IA CORP, 10-K405, 1998-03-31

IA CORP
10-K405, 1998-03-31
PREPACKAGED SOFTWARE

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<PAGE>

To our Valued Stockholders:

Although 1997 has been a challenging year, it has been successful for IA
Corporation. The financial services industry continues to undergo tremendous
change. Its preoccupation with consolidation and Year 2000 problems has led to
delays in undertaking new client-server software initiatives, affecting the
timing of orders to vendors serving the industry.

In spite of this difficult market environment, IA Corporation had a
profitable year with sustained revenues and ending the year with record fourth
quarter revenues and increasing license fees. We added seven new customers and
now have approximately a quarter of the top 100 U.S. banks and two leading
brokerage companies as our customers. This is a key asset of the company given
the formidable barrier to entry in the financial services industry.

Operationally, the latest release of the CheckVision Archive was put into
production use by Comerica. Customers' comments reflect how highly they value
the Company's applications:

"IA software is allowing us to once again break a barrier in providing
more all-encompasing information to our customers, both internal and
external."--SIGNET BANK.

"IA has software with the highest potential for us to offer new products
and services to our corporate customers."--WACHOVIA.

IA Corporation is already the market share leader in bank check transaction
archives and we believe that our archive-centric applications are the engine
for growth. We are now expanding our market presence by addressing the
international financial services market through a global alliance with NCR.
Additionally, the RemitVision integrated retail/wholesale lockbox processing
software platform is now in production use by customers at many operational
sites giving IA Corporation the opportunity to expand its customer base in
this area.

We continue to be upbeat about the future. The financial services industry
will be investing heavily in technology. Given our Company's superior
technology, deep understanding of the financial services industry, our
excellent reputation for execution and our solid customer base, our Company is
in an enviable position to exploit this marketplace. IA Corporation is well
positioned to provide the sophisticated software and services demanded by the
leading companies in the financial services industry.

/s/ C.V. RAVI

C.V. RAVI
Chairman, President and Chief Executive Officer
April 1, 1998
<PAGE>

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------
FORM 10-K

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

For the fiscal year ended December 31, 1997

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

For the transition period from to
------------ ------------

COMMISSION FILE NUMBER 00021539

IA CORPORATION I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 94-3161772
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

1900 POWELL STREET, SUITE 600
EMERYVILLE, CALIFORNIA 94608
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 450-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Common Stock, $.01 par value
(TITLE OF CLASS)

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

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

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

The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 24, 1998 was approximately $9,866,997 based upon the
last sales price reported for such date on the NASDAQ Stock Market. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than -% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is not necessarily
conclusive.

At March 24, 1998, registrant had outstanding 11,486,183 shares of Common
Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III of this Form 10-K is incorporated by
reference to the definitive proxy statement for the annual meeting of
stockholders of the Company which will be filed no later than 120 days after
December 31, 1997.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

IA CORPORATION I

1997 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I................................................................... 3
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II.................................................................. 16
Item 5. Market for the Registrant's Common Stock and Related
Stockholders Matters........................................ 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 23
PART III................................................................. 24
Item 10. Directors and Executive Officers of the Registrant.......... 24
Item 11. Executive Compensation...................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 24
Item 13. Certain Relationships and Related Transactions.............. 24
PART IV.................................................................. 25
Item 14. Exhibits and Financial Statement Schedules.................. 25
</TABLE>

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PART I

This report contains certain forward-looking statements, which involve risks
and uncertainties, including statements regarding the Company's strategy,
financial performance and revenue sources. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of certain factors set forth under "Item 1, Business --
Risk Factors" and elsewhere in this report.

ITEM 1. BUSINESS

IA Corporation I (the "Company") develops, markets, implements and supports
application software solutions for financial service institutions. The
Company's software applications leverage the value of archived transaction
information enabling financial institutions to generate additional revenues,
obtain operational cost savings and extract important marketing data. The
Company currently sells two comprehensive software application frameworks,
CheckVision(R) and RemitVision(R), that are built upon the Company's
transaction archive and information management platform. The Company deploys
its application software products through professional services that include
software customization, software development services, and integration with
legacy systems, installation, training and maintenance. The Company's
customers include two leading U.S. brokerage firms and 20 of the 100 largest
banks in the U.S.

INDUSTRY BACKGROUND

The Company's products serve the financial services industry. Since
deregulation, financial services firms face significant new challenges in
their quest to survive, grow and maximize shareholder value. These challenges
present sales opportunities for the Company's application software products
and related services. To survive and grow, financial services firms must not
only differentiate what are essentially commodity products from their
competitors' offerings, but also deliver their products to a customer base
that is geographically larger and demographically more varied than ever
before. Financial services firms must also enter new markets in addition to
offering new products, and must deliver their services and products through
existing as well as new distribution channels; such initiatives depend on the
firms' abilities to accurately define and exploit markets, products, and
channels by using its accumulated information. Customers increasingly demand
information that is tailored to their individual needs in kind, variety,
relevance, accuracy, timeliness and comprehensiveness; and customers demand
that this information is delivered through solutions which embody current
technology. In this era of consolidations, financial services firms also need
to integrate their post-merger operations efficiently while simultaneously
improving and enhancing customer service. The financial services industry has
been investing heavily in technology; the Tower Group has projected that
spending by U.S. banks on new technology will increase from $3.5 billion in
1995 to nearly $7 billion by the year 2000.

THE IA SOLUTION

A key component of a successful strategy for today's financial services
firms is to exploit the value of their archived transaction information over
the lifetime of such information, and to do so efficiently and effectively.
This requires a variety of applications working with very large repositories
of transaction information. Some of these applications exploit this
information to provide saleable products and services that generate additional
revenues for the financial institution over the entire life span of the
archived information while other applications enable operational cost savings.

To achieve the desired outcome, the applications must be able to readily
access information elements that were created at different times, sources and
locations for different purposes, and to consolidate and integrate them
seamlessly to serve different information needs at different occasions in a
continuum over time, far into the future. The Company's archive-centric
integrated application software products do just that, and the Company's
transaction archive stores all information in electronic form. The Company's
technology represents a major advance over solutions that are narrowly
specialized by source, format, purpose, time domain covered, vendor, or
environment. The incompatible and isolated islands of information created by
these applications--often

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mirrored in firms' business structures--cannot satisfy the modern financial
services firms' information needs, whether for business growth, increased
customer satisfaction or operational efficiency.

The Company offers its customers an end-to-end solution (see Figure 1.1),
consisting of software application frameworks built on a proven base of
technology, software customization services and professional implementation
services. IA's software platform represents the Company's cumulative
investment and expertise in managing and archiving very high volumes of
transaction information. Its application frameworks, which embed the Company's
accumulated knowledge of the financial services industry, are the result of
cumulative investments over time by the Company and its industry development
partners. The Company's professional services enable its customers to move
rapidly toward achieving their strategic objectives by providing pre-sale
consultation, installation, integration, training, maintenance, and
development services.

[GRAPHIC DEPICTING IA'S COMPLETE SOLUTIONS APPEARS HERE]

FIGURE 1.1. IA'S COMPLETE SOLUTIONS

THE IA STRATEGY

The Company's strategy is to continue to expand, extend, and enhance its
suite of software applications that are integrated with the Company's high-
volume, high-performance transaction archive. Successful application solutions
require deep knowledge of the financial services industry that the Company has
built up over the years and which continues to increase. The Company believes
that its archive-centric applications are the engine for its growth in serving
the financial services industry. The Mentis Group has reported that the
percentage of institutions with more than $4 billion in assets that currently
support or plan to support image-based archives will increase by 87%, from 31%
at end of 1997 to 58% at end of 1998. The Company has begun to address the
international financial services market through a global alliance with NCR,
described in the section "Sales, Marketing, and Distribution". The Company's
products have leveraged the rapidly declining costs of electronic storage
products: buying a terabyte repository is not a major financial issue for the
Company's typical customer today. The Company's applications products enable
its customers to utilize archived information such as checks and electronic
transactions, financial statements prepared for the firms' customers, Interred
transactions, and a wide variety of other information, including credit
documents. The Company's customers leverage the value of their rapidly growing
archives of on-line transaction information by harnessing it for a broad range
of purposes over its entire useful lifetime.

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<PAGE>

PRODUCTS

The Company currently sells two application framework software products,
CheckVision and RemitVision, which are built upon the Company's transaction
management and information archive platform. CheckVision consists of the
CheckVision Archive and a suite of applications while RemitVision is a suite
of applications for integrated retail/wholesale lockbox processing connected
to an archive.

Details of transactions including images are stored in the CheckVision
Archive. Any specific application generates value from this stored information
during various time intervals. Also, some applications allow a bank to offer
new products that generate revenues while other applications reduce
operational costs.

SERVICES

The Company provides professional services to install its application
software solutions at the customers' operational sites, to interface solutions
to the customers' operating environments, which usually include legacy
applications, and to support the customers' information technology departments
with various application-related tasks. In addition to its internally funded
product development programs, the Company undertakes customer-funded
development of enhancements or modifications to its application products that
are desired by a particular customer whose specific requirements exceed the
functions or features of the market product. The Company also undertakes large
application development contracts for customers who request custom application
solutions in order to achieve a particular business objective.

The Company offers support contracts, for an annual fee, to customers who
have entered into license agreements for the use of the Company's software
products. In addition to standard software maintenance services, the Company
offers several levels of technical support service: a choice of hours of
coverage for telephone support, remote diagnostics or on-site support. In
addition to the standard training that is included in the installation
services, the Company offers advanced training in its software platform and
application framework technology.

CUSTOMERS

The Company's customers are mainly large U.S. banks as well as two large
brokerage houses. The customers listed below have signed contracts providing
for revenues to the Company of at least $100,000:

ABN AMRO KeyCorp
Bank of Oklahoma Mellon Bank Corporation
Bank of the West Merrill Lynch
Citibank National City Bank
Comerica NationsBank
CoreStates Sanwa Bank of California
Crestar Signet Bank
EDS New Zealand SouthTrust
Fidelity Investments The Northern Trust Company
First Union National Bank UMB Bank
Fleet Bank Union Bank of California
GE Capital Wachovia
Harris Bank Wells Fargo Bank

SALES, MARKETING AND DISTRIBUTION

The Company sells and distributes its application software products through
a combination of direct sales, a global alliance, and joint marketing
agreements. The Company's direct sales organization, which targets large U.S.
banks, is managed from the Company's headquarters in California. Field sales
and application specialists, based at regional offices, cover the
northeastern, southeastern, and central states. Sales and application
specialists

5
<PAGE>

based at the Company's headquarters cover the western states. In 1996 the
Company entered into an agreement with NCR Corporation for distribution of
IA's CheckVision products to the U.S. banks not targeted by the Company's
direct sales force. In 1997 NCR and the Company expanded their relationship
into a global strategic alliance for the worldwide sale and distribution of
the Company's CheckVision archive and application products under NCR's
ImageMark label, and for joint product development activities. This
nonexclusive agreement, signed in July 1997, guarantees the Company royalties
of at least $1 million annually for 10 years. The Company provides technical
application sales support to NCR and is training NCR in product deployment and
product support. In December 1997 the Company received its first royalty
commitment from NCR for archive applications to be delivered to EDS New
Zealand. CheckVision is a key enabling technology for EDS's outsourcing
contract to automate that country's check clearing system. The Company has
entered into joint marketing partnership agreements for its application
software products with Oracle, StorageTek, and CheckFree. These leading firms
sell complementary products to the same target market as the Company and have
significant account presence among the Company's targeted customers.

COMPETITION

The Company's competitors vary in size and in scope and breadth of the
software products and services offered. The Company competes with various
companies, including: (i) a number of private companies and certain public
companies which offer software products targeted at one or more specific
market segments such as BancTec, Fiserv, IBM, NCR and Unisys; (ii) the
internal information technology departments of potential customers which
develop proprietary customer information solutions; and (iii) a number of
companies, such as IBM targeting the enterprise-wide information systems
market. In particular, with respect to its CheckVision software products the
Company competes with IBM and Fiserv, and with respect to its RemitVision
software products the Company competes with BancTec, TRW and Unisys. Among the
Company's potential competitors are also a number of large hardware and
software companies that may develop or acquire software products that compete
with the Company's software products. In competing with hardware vendors, the
Company may be at a competitive disadvantage because hardware vendors are able
to package and discount sales of software bundled with hardware to allow the
customer the opportunity to deal with a single vendor.

INTELLECTUAL PROPERTY AND LICENSING

The Company's success depends upon its proprietary technology. The Company
relies on a combination of copyright, patent, trademark and trade secret laws,
confidentiality procedures, and licensing arrangements to establish and
protect its proprietary rights. The Company presently has four patents. While
the Company's current software products are not dependent on these patents,
such patents may be utilized in future software products. As part of its
confidentiality procedures, the Company generally enters into non-disclosure
agreements with its employees, distributors and corporate partners, and limits
access to and distribution of its software products, supporting documentation
and other proprietary information. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
software products or technology without authorization, or to develop similar
technology independently. In addition, effective protection of intellectual
property rights is unavailable or limited in certain foreign countries where
the Company has in the past and may in the future license its software
products. There can be no assurance that the Company's protection of its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology, duplicate the Company's software
products or design around any intellectual property rights upon which the
Company's business is now or may in the future be dependent.

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<PAGE>

which could have a material adverse effect on the Company's business,
operating results and financial condition. Such claims might require the
Company to enter into royalty or license agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the
Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.

The Company's products incorporate certain software that it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's software products to perform key functions.
There can be no assurance that such firms will remain in business, that they
will continue to support their software products, or that their software
products will otherwise continue to be available to the Company on
commercially reasonable terms. The Company believes that substantially all of
the software it licenses is available from vendors other than the Company's
current vendors, or could be developed internally by the Company, and could
therefore be replaced with equivalent software in a timely manner. However, it
is possible that the loss or inability to maintain any of these software
licenses could result in delays or reductions in product shipments until
equivalent software can be developed, identified, licensed, and integrated,
which would adversely affect the Company's business, operating results, and
financial condition.

The Company typically licenses its software products in object code to
customers under nonexclusive, nontransferable license agreements. As is
customary in the software industry, the Company does not sell or transfer
title of its software products to customers. In addition, the Company escrows
the applicable source code as part of its maintenance program, pursuant to
which the Company's source code will be released to the customer upon the
occurrence of certain events, such as the commencement of bankruptcy or
insolvency proceedings by or against the Company, or certain material breaches
of the agreement. In the event of any release of the source code from escrow,
the customer's license is generally limited to use of the source code to
maintain, support and enhance the Company's software products for the
customer's own use. Licenses for the Company's software products are usually
perpetual. Under the Company's standard form license agreement, the annual
software maintenance fee is based on a percentage of the applicable product
license fee. The Company's published product license price list includes
discounts for multiple sites and/or multiple copies of client viewer software,
and where applicable, upgrade fees for increases in the volume of processed
transactions.

EMPLOYEES

As of December 31, 1997, the Company employed 138 persons, including 24 in
sales and marketing; 100 in product development, delivery, and support; and 14
in general and administrative positions. None of the Company's employees is
represented by an organized association. The Company has experienced no work
stoppages and believes that its relationship with its employees is good.
Competition for qualified personnel in the software segment in which the
Company competes is intense. The Company believes that its future success will
depend in part on its continued ability to attract, hire, and retain qualified
personnel.

EXECUTIVE OFFICERS AND DIRECTORS

The following table set forth certain information as of December 31, 1997,
with respect to each person who is an executive officer or director of the
Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Chakravarthi V. Ravi........ 54 President, Chief Executive Officer and
Chairman of the Board
David M. Winkler............ 53 Chief Financial Officer, Vice President and
Secretary
William E. Guthrie.......... 55 Vice President, Sales
Geraldine McGrath........... 48 General Counsel
Henry Kressel (1)........... 64 Director
Stewart Gross (1) (2)....... 38 Director
John Oltman (2)............. 52 Director
Randy Katz (2).............. 42 Director
</TABLE>
- --------
(1) Compensation Committee member
(2) Audit Committee member

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Dr. Ravi was a founder of the Company and has been the Chairman, President
and Chief Executive Officer of the Company since its inception in July 1992.
Dr. Ravi was President of Litton Industries' Integrated Automation Division,
the Company's predecessor, from August 1990 to July 1992. From 1978 to July
1990, Dr. Ravi worked for Teknekron Controls Inc. and Integrated Automation in
a number of positions in general management, sales and marketing, strategic
planning, software design and implementation of high technology systems. Prior
to 1978, he was an Assistant Professor in the Electrical Engineering and
Computer Science Department of the University of California at Berkeley
specializing in computer architecture, software and telecommunications. Dr.
Ravi received an M.S. and Ph.D. in Electrical Engineering and Computer Science
from the University of California at Berkeley and a B.Tech (Hons.) in
Electrical Engineering from the Indian Institute of Technology in Bombay,
India.

Mr. Winkler was a founder of the Company and has been Chief Financial
Officer and Vice President of the Company since its inception in July 1992.
Mr. Winkler was Chief Financial Officer and Vice President of Litton
Industries' Integrated Automation Division from December 1989 to July 1992.
Prior to December 1989, Mr. Winkler held management responsibilities for
finance and accounting, management information systems, human resources,
facilities, administrative services, and program management with Litton
Amecom, Litton Data Command Systems, and Litton Saudi Arabia Limited, all of
which are computer hardware companies. Mr. Winkler holds a B.S. in Mechanical
Engineering from the University of Notre Dame.

Mr. Guthrie has been with the Company since its inception in July 1992, and
currently serves as Vice President, Sales. Mr. Guthrie was a Regional Sales
Director of Litton Industries' Integrated Automation Division from October
1989 to July 1992. Prior to October 1989, Mr. Guthrie was a Regional Manager
for Prime Computer, a computer manufacturing company, with responsibility for
sales within the Los Angeles region and also held sales management positions
at IBM with responsibilities in the financial services industry. Mr. Guthrie
earned an M.B.A. from Georgia State University and a B.S. in engineering from
the United States Military Academy.

Ms. McGrath has served as General Counsel of the Company since its inception
in July 1992. From August 1987 until July 1992, Ms. McGrath served as Litton
Industries' Integrated Automation Division Counsel and Assistant Secretary.
Ms. McGrath served as General Counsel and Assistant Secretary for Integrated
Automation, Inc., a predecessor for the Company, from June 1986 until August
1987. Ms. McGrath holds a B.A. from San Francisco State University and a J.D.
from San Francisco Law School and is a member of the American Arbitration
Association's Arbitrator and Mediator panels.

Dr. Kressel has served as a director of the Company since its inception in
July 1992. Dr. Kressel, a partner of Warburg, Pincus & Co., the general
partner of Warburg, Pincus Investors, L.P., and a managing director of E.M.
Warburg, Pincus & Co., LLC has been with E.M. Warburg, Pincus & Co., LLC since
1983. Dr. Kressel serves as a director of Level One Communications, Inc.,
TresCom International, Inc., NOVA Corporation, Inc. and several privately held
companies.

Mr. Gross has served as a director of the Company since November 1997. Mr.
Gross, a partner of Warburg, Pincus & Co., the general partner of Warburg,
Pincus Investors, L.P., and a managing director of E.M. Warburg, Pincus & Co.,
LLC, has been with E.M. Warburg, Pincus & Co., LLC since 1987. Mr. Gross is a
Director of BEA Systems, Inc., TSI International Software Ltd., Vanstar
Corporation and several private companies.

Mr. Oltman has served as a director of the Company since March 1996. Mr.
Oltman is the former chairman of the board and chief executive officer of SHL
Systemhouse Inc., a company that provides client/server consulting and
integration services. Mr. Oltman was formerly Worldwide Managing Partner for
Integration Services for Andersen Consulting and a member of Andersen
Consulting's Worldwide Organization Board of Directors. Mr. Oltman serves as a
director of Vanstar and a privately held company.

Dr. Katz has served as a director of the Company since January 1997. Dr.
Katz is the Chairman of the Electrical Engineering and Computer Science
Department at the University of California, Berkeley, and has been

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a professor at UC Berkeley for 17 years. Dr. Katz is responsible for the
creation of a number of multiprocessing features used in the software industry
today, including the revolutionary high performance storage technology RAID
(Redundant Arrays of Inexpensive Disks).

RISK FACTORS

The discussion in this report contains forward-looking statements that
involve risks and uncertainties, including statements regarding the Company's
strategy, financial performance and revenue sources. The Company's actual
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as those discussed
elsewhere in this report.

No Assurance of Profitability. The Company has incurred significant net
losses since its inception, including losses of $1.3 million and $3.9 million
for 1995 and 1994, respectively. At December 31, 1997, the Company had an
accumulated deficit of approximately $11.9 million. Although the Company
achieved net income of approximately $561,000 and $2.3 million for the years
ended December 31, 1997 and 1996, respectively, there can be no assurance that
the Company will have operating profits in any future period, and recent
operating results should not be considered indicative of future financial
performance. See " Item 6, Selected Financial Data" and "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Variability of Quarterly Operating Results. The Company's quarterly
operating results have varied in the past, and the Company expects quarterly
operating results to vary significantly in the future. The Company's revenues
and operating results are difficult to forecast and could be materially
adversely affected by many factors, some of which are outside the control of
the Company, including, among others, the relatively long sales and
implementation cycles of the Company's software products, the variable size
and timing of individual license transactions, the timing of revenue
recognized under the percentage-of-completion method, increased competition,
the timing of new product releases by the Company and its competitors, market
acceptance of the Company's software products, delay or deferral of customer
implementation of the Company's software products, software defects or other
quality problems with the Company's software products, changes in the
Company's and its competitors' pricing policies, the mix of license and
service revenue, budgeting cycles of the Company's customers, the introduction
of indirect sales into the Company's revenue mix which could result in lower
gross margins, changes in operating expenses, changes in Company strategy,
personnel changes and general economic factors. In addition, the Company is in
the process of transitioning from providing software development services to
developing and selling software products, which entails a number of risks,
including potential declines in revenue and the need to develop the
appropriate sales, marketing and software production and distribution
infrastructure. Further, because the Company's orders range in size from
several hundred thousand dollars to several million dollars, any deferral or
cancellation of an expected new order, termination of, or delay in completion
of, an existing large application development contract may have a significant
impact on quarterly operating results. For example, the Company had lower than
anticipated revenues and profits from RemitVision customers in the quarters
ended June 30, September 30 and December 31, 1997. In addition, in the event
of any downturn in any potential customer's business or the economy in
general, purchases of the Company's software products may be deferred or
canceled. The Company has had operating profits only in the quarters ended
March 31, 1995, 1996 and 1997, June 30, 1996, September 30, 1996 and 1997, and
December 31, 1996 and 1997. There can be no assurance that the Company will
have operating profits in future quarters or on an annual basis.

Due primarily to hardware requirements and customer site preparation, there
is typically a three to four months period between when a CheckVision customer
order is placed and the commencement of the Company's installation services.
The Company anticipates a six month to one year installation period for
RemitVision. Installation of the Company's software products requires the
cooperation of the Company's customers. To the extent the installation of the
Company's software products is delayed, the Company's recognition of revenue

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may be delayed, which could have a material adverse effect on the Company's
business, operating results and financial condition. In the past, the Company
has experienced product installation delays, which resulted in strained
customer relations. To date, the Company has been successful in resolving any
and all such issues. However, there is no assurance that the Company will
continue to be successful in similar situations. The failure to resolve
similar situations in the future could have an adverse effect on the Company's
operating results and could also adversely effect the Company's ability to
market its products. The Company's expense levels are based in part on its
expectations of future revenues. If revenue is below expectations, net income
may be disproportionately affected because a significant portion of the
Company's expenses does not vary with revenues. The Company's future operating
results could be adversely affected if revenues do not meet the Company's
expectations. The Company may also choose to reduce prices, increase spending
in response to competition or to pursue new market opportunities. In
particular, the Company's operating margins may be materially adversely
affected in the future if new competitors, technological advances by existing
competitors, other competitive factors, or the Company's failure to continue
to obtain software development contracts require the Company to invest
significantly greater resources in software product development efforts.

Because of the foregoing factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons should not be relied upon as indications of future
performance. Further, it is possible that in future periods the Company's
operating results may be below the expectations of public market analysts and
investors. In such an event, the price of the Company's Common Stock would
likely be materially adversely affected. See "--Risks Associated with
Transition to Software Product Business," "--Dependence on Growth of Market
for Client/Server Applications Software in the Financial Services Industry,"
"--Lengthy Sales Cycle".

Risks Associated with Transition to Software Product Business. When the
Company was formed in 1992, the Company shifted its strategy to focus
increasingly on deriving revenue from software products rather than from
system integration services. During the transition from providing software
development services to developing and selling software products, which is
still under way, a majority of the Company's total revenues has been derived
from the provision of services pursuant to large software development
contracts, certain of which provide the basis for the Company's software
products. The Company recognizes revenue from software development contracts
on the percentage-of-completion basis. Service revenue as a percentage of
total revenues for 1997, 1996 and 1995 was 50.5%, 48.0% and 57.9%,
respectively. To achieve revenue growth and improve operating margins, the
Company must continue to increase market acceptance and sales of the Company's
software products. As the Company becomes increasingly reliant upon software
product sales, it could experience a decline in total revenues if service
revenue declines more quickly than the Company can increase revenue from
software product sales. The Company must develop and enhance its sales and
marketing capabilities and software production and distribution infrastructure
as it continues the transition from a service business to a software product
business. There can be no assurance that the Company will be successful in
creating the necessary capabilities and infrastructure in a timely manner or
at all. Any significant failure by the Company to manage the transition
successfully would have a material adverse effect on the Company's business,
operating results and financial condition and would create significant
fluctuation in quarterly operating results. See "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Dependence on Development Services. To date, the majority of the Company's
total revenues have been derived from large application development contracts.
Although the Company's strategy is to reduce the percentage of its total
revenues from such contracts over time, the Company's total revenues for the
foreseeable future will continue to be substantially dependent upon its
ability to perform services under existing contracts and to attract new
customers to enter into such contracts. Furthermore, the Company has
historically used the research derived from its software development contracts
as the basis for its software products and anticipates that any future
software products will arise from new or existing software development
contracts. To the extent that the Company is unable to complete work on its
existing software development contracts or to attract new customers to enter
into such contracts, the Company's ability to develop new software products
will be materially adversely affected. In addition, to the extent the Company
is required to develop future software products without

10
<PAGE>

software development contracts, the Company's expenditures for software
product development will have to increase, which may materially adversely
affect operating margins. There can be no assurance that the Company will be
able to successfully complete work on its existing software development
contracts, that it will be able to attract new customers to enter into
software development contracts or that it will be able to develop new software
products based on the research undertaken in connection with new or existing
software development contracts, and any such failure would have a material
adverse effect on the Company's business, operating results and financial
condition. To the extent that the Company does develop new software products
based upon technology developed in connection with software development
contracts, the Company may have to expend substantial additional financial
resources on software product development, and there can be no assurance that
such software products will achieve market acceptance. In addition, upon
commercialization of any such software products, the Company has agreed under
certain circumstances in the past, and may in the future agree to pay
royalties to repay development expenses to the customer for whom the
development services were undertaken, and any such payments could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Reliance on Banking Industry; Need to Penetrate Additional Segments of the
Financial Services Industry. Currently, a substantial majority of the
Company's total revenue results from services and licenses provided to banks.
The Company's future operating results will depend in part on its ability to
penetrate additional segments of the financial services industry such as the
brokerage, insurance and credit card segments. While the Company may devote
substantial resources to penetrate these and other markets, there can be no
assurance that the revenues generated from this effort, if any, will exceed
the cost of such efforts. To be successful in expanding its product offerings
to market segments other than the banking industry, the Company will be
required to create new software products and to modify its existing software
products. There can be no assurance that it will be able to create or modify
such software products effectively or that such software products, if
successfully created or modified, will achieve market acceptance. To the
extent that the Company is unable to penetrate new markets, its future
financial condition will be dependent upon its ability to further penetrate
the banking industry. The current focus of the banking industry on mergers and
on year 2000 issues may impede the Company's ability to further penetrate this
industry. If the Company is unable to adapt its software products, or its
sales and marketing efforts to meet the needs of new markets, or if the
Company is unsuccessful in its efforts to further penetrate the banking
industry, the Company's business, operating results and financial condition
could be materially adversely affected.

Lengthy Sales Cycle. The Company's sales cycle is typically six to twelve
months and varies substantially from customer to customer. The Company
believes the purchase of its software products is discretionary and represents
a strategic decision requiring a significant capital investment by its
customers. As a result, purchase of the Company's software products generally
involves a significant commitment of management attention and resources by
prospective customers and requires multiple approvals. Accordingly, the
Company's sales are subject to a long approval process. The Company's
business, operating results and financial condition have been in the past, and
could be in the future, materially adversely affected if customers delay,
reduce or cancel orders. Such delays, reductions or cancellations may
contribute to significant fluctuations of quarterly operating results in the
future and may adversely affect such results.

Customer Concentration. To date the Company has been highly dependent on a
concentrated customer base. In 1997, 1996 and 1995, the Company's two largest
customers provided 24%, 34% and 45% of the Company's total revenue,
respectively. The Company's reliance on a concentrated base of customers has
been due primarily to the Company's dependence on large software development
contracts. The Company intends to continue to seek customer support for
strategic development projects that may yield additional software products and
expects that it may continue to experience a dependence on a few significant
customers for the foreseeable future. If the Company is unable to establish
relationships with additional significant customers and if the Company is
unable to increase revenues derived from the sale of software products as a
percentage of total revenues, the Company's business, operating results and
financial condition could be materially adversely affected.

11
<PAGE>

Rapid Technological Change and Dependence on New Software Products. The
market for the Company's software products is characterized by rapid
technological developments, evolving industry standards and rapid changes in
customer requirements. The introduction of competitive software products
responding to these trends could render the Company's existing software
products obsolete and unmarketable. As a result, the Company's success depends
upon its ability to continue to enhance its existing software products,
respond to changing customer requirements and develop and introduce in a
timely manner new software products that keep pace with technological
developments and emerging industry standards. Customer requirements include,
but are not limited to, operability across distributed heterogeneous and
changing hardware platforms, operating systems, relational databases and
networks. For example, as more of the Company's customers start to utilize
Microsoft NT or adopt other emerging operating systems on server platforms, it
may be necessary for the Company to optimize the operation of the Company's
software products on such platforms in order to maintain its competitive
ability. There can be no assurance that the Company's software products will
achieve market acceptance, or will adequately address the changing needs of
the marketplace, or that the Company will be successful in developing and
marketing enhancements to its existing software products, or new software
products incorporating new technology on a timely basis. If the Company is
unable to develop and introduce new software products, or enhancements to
existing software products, in a timely manner to adequately address changing
market conditions or customer requirements, the Company's business, operating
results and financial condition will be materially adversely affected.

The Company has a number of ongoing software development projects. The
Company expects to release enhancements to its CheckVision and RemitVision
products, as well as a new software product. The Company's objective is to
increase the portion of the Company's total revenues derived from these
software products. There can be no assurance the Company will release these
enhancements in a timely manner or at all, or that the features these enhanced
software products include will be features required to achieve market
acceptance. The Company's product development programs have been delayed in
the past and the Company has recently experienced delays in the development of
RemitVision. The Company had lower than anticipated profits due to delays in
RemitVision contracts. The inability of the Company to complete and
successfully install upgraded versions of RemitVision would materially
adversely affect the Company's business, operating results and financial
condition. The failure of the Company's software products to achieve broader
market acceptance and increased sales could have a material adverse effect on
the Company's business, operating results and financial condition. See "--
Year 2000 Compliance"

Risk of Software Defects and Product Liability. Software products as complex
as those offered by the Company may contain errors that may be detected at any
point in the software products' life cycles. The Company has in the past
discovered software errors in certain of its software products and has
experienced delays in shipment of software products during the period required
to correct these errors. There can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be found,
resulting in loss of, or delay in, market acceptance and diversion of
development resources, injury to the Company's reputation, or increased
service and warranty costs, any of which could have a material adverse effect
on the Company's business, operating results and financial condition.

The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. The Company's software products are generally used to manage
data that is critical to an organization, and, as a result, the sale and
support of software products by the Company may entail the risk of product
liability claims. A liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.

Competition. The Company's competitors vary in size and in scope and breadth
of the software products and services offered. The Company competes with
various companies, including: (i) a number of private companies and certain
public companies which offer software products targeted at one or more
specific market segments such as BancTec, Fiserv, IBM, NCR and Unisys; (ii)
the internal information technology departments of potential customers which
develop proprietary customer information solutions; and (iii) a number of

12
<PAGE>

companies, such as IBM and TRW targeting the enterprise-wide information
systems market. In particular, with respect to its CheckVision software
products the Company competes with IBM and Fiserv, and with respect to its
RemitVision software products the Company competes with BancTec, TRW and
Unisys. Among the Company's potential competitors are also a number of large
hardware and software companies that may develop or acquire software products
that compete with the Company's software products. In competing with hardware
vendors, the Company may be at a competitive disadvantage because hardware
vendors are able to package and discount sales of software bundled with
hardware to allow the customer the opportunity to deal with a single vendor.

Many of the Company's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and larger customer bases, than
the Company. The Company's current and future competitors could introduce
software products with more features, higher scalability, greater
functionality and lower prices than the Company's software products. These
competitors could also bundle existing or new software products with other,
more established software products in order to compete with the Company.
Moreover, as the client/server solutions market develops, a number of
companies with significantly greater resources than the Company could attempt
to increase their presence in this market by acquiring or forming strategic
alliances with competitors or business partners of the Company. Further,
because there are relatively low barriers to entry for the software market,
the Company expects additional competition from other established and emerging
companies. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, operating results and financial
condition. Any material reduction in the price of the Company's software
products would negatively affect gross margins. There can be no assurance that
the Company will be able to provide software products that compete favorably
with the software products of the Company's competitors or that competitive
pressures will not require the Company to reduce its prices. The Company's
failure to provide competitive products will have a materially adverse effect
on the Company's business, operating results and financial condition. See
"Item 1, Business--Industry Background and --Competition."

Dependence on Growth of Market for Client/Server Applications Software in
the Financial Services Industry. Substantially all of the Company's current
business is in the market for client/server solutions and services for check
transaction archives and applications and remittance processing applications
in the banking industry, which is still an emerging market and which is highly
fragmented and subject to rapid change. The Company's future financial
performance will depend in large part on continued growth in the number of
companies in the financial services industry adopting client/server technology
and systems solutions requiring the software products provided by the Company.
There can be no assurance that the market for client/server software products
and services provided by the Company will continue to grow. If the
client/server software and services market segment in which the Company
operates fails to grow, or grows more slowly than the Company currently
anticipates, the Company's business, operating results and financial condition
would be materially adversely affected. See "Item 1, Business--Industry
Background."

Risks Associated with Expanding Distribution. To date, the Company has sold
its software products primarily through its direct sales force. The Company's
ability to achieve significant revenue growth in the future will depend in
large part on its success in recruiting and training sufficient direct sales
personnel and on its ability to successfully establish other distribution
channels. The Company plans to augment its direct sales force by establishing
indirect distribution channels, including the development of joint marketing
relationships with firms that have a large market presence or sell
complementary software products. The Company is in the early stage of a new
global strategic alliance with NCR and the early stage of other indirect
channels, and there can be no assurance that the Company's efforts in this
regard will be successful. There can be no assurance that the Company will be
able to successfully expand its direct sales force or indirect channels or
that any such expansion will result in any substantial increase in revenues.
Any failure by the Company to expand its direct sales force or other
distribution channels could materially adversely affect the Company's
business, operating results and financial condition. See "--Dependence on and
Need to Hire Additional Key Personnel," "Item 1, Business--Strategy" and "Item
1, Business--Sales and Marketing."

13
<PAGE>

Year 2000 Compliance. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. If the Company's internal
systems do not correctly recognize date information when the year changes to
2000, there could be an adverse impact on the Company's operations. The
Company has completed an assessment and does not believe that it will be
required to modify or replace significant portions of its software so that its
internal computer systems will function properly with respect to dates in the
year 2000 and thereafter. The Company is contacting its critical suppliers of
products and services to determine that such suppliers' operations and the
products and services they provide to the Company are Year 2000 capable. There
can be no assurance that the failure of one of the Company's suppliers to
ensure appropriate Year 2000 capability would not have an adverse effect on
the Company. The Company has also assessed the capability of its products sold
to customers and believes that the likelihood of a material adverse impact due
to contingencies related to the Year 2000 issue for the product it has sold is
remote. There can be no assurance, however, that the Company's software
products contain all necessary software for Year 2000 compatibility. If any of
the Company's licensees experience Year 2000 problems, such licensees could
assert claims for damages against the Company. Any such litigation could
result in substantial costs and diversion of the Company's resources, even if
ultimately decided in favor of the Company. In addition, many companies are
expending significant resources to correct their software systems for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase new software products such as those offered by the Company. The
occurrence of any of the foregoing could have a material adverse effect on the
Company's business, financial condition and results from operations.

Management of Expanding and Changing Operations. The Company's growth and
transition have placed significant demands on the Company's management,
operational and technical resources. Such growth and transition are expected
to continue to challenge the Company's sales, marketing, technical and support
personnel and senior management. The Company's future performance will depend
in part on its ability to manage expanding domestic operations and to adapt
its operational systems to respond to changes in its business. The Company is
in the process of transitioning from providing software development services
as a software developer to developing and selling software products, which
entails a number of risks, including potential declines in revenue and the
need to develop the appropriate sales and marketing capabilities and software
production and distribution infrastructure. There can be no assurance that the
Company will be successful in creating the necessary capabilities and
infrastructure in a timely manner or at all. Any failure of the Company to
manage the transition successfully could have a material adverse effect on the
Company's business, operating results and financial condition. The failure of
the Company to effectively manage its growth could have a material adverse
effect on the Company's business, operating results and financial condition.
See "--Risks Associated with Transition to Software Product Business" and
"Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations."

Dependence on and Need to Hire Additional Key Personnel. The Company's
future performance depends to a significant degree upon the continued service
of its senior management, as well as marketing, sales and product development
personnel. The Company does not have long term employment contracts with any
of its employees. The Company does not have and does not intend to obtain key
person life insurance on its personnel. The loss of one or more of the
Company's key personnel could have a material adverse effect on the Company's
business, operating results and financial condition. For example, the
Company's Chief Operating Officer left the Company in February 1997, and,
although active in seeking a replacement, the Company has not yet been
successful in hiring one. The Company believes that its future success will
depend in large part upon its ability to attract and retain highly skilled
management, marketing, sales and product development personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its key employees or that it will be successful in attracting,
assimilating and retaining such personnel in the future. Failure to attract,
assimilate and retain key personnel could have a material adverse effect on
the Company's business, operating results and financial condition. See "Item
1, Business--Employees."

Dependence on Proprietary and Licensed Technology; Risks of
Infringement. The Company's success depends in significant part upon its
proprietary technology. The Company relies on a combination of copyright,

14
<PAGE>

patent, trademark and trade secret laws, confidentiality procedures, and
licensing arrangements to establish and protect its proprietary rights. The
Company presently has four patents. While the Company's current software
products are not dependent on these patents, such patents may be utilized in
future software products. As part of its confidentiality procedures, the
Company generally enters into non-disclosure agreements with its employees,
distributors and business partners, and limits access to and distribution of
its software products, supporting documentation and other proprietary
information. Despite these precautions, it may be possible for a third party
to copy or otherwise obtain and use the Company's software products or
technology without authorization, or to develop similar technology
independently. In addition, effective protection of intellectual property
rights is unavailable or limited in certain foreign countries where the
Company has in the past licensed and may in the future license its software
products. There can be no assurance that the Company's protection of its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology, duplicate the Company's software
products or design around any intellectual property rights upon which the
Company's business is now or may in the future be dependent.

The Company's products incorporate certain software that it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's software products to perform key functions.
There can be no assurance that such firms will remain in business, that they
will continue to support their software products, or that their software
products will otherwise continue to be available to the Company on
commercially reasonable terms. The Company believes that substantially all of
the software it licenses is available from vendors other than the Company's
current vendors, or could be developed internally by the Company, and could
therefore be replaced with equivalent software in a timely manner. However, it
is possible that the loss or inability to maintain any of these software
licenses could result in delays or reductions in product shipments until
equivalent software can be developed, identified, licensed and integrated,
which would adversely affect the Company's business, operating results and
financial condition.

The Company is not aware that any of its software products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future software products. The Company expects that software product
developers will increasingly be subject to such claims as the number of
software products and competitors in the Company's industry segment grows and
the functionality of software products in the industry segment overlaps. Any
such claims, with or without merit, could result in costly litigation that
could absorb significant management time, which could have a material adverse
effect on the Company's business, operating results and financial condition.
Such claims might require the Company to enter into royalty or license
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Item 1, Business--Intellectual Property and
Licensing."

ITEM 2. PROPERTIES

The Company occupies approximately 50,000 square feet of office space in
Emeryville, California, pursuant to a lease, which expires in March 1999, with
an option to extend its term for five years. The Company also leases 4,600
square feet of storage facilities in Oakland, California. Management believes
that its current facilities are adequate to meet its needs through the next 12
months.

ITEM 3. LEGAL PROCEEDINGS

None.

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

No matters were submitted to a vote of security holders in the quarter ended
December 31, 1997.

15
<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS

The Company's common stock is traded on the NASDAQ Stock Market under the
symbol IACP. Market price for the Company's stock, since the Company's initial
public offering on November 8, 1996 through December 31, 1997, is as follows:

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
First Quarter............................................. $7.875 $5.625
Second Quarter............................................ 5.125 2.250
Third Quarter............................................. 3.750 2.375
Fourth Quarter............................................ 3.500 1.250
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
November 8, to December 31, 1996.......................... $6.875 $5.625
</TABLE>

As of December 31, 1997, the Company had approximately 69 holders of record
of its common stock.

The market price for the Common Stock may be affected by a number of
factors, some of which are outside the control of the Company, including the
announcement of new software products or product enhancements by the Company
or its competitors, quarterly variations in the Company's operating results or
the operating results of the Company's competitors or companies in related
industries, changes in earnings estimates or recommendations by securities
analysts, developments in the Company's industry, general market conditions
and other factors, including factors unrelated to the operating performance of
the Company or its competitors. In addition, stock prices for many companies
in the technology and emerging growth sectors have experienced particularly
volatile fluctuations that have often been unrelated to the operating
performance of such companies. Such factors and fluctuations, as well as
general economic, political and market conditions, such as recessions, may
materially adversely affect the market price of the Company's Common Stock.

The Company has never paid cash dividends on its capital stock and does not
expect to pay any such dividends in the foreseeable future. Further, an
existing bank line of credit agreement restricts the Company's ability to pay
cash dividends without the bank's consent.

16
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The net income (loss) per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 (SAB 98). For further discussion of net income (loss) per
share and the impact of Statement No. 128 and SAB 98, see Note 1 and 2 of
Notes to the Consolidated Financial Statements beginning on page 32.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
License....................... $ 7,911 $ 7,345 $ 2,110 $ 1,779 $ 1,357
Service....................... 11,347 12,347 10,150 9,429 8,977
Maintenance................... 3,223 2,588 3,738 3,535 3,003
Hardware...................... -- 3,412 1,532 2,641 3,357
------- ------- -------- -------- -------
Total revenues.............. 22,481 25,692 17,530 17,384 16,694
------- ------- -------- -------- -------
Cost of revenues:
License....................... 362 426 -- -- --
Service....................... 8,322 7,023 6,068 5,058 7,149
Maintenance................... 1,421 1,312 2,105 1,991 1,642
Hardware...................... -- 2,716 865 1,721 2,082
Amortization of purchased
software..................... -- -- -- -- 2,154
------- ------- -------- -------- -------
Total cost of revenues...... 10,105 11,477 9,038 8,770 13,027
------- ------- -------- -------- -------
Operating expenses:
Sales and marketing........... 4,757 5,133 4,313 4,624 3,769
General and administrative.... 3,057 2,646 2,318 2,484 2,590
Product development........... 4,480 4,226 3,238 2,365 1,085
------- ------- -------- -------- -------
Total operating expenses.... 12,294 12,005 9,869 9,473 7,444
------- ------- -------- -------- -------
Operating income (loss) from
continuing operations.......... 82 2,210 (1,377) (859) (3,777)
Other income (expense):
Interest expense.............. (4) (55) (14) (20) --
Interest income and other..... 506 153 79 49 284
------- ------- -------- -------- -------
Income (loss) before income
taxes.......................... 584 2,308 (1,312) (830) $(3,493)
Income taxes.................... 23 -- -- -- --
------- ------- -------- -------- -------
Income (loss) from continuing
operations..................... 561 2,308 (1,312) (830) $(3,493)
Discontinued operations:
Loss from discontinued
operations................... -- -- -- (369) (475)
Loss on disposal of
discontinued operations...... -- -- -- (2,657) --
------- ------- -------- -------- -------
Loss from discontinued
operations..................... -- -- -- (3,026) (475)
------- ------- -------- -------- -------
Net income (loss)............... $ 561 $ 2,308 $ (1,312) $ (3,856) $(3,968)
======= ======= ======== ======== =======
Pro forma basic net income
(loss) per share (1)........... $ 0.05 $ 0.25 $ (0.15)
======= ======= ========
Pro forma diluted net income
(loss) per share (1)........... $ 0.05 $ 0.23 $ (0.15)
======= ======= ========
Pro forma weighted average
common shares outstanding (1).. 11,164 9,098 8,580
Pro forma diluted common shares
outstanding (1)................ 12,017 10,256 8,580
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................. $15,008 $14,117 $ 1,032 $ 1,773 $ 5,370
Total assets.................... 19,288 19,177 5,705 8,259 11,119
Total debt...................... -- -- 200 -- --
Redeemable convertible preferred
stock.......................... -- -- 15,448 14,275 13,102
Stockholders' equity (net
capital deficiency)............ 15,623 14,576 (13,825) (11,400) (6,591)
</TABLE>
- -------
(1)See Note 1 and 2 to Notes to Consolidated Financial Statements.

17
<PAGE>

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

OVERVIEW

The Company was incorporated in July 1992, when the management of the
Company, in partnership with E.M. Warburg, Pincus & Co., LLC, purchased
certain assets and liabilities of Litton Industries' Integrated Automation
Division, a leading system integrator with a primary focus on the aerospace
industry and secondary focus on the financial services and transportation
industries. Following this acquisition, the Company began its transition from
a system integrator to a provider of software development services and a
developer of application framework software products. The Company decided to
de-emphasize the aerospace market, to develop its transaction management
platform into a stand-alone software product, and to build a series of
standard software application products based upon its complex transaction
management platform targeted initially to the financial services industry. To
date, a majority of the Company's total revenues has been derived from the
provision of services to customers pursuant to large software development
contracts. The Company's objective is to increase the portion of the Company's
total revenue derived from software product sales. The Company was able to
increase the amount of software license revenue in 1996 and in 1997.

The Company currently sells two leading application framework software
products, CheckVision and RemitVision, which are built upon the Company's
transaction management and information archive platform. CheckVision is
designed to maximize the value of archived transaction information over the
entire useful life of such information, and RemitVision is designed to provide
banks and other remittance processors with the ability to combine high volume
consumer payment activity with complex accounts receivable processing in one
production environment. The Company has also invested in growing sales and
marketing organization to sell its software products. At the same time, the
Company has continued to develop specific software solutions under application
development contracts for customers primarily in the financial services
industry, which the Company believes, may be the basis for future software
products.

During the transition from providing software development services to
developing and selling software products, which is still under way, a majority
of the Company's total revenues has been derived from the provision of
services to customers pursuant to large software development contracts,
certain of which provide the basis for the Company's application framework
software products. The Company recognizes revenue from software development
contracts on the percentage-of-completion basis. Service revenue as a
percentage of total revenue for 1997, 1996 and 1995 was 50.5%, 48.0% and
57.9%, respectively. In addition, the Company has transitioned out of selling
hardware. Due in part to these transitions, and in part to delays in its
RemitVision product, the Company experienced a decline in total revenue in
1997. To achieve revenue growth and improve operating margins, the Company
must continue to increase market acceptance and sales of the Company's
software products. As the Company becomes increasingly reliant upon software
product sales, it could experience a decline in total revenues if service
revenue declines more quickly than the Company can increase revenue from
software product sales. The Company must develop and enhance its sales and
marketing capabilities, software production and distribution infrastructure as
it continues the transition from a service provider business to a software
product business. There can be no assurance that the Company will be
successful in creating the necessary capabilities and infrastructure in a
timely manner or at all. Any significant failure by the Company to manage the
transition successfully would have a material adverse effect on the Company's
business, operating results and financial condition and would create
significant fluctuation in quarterly operating results.

Installation of the Company's software products requires close cooperation
between the Company and its customers. To the extent the installation of the
Company's software products is delayed, the Company's recognition of revenue
may be delayed, which could have a material adverse effect on the Company's
business, operating results and financial condition. For example, the Company
has experienced product installation delays which have resulted in the Company
having lower than expected revenue and profits from RemitVision customers in
the quarters ended June 30, September 30 and December 31, 1997. The failure to
resolve similar situations in the future could have an adverse affect on the
Company's operating results and could adversely affect the Company's ability
to market its products.

18
<PAGE>

At December 31, 1997, the Company had $4.6 million in unbilled receivables.
These receivables are the result of delays in RemitVision implementations and
timing differences between revenue recognition and cash collections on a
number of contracts. Any inability on the part of the Company to collect these
receivables may materially, adversely affect the financial performance of the
Company.

The Company's total revenues are derived from software licenses, services
and maintenance. The Company licenses software to end-users under non-
cancelable license agreements and provides services such as installation,
training and software maintenance. Software license revenue for contracts not
requiring significant customization services is recognized when a product has
been shipped and all significant contractual obligations have been satisfied
and the resulting receivable is deemed collectible by management. Software
license and service revenues from contracts requiring significant
customization services are recognized on the percentage-of-completion method
based on the ratio of incurred costs to total estimated costs. Actual costs
and gross margins on such contracts could differ from the Company's estimates
and such differences could be material to the financial statements. Allowances
for future estimated warranty costs are provided at the time revenue is
recognized. Maintenance revenue is recognized ratably over the term of the
related agreements, which in most cases is one year. See Note 1 to Notes to
Consolidated Financial Statements.

At December 31, 1997, the Company had an accumulated deficit of
approximately $11.9 million. The Company achieved net income of approximately
$561,000 and $2.3 million for the years ended December 31, 1997 and 1996,
respectively. There can be no assurance that the Company will have operating
profits in any future period and recent operating results should not be
considered indicative of future financial performance.

19
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated consolidated
statement of operations data expressed as a percentage of total revenues:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License.................................... 35.2% 28.6% 12.0%
Service.................................... 50.5 48.0 57.9
Maintenance................................ 14.3 10.1 21.3
Hardware................................... -- 13.3 8.8
-------- -------- --------
Total revenues........................... 100.0 100.0 100.0
Cost of revenues:
License.................................... 1.6 1.7 --
Service.................................... 37.0 27.3 34.6
Maintenance................................ 6.3 5.1 12.0
Hardware................................... -- 10.6 4.9
-------- -------- --------
Total cost of revenues................... 44.9 44.7 51.5
-------- -------- --------
Gross margin................................. 55.1 55.3 48.5
-------- -------- --------
Operating expenses:
Sales and marketing........................ 21.2 20.0 24.6
General and administrative................. 13.6 10.3 13.2
Product development........................ 19.9 16.4 18.5
-------- -------- --------
Total operating expenses................. 54.7 46.7 56.3
-------- -------- --------
Operating income (loss) from continuing
operations.................................. 0.4 8.6 (7.8)
Interest income (expense) and other........ 2.2 0.4 0.4
-------- -------- --------
Income (loss) before income taxes............ 2.6 9.0 (7.4)
Income taxes............................... 0.1 -- --
-------- -------- --------
Net income (loss)............................ 2.5% 9.0% (7.4)%
======== ======== ========
</TABLE>

COMPARISON OF 1997, 1996, AND 1995

REVENUES

License. License revenue to date has been primarily derived from licenses of
the Company's CheckVision, RemitVision, and WorkVision software products.
License revenue was $7.9 million, $7.3 million, and $2.1 million in 1997,
1996, and 1995, respectively. This increase in license revenue was primarily
due to growing market acceptance of the Company's CheckVision and RemitVision
products, and to a lesser extent, revenue from its WorkVision product, which
is licensed pursuant to application framework development contracts.

Service. Service revenue has been comprised primarily of fees from software
application development contracts, and to a lesser extent, fees from
installation services and training for the Company's CheckVision and
RemitVision products. Service revenue was $11.3 million, $12.3 million, and
$10.2 million in 1997, 1996, and 1995, respectively. The decrease in 1997 from
1996 in service revenue is the result of the implementation of the Company's
strategy to focus on product sales and assisting customers in deploying its
software products, thus decreasing the amount of services performed pursuant
to significant application development contracts.

Maintenance. Maintenance revenue is generated primarily by software support
agreements that include telephone support, minor software upgrades and, in
some cases, third party support. Maintenance revenue was $3.2 million, $2.6
million, and $3.7 million in 1997, 1996, and 1995, respectively. Maintenance
revenue increased in 1997 primarily due to the growing base of installed
CheckVision products resulting in a corresponding increase in demand for
maintenance service.

20
<PAGE>

Hardware. There were no hardware revenues for 1997 after the Company found
alternate hardware distribution channels to support its customers. Hardware
revenues for 1996 and 1995 were $3.4 million and $1.5 million, respectively.
The Company has on occasion sold a proprietary, high-margin hardware item to a
single customer, but this practice was discontinued effective January 1, 1996.
The hardware revenue in 1996 was primarily the result of a large RemitVision
contract, and to a lesser extent, numerous CheckVision contracts for which the
Company was required to act as a reseller of certain hardware required for
installation. Previously, the Company provided hardware to its customers where
(i) the customer did not have a relationship with a particular hardware vendor
and direct purchase by the customer would have significantly delayed an
installation by the Company or (ii) certain hardware required for the
operation of the Company's CheckVision and/or RemitVision products were not
available for direct sale to end users.

COST OF REVENUES

License. Cost of license revenue decreased 15.0% in 1997 to $362,000 from
$426,000 in 1996. Cost of license revenue decreased as royalties payable to
third parties decreased due to lower license revenues for RemitVision. The
cost of license revenue as a percentage of license revenue is expected to
increase in the future if the Company's strategy of increasing revenue from
software products developed under software application framework development
contracts is successful and associated royalties become due.

Service. Cost of service revenue is primarily comprised of employee-related
costs and fees for third-party consultants incurred in providing installation,
training and development services. Cost of service revenue was $8.3 million in
1997, $7.0 million in 1996, and $6.1 million in 1995, or 73.3%, 56.9%, and
59.8% of the related service revenue, respectively. Cost of service revenue
increased 18.5% from 1996 to 1997 primarily due to an increase in costs to
complete RemitVision contracts.

Maintenance. Cost of maintenance revenue is primarily comprised of employee-
related costs incurred in providing customer support and also includes the
cost of services provided by third parties for hardware-related maintenance
for certain of the installed base of customers. Cost of maintenance revenue
was $1.4 million in 1997, $1.3 million in 1996, and $2.1 million in 1995, or
44.1%, 50.7%, and 56.3%, of the related maintenance revenue, respectively.
Cost of maintenance revenue increased 8.3% in 1997 from 1996 due to an
increase in maintenance demand resulting from an increased CheckVision
customer base. From 1995 to 1996, maintenance costs decreased as maintenance
agreements related to software products that the Company no longer offers to
new customers expired. Cost of maintenance revenue may increase in the future
if the Company continues to be successful in selling maintenance for its new
software products.

Hardware. Cost of hardware revenue consisted of direct costs of hardware
supplied on behalf of customers and subcontract fees for assembly of the
Company's proprietary hardware item, which the Company discontinued selling in
1995. There was no cost of hardware revenue for 1997. Cost of hardware revenue
in 1996 was $2.7 million and $865,000 in 1995, or 79.6%, and 56.5%, of related
hardware revenue, respectively. In 1996, the cost of hardware revenue as a
percentage of hardware revenue increased as the Company discontinued the sale
of its high margin proprietary hardware product and acted as a reseller of
certain hardware required for installation of its products. In 1995, the cost
of hardware revenue as a percentage of hardware revenue varied due to the
amount of a proprietary hardware item sold.

OPERATING EXPENSES

Sales and marketing. Sales and marketing expense was $4.8 million, $5.1
million, and $4.3 million in 1997, 1996, and 1995, or 21.2%, 20.0% and 24.6%,
of total revenues, respectively. Sales and marketing expense decreased 7.3%
from 1996 to 1997 primarily due to lower sales commissions. The increase in
sales and marketing expense from 1995 to 1996 was the result of increased
sales commissions and an increase in sales and marketing personnel. The
Company intends to expand its sales and marketing personnel and activities
and, therefore, anticipates these expenditures will increase in absolute
dollars and may increase as a percentage of total revenues.

21
<PAGE>

General and administrative. General and administrative expense was $3.1
million in 1997, $2.6 million in 1996, and $2.3 million in 1995, or 13.6%,
10.3%, and 13.2% of total revenues, respectively. General and administrative
expense increased 15.5% from 1996 to 1997 due primarily to additional costs
associated with being a public company. General and administrative expense
increased 14.2% from 1995 to 1996 due primarily to growth in the Company's
infrastructure to support increased revenues. To the extent the Company is
successful in expanding its operations, general and administrative expense is
expected to increase in absolute dollars.

Product development. Product development expense was $4.5 million, $4.2
million, and $3.2 million in 1997, 1996, and 1995, or 19.9%, 16.4%, and 18.5%
of total revenues, respectively. In 1997 and 1996, product development expense
increased primarily as a result of increased work on RemitVision to achieve
product maturity. The Company expects that product development expenditures
for product enhancement and new software products are required to remain
competitive. In particular, to the extent the Company is required to develop
future applications without development contracts, the Company's expenditures
for product development may increase.

LIQUIDITY AND CAPITAL RESOURCES

The company completed an initial public offering of common stock on November
8, 1996 raising net proceeds of $10.6 million. The common stock is trading on
the NASDAQ Stock Market under the symbol IACP.

The Company used cash of $1.7 million, $353,000, and $1.3 million for
operating activities for 1997, 1996, and 1995, respectively. The increase in
the use of cash from 1996 to 1997 was mainly due to a decrease in net income
and an increase in accounts receivable. The decrease in the use of cash from
1995 to 1996 was mainly attributable to profitability partly offset by an
increase in accounts receivable and a decrease in customer deposits.

The Company's investing activities have consisted primarily of purchases of
short-term investments and property and equipment. Short-term investments
purchased totaled $2.0 million in 1997, compared to none in 1996 and 1995.
Capital expenditures totaled $476,000, $351,000 and $127,000 for 1997, 1996,
and 1995, respectively. Capital expenditures consisted of purchases of
computer equipment and office furniture to support the Company's growing
employee base. The Company currently has no significant capital spending
requirements or purchase commitments other than a non-cancelable operating
lease for its facilities. See Note 5 of Notes to the Consolidated Financial
Statements.

Cash provided by financing activities of $445,000 in 1997 was comprised of
proceeds from purchases of common stock under the employee stock purchase and
stock option plans. The initial public offering of the Company's common stock,
and net bank borrowings provided the cash from financing activities in 1996,
and 1995, respectively.

At December 31, 1997, the Company had $7.1 million in cash and cash
equivalents, $2.0 million in short-term cash investments, and $15.0 million in
working capital. The Company has a $2.0 million bank line of credit agreement
that expires in May 1998. Under the terms of the credit agreement, the Company
may borrow up to $2.0 million under a revolving line of credit, which includes
up to $500,000 in commercial and standby letters of credit. The line of
credit, which contains both financial and non-financial covenants, is secured
by substantially all of the Company's assets. Advances under the line of
credit are limited to 80% of eligible billed accounts receivable. Borrowings
accrue interest at the bank's prime rate plus 0.5% (9.0% at December 31,
1997). There were no borrowings under this line of credit at December 31,
1997.

The Company believes that its existing cash, cash equivalents and short-term
cash investments, together with cash flows from operations and available
borrowings under its revolving line of credit, will be sufficient to meet its
working capital requirements for at least the next 12 months.

22
<PAGE>

IMPACT OF YEAR 2000

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. If the Company's internal systems do not
correctly recognize date information when the year changes to 2000, there
could be an adverse impact on the Company's operations. The Company has
completed an assessment and does not believe that it will be required to
modify or replace significant portions of its software so that its internal
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company is contacting its critical suppliers of products
and services to determine that such suppliers' operations and the products and
services they provide to the Company are Year 2000 capable. There can be no
assurance that the failure of one of the Company's suppliers to ensure
appropriate Year 2000 capability would not have an adverse effect on the
Company. The Company has also assessed the capability of its products sold to
customers and believes that the likelihood of a material adverse impact due to
contingencies related to the Year 2000 issue for the product it has sold is
remote. There can be no assurance, however, that the Company's software
products contain all necessary software for Year 2000 compatibility. If any of
the Company's licensees experience Year 2000 problems, such licensees could
assert claims for damages against the Company. Any such litigation could
result in substantial costs and diversion of the Company's resources, even if
ultimately decided in favor of the Company. In addition, many companies are
expending significant resources to correct their software systems for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase new software products such as those offered by the Company. The
occurrence of any of the foregoing could have a material adverse effect on the
Company's business, financial condition and results from operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's consolidated financial statements together with related notes,
report of Ernst & Young LLP, independent auditors, and supplementary financial
information are listed at Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

23
<PAGE>

PART III

Certain information required by Part III is omitted from this report on Form
10-K in light of the fact that the Company will file its Definitive Proxy
Statement for its annual meeting of stockholders pursuant to Regulation 14A of
the Securities and Exchange Act of 1934, as amended (the "Proxy Statement"),
not later than 120 days after the end of the fiscal year covered by this
report, and certain information included in the Proxy Statement is
incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information with respect to persons who are executive officers of
the Registrant is set forth under the caption "Executive Officers" in Part I
of this report. The section entitled "Election of Directors" appearing in the
Registrant's proxy statement for the annual meeting of stockholders to be held
on June 17, 1998, sets forth certain information with respect to the directors
of the Registrant and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The section entitled "Executive Compensation" appearing in the Registrant's
proxy statement for the annual meeting of stockholders to be held on June 17,
1998, sets forth certain information with respect to the compensation of
management of the Registrant and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The section entitled "Election of Directors" appearing in the Registrant's
proxy statement for the annual meeting of stockholders to be held on June 17,
1998, sets forth certain information with respect to the ownership of the
Registrant's Common Stock and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The section entitled "Transactions with Management" appearing in the
Registrant's proxy statement for the annual meeting of stockholders to be held
on June 17, 1998, sets forth certain information with respect to certain
business relationships and transactions between the Registrant and its
directors and officers and is incorporated herein by reference.

24
<PAGE>

PART IV

ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this report:

(1) Consolidated Financial Statements--see "Index to Consolidated
Financial Statements"

(2) Consolidated Financial Statement Schedules:

Schedule II--Valuation and Qualifying Accounts

All schedules, except those listed above, have been omitted
because they are not required, not applicable, or the required
information is shown in the financial statements and related
notes thereto.

(3) Exhibits
<TABLE>
<C> <S>
3.1(a)* Certificate of Incorporation of the Registrant, as amended
(formerly Exhibit 3.1)
3.2* Bylaws of the Registrant.
4.1* Stockholders' Agreement dated July 31, 1992; Amendment No. 1
to Stockholders' Agreement dated May 28, 1996.
10.1+* Agreement between Mellon Bank Corporation and the Registrant
dated March 24, 1995.
10.2* 1992 Stock Plan.
10.3* 1996 Stock Plan.
10.4* 1996 Employee Stock Purchase Plan.
10.5* Loan and Security Agreement dated May 20, 1994 between
Registrant and Bank of the West; First Amendment dated May 22,
1995; Second Amendment dated February 21, 1996; Form of Third
Amendment.
10.6* Severance and Non-Compete Agreement dated July 31, 1992
between Chakravarthi V. Ravi and the Registrant.
10.7* Lease by and between Watergate Tower Associates and the
Registrant dated June 30, 1993.
10.8* Form of Indemnity Agreement.
10.9* Share Exchange Agreement dated May 29, 1996 between the
Registrant, Warburg, Pincus Investors, L.P. and holders of the
Registrant's Series A Preferred Stock.
10.10* Amendment No. 1 to the Share Exchange Agreement dated November
6, 1996 between the Registrant, Warburg, Pincus Investors,
L.P. and holders of the Registrant's Series A Preferred Stock.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 41)
27.1 Financial Data Schedule
</TABLE>
- --------
+ Confidential treatment has been granted for portions of these agreements.
* Incorporated by reference to the exhibits filed with the Company's
registration statement on Form SB-2 (Registration Statement No. 333-4928-
LA)

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1997.

25
<PAGE>

IA CORPORATION I

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... 27
Consolidated Balance Sheets................................................. 28
Consolidated Statements of Operations....................................... 29
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency).... 30
Consolidated Statements of Cash Flows....................................... 31
Notes to Consolidated Financial Statements.................................. 32
</TABLE>

26
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
IA Corporation I

We have audited the accompanying consolidated balance sheets of IA
Corporation I as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of IA Corporation I at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

ERNST & YOUNG LLP

Walnut Creek, California
January 28, 1998

27
<PAGE>

IA CORPORATION I

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 7,058 $ 10,806
Short-term investments................................... 2,000 --
Receivables, including unbilled receivables of $4,593 in
1997 and $2,422 in 1996, less allowance for doubtful
accounts of $46......................................... 8,867 7,259
Other current assets..................................... 748 653
-------- --------
Total current assets.................................... 18,673 18,718
Property and equipment, net................................ 615 459
-------- --------
$ 19,288 $ 19,177
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 343 $ 740
Accrued compensation and related liabilities............. 1,400 1,433
Deferred revenues........................................ 1,402 2,007
Other accrued liabilities................................ 520 421
-------- --------
Total current liabilities............................... 3,665 4,601
Stockholders' equity:
Common shares, $0.01 par value:
Authorized shares--35,000,000
Issued and outstanding shares--8,666,460 at December 31,
1997, and 8,592,402 at December 31, 1996............... 89 86
Class B Common shares, $0.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares--2,417,112................ 25 25
Additional paid-in capital............................... 27,563 27,121
Accumulated deficit...................................... (11,923) (12,484)
Deferred compensation.................................... (131) (172)
-------- --------
Total stockholders' equity.............................. 15,623 14,576
-------- --------
$ 19,288 $ 19,177
======== ========
</TABLE>

See Accompanying Notes

28
<PAGE>

IA CORPORATION I

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Revenues:
License............................................. $7,911 $ 7,345 $ 2,110
Service............................................. 11,347 12,347 10,150
Maintenance......................................... 3,223 2,588 3,738
Hardware............................................ -- 3,412 1,532
------ ------- -------
Total revenues.................................... 22,481 25,692 17,530
Cost of revenues:
License............................................. 362 426 --
Service............................................. 8,322 7,023 6,068
Maintenance......................................... 1,421 1,312 2,105
Hardware............................................ -- 2,716 865
------ ------- -------
Total cost of revenues............................ 10,105 11,477 9,038
Operating expenses:
Sales and marketing................................. 4,757 5,133 4,313
General and administrative.......................... 3,057 2,646 2,318
Product development................................. 4,480 4,226 3,238
------ ------- -------
Total operating expenses.......................... 12,294 12,005 9,869
------ ------- -------
Operating income (loss)............................... 82 2,210 (1,377)
Other income (expense):
Interest expense.................................... (4) (55) (14)
Interest income and other........................... 506 153 79
------ ------- -------
Income (loss) before income taxes..................... 584 2,308 (1,312)
Income taxes........................................ 23 -- --
------ ------- -------
Net income (loss)..................................... 561 2,308 (1,312)
Preferred dividends and accretion..................... -- (880) (1,173)
------ ------- -------
Net income (loss) applicable to common stockholders... $ 561 $ 1,428 $(2,485)
====== ======= =======
Pro forma basic net income (loss) per share........... $ 0.05 $ 0.25 $ (0.15)
====== ======= =======
Pro forma diluted net income (loss) per share......... $ 0.05 $ 0.23 $ (0.15)
====== ======= =======
Pro forma weighted common shares outstanding.......... 11,164 9,098 8,580
Pro forma diluted common shares outstanding........... 12,017 10,256 8,580
</TABLE>

See Accompanying Notes

29
<PAGE>

IA CORPORATION I

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
CUMULATIVE TOTAL
FOREIGN STOCKHOLDERS'
COMMON STOCK ADDITIONAL CURRENCY EQUITY
------------------ PAID-IN- ACCUMULATED DEFERRED TRANSLATION (NET CAPITAL
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION ADJUSTMENT DEFICIENCY)
---------- ------ ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1994................... 5,931,534 $ 59 $ 23 $(11,330) -- $(152) $(11,400)
Issuance of common
stock under stock
option plan........... 68,845 -- 8 -- -- -- 8
Repurchase of common
stock................. (370,363) (3) -- (97) -- -- (100)
Accretion of
mandatorily redeemable
convertible preferred
stock................. -- -- -- (1,173) -- -- (1,173)
Cumulative translation
adjustment............ -- -- -- -- -- 152 152
Net loss............... -- -- -- (1,312) -- -- (1,312)
---------- ---- ------- -------- ----- ----- --------
Balances, December 31,
1995................... 5,630,016 56 31 (13,912) -- -- (13,825)
Issuance of common
stock under stock
option plan........... 275,540 4 5 -- -- -- 9
Initial public offering
of common stock, net
of expenses of $1,283. 2,130,841 21 10,585 -- -- -- 10,606
Conversion of preferred
stock................. 2,973,117 30 16,298 -- -- -- 16,328
Deferred compensation
resulting from grant
of options............ -- -- 202 -- $(202) -- --
Amortization of
deferred compensation. -- -- -- -- 30 -- 30
Accretion of
mandatorily redeemable
convertible preferred
stock................. -- -- -- (880) -- -- (880)
Net income............. -- -- -- 2,308 -- -- 2,308
---------- ---- ------- -------- ----- ----- --------
Balances, December 31,
1996................... 11,009,514 111 27,121 (12,484) (172) -- 14,576
Issuance of common
stock under stock
option and stock
purchase plans........ 274,058 3 442 -- -- -- 445
Amortization of
deferred compensation. -- -- -- -- 41 -- 41
Net income............. -- -- -- 561 -- -- 561
---------- ---- ------- -------- ----- ----- --------
Balances, December 31,
1997................... 11,283,572 $114 $27,563 $(11,923) $(131) $ -- $ 15,623
========== ==== ======= ======== ===== ===== ========
</TABLE>

See Accompanying Notes

30
<PAGE>

IA CORPORATION I

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ 561 $ 2,308 $ (1,312)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation................................... 320 276 294
Amortization of deferred compensation.......... 41 30 --
Loss on disposal of property and equipment..... -- (9) --
Changes in operating assets and liabilities:
Receivables.................................. (1,608) (3,870) (1,433)
Other current assets......................... (95) 193 (32)
Accounts payable............................. (397) 473 (13)
Accrued compensation and related liabilities. (33) 409 258
Deferred revenues............................ (605) (313) 889
Other accrued liabilities.................... 99 150 21
------- -------- --------
Net cash used in operating activities............ (1,717) (353) (1,328)
INVESTING ACTIVITIES
Net proceeds from sale of discontinued business.. -- -- 33
Purchases of property and equipment.............. (476) (351) (127)
Proceeds from sales of property and equipment.... -- 16 --
Purchases of short-term investments.............. (2,000) -- --
------- -------- --------
Net cash used in investing activities............ (2,476) (335) (94)
FINANCING ACTIVITIES
Borrowings under bank line of credit............. 300 778 500
Repayment of borrowings under bank line of
credit.......................................... (300) (978) (300)
Proceeds from issuance of common stock........... 445 10,615 8
Repurchase of common stock....................... -- -- (100)
------- -------- --------
Net cash provided by financing activities........ 445 10,415 108
Net increase (decrease) in cash.................. (3,748) 9,727 (1,314)
Cash at beginning of period...................... 10,806 1,079 2,393
------- -------- --------
Cash at end of period............................ $ 7,058 $ 10,806 $ 1,079
======= ======== ========
Supplemental disclosure of cash flow information:
Deferred compensation related to stock option
grants........................................ $ -- $ 202 $ --
======= ======== ========
Cash paid for interest......................... $ 4 $ 56 $ 11
======= ======== ========
Supplemental noncash investing and financing
information:
Conversion of preferred stock to common stock.. $ -- $ 16,328 $ --
======= ======== ========
</TABLE>

See Accompanying Notes

31
<PAGE>

IA CORPORATION I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY AND BASIS OF PRESENTATION

IA Corporation I (the "Company") was incorporated on July 20, 1992. The
Company develops, markets, implements and supports software solutions for
financial services organizations that require flexible automation of high-
volume, complex transactions. Prior to 1996, the consolidated financial
statements included the accounts of the Company and its wholly owned
subsidiary. In 1996, the wholly owned subsidiary was merged into the Company.

USE OF ESTIMATES

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, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash and cash equivalents consist of deposits with major banks, certificates
of deposit and commercial paper with original maturities of three months or
less. Short-term investments consist of investments in debt securities with
maturities of more than three months, and less than one year.

The Company classifies all investments in debt securities as available-for-
sale or held-to-maturity at the time of purchase and periodically reevaluates
such designations. Investments in marketable equity securities and debt
securities are classified as held-to-maturity when the Company has positive
intent and the ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost with corresponding premiums or
discounts amortized to interest income over the life of the maturity. Debt
securities not classified as held-to-maturity are classified as available-for-
sale and are reported at fair value. Unrecognized gains or losses available-
for-sale securities are included, net of tax, in stockholders' equity until
their disposition. Realized gains and losses and declines in value judged to
be other than temporary on available-for-sale securities are included in other
income and expense. The cost of securities sold is based on the specific
identification method.

While the Company's intent is to hold debt securities to maturity, they are
classified as available-for-sale because the sale of such securities may be
required prior to maturity. At December 31, 1997 and 1996, the Company had
investments in commercial paper recorded in the amount of $5,955,000 (of which
$2,000,000 was classified as short-term investments and $3,955,000 was
classified as cash equivalents), and $8,974,000 (all of which was classified
as cash equivalents), respectively, which approximates fair value. Unrealized
and realized gains and losses in 1997 and 1996 were not material.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives ranging from three to
seven years.

SOFTWARE DEVELOPMENT COSTS

The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed," under which
certain software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated
lives of the related products.

32
<PAGE>

IA CORPORATION I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Technological feasibility is established upon completion of a working model.
As of December 31, 1997, such capitalized software development costs were
insignificant and all software development costs have been charged to product
development expenses in the accompanying consolidated statements of
operations.

REVENUE RECOGNITION

The Company licenses software to end-users under non-cancelable license
agreements and provides services such as installation, training and software
maintenance. Software license revenue for contracts not requiring significant
customization services is recognized when the product has been shipped, all
significant contractual obligations have been satisfied and the resulting
receivable is deemed collectible by management. Software license and service
revenues from contracts requiring significant customization services are
recognized on the percentage-of-completion method based on the ratio of
incurred costs to total estimated costs. Actual costs and gross margins on
such contracts could differ from management's estimates and such differences
could be material to the financial statements. Allowances for estimated future
warranty costs are provided at the time revenue is recognized. Maintenance
revenue is recognized ratably over the term of the related agreements, which
in most cases is one year. Hardware revenue was recognized when the title
passes to the customer.

CREDIT RISK

The Company currently sells its services primarily to large corporations in
the financial services industry in North America. The Company extends credit
based on an evaluation of the customer's financial condition and, generally,
does not require collateral. The Company maintains reserves for potential
credit losses which management believes are adequate to cover any potential
loss. Actual credit losses may differ from management's estimates and such
differences could be material to the financial statements. At December 31,
1997, the Company had $4,593,000 in unbilled receivables. Any inability on the
part of the Company to collect these receivables may materially adversely
affect the Company's financial condition and results of operations.

FOREIGN CURRENCY TRANSLATION

The revenue and expenses of the Company's foreign subsidiary were translated
at monthly average exchange rates. In 1995, the Company discontinued the
operations of its foreign subsidiary.

STOCK-BASED COMPENSATION

The Company accounts for employee stock options in accordance with
Accounting Principles Board No. 25 ("APB 25") and has adopted the "disclosure
only" alternative described in Statement of Accounting Standards No. 123,
"Accounting for Stock-Based Compensation " ("FAS 123").

NET INCOME (LOSS) PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("FAS 128"). FAS 128 replaced the calculation of primary
and fully diluted net income (loss) per share with basic and diluted net
income (loss) per share. Unlike primary net income (loss) per share, basic net
income (loss) per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted net income (loss) per share is very similar to
the previously reported fully diluted net income (loss) per share. Basic and
diluted net income (loss) per share has replaced the previously reported net
income (loss) per share for the years ended December 31, 1996 and 1995 to
apply the requirements of FAS 128.

In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 ("SAB 98"). Under SAB 98, certain shares of
convertible preferred stock, options and warrants to purchase common

33
<PAGE>

IA CORPORATION I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

stock, issued at prices substantially below the per share price sold in the
Company's initial public offering in November 1996, previously included in the
computation of share outstanding pursuant to Staff Accounting Bulletin Nos.
55, 64 and 83, are now excluded from the computation.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP
97-2"), which supersedes SOP 91-1. The Company will be required to adopt this
standard in the first quarter of 1998. Restatement of prior financial
statements is prohibited. SOP 97-2 addresses software revenue recognition
matters primarily from a conceptual level and detailed implementation
guidelines have not yet been issued. Accordingly, the Company is uncertain as
to the effect of SOP 97-2 on its existing revenue recognition practices.

The Company intends to adopt Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("FAS 130") and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," ("FAS 131") in 1998. Both will require additional
disclosure but will not have a material effect on the Company's financial
position or results of operations. FAS 130 will first be reflected in the
Company's first quarter of 1998 interim financial statements. Components of
comprehensive income include items such as net income and changes in the value
of available-for-sale securities. FAS 131 require segments to be determined
based on how management measures performance and makes decisions about
allocating resources. FAS 131 will first be reflected in the Company's 1998
Annual Report.

2. NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON STOCKHOLDERS

Net income (loss) per share applicable to common stockholders is calculated
as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss) applicable to
common stockholders................. $ 561,000 $1,428,000 $(2,485,000)
========== ========== ===========
Denominator for basic net income (loss)
per share--weighted average common
shares outstanding.................... 11,164,431 6,563,257 5,751,589
Effects of dilutive securities:
Common stock options................. 853,092 1,157,895 --
---------- ---------- -----------
Denominator for diluted net income
(loss) per share--adjusted weighted
average common shares and assumed
conversions........................... 12,017,523 7,721,152 5,751,589
========== ========== ===========
Basic net income (loss) per share
applicable to common stockholders..... $ 0.05 $ 0.22 $ (0.43)
========== ========== ===========
Diluted net income (loss) per share
applicable to common stockholders..... $ 0.05 $ 0.18 $ (0.43)
========== ========== ===========
</TABLE>

The pro forma basic and pro forma diluted net income (loss) per share
presented in the statements of operations has been computed as described above
and also gives effect, even if antidilutive, to common equivalent shares from
convertible preferred stock (2,534,460 in 1996 and 2,827,956 in 1995) that
were automatically converted to common stock upon the Company's initial public
offering in November 1996, using the if-converted method.

34
<PAGE>

IA CORPORATION I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Computer equipment............................... $ 1,795,000 $ 1,474,000
Furniture and fixtures........................... 340,000 185,000
Other............................................ 31,000 31,000
----------- -----------
2,166,000 1,690,000
Less accumulated depreciation.................... (1,551,000) (1,231,000)
----------- -----------
$ 615,000 $ 459,000
=========== ===========
</TABLE>

4. LINE OF CREDIT

The line of credit agreement with a bank allows borrowings up to a maximum
of $2,000,000, which includes up to $500,000 in commercial standby letters of
credit, with interest at the bank's prime rate plus 0.5% (9.0% at December 31,
1997). Borrowings are limited to the lesser of $2,000,000 or 80% of eligible
billed receivables. Borrowings under the line of credit are secured by
substantially all of the Company's assets. Under the provisions of the line of
credit, the Company is required to maintain certain financial and non-
financial covenants. The line of credit agreement expires on May 15, 1998. The
Company has no borrowings outstanding under the line of credit at December 31,
1997.

5. COMMITMENTS

The Company leases office space under non-cancelable operating leases.
Future minimum lease payments for the years ending December 31 are as follows:

6. STOCKHOLDERS' EQUITY

INITIAL PUBLIC OFFERING

On November 8, 1996, the Company completed an initial public offering of
2,525,000 shares of common stock (including shares sold by selling
stockholders), at $6.00 per share. The Company received net proceeds of
$10,092,000. In connection with the initial public offering, Series A
preferred stock plus all accrued dividends converted into 2,973,117 shares of
common stock, of which 2,417,112 is Class B common stock. On December 10,
1996, the underwriters exercised a portion of their overallotment option and
the Company issued additional 130,841 shares of the Company's common stock,
raising net proceeds of $514,000.

PREFERRED STOCK

On May 28, 1996, the Company amended its Certificate of Incorporation to
allow the Board of Directors to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights of those shares without any further vote
or action by the stockholders.

35
<PAGE>

IA CORPORATION I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

CLASS B COMMON STOCK

On May 28, 1996, the Company amended its Certificate of Incorporation to
authorize the issuance of Class B common stock. Upon the closing of the
initial public offering, 2,417,112 shares of Class B common stock was issued
in exchange for a portion of the outstanding Series A preferred stock and
accrued dividends. The Class B common stock has the same rights, preferences,
privileges, and restrictions as the common stock, except that the Class B
common stock has very limited voting rights and does not vote for the election
of directors. The shares of Class B common stock are also convertible at the
option of the holder into common stock, so long as such conversion does not
result in the holder obtaining greater than 49% of the Company's outstanding
voting securities.

STOCK SPLIT

On April 30, 1996, the Board of Directors approved a five-for-one stock
split of issued and outstanding common stock. On May 28, 1996, the Board of
Directors approved an additional seven-for-five stock split of issued and
outstanding common stock. All shares in the accompanying consolidated
financial statements have been retroactively adjusted to reflect the stock
split.

STOCK OPTION PLAN

Under the provisions of the Company's 1992 Stock Plan (the "1992 Plan"), the
Board of Directors authorized up to 1,658,769 shares of common stock for the
grant of incentive stock options ("ISOs"), nonqualifying stock options
("NSOs"), or stock purchase rights. All options granted under the 1992 Plan
expire seven years after the date of the grant. Generally, options become
vested and exercisable 20% one year after the date of grant and then 5% at the
end of each three-month period thereafter.

On May 28, 1996, the Company adopted the 1996 Stock Plan (the "1996 Plan")
which provides for the grant of ISO's, NSO's and stock purchase rights. All
options under the 1996 Plan expire ten years after the date of the grant and
become vested and exercisable 25% one year after date of grant and then 1/48
at the end of each month thereafter. A total of 700,000 shares of common stock
have been reserved for issuance under the 1996 Plan. Stock option data is as
follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
NUMBER OF OF SHARES
SHARES UNDER PLANS
--------- --------------
<S> <C> <C>
Options outstanding at December 31, 1994........... 1,086,127 $0.01
Options granted.................................... 317,100 0.28
Options exercised.................................. (68,845) 0.11
Options canceled................................... (175,917) 0.03
--------- -----
Options outstanding at December 31, 1995........... 1,158,465 0.08
Options granted.................................... 455,199 1.93
Options exercised.................................. (275,540) 0.03
Options canceled................................... (23,800) 1.04
--------- -----
Options outstanding at December 31, 1996........... 1,314,324 0.71
Options granted.................................... 861,900 2.84
Options exercised.................................. (138,190) 0.18
Options canceled................................... (321,909) 2.15
--------- -----
Options outstanding at December 31, 1997........... 1,716,125 $1.55
========= =====
</TABLE>

36
<PAGE>

IA CORPORATION I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

At December 31, 1997, options to purchase 431,228 shares of common stock
were exercisable at $0.01 to $6.25 per share. The weighted average fair value
of options granted during the years ended December 31, 1997 and 1995 were
$1.58 and $0.05, respectively. The weighted average fair value of options
granted during 1996 with exercise prices less than the market price at date of
grant was $0.82 per share. The weighted average fair value of options granted
during 1996 with exercise prices equal to the market at date of grant was
$1.21 per share. At December 31, 1997, 115,129 options to purchase common
stock were available for future option grants.

The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- --------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISABLE DECEMBER 31, EXERCISABLE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- --------------- -------------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$0.01-$0.43............. 750,084 3.24 $0.11 327,386 $0.09
$1.43-$2.00............. 384,141 6.88 1.63 85,217 1.43
$2.75-$3.25............. 505,400 9.51 2.95 -- --
$6.00-$6.25............. 76,500 8.92 6.07 18,625 6.07
--------- ---- ----- ------- -----
1,716,125 6.15 $1.55 431,228 $0.61
========= ==== ===== ======= =====
</TABLE>

STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its employee stock awards because as
discussed below, the alternative fair value accounting provided under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," ("FAS 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
when the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation is
recognized.

As adjusted information regarding net income (loss) and earnings per share
is required by FAS 123, which requires the information be presented as if the
Company adopted the fair value of options granted subsequent to December 31,
1994. The Black-Scholes options pricing model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected price
volatility. Because the Company's options have characteristics significantly
different from those traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options.

In the year ended December 31,1997, the fair value of each option granted
was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions. In the year ended
December 31, 1996 and 1995, for the period prior to the initial public
offering, the fair value of each option granted was estimated at the date of
grant using the minimum value method with the following weighted average
assumptions. The minimum value method differs from methods designed to
estimate the fair value of an option, such as the Black-Scholes option pricing
model, because it does not consider the effect of expected volatility.

37
<PAGE>

IA CORPORATION I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The weighted average assumptions used are as follows:

<TABLE>
<CAPTION>
STOCK OPTION PLAN EMPLOYEE STOCK PURCHASE PLAN
------------------------- ----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------- DECEMBER 31,
1997 1996 1995 1997
------- ------- ------- ----------------------------
<S> <C> <C> <C> <C>
Risk-free interest rate. 6.16% 6.09% 5.76% 5.55%
Volatility.............. .75 0 0 .75
Dividend yield.......... 0.0 % 0.0 % 0.0 % 0.0 %
Expected life in years.. 5.23 6.00 6.00 0.50
</TABLE>

Had the compensation costs been determined based upon the fair value at the
date of grant for awards under these plans, consistent with the methodology
prescribed under FAS 123, the Company's net income and net income per share
for the year ended December 31, 1997 would have decreased by approximately
$651,000, or $0.06 and $0.05 per share for pro forma basic and diluted
earnings per share, respectively. The effect in the years ended December 31,
1996 and 1995 were not material. For purposes of adjusted disclosures, the
estimated fair value of the option is amortized to expense over the option's
vesting period for options and the purchase period for stock purchases under
the Employee Stock Purchase Plan. The effects on as adjusted disclosure of
applying FAS 123 are not likely to be representative of the effects on as
adjusted disclosures in future years. Because FAS 123 is applicable only to
options granted subsequent to December 31, 1994, the as adjusted effect will
not be fully reflected until the year ended December 31, 1999. The basic and
diluted net income (loss) per share above does not assume the conversion of
preferred stock effective upon the closing of the Company's initial public
offering, unless it is dilutive, and is calculated using the weighted average
number of shares of common stock outstanding as described in Note 2.

1996 EMPLOYEE STOCK PURCHASE PLAN

On May 28, 1996, the Company adopted an Employee Stock Purchase Plan (the
"Plan"). Under the plan, 400,000 shares of common stock have been reserved for
issuance. The Plan has 24-month offering periods, with each offering period
divided into four consecutive six-month purchase periods. The Plan allows for
eligible employees to purchase stock at 85% of the lower of the fair market
value of the Company's common stock as of the first day of the offering period
or the fair market value of the stock at the end of each purchase period. At
December 31, 1997, 303,581 shares were available for issuance. During 1997,
employees purchased 96,419 shares under the plan. The weighted average fair
value of the rights granted in 1997 using the Black-Scholes model was $2.69
per share.

7. SAVINGS PLAN

The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code. Under the plan, employees may defer up to 18% of their pre-tax
salaries, but not more than the statutory limits. The Company contributes
fifty cents for each dollar contributed by a participant, with a maximum
contribution of 2% of a participant's earnings. The Company's matching
contribution to the savings plan was $138,000, $124,000 and $109,000 in 1997,
1996 and 1995, respectively.

8. INCOME TAXES

At December 31, 1997, the Company's net operating loss carryforward for
federal income tax purposes of approximately $8,922,000 expiring in the years
2008 through 2011 and federal tax credits of approximately $412,000 expiring
in years 2008 through 2011. The Company has net operating loss carryforward
for state income tax purposes of approximately $3,781,000 expiring in the
years 1998 through 2002 and state tax credits of approximately $159,000 with
an indefinite carryforward. The provision for income taxes for the year ended
December 31, 1997 consists primarily of state income taxes of $23,000.

38
<PAGE>

IA CORPORATION I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

Due to "change in ownership" provisions of the Tax Reform Act of 1986,
utilization of the net operating loss and tax credit carryforward may be
subject to an annual limitation regarding their utilization against taxable
income in future periods.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating losses............................. $ 3,260,000 $ 1,859,000
Tax credit carryovers............................ 571,000 479,000
Capital loss carryovers.......................... 1,145,000 1,145,000
Accrued expenses................................. 1,050,000 907,000
Other............................................ 60,000 132,000
----------- -----------
Total deferred tax assets...................... 6,086,000 4,522,000
----------- -----------
Deferred tax liabilities:
Deferred revenue................................. (2,658,000) (864,000)
Other............................................ (217,000) (130,000)
----------- -----------
Total deferred tax liabilities................. (2,875,000) (994,000)
----------- -----------
Net deferred tax assets............................ 3,211,000 3,528,000
Valuation allowance................................ (3,211,000) (3,528,000)
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
</TABLE>

During the years ended December 31, 1997 and 1996, the valuation allowance
decreased by $317,000 and $933,000, respectively.

9. SIGNIFICANT CUSTOMERS

In 1997, two customers accounted for 13% and 11% of total revenues,
respectively. In 1996, two customers accounted for 19% and 15% of total
revenues, respectively. In 1995, one customer accounted for 36% of total
revenues.

39
<PAGE>

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
OF PERIOD DELETIONS(1) PERIOD
---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended December 31, 1997
Deducted from asset accounts
Allowance for doubtful accounts.......... $ 46 $ -- $ 46
---- ---- ----
Totals................................. $ 46 $ -- $ 46
==== ==== ====
Year ended December 31, 1996
Deducted from asset accounts
Allowance for doubtful accounts.......... $ 50 $ 4 $ 46
---- ---- ----
Totals................................. $ 50 $ 4 $ 46
==== ==== ====
Year ended December 31, 1995
Deducted from asset accounts
Allowance for doubtful accounts.......... $ 50 $ -- $ 50
---- ---- ----
Totals................................. $ 50 $ -- $ 50
==== ==== ====
</TABLE>
- --------
(1) Uncollectible accounts written off, less recoveries

40
<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized in the City of Emeryville, State of
California, on the day of March 31, 1998.

IA CORPORATION I

/s/ Chakravarthi V. Ravi
By: _________________________________
CHAKRAVARTHI V. RAVI
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Chakravarthi V. Ravi, his attorney-in-fact, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute,
may do or cause to be done by virtue hereof.

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

SIGNATURES TITLES DATE
---------- ------ ----

/s/ Chakravarthi V. Ravi President, Chief Executive March 31, 1998
- ------------------------------- Officer and Chairman of the
CHAKRAVARTHI V. RAVI Board (Principal Executive
Officer)

/s/ David M. Winkler Vice President and Chief March 31, 1998
- ------------------------------- Financial Officer (Principal
DAVID M. WINKLER Financial and Accounting
Officer)

/s/ Henry Kressel Director March 31, 1998
- -------------------------------
HENRY KRESSEL

/s/ John Oltman Director March 31, 1998
- -------------------------------
JOHN OLTMAN

/s/ Stewart Gross Director March 31, 1998
- -------------------------------
STEWART GROSS

/s/ Randy Katz Director March 31, 1998
- -------------------------------
RANDY KATZ

<PAGE>

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the 1992 Stock Plan, 1996 Stock Plan and the 1996
Employee Stock Purchase Plan of IA Corporation I of our reports dated January
28, 1998 with respect to the consolidated financial statements and schedule of
IA Corporation I included in its Annual Report (Form 10-K) for the year ended
December 31, 1997.

Walnut Creek, California
March 27, 1998

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

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 7,058 10,806
<SECURITIES> 2,000 0
<RECEIVABLES> 8,913 7,305
<ALLOWANCES> 46 46
<INVENTORY> 0 0
<CURRENT-ASSETS> 18,673 18,718
<PP&E> 2,166 1,690
<DEPRECIATION> 551 1,231
<TOTAL-ASSETS> 19,288 19,177
<CURRENT-LIABILITIES> 3,665 4,601
<BONDS> 0 0
0 0
0 0
<COMMON> 114 0
<OTHER-SE> 13,509 111
<TOTAL-LIABILITY-AND-EQUITY> 19,288 19,177
<SALES> 0 0
<TOTAL-REVENUES> 22,481 25,692
<CGS> 10,105 11,477
<TOTAL-COSTS> 10,105 11,477
<OTHER-EXPENSES> 12,294 12,005
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 502 98
<INCOME-PRETAX> 584 2,308
<INCOME-TAX> 23 0
<INCOME-CONTINUING> 561 2,308
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 561 2,308
<EPS-PRIMARY> $0.05 $0.25<F1>
<EPS-DILUTED> $0.05 $0.23
<FN>
<F1>THE EPS FOR 1996 HAS BEEN RESTATED TO COMPLY WITH THE FINANCIAL ACCOUNTING
STANDARDS BOARD STATEMENT NO. 128 "EARNINGS PER SHARE" AND STAFF ACCOUNTING
BULLETIN NO. 98.
</FN>

</TABLE>