and
expected  volatility  of 30%.  The  weighted  average  fair value of all options
granted  during the year ended June 30, 1996 and the six months  ended  December
31, 1996 were $.35 and $.51, respectively.


                                      F-16



                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

14. SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                         
                                                         
                                                         
                                                                                  SIX MONTHS 
                                                         YEARS ENDED                ENDED                CUMULATIVE
                                                           JUNE 30,              DECEMBER 31,           PERIOD FROM
                                                           --------              ------------        OCTOBER 1, 1995 TO
                                                       1995       1996         1995        1996      DECEMBER 31, 1996
                                                       ----       ----         ----        ----      -----------------
                                                                           (UNAUDITED)                  (UNAUDITED)
<S>                                                 <C>         <C>        <C>           <C>         <C>
Supplemental schedule of cash payments:
   Cash paid for interest                           $  --       $  4,235    $  --        $ 30,956         $ 35,191
   Cash paid for income taxes                          --          --          --           --               --
Supplemental schedule of noncash financing and
  investing activities:
   Inventories paid with common stock                  --         33,998      33,998        --              33,998
   Property and equipment acquired by capital lease
     obligations                                       --         33,383       --          22,216           55,599
   Accrued rent paid with common stock                 --          5,041       5,041        --               5,041
   Conversion of demand notes payable and accrued
     interest into convertible promissory notes        --        111,674     111,674        --             111,674
   Conversion of amount due to stockholder into
     common stock                                      --          --          --          18,900           18,900
   Conversion of convertible promissory notes and
     accrued interest into common stock                --          --          --         964,537          964,537
   Conversion of demand notes payable and accrued
     interest into common stock                        --         33,000      33,000        --              33,000
   Conversion of convertible promissory notes into
     common stock                                      --        225,000       --           --             225,000
   Accrued payroll paid with common stock           1,280,596      --          --           --               --
   Debt paid with common stock                         71,529      --          --           --               --
</TABLE>

15. SUBSEQUENT EVENTS

   
    In February 1997, the Company completed a private placement of 47.5 units of
Short Term Promissory  Notes (see Note 6).  Proceeds,  net of financing costs of
$308,750, were $2,066,250.  In accordance with APB No. 14, the Company allocated
gross proceeds of $389,500, net of financing costs of $50,635, to the detachable
warrants and gross  proceeds of $1,985,500 to the Class A and Class B promissory
notes ($2,375,000 face value).  The discount on the debt is being amortized over
3 months, which is the estimated time between the debt issuance and the proposed
initial  public  offering.  Upon  completion  of  the  proposed  initial  public
offering,  the  Company  would  record  interest  expense  of  $389,500  on  the
unamortized  debt discount and record  amortization on the unamortized  deferred
financing costs of $258,115.  In May 1997, certain warrant holders agreed to the
cancellation  of warrants to purchase  235,878  shares of Common Stock issued in
connection with the above Short Term  Promissory  Notes.  No  consideration  was
given in connection with the cancellation of these warrants.
    

    In January 1997, the Company  granted 11,812 options at an exercise price of
$4.00 per share.

    In March 1997,  the Company  granted  38,250 options at an exercise price of
$5.50 per share.

    In  March  1997,  the  Company  issued  47,807  shares  of  Common  Stock in
connection  with the  exercise of a warrant to purchase  common stock for $1.507
per share.


                                      F-17



                              AUGMENT SYSTEMS, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
   (INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1995 AND THE
    CUMULATIVE PERIOD FROM OCTOBER 1, 1995 TO DECEMBER 31, 1996 IS UNAUDITED)

15. SUBSEQUENT EVENTS -- (CONTINUED)

    In April 1997,  the Board of  Directors  declared a  three-for-four  reverse
stock split of the  Company's  Common  Stock.  All Common  Stock,  Common  Stock
Options and per share  information  discussed in the  financial  statements  and
notes have been adjusted to give effect for this stock split.

   
    In April 1997, the Company  issued to Venture  Management  Consultants,  LLC
("Venture  Management"),  of which Fred L. Chanowski, a director of the Company,
is a 20%  member,  a  promissory  note in the  principal  amount of  $200,000 in
consideration for $200,000.  The promissory note bears interest at 18% per annum
with interest and principal payable at maturity on May 31, 1998.

    In May 1997, the Company issued to Venture  Management a promissory  note in
the principal amount of $200,000 in consideration  for $200,000.  The promissory
note bears  interest at 18% per annum with  interest  and  principal  payable at
maturity on June 30, 1998.

    
                                      F-18




                                    GLOSSARY


<TABLE>
<CAPTION>
 TERMS                                        DEFINITIONS
 -----                                        -----------
<S>                             <C>
ASIC                       Application  Specific  Integrated  Circuit.  A custom
                           designed  circuit that  performs a specific  function
                           within a computer system. The use of ASICs simplifies
                           the design and construction of computer modules.

BIT                        A single  binary  digit having a value of either 0 or
                           1. A bit is the smallest  unit of data a computer can
                           process.

BUS                        An  electronic  pathway  by which  processors  in the
                           system communicate and exchange information.

BYTE                       An ordered set of 8 bits.

CEPS                       Color electronic publishing  systems--computer  based
                           systems for data input,  manipulation,  assembly, and
                           output,  both color and black and  white,  in various
                           forms of media.

CPU                        Central  Processing Unit. The component in a computer
                           that is responsible for processing  instructions  and
                           controlling the activities of the other components in
                           the system.

CACHING                    Storing  recently  or  frequently  accessed  data  in
                           memory which allows for faster  access in  subsequent
                           requests.

DISTRIBUTED FILES          Files  that are  stored  and  accessed  on  networked
                           computing   systems   throughout   an   organization.
                           Distributed  files allow  users to share  information
                           without having to transfer the files to each user who
                           needs access.

ETHERNET                   A method  used to  connect a local area  network  for
                           networking and communications.

10BASE-T                   An Ethernet  standard  that uses  twisted  wire pairs
                           (telephone  wire).  All  stations  connect  in a star
                           configuration  to a  central  hub,  also  known  as a
                           multiport  repeater.  10Base-T  is widely used due to
                           the lower cost and flexibility of installing  twisted
                           pair.

100BASE-T                  A faster Ethernet  networking  standard that supports
                           data  transfer  rates up to 100Mbps (100 megabits per
                           second).  Officially,  the 100Base-T standard is IEEE
                           802.3u.  100Base-T  cabling schemes can include pairs
                           of twisted-pair wires or fiber optic cables.

FIBER CONNECTIVITY         Using fiber optic cable (pulses of light sent through
                           strands   of  glass)   to   connect   computing   and
                           communications devices.

FIBRE CHANNEL              An  industry-standard  method of connecting computing
ARBITRATED LOOP            systems  that  allows  information,  including  large
                           files, to be transferred at a high rate of speed.

GEOPHYSICAL IMAGING        Computer    systems    which    provide     graphical
SYSTEMS                    representations  of  mapping,  geological,  or  other
                           types of data. These systems might be used to develop
                           profiles  of census,  ecological,  or  climatological
                           data.

GIGA                       A prefix that means a billion  or a thousand  million
                           units,  as in  gigabaud  and  gigabyte. 

INPUT/OUTPUT               (I/O) Data that is exchanged between two points,  for
                           example  between a user's  computer and a server.  In
                           Augment's  server systems,  high-speed data transfers
                           between the users computer and the server occur via a
                           copper or fiber optic cable.

ISO 9000                   ISO  9000 is the  standard  set by the  International
                           Organization for  Standardization in 1987 for quality
                           management  systems and quality  assurance.  The 9002
                           standard  covers  quality  standards for  engineering
                           practices,  documentation,  testing and  measurement,
                           training,  purchasing  and  materials. 

                           ISO 9000 has three levels of registration:

                           * ISO 9001 is used by companies that design, produce,
                             inspect,  test,  install and service products. 

                           * ISO  9002  is  used  by  companies  that  produce,
                             inspect, test, install and service products but
                             which do not  design  components.  

                           * ISO 9003 is used by companies that must inspect and
                             test   items   (for  example,    an    importer  or
                             distributor).

MBYTE                      One million bits (see definition of bit).


                                      G-1




                                    GLOSSARY -- (CONTINUED)


 TERMS                                        DEFINITIONS
 -----                                        -----------

MULTI-PLATFORM             Supporting   different   operating   systems   and/or
                           computer   hardware   in  a  network   or   operating
                           environment. 

NETWORK                    A  configuration  of  data  processing   devices  and
                           software  connected for information  exchange. 

NUBUS CARDS                Printed  Circuit Boards (PCBs) that support the NuBus
                           system  bus.  A NuBus  card  or  board  contains  the
                           components and circuitry  needed to provide  specific
                           functions.  Sometimes  NuBus  cards work  together as
                           co-processors. The Company's AFX 410's CPU Controller
                           is a  co-processor  that works  with  other  cards to
                           transfer data very quickly.  

NUBUS-90 BACKPLANES        Two high  performance  Printed  Circuit Boards (PCBs)
                           that hold the system  bus.  The AFX 410's  memory and
                           processing   boards   install   into   the   NuBus-90
                           backplanes. The NuBus-90 backplanes support the NuBus
                           system bus and up to 12 boards. 

O/S                        Abbreviation for Operating System,  which is software
                           that  provides   instructions   to  a  computer  (for
                           example,  Windows,  DOS,  MacIntosh,  OS2, and UNIX).

PARALLELL DISK ARRAY       RAID 0. (See  definition  of RAID.) The simplest RAID
                           configuration,   with  data  distributed  across  the
                           array,  but  with no  additional  error  checking  or
                           redundancy.  

RAID                       Redundant  Array of  Independent  Disks.  An array of
                           disks that is used to store information. Provides for
                           concurrent  use of multiple  devices,  which provides
                           either higher peak data rate, higher request handling
                           rate, reduced average queuing delay, or a combination
                           of these, based on the RAID "level" used.  Redundancy
                           or parity mechanisms compensate for the lower overall
                           reliability  of  a  multiple-device  array  versus  a
                           single  device. 

RAID 3                     (See  definition of RAID.) An additional  parity disk
                           is  used  to  store  error  correction   information.

SCALABLE (INTERNAL         The  ability  to  increase   internal   data  storage
STORAGE)                   capacity  to meet the needs of an  organization.  The
                           AFX 410's data storage can be increased in increments
                           of 10 MBytes or 20 MBytes,  depending  on whether the
                           disk array consists of 2 GByte or 4 GByte disks. 

SCSI                       Small Computer System Interface. A computer interface
                           that   provides  a  high-speed   pathway  over  which
                           information  is  transferred.  SCSI  connections  are
                           typically  used to connect  disk and tape drives to a
                           computer system.  

SERIAL PORTS               Connection  points on a  computer  or  communications
                           device supporting serial data transfers.  Serial data
                           transfers  send and  receive  data one bit at a time,
                           albeit at rates up to 100,000 bytes per second.

SUPER SERVER               A  category  of  servers  that  generally  have  high
                           capacity, performance,  functionality and price.

TERA                       A  trillion  units.  Many data  centers  now  require
                           terabytes of storage capacity.

THROUGHPUT                 The  rate at  which  data  moves  from  one  point to
                           another,  for  example,  from a user's  computer to a
                           server. 

UNIX                       An  operating  system  developed  at AT&T Labs in the
                           early 1970's and widely used  throughout the computer
                           industry.  UNIX has been  available on a wide variety
                           of computer hardware  systems. 

Windows NT                 Windows NT (New Technology) is a Microsoft  operating
                           system  developed  in the early  1990's to  provide a
                           secure and stable computing  environment for multiple
                           users. 

World Wide Web (WEB)       The  WorldWide  Web (also  referred  to as WWW or the
                           "Web")  describes  the way in  which  people  use the
                           Internet to access  text,  graphics,  multimedia  and
                           other data from  computer  systems  around the world.
                           The Web is based on Internet  standards  for locating
                           and displaying information.

</TABLE>

                                      G-2














                               INSIDE BACK COVER


         [Illustration depicting an exploded view of an Augment Server]








================================================================================
NO  DEALER,  SALESPERSON  OR  OTHER  PERSON  HAS  BEEN  AUTHORIZED  TO GIVE  ANY
INFORMATION  OR TO MAKE ANY  REPRESENTATIONS  IN  CONNECTION  WITH THIS OFFERING
OTHER  THAN THOSE  CONTAINED  IN THIS  PROSPECTUS  AND,  IF GIVEN OR MADE,  SUCH
INFORMATION  AND  REPRESENTATIONS  MUST  NOT  BE  RELIED  UPON  AS  HAVING  BEEN
AUTHORIZED  BY THE  COMPANY OR BY THE  UNDERWRITERS.  THIS  PROSPECTUS  DOES NOT
CONSTITUTE  AN OFFER TO SELL OR A  SOLICITATION  OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SECURITIES  OFFERED BY THIS PROSPECTUS,  OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION
IN WHICH  SUCH OFFER OR  SOLICITATION  IS NOT  AUTHORIZED  OR IS  UNLAWFUL.  THE
DELIVERY  OF THIS  PROSPECTUS  SHALL NOT,  UNDER ANY  CIRCUMSTANCES,  CREATE ANY
IMPLICATION THAT THE INFORMATION  HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.

                                   ----------

                                TABLE OF CONTENTS
<TABLE>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Prospectus Summary                                                             3
Risk Factors                                                                   6
Dilution                                                                      12
Use of Proceeds                                                               13
Capitalization                                                                15
Dividend Policy                                                               15
Management's Discussion and Analysis of
  Financial Condition and Plan of Operation                                   16
Business                                                                      18
Management                                                                    25
Principal Stockholders                                                        28
Certain Transactions                                                          29
Description of Securities                                                     30
Shares Eligible for Future Sale                                               33
Underwriting                                                                  35
Legal Matters                                                                 36
Experts                                                                       36
Available Information                                                         37
Index to Financial Statements                                                F-1
Glossary                                                                     G-1
</TABLE>

                                   ----------

    UNTIL , 1997  (25  DAYS  AFTER  THE DATE OF THIS  PROSPECTUS),  ALL  DEALERS
EFFECTING  TRANSACTIONS  IN THE COMMON  STOCK AND THE  WARRANTS,  WHETHER OR NOT
PARTICIPATING  IN THIS  DISTRIBUTION,  MAY BE REQUIRED TO DELIVER A  PROSPECTUS.
THIS IS IN ADDITION TO THE  OBLIGATION  OF DEALERS TO DELIVER A PROSPECTUS  WHEN
ACTING  AS  UNDERWRITERS  AND  WITH  RESPECT  TO  THEIR  UNSOLD   ALLOTMENTS  OR
SUBSCRIPTIONS.

================================================================================


================================================================================

                              AUGMENT SYSTEMS, INC.


                                     [Logo]



                        1,800,000 SHARES OF COMMON STOCK
                                       AND
                        1,800,000 REDEEMABLE COMMON STOCK
                                PURCHASE WARRANTS

                                   ----------

                                   PROSPECTUS

                                   ----------

                              GKN SECURITIES CORP.

                             LAIDLAW EQUITIES, INC.


                                     , 1997



================================================================================




                                    PART II
                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

    Except as hereinafter  set forth,  there is no statute,  charter  provision,
by-law,  contract  or other  arrangement  under  which any  controlling  person,
director  or officer  of  Augment  Systems,  Inc.  ("Registrant")  is insured or
indemnified in any manner against  liability  which he may incur in his capacity
as such.

    See  the  fifth  and  sixth  paragraphs  of Item 28  below  for  information
regarding the position of the Securities and Exchange Commission with respect to
the effect of any  indemnification  for liabilities arising under the Securities
Act of 1933, as amended ("Securities Act").

    The Registrant's  Certificate of Incorporation,  as amended ("Certificate of
Incorporation"),  provides that the Registrant shall  indemnify,  to the fullest
extent permitted by Section 145 of the General  Corporation Law of Delaware,  as
amended (the "GCL"),  each person who was or is a party or is  threatened  to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal,  administrative or investigative, by reason of the fact
that he is or was,  or has  agreed to  become,  a  director  or  officer  of the
Registrant,  or is or was serving, or has agreed to serve, at the request of the
Registrant, as a director, officer or trustee of, or in a similar capacity with,
another  corporation,  partnership,  joint  venture,  trust or other  enterprise
(including  any employee  benefit  plan),  or by reason of any action alleged to
have been taken or omitted in such  capacity,  against all  expenses  (including
attorneys' fees),  judgments,  fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom. Such paragraph provides further that the
indemnification  may include  payment by the Registrant of expenses in defending
an action or  proceeding in advance of the final  disposition  of such action or
proceeding  upon receipt of an  undertaking  by the person  indemnified to repay
such payment if it is ultimately  determined that such person is not entitled to
indemnification  hereunder,  which undertaking may be accepted without reference
to the financial  ability of such person to make such repayment.  Such paragraph
provides  further,  however,  that the  Registrant  shall not indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person unless the initiation thereof was approved by its Board
of Directors.

    The Certificate of Incorporation  provides that the  indemnification  rights
set forth above (i) shall not be deemed  exclusive  of any other rights to which
those  indemnified  may  be  entitled  under  any  law,  agreement  or  vote  of
stockholders or  disinterested  directors or otherwise,  and (ii) shall inure to
the benefit of the heirs,  executors and  administrators  of such persons.  Such
paragraph  provides  further that the Registrant  may, to the extent  authorized
from time to time by its Board of  Directors,  grant  indemnification  rights to
other  employees  or agents  of the  Registrant  or other  persons  serving  the
Registrant and such rights may be equivalent to, or greater or less than,  those
set forth in herein.

    Section 145 of the GCL provides as follows:

       (a) A  corporation  may  indemnify any person who was or is a party or is
    threatened  to be made a  party  to any  threatened,  pending  or  completed
    action,  suit or proceeding,  whether  civil,  criminal,  administrative  or
    investigative  (other than action by or in the right of the  corporation) by
    reason of the fact that he is or was a director,  officer, employee or agent
    of the  corporation,  or is or was serving at the request of the corporation
    as  a  director,   officer,   employee  or  agent  of  another  corporation,
    partnership,  joint venture,  trust or other  enterprise,  against  expenses
    (including attorneys' fees), judgments, fines and amounts paid in settlement
    actually and reasonably incurred by him in connection with such action, suit
    or  proceeding  if he acted in good  faith  and in a  manner  he  reasonably
    believed to be in or not opposed to the best  interests of the  corporation,
    and, with respect to any criminal  action or  proceeding,  had no reasonable
    cause to believe his conduct was unlawful.  The  termination  of any action,
    suit or proceeding by judgment,  order,  settlement,

                                      II-1



    conviction, or upon a plea of nolo contendere or its equivalent,  shall not,
    of itself,  create a  presumption  that the person did not act in good faith
    and in a manner which he reasonably  believed to be in or not opposed to the
    best interests of the corporation,  and, with respect to any criminal action
    or  proceeding,  had  reasonable  cause  to  believe  that his  conduct  was
    unlawful.

       (b) A  corporation  may  indemnify any person who was or is a party or is
    threatened to be made a party to any threatened, pending or completed action
    or suit by or in the right of the  corporation  to procure a judgment in its
    favor by reason of the fact that he is or was a director,  officer, employee
    or agent of the  corporation,  or is or was  serving  at the  request of the
    corporation   as  a  director,   officer,   employee  or  agent  of  another
    corporation,  partnership,  joint venture, trust or other enterprise against
    expenses (including attorneys' fees) actually and reasonably incurred by him
    in  connection  with the defense or  settlement of such action or suit if he
    acted in good faith and in a manner he  reasonably  believed to be in or not
    opposed  to the  best  interests  of the  corporation  and  except  that  no
    indemnification shall be made in respect of any claim, issue or matter as to
    which such person shall have been  adjudged to be liable to the  corporation
    unless and only to the  extent  that the Court of  Chancery  or the court in
    which such action or suit was brought shall determine upon application that,
    despite the  adjudication of liability but in view of all the  circumstances
    of the case, such person is fairly and reasonably  entitled to indemnity for
    such  expenses  which the Court of  Chancery  or such other court shall deem
    proper.

       (c) To the  extent  that a  director,  officer,  employee  or  agent of a
    corporation has been successful on the merits or otherwise in defense of any
    action,  suit or proceeding  referred to in subsections  (a) and (b) of this
    section,  or in defense of any claim,  issue or matter therein,  he shall be
    indemnified  against  expenses  (including  attorneys'  fees)  actually  and
    reasonably incurred by him in connection therewith.

       (d) Any  indemnification  under  subsections  (a) and (b) of this section
    (unless  ordered  by a  court)  shall  be  made by the  corporation  only as
    authorized in the specific case upon a determination that indemnification of
    the  director,  officer,  employee  or agent is proper in the  circumstances
    because  he has  met  the  applicable  standard  of  conduct  set  forth  in
    subsections (a) and (b) of this section.  Such  determination  shall be made
    (1) by the board of directors by a majority  vote of a quorum  consisting of
    directors who were not parties to such action, suit or proceeding, or (2) if
    such a  quorum  is not  obtainable,  or,  even if  obtainable  a  quorum  of
    disinterested  directors  so  directs,  by  independent  legal  counsel in a
    written opinion, or (3) by the stockholders.

       (e)  Expenses  incurred by an officer or director in defending a civil or
    criminal  action,  suit or  proceeding  may be paid  by the  corporation  in
    advance of the final  disposition  of such action,  suit or proceeding  upon
    receipt of an  undertaking  by or on behalf of such  director  or officer to
    repay  such  amount  if it shall  ultimately  be  determined  that he is not
    entitled to be indemnified by the corporation as authorized in this section.
    Such  expenses  incurred by other  employees  and agents may be so paid upon
    such  terms  and  conditions,  if  any,  as the  board  of  directors  deems
    appropriate.

       (f) The  indemnification  and  advancement  of expenses  provided  by, or
    granted  pursuant to, the other  subsections  of this  section  shall not be
    deemed exclusive of any other rights to which those seeking  indemnification
    or advancement of expenses may be entitled under any bylaw, agreement,  vote
    of stockholders or disinterested  directors or otherwise,  both as to action
    in his official  capacity and as to action in another capacity while holding
    such office.

       (g) A corporation shall have power to purchase and maintain  insurance on
    behalf of any person who is or was a director, officer, employee or agent of
    the corporation, or is or was serving at the request of the corporation as a
    director,  officer,  employee or agent of another corporation,  partnership,
    joint  venture,  trust or other  enterprise  against any liability  asserted
    against him and incurred by him in any such capacity,  or arising out of his
    status  as such,  whether  or not the  corporation  would  have the power to
    indemnify him against such liability under this section.



                                      II-2


       (h) For purposes of this section,  references to "the corporation"  shall
    include,  in  addition  to  the  resulting   corporation,   any  constituent
    corporation  (including  any  constituent  of a  constituent)  absorbed in a
    consolidation  or merger which,  if its separate  existence  had  continued,
    would have had power and authority to indemnify its directors, officers, and
    employees or agents,  so that any person who is or was a director,  officer,
    employee or agent of such constituent  corporation,  or is or was serving at
    the request of such constituent corporation as a director, officer, employee
    or agent of another corporation,  partnership, joint venture, trust or other
    enterprise, shall stand in the same position under this section with respect
    to the resulting or surviving  corporation  as he would have with respect to
    such constituent corporation if its separate existence had continued.

       (i) For purposes of this section, references to "other enterprises" shall
    include  employee  benefit  plans;  references  to "fines" shall include any
    excise taxes assessed on a person with respect to any employee benefit plan;
    and references to "serving at the request of the corporation"  shall include
    any service as a  director,  officer,  employee or agent of the  corporation
    which imposes duties on, or involves  services by, such  director,  officer,
    employee,   or  agent  with  respect  to  any  employee  benefit  plan,  its
    participants or beneficiaries; and a person who acted in good faith and in a
    manner he reasonably  believed to be in the interest of the participants and
    beneficiaries of an employee benefit plan shall be deemed to have acted in a
    manner "not opposed to the best interests of the corporation" as referred to
    in this section.

       (j) The  indemnification  and  advancement  of expenses  provided  by, or
    granted  pursuant to, this section  shall,  unless  otherwise  provided when
    authorized  or  ratified,  continue  as to a person  who has  ceased to be a
    director,  officer,  employee or agent and shall inure to the benefit of the
    heirs, executors and administrators of such a person.

    The  Registrant  also  maintains  liability  insurance for its directors and
officers.

    Pursuant to Section 5.1 of the Underwriting Agreement, the Underwriters have
agreed to  indemnify  each  director  of the  Registrant,  each  officer  of the
Registrant who has signed the Registration Statement and any person who controls
the  Registrant  within  the  meaning  of the  Securities  Act  against  certain
liabilities, including liabilities under the Securities Act.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

    Expenses of the Registrant in connection with the issuance and  distribution
of the securities being registered are estimated as follows:


<TABLE>
<CAPTION>
<S>                                                                    <C>
Securities and Exchange Commission Registration Fee                   $    8,600.01
NASD Filing Fee                                                            3,341.31
Nasdaq Listing Fee                                                        25,000.00
Blue Sky Fees and Expenses                                                50,000.00
Legal Fees and Expenses                                                  165,000.00
Accounting Fees and Expenses                                             100,000.00
Printing and Engraving Expenses                                          105,000.00
Transfer Agent Fees                                                        7,500.00
Miscellaneous Expenses                                                    36,158.68
                                                                          ---------
  Total                                                                $ 500,600.00
                                                                       ============
</TABLE>

    The Registrant will bear all expenses shown above.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

   
    The following  information  relates to all securities sold by the Registrant
without  registration  under the  Securities Act within the three years prior to
the filing of this Form SB-2.  The number of shares and the price per share have
been  restated  to reflect a  .637434-for-1  reverse  stock  split and a 3-for-4
reverse  stock split of the  Registrant's  Common  Stock on October 30, 1996 and
April 24, 1997, respectively.
    

     (1) On June 30, 1995, the Registrant  issued 239,038 shares of Common Stock
         in connection with a recapitalization  in lieu of payment of $1,280,596
         in accrued  salaries  and $71,529 in debt,  and in exchange for 426,257
         shares of preferred stock and 226,713 shares of common stock.

     (2) On July 15, 1995, the Registrant  issued an aggregate of 705,161 shares
         of Common  Stock to 11 persons in lieu of cash  payments  for  services
         rendered, of which 525,883 shares were issued to management.

     (3) In September  1995, the Registrant  issued 3,346 shares of Common Stock
         valued at  $1.507  per  share to one  person in lieu of a $30,325  cash
         payment for accrued rent. The Registrant subsequently repurchased these
         shares for a $7,000 cash payment in the same month.

     (4) On December 1, 1995,  the  Registrant  issued  22,565  shares of Common
         Stock to Radius for certain  assets valued by the Company at $33,998 in
         connection with a license agreement entered into between the Registrant
         and Radius.

     (5) On December  8, 1995,  the  Registrant  issued an  aggregate  of 21,912
         shares  of  Common  Stock  and  convertible  promissory  notes  in  the
         aggregate  principal amount of $111,674.08 to Massachusetts  Technology
         Development  Corporation  and First Stage Capital  Limited  Partnership
         upon the conversion of a portion of prior debt and accrued  interest in
         the aggregate amount of $144,675.

     (6) From  November 22, 1995 through May 31, 1996,  the  Registrant  sold an
         aggregate  of  147,686  shares  of  Common  Stock  and  issued  secured
         convertible  promissory  notes in the  aggregate  principal  amount  of
         $752,602.50 to 22 accredited  investors for an aggregate purchase price
         of $975,000 in a private placement.

   
         Rickel  &  Associates,  Inc.,  a New  York  corporation,  acted  as the
         placement  agent  for the  private  placement  and was (i)  paid by the
         Registrant an aggregate of $126,750, consisting of a selling commission
         and an expense  allowance,  and (ii) issued warrants to purchase in the
         aggregate  ten  percent  (10%) of the total  number of shares of Common
         Stock issued in the offering and shares issuable upon conversion of the
         notes, or 21,966 shares of Common Stock, at an exercise price of $1.507
         per share.
    

     (7) On January 2, 1996, the Registrant issued an aggregate of 14,276 shares
         of Common Stock to two persons in lieu of cash payments for  consulting
         services rendered.

     (8) In January 1996, the Registrant  issued three  promissory  notes in the
         aggregate  principal amount of $150,000 and warrants to purchase in the
         aggregate 21,515 shares of Common Stock, at an exercise price of $1.507
         per share, to five persons in connection with a private  placement.  In
         the same month, the Registrant  repaid the entire principal amount plus
         accrued interest to the three note holders.

     (9) In February  1996 and April 1996,  the  Registrant  issued  warrants to
         purchase in the aggregate 73,145 shares of Common Stock, at an exercise
         price of $1.507 per share, to four persons in lieu of cash payments for
         services  rendered,  one of whom  exercised  a warrant in March 1997 to
         purchase 47,807 shares of Common Stock.

    (10) In  May  1996,  the  Registrant  issued  warrants  to  purchase  in the
         aggregate 47,808 shares of Common Stock, at an exercise price of $1.507
         per share,  to three  persons  in lieu of cash  payments  for  services
         rendered.

    (11) In May 1996, the Registrant issued convertible  promissory notes in the
         principal  aggregate  amount of $425,000 to nine people and warrants to
         purchase  in the  aggregate  101,592  shares  of  Common  Stock,  at an
         exercise price of $1.507 per share,  to 12 persons in connection with a
         private  placement.  In July and August 1996, the Registrant  repaid an
         aggregate of $200,000 in principal plus accrued interest to four of the
         nine note holders.



                                      II-4

   
    (12) From August 1996 to October 1996,  the five remaining note holders from
         the  nine  people  who  were  issued  convertible  promissory  notes as
         described in paragraph (11) converted  their  promissory  notes, in the
         aggregate  principal amount of $225,000,  into 107,568 shares of Common
         Stock.
    

    (13) From June 20, 1996 through  October 16, 1996,  the  Registrant  sold an
         aggregate  of  1,398,371  shares  of  Common  Stock  to  17  accredited
         investors  for an aggregate  purchase  price of $2,925,000 in a private
         placement.

         Rickel  &  Associates,  Inc.,  a New  York  corporation,  acted  as the
         placement agent for the private  placement and was paid $387,750 by the
         Registrant,  consisting  of $7,500 for  expenses  and a  nonaccountable
         expense allowance and a selling commission.

    (14) In July 1996, the Registrant issued a warrant to purchase 23,904 shares
         of Common Stock,  at an exercise  price of one-half of the price of the
         shares  of  Common  Stock,   in  an  initial  public  offering  of  the
         Registrant,  to one  person  in  lieu  of  cash  payment  for  services
         rendered.

    (15) In September  1996, the Registrant  issued an aggregate of 7,172 shares
         of Common Stock to six persons,  in lieu of cash  payments for services
         rendered.

    (16) In October 1996, the Registrant issued an aggregate of 47,490 shares of
         Common  Stock  to 11  persons  in lieu of cash  payments  for  services
         rendered.

    (17) In October 1996,  the  Registrant  issued a warrant to purchase  11,952
         shares of Common  Stock,  at an  exercise  price of $2.093  per  share,
         effective as of August 1996,  to one person in lieu of cash payment for
         services rendered.

    (18) On November 30,  1996,  the  Registrant  issued an aggregate of 218,374
         shares  of  Common  Stock  upon  the  conversion  of  the   convertible
         promissory notes, in the aggregate  principal amount of $802,018,  held
         by 22 of the 24 people who were issued such notes in paragraph  (5) and
         (6).

    (19) In December 1996, the  Registrant  issued a warrant to purchase  37,500
         shares of Common Stock, at an exercise price of $4.00 per share, to one
         person in lieu of cash payment for services rendered.

   
    (20) From  December  1996  through  February  1997,  the  Registrant  issued
         warrants to purchase in the aggregate  914,188  shares of Common Stock,
         at an  exercise  price equal to either (i) $1.333 per share or, (ii) if
         the  Registrant  consummates an initial  public  offering  ("IPO") by a
         certain date, either one-half or three-fourths of the offering price of
         a share of the Common Stock in the IPO, and issued  promissory notes in
         the aggregate principal amount of $3,585,000 to 53 accredited investors
         for an aggregate  purchase price of $3,585,000 in a private  placement.
         Laidlaw  Equities,  Inc.  acted as the placement  agent for the private
         placement  and  was  paid  approximately  $438,750  by the  Registrant,
         consisting  of  a  nonaccountable   expense  allowance  and  a  selling
         commission.

         In May 1997,  warrants  to  purchase  235,878  shares of Common  Stock,
         issued to ten of the accredited investors, were subsequently cancelled.
    

    (21) In December 1996, the Registrant issued an aggregate of 7,613 shares of
         Common  Stock to two persons upon the  conversion  of prior debt in the
         aggregate amount of $30,450.

    (22) From October 1995 to March 1997, the  Registrant  granted to certain of
         its employees,  pursuant to its Stock Option Plan,  options to purchase
         an aggregate of 429,650 of Common Stock at exercise prices of $1.507 to
         $5.50 per share.

    Except in the transactions described in Items (5), (6), (12), (13), (18) and
(20),  the  Registrant  issued  the above  securities  without  registration  in
reliance upon the exemption  provided by Section 4(2) of the Securities Act as a
transaction  to a limited  number of  investors  which did not  involve a public
offering,   general  solicitation  or  general  advertisement.   There  were  no
underwriters involved in any of these transactions other than those described in
Items (6), (13) and (20) as discussed below.


                                      II-5



    In Items (5),  (12) and (18),  the  Registrant  issued the above  securities
without  registration in reliance upon the exemption provided by Section 3(a)(9)
of the  Securities  Act as a  transaction  in  which  the  Registrant  exchanged
securities  with  its  existing  security  holders  and no  commission  or other
remuneration  was paid or given  directly  or  indirectly  for  soliciting  such
exchange.

    In Items (6),  (13) and (20),  the  Registrant  issued the above  securities
without  registration  in reliance  upon the  exemption  provided by Rule 506 of
Regulation D of the Securities Act as transactions in which there was no general
solicitation or general advertisement,  and the securities were offered and sold
only to  accredited  investors  who  represented  that  they  had the  necessary
experience  and  knowledge  in financial  and  business  matters to evaluate the
merits and risks of the investment.

ITEM 27. EXHIBITS.

    The following exhibits are filed as part of this Registration Statement:

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                       DESCRIPTION
 ------                                       -----------
  <S>             <C>
   
    *1.1          --Form of Underwriting Agreement.
     3.1          --Certificate of Incorporation of the Registrant, as amended.
    *3.2          --By-laws of the Registrant.
    *4.1          --Specimen Common Stock Certificate of the Registrant.
    *4.2          --Form of Underwriters' Purchase Option.
    *4.3          --Specimen Redeemable Common Stock Purchase Warrant.
    *4.4          --Form of Warrant Agreement.
    *5            --Opinion of Warner & Stackpole LLP on legality of securities being registered.
   *10.1          --Lease Agreement of Corporate Headquarters in Westford, Massachusetts between New
                    England Mutual Life Insurance Company and the Registrant dated October 23, 1995.
   *10.1.1        --First Amendment to Lease Agreement of Corporate Headquarters dated as of January
                    31, 1996.
   *10.2          --Lease Agreement of Sales Office in San Diego, California between The Parkwest Partners
                    and the Registrant dated July 1, 1996.
   *10.3          --Restated Technology License Agreement between Radius Inc. and the Registrant dated
                    as of September 27, 1995.
   *10.3.1        --First Amendment to Restated Technology Agreement between Radius Inc. and the Registrant
                    dated as of October 28, 1996.
   *10.4          --Software Development and License Agreement between Polybus
                    Systems Corporation and the Registrant dated as of August 1,
                    1996.
   *10.5          --Form of Warrant as issued to Registrant's other Warrantholders.
   *10.6          --Form of Warrant as issued to placement agent in Registrant's private placement
                    completed in May 1996.
   *10.7          --Form of Promissory Note from Registrant's private placement completed in May 1996.
   *10.8          --Form of Registration Rights Agreement for shares of common stock and shares underlying
                    promissory notes issued in Registrant's private placement completed in May 1996.
   *10.9          --Form of Registration Rights Agreement for shares of common stock issued in Registrant's
                    private placement completed in October 1996.
   *10.10         --Form of Class A Warrant from Registrant's private placement completed in February
                    1997.
   *10.11         --Form of Class B Warrant from Registrant's private placement completed in February
                    1997.
   *10.12         --Form of Class A Promissory Note from Registrant's  private
                    placement completed in February 1997.
   *10.13         --Form of Class B Promissory Note from Registrant's  private
                    placement completed in February 1997.
   *10.14         --Consulting Agreement between Young Management Group, Inc. and the Registrant dated
                    July 1995.
   *10.15         --Registrant's 1995 Stock Option Plan.
   *10.16         --Employment Agreement, dated as of January 1, 1997, between the Registrant and Lorrin
                    G. Gale.
    
 

                                      II-6


   
   *10.17         --Noncompetition, Nondisclosure Agreement, dated as of January 1, 1997, between the
                    Registrant and Duane A. Mayo.
   *10.18         --Promissory Note issued to Venture Management  Consultants,
                    LLC by the Registrant dated April 8, 1997.
    10.19         --Promissory Note issued to Venture Management  Consultants,
                    LLC by the Registrant dated May 6, 1997.
   *11            --Computation of net loss per share of Common Stock.
    23.1          --Consent of BDO Seidman, LLP.
   *23.2          --Consent of Warner & Stackpole LLP (included in Exhibit 5).
   *24            --Power of Attorney.
   *27            --Financial Data Schedule.
</TABLE>
    


- --------
* Previously Filed.

ITEM 28.  UNDERTAKINGS.

    The Registrant hereby undertakes that it will:

    (1) File,  during  any  period  in which it offers  or sells  securities,  a
        post-effective amendment to this registration statement to:

       (i)    Include any prospectus required by section 10(a)(3) of the
              Securities Act;

       (ii)   Reflect in the prospectus any facts or events which,  individually
              or together,  represent a fundamental change in the information in
              the registration statement; and

       (iii)  Include any additional or changed material information on
              the plan of distribution.

    (2) For   determining   liability  under  the  Securities  Act,  treat  each
        post-effective   amendment  as  a  new  registration  statement  of  the
        securities offered, and the Offering of the securities of the securities
        at that time to be the initial bona fide Offering.

    (3) File a post-effective  amendment to remove from  registration any of the
        securities that remain unsold at the end of the Offering.

    (4) Provide to the Underwriters at the closing specified in the underwriting
        agreement  certificates  in such  denominations  and  registered in such
        names as required by the  Underwriters to permit prompt delivery to each
        purchaser.

    (5) For  determining  any  liability  under the  Securities  Act,  treat the
        information  omitted from the form of  prospectus  filed as part of this
        registration  statement  in reliance  upon Rule 430A and  contained in a
        form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
        (4) or 497(h)  under  the  Securities  Act as part of this  registration
        statement as of the time the Commission declared it effective.

    (6) For  determining  any liability  under the  Securities  Act,  treat each
        post-effective  amendment  that  contains a form of  prospectus as a new
        registration  statement for the securities  offered in the  registration
        statement,  and the  offering  of the  securities  at  that  time as the
        initial bona fide Offering of those securities.

    Insofar as indemnification  for liabilities arising under the Securities Act
may  be  permitted  to  directors,  officers  and  controlling  persons  of  the
Registrant pursuant to the foregoing  provisions,  or otherwise,  the Registrant
has been advised that in the opinion of the Securities  and Exchange  Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.

    In the  event  that a claim for  indemnification  against  such  liabilities
(other than the  payment by the  Registrant  of  expenses  incurred or paid by a
director,  officer or  controlling  person of the  Registrant in the  successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling  person in connection with the securities being  registered,  the
Registrant  will,  unless in the  opinion  of its  counsel  the  matter has been
settled by controlling precedent,  submit to a court of appropriate jurisdiction
the question  whether such  indemnification  by it is against  public  policy as
expressed in the Securities  Act and will be governed by the final  adjudication
of such issue.


                                      II-7


                                   SIGNATURES

   
    IN ACCORDANCE  WITH THE  REQUIREMENTS  OF THE  SECURITIES  ACT OF 1933,  THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE  REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS AMENDMENT NO. 3
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,  IN
THE CITY OF WESTFORD, COMMONWEALTH OF MASSACHUSETTS, ON MAY 8, 1997.
    

                                            AUGMENT SYSTEMS, INC.
                                                (Registrant)


                                            By:  /s/ LORRIN G. GALE
                                               ---------------------
                                                   LORRIN G. GALE,
                                                CHIEF EXECUTIVE OFFICER
                                                    AND PRESIDENT

   
IN  ACCORDANCE  WITH  THE  REQUIREMENTS  OF THE  SECURITIES  ACT OF  1933,  THIS
AMENDMENT  NO. 3 TO THE  REGISTRATION  STATEMENT ON FORM SB-2 HAS BEEN SIGNED BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES STATED.
    


<TABLE>
<CAPTION>
   
                 SIGNATURE                                   TITLE                       DATE
                 ---------                                   -----                       ----
          <S>                              <C>                                  <C>
          /s/      LORRIN G. GALE             Chief Executive Officer,              May 8, 1997
             ---------------------------        President and Chairman
                   LORRIN G. GALE               of the Board              
                                                
                         *                     Chief Financial Officer,             May 8, 1997
             ---------------------------        Treasurer, Secretary and
                   DUANE A. MAYO                Director                 
                                              
                          *                    Director                             May 8, 1997
             ---------------------------
                  CHAPELL CORY III

                          *                    Director                             May 8, 1997
             ---------------------------
                  GREGORY M. MILLAR

                          *                    Director                             May 8, 1997
             ---------------------------
                  STANLEY A. YOUNG

                          *                    Director                             May 8, 1997
             ---------------------------
             FRED L. CHANOWSKI

             *   /s/ LORRIN G. GALE     
             ---------------------------
                   LORRIN G. GALE
                  ATTORNEY-IN-FACT

    

</TABLE>

                                      II-8



                             INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 EXHIBIT
  NUMBER                                       DESCRIPTION
  <S>             <C>
   
    *1.1          --Form of Underwriting Agreement.
     3.1          --Certificate of Incorporation of the Registrant, as amended.
    *3.2          --By-laws of the Registrant.
    *4.1          --Specimen Common Stock Certificate of the Registrant.
    *4.2          --Form of Underwriters' Purchase Option.
    *4.3          --Specimen Redeemable Common Stock Purchase Warrant.
    *4.4          --Form of Warrant Agreement.
    *5            --Opinion of Warner & Stackpole LLP on legality of securities being registered.
   *10.1          --Lease Agreement of Corporate Headquarters in Westford, Massachusetts between New
                    England Mutual Life Insurance Company and the Registrant dated October 23, 1995.
   *10.1.1        --First Amendment to Lease Agreement of Corporate Headquarters dated as of January
                    31, 1996.
   *10.2          --Lease Agreement of Sales Office in San Diego, California between The Parkwest Partners
                    and the Registrant dated July 1, 1996.
   *10.3          --Restated Technology License Agreement between Radius Inc. and the Registrant dated
                    as of September 27, 1995.
   *10.3.1        --First Amendment to Restated Technology Agreement between Radius Inc. and the Registrant
                    dated as of October 28, 1996.
   *10.4          --Software Development and License Agreement between Polybus
                    Systems Corporation and the Registrant dated as of August 1,
                    1996.
   *10.5          --Form of Warrant as issued to Registrant's other Warrantholders.
   *10.6          --Form of Warrant as issued to placement agent in Registrant's private placement
                    completed in May 1996.
   *10.7          --Form of Promissory Note from Registrant's private placement completed in May 1996.
   *10.8          --Form of Registration Rights Agreement for shares of common stock and shares underlying
                    promissory notes issued in Registrant's private placement completed in May 1996.
   *10.9          --Form of Registration Rights Agreement for shares of common stock issued in Registrant's
                    private placement completed in October 1996.
   *10.10         --Form of Class A Warrant from Registrant's private placement completed in February
                    1997.
   *10.11         --Form of Class B Warrant from Registrant's private placement completed in February
                    1997.
   *10.12         --Form of Class A Promissory Note from Registrant's  private
                    placement completed in February 1997.
   *10.13         --Form of Class B Promissory Note from Registrant's  private
                    placement completed in February 1997.
   *10.14         --Consulting Agreement between Young Management Group, Inc. and the Registrant dated
                    July 1995.
   *10.15         --Registrant's 1995 Stock Option Plan.
   *10.16         --Employment Agreement, dated as of January 1, 1997, between the Registrant and Lorrin
                    G. Gale.
   *10.17         --Noncompetition, Nondisclosure Agreement, dated as of January 1, 1997, between the
                    Registrant and Duane A. Mayo.
   *10.18         --Promissory Note issued to Venture Management  Consultants,
                    LLC by the Registrant dated April 8, 1997.
    10.19         --Promissory Note issued to Venture Management  Consultants,
                    LLC by the Registrant dated May 6, 1997.
   *11            --Computation of Net Loss per share of Common Stock.
    23.1          --Consent of BDO Seidman, LLP.
   *23.2          --Consent of Warner & Stackpole LLP (included in Exhibit 5).
   *24            --Power of Attorney.
   *27            --Financial Data Schedule.
    


- --------
* Previously Filed.

</TABLE>






                                                                     EXHIBIT 3.1



                          CERTIFICATE OF INCORPORATION

                                       OF

                                  Lextel, Inc.

         FIRST. The name of the Corporation is: Lextel, Inc.

         SECOND.  The address of its registered  office in the State of Delaware
is  Corporation  Trust Center,  1209 Orange  Street,  in the City of Wilmington,
County of New Castle.  The name of its  registered  agent at such address is The
Corporation Trust Company.

         THIRD.  The nature of the  business  or  purposes  to be  conducted  or
promoted by the Corporation is as follows:

         To engage in any lawful act or activity for which  corporations  may be
organized under the General Corporation Law of Delaware.

         FOURTH. The total number of shares of stock which the Corporation shall
have authority to issue is 1,000,000 shares of Common Stock,  $.0l par value per
share.

         FIFTH.  The name and mailing  address of the sale  incorporator  are as
follows;

           NAME                                        MAILING ADDRESS
           ----                                        ---------------

      Lorrin G. Gale                                  22 Circuit Drive
                                                      Stow, Massachusetts 01775

         SIXTH.  In furtherance of and not in limitation of powers  conferred by
statute, it is further provided:

                  1.    Election of directors need not be by written ballot.

                  2.    The Board of Directors is expressly authorized to adopt,
amend or repeal the By-Laws of the Corporation.

         SEVENTH.  Whenever a compromise or arrangement is proposed between this
corporation  and  its  creditors  or any  class  of  them  and/or  between  this
corporation  and its  stockholders  or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on , the application in a summary
way of this  corporation  or of any creditor or stockholder  thereof,  or on the
application of any receiver or receivers  appointed for this  corporation  under
the  provisions  of  section  291 of  Title  8 of the  Delaware  Code  or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this 








corporation  under the provisions of section 279 of Title 8 of the Delaware Code
order  a  meeting  of  the  creditors  or  class  of  creditors,  and/or  of the
stockholders or class of stockholders of this  corporation,  as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing  three-fourths  in value of the  creditors  or class of  creditors,
and/or of the stockholders or class of stockholders of this corporation,  as the
case may be, agree to any compromise or arrangement and to any reorganization of
this  corporation  as consequence of such  compromise or  arrangement,  the said
compromise or arrangement  and the said  reorganization  shall, if sanctioned by
the court to which the said  application  has been  made,  be binding on all the
creditors  or class of  creditors,  and/or on all the  stockholders  or class of
stockholders,  of  this  corporation,  as the  case  may  be,  and  also on this
corporation.

         EIGHTH.  Except to the extent that the General  Corporation  Law of the
State of Delaware  prohibits  the  elimination  or  limitation  of  liability of
directors for breaches of fiduciary duty, no director of the  Corporation  shall
be personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary duty as a director, notwithstanding any provision of
law imposing such  liability.  No amendment to or repeal of this provision shall
apply to or have  any  effect  on the  liability  or  alleged  liability  of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment.

         NINTH.  The  Corporation  shall,  to the fullest  extent  permitted  by
Section 145 of the General Corporation Law of Delaware,  as amended from time to
time,  indemnify each person who was or is a party or is threatened to be made a
party to any  threatened,  pending  or  completed  action,  suit or  proceeding,
whether civil, criminal,  administrative or investigative, by reason of the fact
that he is or was,  or has  agreed to  become,  a  director  or  officer  of the
Corporation, or is or was serving, or has agreed to serve, at the request of the
Corporation,  as a  director,  officer or trustee  of, or in a similar  capacity
with, another corporation, partnership, joint venture, trust or other enterprise
(including  any employee  benefit  plan),  or by reason of any action alleged to
have been taken or omitted in such  capacity,  against all  expenses  (including
attorneys' fees),  judgments,  fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom.

        Indemnification  may include  payment by the  Corporation of expenses in
defending an action or  proceeding in advance of the final  disposition  of such
action or proceeding upon receipt of an undertaking by the person indemnified to
repay  such  payment  if it is  ultimately  determined  that such  person is not
entitled  to  indemnification  under  this  Article,  which  undertaking  may be
accepted without  reference to the financial ability of such person to make such
repayment.









        The   Corporation   shall  not   indemnify   any  such  person   seeking
indemnification  in connection with a proceeding (or part thereof)  initiated by
such person unless the initiation thereof was approved by the Board of Directors
of the Corporation.

        The  indemnification  rights  provided in this  Article (i) shall not be
deemed exclusive of any other rights to which those  indemnified may be entitled
under any law,  agreement or vote of stockholders or disinterested  directors or
otherwise,  and (ii) shall  inure to the  benefit of the  heirs,  executors  and
administrators  of such persons.  The Corporation may, to the extent  authorized
from time to time by its Board of  Directors,  grant  indemnification  rights to
other  employees  or agents of the  Corporation  or other  persons  serving  the
Corporation and such rights may be equivalent to, or greater or less than, those
set forth in this Article.

        TENTH.  The Corporation  reserves the right to amend,  alter,  change or
repeal any provision  contained in this  Certificate  of  Incorporation,  in the
manner  now  or  hereafter   prescribed  by  statute  and  the   Certificate  of
Incorporation,  and all rights  conferred upon  stockholders  herein are granted
subject to this reservation.

         EXECUTED at Stow, Mass., on April 30, 1990.



                                           /s/ Lorrin G. Gale
                                           -------------------------------
                                           Lorrin G. Gale, Incorporator









                           CERTIFICATE OF AMENDMENT OF
                          CERTIFICATE OF INCORPORATION
                            BEFORE PAYMENT OF CAPITAL
                                       OF
                                  LEXTEL, INC.

                         Pursuant to Section 241 of the
                General Corporation Law of the State of Delaware
                ------------------------------------------------

The undersigned, being a majority of the Board of Directors of Lextel, Inc. (the
"Corporation") , a corporation organized and existing under and by virtue of the
provisions  of the  General  Corporation  Law  of the  State  of  Delaware,  the
Certificate of  Incorporation  of which was filed in the office of the Secretary
of State on May 2, 1990 and received for recording in the office of the Recorder
of Deeds for New Castle  County,  State of Delaware,  on May 29, 1990, DO HEREBY
CERTIFY:

FIRST:   That the Corporation has not received any payment for any of its stock.

SECOND:  That the  Certificate of  Incorporation  shall be amended to change the
         name of the Corporation to Augment Systems Incorporated. Such amendment
         shall be effected  by  amending  article  FIRST of the  Certificate  of
         Incorporation to read as follows:

                     "FIRST. The name of the corporation is
                          Augment Systems Incorporated"

THIRD:   That the foregoing  amendment of the Certificate of  Incorporation  has
         been duly adopted in accordance  with the  provisions of Section 241 of
         the General Corporation Law of the State of Delaware.

Executed this 15th day of June, 1990.


                                           /s/ Lorrin G. Gale
                                           ----------------------------
                                           Lorrin G. Gale

                                           /s/ Theodore G. Johnson
                                           ----------------------------
                                           Theodore G. Johnson

                                           /s/ Morton E. Ruberman
                                           ----------------------------
                                           Morton E. Ruderman









                            CERTIFICATE OF AMENDMENT
                                       OF
                          CERTIFICATE OF INCORPORATION
                                       OF
                          AUGMENT SYSTEMS INCORPORATED
                             Pursuant to Section 242
                            of the Corporation Law of
                              the State of Delaware
                              ---------------------

        Augment Systems  Incorporated  (hereinafter  called the  "Corporation"),
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, does hereby certify as follows:

        At a meeting of the Board of Directors of the  Corporation  a resolution
was duly adopted,  pursuant to Section 242 of the General Corporation Law of the
State  of  Delaware,   setting  forth  an  amendment  to  the   Certificate   of
Incorporation  of the  Corporation and declaring said amendment to be advisable.
The  stockholders  of the Corporation  duly approved said proposed  amendment by
written  consent  in  accordance  with  Sections  228  and  242 of  the  General
Corporation  Law of the State of Delaware and written notice of such consent has
been  given to all  stockholders  who  have not  consented  in  writing  to said
amendment. The resolution setting forth the amendment is as follows:

        RESOLVED: That Article FOURTH of the Certificate of Incorporation of the
Corporation  be and  hereby  is  deleted  and the  following  Article  FOURTH is
inserted in lieu thereof;

              FOURTH:  The total  number of shares of all classes of stock which
the Corporation  shall have authority to issue is (i) 2,000,000 shares of Common
Stock,  $.0l par value per share  ("Common  Stock") and (ii)  593,602  shares of
Preferred Stock $.0l par value per share ("Preferred Stock").

        The  following  is a  statement  of the  designations  and  the  powers,
privileges  and rights,  and the  qualifications,  limitations  or  restrictions
thereof in respect of each class of capital stock of the Corporation.








A.      COMMON STOCK.
        -------------

         1. General. The voting,  dividend and liquidation rights of the holders
of the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.

         2. Voting. The holders of the Common Stock are entitled to one vote for
each share held at all meetings of stockholders  (and written actions in lieu of
meetings). There shall be no cumulative voting.

         3.  Dividends.  Dividends  may be declared and paid on the Common Stock
from funds lawfully  available  therefor an and when  determined by the Board of
Directors  and  subject  to  any  preferential   dividend  rights  of  any  then
outstanding Preferred Stock.

         4. Liquidation. Upon the dissolution or liquidation of the Corporation,
whether  voluntary or  involuntary,  holders of Common Stock will be entitled to
receive  all  assets  of  the  Corporation  available  for  distribution  to its
stockholders,  subject  to  any  preferential  rights  of any  then  outstanding
Preferred Stock.

B.      SERIES A PREFERRED STOCK.
        -------------------------

         Five Hundred Ninety-Three  Thousand Six Hundred Two (593,602) shares of
the authorized and unissued  Preferred  Stock of the  Corporation are designated
"Series A Preferred  Stock" (the "Series A Preferred  Stock") with the following
rights,  preferences,  powers,  privileges and  restrictions,  qualification and
limitations.

         1.     Dividends.
                ----------

                (a) The holders of shares of Series A  Preferred  Stock shall be
entitled to receive,  prior to any payment of any cash dividend on any shares of
stock of the  Corporation,  cumulative  dividends,  which dividends shall accrue
semi-annually  from the date of issue at the rate of $.185  per  share per annum
(subject to  appropriate  adjustment in the event of any stock  dividend,  stock
split, combination or other similar recapitalization affecting such shares), and
no  more,  payable  when  and as  declared  by the  Board  of  Directors  of the
Corporation on such date as shall be fixed by the Board of Directors.  The right
to receive  dividends on Series A Preferred  Stock shall be cumulative and shall
accrue in the event that no dividend has been declared on the Series A Preferred
Stock in any prior year.

                (b) The  Corporation  shall not declare or pay any  dividends or
other  distributions  (as  defined in  paragraph  (c) below) on shares of Common
Stock until the holders of the Series A Preferred Stock then  outstanding  shall
have first  received a dividend at the rate  specified in paragraph  (a) of this
Section l, including,  without limitation, any accrued but unpaid dividends from
any prior year, whether or not declared by the Board of Directors.









                (c) For purposes of this  Section 1 unless the context  requires
otherwise,  "distribution"  shall mean the transfer of cash or property  without
consideration,  whether by way of dividend or  otherwise,  payable other than in
Common  Stock  or  other  securities  of the  Corporation,  or the  purchase  or
redemption of shares of the Corporation (other than repurchases of capital stock
of the  Corporation  held by employees or directors of, or  consultants  to, the
Corporation  upon  termination  of their  employment  or  services  pursuant  to
agreements  providing for such repurchase at a price equal to the original issue
price of such shares and other than redemptions in liquidation or dissolution of
the Corporation) for cash or property,  including any such transfer, purchase or
redemption by any subsidiary of this Corporation.

         2.       Liquidation, Merger and Record Date.
                  ------------------------------------

                (a) In the event of any  voluntary or  involuntary  liquidation,
dissolution or winding up of the Corporation,  the holders of shares of Series A
Preferred Stock then outstanding  shall be entitled to be paid out of the assets
of the Corporation  available for  distribution to its  stockholders  before any
payment  shall be made to the  holders  of Common  Stock or any  other  class or
series of stock ranking on  liquidation  junior to the Series A Preferred  Stock
(such  Common  Stock and other stock being  collectively  referred to as "Junior
Stock") by reason of their ownership thereof, an amount equal to $1.57 per share
(subject to  appropriate  adjustment in the event of any stock  dividend,  stock
split,  combination  or other similar  recapitalization  affecting such shares),
plus any  dividends  accrued or declared  but unpaid  thereon.  if upon any such
liquidation,  dissolution or winding up of the Corporation the remaining  assets
of the  Corporation  available for  distribution  to its  stockholders  shall be
insufficient  to pay the holders of shares of Series A Preferred  Stock the full
amount  to which  they  shall be  entitled,  the  holders  of shares of Series A
Preferred  Stock and any class or series of stock  ranking on  liquidation  on a
parity with the Series A Preferred Stock shall share ratably in any distribution
of the  remaining  assets  and funds of the  Corporation  in  proportion  to the
respective  amounts  which would  otherwise  be payable in respect of the shares
held by them upon such distribution if all amounts payable on or with respect to
such shares  were paid in full.  Upon  payment of the amount  called for by this
Section 2(a) the shares of Series A Preferred Stock shall be deemed to have been
redeemed in full and the holders of these shares shall have no further rights as
holders of such shares.

                (b) After the payment of all preferential amounts required to be
paid to the holders of Series A,  Preferred  Stock and any other class or series
of stock of the Corporation ranking on liquidation on a parity with the Series A
Preferred  Stock,  upon  the  dissolution  liquidation  or  winding  up  of  the
Corporation,  the holders of shares of Junior  Stock then  outstanding  shall be
entitled to receive the remaining assets and funds of the Corporation  available
for distribution to its stockholders,

                (c) The merger or  consolidation of the Corporation into or with
another  corporation  (except if the Corporation is the surviving entity and the
holders of capital stock of the Corporation  immediately prior to such merger or
consolidation continue to hold at least 51% by voting power of the capital stock
of the  surviving  Corporation),  or the  sale of all or  substantially  all the
assets of the Corporation,  shall be deemed to be a liquidation,  dissolution or













winding up of the  Corporation  for purposes of this Section 2 if the holders of
at least 66 2/3% of the then  outstanding  shares of Series A Preferred Stock so
elect  within  ten days of the  receipt  of a written  notice  thereof  from the
Corporation before the effective date of such event; provided,  however, that if
(i) the  holders  of at least  66-2/3%  of the  outstanding  shares  of Series A
Preferred Stock approve such merger, consolidation or sale and (ii) such merger,
consolidation  or sale is  effected  through  an  exchange  of  shares  or other
mechanism  whereby the Corporation does not receive,  at the time of such merger
or  consolidation,  cash or  other  property  payments  sufficient  to make  the
payments  required by Section 2(a), then the holders of Series A Preferred Stock
shall  have  no  right  to  treat  such  merger,  consolidation  or  sale  as  a
liquidation,  dissolution  or  winding-up  of the  Company  and to  receive  any
payments  pursuant to this Section 2 by reason of such merger or  consolidation.
The value of such property , rights or other  securities  shall be determined in
good faith by the Board of Directors of the Corporation.

                  (d)      In the event of:
                         
                           (i) any taking by the  Corporation of a record of the
holders of any class of securities  for the purpose of  determining  the holders
thereof who are entitled to receive any dividend or other  distribution,  or any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right; or

                           (ii) any capital  reorganization  of the Corporation,
any reclassification or recapitalization of the capital stock of the Corporation
or any transfer of all or substantially  all of the assets of the Corporation to
any other  corporation,  or any other  entity or  person,  then and in each such
event,  the  Corporation  shall  mail or cause to be  mailed  to each  holder of
Preferred Stock a notice  specifying (a) the date on which any such record is to
be  taken  for the  purpose  of  such  dividend,  distribution  or  right  and a
description of such dividend,  distribution or right,  (b) the date on which any
such reorganization,  reclassification recapitalization, transfer consolidation,
merger,  dissolution,  liquidation or winding up is expected to become effective
and (c) the time, if any, that is to be fixed,  as to when the holders of record
of Common Stock (or other securities) shall be entitled to exchange their shares
of  Common  Stock  (or  other  securities)  for  securities  or  other  property
deliverable  upon  such   reorganization,   reclassification   recapitalization,
transfer,  consolidation,  merger, dissolution,  liquidation or winding up. Such
notice shall be mailed at least twenty (20) days prior to the date  specified in
such notice on which such action is to be taken.

        3.  Voting.  Except as  otherwise  provided  by the laws of the State of
Delaware,  the holders of Series A Preferred  Stock shall have no voting  rights
and the entire voting power for the election of directors of the Corporation and
for all other purposes shall be vested in the holders of Common Stock.

        4.  Protective  Provisions.  So long as any shares of Series A Preferred
Stock are  outstanding,  the Corporation  shall not, without first obtaining the
approval of at least 66-2/3% of the then outstanding shares of Preferred Stock:










                  (a) redeem,  purchase or  otherwise  acquire for value (or pay
into or set aside for a sinking  fund for such  purpose),  or declare and pay or
set aside funds for the payment of any  dividend  with  respect to, any share or
shares of Common or Preferred Stock,  except as required or permitted under this
Certificate of Incorporation; or

                  (b)  authorize  or issue,  or obligate  itself to authorize or
issue, additional shares of Preferred Stock; or

                  (c)  authorize  or issue,  or obligate  itself to authorize or
issue,  any other equity  security  senior to or on a parity with the  Preferred
Stock as to  liquidation  preferences,  dividend  rights,  conversion  rights or
voting rights; or

                  (d) except as  permitted  in  paragraph  2(c) above,  merge or
consolidate  with any other  corporation,  or sell,  assign,  lease or otherwise
dispose of or voluntarily  part with the control of (whether in one  transaction
or in a series of related transactions) all, or substantially all, of its assets
(whether now owned or hereafter acquired) except for sales or other dispositions
of assets in the  ordinary  course of  business  and except  that (i) any wholly
owned  subsidiary may merge into or consolidate  with or transfer  assets to any
other subsidiary and (ii) any wholly owned subsidiary may merge into or transfer
assets to the Corporation; or

                  (e)  alter  the  size  of  the  Board  of   Directors  of  the
Corporation;

                  (f)  authorize  the   Corporation   to  transfer  any  patent,
copyright, trademark, trade secret or other intellectual property right; or

                  (g)      amend this Article FOURTH.

         Nothing contained in this Section 4 shall be deemed to limit any rights
which may otherwise be available under the General  Corporation Law of the State
of Delaware. The provisions of this Section 4 shall terminate upon the effective
date of a registration  statement filed by the Corporation  under the Securities
Act of 1933 covering the  Corporation's  initial public offering of Common Stock
resulting in gross  proceeds to the  Company,  and, if  applicable,  any selling
stockholders of at least $5,000,000.

           5.     Optional Redemption by the Holders.
                  -----------------------------------

                  (a) Subject to the terms of  Subsection  5(d), at any time and
from time to time  after  December  5,  1995,  the  holders  of  66-2/3%  of the
outstanding  Series A Preferred  Stock may request the Corporation to redeem all
(or any lesser amount requested by such holders) of the Series A Preferred Stock
by paying $1.583 per share (subject to appropriate  adjustment for stock splits,
stock dividends,  combinations or other similar recapitalizations affecting such
shares),  plus any dividends accrued but unpaid thereon, in cash, for each share
of Series A  Preferred  stock  then  redeemed  (hereinafter  referred  to as the
"Redemption Price").










                  (b)  At  least  30  days  prior  to the  date  fixed  for  any
redemption  of  Series  A  Preferred  Stock  (hereinafter  referred  to  as  the
"Redemption Date"), written notice shall be mailed, by first class or registered
mail,  postage prepaid,  to each holder of record of Series A Preferred Stock to
be  redeemed,  at his or its address  last shown on the records of the  transfer
agent of the Series A Preferred Stock (or the records of the Corporation,  if it
serves as its own transfer  agent)  notifying such holder of the election of the
holders of 66-2/3% of the Series A Preferred  Stock to compel the Corporation to
redeem such shares,  specifying the Redemption Date and calling upon such holder
to surrender to the Corporation,  in the manner and at the place designated, his
or its certificate or certificates  representing the shares to be redeemed (such
notice is hereinafter  referred to as the "Redemption  Notice").  On or prior to
the  Redemption  Date,  each holder of Series A  Preferred  Stock to be redeemed
shall surrender his or its certificate or certificates  representing such shares
to the Corporation,  in the manner and at the place designated in the Redemption
Notice,  and thereupon the  Redemption  Price of such shares shall be payable to
the order of the person whose name appears on such  certificate or  certificates
as the owner thereof and each surrendered  certificate shall be cancelled.  From
and after the Redemption Date, unless there shall have been a default in payment
of the  Redemption  Price,  all rights of the  holders of the Series A Preferred
Stock designated for redemption in the Redemption  Notice as holders of Series A
Preferred Stock of the  Corporation  (except the right to receive the Redemption
Price without  interest upon  surrender of their  certificate  or  certificates)
shall cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the  Corporation or be deemed to be outstanding  for
any purpose whatsoever.

                  (c) On or prior to the Redemption Date, the Corporation  shall
deposit  the  Redemption  Price  of all  shares  of  Series  A  Preferred  Stock
designated for  redemption in the Redemption  Notice and not yet redeemed with a
bank or trust  company  having  aggregate  capital  and  surplus  in  excess  of
$25,000,000  as a trust fund for the  benefit of the  respective  holders of the
shares  designated  for  redemption  and  not  yet  redeemed,  with  irrevocable
instructions  and authority to the bank or trust  company to pay the  Redemption
Price for such  shares to their  respective  holders on or after the  Redemption
Date upon  receipt of  notification  from the  Corporation  that such holder has
surrendered his or its share certificate to the Corporation.  The balance of any
monies  deposited by the Corporation  pursuant to this Subsection 6(c) remaining
unclaimed at the  expiration  of one year  following the  Redemption  Date shall
thereafter  be  returned to the  Corporation  upon its  request  expressed  in a
resolution of its-Board of Directors.

                  (d) Notwithstanding  any of the foregoing,  the holders of the
outstanding  shares of Series A  Preferred  Stock may not compel the  Company to
redeem any shares of Series A Preferred stock if:

                           (i)      As a result of such redemption the Company's
                                    working  capital,  determined  in accordance
                                    with    generally    accepted     accounting
                                    principals, would be $500,000 or less;

                           (ii)     the  Company's  ratio of total debt to total
                                    equity,   determined  in   accordance   with
                                    generally  accepted  accounting   principals
                                    would exceed 1.5:1; or












                           (iii)    such  redemption  would cause the Company to
                                    violate  the  terms of any  loan  agreement,
                                    indenture or similar instrument to which the
                                    Company is then a party.

                  (e) In the event  that the  Corporation,  whether by reason of
the limitation  contain in Section 5(d) above or otherwise,  fails to redeem all
of the Preferred Stock to be redeemed under Section 5(a) below, the Corporation;

                           (i)      shall redeem as much of the Preferred  Stock
                                    as it  would  be able to  redeem  and  still
                                    remain in compliance  with said Section 5(d)
                                    and with  applicable  law,  with any partial
                                    redemption  being  made from each  holder of
                                    Preferred Stock pro rata based on the number
                                    of shares held;


                           (ii)     the  Corporation  shall redeem the remaining
                                    shares of  Preferred  Stock as soon as it is
                                    able to do so under  said  Section  5(d) and
                                    applicable law; and


                           (iii)    until all Preferred  Stock has been redeemed
                                    in full, the Corporation will not declare or
                                    set  aside  any  sums  for  the  payment  of
                                    dividends  on any capital  stock (other than
                                    the  Preferred  Stock),  will  not  make any
                                    distribution  or payment with respect to any
                                    of its  capital  stock,  will not redeem any
                                    shares  of its  capital  stock  and will not
                                    make any loan or advance to any stockholder,
                                    employee, officer or consultant,  other than
                                    in the  ordinary  course of  business  or in
                                    connection  with  repurchases  of stock from
                                    any employee pursuant to any plan, agreement
                                    or  arrangement  approved  by the  Board  of
                                    Directors of the Company.

         6.       Optional Redemption by the Corporation.
                  ---------------------------------------

                  (a) At any time and from time to time, the Corporation may, at
the option of its Board of Directors,  redeem the Series A Preferred  Stock,  in
whole or in part, by paying $l.583 per share (subject to appropriate  adjustment
for   stock   splits,   stock   dividends,   combinations   or   other   similar
recapitalizations affecting such shares), plus any dividends accrued thereon, in
cash for each  share of Series A  Preferred  Stock  then  redeemed  (hereinafter
referred to as the "Corporation Redemption Price").

                  (b) In the event of any  redemption of only a part of the then
outstanding  Series  A  Preferred  Stock,  the  Corporation  shall  effect  such
redemption  pro rata among the holders  thereof based on the number of shares of
Series A  Preferred  Stock held by such  holders on the date of the  Corporation
Redemption Notice (as defined below).











                  (c)  Corporation  Redemptions  made pursuant to this Section 6
shall  not  relieve  the  Corporation  of its  obligations  to  redeem  Series A
Preferred Stock in accordance with the provisions of Section 5.

                  (d)  At  least  30  days  prior  to the  date  fixed  for  any
redemption  of  Series  A  Preferred  Stock  (hereinafter  referred  to  as  the
"Corporation  Redemption Date"),  written notice shall be mailed, by first class
or  registered  mail,  postage  prepaid,  to each  holder  of record of Series A
Preferred Stock to be redeemed,  at his or its address last shown on the records
of the  transfer  agent of the Series A  Preferred  Stock (or the records of the
Corporation,  if it serves as its own transfer agent),  notifying such holder of
the  election  of  the  Corporation  to  redeem  such  shares,   specifying  the
Corporation  Redemption  Date and calling  upon such holder to  surrender to the
Corporation,  in the manner and at the place designated,  his or its certificate
or  certificates  representing  the  shares  to  be  redeemed  (such  notice  is
hereinafter referred to as the "Corporation  Redemption Notice"). On or prior to
the Corporation  Redemption  Date, each holder of Series A Preferred Stock to be
redeemed shall  surrender his or its  certificate or  certificates  representing
such shares to the Corporation, in the manner and at the place designated in the
Corporation  Redemption Notice and thereupon the Corporation Redemption Price of
such shares  shall be payable to the order of the person  whose name  appears on
such  certificate  or  certificates  as the owner  thereof and each  surrendered
certificate  shall  be  cancelled.  In  the  event  less  than  all  the  shares
represented by any such  certificate are redeemed,  a new  certificate  shall be
issued  representing  the  unredeemed  shares.  From and after  the  Corporation
Redemption  Date,  unless  there  shall  have been a default  in  payment of the
Corporation  Redemption  Price,  all  rights  of the  holders  of the  Series  A
Preferred Stock designated for redemption in the Corporation  Redemption  Notice
as holders of Series A Preferred stock of the  Corporation  (except the right to
receive the  Corporation  Redemption  Price without  interest upon  surrender of
their certificate or certificates)  shall cease with respect to such shares, and
such shares shall not thereafter be transferred on the books of the  Corporation
or be deemed to be outstanding for any purpose whatsoever.

                  (e)  On or  prior  to the  Corporation  Redemption  Date,  the
Corporation  shall  deposit the  Corporation  Redemption  Price of all shares of
Series A Preferred Stock designated for redemption in the Corporation Redemption
Notice  and not yet  redeemed  with a bank or  trust  company  having  aggregate
capital and surplus in excess of  $25,000,000 as a trust fund for the benefit of
the  respective  holders of the shares  designated  for  redemption  and not yet
redeemed,  with  irrevocable  instructions  and  authority  to the bank or trust
company  to pay the  Corporation  Redemption  Price  for  such  shares  to their
respective  holders on or after the Corporation  Redemption Date upon receipt of
notification  from the  Corporation  that such holder has surrendered his or its
share certificate to the Corporation. The balance of any monies deposited by the
Corporation  pursuant  to  this  Subsection  6(e)  remaining  unclaimed  at  the
expiration  of  one  year  following  the  Corporation   Redemption  Date  shall
thereafter  be  returned to the  Corporation  upon its  request  expressed  in a
resolution of its Board of Directors.

                  (f) Subject to the provisions  hereof,  the Board of Directors
of the Corporation  shall have authority to prescribe the manner in which Series
A Preferred  Stock shall be redeemed 












from time to time.  Any shares of Series A  Preferred  Stock so  redeemed  shall
permanently  be  retired,  shall no longer be deemed  outstanding  and shall not
under any  circumstances be reissued,  and the Corporation may from time to time
take such appropriate action as may be necessary to reduce the authorized Series
A  Preferred  Stock  accordingly.  Nothing  herein  contained  shall  prevent or
restrict the purchase by the Corporation,  from time to time either at public or
private sale,  of the whole or any part of the Series A Preferred  Stock at such
price or prices as the Corporation  may determine,  subject to the provisions of
applicable law.

        IN WITNESS WHEREOF,  the Corporation has caused its corporate seal to be
affixed  hereto and this  Certificate of Amendment to be signed by its President
and attested by its Secretary this 28th day of November, 1990.

ATTEST:                                     AUGMENT SYSTEMS INCORPORATED

/s/ Alexander Bernhard                      By: /s/ Chappel Cory III 
- ----------------------------------              -----------------------------
Alexander Bernhard, Secretary                   Chappel Cory III, President


[Corporate Seal]










                            CERTIFICATE OF AMENDMENT

                                       OF

                          CERTIFICATE OF INCORPORATION

                                       OF

                          AUGMENT SYSTEMS INCORPORATED



                  AUGMENT  SYSTEMS  INCORPORATED,  a  corporation  organized and
existing  under  and by virtue of the  General  Corporation  Law of the State of
Delaware, DOES HEREBY CERTIFY:

                  FIRST:  That,  by  unanimous  written  consent of the Board of
Directors,   a  resolution   proposing  an  amendment  to  the   Certificate  of
Incorporation of said Corporation to increase the number of authorized shares of
Common Stock,  $.01 par value,  and Preferred  Stock,  $.01 par value,  was duly
adopted and declared to be advisable.

                  SECOND:  That, in  accordance  with Section 211 of the General
Corporation Law of the State of Delaware, the holders of the outstanding capital
stock of the Corporation  required to amend said  Certificate  voted, by written
consent dated July 31, 1995, to approve such amendment.  The resolution  setting
forth the amendment is as follows:

RESOLVED: That Article 4 of the  Corporation's  Certificate of  Incorporation be
          amended  by  deleting  said  Article 4  thereof  in its  entirety  and
          substituting the following therefor:

                           "4.  The  total  number of all  classes  of shares of
                  stock which the  corporation  shall have authority to issue is
                  seventeen million (17,000,000)  shares,  consisting of fifteen
                  million  (15,000,000)  shares of Common Stock with a par value
                  of One Cent  ($.01) per  share,  and two  million  (2,000,000)
                  shares of Preferred  Stock with a par value of One Cent ($.01)
                  per share,  amounting in the aggregate to One Hundred  Seventy
                  Thousand Dollars ($170,000.00).

                           "The   designations   and  powers,   the  rights  and
                  preferences   and   the    qualifications,    limitations   or
                  restrictions  with  respect  to each  class  of  stock  of the
                  corporation  shall be as  determined by the Board of Directors
                  from time to time."

                  and that the officers of the  Corporation  be, and hereby are,
                  authorized  and directed to execute and file a Certificate  of
                  Amendment   evidencing   said   amendment  with  the  Delaware
                  Secretary of State.











                  THIRD:  That,  pursuant  to  Section  228(d)  of  the  General
Corporation Law of the State of Delaware, written notice of the adoption of said
resolution by written consent of a majority of the outstanding shares of capital
stock of the Corporation was mailed to all  stockholders  who did not consent in
writing thereto.

                  FOURTH:  That said  amendment  was duly adopted in  accordance
with the provisions of Section 242 of the General  Corporation  Law of the State
of Delaware.

                  IN WITNESS WHEREOF, said AUGMENT SYSTEMS,  INC.. has caused it
corporate  seal to be  hereunto  affixed  and this  certificate  to be signed by
Lorrin Gale, its President and Duane A. Mayo,  its  Secretary,  this 12th day of
September, 1995.

                                                  AUGMENT SYSTEMS INCORPORATED



[SEAL]                                            By: /s/ Lorrin Gale
                                                      -------------------------
                                                      Lorrin Gale, President


/s/ Duane A. Mayo
- ------------------------------
Duane A. Mayo, Secretary














                            CERTIFICATE OF AMENDMENT

                                       OF

                          CERTIFICATE OF INCORPORATION

                                       OF

                          AUGMENT SYSTEMS INCORPORATED



                  AUGMENT  SYSTEMS  INCORPORATED,  a  corporation  organized and
existing  under  and by virtue of the  General  Corporation  Law of the State of
Delaware, DOES HEREBY CERTIFY:

                  FIRST:  That,  by  unanimous  written  consent of the Board of
Directors,  resolutions proposing amendments to the Certificate of Incorporation
of said  Corporation to (a) change the name of the  Corporation and (b) increase
the number of  authorized  shares of Common  Stock,  $.01 par  value,  were duly
adopted and declared to be advisable.

                  SECOND:  That, in  accordance  with Section 211 of the General
Corporation Law of the State of Delaware, the holders of the outstanding capital
stock of the Corporation  required to amend said  Certificate  voted, by written
consent  dated  October 21, 1996, to approve such  amendments.  The  resolutions
setting forth the amendments are as follows:

RESOLVED:         That the name of the  Corporation  be  changed  from  "Augment
                  Systems  Incorporated"  to "Augment  Systems,  Inc."; and that
                  Article 1 of the  Corporation's  Certificate of Incorporation,
                  as amended,  be amended by deleting  said Article 1 thereof in
                  its entirety and substituting the following therefor:

                           "1. The name of the Corporation shall be Augment 
                               Systems, Inc."

FURTHER
RESOLVED:         That the number of shares of Common Stock, $.01 par value that
                  the  Corporation  shall have  authority  to issue be increased
                  from Fifteen  Million  (15,000,000)  shares to Thirty  Million
                  (30,000,000);   and  that  Article  4  of  the   Corporation's
                  Certificate  of  Incorporation  be  amended by  deleting  said
                  Article  4  thereof  in  its  entirety  and  substituting  the
                  following therefor:

                           "4.  The  total  number of all  classes  of shares of
                  stock which the  corporation  shall have authority to issue is
                  thirty-two million (32,000,000)  shares,  consisting of thirty
                  million  (30,000,000)  shares of Common Stock with a par value
                  of One Cent  ($.01) per  share,  and two  million  (2,000,000)
                  shares of 












                  Preferred Stock with a par value of One Cent ($.01) per share,
                  amounting in the  aggregate to Three Hundred  Twenty  Thousand
                  Dollars ($320,000.00).

                           "The   designations   and  powers,   the  rights  and
                  preferences   and   the    qualifications,    limitations   or
                  restrictions  with  respect  to each  class  of  stock  of the
                  corporation  shall be as  determined by the Board of Directors
                  from time to time."


                  THIRD:  That,  pursuant  to  Section  228(d)  of  the  General
Corporation Law of the State of Delaware, written notice of the adoption of said
resolutions  by  written  consent  of a majority  of the  outstanding  shares of
capital  stock of the  Corporation  was mailed to all  stockholders  who did not
consent in writing thereto.

                  FOURTH:  That said  amendment  was duly adopted in  accordance
with the provisions of Section 242 of the General  Corporation  Law of the State
of Delaware.

                  IN WITNESS WHEREOF, said AUGMENT SYSTEMS,  INC.. has caused it
corporate  seal to be  hereunto  affixed  and this  certificate  to be signed by
Lorrin Gale, its President and Duane A. Mayo,  its  Secretary,  this 29th day of
October, 1996.

                                                 AUGMENT SYSTEMS INCORPORATED



[SEAL]                                           By: /s/ Lorrin Gale
                                                     ------------------------
                                                     Lorrin Gale, President


/s/ Duane A. Mayo
- --------------------------
Duane A. Mayo, Secretary








                            CERTIFICATE OF AMENDMENT

                                       OF

                          CERTIFICATE OF INCORPORATION

                                       OF

                              AUGMENT SYSTEMS, INC.



                  AUGMENT  SYSTEMS,  INC., a corporation  organized and existing
under and by virtue of the  General  Corporation  Law of the State of  Delaware,
DOES HEREBY CERTIFY:

                  FIRST:  That, by the unanimous  vote of the Board of Directors
at a Special Meeting held on April 8, 1997, a resolution  proposing an amendment
to the  Certificate  of  Incorporation  of said  Corporation to effect a 3-for-4
reverse stock split of the Corporation's issued and outstanding shares of Common
Stock, $.01 par value, and shares reserved for issuance; provided, however, that
the par value of said  Common  Stock  shall  remain as $.01 per share,  was duly
adopted and declared to be advisable.

                  SECOND:  That, in  accordance  with Section 228 of the General
Corporation Law of the State of Delaware, the holders of the outstanding capital
stock of the Corporation  required to amend said  Certificate  voted, by written
consent  dated  April 8, 1997,  to approve  such  amendment  to Article 4 of the
Corporation's  Certificate  of  Amendment.  The  resolution  setting  forth  the
amendment is as follows:

RESOLVED:         That  there be,  and  hereby  is,  declared  a  three-for-four
                  reverse  stock  split of the  Corporation's  shares  of Common
                  Stock, $.01 par value, issued and outstanding and reserved for
                  issuance  immediately  prior to the  filing of this  Amendment
                  with  the  Secretary  of  State  of  the  State  of  Delaware;
                  provided,  however,  that the par value of said  Common  Stock
                  shall remain as $.01 per share.

                  THIRD: That said amendment was duly adopted in accordance with
the  provisions  of Sections 242 and 228 of the General  Corporation  Law of the
State of Delaware.



                        [SPACE LEFT INTENTIONALLY BLANK]







                  IN WITNESS WHEREOF,  said AUGMENT SYSTEMS,  INC. has caused it
corporate  seal to be  hereunto  affixed  and this  certificate  to be signed by
Lorrin Gale, its President,  and Duane A. Mayo, its Secretary,  this 23rd day of
April, 1997.


                                                     AUGMENT SYSTEMS, INC.


         [SEAL]
                                                     By: /s/ Lorrin Gale
                                                        ----------------------
                                                        Lorrin Gale, President



   /s/ Duane A. Mayo
  ----------------------
  Duane A. Mayo, Secretary












                            CERTIFICATE OF CORRECTION

                                       OF

                            CERTIFICATE OF AMENDMENT

                                       OF

                              AUGMENT SYSTEMS, INC.


         Pursuant to the provisions of Section 103(f) of the General Corporation
Laws of the State of Delaware,  the  undersigned,  being the  President  and the
Secretary  of  Augment  Systems   Incorporated,   a  Delaware  corporation  (the
"Corporation"), DO HEREBY CERTIFY:

         FIRST:   That  the  Certificate  of  Amendment  of  the   Corporation's
Certificate of Incorporation, filed with the office of the Secretary of State of
Delaware on October 30, 1996, contained an error, to wit:

         An amendment  to the  Corporation's  Certificate  of  Incorporation  to
effect a  .637343-for-one  reverse stock split of the  Corporation's  issued and
outstanding  shares of Common  Stock,  $.01 par value,  and shares  reserved for
issuance,  was  approved  by the  Board  of  Directors  and the  holders  of the
outstanding  capital stock of the Corporation  required to amend the Certificate
of  Incorporation,  but was  inadvertently  omitted  from  said  Certificate  of
Amendment. Therefore, paragraph FIRST of said Certificate of Amendment is hereby
corrected to read as follows:

                  "FIRST:  That,  by unanimous  written  consent of the Board of
Directors,  resolutions proposing amendments to the Certificate of Incorporation
of said Corporation to (a) change the name of the Corporation,  (b) increase the
number of authorized  shares of Common Stock, $.01 par value and (c) to effect a
 .637343-for-one  reverse stock split 




of the  Corporation's  issued and outstanding  shares of Common Stock,  $.01 par
value,  and shares  reserved for issuance,  were duly adopted and declared to be
advisable."

                  The resolution setting forth the amendment is as follows:

"RESOLVED:          That there be, and  hereby  is,  declared a  .637343-for-one
                    reverse  stock split of the  Corporation's  shares of Common
                    Stock,  $.01 par value,  issued and outstanding and reserved
                    for  issuance  immediately  prior  to  the  filing  of  this
                    Amendment  with  the  Secretary  of  State  of the  State of
                    Delaware;  provided,  however,  that  the par  value of said
                    Common Stock shall remain as $.01 per share."

         SECOND:  That all other  provisions  contained in said  Certificate  of
Amendment  are  ratified,  confirmed and approved in all respects as of the date
hereof and are restated as follows:

                  AUGMENT  SYSTEMS  INCORPORATED,  a  corporation  organized and
existing  under  and by virtue of the  General  Corporation  Law of the State of
Delaware, DOES HEREBY CERTIFY:

                  SECOND:  That, in  accordance  with Section 228 of the General
Corporation Law of the State of Delaware, the holders of the outstanding capital
stock of the Corporation  required to amend said  Certificate  voted, by written
consent  dated  October 21, 1996, to approve such  amendments.  The  resolutions
setting forth the amendments are as follows:

RESOLVED:         That the name of the  Corporation  be  changed  from  "Augment
                  Systems  Incorporated"  to "Augment  Systems,  Inc."; and that
                  Article 1 of the  Corporation's  Certificate of Incorporation,
                  as amended,  be amended by deleting  said Article 1 thereof in
                  its entirety and substituting the following therefor:

                           "1.  The name of the  Corporation  shall  be  Augment
                  Systems, Inc."

FURTHER
RESOLVED:         That the number of shares of Common Stock, $.01 par value that
                  the  Corporation  shall have  authority  to issue be increased
                  from Fifteen  Million  (15,000,000)  shares to Thirty  Million
                  (30,000,000);   and  that  Article  4  of  the   Corporation's
                  Certificate  of  Incorporation  be  amended by  deleting  said
                  Article  4  thereof  in  its  entirety  and  substituting  the
                  following therefor:






                           "4.  The  total  number of all  classes  of shares of
                  stock which the  corporation  shall have authority to issue is
                  thirty-two million (32,000,000)  shares,  consisting of thirty
                  million  (30,000,000)  shares of Common Stock with a par value
                  of One Cent  ($.01) per  share,  and two  million  (2,000,000)
                  shares of Preferred  Stock with a par value of One Cent ($.01)
                  per share,  amounting in the aggregate to Three Hundred Twenty
                  Thousand Dollars ($320,000.00).

                           "The   designations   and  powers,   the  rights  and
                  preferences   and   the    qualifications,    limitations   or
                  restrictions  with  respect  to each  class  of  stock  of the
                  corporation  shall be as  determined by the Board of Directors
                  from time to time."

                  THIRD: That said amendment was duly adopted in accordance with
the  provisions  of Sections 242 and 228 of the General  Corporation  Law of the
State of Delaware.



                        [SPACE INTENTIONALLY LEFT BLANK]





                  IN WITNESS WHEREOF,  said AUGMENT SYSTEMS,  INC. has caused it
corporate  seal to be  hereunto  affixed  and this  certificate  to be signed by
Lorrin Gale, its President and Duane A. Mayo,  its  Secretary,  this 23rd day of
April, 1997.

                                                 AUGMENT SYSTEMS, INC.



        [SEAL]
                                                 By: /s/ Lorrin Gale
                                                    ------------------------
                                                    Lorrin Gale, President


  /s/ Duane A. Mayo
 ------------------------
 Duane A. Mayo, Secretary







                                                                   EXHIBIT 10.19

                                 PROMISSORY NOTE

$200,000                                                             May 6, 1997



     FOR VALUE  RECEIVED,  the  undersigned  Augment  Systems,  Inc., a Delaware
corporation  (the  "Company"),  hereby  promises  to pay to the order of Venture
Management  Consultants, LLC, a Massachusetts  limited liability company located
at 60 Wells  Avenue,  Newton,  MA 02159  (the  "Holder"), on June 30,  1998 (the
"Maturity  Date"),  in lawful  money of the  United  States  and in  immediately
available funds, the principal amount of Two Hundred Thousand Dollars ($200,000)
together with interest on the unpaid balance of said principal  amount from time
to time outstanding at the rate of eighteen  percent (18%) per annum;  provided,
however,  that the Company shall have the right to prepay all or any part of the
principal  of this Note at any time and from  time to time  without  premium  or
penalty.

     If  the  Maturity  Date  is on a  Saturday,  Sunday  or  legal  holiday  in
Massachusetts  on which banks are  authorized  or required by law to close,  the
maturity  date of this Note shall be  extended to the next  succeeding  business
day.

     This Note  shall be paid in full,  without  premium  but with all  interest
accrued  thereon,  in  the  event,  and  on  the  date,  that  the  Company  (i)
consolidates or merges with another  corporation in which the Company is not the
surviving  corporation or in which more than 50% of the equity  ownership of the
Company has been transferred or (ii) effectuates a closing of the sale of all or
substantially all of the assets or substantially  all of the outstanding  common
stock of the Company.

     In the  event of a default  as  defined  in the  succeeding  sentence,  the
Company shall  reimburse the Holder for all reasonable  out-of-pocket  expenses,
including  attorneys' fees,  incurred in enforcing or attempting to enforce this
Note.  For the  purpose  of this  Note,  a default  shall,  at the option of the
Holder,  be deemed to exist upon the  occurence of one or more of the  following
events:

      i. if the Company shall fail to pay the  principal and interest  after the
         same has become due and payable;

      ii.if the  Company  shall take any  voluntary  action or be subject of any
         involuntary  action  seeking  bankruptcy,   insolvency  administration,
         receivership,  dissolution  or other similar action or shall suffer any
         such similar action without  obtaining  dismissal of such action within
         obtaining  dismissal of  such action within forty-five (45) days of the
         taking thereof.

     This Note shall inure to the benefit of the Holder and its  successors  and
assigns,  provided that this Note shall not be transferred  or assigned  without
the prior  written  consent of the Company.  This Note shall be binding upon the
Company  and any  successor  to its  business,  whether by merger of  otherwise.
Subject to applicable law, this Note may be amended,  modified and  supplemented
only by written agreement of both the Company and Holder.





     No delay or  omission  on the part of the  Holder in  exercising  any right
hereunder  shall operate as a waiver of such right or of any other right of such
Holder, nor shall any delay, omission, or waiver on any one occasion be deemed a
bar to or waiver  of the same or any other  right of any  future  occasion.  The
Company  waives  presentment,  demand,  protest  and  notice  of  every  kind in
connection with the enforcement and collection of this Note.

     The execution,  delivery and  performance of this Note shall be governed by
and construed in accordance with the laws of the Commonwealth of Massachusetts.

     Executed as a sealed instrument as of the date set forth above.


                                                  AUGMENT SYSTEMS, INC.

                                                  By: /s/ Duane A. Mayo
                                                     -----------------------
                                                      Duane A. Mayo
                                                      Treasurer and Secretary




                                                                    EXHIBIT 23.1


              Consent of Independent Certified Public Accountants




Augment Systems, Inc.
Westford, Massachusetts

We  hereby  consent  to the use in the  Prospectus  constituting  a part of this
Registration Statement of our report dated February 20, 1997, except for Note 15
which is as of May 8, 1997,  relating  to the  financial  statements  of Augment
Systems,  Inc.,  which is contained in that  Prospectus.  Our report contains an
explanatory  paragraph  regarding the  Company's  ability to continue as a going
concern.

We also  consent  to the  reference  to us under the  caption  "Experts"  in the
Prospectus.
                                                                         

                                                                BDO Seidman, LLP



Boston, Massachusetts
May 9, 1997





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