VERSATILITY INC, 424B1, 1996-12-13

VERSATILITY INC
424B1, 1996-12-13
PREPACKAGED SOFTWARE

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<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-13771

PROSPECTUS

2,200,000 SHARES

[VERSATILITY INC. LOGO]

COMMON STOCK

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

All of the 2,200,000 shares of Common Stock offered hereby are being
offered by Versatility Inc. ("Versatility" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for information relating to the factors considered in
determining the initial public offering price.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "VERS."

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 5 FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.

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

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

<TABLE>
======================================================================================================
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $15.00 $1.05 $13.95
- ------------------------------------------------------------------------------------------------------
Total(3).................................... $33,000,000 $2,310,000 $30,690,000
======================================================================================================

(1) The Company and certain stockholders (the "Selling Stockholders") have
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Principal and Selling Stockholders" and "Underwriting."
(2) Before deducting expenses estimated at $780,000, payable by the Company.

(3) The Company and the Selling Stockholders have granted to the several
Underwriters options, exercisable within 30 days after the date hereof, to
purchase up to an additional 330,000 shares of Common Stock solely to cover
over-allotments, if any. If all of such additional shares are purchased,
the total Price to Public, Underwriting Discount, Proceeds to Company and
Proceeds to the Selling Stockholders will be $37,950,000, $2,656,500,
$32,525,653 and $2,767,847, respectively. See "Principal and Selling
Stockholders" and "Underwriting."

</TABLE>

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

The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York, on or
about December 18, 1996.

------------------------
MERRILL LYNCH & CO.

MONTGOMERY SECURITIES

OPPENHEIMER & CO., INC.

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

The date of this Prospectus is December 12, 1996.

<PAGE> 2
[Logo]
Versatility Inc.

VERSATILITY TELESALES CALL CENTER APPLICATION
---------------------------------------------

<TABLE>
<S> <C> <C> <C> <C> <C>
Agents may perform Products are Simple and Questions and The application includes The Next Step
account searches displayed in a complex orders Objections enables extensive on-line help. button is used
using search strings, features and and quotes can agents to quickly Agents can search for to navigate
wild cards and benefits format be generated and field common help topics, obtain through a pre-
case-sensitive with cross-sell tracked by questions that glossary information or defined flow
searches. and up-sell account. may arise during access cue cards for of screens.
information. conversation. step-by-step
instructions.

</TABLE>

[Picture of computer screen with arrows pointing from descriptive paragraphs to
parts of the computer screen.]

The Profile Screen displays demographic information about the account.

The Desktop Telephone brings telephony services to the agent's PC. The system
provides autodialing, predictive dialing and voice/data transfer.

The Call Status Bar is used to indicate the outcome of the conversation,
important for tracking trends with regard to products, services and account
preferences/dislikes.

A color-coded transaction clock indicates the time spent with an account. It
also shows the agents' current time and the account's current time, each
expressed in the appropriate time zone.

PowerGuide is a presentation support tool providing call guides, scripting and
integration to other applications and database.

PowerGuide uses buttons and hot spots for intelligent branching to other panels
or applications.

Versatility is a trademark, and POWERGUIDE(R) and the Company's logo are
registered trademarks, of the Company. This Prospectus also includes
trademarks and tradenames of other companies.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

<PAGE> 3

PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus.

THE COMPANY

Versatility is a leading provider of client/server customer interaction
software that enables businesses to automate and enhance their telemarketing and
teleselling capabilities. The Company's software products are designed to
increase the productivity and revenue-generating capabilities of organizations
operating call centers to interact with existing and potential customers. The
Company's products include desktop software applications, development and
customization tools and optional server-based software services, and support a
wide variety of leading computing platforms, allowing users to implement a
scaleable, flexible and interoperable software solution that can be used
independently or as part of an integrated enterprise-wide customer interaction
implementation. Versatility also offers fee-based professional, consulting and
maintenance services to provide implementation, integration and ongoing support
of the Company's software products.

Companies in a variety of industries recognize the strategic importance of
developing and maintaining long-term customer relationships. Companies are
increasingly viewing every stage of customer interaction, from initial sales and
marketing activities to post-sales service and support, as an opportunity to
distinguish their products and services, "cross-sell" related products or
"up-sell" higher margin products, and receive and process valuable customer
feedback. In recent years, telephony-based customer interaction has become an
increasingly significant channel as organizations have recognized that the
telephone can help them more effectively leverage their sales and marketing
investments, access a larger customer base, enhance customer satisfaction and
increase revenue.

The telephony-based customer interaction market is expected to grow
significantly over the next few years. Industry sources estimate that the market
for call center hardware and software is expected to exceed $10.0 billion by
2001. The customer interaction software market, which in addition to the
principal markets addressed by the Company includes customer support, help desk,
field sales force automation and quality assurance applications, is expected to
grow from $1.1 billion in 1995 to over $2.7 billion in 1998.

Versatility provides a suite of software applications that provide call
center agents with the guidance and product and customer information they need
to effectively sell increasingly complex products and services. The Company's
software can enhance revenue-generating functions by supporting not only order
taking but also cross-selling and up-selling other products and services.
Versatility's products also permit the gathering of valuable information
concerning customer needs, buying patterns and demographics, are fully
integrated with the organization's information and telephone systems, enabling
more effective exchange of gathered data and can readily be tailored to the
needs of particular businesses, marketing campaigns or call center agents. The
Company's software solutions are scaleable to support large volumes of calls and
open to permit integration with a wide variety of telephony and computing
systems.

The Company's products are used by customers operating large and mid-sized
call centers for activities including telebanking, claims servicing, customer
service, consumer product telesales and other applications. Since introducing
Versatility Series in May 1995, the Company has licensed Versatility Series
applications for use on over 6,000 agent desktops. The Company's customers
include Avantel, S.A., British Telecommunications Plc ("BT"), Chase Bank, Medco
Containment Services and Mellon Bank. Versatility markets its products and
services to customers in a number of targeted industries, including the
financial services and communications industries. The Company sells its software
and services in the United States through a direct sales organization that
focuses primarily on enterprise-wide, large-scale solutions with complex
requirements. In addition, Versatility markets and sells software through
value-added resellers ("VARs"), distributors and third party systems integrators
in the United States and internationally.
------------------------

The Company was incorporated as National Political Resources, Inc. in the
District of Columbia in 1981 and merged into NPRI, Inc., a Virginia corporation,
in July 1991. In January 1996, NPRI, Inc. reincorporated in Delaware. The
Company changed its name to Versatility Inc. in June 1996. The Company's
executive offices are located at 11781 Lee Jackson Memorial Highway, Seventh
Floor, Fairfax, Virginia 22033, and its telephone number is (703) 591-2900. As
used herein, the term "Company" refers to Versatility Inc., its subsidiaries and
the predecessors of Versatility Inc.

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<PAGE> 4
- --------------------------------------------------------------------------------
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company......................... 2,200,000 shares
Common Stock to be outstanding after the offering(1)........ 7,201,883 shares
Use of proceeds............................................. Working capital and other
general corporate purposes,
including expansion of the
Company's sales and marketing
and product development
organizations.
Nasdaq National Market symbol............................... VERS
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
---------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License revenue.............................. $4,226 $5,510 $5,393 $ 8,045 $10,345 $3,616 $ 7,548
Service and maintenance revenue.............. 2,271 2,411 2,987 3,440 6,190 3,035 3,923
Total revenue............................ 6,497 7,921 8,380 11,485 16,535 6,651 11,471
Write-off of capitalized software(2)........... -- -- -- -- 829 829 --
Income (loss) from operations(2)............... (171) (383) 161 1,981 861 (145) 612
Net income (loss).............................. (174) (372) 110 1,257 657 (92) 418
Pro forma net income (loss) per share(3)....... $ 0.12 $(0.02) $ 0.07
Pro forma weighted average number of shares
outstanding(3)............................... 5,603 5,603 5,603
</TABLE>

<TABLE>
<CAPTION>
OCTOBER 31, 1996
-----------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(4) ADJUSTED(4)(5)
------- -------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................................................... $ 1,983 $ 1,983 $ 31,893
Working capital................................................................. 5,311 5,311 35,221
Total assets.................................................................... 13,149 13,149 43,059
Long-term debt, less current portion............................................ 201 201 201
Redeemable convertible preferred stock.......................................... 3,737 -- --
Stockholders' equity............................................................ 2,080 5,817 35,727
</TABLE>

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

(1) Excludes (i) 740,505 shares of Common Stock issuable upon the exercise of
outstanding options and (ii) 711,000 shares of Common Stock available for
issuance pursuant to the Company's stock plans. See "Management -- Stock
Plans."

(2) Income from operations in fiscal 1994, 1995 and 1996 and in the six months
ended October 31, 1995 reflects the impact of the capitalization and
subsequent amortization of software development costs. Income from
operations in fiscal 1996, including the six months ended October 31, 1995,
reflects a one-time write-off of unamortized software development costs of
$829,000 in July 1995. Had the software development costs not been required
to be capitalized, and the corresponding amortization and write-off not been
recorded, income (loss) from operations in fiscal 1994, 1995 and 1996 and in
the six months ended October 31, 1995 would have been ($91,000), $1.4
million, $1.7 million and $684,000, respectively.

(3) Calculated on the basis described in Note 1 of Notes to Consolidated
Financial Statements.

(4) Gives effect to the automatic conversion of all outstanding shares of the
Company's Series A Preferred Stock into 992,061 shares of Common Stock upon
the closing of this offering.

(5) Adjusted to reflect the sale by the Company of shares of Common Stock
offered hereby and the receipt of the estimated net proceeds therefrom.

Except as otherwise noted or the context otherwise requires, all
information contained in this Prospectus (i) assumes no exercise of the
Underwriters' over-allotment option, (ii) reflects the automatic conversion of
all outstanding shares of Series A Convertible Preferred Stock (the "Series A
Preferred Stock") into 992,061 shares of Common Stock upon the closing of this
offering and (iii) reflects the filing of an Amended and Restated Certificate of
Incorporation upon the closing of this offering to delete all references to the
Series A Preferred Stock and to create a class of authorized but undesignated
preferred stock. See "Description of Capital Stock," "Underwriting" and Notes 7
and 13 of Notes to Consolidated Financial Statements. The Company's fiscal year
ends on April 30. All references to fiscal years in this Prospectus refer to the
fiscal years ending in the calendar years indicated (e.g., fiscal 1996 refers to
the fiscal year ended April 30, 1996).

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."

4
<PAGE> 5

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered in evaluating the Company and its business before
purchasing shares of Common Stock offered hereby.

DEPENDENCE ON NEW PRODUCTS; RISK ASSOCIATED WITH SERVICING THE CUSTOMER
INTERACTION SOFTWARE MARKET

The Company currently derives substantially all of its revenue from sales
of its Versatility Series software and related services. The Versatility Series
was introduced in May 1995, and the Company expects that this product and
related services, together with Versatility CallCenter, introduced in August
1996, will continue to account for a substantial portion of the Company's
revenue for the foreseeable future. However, the Company has little operating
history with the Versatility Series and Versatility CallCenter products. The
Company's financial results for periods prior to fiscal 1996 reflect sales of
the Company's previous generation of products, which the Company no longer
actively markets. The lifecycle of the Company's current products is difficult
to estimate as a result of many factors, including the unknown future demand for
customer interaction software and the effects of competition in this market.
Moreover, although the Company intends to enhance these products and develop
related products, the Company's strategy is to continue to focus on providing
customer interaction software applications as its sole line of business. As a
result, any factor adversely affecting the market for customer interaction
software applications in general, or the Versatility Series and Versatility
CallCenter products in particular, could adversely affect the Company's
business, financial condition and results of operations. The market for customer
interaction software products is intensely competitive, highly fragmented and
subject to rapid change. The Company's future success will depend on continued
growth in the market for customer interaction applications. There can be no
assurance that the market for customer interaction applications will continue to
grow. If this market fails to grow or grows more slowly than the Company
currently anticipates, the Company's business, financial condition and results
of operations would be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

DEPENDENCE ON LARGE LICENSE FEES AND CUSTOMER CONCENTRATION

A relatively small number of customers have accounted for a significant
percentage of the Company's revenue in any given period. In fiscal 1996, the
Company's eight largest customers accounted for 73.3% of the Company's total
revenue, two of which, BT and Medco Containment Services, accounted for 25.7%
and 22.2%, respectively. In the first six months of fiscal 1997, two customers,
BT and Avantel, S.A., accounted for 24.9% and 18.7%, respectively, of the
Company's total revenue. Although the particular customers may change from
period to period, the Company expects that large sales to a limited number of
customers will continue to account for a significant percentage of its revenue
in any particular period for the foreseeable future. Therefore, the loss,
deferral or cancellation of an order could have a significant impact on the
Company's operating results in a particular quarter. The Company has no
long-term contracts with its customers and there can be no assurance that its
current customers will place additional orders, or that the Company will obtain
orders of similar magnitude from other customers. The loss of any major customer
or any reduction, delay in or cancellation of orders by any such customer, or
the failure of the Company to market successfully to new customers could have a
materially adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Results of Operations."

QUARTERLY FLUCTUATIONS IN REVENUE AND OPERATING RESULTS

5
<PAGE> 6

sales, commercial strategies adopted by competitors, changes in foreign currency
exchange rates, customers' budgets constraints, and the Company's ability to
control costs. In addition, a limited number of relatively large customer orders
has accounted for and is likely to continue to account for a substantial portion
of the Company's total revenue in any particular quarter. The timing of such
orders can be difficult to predict given the average size of the Company's
orders and the length of its sales process. The Company has in the past
recognized a substantial portion of its revenue in the last month of a quarter.
Therefore, the loss, deferral or cancellation of an order could have a
significant adverse impact on the Company's revenue and operating results in a
particular quarter. Because the Company's operating expense levels are
relatively fixed and tied to anticipated levels of revenue, any delay in the
recognition of revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter. Based upon
all of the foregoing, the Company believes that quarter-to-quarter comparisons
of its results of operations are not necessarily meaningful and such comparisons
should not be relied upon as indications of future performance. It is also
likely that the Company's future quarterly operating results in any given period
will not meet the expectations of market analysts or investors, which could have
an adverse effect on the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Quarterly Results of Operations."

LENGTH OF SALES AND IMPLEMENTATION PROCESSES

Selling the Company's products generally requires the Company to provide a
significant level of education to prospective customers regarding the use and
benefits of the Company's products. In addition, implementation of the Company's
products involves a significant commitment of resources by prospective customers
and is commonly associated with substantial integration efforts which may be
performed by the Company, by the customer, or by a third party systems
integrator. For these and other reasons, the length of time between the date of
initial contact with the potential customer and the implementation of the
Company's products is often lengthy, typically ranging from two to nine months
or more, and is subject to delays over which the Company has little or no
control. The Company's implementation cycle could be lengthened by increases in
the size and complexity of its implementations and by delays in its customers'
adoption of client/server computing environments. Delay in or cancellation of
the sale or implementation of applications could have a materially adverse
effect on the Company's business, financial condition and results of operations
and cause the Company's operating results to vary significantly from quarter to
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results of Operations."

EXPANSION OF SALES FORCE AND CHANNELS OF DISTRIBUTION

Historically, the Company has distributed its products primarily through
its direct sales force. An integral part of the Company's strategy includes
expanding its direct sales force while developing additional marketing, sales
and implementation relationships with third party systems integrators and
value-added resellers ("VARs"). The Company's ability to achieve significant
revenue growth in the future will depend on its ability to attract, train and
retain additional qualified direct sales personnel. In addition, the Company
currently is investing, and intends to continue investing, significant resources
to develop its relationships with third party systems integrators and VARs,
especially in international markets. The Company has only limited experience
distributing its products through indirect channels. If the Company is unable to
develop its relationships with third party systems integrators and VARs, or if
the third party systems integrators and VARs with which the Company develops
relationships are unable to effectively market, sell and implement the Company's
software applications, the Company's business, financial condition and results
of operations could be materially adversely affected. See "Business -- Sales and
Marketing."

DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS; POTENTIAL FOR CHANNEL CONFLICT

The Company's strategy is to increase its use of third party systems
integrators and VARs to distribute its products. These independent sales
organizations, which generally install and support the product lines of a number
of companies, are not under the direct control of the Company, are not subject
to any minimum purchase requirements and can discontinue marketing the Company's
products at any time without cause.

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<PAGE> 7

Many of the Company's third party systems integrators and VARs sell or co-market
potentially competitive products. Accordingly, the Company must compete for the
focus and sales efforts of its third party systems integrators and VARs.
Additionally, selling through indirect channels may limit the Company's contacts
with its customers. As a result, the Company's ability to accurately forecast
sales and revenue, evaluate customer satisfaction and recognize emerging
customer requirements may be hindered. In addition, the Company's gross profit
on sales to third party systems integrators and VARs tends to be lower than on
its direct sales, although the Company's selling and marketing expenses and
servicing costs also tend to be lower with respect to these sales. There can be
no assurance that the Company's current third party systems integrators and VARs
will continue to distribute or recommend the Company's products or do so
successfully. There can also be no assurance that one or more of these companies
will not begin to market products in competition with the Company. The
termination of one or more of these relationships could adversely affect the
Company's business, financial condition and results of operations. See "Business
- -- Sales and Marketing."

The Company's strategy of marketing its products directly to end-users and
indirectly through VARs and third party systems integrators may result in
distribution channel conflicts. The Company's direct sales efforts may compete
with those of its indirect channels and, to the extent different resellers
target the same customers, resellers may also come into conflict with each
other. Although the Company has attempted to manage its distribution channels in
a manner to avoid potential conflicts, there can be no assurance that channel
conflicts will not materially adversely affect its relationships with existing
third party systems integrators or VARs or adversely affect its ability to
attract new third party systems integrators and VARs. See "Business -- Sales and
Marketing."

INTERNATIONAL OPERATIONS

Revenue from sales outside the United States in fiscal 1994, 1995, 1996 and
the first six months of fiscal 1997 accounted for approximately 18.8%, 16.3%,
40.8% and 53.6%, respectively, of the Company's total revenue. International
operations are subject to inherent risks, including the impact of possible
recessionary environments in economies outside the United States, changes in
demand for the Company's products resulting from fluctuations in exchange rates,
unexpected changes in legal and regulatory requirements including those relating
to telemarketing activities, changes in tariffs, seasonality of sales, costs of
localizing products for foreign markets, longer accounts receivable collection
periods and greater difficulty in accounts receivable collection, difficulties
and costs of staffing and managing foreign operations, reduced protection for
intellectual property rights in some countries, potentially adverse tax
consequences and political and economic instability. There can be no assurance
that the Company will be able to sustain or increase international revenue, or
that the factors listed above will not have a material adverse impact on the
Company's international operations. While the Company's expenses incurred in
foreign countries are typically denominated in the local currencies, revenue
generated by the Company's international sales typically is paid in U.S. dollars
or British pounds. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in currency exchange
rates in the future will not have a material adverse impact on the Company's
international operations. The Company currently does not engage in hedging
activities.

A significant element of the Company's strategy is to continue the
expansion of its operations in international markets. This expansion has
required and will continue to require significant management attention and
financial resources to develop international sales channels. Because of the
difficulty in penetrating new markets, along with the Company's size and
geographic location, there can be no assurance that the Company will be able to
maintain or increase international revenue. To the extent that the Company is
unable to do so, the Company's financial condition and results of operations
could be materially adversely affected. A substantial portion of the Company's
international sales are expected to be made using indirect selling channels,
such as third party systems integrators and VARs. A reduction in sales by all or
some of these distributors or a termination of their relationships with the
Company could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Sales and
Marketing."

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<PAGE> 8

COMPETITION

The market for the Company's products is intensely competitive, highly
fragmented and subject to rapid change. Because the Company offers multiple
applications which can be purchased separately or integrated as part of the
Versatility Series, the Company competes with a variety of companies depending
on the target market for their applications software products. The Company's
principal competitors in the customer interaction software market are Brock
International, Inc., Digital Systems International, Inc., Information Management
Associates, Inc., Scopus Technology, Inc. and The Vantive Corporation. For
installations where telephony functions are of prime importance, competitors
include Davox Corporation, Early Cloud and Company (a division of IBM) and EIS
International, Inc. The Company also competes with third party professional
service organizations that develop custom software and with the information
technology departments of potential customers, which develop applications
internally. Among the Company's potential competitors are also a number of large
hardware and software companies that may develop or acquire products that
compete with the Company's products. Increased competition is likely to result
in price reductions, reduced operating margins and loss of market share, any of
which could materially adversely affect the Company's business, financial
condition and results of operations. Many of the Company's current and potential
competitors have significantly greater financial, technical, marketing and other
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of products
than can the Company. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations. See "Business --
Competition."

MANAGEMENT OF GROWTH

The Company has recently experienced significant growth in revenue,
operations and personnel. Continued growth will challenge the Company's
management systems and resources and require the Company to improve and upgrade
its management information systems. In addition, the Company will need to hire
more technical, sales and marketing, support and administrative personnel to
adequately service and support its growing customer base. There can be no
assurance that the Company will be able to successfully upgrade its systems or
to attract, retain and successfully train the necessary personnel to accomplish
its growth strategies or that it will not experience constraints that will
adversely affect its ability to satisfy customer demand in a timely fashion or
to satisfactorily support its customers. Any of these events could injure the
Company's reputation or lead to loss of customers. If the Company is unable to
manage growth effectively, the Company's business, financial condition and
results of operations could be adversely affected. See "Business -- Employees"
and "Management -- Executive Officers and Directors."

DEPENDENCE ON GROWTH OF CLIENT/SERVER COMPUTING ENVIRONMENT

The client/server software environment is relatively new. The Company
markets its products solely to customers that have committed or are committing
their call center systems to client/server environments, or are converting
legacy systems, in part or in whole, to a client/server environment. The
Company's success will depend on further development of and growth in the number
of organizations adopting client/server computing environments. There can be no
assurance, however, that the client/server market will maintain its current rate
of growth. There also can be no assurance that the client/server computing
trends anticipated by the Company will occur or that the Company will be able to
respond effectively to the evolving requirements of this market. If the
client/server market fails to grow, or grows at a rate slower than experienced
in the past, the Company's business, financial condition and results of
operations could be materially adversely affected.

RAPID TECHNOLOGICAL CHANGE AND PRODUCT DEVELOPMENT RISKS

The customer interaction software market is subject to rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards that may render existing products and services obsolete. As a
result, the Company's position in this market could be eroded rapidly by
unforeseen changes in application features and functions. The life cycles of the
Company's products are difficult to estimate. The Company's growth and future
operating results will depend in part upon its ability to

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<PAGE> 9

enhance existing applications and develop and introduce new applications that
meet or exceed technological advances in the marketplace, that meet changing
customer requirements, that respond to competitive products and that achieve
market acceptance. The Company's product development and testing efforts are
expected to require substantial investments by the Company. There can be no
assurance that the Company will possess sufficient resources to make these
necessary investments. The Company has in the past experienced delays both in
developing new products and in customizing existing products, and there can be
no assurance that the Company will not experience difficulties that could cause
delays in the future. In addition, there can be no assurance that such products
will meet the requirements of the marketplace and achieve market acceptance, or
that the Company's current or future products will conform to industry
standards. If the Company is unable, for technological or other reasons, to
develop and introduce new and enhanced products in a timely manner, the
Company's business, financial condition and results of operations could be
materially adversely affected.

Software products as complex as those offered by the Company may contain
errors that may be detected at any point in the products' life cycles. The
Company has, in the past, discovered software errors in certain of its products
and has experienced delays in shipment of products during the period required to
correct these errors. In particular, the computing environment is characterized
by a wide variety of standard and non-standard configurations that make
pre-release testing for programming or compatibility errors very difficult and
time consuming. There can be no assurance that, despite extensive 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 sales, 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, financial condition and results of operations. See "Business
- -- Product Development."

DIFFICULTY IN PROTECTING PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT

The Company relies on a combination of copyright, trade secret and
trademark laws, confidentiality procedures and contractual provisions to protect
its proprietary rights in its products and technology. The Company does not rely
upon patent protection and does not currently expect to seek patents on any
aspects of its technology. There can be no assurance that the confidentiality
agreements and other methods on which the Company relies to protect its trade
secrets and proprietary technology will be adequate. Further, the Company may be
subject to additional risks as it enters into transactions in countries where
intellectual property laws are not well developed or are poorly enforced. Legal
protections of the Company's rights may be ineffective in such countries.
Litigation to defend and enforce the Company's intellectual property rights
could result in substantial costs and diversion of resources and could have a
materially adverse effect on the Company's business, financial condition and
results of operations, regardless of the final outcome of such litigation.
Despite the Company's efforts to safeguard and maintain its proprietary rights
both in the United States and abroad, there can be no assurance that the Company
will be successful in doing so or that the steps taken by the Company in this
regard will be adequate to deter misappropriation or independent third-party
development of the Company's technology or to prevent an unauthorized third
party from copying or otherwise obtaining and using the Company's products or
technology. There also can be no assurance that others will not independently
develop similar technologies or duplicate any technology developed by the
Company. Any such events could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company has entered into agreements with a small number of its
customers requiring the Company to place its source code in escrow. These escrow
agreements typically provide that these customers have a limited, non-exclusive
right to use such code in the event that there is a bankruptcy proceeding by or
against the Company, if the Company ceases to do business or if the Company
fails to meet its support obligations. Entering into such agreements may
increase the likelihood of misappropriation by third parties.

9
<PAGE> 10

against the Company in the future with respect to current or future products.
Any claims or litigation, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing arrangements. Such royalty or licensing
arrangements, if required, may not be available on terms acceptable to the
Company, if at all, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Adverse determinations
in such claims or litigation could also have a material adverse effect on the
Company's business, financial condition and results of operations.

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent upon the continued
service of its executive officers and other key management and technical
personnel, and on its ability to continue to attract, retain and motivate
qualified personnel, such as experienced software developers and sales
personnel. Competition for such employees is very intense. The Company has no
long-term employment contracts with any of its employees. The loss of the
services of one or more of the Company's executive officers, software developers
or other key personnel or the Company's inability to recruit replacements for
such personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company maintains $1.0
million of key-man life insurance on Ronald R. Charnock, the Company's President
and Chief Executive Officer. See "Business -- Employees" and "Management --
Executive Officers and Directors."

REGULATORY ENVIRONMENT

Certain uses of outbound call processing systems are regulated by federal,
state and foreign law. Although the compliance with these laws may limit the
potential use of the Company's products in some respects, the Company's systems
can be programmed to operate automatically in full compliance with these laws
through the use of appropriate calling lists and calling campaign time
parameters. There can be no assurance, however, that future legislation further
restricting telephone solicitation practices, if enacted, would not adversely
affect the Company. See "Business -- Regulatory Environment."

CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES

Upon the closing of this offering, the Company's directors, executive
officers and other employees, together with entities affiliated with them, will
beneficially own approximately 66.5% of the outstanding Common Stock (62.8% if
the Underwriters' over-allotment option is exercised in full). Accordingly, such
persons together will have sufficient voting power to control the outcome of
matters submitted to the stockholders for approval (including the election of
the Board of Directors) and also to have control over the management and affairs
of the Company. As a result of such control, certain transactions may not be
possible without the approval of such stockholders. These transactions include
mergers involving the Company, tender offers, open-market purchase programs or
other purchases of Common Stock that could give stockholders of the Company the
opportunity to realize a premium over the then-prevailing market price for their
shares of Common Stock. See "Principal and Selling Stockholders" and
"Description of Capital Stock -- Delaware Law and Certain Charter and By-Law
Provisions; Anti-Takeover Effects."

BROAD DISCRETION IN USE OF PROCEEDS

The Company intends to use the proceeds of this offering primarily for
working capital and general corporate purposes, including expansion of the
Company's sales and marketing and product development organizations. The Company
has not identified specific uses of the net proceeds to be received by it from
this offering. Accordingly, the Company's management will have broad discretion
as to the use of such proceeds without any action or approval of the Company's
stockholders. See "Use of Proceeds."

ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price was determined through negotiations
among the Company and the Underwriters. See "Underwriting" for a discussion of
factors considered in determining the initial public offering price of the
Common Stock. There can be no assurance that an active public market for the
Common Stock will develop or be sustained after the offering or that the market
price of the Common Stock will not decline below the initial public offering
price. The trading price of the Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements of technological innovations or new

10
<PAGE> 11

products by the Company or its competitors, general conditions in the customer
interaction software market, changes in earnings estimates by analysts, or other
events or factors. Extreme price and trading volume volatility has significantly
affected the market prices of securities of many high technology companies in
recent months, for reasons frequently unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. See "Underwriting."

EFFECT OF ANTI-TAKEOVER PROVISIONS

Upon the closing of this offering, the Company's Board of Directors will
have the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges of those shares without
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any shares of Preferred Stock that may be issued in
the future. While the Company has no present intention to issue shares of
Preferred Stock, such issuance could have the effect of making it more difficult
for a third party to effect a change of control of the Company. In addition, the
Preferred Stock may have other rights, including voting and economic rights,
senior to the Common Stock, and, as a result, the issuance thereof could have a
material adverse effect on the market value of the Common Stock. Furthermore,
the Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person first becomes an
"interested stockholder," unless the business combination is approved in a
prescribed manner. The application of Section 203 could also have the effect of
delaying or preventing a change of control of the Company. Certain other
provisions of the Company's Second Amended and Restated Certificate of
Incorporation, including a classified board of directors and a prohibition on
stockholder action by written consent, may have the effect of delaying or
preventing changes of control or management of the Company, which could
adversely affect the market price of the Company's Common Stock. See
"Management -- Executive Officers and Directors" and "Description of Capital
Stock -- Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover
Effects."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market after
this offering could adversely affect the prevailing market price of the Common
Stock. In addition to the 2,200,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option), as of the
date of this Prospectus (the "Effective Date"), there will be 5,001,883 shares
of Common Stock outstanding, all of which are "restricted" shares (the
"Restricted Shares") under the Securities Act of 1933, as amended (the
"Securities Act"). Approximately 640,000 Restricted Shares will be eligible for
sale immediately following the Effective Date in reliance on Rule 144(k)
promulgated under the Securities Act. Beginning 90 days after the Effective
Date, an additional 3,360,000 Restricted Shares will first become eligible for
sale in the public markets pursuant to Rules 144 promulgated under the
Securities Act. Of such shares, all but 4,911 are subject to "lock-up"
agreements with the Underwriters which will expire 180 days after the date of
this Prospectus (or earlier, with the consent of Merrill Lynch & Co.). The
remaining 1,001,883 Restricted Shares will not be eligible for sale under Rule
144 until the expiration of a two-year holding period from the date of their
acquisition. In addition, as of November 15, 1996, options to purchase an
aggregate of 740,505 shares of Common Stock were outstanding. Of the shares
issuable upon the exercise of options, 652,592 shares of Common Stock are
subject to lock-up agreements with the Underwriters. The Company intends to file
with the Securities and Exchange Commission a registration statement on Form S-8
within 90 days following the Effective Date. See "Principal and Selling
Stockholders" and "Shares Eligible for Future Sale."

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution in the pro forma net tangible book value of the Common
Stock from the initial public offering price. See "Dilution."

11
<PAGE> 12

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered hereby, at the initial public offering price of $15.00 per
share, after deducting the underwriting discount and estimated offering
expenses, are estimated to be $29.9 million ($31.7 million if the Underwriters'
over-allotment option is exercised in full). The Company will not receive any
proceeds from the sale of shares of Common Stock by the Selling Stockholders
upon the exercise of the Underwriters' over-allotment options. See "Principal
and Selling Stockholders."

The principal purposes of this offering are to increase the Company's
equity capital and to create a public market for the Company's Common Stock,
which will facilitate future access by the Company to public equity markets and
enhance the ability of the Company to use its Common Stock as a means for
attracting and retaining key employees. The Company intends to use the net
proceeds of this offering primarily for working capital and general corporate
purposes, including expansion of the Company's sales and marketing and product
development organizations. A portion of the net proceeds may also be used for
investments in or acquisitions of complementary businesses, products or
technologies, although no such transactions are currently being discussed or are
under negotiation. Pending such uses, the Company expects to invest the net
proceeds in short-term, interest-bearing, investment grade securities.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends on its capital stock in the
foreseeable future. In addition, the Company's loan agreement with its
commercial bank prohibits the payment of cash dividends.

12
<PAGE> 13

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
October 31, 1996 (i) on an actual basis, (ii) on a pro forma basis to reflect
the automatic conversion of all outstanding shares of Series A Preferred Stock
into 992,061 shares of Common Stock upon the closing of this offering, and (iii)
on an adjusted basis to reflect the sale by the Company of the 2,200,000 shares
of Common Stock offered hereby and the receipt by the Company of the estimated
net proceeds therefrom, after deducting the underwriting discount and estimated
offering expenses. The information in this table is qualified by, and should be
read in conjunction with, the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
OCTOBER 31, 1996
-------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------ --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, less current portion.................... $ 201 $ 201 $ 201
Series A Redeemable Convertible Preferred Stock, $.01
par value, 992,061 shares authorized, issued and
outstanding (actual); no shares authorized, issued or
outstanding (pro forma and pro forma as adjusted)..... 3,737 -- --
Stockholders' equity:
Preferred Stock, $.01 par value, no shares
authorized, issued or outstanding (actual);
2,000,000 shares authorized, no shares issued or
outstanding (pro forma and pro forma as
adjusted)........................................ -- -- --
Common Stock, $.01 par value, 20,000,000 shares
authorized; 4,000,000 shares issued and
outstanding (actual); 4,992,061 shares issued and
outstanding (pro forma); 7,192,061 shares issued
and outstanding (pro forma as adjusted)(1)....... 40 50 72
Additional paid-in capital.............................. -- 3,727 33,615
Retained earnings....................................... 2,102 2,102 2,102
Foreign currency translation adjustment................. (62) (62) (62)
------ ------ -------
Total stockholders' equity......................... 2,080 5,817 35,727
------ ------ -------
Total capitalization.......................... $6,018 $6,018 $35,928
====== ====== =======
</TABLE>

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

(1) Excludes (i) 750,327 shares of Common Stock issuable upon the exercise of
options outstanding as of October 31, 1996, and (ii) 711,000 shares of
Common Stock available for issuance pursuant to the Company's stock plans.
See "Management -- Stock Plans" and Notes 9 and 13 of Notes to Consolidated
Financial Statements.

13
<PAGE> 14

DILUTION

The pro forma net tangible book value of the Company at October 31, 1996
was $5.8 million, or $1.17 per share of Common Stock. Pro forma net tangible
book value per share represents the amount of total tangible assets less total
liabilities, divided by the total number of shares of Common Stock outstanding
(giving effect to the conversion to Common Stock of all outstanding shares of
Series A Preferred Stock). After giving effect to the sale of the 2,200,000
shares of Common Stock offered by the Company hereby, at the initial public
offering price of $15.00 per share and after deducting the underwriting discount
and estimated offering expenses, the pro forma net tangible book value of the
Company at October 31, 1996 would have been $35.7 million, or $4.97 per share of
Common Stock. This represents an immediate increase in such pro forma net
tangible book value of $3.80 per share to existing stockholders and an immediate
dilution of $10.03 per share to investors purchasing shares in this offering.
The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $15.00
Pro forma net tangible book value per share before the
offering................................................. $1.17
Increase in net tangible book value per share attributable
to new investors......................................... 3.80
-----
Pro forma net tangible book value per share after the
offering...................................................... 4.97
------
Dilution per share to new investors(1).......................... $10.03
======
</TABLE>

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

(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value after this offering would be approximately
$5.13 per share, resulting in dilution to new investors in this offering of
$9.87 per share. See "Underwriting."

The following table sets forth, on a pro forma basis as of October 31,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average price paid per share by
existing stockholders and to be paid by the purchasers of the shares offered by
the Company hereby (at the initial public offering price of $15.00 per share and
before deducting the underwriting discount and offering expenses):

<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 4,992,061 69.4% $ 3,501,000 9.6% $ 0.70
New investors....................... 2,200,000 30.6 33,000,000 90.4 15.00
--------- ----- ----------- -----
Total.......................... 7,192,061 100.0% $36,501,000 100.0%
========= ===== =========== =====
</TABLE>

The foregoing tables assume no exercise of outstanding stock options. As of
October 31, 1996, there were 750,327 shares of Common Stock issuable upon the
exercise of outstanding options at a weighted average exercise price of $2.60
per share. To the extent these options are exercised in the future, there will
be further dilution to new investors.

14
<PAGE> 15

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following table sets forth for the periods indicated selected
consolidated financial data of the Company. The statement of operations data for
the years ended April 30, 1994, 1995 and 1996 and the balance sheet data as of
April 30, 1995 and 1996 have been derived from Consolidated Financial Statements
audited by Deloitte & Touche LLP, independent auditors, which are included
elsewhere in this Prospectus. The statement of operations data for the years
ended April 30, 1992 and 1993 and the balance sheet data as of April 30, 1992,
1993 and 1994 have been derived from Consolidated Financial Statements audited,
in the case of fiscal 1993 and 1994, by Deloitte & Touche LLP, independent
auditors, and in the case of fiscal 1992, by other independent auditors, not
included in this Prospectus. Data for the six months ended October 31, 1995 and
1996 have been derived from unaudited Consolidated Financial Statements included
elsewhere in this Prospectus and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations for the periods presented.
Results for the six months ended October 31, 1996 are not necessarily indicative
of the results to be expected for the full year ending April 30, 1997. This data
is qualified by the more detailed Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus and should be read in conjunction
with such Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
----------------------------------------------- ------------------
1992 1993 1994 1995 1996 1995 1996
------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
License revenue...................... $4,226 $5,510 $5,393 $ 8,045 $10,345 $3,616 $ 7,548
Service and maintenance revenue...... 2,271 2,411 2,987 3,440 6,190 3,035 3,923
------ ------ ------ ------- ------- ------ -------
Total revenue.................... 6,497 7,921 8,380 11,485 16,535 6,651 11,471
------ ------ ------ ------- ------- ------ -------
Cost of revenue:
License revenue...................... 1,501 1,890 1,924 1,493 573 243 409
Service and maintenance revenue...... 1,196 1,745 2,056 2,385 4,267 1,763 2,471
------ ------ ------ ------- ------- ------ -------
Total cost of revenue............ 2,697 3,635 3,980 3,878 4,840 2,006 2,880
------ ------ ------ ------- ------- ------ -------
Gross margin........................... 3,800 4,286 4,400 7,607 11,695 4,645 8,591
------ ------ ------ ------- ------- ------ -------
Operating expenses:
Selling, general and
administrative..................... 3,506 4,048 3,717 4,550 7,770 2,937 6,592
Research and development............. 247 183 389 711 2,074 957 1,280
Depreciation and amortization........ 218 438 133 365 161 67 107
Write-off of capitalized software.... -- -- -- -- 829 829 --
------ ------ ------ ------- ------- ------ -------
Total operating expenses......... 3,971 4,669 4,239 5,626 10,834 4,790 7,979
------ ------ ------ ------- ------- ------ -------
Income (loss) from operations.......... (171) (383) 161 1,981 861 (145) 612
Interest income (expense), net......... (11) (7) (20) (9) 3 13 (13)
------ ------ ------ ------- ------- ------ -------
Income (loss) before provision
(benefit) for income taxes........... (182) (390) 141 1,972 864 (132) 599
Provision (benefit) for income taxes... (8) (18) 31 715 207 (40) 181
------ ------ ------ ------- ------- ------ -------
Net income (loss)...................... $ (174) $ (372) $ 110 $ 1,257 $ 657 $ (92) $ 418
====== ====== ====== ======= ======= ====== =======
Pro forma net income (loss) per
share(1)............................. $ 0.12 $(0.02) $ 0.07
======= ====== =======
Pro forma weighted average common and
common equivalent shares
outstanding(1)....................... 5,603 5,603 5,603
===== ===== =====
</TABLE>

<TABLE>
<CAPTION>
OCTOBER 31, 1996
APRIL 30, ------------------
----------------------------------------------- PRO
1992 1993 1994 1995 1996 ACTUAL FORMA(2)
------ ------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 281 $ 108 $ 192 $1,414 $2,280 $ 1,983 $ 1,983
Working capital (deficiency)........... (151) (318) (573) 446 5,066 5,311 5,311
Total assets........................... 2,979 2,832 2,060 4,288 9,631 13,149 13,149
Long-term debt, less current portion... 159 101 114 51 70 201 201
Redeemable convertible preferred
stock................................ -- -- -- -- 3,561 3,737 --
Stockholders' equity (deficit)......... 345 (35) 75 1,331 1,834 2,080 5,817
</TABLE>

- ---------------
(1) Calculated on the basis described in Note 1 of Notes to Consolidated
Financial Statements.

(2) Gives effect to the automatic conversion of all outstanding shares of Series
A Preferred Stock into 992,061 shares of Common Stock upon the closing of
this offering.

15
<PAGE> 16

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Versatility is a leading provider of client/server customer interaction
software that enables businesses to automate their telemarketing and teleselling
capabilities. Founded in 1981 as an information management consulting firm,
Versatility introduced its first commercial product in 1985, a telemarketing
application product based on the Digital Equipment Corporation ("DEC") VAX/VMS
System. The Company operated as a DEC value-added reseller, supplying turnkey
call center solutions to large and mid-sized companies in a variety of
industries, until the end of fiscal 1994. In November 1993, the Company began
developing applications based on the client/server architecture which culminated
with the release of the Versatility Series in May 1995. In fiscal 1996,
substantially all of the Company's revenue was derived from sales or services
related to the Versatility Series. In August 1996, the Company released
Versatility CallCenter, a CD-ROM-based call center software application that
supports call centers of 50 agents or less.

The Company's revenue is derived principally from two sources: (i) product
license fees for the use of the Company's software products and (ii) service
fees for implementation, maintenance, consulting and training related to the
Company's software products. Over the last three fiscal years, the Company's
total revenue has increased at a compounded annual growth rate of 40.5%.
Historically, the Company's service and maintenance revenue has increased with
license revenue. However, to the extent the Company is successful in
implementing its strategy of distributing a greater proportion of its products
through third party systems integrators and VARs, who will perform such
services, the Company expects that, in future periods, service and maintenance
revenue will decrease as a percentage of total revenue. While hardware sales
relating to implementation of the Company's VAX/VMS application represented
22.8% and 12.1% of the Company's revenue in fiscal 1994 and 1995, respectively,
the Company has not had significant levels of hardware revenue since the
introduction of its client/server products beginning in fiscal 1996. Revenue
from hardware sales have been included in license revenue for such years.

The Company's contracts with its customers often involve significant
customization and installation obligations. In these situations, license revenue
is recognized based on the percentage of completion method which is based on
achievement of certain milestones. When the Company is under no obligation to
install or customize the software, license revenue is recognized upon shipment.
Service revenue for implementation, consulting and training is recognized as the
service is performed. Revenue from maintenance services is recognized ratably
over the term of the service agreement.

The Company's strategy is to increase its use of third party systems
integrators and VARs to distribute its products. Because the Company generally
has no obligation to provide installation, maintenance, training or other
services under such arrangements, the Company generally recognizes software
license revenue from third party systems integrators and VARs upon shipment of
an order. The Company does not expect to receive substantial amounts of service
or maintenance revenue under such arrangements.

For the fiscal year ended April 30, 1996, the Company's eight largest
customers accounted for 73.3% of the Company's total revenue, of which two
customers, British Telecommunications, Plc ("BT") and Medco Containment
Services, accounted for 25.7% and 22.2%, respectively. For the first six months
of fiscal 1997, BT and Avantel, S.A. accounted for 24.9% and 18.7%,
respectively, of the Company's total revenue. Although the particular customers
may change from period to period, the Company expects that large sales to a
limited number of customers will continue to account for a significant
percentage of its total revenue in any particular period. Given the customer
concentration and the duration of the sales and implementation cycle, the loss
of a major customer or any reduction or delay in sales to or implementation by
these or other customers could have a material adverse effect on the Company's
operating results in any particular period. See "Risk Factors -- Dependence on
Large License Fees and Customer Concentration," "-- Length of Sales and
Implementation Process" and "-- Fluctuations in Revenue and Operating Results."

Revenue from customers outside the United States accounted for 18.8%,
16.3%, 40.8 % and 53.6% of the Company's total revenue for fiscal 1994, 1995 and
1996 and the first six months of fiscal 1997, respectively.

16
<PAGE> 17

While the Company's expenses incurred in foreign countries are typically
denominated in the local currencies, revenue generated by the Company's
international sales typically is paid in U.S. dollars or British pounds.
Although exposure to currency fluctuations to date has been insignificant, there
can be no assurance that fluctuations in currency exchange rates in the future
will not have a material adverse impact on the Company's international
operations. The Company currently does not engage in hedging activities.

During the course of the development of the client/server software
applications, the Company capitalized costs associated with the Versatility
Series in compliance with Statement of Financial Accounting Standards No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS 86"). The amount of software capitalized totaled $995,000 and,
beginning in November 1994, was amortized over three years on a straight-line
basis. In connection with two major implementations of the Versatility Series
product in July 1995, the Company decided to add features and functions which
were substantially different than those included in the software as originally
capitalized. Management determined that these features and functions
substantially altered the content of the product, effectively eliminating any
remaining useful life of the capitalized asset. Accordingly, the Company wrote
off the remaining asset of $829,000 in the first quarter of fiscal 1996. The
Company anticipates that for the foreseeable future, no software development
costs will meet the requirements for capitalization under SFAS 86.

RESULTS OF OPERATIONS

The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue:

<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
---------------------------------------------------
SIX MONTHS
YEAR ENDED APRIL 30, ENDED OCTOBER 31,
------------------------- -----------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
License revenue......................... 64.4% 70.0% 62.6% 54.4% 65.8%
Service and maintenance revenue......... 35.6 30.0 37.4 45.6 34.2
----- ----- ----- ----- -----
Total revenue...................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenue:
License revenue......................... 23.0 13.0 3.5 3.7 3.6
Service and maintenance revenue......... 24.5 20.8 25.8 26.5 21.5
----- ----- ----- ----- -----
Total cost of revenue.............. 47.5 33.8 29.3 30.2 25.1
----- ----- ----- ----- -----
Gross margin................................. 52.5 66.2 70.7 69.8 74.9
----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative..... 44.4 39.6 47.0 44.1 57.5
Research and development................ 4.6 6.2 12.5 14.4 11.2
Depreciation and amortization........... 1.6 3.2 1.0 1.0 0.9
Write-off of capitalized software....... -- -- 5.0 12.5 --
----- ----- ----- ----- -----
Total operating expenses........... 50.6 49.0 65.5 72.0 69.6
----- ----- ----- ----- -----
Income (loss) from operations................ 1.9 17.2 5.2 (2.2) 5.3
Interest income (expense), net............... (0.2) (0.1) (0.0) 0.2 (0.1)
----- ----- ----- ----- -----
Income (loss) before provision (benefit) for
income taxes............................... 1.7 17.1 5.2 (2.0) 5.2
Provision (benefit) for income taxes......... 0.4 6.2 1.2 (0.6) 1.6
----- ----- ----- ----- -----
Net income (loss)............................ 1.3% 10.9% 4.0% (1.4)% 3.6%
===== ===== ===== ===== =====
</TABLE>

The following table sets forth, for each component of revenue, the cost of
such revenue expressed as a percentage of such revenue for the periods
indicated:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
------------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Cost of license revenue...................... 35.7% 18.6% 5.5% 6.7% 5.4%
Cost of service and maintenance revenue...... 68.8% 69.3% 68.9% 58.1% 63.0%
</TABLE>

17
<PAGE> 18

SIX MONTHS ENDED OCTOBER 31, 1996 COMPARED TO SIX MONTHS ENDED OCTOBER 31,
1995

Revenue. Total revenue increased 72.5% from $6.7 million in the first half
of fiscal 1996 to $11.5 million in the first half of fiscal 1997. Revenue from
license fees increased 108.8% from $3.6 million in the first half of fiscal
1996, or 54.4% of total revenue, to $7.5 million in the first half of fiscal
1997, or 65.8% of total revenue. In the first half of fiscal 1997, BT conducted
a partial rollout of its implementation of the Versatility Series in the United
Kingdom which contributed approximately $2.1 million of license revenue. In
addition, in the second quarter of fiscal 1997 Avantel, S.A. entered into a
contract for an additional site license resulting in $1.4 million of license
revenue. Service revenue increased 29.3% from $3.0 million in the first half of
fiscal 1996 to $3.9 million in the first half of fiscal 1997. Service revenue,
however, decreased as a percentage of total revenue from 45.6% in the first half
of fiscal 1996 to 34.2% in the first half of fiscal 1997, as a result of the
Company's increase in indirect sales which generally do not provide installation
or service revenue to the Company.

Cost of Revenue. Cost of license revenue is comprised of the costs of
media, packaging, documentation and incidental hardware costs. In years prior to
fiscal 1996, the cost of license revenue also included significant costs related
to hardware and third party software. Cost of service and maintenance revenue
consists of salaries, wages, benefits and other direct costs related to
installing, customizing and supporting customer implementations. These costs
also include telephone support and training.

Total cost of revenue increased from $2.0 million in the first half of
fiscal 1996, or 30.2% of total revenue, to $2.9 million for the first half of
fiscal 1997, or 25.1% of total revenue. Cost of license revenue increased from
$243,000 in the first half of fiscal 1996, or 6.7% of license revenue, to
$409,000 in the first half of fiscal 1997, or 5.4% of license revenue. The
higher costs of license revenue in the first half of fiscal 1997 included costs
relating to incidental hardware sold with the Versatility Series product. Cost
of service and maintenance revenue increased from $1.8 million in the first half
of fiscal 1996, or 58.1% of service and maintenance revenue, to $2.5 million in
the first half of fiscal 1997, or 63.0% of service and maintenance revenue, as a
result of additions to the Company's consulting, customization and
implementation staff to support the growing number of the Company's customers.
During the first quarter of fiscal 1997, the Company's cost of service and
maintenance revenue increased as a percentage of such revenue due in part to the
engagement of contract programmers to complete certain custom implementations of
the Versatility Series. The Company's cost of service and maintenance revenue
declined as a percentage of such revenue during the second quarter of fiscal
1997, due in part to completion of the implementations noted above as well as a
higher average billing rate for services than historically experienced.

Selling, General and Administrative. Selling expenses consist of personnel
costs, including compensation and benefits and costs of travel, advertising,
public relations, seminars and trade shows. General and administrative expenses
represent the costs of executive, finance and support personnel and unallocated
corporate expenses such as rent, utilities, legal and auditing. Selling, general
and administrative expenses increased from $2.9 million for the first half of
fiscal 1996, or 44.2% of total revenue, to $6.6 million for the first half of
fiscal 1997, or 57.5% of total revenue. This increase represents costs related
to additions to the Company's sales force and administrative personnel needed to
support the Company's growth. In the last half of fiscal 1996, the Company added
a 12-person product management department. This department had costs of $919,000
in the first half of fiscal 1997. The Company also doubled its total sales staff
and introduced new selling channels between the two periods, resulting in total
selling costs of $2.7 million in the first half of fiscal 1997 compared to $1.0
million for the same period in the prior year. General and administrative costs
increased from $1.3 million in the first half of fiscal 1996 to $2.2 million in
the first half of fiscal 1997 as a result of increases in administrative
overhead to support the larger employee base, higher recruiting costs for
administrative personnel, costs relating to additional headquarters office
space, costs relating to new office space in the United Kingdom and higher legal
and accounting fees. Marketing costs increased from $629,000 in the first half
of fiscal 1996 to $716,000 in the first half of fiscal 1997 due to higher
consulting and recruiting expenses relating to marketing personnel.

Research and Development. Research and development expenses consist of
personnel costs and direct overhead costs incurred in developing software
features and functionality. Research and development expenses

18
<PAGE> 19

increased from $957,000 in the first half of fiscal 1996, or 14.4% of total
revenue, to $1.3 million in the first half of fiscal 1997, or 11.2% of total
revenue. The increase was due to the hiring of additional software engineers to
support increased development activities.

Depreciation and Amortization and Write-off of Capitalized
Software. Depreciation and amortization expenses were $67,000 in the first half
of fiscal 1996 and $107,000 in the first half of fiscal 1997. Additionally, in
the first half of fiscal 1996, the Company wrote off all remaining capitalized
software totaling $829,000. No amounts were written off in the first half of
fiscal 1997 and the Company anticipates that, for the foreseeable future, no
software development costs will meet the requirements for capitalization.

Interest Income (Expense), Net. Interest income (expense), net consists of
interest earned on cash and cash equivalents, offset by interest expense on debt
and equipment financing. Net interest income (expense) was $13,000 in the first
half of fiscal 1996 and ($13,000) in the first half of fiscal 1997. The
difference results from interest expense attributable to borrowings under the
Company's line of credit in the first half of fiscal 1997.

Provision (Benefit) for Income Taxes. The Company accounts for income
taxes under Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes"("SFAS 109"). The provision for income taxes is computed based on
pretax income, with deferred income taxes recorded for the differences between
pretax accounting and pretax taxable income. The Company's provision (benefit)
for income taxes was ($40,000) in the first half of fiscal 1996 compared to
$181,000 in the first half of fiscal 1997. For the first half of fiscal 1996 and
1997, the effective tax rate was approximately 30.0%. The favorable effective
tax rate for these periods reflected a significant portion of sales through the
Company's Foreign Sales Corporation and other tax benefits.

Net Income (Loss). Net income (loss) improved from ($92,000) for the first
half of fiscal 1996 to $418,000 for the first half of fiscal 1997. If the
Company had not been required to capitalize software development costs and no
amortization or write-off had been recorded, net income for the first half of
fiscal 1996 would have been $488,000.

FISCAL 1996 COMPARED TO FISCAL 1995

Revenue. Total revenue increased 44.0% from $11.5 million in fiscal 1995
to $16.5 million in fiscal 1996. Revenue from license fees increased 28.6% from
$8.0 million in fiscal 1995, or 70.0% of total revenue, to $10.3 million in
fiscal 1996, or 62.6% of total revenue. Service and maintenance revenue
increased 79.9% from $3.4 million in fiscal 1995, or 30.0% of total revenue, to
$6.2 million in fiscal 1996, or 37.4% of total revenue. The increase in total
revenue was significantly influenced by the roll-out of the Versatility Series
at BT which contributed $3.0 million in license revenue and $1.2 million in
service and maintenance revenue. Revenue from hardware sales decreased from $1.4
million in fiscal 1995 to $139,000 in fiscal 1996, as the Company completed its
transition to licensing products based on a client/server architecture. Hardware
revenue in fiscal 1995 was derived primarily from sales of DEC VAX/VMS hardware,
while such revenue for fiscal 1996 consisted of incidental sales of hardware
related to the Versatility Series product. The Company does not expect
significant hardware sales to occur in the future.

Cost of Revenue. Total cost of revenue increased from $3.9 million in
fiscal 1995, or 33.8% of total revenue, to $4.8 million in fiscal 1996, or 29.3%
of total revenue. Cost of license revenue decreased from $1.5 million in fiscal
1995, or 18.6% of license revenue, to $573,000 in fiscal 1996, or 5.5% of
license revenue. This decrease resulted from the Company's shift away from
providing complete hardware and software configurations for its customers using
DEC hardware and software. The cost of service and maintenance revenue increased
from $2.4 million in fiscal 1995, or 69.3% of service and maintenance revenue,
to $4.3 million in fiscal 1996, or 68.9% of service and maintenance revenue. The
increase represents the addition of consulting and other staff to support
additional revenue as well as the costs relating to the installation of the
Company's products at BT.

Selling, General and Administrative. The Company's selling, general and
administrative expenses increased from $4.6 million in fiscal 1995, or 39.6% of
total revenue, to $7.8 million in fiscal 1996, or 47.0% of

19
<PAGE> 20

total revenue. The increase was primarily attributable to additions to the
Company's sales and marketing staff. During fiscal 1996, the number of the
Company's employees grew from 67 to 135. Of the increase, 45 new hires joined
the sales and marketing departments, with the remainder accepting management or
administrative positions.

Research and Development. Research and development expenses increased from
$711,000 in fiscal 1995, or 6.2% of total revenue, to $2.1 million in fiscal
1996, or 12.5% of total revenue. In addition, $743,000 of research and
development expenditures were capitalized in fiscal 1995, while no such costs
were capitalized in fiscal 1996. If these capitalized software development
expenditures were added, research and development expenses for fiscal 1995,
would have been $1.5 million. This increase in research and development
expenditures resulted from the addition of software developers needed to support
the Company's new product development, as well as costs relating to enhancements
to the Versatility Series and Versatility CallCenter products.

Depreciation and Amortization and Write-off of Capitalized
Software. Depreciation and amortization expenses decreased from $365,000 in
fiscal 1995 to $161,000 in fiscal 1996. Certain assets had been fully amortized
in fiscal 1995 and the Company entered into leasing arrangements for capital
equipment acquired in fiscal 1996. Depreciation and amortization expenses in
fiscal 1995 included $166,000 of amortization of capitalized software. The
unamortized portion of this asset, amounting to $829,000, was written off in
fiscal 1996 as management determined that no net realizable value in the asset
remained. No such write-off was recorded in fiscal 1995.

Interest Income (Expense), Net. Interest income (expense), net was
($9,000) in fiscal 1995 and $3,000 in fiscal 1996. The difference resulted from
higher available cash balances in fiscal 1996, primarily due to the cash raised
in a private placement in January 1996, which was partially offset by increased
interest expense due to borrowings under the Company's line of credit.

Provision (Benefit) for Income Taxes. The Company's provision for income
taxes was $715,000 in fiscal 1995 compared to $207,000 in fiscal 1996. The
effective rate in fiscal 1995 was 36.3%, while the effective rate in fiscal 1996
was 24.0%. The Company incurred a lower effective rate in fiscal 1996 due to tax
benefits derived from sales made through the Company's Foreign Sales Corporation
and due to a previously unrecognized tax benefit derived from the write-off in a
previous period of an investment in a discontinued subsidiary.

Net Income (Loss). Net income decreased from $1.3 million for fiscal 1995
to $657,000 for fiscal 1996. If the Company had not been required to capitalize
software development costs and no amortization or write-off had been recorded,
net income for fiscal 1995 and fiscal 1996 would have been $889,000 and $1.3
million, respectively.

FISCAL 1995 COMPARED TO FISCAL 1994

Revenue. Revenue increased 37.1% from $8.4 million in fiscal 1994 to $11.5
million in fiscal 1995. Most of this increase resulted from a 49.2% increase in
license revenue from $5.4 million in fiscal 1994, or 64.4% of total revenue, to
$8.0 million in fiscal 1995, or 70.0% of total revenue. In addition, service and
maintenance revenue increased 15.2%, from $3.0 million in fiscal 1994, or 35.6%
of total revenue, to $3.4 million in fiscal 1995, or 30.0% of total revenue.
Total revenue in fiscal 1994 and fiscal 1995 also included $1.9 million and $1.4
million, respectively, in hardware sales, the result of the last of the
Company's DEC VAX/VMS implementations undertaken prior to release of the
Company's client/server products. Hardware sales represented 22.8% of the
Company's total revenue in fiscal 1994 and 12.1% of total revenue in fiscal
1995.

Cost of Revenue. Total cost of revenue was $3.9 million in both fiscal
1994 and 1995, but decreased as a percentage of total revenue from 47.5% in
fiscal 1994 to 33.8% in fiscal 1995. Cost of license revenue decreased 22.4%
from $1.9 million in fiscal 1994, or 35.7% of license revenue, to $1.5 million
in fiscal 1995, or 18.6% of license revenue. This decrease was a result of a
smaller proportion of revenue from hardware sales which had a higher cost of
license revenue than other components of sales. Cost of service and maintenance
revenue increased 16.0% from $2.1 million in fiscal 1994, or 68.8% of service
and maintenance revenue, to $2.4

20
<PAGE> 21

million in fiscal 1995, or 69.3% of service and maintenance revenue. This
increase was a result of increased hiring in the services and maintenance areas.

Selling, General and Administrative. The Company's selling, general and
administrative expenses increased from $3.7 million in fiscal 1994, or 44.4% of
total revenue, to $4.6 million in fiscal 1995, or 39.6% of total revenue. The
increase in costs were due to the addition of four sales representatives and a
new five-person marketing department. In fiscal 1995, the Company also moved to
new headquarters, increasing rent and related moving and utilities expenses by
$211,000.

Research and Development. Research and development expenses increased
82.8% from $389,000 in fiscal 1994, or 4.6% of total revenue, to $711,000 in
fiscal 1995, or 6.2% of total revenue. In addition, $251,000 of research and
development expenditures were capitalized in fiscal 1994, while $743,000 were
capitalized in fiscal 1995. If amounts capitalized were added, research and
development expenses would have been $640,000 in fiscal 1994 and $1.5 million in
fiscal 1995, or 7.6% and 12.7% of total revenue, respectively. The increase in
research and development expenses represents costs relating to additions to the
Company's research and development department and overhead expenditures needed
to undertake the development of client/server products.

Depreciation and Amortization. Depreciation and amortization expenses
increased from $133,000 in fiscal 1994 to $365,000 in fiscal 1995. The increase
in these expenses during fiscal 1995 was primarily due to amortization of
capitalized software of $166,000.

Interest Income (Expense), Net. Interest income (expense), net was
($20,000) in fiscal 1994 and ($9,000) in fiscal 1995. The difference resulted
from higher interest expense in fiscal 1994 on a note payable relating to the
acquisition of a subsequently discontinued subsidiary.

Provision (Benefit) for Income Taxes. The provision for income taxes
increased from $31,000 in fiscal 1994 to $715,000 in fiscal 1995. This increase
represented a change in the effective tax rate from 22.0% to 36.3%. The change
in the effective rate resulted from utilization in fiscal 1994 of operating loss
carryforwards from prior years which were not available in fiscal 1995.

Net Income (Loss). Net income increased from $110,000 for fiscal 1994 to
$1.3 million for fiscal 1995. If the Company had not been required to capitalize
software development costs and no amortization had been recorded, net loss in
fiscal 1994 would have been ($86,000), while net income in fiscal 1995 would
have been $889,000.

21
<PAGE> 22

QUARTERLY RESULTS OF OPERATIONS

The following table presents certain unaudited quarterly financial
information for the eight quarters ended October 31, 1996. In the opinion of the
Company's management, this information has been prepared on the same basis as
the Consolidated Financial Statements appearing elsewhere in this Prospectus and
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial results set forth herein. Results of
operations for any previous quarter are not necessarily indicative of results
for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------
1995 1996
-------------------------------------- ---------------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31
------- -------- ------- ------- ------- -------- ------- --------
(IN THOUSANDS)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue........................... $2,366 $2,570 $1,473 $2,142 $2,267 $4,463 $3,788 $3,760
Service and maintenance revenue........... 910 1,045 1,189 1,846 1,690 1,465 1,632 2,291
------ ------ ------ ------ ------ ------ ------ ------
Total revenue......................... 3,276 3,615 2,662 3,988 3,957 5,928 5,420 6,051
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenue:
License revenue........................... 335 764 32 210 115 216 205 204
Service and maintenance revenue........... 563 672 767 996 1,101 1,403 1,232 1,239
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenue................. 898 1,436 799 1,206 1,216 1,619 1,437 1,443
------ ------ ------ ------ ------ ------ ------ ------
Gross margin.................................. 2,378 2,179 1,863 2,782 2,741 4,309 3,983 4,608
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Selling, general and administrative....... 1,096 1,503 1,304 1,633 1,826 3,007 3,037 3,555
Research and development.................. 138 363 476 481 473 644 618 662
Depreciation and amortization............. 130 140 32 35 45 49 50 57
Write-off of capitalized software......... -- -- 829 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses.............. 1,364 2,006 2,641 2,149 2,344 3,700 3,705 4,274
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations................. 1,014 173 (778) 633 397 609 278 334
Interest income (expense), net................ (1) (5) 9 4 0 (10) (6) (7)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before provision (benefit) for
income taxes................................ 1,013 168 (769) 637 397 599 272 327
Provision (benefit) for income taxes.......... 365 65 (199) 159 104 143 70 111
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)............................. $ 648 $ 103 $ (570) $ 478 $ 293 $ 456 $ 202 $ 216
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
(AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue.......................... 72.2% 71.1% 55.3% 53.7% 57.3% 75.3% 69.9% 62.1%
Service and maintenance revenue.......... 27.8 28.9 44.7 46.3 42.7 24.7 30.1 37.9
----- ----- ----- ----- ----- ----- ----- -----
Total revenue........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenue:
License revenue.......................... 10.2 21.1 1.2 5.2 2.9 3.6 3.8 3.4
----- ----- ----- ----- ----- ----- ----- -----
Service and maintenance revenue.......... 17.2 18.6 28.8 25.0 27.8 23.7 22.7 20.5
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenue................ 27.4 39.7 30.0 30.2 30.7 27.3 26.5 23.9
----- ----- ----- ----- ----- ----- ----- -----
Gross margin................................. 72.6 60.3 70.0 69.8 69.3 72.7 73.5 76.1
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Selling, general and administrative...... 33.5 41.6 49.0 40.9 46.2 50.7 56.1 58.7
Research and development................. 4.2 10.0 17.9 12.1 12.0 10.9 11.4 10.9
Depreciation and amortization............ 4.0 3.9 1.2 0.9 1.1 0.8 0.9 1.0
Write-off of capitalized software........ -- -- 31.1 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses............. 41.7 55.5 99.2 53.9 59.3 62.4 68.4 70.6
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations................ 30.9 4.8 (29.2) 15.9 10.0 10.3 5.1 5.5
Interest income (expense), net............... (0.0) (0.1) 0.3 0.1 0.0 (0.2) (0.1) (0.1)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision (benefit) for
income taxes............................... 30.9 4.7 (28.9) 16.0 10.0 10.1 5.0 5.4
Provision (benefit) for income taxes......... 11.1 1.8 (7.5) 4.0 2.6 2.4 1.3 1.8
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)............................ 19.8% 2.9% (21.4)% 12.0% 7.4% 7.7% 3.7% 3.6%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

The following table sets forth, for each component of revenue, the cost of
such revenue expressed as a percentage of such revenue for the periods
indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
1995 1996
-------------------------------------- --------------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of license revenue....................... 14.2% 29.7% 2.2% 9.8% 5.1% 4.8% 5.4% 5.4%
Cost of service and maintenance revenue....... 61.9% 64.3% 64.5% 54.0% 65.1% 95.8% 75.5% 54.1%
</TABLE>

22
<PAGE> 23

The Company's revenue and operating results could fluctuate significantly
from quarter to quarter due to a combination of factors, including variations in
the demand for the Company's products, the level of product and price
competition, the length of the Company's sales process, the size and timing of
individual transactions, any delay in or cancellation of customer
implementations, the Company's success in expanding its customer support
organization, direct sales force and indirect distribution channels, the timing
of new product introductions and enhancements by the Company or its competitors,
the mix of products and services sold, the mix of sales through direct and
indirect channels, any delay in or cancellation of customer implementations, the
Company's success in expanding its customer support organization, direct sales
force and indirect distribution channels, the timing of new product
introductions and enhancements by the Company or its competitors, the ratio of
international to domestic sales, commercial strategies adopted by competitors,
changes in foreign currency exchange rates, customers' budgets constraints, and
the Company's ability to control costs. In addition, a limited number of
relatively large customer orders has accounted for and is likely to account for
a substantial portion of the Company's total revenue in any particular quarter.
The timing of such orders can be difficult to predict given the average size of
the Company's orders and the length of its sales process. The Company has in the
past recognized a substantial portion of its revenue in the last month of a
quarter. Therefore, the loss, deferral or cancellation of an order could have a
significant adverse impact on the Company's revenue and operating results in a
particular quarter. Because the Company's operating expense levels are
relatively fixed and tied to anticipated levels of revenue, any delay in the
recognition of revenue from a limited number of license transactions could cause
significant variations in operating results from quarter to quarter. Based on
the foregoing, the Company believes that quarter-to-quarter comparisons of its
results of operations are not necessarily meaningful and such comparisons should
not be relied upon as indications of future performance.

LIQUIDITY AND CAPITAL RESOURCES

The Company has funded its operations to date primarily through cash
generated from operations, through the private sale of preferred stock in
January 1996 totaling $3.5 million and from funds obtained from revolving credit
facilities with commercial banks. The Company's existing $2.5 million line of
credit had an outstanding balance of $2.0 million at October 31, 1996, and
$229,000 was outstanding under its $1.0 million equipment line of credit.
Advances under the working capital line bear interest at a variable annual rate
equal to the prime rate of the bank plus 0.5%, and advances under the equipment
line bear interest at a variable annual rate equal to the prime rate of the bank
plus 1.0%. Both lines expire on August 5, 1997.

At October 31, 1996, the Company had $2.0 million in cash and $8.2 million
in accounts receivable. For the six months ended October 31, 1996, net cash used
by operations totaled $698,000. In addition, the Company used $756,000 for
investing activities, which included $240,000 for the expansion of the Company's
distribution channels and $516,000 loaned to Serenity Real Properties Limited
Partnership. These uses of cash were partially offset by net borrowings of $1.2
million under the Company's working capital line of credit, resulting in a net
cash decrease of $297,000.

In fiscal 1996, cash used in operations totaled $2.9 million, primarily due
to an increase in accounts receivable resulting from the rapid expansion of the
Company's operations. This use was offset by cash provided by the Company's
preferred stock financing in January 1996, resulting in a net cash increase of
$866,000.

The Company invested $156,000, $235,000 and $240,000 in capital
expenditures in fiscal 1995, fiscal 1996 and the first half of fiscal 1997,
respectively. Capital expenditures include purchases of computer hardware used
primarily in product development, product demonstrations, training and support.
Over the course of fiscal 1996, the Company has financed a portion of its
capital equipment needs through operating leases. During the six months ended
October 31, 1996, the Company financed $229,000 of the capital assets acquired
through a capital lease under its $1.0 million equipment line of credit.

The Company anticipates that its existing cash balances, funds anticipated
to be generated from operations, combined with the proceeds from this offering
and interest thereon, will be adequate to satisfy its working capital
requirements for its current and planned operations for at least the next twelve
months. The Company's future operating and capital requirements will depend on
numerous factors, including the progress of the Company's internal research and
development programs, the level of resources the Company devotes to the
development of marketing and sales capabilities, technological advances, the
status of competing products, and the successful development and timely
introduction of its own products. In the longer term, the Company may require
additional equity or debt financing. No assurance can be given that these funds
will be available to the Company on acceptable terms, if at all.

23
<PAGE> 24

BUSINESS

The Company's products are used by customers operating large and mid-sized
call centers for activities including telebanking, claims servicing, customer
service, consumer product telesales and other applications. Since introducing
the Versatility Series in May 1995, the Company has licensed Versatility Series
applications for use on over 6,000 agent desktops. The Company's customers
include Avantel, S.A., British Telecommunications, Plc, Chase Bank, Medco
Containment Services, Inc. and Mellon Bank. Versatility markets its products and
services to customers in a number of targeted industries, including the
financial services and communications industries. The Company sells its software
and services in the United States through a direct sales organization that
focuses primarily on enterprise-wide, large-scale solutions with complex
requirements. In addition, Versatility markets and sells software through
value-added resellers, distributors and third party systems integrators, in the
United States and internationally.

INDUSTRY BACKGROUND

Companies in a variety of industries recognize the strategic importance of
developing and maintaining long-term customer relationships. Companies are
increasingly viewing every stage of customer interaction, from initial sales and
marketing activities to post-sales service and support, as an opportunity to
distinguish their products and services, "cross-sell" related products or
"up-sell" higher margin products, and receive and process valuable customer
feedback. Effective customer interaction can significantly increase revenue,
build customer loyalty, allow organizations to better incorporate customer
requirements into future product releases and reduce customer acquisition and
retention costs. Customer interaction can be provided through a number of
channels, including field sales and support, direct marketing programs,
telephone contact and unassisted selling channels such as the Internet.

In recent years, telephony-based customer interaction has become an
increasingly significant channel as organizations have recognized that the
telephone can help them more effectively leverage their sales and marketing
investments, access a larger customer base, enhance customer satisfaction and
increase revenue. The increase in telephony-based customer interaction has also
been driven by a number of other factors, including decreased telecommunications
costs, the proliferation of toll-free 800 numbers, and the introduction of new
technology, such as computer/telephone integration ("CTI"), which automates the
calling process while providing real-time access to computer-based information
resources.

Telephony-based customer interaction activities may be conducted through
either "formal" or "informal" call centers. Formal call centers generally are
large rooms with supervisor stations and agent workstations linked to a central
telephone switch and computer system, where agents handle a steady flow of
contacts relating to a relatively fixed set of products or services. Common
examples of formal call centers are credit card marketing operations and
customer support centers performing activities such as insurance claims
processing. In contrast, informal call centers are more loosely related groups
of "phone workers" providing services that are less structured and may not rely
exclusively on the telephone. Examples of informal call

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centers include real estate agencies, regional brokerage offices and similar
operations. Historically, companies have viewed their call centers as either
"cost-generating" or "revenue-generating." Revenue-generating call centers such
as telemarketing operations were usually focused on sales and marketing
functions. Cost-generating call centers typically did not handle
revenue-generating calls and instead focused on providing customer service or
support functions. In addition, call centers typically focus either on handling
inbound calls, for functions such as product support, or conducting outbound
calls, for functions such as magazine subscription sales.

The typical formal call center is comprised of a high capacity telephone
switch supported by an interactive voice response ("IVR") unit and an automated
call distributor ("ACD") that together screen and route incoming calls to
agents, "predictive dialers" used to automate outbound dialing, a data network
that supports agent workstations and monitoring and reporting systems used by
call center managers. Informal call centers typically use a standard office
phone system on a private branch exchange ("PBX") rather than a specialized
telephone switch.

Call center systems generally include specialized applications software
which allows organizations to conduct inbound or outbound calling activities,
manage system resources, monitor call center capacity and provide system usage
and other reporting capabilities. These applications have historically been
developed for centralized, mainframe-based information systems. While
effectively automating many functions such as inbound call distribution,
outbound dialing, and simple database management, these legacy applications were
often very expensive to install and did not offer sufficient flexibility to
allow customization or to adapt to an organization's changing requirements. In
addition, these applications did not provide high levels of scaleability or
interoperability with an organization's other information systems. Recently,
call center technology has joined the more general migration from
mainframe-based legacy systems to distributed computing systems based on open
systems and client/server architecture. This development has allowed companies
to incorporate leading hardware and software products from multiple vendors into
more advanced and productive call center systems.

To date, however, the software component of these systems has been used
primarily to implement the telephony functions of the center, such as predictive
dialing and "dynamic call blending," which permits agents to be automatically
switched between inbound and outbound calls, rather than focusing on increasing
the productivity of the telephone agent's interaction with the customer.
Customer interaction applications that have been developed for these systems
have been primarily focused on automating technical support and other customer
support ("help desk") functions and primarily address opportunities for
organizations to reduce customer support costs rather than to generate
additional revenue.

To leverage an organization's call center investment and take full
advantage of the revenue generating potential of teleselling and telemarketing
in a client/server computing environment, companies require software
applications that: (i) can provide call center agents with the guidance and
product and customer information they need to effectively sell increasingly
complex products and services; (ii) enhance revenue-generating functions by
supporting not only order taking but also cross-selling and up-selling other
products and services; (iii) permit the gathering of valuable information
concerning customer needs, buying patterns and demographics; (iv) are fully
integrated with the organization's information and telephone systems, enabling
more effective exchange of gathered data; (v) can readily be tailored to the
needs of particular businesses, marketing campaigns or call center agents; and
(vi) are scaleable to support large volumes of calls and open to permit
integration with a wide variety of telephony and computing systems.

THE VERSATILITY SOLUTION

Versatility provides a suite of software applications and related services
that allow its customers to operate flexible and highly functional inbound
and/or outbound call centers which can significantly enhance their
telephony-based sales and marketing capabilities. The Company's applications
allow an organization to automate the most significant telephony-based customer
interaction functions, including generating and qualifying sales leads,
providing comprehensive product or service information, generating order quotes
and processing and fulfilling customer orders. The Company's products are
designed to support both formal call

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centers, typically involving large and mid-sized installations, and informal
call centers, requiring a smaller scale implementation, for customers in the
United States and internationally.

The Company's products include a number of software applications which
provide call center agents with desktop access to a variety of information in an
easy-to-use graphical format, including customer identity and call history,
comprehensive product descriptions such as features and benefits, and a list of
related products or services which an agent can cross-sell or up-sell to the
customer. The Company's software includes scripting capabilities which
efficiently guide agents through each stage of the sales process, including
initial contact, presentation of product offerings, responses to frequently
asked questions or objections, quote generation, order taking and fulfillment.
In addition, the Company's products can be easily tailored to the specific needs
of the organization or marketing campaign and customized to match the skill sets
of individual call center agents. The Company's products also facilitate
exchange of information between the call center and the organization's other
information systems, allowing the organization to incorporate data generated in
the call center into their other business operations, including new product
development. In addition to desktop applications, the Company's products include
optional server-based software which allows customers to leverage CTI and other
technologies to increase the speed and productivity of their telephony-based
activities.

The Versatility Series, the Company's principal product, uses an advanced,
scaleable three-tier client/server architecture capable of supporting
installations with more than 1,000 simultaneous users on a single server. The
Versatility Series is highly customizable, allowing modification to suit a
specific industry or application. The Versatility Series can also be integrated
with the customer's information systems or with third party applications, such
as help desk or field sales automation software, to provide a customer with a
comprehensive, enterprise-wide customer interaction solution.

In August 1996, the Company released the Versatility CallCenter
client/server packaged software application which provides the basic features
and functions of the Versatility Series desktop applications to smaller formal
or informal call centers, typically found in mid-sized companies or departments
of larger organizations. Customers using the Versatility CallCenter product can
expand to the more scaleable Versatility Series.

STRATEGY

The Company's objective is to be a leading provider of customer interaction
software by offering advanced and highly functional applications that allow
customers to leverage their investment in call centers and maximize
telephony-based revenue and customer satisfaction. The Company's strategy to
achieve this objective includes the following key elements:

Target Specific Industries. The Company's marketing strategy is to focus
on selected industries in which it can develop a leading market share. The
Company currently targets the financial services and communications industries,
which have a relatively long experience with telephony-based customer
interaction. The Company believes that its targeted marketing strategy better
focuses product development efforts, controls selling costs and leads to higher
overall customer satisfaction. At the same time, the Company has designed its
desktop applications and database model to easily support modifications or
additional functions to support the needs of additional industries.

Use Multiple Distribution Channels. The Company believes that it can more
rapidly obtain market share by using a combination of direct and indirect sales
channels. While the Company will continue to use direct sales and support as the
primary channel for selling the Versatility Series to large call center
operations, the Company intends to increasingly form alliances with large third
party systems integrators to increase its presence in the market for large-scale
systems. The Company has also recently begun to market the Versatility Series
through VARs and distributors and intends to use these indirect channels to
market its Versatility CallCenter product to mid-size companies.

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Expand Existing Customer Relationships. The Company believes that
follow-on sales to existing customers can leverage Versatility's sales and
marketing investment and can also provide a more stable revenue base. The
Company believes that significant opportunities exist to increase the number of
licenses sold to many of its existing customers through expanded implementations
or sales to additional groups within a customer's organization. The Company
focuses on increasing follow-on sales by providing high levels of post-sales
support to maximize customer satisfaction.

Maintain Technology Leadership. The Company has over 15 years of
experience in developing call center technology and has invested substantial
resources in new product development. In 1988, the Company released one of the
first CTI-enabled software applications and, in 1995, the Company was the first
to release a client/server software application specifically designed for
telemarketing and telesales functions. The Company intends to maintain its
technology leadership by enhancing the performance and functionality of its
products and by assuring that its products are compatible with emerging
telephony technology and computing environments.

Increase International Revenue. The Company believes that international
markets offer significant growth opportunities. The Company has positioned
itself to take advantage of these opportunities by commencing operations in the
United Kingdom in 1992 and by developing and expanding its relationships with a
number of international VARs and distributors to allow the Company to
cost-effectively increase its international revenue. The Company intends to
continue to expand its international presence by adding VARs and distributors in
targeted countries.

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PRODUCTS

The Company's products include the Versatility Series, a suite of modular
applications that includes optional software-based marketing and telephony
services. The Versatility Series can be modified with available customization
tools and is designed to support customers with large user populations. For
smaller installations, the Company offers Versatility CallCenter, which includes
key elements of the Versatility Series applications, scaled to support 50 users
or less.

The following table illustrates the features and functions of the Company's
two core product families:

<TABLE>
VERSATILITY PRODUCTS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
PRODUCT NAME FEATURES AND FUNCTIONS
- ---------------------------------------------------------------------------------------------------------------------------------
Versatility Series
- ---------------------------------------------------------------------------------------------------------------------------------
Versatility Call Center Applications

Versatility Telemarketing Client/server desktop application consisting of customer demographic profiles, list
management, contact histories, product information, features and benefits, questions,
answers and objections, simple product ordering and PowerGuide scripts, call guides and
marketing information

Versatility Telesales All of the above plus: screen-based telephony, quotation generation and maintenance,
complex order generation, fulfillment, calendaring, task scheduling and reminders

Versatility Teleservice (1) All of the above plus: installed product/service profiles, knowlege-based search engine,
problem and case tracking and escalation

Versatility Telephone All of the above plus: account opportunity management, activity tracking and forecasting,
Account Management (1) diary management and appointment scheduling
- ---------------------------------------------------------------------------------------------------------------------------------
Versatility Open Telephony Services

Versatility OpenTel Unassisted server-generated telephony, screen pops of account information using automatic
number identification, call transfer and campaign routing based on dialed number
identification

Versatility Predictive Predictive outbound call dialing, accounting recycling and center management and monitoring
facility

Versatility Call Blending Dynamic inbound and outbound call and agent load balancing and center management and
monitoring facility

Versatility IVR Interactive voice response unit, transaction data capturing and call handling facility
- ---------------------------------------------------------------------------------------------------------------------------------
Versatility Marketing Management
Services

Versatility Campaign Plus Marketing campaign list creation and maintenance and monitoring facility, including
adaptive marketing and demographic profile templates

Versatility Fulfillment Fulfillment facility with back office systems integration

Versatility Insight Data warehousing, performance monitoring and real-time tracking of center, agent and
transaction activity

Versatility Monitor Real-time agent and supervisor screen monitoring and observation facility
- ---------------------------------------------------------------------------------------------------------------------------------
Versatility CallCenter A CD-ROM-based product consisting of the Versatility Telesales application, Versatility
OpenTel and a campaign and list management facility that includes elements of Versatility
Campaign Plus
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Currently in development and expected to be released by the end of fiscal 1997.

</TABLE>

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VERSATILITY SERIES. The Versatility Series is generally marketed to large
organizations operating formal call centers. At the core of the Versatility
Series are the Versatility Call Center Applications, which allow call center
agents to effectively conduct telemarketing and telesales activities.
Versatility Series customers purchase one of the Versatility Call Center
Applications and usually purchase one or more optional services from either the
Versatility Marketing Management Services or the Versatility Open Telephony
Services.

The Versatility Call Center Applications include two existing applications,
Versatility Telemarketing and Versatility Telesales. The Company is also
developing two additional applications, Versatility Teleservice and Versatility
Telephone Account Management, which will include the same architecture and core
functionality as the Company's current applications, with additional features
specifically designed to address teleservicing and telephone account management
activities. Versatility Telemarketing supplies a call center agent with customer
information as an outbound telephone call is made or as an inbound call is
routed to that agent. Once customer contact is made, an agent can access product
information, such as features, benefits and commonly asked questions, in order
to effectively and accurately market and sell that product. An agent can then
click to descriptions of other products to cross-sell or up-sell. To close a
sale, an agent can access on-line order taking and fulfillment capabilities.
Building on these core functions, Versatility Telesales provides additional
capabilities to generate on-line quotes, readily access information regarding
discounts and schedule automatic customer call-backs.

All Versatility Call Center Applications are Windows-based and are
integrated with the Versatility PowerGuide facility, a presentation support tool
providing call guides and scripting capabilities. PowerGuide enables selling
scripts to be tailored to the needs of the company or marketing campaign and
customized to match the skill sets of particular telemarketing agents.
PowerGuide can integrate with one or more external applications, such as word
processing, spreadsheet, and graphics presentation applications, using
Microsoft's Dynamic Data Exchange standard to exchange information between
applications. PowerGuide can also be used to generate Microsoft Visual Basic
forms and applications.

Versatility Call Center Applications allow customers to develop many
versions of the application which can be tailored extensively and used
simultaneously. For example, a call center may want to have a different
application design and functionality for each marketing and selling campaign.
Each tailored application can be augmented by its own tailored Versatility
PowerGuide session.

In addition to Versatility Call Center Applications, the Versatility Series
provide network server services, called the Versatility Marketing Management
Services, which provide the call center network and its managers with a number
of capabilities, including list, database and campaign management, adaptive
marketing, statistical tracking, data warehousing, decision support, document
production, integration with document management systems and centralized call
center operations management. Additionally, the Versatility Series CTI services,
called Versatility Open Telephony Services, which integrate the telephone and
computer systems, provide functions such as screen-based telephony, "screen
pops" in which relevant caller information appears on an agent's screen as an
inbound call arrives or as an outbound call is initiated, predictive dialing of
outbound campaigns, coordination of service levels, inbound and outbound dynamic
call blending and IVR integration and coordination.

All Versatility Series products are licensed based on the total number of
concurrent desktop users. Versatility Call Center Applications start at a U.S.
list price of $950 per licensed user. Versatility Marketing Management Services
and Versatility Open Telephony Services are sold as optional modules as part of
a total Versatility Series system. The U.S. list price of these network modules
ranges from $300 to $2,500 per user per service. A majority of the revenue from
the Versatility Series products has been derived from contracts with customers
in amounts in excess of $200,000.

VERSATILITY CALLCENTER. In August 1996, the Company released Versatility
CallCenter, a CD-ROM-based call center software application that supports formal
or informal call centers of 50 agents or less. Versatility CallCenter includes
many of the features of the Versatility Call Center Applications, including
customer profiles, product information, product features and benefits, question
and objection handling, quotation preparation and order taking and servicing,
literature fulfillment, activity tracking with call back calendars and
reminders, scripting and call guides. In addition, the product supports list
management and call

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recycling for outbound campaigns and CTI for screen-based dialing and incoming
call management, including screen pops of customer profile information.
Versatility CallCenter also incorporates several network-based server facilities
that include elements of the Versatility Marketing Management and Versatility
Open Telephony services, redesigned to meet the needs of this smaller customer.
Versatility CallCenter is also licensed based on the number of concurrent users
and has a U.S. list price of $1,695 per user.

Certain uses of outbound call processing systems are regulated by federal,
state and foreign law, including the Telephone Consumer Protection Act of 1991
and the Federal Fair Debt Collection Practices Act. Although compliance with
these laws may limit the potential uses of the Company's products in some
respects, the Company's products can be programmed to operate automatically in
full compliance with these laws through the use of appropriate calling lists and
calling campaign time parameters. There can be no assurance, however, that
future legislation further restricting telephone solicitation practices, if
enacted, would not adversely affect the Company.

SERVICES

Versatility provides fee-based maintenance and support services designed to
increase the effectiveness and ongoing performance of its customer's call center
operations and to increase the Company's revenue base. Substantially all of the
Company's customers have ongoing maintenance contracts. As of September 30,
1996, the Company employed 19, 12 and five employees providing professional
services, maintenance and training, respectively.

Professional Services. The Company's consultants work closely with
customers to provide assistance with application implementation and
customization, interface development, communications and information systems
integration, planning and project management. Fees for professional services are
charged separately from the Company's software product licenses and are
generally charged on a time-and-materials basis.

Maintenance. Maintenance services are available for an annual fee equal to
a percentage of the total license price. Maintenance services include software
updates, maintenance releases and technical support. The Company offers
telephone, pager, electronic mail, dialup modem and facsimile customer support.
The Company also provides customers with account management services, technical
bulletins, weekly status reports and ongoing communications on new features or
products under development.

Training. The Company offers a comprehensive set of training courses
covering systems administration, specific training on certain product modules
and project team training as well as training courses for the Company's
resellers. Training classes are offered at the Company's offices in Fairfax,
Virginia and Aldermaston, U.K. The Company also provides extensive on-site
training services for most enterprise installations, including customized
training for each customer. Fees for education and training are generally
charged in addition to the license fees and are charged on a per-student,
per-class or time-and-materials basis.

CUSTOMERS AND MARKETS

Since introducing the Versatility Series in May 1995, the Company has
licensed Versatility Series applications for use on over 6,000 agent desktops.
The following list includes customers who have purchased over $250,000 of
Versatility Series software and services:

AT&T Canada Long Distance
AT&T Wireless Services
Avantel, S.A.
British Telecommunications, Plc
Chase Bank
Medco Containment Services, Inc.
Mellon Bank, N.A.
Primeco Personal Communications, L.P.
The Polk Company
Sanwa Bank
Faneuil ISG Inc.

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Organizations from a number of different industries have implemented the
Versatility Series, as illustrated by the following examples:

Financial Services

A major commercial bank was committed to providing cost-effective
telephony-based customer service. In addition, the bank wanted to identify,
retain and cross-sell its retail customer base and to target, qualify and
attract high profit accounts from other banks. The bank's existing customer
service system was mainframe-based and was difficult and time-consuming for
agents to understand and use. The bank emphasized three objectives in
implementing a new system: enhanced customer service responsiveness, reduced
transaction times and the support of sales-oriented activities in its customer
service operation.

After implementing the Versatility Telesales desktop application, the bank
was able to reduce transaction times with an easy-to-use application that
provides telebanking agents with real-time access to comprehensive customer
information stored on the bank's legacy mainframe systems. The new system also
reduces transaction times by using the quotation, order taking, cross-sell,
up-sell and fulfillment capabilities of the Versatility Telesales application.
Additionally, product and market information provided by Versatility PowerGuide
enables agents to more effectively sell bank products and services during the
call.

Pharmaceutical Provider

A direct distributor of pharmaceutical products sought to differentiate its
services and enhance its efficiency. The company's previous system was not
GUI-based and was difficult to use, requiring agents to memorize multiple codes
and procedures before becoming fully effective. The company could not reduce the
inherent complexity of its interactions with customers, but required a system
that was easier to learn and that enabled agents to become productive more
rapidly. Also, the company felt that introducing proactive outbound calling for
market research and product sales would contribute to the overall effectiveness
of its telemarketing operations. The new solution had to be implemented quickly,
and also be customizable to meet the unique and changing needs of its business.

Using the business objects and development tools of the Versatility Call
Center Applications, the company created a customized version of the Versatility
Series applications. By using Versatility PowerGuide, call guides can be created
to assist agents in handling various types of calls and to highlight likely
issues or problems. As a result, more customer service issues are resolved
without the need to call the customer back. This company also uses Versatility
IVR to collect customer information, which can be stored in the company's
database or transferred to an appropriate agent if agent assistance is requested
by the caller. This company is in the process of implementing Versatility
Telemarketing and Campaign Plus for new, outbound sales and service campaigns.

Communications

A global communications company, operating in an increasingly competitive
market, required a way to react quickly and effectively to competitors that were
targeting specific customers for their many products and services. Given the
scope of its call center operations, the company required a solution supporting
hundreds of agents at multiple sites operating as a single "virtual" call center
that could be centrally managed and administered. This company was also
undergoing significant operational changes and wanted to make information
contained in legacy systems available to various operating departments.

The Company implemented a tailored version of the Versatility Telesales
application which is currently used to support inbound calls made in response to
targeted direct marketing campaigns, including catalog mailings. The Company
also uses the Versatility Series to rapidly design multiple outbound marketing
campaigns targeted to specific customer segments. The system supports agents in
over ten call centers, all working from a centralized database and over the
existing corporate communications network. Using Versatility OpenTel, agents are
able to use a PC screen phone to place calls to assigned accounts and to route
calls from these accounts to the assigned agent. Agent supervisors and call
center managers, as well as corporate marketing, use Versatility Insight to
obtain real-time graphs and reports on calling activity, including agent, center
and marketing campaign performance. This information is used to direct
supervisors to those

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agents that need assistance and to create or modify outbound marketing campaigns
targeted for specific products or product sets.

TECHNOLOGY AND PRODUCT DEVELOPMENT

The Company's core technology was designed to facilitate the development
and customization of enterprise-wide customer interaction applications which are
interoperable with a number of other applications and can be used by a wide
variety of customers. The Company's applications are built upon a common core
architecture that is designed to leverage efficiently the performance and
scaleability of client/server computing and object-oriented development
methodologies. Versatility believes that its product architecture allows it to
craft tailored solutions for its customers and to simplify and facilitate new
product development.

The Versatility Series and Versatility CallCenter products are built using
a highly scaleable and flexible three-tier client/server model which takes
advantage of the difference in computing power between the desktop client and
the server to free-up limited desktop computing power and memory. The Company's
products support a number of client computing platforms, such as Microsoft
Windows 3.1, Microsoft Windows 95 and Microsoft Windows NT; leading relational
databases from Oracle, Informix, Sybase, Ingres, and Microsoft; and server
operating systems, such as Microsoft Windows NT Server and various versions of
Unix. The Company's products have been developed using Microsoft Visual C++,
Microsoft Foundation Classes and Centura Team Developer.

Versatility began the development of products based on a client/server
architecture in November 1993. The Company made substantial investments in new
product development in 1994 and introduced the Versatility Series in May 1995.
In August 1996, the Company released Versatility CallCenter. The Company
continues to make substantial investments in product development to improve and
enhance the functionality of its existing products. The Company also intends to
expand its existing product offerings and to introduce new products for the
client/server applications market. Although the Company expects that certain of
its new products will be developed internally, the Company may, based on timing
and cost considerations, acquire technology and products from third parties.

The Company's current development efforts include the completion of
Versatility Teleservice and Versatility Telephone Account Management
applications as well as development of Versatility Open Web, a new server module
which will expand a call center's ability to sell to and support customers over
the Internet. Versatility Open Web is being designed to enable a potential
customer to click on a button on a company's site on the World Wide Web, which
sends a message directing an agent at a company's call center to respond to this
inquiry. The call center agent will also be simultaneously provided with
customer information entered by the customer while viewing the Web site, and
will be able to see the Web pages previously viewed by the customer. Customer
information could also be transferred to a database for future use in marketing
campaigns. Versatility Open Web, which is currently expected to be released by
the end of 1996, is being designed to run on Windows NT and to be used with the
Company's other applications and services or as a stand-alone application.

As of October 31, 1996, the Company's research and development and quality
assurance staff consisted of 28 employees. The Company's total expenses for
research and development for fiscal years 1994, 1995, 1996 and the first six
months of fiscal 1997 were $389,000, $711,000, $2.1 million and $1.3 million,
respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future.

The Company's future success will depend on its ability to enhance its
current products and to develop and introduce new products on a timely basis
that keep pace with technological developments, emerging industry standards and
the increasingly sophisticated needs of its customers and markets. There can be
no assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace and achieve market acceptance. Furthermore,
changing resource allocations can delay new products and certain product
enhancements. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements, the Company's business,
financial condition and results of operations will be materially adversely

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affected. In addition, software products as complex as those offered by the
Company may contain undetected errors or failures when first introduced or when
new versions are released. The Company has in the past discovered software
errors in certain of its new products or enhancements and has experienced delays
or lost revenue during the period required to correct these errors. Although the
Company has not experienced material adverse effects resulting from such errors
to date, there can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products or
releases after commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could have a material adverse effect upon the
Company's business, financial condition and results of operations. See "Risk
Factors -- Rapid Technological Change and Product Development Risks."

SALES AND MARKETING

Sales. The Company believes that the coordinated use of multiple selling
channels is required to reach the diverse and growing base of prospective
customers. Based on their telemarketing strategies and buying patterns, these
prospective customers can be divided into three groups: (i) customers with
large-scale installations which are best served through direct sales teams, (ii)
customers with large-scale installations who require turnkey system solutions
from third party systems integrators, and (iii) customers with mid-sized
installations who need basic solutions that can be purchased relatively
inexpensively and can be quickly implemented. To address these groups, in
November 1995, the Company established four strategic selling units to focus
attention and specific solutions to targeted selling channels and markets. These
four selling units are: Enterprise Solutions, Alliances, Channels, and
International.

Enterprise Solutions. Enterprise Solutions is the Company's domestic
direct sales unit which focuses on the financial services and
communications industries. The Enterprise Solutions selling unit markets
the Versatility Series to large organizations which require a customized
and integrated call center application. This selling unit consists of 29
employees who are divided into sales and sales support teams for each
target market, a professional services organization that performs
implementation, project management and customization activities and a
customer services group responsible for post-implementation support.

Alliances. The Alliances selling unit markets the Versatility Series
to third party systems integrators and distributors who provide
comprehensive solutions to large-scale enterprise-wide environments and who
want to provide their customers with an integrated call center solution.
This selling unit consists of sales and sales personnel supporting third
party systems integrators and distributors and a services department that
handles certain support activities for the distributors or for their
customers. The Company currently has active relationships with several
third party systems integrators including Electronic Data Systems
Corporation, American Management Systems, Inc., Norstan Inc. and Cincom
Systems, Inc. As of October 31, 1996, this selling unit consisted of 9
employees.

Channels. The Channels selling unit targets mid-sized companies that
operate formal and informal call centers of 10 to 50 agents. This selling
unit markets the Versatility CallCenter product to Versatility Integration
Professional ("VIP") resellers and will sell directly to an end user
customer if there is not a trained VIP reseller in place to support the
sale. This selling unit was formed to develop regional-based sales and
support teams to evaluate, recruit and train VIP resellers. As of October
31, 1996, this selling unit consisted of 9 employees and had arrangements
with 15 VIP resellers.

International. The International selling unit markets the Versatility
Series and Versatility CallCenter products to third party systems
integrators, distributors and resellers outside of North America. This
selling unit has regional sales and support teams covering Western Europe,
the Middle East and certain African countries and expects to begin selling
in the Pacific Rim and Latin American regions. The International selling
unit is headquartered in Aldermaston, U.K., with support personnel located
in the Netherlands and Sweden and, as of October 31, 1996, consisted of 17
employees.

Marketing. The Company's marketing efforts support each of the strategic
selling units. The Company's marketing programs include product management,
product marketing, maintenance and enhancement of the Company's Web site, direct
marketing, including the operation of the Company's in-house direct mail and
telemarketing operation, public relations and press and analyst communications
and event support. The

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Company's marketing department also maintains marketing relationships with a
variety of third party vendors, such as telephone switch manufacturers, computer
manufacturers, database providers and others. As of October 31, 1996, the
Company's marketing department consisted of 13 employees. The Company uses the
Versatility CallCenter product in its in-house direct marketing and
telemarketing facility.

COMPETITION

The market for the Company's products is intensely competitive, highly
fragmented and subject to rapid change. Because the Company offers multiple
applications which can be purchased separately or integrated as part of the
Versatility Series, the Company competes with a variety of companies depending
on the target market for their applications software products. The Company's
principal competitors in the customer interaction software market are Brock
International, Inc., Digital Systems International, Inc, Information Management
Associates, Inc., Scopus Technology, Inc., and The Vantive Corporation. For
installations where telephony functions are of prime importance, competitors
include Davox Corporation, Early Cloud and Company (a division of IBM) and EIS
International, Inc. The Company also competes with third party professional
service organizations that develop custom software and with the information
technology departments of potential customers. The Company's potential
competitors also include a number of large hardware and software companies that
may develop or acquire products that compete with the Company's products. The
Company believes that the principal competitive factors affecting its market
include product features such as flexibility, scaleability, interoperability,
functionality and ease of use, as well as product reputation, quality,
performance, price, customer service and support, the effectiveness of sales and
marketing efforts and vendor reputation. Although the Company believes that its
products currently compete favorably with respect to such factors, there can be
no assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other resources.

In addition, the Company believes that existing competitors and new market
entrants will attempt to develop fully integrated customer interaction solution
applications suites that may include call center telesales and telemarketing
applications which provide comparable functionality to the Company's existing
applications. The Company also expects that competition will increase as a
result of software industry consolidation. Current and potential competitors
have established or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of the Company's potential customers. Accordingly, it is possible that new
competitors or alliances among competitors will emerge and rapidly acquire
significant market share.

Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share, any of which could materially
adversely affect the Company's business, financial condition and results of
operations. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than can the
Company. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, financial condition and results of operations. See "Risk Factors --
Competition."

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

34
<PAGE> 35

business, financial condition and results of operations, regardless of the final
outcome of such litigation. Despite the Company's efforts to safeguard and
maintain its proprietary rights both in the United States and abroad, there can
be no assurance that the Company will be successful in doing so, or that the
steps taken by the Company in this regard will be adequate to deter
misappropriation or independent third-party development of the Company's
technology or to prevent an unauthorized third party from copying or otherwise
obtaining and using the Company's products or technology. There also can be no
assurance that others will not independently develop similar technologies or
duplicate any technology developed by the Company. Any such events could have a
material adverse effect on the Company's business, financial condition and
results of operations.

As the number of customer interaction software applications in the industry
increases and the functionality of these products further overlaps, software
development companies like the Company may increasingly become subject to claims
of infringement or misappropriation of the intellectual property rights of
others. There can be no assurance that third parties will not assert
infringement or misappropriation claims against the Company in the future with
respect to current or future products. Any claims or litigation, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require the Company to enter into royalty or licensing
arrangements. Such royalty or licensing arrangements, if required, may not be
available on terms acceptable to the Company, if at all, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Adverse determinations in such claims or litigation could
also have a material adverse effect on the Company's business, financial
condition and results of operations.

REGULATORY ENVIRONMENT

Certain uses of outbound call processing systems are regulated by federal,
state and foreign law. The Federal Telephone Consumer Protection Act (the
"TCPA") prohibits the use of automatic dialing equipment to call emergency
telephone lines, health care and similar facility patient telephone lines, and
telephone lines where the called party is charged for incoming calls, such as
those used by pager and cellular phone services. The TCPA prohibits use of such
equipment to engage two or more lines of a multi-line business simultaneously.
Among other things, the TCPA required the Federal Communications Commission
("FCC") to create regulations protecting residential telephone subscribers from
unwanted telephone solicitations. The rules adopted by the FCC require that
telemarketers maintain a company-specific "do-not-call list" which contains the
names and numbers of residential subscribers who do not want to receive calls.
An entity which has an "established business relationship" with a party it calls
and tax-exempt nonprofit organizations are exempt from do-not-call lists. The
rules also require that telemarketers may call consumers only after 8 a.m. and
before 9 p.m., local time. Certain states have enacted similar laws limiting
access to telephone subscribers who object to receiving solicitations. Although
compliance with these laws may limit the potential use of the Company's products
in some respects, the Company's systems can be programmed to operate
automatically in full compliance with these laws through the use of appropriate
calling lists and calling campaign time parameters. There can be no assurance,
however, that future legislation further restricting telephone solicitation
practices, if enacted, would not adversely affect the Company.

EMPLOYEES

As of October 31, 1996, the Company had 146 full-time employees, of which
129 were based in the United States and 17 were based internationally. None of
the employees of the Company is covered by a collective bargaining agreement.
The Company does not have long-term employment agreements with any of its
employees. The Company considers its relations with its employees to be good.

35
<PAGE> 36

The Company believes its future success will depend in large part on the
Company's ability to recruit and retain qualified employees, especially
experienced software engineering and sales personnel. The competition for such
personnel is intense. There can be no assurance that the Company will be
successful in retaining or recruiting key personnel.

FACILITIES

The Company's principal administrative, sales, marketing, support, and
research and development facility is located in 40,303 square feet of modern
office space in Fairfax, Virginia. This facility is leased to the Company
through 2004. The Company also leases 2,463 square feet in Irvine, California
and 6,600 square feet in Aldermaston, U.K. Management believes its current
facilities are adequate to meet its needs through the next twelve months and
that, if required, suitable additional or alternative space will be available to
accommodate expansion of the Company's operations on commercially reasonable
terms.

LEGAL PROCEEDINGS

One of the Company's former VARs has filed a claim for arbitration against
the Company asserting, among other things, that the Company misrepresented the
functionality of its products and wrongfully terminated the VAR's reseller
agreement, and claiming not less than $1.0 million in damages. The Company
intends to vigorously defend this action and, based upon information currently
available, believes that the action will not have a material impact on the
Company. However, because the arbitration proceedings are at a preliminary stage
and discovery has not yet begun, the Company cannot predict the ultimate outcome
of this action and there can be no assurance that the Company will be successful
in the arbitration proceedings.

Versatility is not a party to any other material legal proceedings.

36
<PAGE> 37

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -------------------------------------------------------------------------
<S> <C> <C>
Ronald R. Charnock................. 46 President, Chief Executive Officer and Chairman of the Board of Directors
Donald C. Yount, Jr. .............. 35 Senior Vice President, Finance and Chief Financial Officer
Marcus W. Heth..................... 41 Senior Vice President, Technologies, Secretary and Director
Stephen P. Winings................. 45 Senior Vice President, Marketing
Thomas A. Smith(1)(2).............. 34 Director
Charles A. Johnson(1)(2)........... 47 Director
Paul J. Palmer(1).................. 65 Director
</TABLE>
- ---------------

(1) Member of Compensation Committee.

(2) Member of Audit Committee.

RONALD R. CHARNOCK has served as President, Chief Executive Officer and
Chairman of the Board of Directors since co-founding the Company in 1981. From
1975 to the founding of the Company, Mr. Charnock was Director of the Computer
Services Division of the Republican National Committee. Mr. Charnock was the
founder in June 1990 and was the initial Chairman, serving until October 1994,
of the Alliance of Computer-Based Telephony Application Suppliers of the North
American Telecommunications Association. In October 1994, Mr. Charnock was
elected Vice Chairman of the Multimedia Telecommunications Association and
elected Chairman of that association in January 1996.

DONALD C. YOUNT, JR. has served as the Company's Chief Financial Officer
since July 1995. From March 1990 to July 1995, Mr. Yount held various positions
with K-III Communications Corporation ("K-III"), a diversified communications
company, most recently as Vice President and Chief Financial Officer of one of
K-III's operating companies, Films for the Humanities, Inc. Prior to joining
K-III, Mr. Yount was employed by the North America Corporate Finance Group of
the Chase Manhattan Bank, by Deloitte, Haskins and Sells as a consultant and by
Peat, Marwick & Co. as an auditor. Mr. Yount is a certified public accountant.

MARCUS W. HETH co-founded the Company in 1981 and has served as a director
of the Company since that time and as Treasurer and Secretary since January
1996. In May 1996, Mr. Heth became the Company's Senior Vice President,
Technologies. From October 1993 to May 1996, Mr. Heth was President of NPRI
Technologies, Inc., a wholly owned subsidiary of the Company. From August 1991
to October 1993, Mr. Heth was the Company's Vice President of Sales and
Marketing. From May 1981 to August 1991, he was the Company's Vice President,
Business Operations. Prior to co-founding the Company in 1981, Mr. Heth was
employed by the Republican National Committee, most recently as Manager of
Software Development.

STEPHEN P. WININGS, Senior Vice President, Marketing, joined the Company in
August 1996. From 1991 to August 1996, Mr. Winings was Vice President,
Marketing, of Software AG of North America. From 1989 to 1991, he was President
and Chief Executive Officer, Technology Division, for the Institute for
International Research, an information research company. From 1988 to 1989, Mr.
Winings was Executive Vice President, Corporate Development with CLC
Corporation, a technology training company. From 1987 to 1988, Mr. Winings was
Division President of Prentice Hall Information a division of Paramount
Communications. From 1986 to 1987, he was Division President with Simon &
Schuster, a division of Paramount Communications.

THOMAS A. SMITH has been a director since January 1996. Since October 1990,
Mr. Smith has been employed by the Edison Venture Fund. In 1993, Mr. Smith
became a general partner of the Edison Venture Fund and has directed Edison's
Washington, D.C. office since 1994. From 1986 to 1990, Mr. Smith was a senior
associate in the risk capital investment subsidiary of The Chase Manhattan
Corporation.

37
<PAGE> 38

CHARLES A. JOHNSON has been a director of the Company since January 1996.
Since 1993, Mr. Johnson has been a general partner of Noro-Moseley Partners III,
L.P., an Atlanta-based venture capital firm. From 1992 to 1993, Mr. Johnson was
an independent consultant. In 1983, Mr. Johnson co-founded Sales Technologies,
Inc., a startup software company, and served as its President and Chief
Executive Officer until Sales Technologies, Inc. was acquired by Dun and
Bradstreet in January 1989. Mr. Johnson continued in his role as Chief Executive
Officer of that division of Dun and Bradstreet until February 1992. Prior to
founding Sales Technologies, Inc., Mr. Johnson was a management consultant with
McKinsey & Company and held a number of sales and marketing positions with
Procter & Gamble.

PAUL J. PALMER has been a Director of the Company since September 1996.
Since January 1994, Mr. Palmer has been an executive consultant specializing in
the software industry. From 1957 until his retirement in December 1993, Mr.
Palmer held various positions in marketing and development with IBM, most
recently as Vice President.

Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors are duly elected and qualified.
Messrs. Smith and Johnson were nominated and elected pursuant to a Voting
Agreement which was entered into in connection with the issuance of the Series A
Preferred Stock, which Voting Agreement will terminate upon the closing of this
offering. There are no family relationships among any of the executive officers
or directors of the Company.

Upon the closing of this offering, the Company's Board of Directors will be
divided into three classes each of whose members will serve for staggered
three-year terms. Messrs. Heth and Johnson will serve in the class the term of
which expires in 1997; Messrs. Palmer and Smith will serve in the class the term
of which expires in 1998; and Mr. Charnock will serve in the class the term of
which expires in 1999. Upon the expiration of the term of each class of
directors, directors comprising such class of directors will be elected for a
three-year term at the next succeeding annual meeting of stockholders.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to January 1996, the Company had no separate compensation committee
or other board committee performing equivalent functions, and these functions
were performed by the Company's Board of Directors. In January 1996, the Company
established a Compensation Committee which consisted of Messrs. Smith and
Johnson. In September 1996, the Board of Directors established a new
Compensation Committee which consists of Messrs. Smith, Johnson and Palmer, each
of whom are non-employee directors. See "Management -- Executive Compensation"
for shares issued and options granted to executive officers as compensation for
services rendered in fiscal 1996.

See "Certain Transactions" for information regarding certain relationships
and transactions between the Company and certain members of the Board of
Directors.

DIRECTOR COMMITTEES AND COMPENSATION

Committees. The Audit Committee consists of Messrs. Smith and Johnson. The
Audit Committee reviews with the Company's independent auditors the scope and
timing of their audit services and any other services they are asked to perform,
the auditor's report on the Company's financial statements following completion
of their audit and the Company's policies and procedures with respect to
internal accounting and financial controls. In addition, the Audit Committee
makes annual recommendations to the Board of Directors for the appointment of
independent auditors for the ensuing year.

The Compensation Committee consists of Messrs. Smith, Johnson and Palmer.
The Compensation Committee reviews and evaluates the compensation and benefits
of all officers of the Company, reviews general policy matters relating to
compensation and benefits of employees of the Company and makes recommendations
concerning these matters to the Board of Directors. The Compensation Committee
also administers the Company's 1995 Employee Stock Option Plan and the 1995
Incentive Stock Option Plan, and, upon the closing of this offering, will
administer the Company's 1996 Stock Option Plan and 1996 Employee Stock Purchase
Plan. See "-- Stock Plans."

38
<PAGE> 39

Director Compensation. All non-employee directors are reimbursed for
travel and other related expenses incurred in attending meetings of the Board of
Directors. On September 30, 1996, in connection with his election to the Board
of Directors, Mr. Palmer was granted options to purchase 15,000 shares of Common
Stock at an exercise price of $10.50 per share. These options expire five years
from the date of grant with 5,000 shares vesting immediately and the remainder
vesting quarterly over two years.

EXECUTIVE COMPENSATION

Summary Compensation. The following table sets forth the compensation
earned by the Company's Chief Executive Officer and each of the other most
highly compensated executive officers of the Company whose total salary and
bonus for fiscal 1996 exceeded $100,000 (collectively, the "Named Executive
Officers") for services rendered in all capacities to the Company in fiscal
1996:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION(1)
---------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS
- ----------------------------------------------------- --------- -------- ---------------
<S> <C> <C> <C>
Ronald R. Charnock, Chief Executive Officer,
President and Chairman of the Board of Directors... $145,000 $151,858 --
Marcus W. Heth, Senior Vice President, Technologies,
Secretary and Director............................. 140,000 150,993 --
Donald C. Yount, Jr., Senior Vice President, Finance
and Chief Financial Officer........................ 78,077 19,050 6,004
</TABLE>

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

(1) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1996.

Option Grants. The following table provides information concerning grants
of stock options made during fiscal 1996 by the Company to the Named Executive
Officers:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------
NAME GRANTED IN FISCAL YEAR(3) ($/SH) DATE 5% 10%
- -------------------------------- ----- ----------------- -------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Ronald R. Charnock.............. -- -- -- -- -- --
Marcus W. Heth.................. -- -- -- -- -- --
Donald C. Yount, Jr............. 4,040(1) 0.99% $ 0.80 1/16/01 $ 893 $1,973
1,964(2) 0.80 4/30/01 434 959
</TABLE>

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

(1) Options vested 100% on the date of grant. Options were granted at the fair
market value of the Company's Common Stock as determined by the Company's
Board of Directors on the date of grant.

(2) Options vest 20% on the date of grant with an additional 20% vesting
annually on the anniversary date of such grant. Options were granted at the
fair market value of the Company's Common Stock as determined by the
Company's Board of Directors on the date of grant.

(3) Based on options to purchase an aggregate of 611,327 shares of Common Stock
granted to all employees of the Company in fiscal 1996, including the Named
Executive Officers.

(4) The potential realizable value is calculated based on the term of the option
at the time of grant (five years). Stock price appreciation of 5% and 10% is
based on the fair value at the time of grant and assumes that the option is
exercised at the exercise price and sold on the last day of its term at the
appreciated price, pursuant to rules promulgated by the Securities and
Exchange Commission. The potential realizable value does not represent the
Company's prediction of its stock price performance. This table does not
take into account any appreciation of the fair value of the Common Stock
from the date of grant to date. There can be no assurance that the actual
stock price appreciation over the five-year option term will be at the
assumed 5% and 10% levels or at any other defined level.

39
<PAGE> 40

Option Exercises and Unexercised Option Holdings. The following table
provides information regarding unexercised stock options held as of April 30,
1996 by each of the Named Executive Officers. None of the Named Executive
Officers exercised any stock options in fiscal 1996.

AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR-END OPTIONS AT YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald R. Charnock...................... -- -- -- --
Marcus W. Heth.......................... -- -- -- --
Donald C. Yount, Jr..................... 4,432 1,572 $62,934 $22,322
</TABLE>

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

(1) There was no public trading market for the Common Stock as of April 30,
1996. Accordingly, these values have been calculated on the basis of the
initial public offering price of $15.00 per share, less the applicable
exercise price.

STOCK PLANS

1995 Employee Stock Option Plan. The Company's 1995 Employee Stock Option
Plan (the "1995 Employee Plan"), which was adopted by the Board of Directors and
approved by the Company's stockholders on January 16, 1996, provides for the
issuance of a maximum of 430,708 shares of Common Stock, less any shares issued
under the 1995 Incentive Plan (as defined below), pursuant to the grant of
non-statutory stock options to employees, non-employees or consultants of the
Company. Options granted under the 1995 Employee Plan become fully vested on the
date of grant and are not transferable by the holder except by will or by the
laws of descent and distribution.

As of November 15, 1996, options to purchase 218,936 shares of Common Stock
at a price of $0.80 per share were outstanding under the 1995 Employee Plan, and
9,822 of such options had been exercised. On September 30, 1996, the Company's
Board of Directors determined that no further options would be granted under the
1995 Employee Plan.

1995 Incentive Stock Option Plan. The Company's 1995 Incentive Stock
Option Plan (the "1995 Incentive Plan") was adopted by the Board of Directors
and approved by the Company's stockholders on January 16, 1996. The 1995
Incentive Plan provides for the issuance of a maximum of 430,708 shares of
Common Stock less any shares issued under the 1995 Employee Plan pursuant to the
grant to officers and employees of "incentive stock options" within the meaning
of the Internal Revenue Code. Options granted under the 1995 Incentive Plan
generally vest 20% on the date of grant and 20% annually thereafter on the
anniversary of the date of the grant and are not transferable by the holder
except by will or by the laws of descent and distribution.

As of November 15, 1996, options to purchase 62,569 shares of Common Stock
at a price of $0.80 per share were outstanding under the 1995 Incentive Plan and
no such options had been exercised. On September 30, 1996, the Company's Board
of Directors determined that no further options would be granted under the 1995
Incentive Plan.

In addition to options granted under the 1995 Employee Plan and the 1995
Incentive Plan, in January 1996, the Company granted Louis Venezia options to
purchase 320,000 shares of Common Stock at an exercise price of $0.80 per share.

1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan") was adopted by the Board of Directors on September 30, 1996 and approved
by the Company's stockholders on September 30, 1996. The 1996 Plan provides for
the issuance of a maximum of 750,000 shares of Common Stock pursuant to the
grant to employees of "incentive stock options" within the meaning of the
Internal Revenue Code and the grant of non-qualified stock options, stock awards
or opportunities to make direct purchases of stock in the Company to employees,
consultants, directors and officers of the Company.

40
<PAGE> 41

The 1996 Plan is administered by the Compensation Committee of the Board of
Directors. Subject to the provisions of the 1996 Plan, the Compensation
Committee has the authority to select the optionees and determine the terms of
the options granted, including: (i) the number of shares subject to each option,
(ii) when the option becomes exercisable, (iii) the exercise price of the option
(which in the case of an incentive stock option cannot be less than the market
price of the Common Stock as of the date of grant), (iv) the duration of the
option and (v) the time, manner and form of payment upon exercise of an option.
An option is not transferable by the optionholder except by will or by the laws
of descent and distribution. Generally, no incentive stock option may be
exercised more than 90 days following termination of employment. However, in the
event that termination is due to death or disability, the option is exercisable
for a maximum of 180 days after such termination.

As of November 15, 1996, options to purchase 139,000 shares of Common Stock
at a price of $10.50 per share were outstanding under the 1996 Plan, and no
options had been exercised.

1996 Employee Stock Purchase Plan. The 1996 Employee Stock Purchase Plan
(the "1996 Purchase Plan") was adopted by the Board of Directors on September
30, 1996 and approved by the Company's stockholders on September 30, 1996. The
1996 Purchase Plan will take effect upon completion of this offering. The 1996
Purchase Plan provides for the issuance of a maximum of 100,000 shares of Common
Stock pursuant to the exercise of nontransferable purchase rights granted to
participating employees.

The 1996 Purchase Plan is administered by the Compensation Committee of the
Board of Directors. All employees of the Company whose customary employment is
20 hours or more per week and more than five months in any calendar year and who
have completed at least one year of employment, except employees who own five
percent or more of the Company's stock, are eligible to participate in the 1996
Purchase Plan. Employees who own five percent or more of the Company's Common
Stock and directors who are not employees of the Company may not participate in
the 1996 Purchase Plan. To participate in the 1996 Purchase Plan, an employee
must authorize the Company to deduct an amount (not less than one percent nor
more than ten percent of a participant's total cash compensation) from his or
her pay during six-month periods commencing on January 1 and July 1 of each year
(each a "Plan Period"), but in no case shall an employee be entitled to purchase
more than 250 shares in any Plan Period. The exercise price for the purchase
right each Plan Period is 85% of the lesser of the market price of the Common
Stock on the first or last business day of the Plan Period. If an employee is
not a participant on the last day of the Plan Period, such employee is not
entitled to exercise his or her purchase right, and the amount of his or her
accumulated payroll deductions will be refunded. An employee's rights under the
1996 Purchase Plan terminate upon his or her voluntary withdrawal from the plan
at any time or upon termination of employment. No options have been granted to
date under the 1996 Purchase Plan.

401(K) PLAN

The Company maintains a 401(k) retirement savings plan (the "401(k) Plan").
All employees of the Company who have completed six months of service are
eligible to participate in the 401(k) Plan. The 401(k) Plan provides that each
participant may contribute a portion of his or her pre-tax compensation (up to a
statutorily prescribed annual limit, $9,500 in 1996) to the 401(k) Plan. The
percentage elected by certain highly compensated participants may be required to
be lower. All amounts contributed to the 401(k) Plan by employee participants
and earnings on these contributions are fully vested at all times. The Company,
at its discretion, may contribute to the 401(k) Plan. Such Company contributions
become fully vested upon a participant's completion of three years of service.
The Company has never made a discretionary contribution, although the Company
may elect to make contributions in the future.

41
<PAGE> 42

CERTAIN TRANSACTIONS

Prior to October 31, 1996, the Company was the 1% general partner of
Serenity Real Properties Limited Partnership (the "Partnership") of which Mr.
Ronald R. Charnock, the Company's President and Chief Executive Officer, Mr.
Marcus W. Heth, the Company's Senior Vice President, Technologies, and Mr. Keith
P. Roberts, the Company's Director of Product Development, were the limited
partners holding the remaining 99% of the partnership interests (the "Limited
Partners"). The Partnership is the owner of an office building in Alexandria,
Virginia (the "Property"), which was the Company's headquarters until October
1994 and which was leased by the Company under a lease expiring in April 1997
and providing for monthly rental payments of $10,000. In addition, the Company
had guaranteed a mortgage loan made by a commercial bank to the Partnership,
which had an outstanding balance of $614,000 at September 30, 1996. This loan
was also guaranteed by each of the Limited Partners and was secured by a
mortgage on the Property.

On October 31, 1996, the Company sold its general partnership interest in
the Partnership, for consideration equal to its capital account of $3,131, to
Serenity L.L.C., whose members are the Limited Partners. In connection with the
sale of its general partnership interest in the Partnership, the Company made to
the Partnership a loan of $519,305 evidenced by a Deed of Trust Note which bears
interest at the prime rate and is payable upon the earliest of (i) the sale of
the Property, (ii) demand by the Company and (iii) October 31, 1997. The Deed of
Trust Note is secured by a mortgage on the Property and is guaranteed by each of
the Limited Partners. The Partnership used the proceeds of this loan to repay
its loan from the bank and discharge its mortgage on the Property. In connection
with these transactions, the Partnership agreed to the termination of its lease
with Company. The Company believes that these transactions were in the best
interest of the Company and its stockholders and that the consideration received
by it for its general partnership interest in the Partnership was not less than
the fair value of the interest.

The Company has extended loans to Mr. Charnock, with principal and accrued
interest totaling $113,045 at November 6, 1996. Such loans are evidenced by a
promissory note, are payable on the earliest of (i) demand and (ii) November 6,
1997 and bear interest at the prime rate.

Certain obligations under the Company's Master Equipment Lease with its
leasing agent, are personally guaranteed by Mr. Charnock. As of October 31,
1996, $937,000 was outstanding under the Master Equipment Lease, of which
$598,000 is guaranteed by Mr. Charnock. Such payments are due monthly through
March 2000.

The Company has adopted a policy whereby all future transactions between
the Company and its officers, directors and affiliates will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be approved by a majority of the disinterested members of the Board of
Directors.

42
<PAGE> 43

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 15, 1996 (i) by each
person or entity known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) by each director of the Company, (iii)
by each of the Named Executive Officers and (iv) by all directors and executive
officers of the Company as a group. This table assumes no exercise of the
Underwriters' overallotment options. The Company and two of the Company's
stockholders, Edison Venture Fund III, L.P. and Noro-Moseley Partners III, L.P.,
have granted to the Underwriters options to purchase 131,588, 113,378 and 85,034
shares, respectively, to cover over-allotments. See "Underwriting." Footnotes 2
and 3 to the table provide information regarding the stock holdings of the
Selling Stockholders after this offering in the event the Underwriters exercise
the over-allotment options in full. Unless otherwise indicated below, to the
knowledge of the Company, each person or entity listed below maintains a
business address c/o Versatility Inc., 11781 Lee Jackson Memorial Highway,
Seventh Floor, Fairfax, Virginia 22033 and has sole voting and investment power
over the shares of Common Stock shown as beneficially owned, except to the
extent authority is shared by spouses under applicable law.

<TABLE>
<CAPTION>
PERCENT OWNED(1)
------------------------------
SHARES BENEFICIALLY BEFORE THE AFTER THE
NAME AND ADDRESS OWNED OFFERING OFFERING
- --------------------------------------------------- ------------------- ------------ -----------
<S> <C> <C> <C>
Edison Venture Fund III, L.P.(2)................... 566,892 11.3% 7.9%
997 Lenox Drive, #3
Lawrenceville, NJ 08648
Noro-Moseley Partners III, L.P.(3)................. 425,169 8.5% 5.9%
4200 North Side Parkway, NW
Building 9
Atlanta, GA 30327
Keith D. Roberts................................... 1,000,000 20.0% 13.9%
Benjamin Cotten.................................... 320,000 6.4% 4.4%
Ronald R. Charnock................................. 1,360,000 27.2% 18.9%
Donald C. Yount, Jr.(4)............................ 8,432 * *
Marcus W. Heth..................................... 1,000,000 20.0% 13.9%
Thomas A. Smith(5)................................. 566,892 11.3% 7.9%
Charles A. Johnson(6).............................. 425,169 8.5% 5.9%
Paul J. Palmer(7).................................. 6,250 * *
Louis Venezia(8)................................... 332,468 6.2% 4.4%
Ernest Connon(9)................................... 320,493 6.4% 4.4%
Stephen P. Winings(10)............................. 4,000 * *
All Executive Officers and Directors as a group
(7 persons)(4)(5)(6)(7)(10)...................... 3,370,743 67.1% 46.7%
</TABLE>

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

* Less than 1% of the outstanding Common Stock.

(1) The number of shares of Common Stock deemed outstanding prior to this
offering includes 5,001,883 shares of Common Stock outstanding as of
November 15, 1996 (including 992,061 shares to be issued upon the automatic
conversion of all outstanding shares of Series A Preferred Stock on the
closing of this offering). The number of shares of Common Stock deemed
outstanding after this offering includes an additional 2,200,000 shares of
Common Stock which are being offered for sale by the Company in this
offering.

(2) If the Underwriters' over-allotment options are exercised in full, Edison
Venture Fund III, L.P. will sell 113,378 shares and thereafter beneficially
own 453,514 shares, representing 6.2% of the outstanding Common Stock.

(3) If the Underwriters' over-allotment options are exercised in full,
Noro-Moseley Partners III, L.P. will sell 85,034 shares and thereafter
beneficially own 340,135 shares, representing 4.6% of the outstanding
Common Stock.

(4) Consists of 8,432 shares issuable pursuant to stock options which are
exercisable within 60 days of November 15, 1996.

43
<PAGE> 44

(5) Consists of 566,892 shares of Common Stock held by Edison Venture Fund III,
L.P., of which Mr. Smith is a general partner. Mr. Smith may be deemed to
share voting and investment power with respect to these shares. Mr. Smith
disclaims beneficial ownership of such shares.

(6) Consists of 425,169 shares held by Noro-Moseley Partners III, L.P. of which
Mr. Johnson is a general partner. Mr. Johnson may be deemed to share voting
and investment power with respect to these shares. Mr. Johnson disclaims
beneficial ownership of such shares.

(7) Consists of 6,250 shares issuable pursuant to stock options which are
exercisable within 60 days of November 15, 1996.

(8) Consists of 332,468 shares issuable pursuant to stock options which are
exercisable within 60 days of November 15, 1996.

(9) Includes 493 shares issuable pursuant to stock options which are
exercisable within 60 days of November 15, 1996.

(10) Consists of 4,000 shares issuable pursuant to stock options which are
exercisable within 60 days of November 15, 1996.

44
<PAGE> 45

DESCRIPTION OF CAPITAL STOCK

Effective upon the closing of this offering, the authorized capital stock
of the Company will consist of 20,000,000 shares of Common Stock, par value $.01
per share, and 2,000,000 shares of Preferred Stock, par value $.01 per share.

COMMON STOCK

As of November 15, 1996, there were 5,001,883 shares of Common Stock
outstanding and held of record by 9 stockholders, after giving effect to the
automatic conversion of all outstanding shares of Series A Preferred Stock upon
the closing of this offering. Based upon the number of shares outstanding as of
that date and giving effect to the issuance of the 2,200,000 shares of Common
Stock offered hereby, there will be 7,201,883 shares of Common Stock outstanding
upon the closing of this offering.

Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
any Preferred Stock then outstanding. Upon the liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
ratably the net assets of the Company available after the payment of all debts
and other liabilities and subject to the prior rights of any Preferred Stock
then outstanding. Holders of the Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are, and
the shares offered by the Company in this offering will be, when issued and paid
for, fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. Upon the closing of this
offering, there will be no shares of Preferred Stock outstanding.

PREFERRED STOCK

The Second Amended and Restated Certificate of Incorporation of the Company
approved by the stockholders of the Company on September 30, 1996, which will be
filed immediately after the closing of this offering, will delete all references
to the formerly designated Series A Preferred Stock.

The Board of Directors will be authorized without further stockholder
approval, subject to certain limitations prescribed by law, to issue from time
to time up to an aggregate of 2,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company. The Company has no present plans to designate
or issue any shares of Preferred Stock.

REGISTRATION RIGHTS

At the completion of this offering, certain stockholders of the Company
(the "Rightsholders") will be entitled to require the Company to register under
the Securities Act of 1933, as amended (the "Act"), up to a total of 992,061
shares of outstanding Common Stock (the "Registrable Shares") under the terms of
an agreement among the Company and the Rightsholders (the "Registration
Agreement"). The Registration Agreement provides that in the event the Company
proposes to register any of its securities under the Act at any time or times,
the Rightsholders, subject to certain exceptions, shall be entitled to include
Registrable Shares in such registration. However, the managing underwriter of
any such offering may exclude for marketing reasons some or all of such
Registrable Shares from such registration. Certain Rightsholders also have,
subject to certain conditions and limitations, additional rights to require the
Company to prepare and file a registration statement under the Act with respect
to their Registrable Shares if Rightsholders holding at least 40% of the
Registrable Shares held by all such Rightsholders so request at any time six
months or more after the date of this Prospectus. Rightsholders may also, at any
time, require the Company to file a

45
<PAGE> 46

registration statement on Form S-3 under the Act, or any successor form thereto,
if the aggregate price to the public of such offering can reasonably be
anticipated to exceed $4,000,000 and if the Company is entitled to use Form S-3.
There is no limitation on the number of registrations on Form S-3 that may be
requested by Rightsholders. The Company is generally required to bear the
expenses of all such registrations, except underwriting discounts and
commissions.

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock.

The Company's Second Amended and Restated Certificate of Incorporation
provides for the division of the Board of Directors into three classes as nearly
equal in size as possible with staggered three-year terms. See "Management --
Executive Officers and Directors." Any director may be removed without cause
only by the vote of at least 75% of the shares entitled to vote for the election
of directors or with cause by the vote of at least a majority of such shares.
These provisions could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, control of
the Company.

The Company's Amended and Restated By-laws, which will be in effect upon
the closing of the offering, provide that for nominations for the Board of
Directors or for other business to be properly brought by a stockholder before a
meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a notice of
nominations or other business to be brought before an annual meeting must be
delivered not less than 120 days nor more than 150 days prior to the first
anniversary of the date of the proxy statement delivered to stockholders in
connection with the preceding year's annual meeting or, if the date of the
annual meeting is either more than 30 days before or more than 60 days after
such anniversary, or if no proxy statement was delivered to stockholders in
connection with the preceding year's annual meeting, such notice must be
delivered not earlier than 90 days prior to such annual meeting and not later
than the later of 60 days prior to the annual meeting or 10 days following the
date on which public announcement of the date of such annual meeting is first
made by the Company. With respect to special meetings, notice must generally be
delivered not more than 90 days prior to such meeting and not later than the
later of 60 days prior to such meeting or 10 days following the day on which
public announcement of such meeting is first made by the Company. The notice
must contain, among other things, certain information about the stockholder
delivering the notice and, as applicable, background information about each
nominee or a description of the proposed business to be brought before the
meeting.

The Company's Second Amended and Restated Certificate of Incorporation
authorizes the Board of Directors, when considering a tender offer or merger or
acquisition proposal, to take into account factors in addition to potential
economic benefits to stockholders. Such factors may include: (i) the interests
of the Company's stockholders, including the possibility that these interests
might be best served by the continued independence of the Company; (ii) whether
the proposed transaction might violate Federal or state laws; (iii) the
consideration being offered in the proposed transaction in relation to the then
current market price for the outstanding capital stock of the Company, as well
as in relation to the market price for the capital stock of the Company over a
period of years, the estimated price that might be achieved in a negotiated sale
of the Company as a whole or in part or through orderly liquidation, the
premiums over market price for the securities of other corporations in similar
transactions, current political, economic and other factors bearing on
securities prices and the Company's financial condition and future prospects;
and (iv) the social, legal and economic effects upon employees, suppliers,
customers, creditors and others having similar relationships with the Company,
upon the communities in which the Company conducts its business and upon the
economy of

46
<PAGE> 47

the state, region and nation. The foregoing provisions could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, control of the Company.

The Company's Second Amended and Restated Certificate of Incorporation
provides that any action required or permitted to be taken by the stockholders
of the Company may be taken only at a duly called annual or special meeting of
the stockholders and not by written consent, and that special meetings may be
called only by the Chairman of the Board of Directors, a majority of the Board
of Directors, or the President of the Company. These provisions could have the
effect of delaying until the next annual stockholder's meeting stockholder
actions that are favored by the holders of a majority of the outstanding voting
securities of the Company. These provisions may also discourage another person
or entity from making a tender offer for the Company's Common Stock, because
such person or entity, even if it acquired a majority of the outstanding voting
securities of the Company, would be able to take action as a stockholder (such
as electing new directors or approving a merger) only at a duly called
stockholder's meeting, and not by written consent.

The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or By-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Second Amended and Restated Certificate of Incorporation requires the
affirmative vote of the holders of at least 75% of the outstanding voting stock
of the Company to amend or repeal certain charter provisions and to reduce the
number of authorized shares of Common Stock and Preferred Stock. Such 75% vote
is also required to amend or repeal certain By-law provisions. The By-laws may
be amended or repealed by a majority vote of the Board of Directors or the
holders of a majority of the shares of the Company's voting stock. Such 75%
stockholder vote would be in addition to any separate class vote that might in
the future be required pursuant to the terms of any Preferred Stock that might
be outstanding at the time any such amendments are submitted to stockholders.
The foregoing provisions could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, control
of the Company.

LIMITATION OF LIABILITY AND INDEMNIFICATION

The Second Amended and Restated Certificate of Incorporation contains
certain provisions permitted under the DGCL relating to the liability of
directors. These provisions eliminate a director's personal liability for
monetary damages resulting from a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. These provisions do not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director's fiduciary duty. These provisions will not alter a director's
liability under Federal securities laws. The Company's Second Amended and
Restated Certificate of Incorporation also contains provisions requiring the
Company to indemnify the directors and officers of the Company to the fullest
extent permitted by the DGCL. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve as
directors.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Boston EquiServ, a
Bank of Boston State Street service company.

47
<PAGE> 48

SHARES ELIGIBLE FOR FUTURE SALE

Upon the closing of this offering, the Company will have 7,201,883 shares
of Common Stock outstanding. Of these shares, the 2,200,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Act, except that any shares purchased by "affiliates" of the Company,
as that term is defined in Rule 144 ("Rule 144") under the Act ("Affiliates"),
may generally only be sold in compliance with the limitations of Rule 144
described below.

SALES OF RESTRICTED SHARES

The remaining 5,001,883 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. Of the Restricted Shares, 640,000 shares may be eligible
for sale in the public market in accordance with Rule 144(k) under the Act
immediately following the Effective Date; all of these shares are subject to the
180-day lock-up agreements described below (the "Lock-up Agreements"). An
additional 3,360,000 Restricted Shares will become eligible for sale in the
public market in accordance with Rule 144 under the Act beginning 90 days after
the Effective Date. Of these shares, all but 4,911 are subject to Lock-up
Agreements. The remaining 1,001,883 outstanding Restricted Shares will not be
eligible for sale under Rule 144 until the expiration of a two-year holding
period from the date of their acquisition, and may be resold in the public
market only in compliance with the registration requirements of the Act or
pursuant to a valid exemption therefrom. In addition, certain securityholders
have the right to have their Restricted Shares registered by the Company under
the Act. See "Description of Capital Stock -- Registration Rights."

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
72,019 shares immediately after this offering) or (ii) the average weekly
trading volume of the Common Stock in the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of such sale is filed. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least three years may resell such
shares without compliance with the foregoing requirements. In meeting the two-
and three-year holding periods described above, a holder of Restricted Shares
can include the holding periods of a prior owner who was not an Affiliate. The
Securities and Exchange Commission has proposed an amendment to Rule 144 which
would reduce the holding period required for shares subject to Rule 144 to be
come eligible for sale in the public market from two years to one year and from
three years to two years in the case of Rule 144(k).

Rule 701 under the Act provides that the shares of Common Stock acquired on
the exercise of currently outstanding options may be resold by persons, other
than Affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by Affiliates under Rule
144 without compliance with its two-year minimum holding period, subject to
certain limitations.

OPTIONS

As of November 15, 1996, options to purchase a total of 740,505 shares of
Common Stock were outstanding. Of the shares issuable pursuant to such options,
652,592 are subject to Lock-up Agreements.

The Company intends to file one or more registration statements on Form S-8
under the Act to register all shares of Common Stock subject to outstanding
stock options and Common Stock issuable pursuant to the Company's stock option
and purchase plans that do not qualify for an exemption under Rule 701 from the
registration requirements of the Act. The Company expects to file these
registration statements 90 days following the closing of this offering, and such
registration statements are expected to become effective upon filing. Shares
covered by these registration statements will thereupon be eligible for sale in
the public markets, subject to the Lock-up Agreements, to the extent applicable.

48
<PAGE> 49

LOCK-UP AGREEMENTS

All executive officers and directors of the Company and certain
stockholders, who in the aggregate hold 4,996,972 shares of Common Stock, and
holders of options to purchase 652,592 shares of Common Stock, have agreed,
pursuant to the Lock-up Agreements, that they will not, directly or indirectly,
offer, sell, offer to sell, contract to sell, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, grant of any option to purchase or any other sale or disposition) any
shares of Common Stock or other capital stock of the Company or any securities
convertible into, or exercisable or exchangeable for, any shares of Common Stock
or other capital stock of the Company for a period of 180 days after the date of
this Prospectus without the prior written consent of Merrill Lynch.

REGISTRATION RIGHTS

At the completion of this offering, certain stockholders of the Company
will be entitled to require the Company to register under the Act up to a total
of 992,061 shares of outstanding Common Stock. See "Description of Capital Stock
- -- Registration Rights."

49
<PAGE> 50

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Montgomery Securities and
Oppenheimer & Co., Inc. are acting as the representatives (the
"Representatives"), has severally agreed to purchase from the Company, the
aggregate number of shares of Common Stock set forth opposite its name below.
The Underwriters are committed to purchase all of such shares if any are
purchased. Under certain circumstances, the commitments of non-defaulting
Underwriters may be increased as set forth in the Purchase Agreement.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................................... 400,000
Montgomery Securities........................................................... 400,000
Oppenheimer & Co., Inc. ........................................................ 400,000
Bear, Stearns & Co. Inc......................................................... 57,500
Alex. Brown & Sons Incorporated ................................................ 57,500
Donaldson, Lufkin & Jenrette Securities Corporation............................. 57,500
Goldman, Sachs & Co............................................................. 57,500
Hambrecht & Quist LLC........................................................... 57,500
Morgan Stanley & Co. Incorporated............................................... 57,500
Prudential Securities Incorporated.............................................. 57,500
Robertson, Stephens & Company LLC............................................... 57,500
Branch, Cabell and Company...................................................... 30,000
Brean Murray & Co., Inc......................................................... 30,000
Dain Bosworth Incorporated...................................................... 30,000
Dakin Securities Corporation.................................................... 30,000
Davenport & Co. of Virginia, Inc................................................ 30,000
Ferris, Baker Watts, Incorporated............................................... 30,000
First Albany Corporation........................................................ 30,000
Friedman, Billings, Ramsey & Co., Inc........................................... 30,000
Johnston, Lemon & Co. Incorporated.............................................. 30,000
Ladenburg, Thalmann & Co. Inc................................................... 30,000
Legg Mason Wood Walker, Incorporated............................................ 30,000
Morgan Keegan & Company, Inc.................................................... 30,000
Ragen MacKenzie Incorporated.................................................... 30,000
The Robinson-Humphrey Company, Inc.............................................. 30,000
Stephens Inc.................................................................... 30,000
Unterberg Harris................................................................ 30,000
Wessels, Arnold & Henderson, L.L.C.............................................. 30,000
Wheat, First Securities, Inc.................................................... 30,000
---------
Total.............................................................. 2,200,000
=========
</TABLE>

Prior to the offering, there has been no public market for the shares of
Common Stock. The initial public offering price was determined through
negotiations among the Company and the Representatives. Among the factors
considered in determining the initial public offering price of the Common Stock,
in addition to the prevailing market conditions, were price-earnings ratios of
publicly-traded companies that the Representatives believe to be comparable to
the Company, certain financial information of the Company, the history of, and
the prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, its past and present operations, the
prospects for and timing of future revenue of the Company, the present state of
the Company's development, and the above factors in relation to market values
and various valuation measures of companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the offering at or above the initial public offering price.

50
<PAGE> 51

The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $.63 per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $.10 per share on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.

The Company and the Selling Stockholders have granted the Underwriters
options, exercisable for 30 days after the date hereof, to purchase up to
330,000 additional shares of Common Stock to cover over-allotments, if any, at
the initial public offering price, less the underwriting discount. If the
Underwriters exercise these options, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of shares of Common Stock to be purchased by
it in the foregoing table is of the 2,200,000 shares of Common Stock offered
hereby. See "Principal and Selling Stockholders".

The Underwriters have reserved for sale at the initial public offering
price up to 60,000 shares which may be sold to the Company's employees and
persons associated with the Company or affiliated with any director, officer or
employee of the Company. The number of shares available for sale to the general
public will be reduced to the extent any reserved shares are purchased. Any
reserved shares not so purchased will be offered to the public by the
Underwriters on the same basis as the other shares offered hereby.

The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Act, or to contribute to payments the Underwriters may be required to make
in respect thereof.

The Company and all of the Company's stockholders have agreed, subject to
certain exceptions, not to sell, offer to sell, grant any option for the sale
of, or otherwise dispose of any Common Stock or securities convertible into or
exercisable for Common Stock, without the prior written consent of Merrill
Lynch, for a period of 180 days after the date of this Prospectus.
Notwithstanding the foregoing, the Company may, without the consent of Merrill
Lynch, offer, issue or sell, or otherwise dispose of shares of Common Stock or
other securities (i) pursuant to the Purchase Agreement, (ii) pursuant to
reservations, agreements, or employee or director benefit plans described or
referred to in this Prospectus or (iii) pursuant to the exercise of options
referred to in this Prospectus.

The Underwriters do not intend to confirm sales of Common Stock offered
hereby to any accounts over which they exercise discretionary authority.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Hale and Dorr, Washington, D.C.

EXPERTS

The consolidated financial statements as of April 30, 1995 and 1996 and for
each of the three years in the period ended April 30, 1996 included in this
Prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.

<PAGE> 52

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including all amendments and
exhibits thereto, the "Registration Statement") under the Act, with respect to
the Common Stock offered hereby. As permitted by the rules and regulations of
the Commission, this Prospectus omits certain information contained in the
Registration Statement. For further information with respect to the Company and
the Common Stock offered hereby, reference is hereby made to the Registration
Statement and to the exhibits and schedules filed therewith as a part thereof.
Statements contained in this Prospectus regarding the contents of any agreement
or other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is made to the copy of such
agreement filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, may be inspected at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at certain of its Regional Offices located at 7
World Trade Center, 13th Floor, New York, NY 10048 and 500 West Madison Street,
Chicago, IL 60661. Copies of all or any part thereof may be obtained from the
Commission, 450 Fifth Street, Washington, D.C. 20549 upon payment of the
prescribed fees. The Commission maintains a World Wide Web site at
http://www.sec.gov from which information concerning registrants may be
obtained.

The Company intends to furnish to its stockholders annual reports
containing financial statements audited by an independent accounting firm and
quarterly reports containing unaudited financial statements for the first three
quarters of each fiscal year.

52
<PAGE> 53

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

VERSATILITY INC.

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets at April 30, 1995 and 1996 and unaudited at October 31,
1996................................................................................ F-3
Consolidated Statements of Operations for the years ended April 30, 1994, 1995 and
1996 and the unaudited six months ended October 31, 1995 and 1996................... F-5
Consolidated Statements of Cash Flows for the years ended April 30, 1994, 1995 and
1996 and the unaudited six months ended October 31, 1995 and 1996................... F-6
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years
ended April 30, 1994, 1995 and 1996 and the unaudited six months ended October 31,
1996................................................................................ F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>

F-1
<PAGE> 54

INDEPENDENT AUDITORS' REPORT

Board of Directors of Versatility Inc.:

We have audited the accompanying consolidated balance sheets of Versatility
Inc., and subsidiaries (the "Company") as of April 30, 1995 and 1996, and the
related consolidated statements of operations, of changes in stockholders'
equity (deficit), and of cash flows for the years ended April 30, 1994, 1995 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Versatility Inc. and
subsidiaries at April 30, 1995 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended April 30, 1996
in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Washington, DC

June 21, 1996, except for Note 13 paragraphs 1 through 5
as to which the date is October 3, 1996 and
Note 13 paragraphs 6 through 8 as to which
the date is October 31, 1996

F-2
<PAGE> 55

VERSATILITY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31, 1996
-------------------------- --------------------------
1995 1996 ACTUAL PRO FORMA
----------- ----------- ----------- -----------
(UNAUDITED)

<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents
(Note 1).......................... $ 1,414,205 $ 2,280,273 $ 1,983,026 $ 1,983,026
Accounts receivable -- (net of
allowance for doubtful accounts of
$70,354, $157,874 and $191,262 --
unaudited)........................ 1,423,094 5,707,724 8,161,046 8,161,046
Prepaid expenses.................... 24,956 642,045 1,100,648 1,100,648
Inventory (Note 1).................. 7,356 -- 15,997 15,997
Note receivable (Note 13)........... -- -- 519,305 519,305
Deferred income taxes (Note 10)..... -- 130,238 130,238 130,238
----------- ----------- ----------- -----------
Total current assets........... 2,869,611 8,760,280 11,910,260 11,910,260
----------- ----------- ----------- -----------
Other assets:
Related party receivables
(Note 3).......................... 114,016 80,000 89,165 89,165
Deposits............................ 77,531 157,835 158,347 158,347
Investments (Notes 3 and 13)........ 4,126 3,137 -- --
Assets held for sale................ -- 76,004 101,646 101,646
Capitalized software, net of
accumulated amortization of
$165,805 for 1995
(Note 1).......................... 829,026 -- -- --
Purchased software, net of
accumulated amortization of $0,
$11,500 and $23,000
-- unaudited(Note 1).............. -- 103,500 92,000 92,000
----------- ----------- ----------- -----------
Total other assets............. 1,024,699 420,476 441,158 441,158
----------- ----------- ----------- -----------
Property and equipment (Note 1):
Computers........................... 809,845 893,674 1,042,364 1,042,364
Office furniture and equipment...... 575,000 637,559 664,413 664,413
Leasehold improvements.............. 180,347 181,485 187,051 187,051
Capital leases...................... 113,278 160,822 425,219 425,219
----------- ----------- ----------- -----------
1,678,470 1,873,540 2,319,047 2,319,047
Less: Accumulated depreciation and
amortization...................... (1,285,168) (1,423,234) (1,521,248) (1,521,248)
----------- ----------- ----------- -----------
Net property and equipment..... 393,302 450,306 797,799 797,799
----------- ----------- ----------- -----------
Total.................................... $ 4,287,612 $ 9,631,062 $13,149,217 $13,149,217
=========== =========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 56

VERSATILITY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31, 1996
----------------------- -------------------------
1995 1996 ACTUAL PRO FORMA
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 890,455 $ 824,745 $ 1,163,105 $ 1,163,105
Accrued liabilities (Note 4).............. 752,075 1,393,653 2,239,201 2,239,201
Related party payables (Note 3)........... 86,218 3,443 78,079 78,079
Income taxes payable (Note 10)............ 448,767 356,503 237,878 237,878
Capital lease payable (Note 6)............ 22,976 30,848 109,674 109,674
Current maturities of notes payable (Note
5)...................................... 35,250 -- -- --
Line of credit (Notes 5 and 13)........... -- 800,772 1,972,736 1,972,736
Deferred revenue (Note 1)................. 188,106 284,700 798,380 798,380
---------- ---------- ----------- -----------
Total current liabilities............ 2,423,847 3,694,664 6,599,053 6,599,053
---------- ---------- ----------- -----------
Long-term liabilities:
Capital lease payable, less current
maturities (Note 6)..................... 51,042 69,983 200,834 200,834
Deferred rent (Note 1).................... 154,006 221,899 283,012 283,012
Deferred income taxes (Note 10)........... 327,454 249,401 249,401 249,401
---------- ---------- ----------- -----------
Total other liabilities.............. 532,502 541,283 733,247 733,247
---------- ---------- ----------- -----------
Commitments and Contingencies (Notes 6 and 13)
Redeemable preferred stock
Series A redeemable convertible preferred
stock, par value $.01 -- 992,061 shares
authorized, issued and outstanding,
liquidation preference -- $3.52784 per share
(Note 7)..................................... -- 3,561,293 3,737,293 --
Stockholders' equity (Note 8):
Common stock, par value $.01 -- 20,000,000
shares authorized, actual: 4,000,000
shares issued and outstanding; pro
forma: 4,992,061 shares issued and
outstanding
(Notes 1 and 8)......................... 40,000 40,000 40,000 49,921
Additional paid-in capital................ -- -- -- 3,727,372
Foreign currency translation adjustments
(Note 1)................................ -- (66,311) (62,680) (62,680)
Retained earnings......................... 1,291,263 1,860,133 2,102,304 2,102,304
---------- ---------- ----------- -----------
Stockholders' equity................. 1,331,263 1,833,822 2,079,624 5,816,917
---------- ---------- ----------- -----------
Total.......................................... $4,287,612 $9,631,062 $13,149,217 $13,149,217
========= ========= ========== ==========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 57

VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
------------------------------------- ------------------------
1994 1995 1996 1995 1996
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License revenue (Note 1)................ $5,392,891 $8,045,345 $10,345,323 $3,615,602 $ 7,548,410
Service and maintenance revenue (Note
1).................................... 2,987,444 3,439,806 6,189,949 3,034,914 3,923,094
---------- ---------- ----------- ---------- -----------
Total revenue...................... 8,380,335 11,485,151 16,535,272 6,650,516 11,471,504
---------- ---------- ----------- ---------- -----------
Cost of revenue:
License revenue......................... 1,923,777 1,493,194 573,329 242,734 409,476
Service and maintenance revenue......... 2,056,524 2,384,946 4,266,984 1,763,147 2,471,013
---------- ---------- ----------- ---------- -----------
Total cost of revenue.............. 3,980,301 3,878,140 4,840,313 2,005,881 2,880,489
---------- ---------- ----------- ---------- -----------
Gross margin................................ 4,400,034 7,607,011 11,694,959 4,644,635 8,591,015
---------- ---------- ----------- ---------- -----------
Operating expenses:
Selling, general and administrative..... 3,716,966 4,550,182 7,769,751 2,936,407 6,592,245
Research and development................ 389,154 710,828 2,073,797 956,978 1,279,965
Depreciation and amortization........... 133,444 365,490 161,346 67,322 107,083
Write off of capitalized software....... -- -- 829,026 829,026 --
---------- ---------- ----------- ---------- -----------
Total operating expenses........... 4,239,564 5,626,500 10,833,920 4,789,733 7,979,293
---------- ---------- ----------- ---------- -----------
Income (loss) from operations............... 160,470 1,980,511 861,039 (145,098) 611,722
Interest income (expense), net (Note 12).... (19,259) (8,977) 3,140 13,212 (12,551)
---------- ---------- ----------- ---------- -----------
Income (loss) before provision (benefit) for
income taxes.............................. 141,211 1,971,534 864,179 (131,886) 599,171
Provision (benefit) for income taxes (Notes
1 and 10)................................. 31,087 714,947 207,309 (40,000) 181,000
---------- ---------- ----------- ---------- -----------
Net income (loss)........................... $ 110,124 $1,256,587 $ 656,870 $ (91,886) $ 418,171
========== ========== =========== ========== ===========
Pro forma net income (loss) per share....... $ 0.12 $ (0.02) $ 0.07
=========== ========== ===========
Pro forma weighted average common and common
equivalent shares outstanding............. 5,603,205 5,603,205 5,603,205
=========== ========== ===========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 58

VERSATILITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30, OCTOBER 31,
------------------------------------ -----------------------
1994 1995 1996 1995 1996
--------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income (loss).................................... $ 110,124 $1,256,587 $ 656,870 $ (91,886) $ 418,171
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation..................................... 133,444 199,685 149,846 67,322 95,583
Amortization..................................... -- 165,805 11,500 -- 11,500
Loss (gain) on equity investment................. (107) (122) 989 -- 6
Deferred income taxes............................ (100,800) 288,719 (208,291) (316,230) --
Write-off of capitalized software................ -- -- 829,026 829,026 --
Changes in assets and liabilities:
Accounts receivable.......................... 936,409 (414,912) (4,284,630) (1,615,759) (2,453,322)
Income taxes receivable...................... 207,419 -- -- -- --
Prepaid expenses............................. (5,772) (8,156) (617,089) (476,684) (458,603)
Inventory.................................... 36,260 -- 7,356 -- (15,997)
Related party receivables.................... (13,584) 3,143 34,016 (51,053) (9,165)
Deposits..................................... 6,573 (52,184) (80,304) (35,414) (512)
Accounts payable............................. (867,102) 170,482 (65,710) 184,572 338,360
Accrued liabilities.......................... 68,783 319,481 641,578 (113,677) 845,548
Related party payables....................... (48,242) 4,460 (82,775) 44,400 74,636
Income taxes payable......................... 131,887 308,580 (92,264) (145,346) (118,625)
Deferred rent................................ (61,416) 20,938 67,893 21,746 61,113
Deferred revenue............................. (40,020) (53,740) 96,594 16,198 513,680
--------- ----------- ----------- ----------- ----------
Net cash (used in) provided by operating
activities............................. 493,856 2,208,766 (2,935,395) (1,682,785) (697,627)
--------- ----------- ----------- ----------- ----------
Cash flows from investing activities:
Purchase of property and equipment and assets held
for sale........................................... (79,949) (155,734) (235,310) (104,225) (239,777)
Software development costs........................... (251,435) (743,396) -- -- --
Purchased software................................... -- -- (115,000) (55,000) --
Related party note receivable........................ -- -- -- -- (516,174)
--------- ----------- ----------- ----------- ----------
Net cash used in investing activities.... (331,384) (899,130) (350,310) (159,225) (755,951)
--------- ----------- ----------- ----------- ----------
Cash flows from financing activities:
Borrowings under line of credit...................... -- -- 800,772 500,000 2,490,214
Payments under line of credit........................ -- -- -- -- (1,318,250)
Proceeds from sale of preferred stock, net........... -- -- 3,473,293 -- --
Principal payments under note payable................ (55,090) (65,453) (35,250) (31,691) --
Principal payments under capital leases.............. (23,008) (22,432) (20,731) (11,957) (19,264)
--------- ----------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities............................. (78,098) (87,885) 4,218,084 456,352 1,152,700
--------- ----------- ----------- ----------- ----------
Effect of exchange rate changes on cash.................. -- -- (66,311) (28,547) 3,631
--------- ----------- ----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents..... 84,374 1,221,751 866,068 (1,414,205) (297,247)
Cash and cash equivalents, beginning of period........... 108,080 192,454 1,414,205 1,414,205 2,280,273
--------- ----------- ----------- ----------- ----------
Cash and cash equivalents, end of period................. $ 192,454 $1,414,205 $ 2,280,273 $ -- $1,983,026
========= =========== =========== =========== ==========
Supplemental disclosures of cash flow information:
Interest paid........................................ $ 30,244 $ 18,691 $ 27,732 $ 6,994 $ 66,195
========= =========== =========== =========== ==========
Income taxes paid.................................... $ 8,300 $ 114,309 $ 506,490 $ 350,800 $ 303,635
========= =========== =========== =========== ==========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 59

VERSATILITY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
NUMBER OF FOREIGN
SHARES OF ADDITIONAL CURRENCY RETAINED
COMMON COMMON PAID-IN TRANSLATION EARNINGS
STOCK STOCK CAPITAL ADJUSTMENTS (DEFICIT) TOTAL
--------- ------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 1, 1993......................... 4,000,000 $40,000 $ -- $ -- $ (75,448) $ (35,448)
Net income............................... 110,124 110,124
--------- ------- ---------- -------- ---------- ----------
Balance, April 30, 1994...................... 4,000,000 40,000 -- -- 34,676 74,676
Net income............................... 1,256,587 1,256,587
--------- ------- ---------- -------- ---------- ----------
Balance, April 30, 1995...................... 4,000,000 40,000 -- -- 1,291,263 1,331,263
Foreign currency translation
adjustments............................ (66,311) (66,311)
Accretion of dividends on redeemable
preferred stock........................ (88,000) (88,000)
Net income............................... 656,870 656,870
--------- ------- ---------- -------- ---------- ----------
Balance, April 30, 1996...................... 4,000,000 40,000 -- (66,311) 1,860,133 1,833,822
Foreign currency translation adjustments
(unaudited)............................ 3,631 3,631
Accretion of dividends on redeemable
preferred stock (unaudited)............ (176,000) (176,000)
Net income (unaudited)................... 418,171 418,171
--------- ------- ---------- -------- ---------- ----------
Balance, October 31, 1996 (unaudited)........ 4,000,000 $40,000 $ -- $(62,680) $2,102,304 $2,079,624
========= ======= ========== ======== ========== ==========
Pro Forma Balance, October 31, 1996
(unaudited)................................ 4,992,061 $49,921 $3,727,372 $(62,680) $2,102,304 $5,816,917
========= ======= ========== ======== ========== ==========
</TABLE>

See notes to consolidated financial statements.

F-7
<PAGE> 60

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED)

Versatility Inc. (the "Company") was incorporated as National Political
Resources, Inc, in the District of Columbia in 1981 and merged into NPRI, Inc.,
a Virginia corporation, in July 1991. In January 1996, NPRI, Inc. reincorporated
in Delaware. The Company changed its name to Versatility Inc. in June 1996.

The Company is a provider of client/server customer interaction software
that enables businesses to automate and enhance their telemarketing and
teleselling capabilities. The Company's products include software applications,
development and customization tools and optional software services. The Company
also offers fee-based professional, consulting and maintenance services.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The financial statements include the results
of Versatility Inc., and its wholly owned subsidiaries, NPRI Technologies, Ltd.
and Versatility (UK) Limited. All significant intercompany accounts and
transactions have been eliminated in consolidation. On April 30, 1996, NPRI
Technologies, Ltd. was dissolved, and its operations were merged with
Versatility Inc. The Company accounts for its investment in Serenity Real
Property Limited Partnership using the equity method. (See Note 3)

Cash and Cash Equivalents - For purposes of the Statements of Cash Flows,
the Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company's investments consist
of a money market account.

Inventory - Inventory consists of miscellaneous hardware and is stated at
the lower of cost or market, on a first-in, first-out basis.

Capitalized Software - During the course of the development of the
Versatility Series software, the Company capitalized its development costs in
compliance with Statement of Financial Accounting Standards No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
The amount of software capitalized totaled $995,000 and, beginning in November
1994, was amortized over three years on a straight-line basis. In connection
with two major implementations of the Versatility Series product in July 1995,
the Company decided to add features and functions to the product that were
substantially different than those included in the software as originally
capitalized. Management determined that these features and functions
substantially altered the content of the product, effectively eliminating any
remaining useful life of the capitalized asset. Accordingly, the Company wrote
off the remaining asset of $829,000 in the first quarter of fiscal 1996.

Purchased Software - Purchased software is amortized on a straight-line
basis over the shorter of five years or the useful life of the asset.

Property and Equipment - Property and equipment are stated at cost.
Depreciation on property and equipment, including amortization on capital
leases, is computed on a straight-line basis over the estimated useful lives of
the assets, ranging from three to ten years. The leasehold improvements are
depreciated over the shorter of the useful life of the assets or the term of the
related lease. Repairs and maintenance are charged to operations as incurred.
Major improvements and betterments are capitalized.

Deferred Rent - Deferred rent represents the effects of certain rent
concessions that are amortized over the life of the lease on a straight-line
basis.

Recapitalization - In conjunction with the issuance of the Series A
redeemable convertible preferred stock (the "Series A Preferred Stock") (See
Note 7), the Company declared, on January 24, 1996, a 4,000 for 1 stock split on
its common stock, and changed the par value from $1.00 to $.01. The shares
outstanding have been restated to give effect to the stock split.

Redeemable Preferred Stock - The Company accretes the increase in the
redemption value of its Series A Preferred Stock through a charge to retained
earnings. (See Notes 7 and 13)

F-8
<PAGE> 61

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)

Currency Translation - Assets and liabilities of the Company's foreign
operations are translated into U.S. dollars at the exchange rate in effect at
the balance sheet date and revenues and expenses are translated at average rates
in effect during the period. The unrealized currency translation adjustment is
reflected as a separate component of stockholders' equity on the balance sheet.

Revenue Recognition - The Company's revenue is derived principally from two
sources: (i) product license fees for the use of the Company's software products
and (ii) service fees for implementation, maintenance, consulting and training
related to the Company's software products. The Company's contracts with its
customer often involve significant customization and installation obligations.
In these situations, license revenue is recognized based on the percentage of
completion method which is based on achievement of certain milestones. When the
Company is under no obligation to install or customize the software, license
revenue is recognized upon shipment. Service revenue for implementation,
consulting services and training is generally recognized as the services are
performed. Revenue from maintenance services is recognized ratably over the term
of the service agreement.

Revenue from hardware sales relating to the implementation of the Company's
VAX/VMS application are included in license revenue. These hardware sales were
$1.9 million and $1.4 million for the years ended April 30, 1994 and 1995,
respectively. Hardware sales for the year ended April 30, 1996 and the six
months ended October 31, 1996 were insignificant.

Income Taxes - The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). SFAS 109 requires, among other things, using the liability
method of computing deferred income taxes.

Pro Forma Net Income (Loss) Per Share - Pro forma net income (loss) per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
consist of redeemable convertible preferred stock (using the as if converted
method) and stock options (using the treasury stock method). Common equivalent
shares are excluded from the computation if their effect is antidilutive except
that (i) pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins and staff policy, such computations include all common and common
equivalent shares issued within the 12 months preceding the filing date as if
they were outstanding for all periods presented (using the treasury stock method
and the anticipated public offering price) and (ii) redeemable convertible
preferred stock outstanding during the period is included (using the as
converted method) in the computation as common equivalent shares even when the
effect is antidilutive. Historical earnings per share prior to fiscal 1996 have
not been presented since such amounts are not deemed meaningful due to the
significant change in the Company's capital structure that will occur in
connection with the proposed offering.

Non-cash Transactions - The Company acquired $113,278, $47,544 and $228,941
(unaudited) of equipment through capital leases during fiscal 1994 and 1996 and
the six months ended October 31, 1996, respectively.

Concentration of Credit Risk - Financial instruments which potentially
subject the Company to a concentration of credit risk principally consist of
accounts receivable. In fiscal 1996, two customers accounted for 25.7% and 22.2%
of the Company's total revenue, respectively, and in the first half of fiscal
1997, two customers accounted for 24.9% and 18.7%, respectively, of the
Company's total revenue. As of April 30, 1996, 44.3% of accounts receivable was
concentrated with one customer. The Company has subsequently collected all of
these accounts receivable from this customer. The Company generally does not
require collateral on accounts receivable as the majority of the Company's
customers are large, well established companies. The Company provides reserves
for credit losses and such losses have been insignificant.

Stock Based Compensation - The Company grants stock options for a fixed
number of shares to employees with an exercise price not less than the estimated
fair value of the shares as determined by the

F-9
<PAGE> 62

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)

Board of Directors at the date of grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and, accordingly, recognizes compensation expense for stock option
grants only when the exercise price is less than the fair value of the shares at
the date of grant.

In October 1995, the FASB issued Statement of Financial Accounting Standard
No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) which provides an
alternative to APB Opinion No. 25 in accounting for stock-based compensation
issued to employees. As permitted by SFAS 123, the Company plans to continue to
account for stock-based compensation in accordance with APB Opinion No. 25. The
Company will present in its annual financial statements the additional
disclosures required by SFAS 123.

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 at the date of the financial statements and the reported amounts of
revenue and expenses during the reported period. Actual results could differ
from those estimates.

Unaudited Interim Financial Data - The unaudited interim financial
statements for the six months ended October 31, 1995 and 1996 have been prepared
on the same basis as the audited consolidated financial statements and, in the
opinion of management, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles. The
data disclosed in the notes to the consolidated financial statements for these
periods are unaudited. The Company believes the results of operations for the
interim periods are not necessarily indicative of the results to be expected for
any future period.

2. BUSINESS ACQUISITION

Versatility (UK) Limited was acquired by the Company during December 1995.
The shareholders of the Company were the same shareholders of Versatility (UK)
Limited, with proportionate ownership in both companies being the same. The
acquisition was completed by exchanging 2,000,000 shares of common stock of the
Company for all of the outstanding capital stock of Versatility (UK) Limited.
The shares of Versatility (UK) Limited were subsequently retired. The business
combination has been treated as an exchange between companies under common
control, which is accounted for in a manner similar to a pooling of interests.
Accordingly, the consolidated financial statements for all periods prior to the
combination have been restated to reflect the combined operations. Intercompany
transactions have been eliminated.

The following is a reconciliation of revenue and earnings previously
reported by the Company for the year ended April 30, 1995 with the combined
amounts currently presented in the financial statements for that year:

<TABLE>
<CAPTION>
VERSATILITY (UK) INTERCOMPANY CONSOLIDATED
COMPANY LIMITED ROYALTIES AMOUNTS
----------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales.......................... $10,516,837 $1,801,964 ($833,650) $11,485,151
Income from operations............. 951,896 1,028,615 -- 1,980,511
</TABLE>

Included in consolidated results of operations for the year ended April 30,
1996 are the following results of the previously separate companies for the
period of May 1, 1995 to December 31, 1995:

<TABLE>
<CAPTION>
VERSATILITY (UK) INTERCOMPANY CONSOLIDATED
COMPANY LIMITED ROYALTIES AMOUNTS
---------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales........................... $6,688,983 $2,530,343 ($571,361) $ 8,647,965
Income from operations.............. 191,137 344,775 -- 535,912
</TABLE>

F-10
<PAGE> 63

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)

3. RELATED PARTY TRANSACTIONS

Related Party Receivables - The Company has the following receivables from
related parties or affiliated entities at April 30, 1995 and 1996 and October
31, 1996 as follows:

<TABLE>
<CAPTION>
APRIL 30,
-------------------- OCTOBER 31,
1995 1996 1996
-------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Stockholder loans............................ $109,170 $65,544 $78,290
Other........................................ 4,846 14,456 10,875
-------- ------- -----------
$114,016 $80,000 $89,165
======== ======= ===========
</TABLE>

The stockholder loans accrue interest at the prime rate. The loans and any
interest accrued thereunder may be offset against accrued bonuses. Included in
accounts receivable is approximately $29,000 and $37,000 of accrued interest
relating to these loans for fiscal 1995 and 1996, respectively.

The Company leases office space from Serenity Real Properties Limited
Partnership (the "Partnership"). The limited partners are stockholders in the
Company and the Company is the general partner. (See Notes 6 and 13)

As general partner, the Company holds a 1% interest and is allocated 1% of
the net income or loss of the Partnership. The Company would be responsible for
all of the losses to the extent that the Partnership's liabilities exceed its
assets. As of April 30, 1996, the Partnership's unaudited financial position was
as follows:

<TABLE>
<CAPTION>
UNAUDITED
----------
<S> <C>
Current assets (including $3,443 receivable from the
Company)................................................... $173,818
Land, buildings, equipment and intangibles................... 762,056
----------
Total assets................................................. $935,874
==========
Mortgage payable............................................. $622,217
Partners' capital............................................ 313,657
----------
Total liabilities and partners' capital...................... $935,874
==========
</TABLE>

As general partner, the Company is contingently liable for the liabilities
of the Partnership should the Partnership not be able to satisfy its obligations
on a timely basis. Additionally, the Company is contingently liable for the
mortgage note payable as guarantor.

The Partnership's annual rental income is $120,000, all of which is derived
from the Company. An equal amount has been expensed by the Company.

4. ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of April 30, 1995 and
1996 and October 31, 1996:

<TABLE>
<CAPTION>
APRIL 30, OCTOBER
--------------------- 31,
1995 1996 1996
-------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Accrued commissions and salaries................... $244,837 $ 335,395 $ 611,715
Accrued bonuses.................................... 207,113 461,586 417,413
Accrued payroll taxes and withholdings............. 173,279 341,397 459,144
Accrued vacation................................... 86,388 203,219 322,257
Other.............................................. 40,458 52,056 428,672
-------- ---------- ----------
$752,075 $1,393,653 $2,239,201
======== ========= =========
</TABLE>

F-11
<PAGE> 64

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)

5. LINE OF CREDIT

In June 1995, the Company obtained a $1.0 million line of credit from a
bank for financing accounts receivable and working capital. The line of credit
is collateralized with a first priority security interest in all accounts
receivable. The line expires on August 31, 1996. Amounts outstanding under the
line plus accrued interest at April 30, 1996 were $800,772. The weighted average
interest rate for fiscal 1996 was 9.1%. The line of credit has various
covenants, including limitations on disposition of assets. The Company also must
maintain certain financial ratios. The Company's loan agreement prohibits the
payment of cash dividends. On August 28, 1996, the Company obtained a new line
of credit. (See Note 13)

At April 30, 1995, the Company had a note payable of $35,250. The note was
paid in full in December 1995.

6. COMMITMENTS

Operating Leases -- Versatility is committed on a lease for office space in
Alexandria, Virginia, through Apri1 30, 1997, at an annual rate of $120,000 to
the Partnership. (See Notes 3 and 13)

The Company leases office space, equipment and automobiles under
noncancelable operating leases expiring through 2004. The leases for office
space have abatements that range from two to six months and scheduled annual
rent escalations of approximately 3%. None of the equipment or automobile
agreements contain unusual renewal or purchase options. Total rent expense for
the years ended April 30, 1994, 1995 and 1996 was $390,049, $514,963 and
$876,093, respectively.

As of April 30, 1996, future minimum lease payments for the operating
leases are as follows:

<TABLE>
<CAPTION>
YEARS ENDING APRIL 30,
-----------------------------------------------------------
<S> <C>
1997.................................................. $1,138,480
1998.................................................. 1,067,062
1999.................................................. 986,789
2000.................................................. 928,834
2001.................................................. 851,401
Thereafter............................................ 2,767,986
----------
Total................................................. $7,740,552
=========
</TABLE>

Capital Leases -- The Company is obligated under capital leases for various
office equipment. As of April 30, 1996, future minimum lease payments for the
capital leases are as follows:

<TABLE>
<CAPTION>
YEARS ENDING APRIL 30,
------------------------------------------------------------
<S> <C>
1997................................................... $ 45,156
1998................................................... 45,156
1999................................................... 14,500
2000................................................... 9,504
2001................................................... 7,920
--------
Total.................................................. 122,236
Less: Imputed interest at 12%.......................... (21,405)
--------
Present value of future minimum lease payments......... $100,831
========
</TABLE>

7. REDEEMABLE CONVERTIBLE PREFERRED STOCK

On January 24, 1996, the Company issued 992,061 shares of the Company's
Series A Preferred Stock. Shares of Series A Preferred Stock have the same
voting rights as common stock. The holders of the Series A

F-12
<PAGE> 65

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)

Preferred Stock (the "Holders"), voting as a separate series, shall be entitled
to elect two directors of the Company. If the Company incurs an Underperformance
Event, as defined in the Series A Preferred Stock Agreement (the "Agreement"),
the Holders shall be entitled to elect a majority of the directors of the
Company. The Agreement also contains certain registration rights and affirmative
and negative covenants.

When and if declared by the Board of Directors, the Series A Preferred
Stock accrues quarterly dividends for payment at the rate per annum of $0.352784
per share (the "Accruing Dividends"). Accruing Dividends accrue on the annual
anniversary date of the initial purchase (January 24th), whether or not earned
or declared, and shall be cumulative. Such dividend will be payable only (i) if,
as and when determined by the Board of Directors; or (ii) upon the liquidation,
dissolution or winding up of the Company; or (iii) upon redemption of the Series
A Preferred Stock. Any accrued but unpaid Accrued Dividends on any shares of
Series A Preferred Stock shall expire upon any conversion of such share of
Series A Preferred Stock. No dividends may be paid on common stock unless the
Series A Preferred Stock receives a dividend of an equal amount on a per share
basis.

Shares of the Series A Preferred Stock are convertible into common stock at
the option of the holder. The conversion rate is one share of common stock for
each share of Series A Preferred Stock. Each share of Series A Preferred Stock
will automatically (and mandatorily) be converted into one share of common stock
upon the closing of an underwritten public offering of shares of common stock in
which (i) the aggregate price paid for such shares by the public shall be at
least $15 million and (ii) the price paid by the public for such shares shall be
at least $14.12 per share. The automatic conversion will result in an additional
992,061 shares of common stock. (See Note 13)

At any time on or after January 16, 1999, with the approval of the holders
of 66-2/3% of the then outstanding shares of Series A Preferred Stock, one or
more Holders may require the Company to redeem 33-1/3% of the shares of the then
outstanding shares of the Series A Preferred Stock. On or after the second
anniversary date from the Original Redemption Date, as defined in the Agreement,
the Holders may require the Company to redeem 50% of the shares of the then
outstanding shares of the Series A Preferred Stock, and on or after the third
anniversary date from the Original Redemption Date, the Holders may require the
Company to redeem 100% of the shares of the then outstanding shares of the
Series A Preferred Stock.

Upon liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the Holders shall first be entitled, before any
distribution or payment is made upon any stock ranking on liquidation junior to
the Series A Preferred Stock, to be paid an amount equal to $3.52784 per share
plus, in the case of each share, an amount equal to all Accruing Dividends
thereon (whether or not declared), or if insufficient funds exist, a pro rata
share of assets available for distribution. (See Note 13)

8. STOCKHOLDERS' EQUITY

As of April 30, 1995, the Company had 5,000 shares of common stock
authorized, 1,000 shares issued and outstanding, and no preferred stock
authorized, issued or outstanding. In January 1996, a recapitalization of the
Company was effected. A new corporation was formed, whereby 4,000 shares of
Versatility Inc. common stock were issued for every one share previously
outstanding. The total authorized shares of common stock were increased to
20,000,000 and 992,061 shares of Series A Preferred Stock were authorized. (See
Note 13)

9. BENEFIT PLANS

The Company has a savings and investment plan (the "Plan") which covers
employees of the Company and that qualifies under section 401(k) of the Internal
Revenue Code. All full-time employees who are at least 21 years old and have
completed at least six months of service are eligible to participate. Under the
terms of

F-13
<PAGE> 66

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)

the Plan, employees may defer a portion of their salaries as employee
contributions. A discretionary corporate contribution is determined annually.
The Company has never made a contribution. Employee contributions are vested
immediately; however, discretionary company contributions are 100% vested upon
three years of service. The Company is not obligated under any other post
retirement benefit plans.

In April 1993, the Company adopted the Employee Special Incentive Plan (the
"1993 Incentive Plan"). Under the Incentive Plan, employees who met the
eligibility requirements were awarded deferred compensation units. On January
16, 1996, the Incentive Plan was terminated and the Company's 1995 Employee
Stock Option Plan (the "1995 Employee Plan") and 1995 Incentive Stock Option
Plan (the "1995 Incentive Plan") were adopted by the Company's Board of
Directors and Stockholders. In connection with the adoption of the 1995 Employee
Plan, the Company's Compensation Committee of the Board of Directors granted
non-statutory options to purchase an aggregate of 228,758 shares of Common Stock
to employees who had vested deferred compensation units pursuant to the
terminated 1993 Incentive Plan. All such options became fully vested upon grant.

1995 Employee Plan. The 1995 Employee Plan provides for the issuance of a
maximum of 430,708 shares of Common Stock, less any shares issued under the 1995
Incentive Plan, pursuant to the grant of non-statutory stock options to
employees, non-employees or consultants of the Company. Options granted under
the 1995 Employee Plan are not transferable by the holder except by will or by
the laws of descent and distribution. As of April 30, 1996, options to purchase
228,758 shares of Common Stock at a price of $0.80 per share were outstanding
under the 1995 Employee Plan, and no such options had been exercised. (See Note
13)

1995 Incentive Plan. The 1995 Incentive Plan provides for the issuance of
a maximum of 430,708 shares of Common Stock, less any shares issued under the
1995 Employee Plan, pursuant to the grant to officers and employees of
"incentive stock options" within the meaning of the Internal Revenue Code.
Options granted under the 1995 Incentive Plan generally vest 20% on the date of
grant and thereafter 20% on the anniversary of the date of the grant and are not
transferable by the holder except by will or by the laws of descent and
distribution. As of April 30, 1996, options to purchase 62,569 shares of Common
Stock at a price of $0.80 per share were outstanding under the 1995 Incentive
Plan and no such options had been exercised. (See Note 13)

Options to purchase 320,000 shares of Common Stock were granted to an
officer on January 17, 1996. These stock options vested immediately with an
exercise price of $.80 per share, which was determined by the Board of Directors
of the Company to be the fair market value.

10. INCOME TAXES

The provision for income taxes is computed based on pretax accounting
income. Deferred income taxes include the tax effects of temporary differences
between pretax accounting income and tax income. A deferred income tax liability
has been recorded to reflect the temporary differences between the financial
statements and the tax returns.

F-14
<PAGE> 67

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)

The provision for income taxes at April 30, 1994, 1995 and 1996 consist of
the following:

<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current provision:
Federal................................................ $ 89,515 $ 335,267 $ 284,641
Foreign................................................ 24,887 51,518 78,520
State.................................................. 17,485 39,443 51,229
--------- --------- ---------
Total current provision........................... 131,887 426,228 414,390
--------- --------- ---------
Deferred provision:
Federal................................................ (85,332) 258,328 (175,496)
Foreign................................................ 1,200 -- --
State.................................................. (16,668) 30,391 (31,585)
--------- --------- ---------
Total deferred provision (benefit)................ (100,800) 288,719 (207,081)
--------- --------- ---------
Total provision for income taxes............................ $ 31,087 $ 714,947 $ 207,309
========= ========= =========
</TABLE>

The approximate tax effects of each type of temporary difference that gave
rise to the Company's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Vacation expense....................................... $ 19,147 $ 19,125 $ 70,309
Accrued bonus expenses................................. 6,194 78,703 --
Bad debt reserve....................................... 26,735 26,735 59,929
Rent expense........................................... -- -- 84,233
Net operating loss carryforward........................ 125,782 -- --
Other.................................................. 9,036 2,202 --
--------- --------- ---------
Total deferred tax assets.............................. 186,894 126,765 214,471
Valuation allowance.................................... (126,375) (126,765) --
--------- --------- ---------
Net deferred tax assets................................ $ 60,519 $ -- $ 214,471
========= ========= =========
Deferred tax liabilities:
Software costs......................................... $ 92,994 $ 315,030 --
Accelerated depreciation and other..................... 6,260 12,424 333,634
--------- --------- ---------
Total deferred tax liabilities......................... $ 99,254 $ 327,454 $ 333,634
========= ========= =========
</TABLE>

The provision for income taxes differs from the amount computed by applying
the statutory U.S. Federal income tax rate to income before taxes as a result of
the following:

<TABLE>
<CAPTION>
1994 1995 1996
----- ---- -----
<S> <C> <C> <C>
U.S. Federal statutory rate.................................. 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit........ 4.0 4.0 4.0
Impact of foreign earnings and taxes......................... 9.7 (1.0) (1.7)
General business credits..................................... -- (3.1) --
Benefit from foreign sales corporation....................... -- -- (13.4)
Net operating loss........................................... (41.0) -- --
Other........................................................ 15.3 2.4 1.0
----- ---- -----
Effective tax rate........................................... 22.0% 36.3% 23.9%
===== ==== =====
</TABLE>

F-15
<PAGE> 68

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)

11. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION

The Company operates in one industry segment, the development and marketing
of computer software programs and related services. The Company markets its
products worldwide and operations can be grouped into two main geographic areas.
Pertinent financial data by major geographic area is summarized below.

<TABLE>
<CAPTION>
ELIMINATIONS AND
UNITED UNITED OTHER CORPORATE
STATES KINGDOM EXPENSES CONSOLIDATED
----------- ---------- ----------------- -----------
<S> <C> <C> <C> <C>
Years ending April 30, 1994:
Revenue.................... $ 7,796,870 $1,574,375 $ (990,910) $ 8,380,335
Income from operations..... 451,711 1,088,823 (1,380,064) 160,470
Identifiable assets........ 1,843,156 216,833 -- 2,059,989
1995:
Revenue.................... $10,516,837 $1,801,964 $ (833,650) $11,485,151
Income from operations..... 2,969,058 1,028,615 (2,017,162) 1,980,511
Identifiable assets........ 3,834,339 453,273 -- 4,287,612
1996:
Revenue.................... $14,241,435 $2,991,493 $ (697,656) $16,535,272
Income from operations..... 5,250,464 1,060,603 (5,450,028) 861,039
Identifiable assets........ 9,518,498 112,564 -- 9,631,062
</TABLE>

The Company charges a royalty to Versatility (UK) Limited for software
sales of the Company's products sold by Versatility (UK) Limited. The royalty is
intended to cover primarily software development expense and marketing expense.
Versatility (UK) Limited reflects the royalty as a cost of revenue. For fiscal
1994, 1995 and 1996 the royalty was $990,910, $833,650 and $697,656,
respectively. These amounts were eliminated in consolidation and are not
reflected in the revenue and income from operations amounts above.

Significant customers:

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Customer A............................................ -- -- 25.7%
Customer B............................................ -- -- 22.2%
Customer C............................................ -- 17.7% --
Customer D............................................ 13.0% -- --
</TABLE>

Included in United States revenue is $68,654 and $3.8 million of export
revenue for fiscal 1995 and 1996, respectively. For fiscal 1996, $2.1 million of
export sales were generated in the United Kingdom, with the remaining sales in
both fiscal 1995 and 1996 generated in Canada and Mexico. Included in United
Kingdom revenue is $617,544 and $527,681 of export revenue for fiscal 1995 and
1996, respectively, which was generated in Western Europe, exclusive of the
United Kingdom. Export revenue for fiscal 1994 was insignificant for both the
United States and the United Kingdom.

12. INTEREST INCOME (EXPENSE), NET

Interest income (expense), net includes interest income of $10,985, $9,369,
$66,643 and $28,108 (unaudited) in fiscal 1994, 1995 and 1996 and the six months
ending October 31, 1996, respectively, and interest expense of $30,244, $18,346,
$63,503, and $40,659 (unaudited) in fiscal 1994, 1995 and 1996 and the six
months ending October 31, 1996, respectively.

13. SUBSEQUENT EVENTS

Line of Credit

On August 28, 1996, the Company obtained a new $2.5 million operating line
of credit from a bank for financing accounts receivable and working capital and
a new $1.0 million equipment line of credit from the

F-16
<PAGE> 69

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)

same bank to finance acquisition of property and equipment. These lines of
credit expire on August 5, 1997 and are secured by all of the Company's assets.
The operating and equipment lines of credit bear interest at the prime rate plus
0.5% and 1.0%, respectively. The lines of credit are collateralized with a first
priority security interest in all assets. The lines of credit have various
covenants, including limitations on disposition of assets. The Company also must
maintain certain financial ratios and is prohibited from paying cash dividends.
The amount outstanding under the operating line plus accrued interest at October
31, 1996 was $2.0 million. The amount borrowed under the equipment line was
$228,941 at October 31, 1996 and is included with the capital lease payable.

Stock Option Plans

On September 30, 1996, the Board of Directors determined that no further
options would be granted under the 1995 Employee Stock Option Plan and the 1995
Incentive Stock Option Plan. (See Note 9) In addition, the Board of Directors
adopted the 1996 Stock Option Plan, which provides for the issuance of a maximum
of 750,000 shares of common stock. On September 30, 1996, the Board of Directors
granted options to purchase 139,000 shares of common stock with an exercise
price of $10.50 per share, which was determined by the Board of Directors to be
the fair market value. Options to purchase 124,000 shares of common stock become
exercisable in cumulative annual increments of 20% each year, with the first 20%
becoming exercisable upon the date of grant. Options for the remaining 15,000
shares become exercisable in cumulative quarterly increments of 1,250 shares,
with 5,000 shares being immediately exercisable.

1996 Employee Stock Purchase Plan

On September 30, 1996, the Board of Directors adopted the 1996 Employee
Stock Purchase Plan (the "1996 Purchase Plan"). The 1996 Purchase Plan will take
effect upon the completion of the initial public offering and provides for the
issuance of a maximum of 100,000 shares of common stock. The 1996 Purchase Plan
will enable eligible employees to purchase common stock at 85% of the lower of
the fair market value of the Company's common stock on the first day or the last
day of each six-month purchase period.

Preferred Stock

On October 3, 1996, the Company filed an Amendment to its Amended and
Restated Certificate of Incorporation, providing for the automatic conversion of
all outstanding shares of Series A Preferred Stock into 992,061 shares of common
stock upon the closing of an underwritten public offering of shares of common
stock in which (i) the aggregate price paid for such shares by the public is at
least $15.0 million and (ii) the per share price paid by the public for such
shares is at least $11.00. On September 30, 1996, the Company's stockholders
approved the Second Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), which will be filed immediately after the
closing of the initial public offering. The Certificate of Incorporation will
delete all references to the formerly designated Series A Preferred Stock. In
addition, 2,000,000 shares of preferred stock will be authorized and the Board
of Directors will have the authority to issue the preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof.
(See Note 7)

Legal Proceedings

F-17
<PAGE> 70

VERSATILITY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED OCTOBER 31,
1995 AND 1996 (UNAUDITED) -- (CONTINUED)

Sale of Partnership Interest and Termination of Lease

On October 31, 1996, the Company sold its general partnership interest in
the Partnership, for consideration equal to its capital account of $3,131, to
Serenity L.L.C., whose members are the Limited Partners. In connection with the
sale of its general partnership interest in the Partnership, the Company made to
the Partnership a loan of $519,000 evidenced by a Deed of Trust Note which bears
interest at the same rate and is payable upon the earliest of (i) the sale of
the Property, (ii) demand by the Company and (iii) October 31, 1997. The Deed of
Trust Note is secured by a mortgage on the Property and is guaranteed by each of
the Limited Partners. The Partnership used the proceeds of this loan to repay
its loan from the bank and discharge its mortgage on the Property. In connection
with these transactions, the Partnership agreed to the termination of its lease
with the Company.

Initial Public Offering

The Company has filed with the Securities and Exchange Commission a Form
S-1 relating to an initial public offering of 2,200,000 shares of common stock.

F-18
<PAGE> 71
===============================================================================

NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 5
Use of Proceeds......................... 12
Dividend Policy......................... 12
Capitalization.......................... 13
Dilution................................ 14
Selected Consolidated Financial Data.... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 16
Business................................ 24
Management.............................. 37
Certain Transactions.................... 42
Principal and Selling Stockholders...... 43
Description of Capital Stock............ 45
Shares Eligible for Future Sale......... 48
Underwriting............................ 50
Legal Matters........................... 51
Experts................................. 51
Additional Information.................. 52
Index to Consolidated Financial
Statements............................ F-1
</TABLE>

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

UNTIL JANUARY 6, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

2,200,000 SHARES

[VERSATILITY INC. LOGO]

COMMON STOCK

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

PROSPECTUS

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

MERRILL LYNCH & CO.

MONTGOMERY SECURITIES

OPPENHEIMER & CO., INC.

DECEMBER 12, 1996

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