VERSATILITY INC, 10-Q, 1998-09-11

VERSATILITY INC
10-Q, 1998-09-11
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 31, 1998

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

For the Transition Period from ____________________ to ____________________

Commission File Number: 0-21793

VERSATILITY INC.
(Exact name of registrant as specified in its charter)

DELAWARE 52-1214354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

11781 Lee Jackson Memorial Highway
Seventh Floor
Fairfax, Virginia 22033
(703) 591-2900

(Address and telephone number of principal executive offices)

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES [X] NO [ ]

As of August 31, 1998, there were 7,595,009 shares of common stock outstanding,
par value $.01 per share.

<PAGE>

VERSATILITY INC.

Form 10-Q

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S><C>
PART I: FINANCIAL INFORMATION

Item 1: Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of April 30, 1998 and July 31, 1998 3

Condensed Consolidated Statements of Operations for the Three Months Ended
July 31, 1997 and 1998 5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended
July 31, 1997 and 1998 6

Condensed Consolidated Statements of Changes in Stockholders' Equity
for the Three Months Ended July 31, 1998 7

Notes to Condensed Consolidated Financial Statements 8

Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 11

Item 3: Quantitative and Qualitative Disclosures About Market Risk 22

PART II: OTHER INFORMATION

Item 1: Legal Proceedings 23

Item 2: Changes in Securities 24

Item 3: Defaults upon Securities 24

Item 4: Submission of Matters to a Vote of Security Holders 24

Item 5: Other Information 24

Item 6: Exhibits and Reports on Form 8-K 24

Signatures 25
</TABLE>

<PAGE>

Part I: Financial Information
Item 1: Financial Statements

VERSATILITY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1998 1998
--------- --------
<S><C>
ASSETS

Current assets:
Cash and cash equivalents............... $ 5,591,067 $ 879,037
Short-term investments.................. 565,938 --
Accounts receivable, net of
allowance for doubtful accounts
of $871,389 and $802,557.............. 3,681,293 4,457,334
Prepaid expenses........................ 632,511 603,989
Related party receivables............... 94,421 197,419
Note receivable-non/related party....... 200,000 100,000
Income taxes receivable................. 2,003,278 1,708,278
----------- -----------
Total current assets............... 12,768,508 7,946,057
----------- -----------
Other assets:
Deposits................................ 289,689 365,609
Prepaid Expenses........................ 37,107 --
Purchased software, net of
accumulated amortization of
$89,890 and $102,796.................. 168,230 155,324
----------- -----------
Total other assets................. 495,026 520,933
----------- -----------
Property and equipment:
Computers............................... 2,400,222 2,400,222
Office furniture and equipment.......... 932,774 851,890
Leasehold improvements.................. 416,881 416,881
Capital leases.......................... 744,883 744,883
----------- -----------
4,494,760 4,413,876
Less: accumulated depreciation............... (2,212,113) (2,369,865)
----------- -----------
Net property and equipment.............. 2,282,647 2,044,011
----------- -----------
Total........................................ $15,546,181 $10,511,001
=========== ===========
</TABLE>

See Notes to condensed consolidated financial statements.

<PAGE>

VERSATILITY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1998 1998
--------- --------
<S><C>

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable..................................... $ 2,277,692 $ 1,305,747
Accrued liabilities.................................. 2,995,756 1,459,017
Related party payables............................... 10,240 10,240
Income taxes payable................................. -- 24,076
Capital lease payable................................ 27,252 25,933
Line of credit....................................... 5,294,203 3,495,866
Deferred revenue..................................... 2,928,048 4,017,019
----------- -----------
Total current liabilities........................ 13,533,191 10,337,896
----------- -----------

Long-term liabilities:
Capital lease payable, less current maturities 73,243 60,912
Deferred rent........................................ 397,006 407,173
----------- -----------
Total other liabilities.............................. 470,249 468,085
----------- -----------
Total liabilities................................ 14,003,440 10,805,983
----------- -----------

Commitments and Contingencies (Notes 1 and 6)

Stockholders' equity (deficit):
Preferred stock, $.01 par value
2,000,000 shares authorized, no shares issued
or outstanding at April 30, 1998 and
July 31, 1998...................................... -- --
Common stock, par value $.01 --
20,000,000 shares authorized,
7,581,380 shares issued and
outstanding at April 30, 1998;
7,595,009 shares issued and
outstanding at July 31, 1998....................... 75,814 75,950
Additional paid-in capital 34,793,862 34,804,515
Foreign currency translation adjustments............. (130,870) 138,457
Accumulated deficit.................................. (33,196,065) (35,313,904)
----------- -----------
Total stockholders' equity (deficit)................. 1,542,741 (294,982)
----------- -----------
Total.................................................. $15,546,181 $10,511,001
=========== ===========
</TABLE>

See Notes to condensed consolidated financial statements

<PAGE>

VERSATILITY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1997 1998
---- ----
<S><C>
Revenue:
License revenue..................................... $2,044,573 $ 1,879,313
Service and maintenance revenue..................... 3,886,823 1,742,061
---------- -----------
Total revenue.................................. 5,931,396 3,621,374
---------- -----------
Cost of revenue:
License revenue..................................... 664,282 370,921
Service and maintenance revenue..................... 3,275,587 1,300,349
---------- -----------
Total cost of revenue.......................... 3,939,869 1,671,270
---------- -----------
Gross margin............................................ 1,991,527 1,950,104
---------- -----------
Operating expenses:
Selling, general and administrative................. 4,332,895 2,862,187
Research and development......... 961,802 657,679
Litigation settlement and related costs............. 500,000 243,820
Depreciation and amortization....................... 98,560 170,660
---------- -----------
Total operating expenses....................... 5,893,257 3,934,346
---------- -----------
Loss from operations.................................... (3,901,730) (1,984,242)
Interest income (expense), net.......................... 248,703 (133,597)
---------- -----------
Loss before provision (benefit) for
income taxes............................................ (3,653,027) (2,117,839)
Provision (benefit) for income taxes.................... -- --
---------- -----------
Net loss................................................ (3,653,027) (2,117,839)
========== ===========
Net loss per share...................................... $ (0.50) $ (0.28)
========== ===========
Weighted average common and common
equivalent shares outstanding......................... 7,320,792 7,592,654
========== ===========
</TABLE>

See Notes to condensed consolidated financial statements

<PAGE>

VERSATILITY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1997 1998
---- ----
<S><C>
Cash flows from operating activities:
Net loss............................................ $(3,653,027) $(2,117,839)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation...................................... 87,599 157,752
Amortization...................................... 10,961 12,906
Loss on disposal of fixed assets.................. -- 80,884
Changes in assets and liabilities:
Accounts receivable............................. 1,403,455 (776,041)
Prepaid expenses................................ (180,014) 65,629
Inventory....................................... (28,266) --
Related party receivables....................... (10,973) (102,998)
Deposits........................................ (39,779) (75,920)
Accounts payable................................ 355,773 (971,945)
Accrued liabilities............................. (234,468) (1,803,593)
Related party payables.......................... (8,590) --
Income taxes payable/receivable................. (300,000) 319,076
Deferred rent................................... 15,205 10,167
Deferred income taxes........................... -- 266,854
Deferred revenue................................ (750,612) 1,088,971
----------- -----------
Net cash used in operating activities......... (3,332,763) (3,846,097)
----------- -----------
Cash flows from investing activities:
Sale of investments................................. 48,262 565,938

Purchase of property and equipment..................... (1,069,088) --
Notes receivable.................................... -- 100,000
----------- -----------
Net cash (used in)provided by activities...... (1,020,826) 665,938
----------- -----------
Cash flows from financing activities:
Borrowings under line of credit..................... 232,817 --
Payments under line of credit....................... (36,994) (1,798,337)
Proceeds from sale of common stock, net............. 114,431 10,789
Principal payments under capital leases............. (17,495) (13,650)
----------- -----------
Net cash provided by (used in)
financing activities........................ 292,759 (1,801,198)
----------- -----------
Effect of exchange rate changes on cash................ (22,248) (269,327)
----------- -----------
Net decrease in cash and cash equivalents.............. (4,083,051) (4,712,030)
Cash and cash equivalents, beginning of period......... 18,825,764 5,591,067
----------- -----------
Cash and cash equivalents, end of period............... $14,742,713 $ 879,037
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid....................................... $ 69,315 $ 143,443
=========== ===========
Income taxes paid................................... $ 290,000 $ --
=========== ===========
</TABLE>

See Notes to condensed consolidated financial statements

<PAGE>

VERSATILITY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)

<TABLE>
<CAPTION>
NUMBER
OF
SHARES FOREIGN
OF ADDITIONAL CURRENCY
COMMON COMMON PAID-IN TRANSLATION ACCUMULATED
STOCK STOCK CAPITAL ADJUSTMENTS DEFICIT TOTAL
--------- ------- ---------- ----------- ------------- -----------
<S><C>
Balance, April 30, 1998.......................... 7,581,380 $75,814 $34,793,862 $(130,870) $(33,196,065) $ 1,542,741
Issuance of common stock related to
exercise of stock options.................... 13,629 136 10,653 10,789
Foreign currency translation adjustments....... 269,327 269,327
Net loss....................................... (2,117,839) (2,117,839)
--------- ------- ----------- --------- ------------ -----------
Balance, July 31, 1998........................... 7,595,009 $75,950 $34,804,515 $ 138,457 $(35,313,904) $ (294,982)
========= ======= =========== ========= ============ ===========
</TABLE>

See Notes to condensed consolidated financial statements.

<PAGE>

VERSATILITY INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements 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 results of operations for the interim periods are not
necessarily indicative of the results to be expected for any future period.
Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and analysis
of financial condition and results of operations, contained in Versatility
Inc.'s Annual Report on Form 10-K for the fiscal year ended April 30, 1998.

2. LITIGATION

Between March 6, 1998 and April 8, 1998 the Company and certain of its
current and former officers and directors, among others, were sued in various
putative securities class actions filed in the United States District Court for
the Southern District of New York and the United States District for the Eastern
District of Virginia, as follows: Thomas Esposito, et al. v. Versatility, Inc.,
et al. (S.D.N.Y.); Tammy Newsman v. Versatility, Inc., et al. (S.D.N.Y.); Sam
Succar v. Versatility, Inc. et al. (S.D.N.Y.); Thomas K. Doyle v. Versatility,
Inc. et al. (E.D. VA); and Steven Bowen v. Versatility, Inc. et al. (S.D.N.Y.)
(together "the putative class actions"). Collectively, the putative class
actions asserted claims under Sections 11, 12(2) and 15 of the Securities Act of
1933 (the "Securities Act") and Section 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the "Exchange Act") for alleged misrepresentations and
omissions in connection with the Securities and Exchange Commission
("Commission") public filings and other public statements made by the Company.
Among other allegations, each of the putative class actions alleged that the
Company misrepresented its financial results and its accounting practices during
the period December 12, 1996 through March 12, 1998, including in the Company's
initial public offering ("IPO") Prospectus. The complaints in certain of the
putative class actions also asserted, among other allegations, that the Company
and certain of the other defendants made misrepresentations in the IPO
Prospectus and thereafter regarding the performance capabilities of the
Company's CALLCENTER product. See "Factors Which May Effect Future Operating
Results - Litigation Risks" below.

Versatility reached a settlement with the plaintiffs in all six putative
securities class action lawsuits currently pending against the Company on July
9, 1998. The settlement is conditioned upon final Court approval of the
settlement agreement.

Under the proposed settlement, the class actions would be dismissed and a
settlement fund would be created for the members of the proposed class
consisting of $3.5 million in cash, which represents proceeds from Versatility's
directors' and officers' liability insurance and related recoveries by the
Company. In addition, as part of the settlement, an aggregate of 350,000 shares
of Versatility Common Stock will be transferred to the Company by certain
defendants other than the Company in settlement of the claims against them.
Thereafter, the Company will issue 750,000 shares of its Common Stock for the
benefit of the proposed plaintiff class, 350,000 shares of which will be in
substitution of shares provided by those certain defendants in settlement of the
claims against them.

Since March 1998 the Company has been responding to informal requests for
information from the Commission relating to certain of the Company's financial
matters. In May 1998, the Company was advised by the Commission that it had
obtained a formal order of investigation so that, among other matters, it may
utilize subpoena powers to obtain information relevant to its inquiry. The
Commission has and may in the future utilize its subpoena powers to obtain
information from various officers, directors and employees of the Company and
from persons not presently associated with the Company. If, after completion of
its investigation, the Commission finds that violations of the federal
securities laws have occurred, the Commission has the authority to order persons
to cease and desist from committing or causing such violations and any future
violations. The Commission may also seek administrative, civil and criminal
fines and penalties and injunctive relief. The Department of Justice has the
authority in respect of criminal matters. There can be no assurance as to the
timeliness of the

<PAGE>

completion of the investigation or as to the final result thereof, and no
assurance can be given that the final result of the investigation will not have
a material adverse effect on the Company. The Company is cooperating fully with
the investigation, and has responded and will continue to respond to requests
for information in connection with the investigation.

One of the Company's former VARs had filed a claim for arbitration
(non-binding) 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 defended this action in arbitration proceedings. In
April 1997, the arbitration panel awarded $267,000 in net damages to the
plaintiff in the proceedings. The arbitration panel's decision was appealed. In
August 1997, the Company settled the litigation with the former VAR for
$250,000. The Company recorded a one-time charge in the quarter ended July 31,
1997 related to this litigation for $500,000, which included the settlement
charge and other costs and expenses associated with the litigation.

A former customer was seeking damages in excess $1,000,000 for alleged
breaches of contract and warranties, as well as alleged misrepresentations. On
April 16, 1998, the Company filed a response denying the allegations and
counter-claiming for damages in excess of $400,000 for breach of contract. On
August 14, 1998, the Company reached an agreement and settled this litigation
for $100,000. The Company recorded the settlement costs in the quarter ended
July 31, 1998.

A customer of a Versatility reseller has sued for damages for an amount
not less than $1,000,000. In December 1997, the District Court dismissed the
action. In February 1998, essentially the same claim was made in a different
District Court. The Company is vigorously defending this case. The outcome of
this matter cannot be ascertained at this time.

3. LINE OF CREDIT

On October 29, 1997, the Company entered into a new credit facility with
its commercial bank which provided for a $5.0 million operating line of credit
and a new $2.0 million equipment line of credit.

Since the Company was not in compliance with various covenants in the
above credit facility, on April 28, 1998, the Company entered into an amendment
to the credit facility effective April 30, 1998, in which the bank waived all
prior defaults, and provided for the following terms: the $2.0 million equipment
line was cancelled and the outstanding balance of $256,703 was transferred to
the operating line of credit. Shortly after the effective date, the Company
permanently paid down the operating line to $3.8 million and may not borrow any
additional amounts under the line. In addition, in exchange for the bank's
forbearance in exercising its rights under the previous arrangement, the Company
issued to the Bank warrants to purchase 100,000 shares of the Company's common
stock with an exercise price of $2.50 per share. The credit facility continues
to be collateralized by all of the Company's assets. The agreement provides that
the Company must maintain certain financial covenants, including a minimum
tangible net worth and a minimum cash balance. The line of credit matures on
November 5, 1998. As of July 31, 1998, the Company was not in compliance with
these new covenants and therefore was in default under the operating line of
credit. In connection with the proposed merger (See Note 5, Recent Developments)
the Company has entered into a Loan Modification, Consent and Forebearance
Agreement. Subject to certain terms and conditions, the bank agreed to forbear
from exercising remedies available to it as a result of the Company's existing
defaults under the loan agreement with the bank until the earlier of December
31, 1998 and the completion of the Merger.

4. NET INCOME (LOSS) PER SHARE

Net Income (loss) Per Share - During fiscal 1998, the Company adopted
Statement of Financial accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 requires the presentation of basic income per share and,
for companies with potentially dilutive securities, such as options, diluted
income per share. Basic income per share is computed using the weighted average
number of shares of common stock outstanding. Diluted income per share is
computed using the weighted average number of shares of common stock and, when
dilutive, common equivalent shares from options to purchase common stock using
the treasury stock method. The following table sets forth the computation of
basic and diluted income per share:

<PAGE>

<TABLE>
<CAPTION>
Quarter Ended July 31,
---------------------------
1997 1998
----------- ------------
<S><C>
Weighted average common shares 7,320,797 7,592,654
Dilutive potential common shares -- --
----------- -----------
Shares used in diluted share computation 7,320,797 7,592,654
Net income (loss) available (attributable)
to common shareholders $(3,653,027) $(2,117,839)
Basic income (loss) per share $ (0.50) $ (0.28)
Diluted income (loss) per share $ (0.50) $ (0.28)
</TABLE>

The dilutive effect of options for 720,387 and 2,283,002 shares has not
been considered in the computation of diluted income (loss) per share in fiscal
1998 and 1999 because such shares would be anti-dilutive.

5. RECENT DEVELOPMENTS

On August 21, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Oracle Corporation, a Delaware corporation
("Parent"), and AQX Acquisition Corporation, a Delaware corporation and a wholly
owned subsidiary of Parent (the "Purchaser"), which provides for the merger (the
"Merger") of the Purchaser with and into the Company, with the Company
continuing as the surviving corporation (the "Surviving Corporation"). Pursuant
to the terms of the Merger Agreement, at the effective time of the Merger (the
"Effective Time"), (i) each share of Common Stock, par value $0.01 per share, of
the Company (the "Common Stock") outstanding immediately prior to the Effective
Time (other than shares held by the Company, the Purchaser or Parent (which will
be cancelled) and shares for which appraisal rights under Delaware law are
perfected) will be converted into a right to receive a cash payment in the
amount of $1.50 per share and (ii) each share of Common Stock, par value $0.001
per share, of the Purchaser outstanding prior to the Effective Time will be
converted into the right to receive one share of the common stock, par value
$0.01 per share, of the Surviving Corporation.

The closing of the Merger is subject to a number of conditions precedent,
including, without limitation, (i) the receipt of all required government
approvals, (ii) the approval of the Merger by the stockholders of the Company,
(iii) the retention of certain key employees of the Company, (iv) the receipt of
final court approval of the settlement of the putative securities class actions
(as defined herein) on terms consistent with the Memorandum of Understanding
Concerning Settlement Terms dated July 9, 1998 and the expiration of all rights
to appeal such settlement, and (v) absence of any instituted and continuing (or
in the case of (c) below, threatened) action, suit or proceeding against the
Company, Parent, the Purchaser or any officer, director, employee or other
person that the Company is obligated to indemnify, or by any governmental entity
or third party (a) directly, or indirectly relating to the Merger Agreement, the
License Agreement (defined below), any intellectual property of the Company, (b)
who is or was a stockholder of the Company or in a derivative action on behalf
of the Company, or (c) which could reasonably be expected to have a material
adverse effect on the Company and its subsidiaries, taken as a whole.

In connection with the Merger Agreement, Edison Venture Fund, L.P.,
Noro-Moseley Partners III, L.P., Keith D. Roberts, Ronald R. Charnock, Ernest J.
Connon and Marcus W. Heth each entered into Support Agreements ("Support
Agreements") with the Company and Parent, whereby the stockholders (i) agreed to
vote all shares of Common Stock in favor of the Merger and against any action by
the Company that would breach the Merger Agreement or impair or delay the
consummation of the Merger and (ii) granted to designees of Parent an
irrevocable proxy to vote such shares in favor of the Merger and as agreed in
the Support Agreements. The Support Agreements terminate upon the earlier of the
Effective Time or the termination of the Merger Agreement.

In connection with the Merger Agreement, the Company entered into a
Technology License Agreement (the "License Agreement") with Parent whereby the
Company agreed to grant to Parent an irrevocable, non-exclusive license of the
Company's computer software and related technology (the "Technology"). On
September 10, 1998, the Company and Oracle amended the License Agreement (the
"Amendment to the License Agreement"). Parent will pay the Company a sublicense
fee equal to 30% of the net fees Parent receives for sublicenses of the
Technology, of which $2,000,000 will be prepaid in three equal monthly
installments commencing on September 1, 1998 (the "Prepaid License Fee"). In the
event that Parent (i) breaches the terms of the Merger Agreement or fails to pay
the sublicense fee when due, the Company may terminate the License Agreement
upon repayment of the Prepaid License Fee paid to the Company in excess of
$360,000, or (ii) the Merger Agreement is terminated as a result of the Company
accepting a superior offer than that presented in the Merger Agreement upon
repayment of the Prepaid License Fee paid

<PAGE>

to the Company and payment of the termination fee set forth in the Merger
Agreement.

As a condition precedent to the execution of the Merger Agreement, Parent
and each of Paul J. Zoukis, James J. Dellamore and Marcus W. Heth entered into
Non-Competition Agreements which have an initial term of two years from the
Effective Time and terminate upon the termination of the Merger Agreement. In
addition, Parent delivered to each of Messrs. Zoukis, Dellamore and Heth a
letter indicating its intent to offer employment to each at the Effective Time.

In connection with the Merger Agreement, the Company, Parent and Silicon
Valley Bank, a California chartered bank (the "Bank"), entered into a Loan
Modification, Consent and Forbearance Agreement (the "Loan Modification
Agreement") whereby, pursuant to the terms of the Loan Modification Agreement,
the Bank agreed, subject to certain conditions, to forebear from exercising
certain remedies available to it as a result of the Company's existing defaults
under the loan agreements with the Bank until the earlier of December 31, 1998
and the consummation of the Merger. The Bank's continuing forbearance will
terminate upon the termination of the Merger Agreement. The Bank also agreed to
allow the Company and Parent to enter into the License Agreement, to waive the
anti-dilution provisions applicable to its warrant to purchase 100,000 shares of
Common Stock during the period of forbearance and to terminate its Warrant
Agreement upon consummation of the Merger. The Company agreed to deposit into an
account at the Bank any refund that the Company may receive from the Internal
Revenue Service and/or the Commonwealth of Virginia and agreed to withdraw such
funds only pursuant to a cash plan approved by the Bank.

On August 20, 1998, the Board of Directors of the Company approved the
Merger Agreement and the Merger and recommended that it be submitted to the
stockholders of the Company for their approval. The Company will file with the
Securities and Exchange Commission a proxy statement that will be mailed to the
stockholders in connection with a special stockholders' meeting called to
consider and vote upon the Merger. The foregoing description of the Amendment to
the License Agreement is qualified in its entirety by the text of the Amendment
to the License Agreement which is set forth as Exhibit 10.5 hereto and is
incorporated herein by reference.

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

THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS AND INFORMATION THAT ARE
BASED ON MANAGEMENT'S BELIEFS AS WELL AS ASSUMPTIONS MADE BY MANAGEMENT. SUCH
STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES WHICH COULD CAUSE
ACTUAL RESULTS TO VARY MATERIALLY FROM THOSE CONTAINED IN SUCH FORWARD LOOKING
STATEMENTS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR
SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED, EXPECTED OR PROJECTED. CERTAIN OF
THESE RISKS AND UNCERTAINTIES AS WELL AS OTHER RISKS AND UNCERTAINTIES ARE
DESCRIBED IN FACTORS WHICH MAY EFFECT FUTURE OPERATING RESULTS HEREIN AND IN THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-1 FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, AND DECLARED EFFECTIVE ON DECEMBER 12, 1996 AND ON
SUBSEQUENT SECURITIES AND EXCHANGE COMMISSION FILINGS, INCLUDING THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 1998.

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 that culminated
with the release of the VERSATILITY SERIES in May 1995. Since fiscal 1996,
substantially all of the Company's revenue was derived from sales or services
related to the VERSATILITY SERIES.

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 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
the achievement of certain performance milestones as defined in the contracts.
When the Company is under no obligation to install or customize the

<PAGE>

software, license revenue is recognized upon shipment as long as cash collection
is probable. 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. An allowance for doubtful accounts receivable and sales has been
recorded which is considered adequate to absorb currently estimated bad debts
and disputed amounts in these accounts.

Revenue from customers outside the United States accounted for 35.4% and
38.8% the Company's total revenue for the first three months of fiscal 1998 and
1999, respectively. 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 not been
considered significant, 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.

RECENT DEVELOPMENTS

On August 21, 1998, the Company, entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Oracle Corporation, a Delaware corporation
("Oracle"), and AQX Acquisition Corporation, a Delaware corporation and a wholly
owned subsidiary of Oracle (the "Purchaser"), which provides for the merger (the
"Merger") of the Purchaser with and into the Company, with the Company
continuing as the surviving corporation (the "Surviving Corporation"). Pursuant
to the terms of the Merger Agreement, at the effective time of the Merger (the
"Effective Time"), (i) each share of Common Stock, par value $.01 per share, of
the Company (the "Common Stock") outstanding immediately prior to the Effective
Time (other than shares held by the Company, the Purchaser or Oracle (which will
be cancelled) and shares for which appraisal rights under Delaware law are
perfected) will be converted into a right to receive a cash payment in the
amount of $1.50 per share and (ii) each share of Common Stock, par value $0.001
per share, of the Purchaser outstanding prior to the Effective Time will be
converted into the right to receive one share of the common stock, par value
$0.01 per share, of the Surviving Corporation.

The closing of the Merger is subject to a number of conditions precedent,
including, without limitation, (i) the receipt of all required government
approvals, (ii) the approval of the Merger by the stockholders of the Company,
(iii) the retention of certain key employees of the Company, (iv) the receipt of
final court approval of the settlement of the putative securities class actions
(as defined below) on terms consistent with the Memorandum of Understanding
Concerning Settlement Terms dated July 9, 1998 and the expiration of all rights
to appeal such settlement, and (v) absence of any instituted and continuing (or
in the case of (c) below, threatened) action, suit or proceeding against the
Company, Oracle, the Purchaser or any officer, director, employee or other
person that the Company is obligated to indemnify, or by any governmental entity
or third party (a) directly, or indirectly relating to the Merger Agreement, the
License Agreement (defined below), any intellectual property of the Company, (b)
who is or was a stockholder of the Company or in a derivative action on behalf
of the Company, or (c) which could reasonably be expected to have a material
adverse effect on the Company and its subsidiaries, taken as a whole.

In connection with the Merger Agreement, Edison Venture Fund, L.P.,
Noro-Moseley Partners III, L.P., and Messrs. Keith D. Roberts, Ronald R.
Charnock, Ernest J. Connon and Marcus W. Heth each entered into Support
Agreements ("Support Agreements") with the Company and Oracle, whereby the
stockholders (i) agreed to vote all shares of Common Stock in favor of the
Merger and against any action by the Company that would breach the Merger
Agreement or impair or delay the consummation of the Merger and (ii) granted to
designees of Oracle an irrevocable proxy to vote such shares in favor of the
Merger and as agreed in the Support Agreements. The Support Agreements terminate
upon the earlier of the Effective Time or the termination of the Merger
Agreement.

In connection with the Merger Agreement, the Company entered into a
Technology License Agreement (the "License Agreement") with Oracle whereby the
Company agreed to grant to Oracle an irrevocable, non-exclusive license of the
Company's computer software and related technology (the "Technology"). On
September 10, 1998, the Company and Oracle amended the License Agreement (the
"Amendment to the License Agreement"). Oracle will pay the Company a sublicense
fee equal to 30% of the net fees Oracle receives for sublicenses of the
Technology, of which $2,000,000 will be prepaid in three equal monthly
installments commencing on September 1, 1998 (the "Prepaid License Fee"). In the
event that Oracle (i) breaches the terms of the Merger Agreement or fails to pay
the sublicense fee when due, the Company may terminate the License Agreement
upon repayment of the Prepaid License Fee paid to the Company in excess of
$360,000, or (ii) the Merger Agreement is terminated as a result of the Company
accepting a superior offer than that presented in the Merger Agreement upon
repayment of the Prepaid License Fee paid to the Company and payment of the
termination fee set forth in the Merger Agreement.

As a condition precedent to the execution of the Merger Agreement, Oracle
and each of Messrs. Paul J. Zoukis, James J.

<PAGE>

Dellamore and Marcus W. Heth entered into Non-Competition Agreements which have
an initial term of two years from the Effective Time and terminate upon the
termination of the Merger Agreement. In addition, Oracle delivered to each of
Messrs. Zoukis, Dellamore and Heth a letter indicating its intent to offer
employment to each at the Effective Time.

In connection with the Merger Agreement, the Company, Oracle and Silicon
Valley Bank, a California chartered bank (the "Bank"), entered into a Loan
Modification, Consent and Forbearance Agreement (the "Loan Modification
Agreement") whereby, pursuant to the terms of the Loan Modification Agreement,
the Bank agreed, subject to certain conditions, to forebear from exercising
certain remedies available to it as a result of the Company's existing defaults
under the loan agreements with the Bank until the earlier of December 31, 1998
and the consummation of the Merger. The Bank's continuing forbearance will
terminate upon the termination of the Merger Agreement. The Bank also agreed to
allow the Company and Oracle to enter into the License Agreement, to waive the
anti-dilution provisions applicable to its warrant to purchase 100,000 shares
of Common Stock during the period of forbearance and to terminate its Warrant
Agreement upon consummation of the Merger. The Company agreed to deposit into
an account at the Bank any refund that the Company may receive from the
Internal Revenue Service and/or the Commonwealth of Virginia and agreed to
withdraw such funds only pursuant to a cash plan approved by the Bank.

The foregoing descriptions of the Merger Agreement, the form of Support
Agreement, the License Agreement, and the Loan Modification Agreement are
qualified in their entirety by the text of the Merger Agreement, the form of
Support Agreement, the License Agreement, and the Loan Modification Agreement
which are set forth as Exhibits 2.1, 10.1, 10.2 and 10.3, respectively, on the
Form 8-K dated August 21, 1998 and are incorporated herein by reference. The
foregoing description of the Amendment to the License Agreement is qualified in
its entirety by the text of the Amendment to the License Agreement which is set
forth as Exhibit 10.5 hereto and is incorporated herein by reference.

<PAGE>

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
THREE MONTHS ENDED
JULY 31,
1997 1998
---- ----
<S><C>
Revenue:
License revenue................................. 34.5% 51.9%
Service and maintenance revenue................. 65.5 48.1
----- -----
Total revenue.............................. 100.0 100.0
----- -----
Cost of revenue:
License revenue................................. 11.2 10.3
Service and maintenance revenue................. 55.2 35.9
----- -----
Total cost of revenue...................... 66.4 46.2
----- -----
Gross margin......................................... 33.6 53.8
----- -----
Operating expenses:
Selling, general and administrative............ 73.1 79.0
Research and development........................ 16.2 18.2
Litigation settlement and related costs......... 8.4 6.7
Depreciation and amortization................... 1.7 4.7
----- -----
Total operating expenses................... 99.4 108.6
----- -----
Loss from operations................................. (65.8) (54.8)

Interest income (expense), net....................... 4.2 (3.7)
----- -----
Loss before benefit for
income taxes....................................... (61.6) (58.5)
Benefit for income taxes............................. -- --
----- -----

Net loss............................................. (61.6)% (58.5)%
====== ======
</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 JULY 31,
1997 1998
---- ----
<S><C>
Cost of license revenue........................... 32.5% 19.7%
Cost of service and maintenance revenue........... 84.3% 74.6%
</TABLE>

REVENUE. Total revenue decreased 38.9% from $5.9 million in the three months
ended July 31, 1997 to $3.6 million in the three months ended July 31, 1998.
Revenue from license fees decreased 8.1% from $2.0 million in the three months
ended July 31, 1997, or 34.5% of total revenue, to $1.9 million in the three
months ended July 31, 1998, or 51.9% of total revenue. The decrease in license
fees for the quarter ending July 31, 1998, was primarily related to sales not
materializing due primarily to the events surrounding the Company during the
fourth quarter of fiscal 1998 and the first quarter of fiscal 1999. Service
revenue decreased 55.2% from $3.9 million in the three months ended July 31,
1997 to $1.7 million in the three months ended July 31, 1998. This decrease was
due to the reduced orders related to the material uncertainties surrounding the
Company during the last five fiscal months. The mix of revenue changed from
34.5% license revenue and 65.5% service revenue in the prior year to
approximately 52% license revenue and 48% services revenue in the current year,
due to the larger amounts of services performed in the first three months of
fiscal 1998. In addition, the shift in revenue mix is also attributed to the
negative impact of the events surrounding the Company during its fourth quarter
of fiscal 1998 and in the first quarter of fiscal 1999.

<PAGE>

COST OF REVENUE. Cost of license revenue is comprised of the costs of media,
packaging, documentation and incidental hardware costs. 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 decreased from $3.9 million in the three months ended
July 31, 1997, or 66.4% of total revenue, to $1.7 million in the three months
ended July 31, 1998, or 46.2% of total revenue. Cost of license revenue
decreased from $664,000 in the three months ended July 31, 1997, or 32.5% of
license revenue to $371,000 in the three months ended July 31, 1998, or 19.7% of
license revenue. Cost of service and maintenance revenue decreased from $3.3
million in the three months ended July 31, 1997, or 84.3% of service and
maintenance revenue, to $1.3 million in the three months ended July 31, 1998, or
74.6% of service and maintenance revenue. The decrease was the result of
consulting staff reductions made in the Company's consulting, customization and
implementation support in the fourth quarter of fiscal 1998. Total cost of
revenue was positively affected in the current year compared to the same period
in the prior year due to the significant cost reductions and the limited use of
third party consultants.

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 decreased from $4.3 million for the three months
ended July 31, 1997, or 73.1% of total revenue, to $2.9 million for the three
months ended July 31, 1998, or 79.0% of total revenue. This decrease was
attributable to reductions in the Company's headcount, and lower administrative
and facility expenses.

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 decreased from
$962,000 for the three months ended July 31, 1997, or 16.2% of total revenue, to
$658,000 for the three months ended July 31, 1998, or 18.2% of total revenue.
The decrease was primarily due to the reduction in the use of outside
consultants used to assist with quality assurance testing.

LITIGATION SETTLEMENT AND RELATED COSTS. One of the Company's former VARs
filed a claim for arbitration against the Company in connection with the
termination of the VAR's reseller agreement with the Company, claiming not less
than $1.0 million in damages. The Company defended this action in arbitration
proceedings. In April 1997, the arbitration panel awarded $267,000 in net
damages to the plaintiff in the proceedings. The arbitration panel's decision
was appealed. In August 1997, the Company settled the litigation with the former
VAR for $250,000. The Company has recorded a one-time charge in the quarter
ended July 31, 1997 related to this litigation for $500,000, which includes the
settlement charge and other costs and expenses associated with defending the
litigation. In the period ended July 31, 1998, the Company recorded
approximately $244,000 in litigation expenses and settlement costs related to
the class action lawsuit and the settlement and related costs with a customer
litigation.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were
$99,000 in the three months ended July 31, 1997, and $171,000 in the three
months ended July 31, 1998. The increase in fiscal year 1999 was due to the
additional depreciation on equipment the Company purchased in fiscal 1998.

INTEREST INCOME (EXPENSE), NET. Interest income (expense), consists of
interest earned on cash and cash equivalents, offset by interest expense on debt
and equipment financing. Net interest income (expense) was $249,000 and
$(134,000) for the three months ended July 31, 1997 and 1998, respectively. The
difference results from interest income attributable to the cash raised through
the initial public offering in the third quarter of fiscal 1997, partially
offset by interest expense related to borrowings on the line of credit.

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 (benefit) for income taxes is computed based
on pretax income, with deferred income taxes recorded for the differences
between pretax accounting and pretax taxable income (loss). The Company did not
record a provision or benefit in fiscal 1998 or in fiscal 1999.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

On October 29, 1997, the Company entered into a credit facility with
its commercial bank which provided for a $5.0 million operating line of credit
and a new $2.0 million equipment line of credit. Since the company was not in
compliance with various covenants in the above credit facility in subsequent
quarters, on April 28, 1998, the Company entered into an amendment to the credit
facility effective April 30, 1998, in which the bank waived all prior
non-compliance and provided for the following terms: the $2.0 million equipment
line was cancelled and the outstanding balance of $256,703 was transferred to
the operating line of credit. Subsequent to April 30, 1998, the Company
permanently paid down the operating line to $3.8 million and may not borrow any
additional amounts under the line. In addition, in exchange for the bank's
forbearance in exercising its rights under the previous arrangement, the Company
issued to the Bank warrants to purchase 100,000 shares of the Company's Common
Stock with an exercise price of $2.50 per share. The credit facility continues
to be collateralized by all of the Company's assets and intellectual property.
The agreement provides that the Company must maintain certain financial
covenants, including a minimum tangible net worth and a minimum cash balance. As
of July 31, 1998 the Company was not in compliance with these new covenants and
therefore was in default under the operating line of credit. In connection with
the proposed merger (See "Recent Developments") the Company has entered into a
Loan Modification Agreement. The bank, subject to certain conditions, agreed to
forbear from exercising certain remedies available to it as a result of the
Company's existing defaults under the loan agreement with the bank until the
earlier of December 31, 1998 and the completion of the Merger.

At July 31, 1998, the Company had $879,000 in cash and cash equivalents. For
the quarter ended July 31, 1998, net cash used in operating activities totaled
$3.8 million. During the quarter, the Company liquidated approximately $566,000
in short-term investments and generated an additional $180,000 from the
collection of notes receivable and sale of assets. During the quarter the
Company repaid the bank approximately $1.8 million as agreed to in the loan
amendment effective April 30, 1998 as described above.

As shown in the financial statements contained herein, the Company has
incurred substantial operating losses and anticipates a loss in the second
quarter of fiscal 1999. On August 31, 1998, the Company had approximately
$597,000 in cash and cash equivalents. The Company believes that its cash on
hand and cash flow from anticipated operating activities will not be sufficient
to meet its ongoing obligations through the second quarter of fiscal 1999. At
August 31, 1998, the Company had outstanding approximately $3.5 million under
its line of credit and was in default of the line. Additionally, the Company
expects to continue to incur significant amounts to comply with and defend the
lawsuits and investigations described below in "Litigation Risks." On August 21,
1998, the company entered into an Agreement and Plan of Merger with Oracle and
Purchaser. See "Recent Developments." In connection with the Merger Agreement,
the Company and Oracle entered into the License Agreement, as amended. As part
of the License Agreement, on September 1, 1998, Oracle paid to the Company, and
will make two additional payments of, the Prepaid License Fee equal to $666,667.
See "Recent Developments." There is no assurance that the Company will be able
to complete the Merger Agreement, or in the event of a termination of the Merger
Agreement, raise capital on favorable terms, or at all. If the Merger is
terminated and the Company is unable to obtain additional financing sufficient
to meet its operating needs, the Company would be required to significantly
reduce the scope of, or cease conducting, its operations during the second
quarter of fiscal 1999. See "Recent Developments."

FACTORS WHICH MAY EFFECT FUTURE OPERATING RESULTS

The following issues and uncertainties, among others, should be considered in
evaluating the Company's outlook.

RISKS RELATING TO CASH FLOW LEVELS. As of August 31, 1998, the Company had
$597,000 in cash and cash equivalents. The Company believes that its cash on
hand and cash flow from anticipated operating activities will not be sufficient
to meet its ongoing obligations through the second quarter of fiscal 1999.
Additionally, the Company expects to incur significant amounts to comply with
and defend the lawsuits and investigations described in "Litigation Risks." See
Note 5 "Recent Developments." If the Company is unable to complete the Merger
described above, or in the event of a termination of the Merger and the Company
is unable to obtain additional financing sufficient to meet its operating needs,
the Company would be required to significantly reduce the scope of, or cease
conducting, its operations during the second quarter of fiscal 1999.

ADVERSE EFFECTS OF RESTATEMENT OF FINANCIAL STATEMENTS. On March 12, 1998,
the Company announced that it expected to restate its financial results for the
fiscal year ended April 30, 1997 and the fiscal quarters ended July 31, 1997 and
October 31, 1997, and that its Form 10-Q for the quarter ended January 31, 1998
would not be filed on time, all as a result of concerns over the accounting
treatment of certain transactions, which the Company was examining. The
uncertainties resulting from this announcement and the subsequent results of the
Company's restatement of those reports, have had a material adverse affect on
the Company's business and financial condition. In addition, such announcements
have and will continue to have additional adverse effects on the Company. Due to
the Company's financial uncertainty, certain customers of the Company have
stated that they will

<PAGE>

postpone purchases of the Company's products and services until the Company
secures financing or enters into a relationship with a strategic partner.
However, there can be no assurance that customers will resume purchasing the
Company's products or services due to the announcement of the merger.
Furthermore, there can be no assurance that the Company's Common Stock will not
further decline due to reactions by analysts or otherwise.

RISKS RELATING TO TRADING ON THE OTC BULLETIN BOARD. The Company's Common
Stock is currently traded on the OTC Bulletin Board, a regulated quotation
service for non-Nasdaq over the counter securities. Because the Company's Common
Stock is no longer listed on the Nasdaq National Market, an investor could find
it more difficult to dispose of, or to obtain accurate quotations as to the
market value of the Company's Common Stock. In addition, if the trading price of
the Common Stock were to remain below $5.00 per share or the Company failed to
maintain net tangible assets (total assets less tangible assets less
liabilities) in excess of $2.0 million (the "Net Tangible Asset Test") or
average revenue of at least $6.0 million for the last three years (the "Revenue
Test"), trading in the Company's Common Stock would also be subject to the
requirements of certain rules under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that (i) has a market
price of less than $5.00 per share or (ii) fails to meet (A) the Net Tangible
Asset Test or (B) the Revenue Test, subject to certain exceptions. The
additional burdens imposed upon broker-dealers by such requirements could
discourage broker-dealers from effecting transactions in the Common Stock, which
could severely limit the market liquidity of the Common Stock and the ability of
investors to trade the Company's Common Stock. See "Risks Relating to Penny
Stock"; "Possible Effect of Penny Stock Rules on Liquidity for the Company's
Common Stock."

RISKS RELATING TO "PENNY STOCK"; POSSIBLE EFFECT OF "PENNY STOCK" RULES ON
LIQUIDITY FOR THE COMPANY'S COMMON STOCK. Because the Company's Common Stock is
not listed on a National Securities Exchange nor listed on a national or a
qualified automated quotation system, they may become subject to Rule 15g-9
under the Exchange Act, which imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with a net worth in
excess or $1,000,000 or annual incomes exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by Rule 15g-9, a broker-dealer must
make special suitability determinations for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, such
Rule may affect the ability of broker-dealers to sell the Company's Common Stock
and may affect the ability of the purchaser to sell any of the Company's Common
Stock in the secondary market.

The Commission has adopted regulations that generally define a "penny stock"
to be any equity security that (i) has a market price (as therein defined) of
less than $5.00 per share or with an exercise price of less than $5.00 per share
or (ii) fails to meet (A) the Net Tangible Asset Test or (B) the Revenue Test,
subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require delivery, prior to any transaction in a penny
stock, of a disclosure schedule prepared by the Commission relating to the penny
stock market. Disclosure is also required to be made about sales commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stock.

There can be no assurance that the Company's Common Stock will continue to
qualify for exemption from the penny stock restrictions. In any event, even if
the Company's Common Stock is exempt from such restrictions, the Company would
remain subject to Section 15(b)(6) of the Exchange Act, which gives the
Commission the authority to restrict any person from participating in a
distribution of penny stock, if the Commission finds that such a restriction
would be in the public interest.

If the Company's Common Stock was subject to the rules on penny stocks, the
market liquidity for the Company's Common Stock could be materially adversely
affected.

LITIGATION RISKS. Between March 6, 1998 and April 8, 1998 the Company and
certain of its current and former officers and directors, among others, were
sued in various putative securities class action cases filed in the United
States District Court for the Southern District of New York and the United
States District Court for the Eastern District of Virginia, as follows: Thomas
Esposito, et al. v. Versatility, Inc. et al. (S.D.N.Y.); Tammy Newsman v.
Versatility, Inc., et al. (S.D.N.Y.); Sam Succar v. Versatility, Inc., et al.
(S.D.N.Y.); Thomas K. Doyle v. Versatility, Inc. et al. (E.D. Va); and Steven
Bowen v. Versatility, Inc. et al. (S.D.N.Y.) (together "the putative class
actions"). In addition, the Company's auditors and the lead underwriters in its
December 1996 IPO were named as defendants in one or more of the putative class
actions. Collectively, the putative class actions asserted claims under Sections
11, 12(2), and 15 of Securities Act and Section 10(b) and 20(a) of the
17

<PAGE>

Exchange Act for alleged misrepresentations and omissions in connection with the
SEC public filings and other public statements made by the Company. Among other
allegations, each of the putative class actions alleged that the Company
misrepresented its financial results and its accounting practices during the
period December 12, 1996 through March 12, 1998, including in the Company's IPO
Prospectus. The complaints in certain of the putative class actions also
asserted, among other allegations, that the Company and certain of other
defendants made misrepresentations in the IPO Prospectus and thereafter
regarding the performance capabilities of the Company's CallCenter product.

A former customer was seeking damages in excess of $1,000,000 for alleged
breaches of contract and warranties, as well as alleged misrepresentations. On
April 16, 1998, the Company filed a response denying the allegations and
counter-claiming for damages in excess of $400,000 for breach of contract. On
August 14, 1998, the Company reached an agreement and settled this litigation
for $100,000. The Company recorded the settlement costs in the quarter ended
July 31, 1998.

A customer of a Versatility reseller has sued for damages for an amount
not less than $1,000,000. In December 1997, the District Court dismissed the
action. In February 1998, essentially the same claim was made in a different
District Court. The Company intends to vigorously defend this case. The outcome
of this matter cannot be ascertained at this time.

RISKS RELATING TO YEAR 2000 ISSUES. The Company believes that its software is
substantially year 2000 compliant and currently does not anticipate material
expenditures to remedy any year 2000 problems. However, many computer systems
were not designed to handle any dates beyond the year 1999, and therefore, many
companies will be required to modify their computer hardware and software prior
to the year 2000 in order to remain functional. Many enterprises, including the
Company's present and potential customers, will be devoting a substantial
portion of their information systems spending to resolving this upcoming year
2000 problem, which may result in spending being diverted from network
applications, such as the Company's products, over the next two years.

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 will continue to account for all of the
Company's revenue for the foreseeable future. However, the Company has little
operating history with the VERSATILITY SERIES 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

<PAGE>

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 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 outlook 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.

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 1998, the Company's two largest
customers accounted for 38.6% of the Company's total revenue, of which, British
Telecom accounted for 22.1%. 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 "Risks Relating to Cash Flow Levels."

QUARTERLY FLUCTUATIONS IN REVENUE AND OPERATING RESULTS. The Company's
revenue and operating results have in the past and could continue in the future
to 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, 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 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.

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.

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 was to expand its direct sales force
while developing

<PAGE>

additional marketing, sales and implementation relationships with third party
systems integrators and VARs. The Company's ability to achieve revenue growth in
the future will depend on its ability to attract, train and retain additional
qualified direct sales personnel. In addition, the Company was 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. Subsequent to fiscal 1997, the VARs relationships did not develop as
planned and the Company has significantly reduced its relationships with many
VARs and its dependence on them for future business.

DEPENDENCE ON INDIRECT DISTRIBUTION CHANNELS; POTENTIAL FOR CHANNEL CONFLICT.
The Company's strategy was 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. 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.

INTERNATIONAL OPERATIONS. Revenue from sales outside the United States in
fiscal 1997 and 1998 accounted for approximately 54.6% and 39.0%, 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.

Effective June 1, 1998 the company signed a worldwide distribution agreement
with Cincom Systems, Inc. This non-exclusive agreement includes Cincom's
absorption of Versatility's international distribution channels. With the
execution of this transaction, Versatility has eliminated all its direct sales
and support presence outside of the U.K.

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
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

<PAGE>

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. The delisting
of the Company's Common Stock from The Nasdaq Stock Market and the Company's
current financial condition could also impair the Company's ability to compete.
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.

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 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.

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

<PAGE>

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 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.

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.

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 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.

Since February 1998, the Company has replaced substantially all of its senior
management. The Company's current President and Chief Operating Officer and
current Chief Financial Officer joined the Company in February 1998, together
with the new Senior Vice President of Operations. The Company's former
President, Chairman and Chief Executive Officer resigned from all positions with
the Company and the former Chief Financial Officer and Vice President in charge
of sales have also left the Company.

REGULATORY ENVIRONMENT. Federal, state and foreign law regulate certain uses
of outbound call processing systems. 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.

Item 3: Quantitative and Qualitative Disclosures about Market Risk:

Not Applicable

<PAGE>

Part II: Other Information

Item 1: Legal Proceedings:

Between March 6, 1998 and April 8, 1998 the Company and certain of its
current and former officers and directors, among others, were sued in various
putative securities class actions filed in the United States District Court for
the Southern District of New York and the United States District for the Eastern
District of Virginia, as follows: Thomas Esposito, et al. v. Versatility, Inc.,
et al. (S.D.N.Y.); Tammy Newsman v. Versatility, Inc., et al. (S.D.N.Y.); Sam
Succar v. Versatility, Inc. et al. (S.D.N.Y.); Thomas K. Doyle v. Versatility,
Inc. et al. (E.D. VA); and Steven Bowen v. Versatility, Inc. et al. (S.D.N.Y.)
(together "the putative class actions"). Collectively, the putative class
actions asserted claims under Sections 11, 12(2) and 15 of the Securities Act
and Section 10(b) and 20(a) of the Exchange Act for alleged misrepresentations
and omissions in connection with the SEC public filings and other public
statements made by the Company. Among other allegations, each of the putative
class actions alleged that the Company misrepresented its financial results and
its accounting practices during the period December 12, 1996 through March 12,
1998, including in the Company's IPO Prospectus. The complaints in certain of
the putative class actions also asserted, among other allegations, that the
Company and certain of the other defendants made misrepresentations in the IPO
Prospectus and thereafter regarding the performance capabilities of the
Company's CALLCENTER product. See "Factors Which May Effect Future Operating
Results - Litigation Risks" below.

A former customer was seeking damages in excess $1,000,000 for alleged
breaches of contract and warranties, as well as alleged misrepresentations. On
April 16, 1998, the Company filed a response denying the allegations and
counter-claiming for damages in excess of $400,000 for breach of contract. On
August 14, 1998 the Company settled this case and recorded the settlement
expenses in the quarter ended July 31, 1998.

<PAGE>

A customer of a Versatility reseller has sued for damages for an amount
not less than $1,000,000. In December 1997, the District Court dismissed the
action. In February 1998, essentially the same claim was made in a different
District Court. The Company intends to vigorously defend this case. The outcome
of this matter cannot be ascertained at this time.

Item 2: Changes in Securities and Use of Proceeds:

On May 8, 1998, the Board adopted the 1998 Non-Qualified Stock Option
Plan, pursuant to which it may grant options to purchase an aggregate number of
1,250,000 shares of the Company's Common Stock to (i) non-officers and (ii) any
new officer of the Company if such grant is an inducement essential to the
individual entering into an employment agreement with the Company as a new
employee. Such shares have not been registered under the Securities Act. During
the quarter ended July 31, 1998, the Company granted options to purchase
1,107,000 shares of Common Stock at a price per share of $1.89. All such options
vest 20% upon grant and 20% annually thereafter on the anniversary of the date
of grant and are subject to acceleration at the discretion of the Board of
Directors of the Company. Such sales are exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.

Item 3: Defaults Upon Senior Securities:

On October 29, 1997, the Company entered into a new credit facility with
its Bank which provided for a $5.0 million operating line of credit and a new
$2.0 million equipment line of credit. Since the Company was not in compliance
with various covenants in the credit facility, on April 28, 1998, the Company
entered into an amendment to the credit facility effective April 30, 1998, in
which the Bank waived all prior defaults, and provided for the following terms:
the $2.0 million equipment line was canceled and the outstanding balance of
$256,703 was transferred to the operating line of credit. Shortly after the
effective date, the Company permanently paid down the operating line to $3.8
million and may not borrow any additional amounts under the line. The agreement
provides that the Company must maintain certain financial covenants, including a
minimum tangible net worth and a minimum cash balance. The line of credit
matures on November 5, 1998.

The Company is not in compliance with these new covenants and therefore is
in default under the operating line of credit. In connection with the Merger
Agreement, the Bank entered into a Loan Modification, Consent and Forbearance
Agreement (the "Loan Modification Agreement") whereby, pursuant to the terms of
the Loan Modification Agreement, the Bank, subject to certain conditions, agreed
to forebear from exercising certain remedies available to it as a result of the
Company's existing defaults under the loan agreements with the Bank until the
earlier of December 31, 1998 and the consummation of the Merger. The Bank's
continuing forbearance will terminate upon the termination of the Merger
Agreement. See "Recent Developments."

Item 4: Submission of Matters to a Vote of Security Holders:

None.

Item 5: Other Information:

Not Applicable.

Item 6: Exhibits and Reports on Form 8-K:

(a) Exhibits

2.1* Agreement and Plan of Merger dated as of August 21, 1998, by
and among Versatility Inc., Oracle Corporation and AQX
Acquisition Corporation

10.1* Form of Support Agreement

10.2* License Agreement dated as of August 21, 1998, by and between
Versatility Inc. and Oracle Corporation

10.3* Loan Modification, Consent and Forbearance Agreement dated
August 20, 1998 by and among Versatility Inc., Oracle
Corporation and Silicon Valley Bank

10.4 1998 Non-qualified Stock Option Plan

10.5 Amendment No. 1 to License Agreement dated September 10, 1998
by and between Versatility Inc. and Oracle Corporation

27.1 Financial Data Schedule

27.2 Financial Data Schedule

* Incorporated by Reference from Form 8-K filed with the Commission
on August 25, 1998

(b) Reports on Form 8-K

None

<PAGE>

Signatures

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

VERSATILITY INC.

Dated: September 11, 1998 By: /s/ Kenneth T. Nelson
-----------------------
Kenneth T. Nelson
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)

<PAGE>

EXHIBIT INDEX

Exhibit No. Description Page

10.4 1998 Non Qualified Stock Option Plan 27
10.5 Amendment No. 1 to License Agreement 34
27.1 Financial Data Schedule for July 31, 1998 35
27.2 Financial Data Schedule for July 31, 1997 36

Exhibit 10.4

VERSATILITY INC.

1998 NON-QUALIFIED STOCK OPTION PLAN

1. PURPOSE. This 1998 Non-Qualified Stock Option Plan (the "Plan") is
intended to provide incentives to new officers, employees and consultants of
Versatility Inc. (the "Company"), and of any present or future subsidiary of the
Company ("Related Corporations") by providing them with opportunities to
purchase stock in the Company pursuant to options ("Non-Qualified Options" or
"Options") granted hereunder which do not qualify as "incentive stock options"
("ISOs") under Section 422(b) of the Internal Revenue Code (the "Code"). The
Plan is not intended to provide Option grants to any person who is an officer or
director of the Company or Related Corporations, unless such grant is an
inducement essential to such person's entering into one or more employment
agreements with the Company as a new employee.

2. ADMINISTRATION OF THE PLAN.

A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered
by the Board of Directors of the Company (the "Board") or, subject to
paragraph 2(D) (relating to compliance with Section 162(m) of the Code),
by a committee appointed by the Board (the "Committee"). Hereinafter, all
references in this Plan to the "Committee" shall mean the Board if no
Committee has been appointed. Subject to ratification of the grant or
authorization of each Option by the Board (if so required by applicable
state law), and subject to the terms of the Plan, the Committee shall have
the authority to (i) determine to whom, from among the class of
individuals and entities eligible under paragraph 3 to receive Options,
Options may be granted; (ii) determine the time or times at which Options
shall be granted; (iii) determine the option price of shares subject to
each Option, which price shall not be less than the minimum price
specified in paragraph 6; (iv) determine (subject to paragraph 7) the time
or times when each Option shall become exercisable and the duration of the
exercise period; (v) determine whether restrictions such as repurchase
options are to be imposed on shares subject to Options and the nature of
such restrictions, if any, and (vi) interpret the Plan and prescribe and
rescind rules and regulations relating to it. The Committee shall take
whatever actions it deems necessary, under Section 422 of the Code and the
regulations promulgated thereunder, to ensure that no Option issued
hereunder is treated as an ISO. The interpretation and construction by the
Committee of any provisions of the Plan or of any Option granted under it
shall be final unless otherwise determined by the Board. The Committee may
from time to time adopt such rules and regulations for carrying out the
Plan as it may deem advisable. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with
respect to the Plan or any Option granted under it.

B. COMMITTEE ACTIONS. The Committee may select one of its members as
its chairman, and shall hold meetings at such time and places as it may
determine. A majority of the Committee shall constitute a quorum and acts
by a majority of the members of the Committee, or acts reduced to or
approved in writing by a majority of the members of the Committee (if
consistent with applicable state law), shall constitute the valid acts of
the Committee. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill
vacancies however caused, or remove all members of the Committee and
thereafter directly administer the Plan.

C. GRANT OF OPTIONS TO BOARD MEMBERS. Options may be granted to
members of the Board. All grants of Options to members of the Board shall
in all respects be made in accordance with the provisions of this Plan
applicable to other eligible persons. Members of the Board who either (i)
are eligible to receive grants of Options pursuant to the Plan or (ii)
have been granted Options may vote on any matters affecting the
administration of the Plan or the grant of any Options pursuant to the
Plan, except that no such member shall act upon the granting to himself or
herself of Options, but any such member may be counted in determining the
existence of a quorum at any meeting of the Board during which action is
taken with respect to the granting to such member of Options.

D. PERFORMANCE-BASED COMPENSATION. Subject to the provisions of any
Agreement (as defined below) relating to an Option. The Board, in its
discretion, may take such action as may be necessary to ensure that
Options granted under the Plan qualify as "qualified performance-based
compensation" within the meaning of Section 162(m) of the Code and
applicable regulations promulgated thereunder ("Performance-Based
Compensation"), which action may include, in the Board's discretion, some
or all of the following (i) if the Board determines that Options granted
under the

<PAGE>

Plan generally shall constitute Performance-Based Compensation, the Plan
shall be administered, to the extent required for such Options to
constitute Performance-Based Compensation, by a Committee consisting
solely of two or more "outside directors" (as defined in applicable
regulations promulgated under Section 162(m) of the Code), (ii) if any
Non-Qualified Options with an exercise price less than the fair market
value per share of Common Stock are granted under the Plan and the Board
determines that such Options should constitute Performance-Based
Compensation, such options shall be made exercisable only upon the
attainment of a pre-established, objective performance goal established by
the Committee, and such grant shall be submitted for, and shall be
contingent upon shareholder approval and (iii) Options granted under the
Plan may be subject to such other terms and conditions as are necessary
for compensation recognized in connection with the exercise or disposition
of such Option or the disposition of Common Stock acquired pursuant to
such Option, to constitute Performance-Based Compensation.

3. ELIGIBLE EMPLOYEES AND OTHERS. Non-Qualified Options may be granted to:
(a) any employee or consultant of the Company or any Related Corporation who is
not an officer of the Company on the date of such grant; or (b) any new officer
of the Company, if such grant is an inducement essential to the individuals
entering into one or more employment agreements with the Company as a new
employee. The Committee may take into consideration a recipient's individual
circumstances in determining whether to grant an Option. The granting of any
Option to any individual or entity shall neither entitle such grantee to, nor
disqualify such grantee from, participation in any other grant of Options.

4. STOCK. The stock subject to Options shall be authorized but unissued
shares of Common Stock of the Company, par value $.01 per share (the "Common
Stock"), or shares of Common Stock reacquired by the Company in any manner. The
aggregate number of shares which may be issued pursuant to the Plan is
2,500,000, subject to adjustment as provided in paragraph 13. If any Option
granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole
or in part or shall be repurchased by the Company, the shares of Common Stock
subject to such Option shall again be available for grants of Options under the
Plan.

No employee of the Company or any Related Corporation may be granted
Options to acquire, in the aggregate, more than 1,125,000 of shares of Common
Stock under the Plan. If any Option granted under the Plan shall expire or
terminate for any reason without having been exercised in full or shall cease
for any reason to be exercisable in whole or in part or shall be repurchased by
the Company, the shares of Common Stock subject to such Option shall be included
in the determination of the aggregate number of shares of Common Stock deemed to
have been granted to such employee under the Plan.

5. GRANTING OF OPTIONS. Options may be granted under the Plan at any time
on or after April 14, 1998 and prior to April 14, 2008. The date of grant of an
Option under the Plan will be the date specified by the Committee at the time it
grants the Option; provided, however, that such date shall not be prior to the
date on which the Committee acts to approve the grant.

6. MINIMUM OPTION PRICE.

Subject to paragraph 2(D) (relating to compliance with Section 162(m) of
the Code), the exercise price per share specified in the agreement relating to
each Non-Qualified Option granted under the Plan (the "Agreement"), may be less
than the fair market value of the Common Stock of the Company on the date of
grant, but shall in no event be less than the minimum legal consideration
required therefor under the laws of any jurisdiction in which the Company or its
successors in interest may be organized.

7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10 or as specified in the Agreement relating to such Option,
each Option shall expire on the date specified by the Committee, but not more
than ten years from the date of grant.

8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:

A. VESTING. The Option shall either be fully exercisable on the
date of grant or shall become exercisable thereafter in such installments
as the Committee may specify.

B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee.

<PAGE>

C. PARTIAL EXERCISE. Each Option or installment may be exercised at
any time or from time to time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.

D. ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date that any installment of any Option becomes
exercisable.

9. TERMINATION OF BUSINESS RELATIONSHIP. Each Option may provide that it
shall terminate before its stated expiration date, upon terms specified by the
Committee, if the optionee ceases to be an employee, officer or director or
consultant of the Company, of any Related Corporation, or of the Company and all
Related Corporations (any such relationship hereinafter referred to as a
"Business Relationship with the Company"). Nothing in the Plan or any Option
granted hereunder shall be deemed to give any optionee the right to continue his
or her Business Relationship with the Company for any period of time.

10. DEATH; DISABILITY.

A. DEATH. Unless otherwise specified by the Committee, if an
optionee's Business Relationship with the Company terminates by reason of
death, his or her Option may be exercised, to the extent of the number of
shares with respect to which such optionee could have exercised it on the
date of such optionee's death, by such optionee's estate, personal
representative or beneficiary who has acquired the Option by will or by
the laws of descent and distribution, at any time prior to the earlier of
the specified expiration date of the Option or 180 days from the date of
death.

B. DISABILITY. Unless otherwise specified by the Committee, if an
optionee's Business Relationship with the Company terminates by reason of
such optionee's disability, such optionee shall have the right to exercise
his or her Option, to the extent of the number of shares with respect to
which such optionee could otherwise have exercised it on the date his or
her Business Relationship with the Company terminated, at any time prior
to the earlier of the specified expiration date of the Option or 180 days
from the date of the termination of the optionee's Business Relationship
with the Company. Unless otherwise defined in an Agreement between the
Company and the Optionee, the term "disability" shall mean "permanent and
total disability" as defined in Section 22(e)(3) of the Code or any
successor statute.

11. ASSIGNABILITY. No Option shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution, and during
the lifetime of the optionee each Option shall be exercisable only by the
optionee.

12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any Option
shall be subject to the restrictions set forth herein or, consistent with
paragraph 7, to such other or additional termination and cancellation provisions
as the Committee may determine. The Committee may from time to time confer
authority and responsibility on one or more of its own members and/or one or
more officers of the Company to execute and deliver such instruments. The proper
officers of the Company are authorized and directed to take any and all action
necessary or advisable from time to time to carry out the terms of such
instruments.

13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the Agreement between the optionee and the Company relating to such
Option:

A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of Options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.

B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
with or acquired by another entity in a merger or other reorganization in
which the holders of the outstanding voting stock of the Company
immediately preceding the consummation of such event, shall, immediately
following such event, hold, as a group, less than a majority

<PAGE>

of the voting securities of the surviving or successor entity, or in the
event of a sale of all or substantially all of the Company's assets or
otherwise (each, an "Acquisition"), the Committee or the board of
directors of any entity assuming the obligations of the Company hereunder
(the "Successor Board"), shall, as to outstanding Options, either (i) make
appropriate provision for the continuation of such Options by substituting
on an equitable basis for the shares then subject to such Options either
(a) the consideration payable with respect to the outstanding shares of
Common Stock in connection with the Acquisition, (b) shares of stock of
the surviving or successor corporation or (c) such other securities as the
Successor Board deems appropriate, the fair market value of which shall
not materially exceed the fair market value of the shares of Common Stock
subject to such Options immediately preceding the Acquisition; or (ii)
upon written notice to the optionees, provide that all Options must be
exercised, to the extent then exercisable or to be exercisable as a result
of the Acquisition, within a specified number of days of the date of such
notice, at the end of which period the Options shall terminate; or (iii)
terminate all Options in exchange for a cash payment equal to the excess
of the fair market value of the shares subject to such Options (to the
extent then exercisable or to be exercisable as a result of the
Acquisition) over the exercise price thereof.

C. RECAPITALIZATION OR REORGANIZATION. Except as otherwise provided
in any Agreement and other than a transaction described in subparagraph B
above, in the event of a recapitalization or reorganization of the Company
pursuant to which securities of the Company or of another corporation are
issued with respect to the outstanding shares of Common Stock, an optionee
upon exercising an Option shall be entitled to receive for the purchase
price paid upon such exercise the securities such optionee would have
received if such optionee had exercised his or her Option prior to such
recapitalization or reorganization.

D. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Committee shall, as to
outstanding Option, either (i) upon written notice to the optionees,
provide that all Options must be exercised, to the extent then exercisable
or to be exercisable as a result of the liquidation or dissolution, within
a specified number of days of the date of such notice, at the end of which
period the Options shall terminate; or (ii) terminate all Options in
exchange for a cash payment equal to the excess of the fair market value
of the shares subject to such Options (to the extent then exercisable or
to be exercisable as a result of the liquidation or dissolution) over the
exercise price thereof.

E. ISSUANCES OF SECURITIES. Except as expressly provided herein or
in any Agreement, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares subject to Options.

F. FRACTIONAL SHARES. No fractional shares shall be issued under the
Plan and the optionee shall receive from the Company cash in lieu of such
fractional shares.

G. ADJUSTMENTS. Upon the happening of any of the events described
above, the class and aggregate number of shares set forth in paragraph 4
hereof that are subject to Options which previously have been or
subsequently may be granted under the Plan shall also be appropriately and
equitably adjusted to reflect the events described in such subparagraphs.
The Committee or the Successor Board shall determine the specific
adjustments to be made under this paragraph 13 and, subject to paragraph
2, its determination shall be conclusive.

14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Option being exercised and specify the
number of shares as to which such Option is being exercised, accompanied by full
payment of the purchase price therefor either (a) in United States dollars in
cash or by check, (b) at the discretion of the Committee, through delivery of
shares of Common Stock (or options to purchase Common Stock) having a fair
market value equal as of the date of the exercise to the cash exercise price of
the Option, (c) at the discretion of the Committee, by delivery of the
optionee's non-recourse note secured by the Option bearing interest payable not
less than annually at no less than 100% of the lowest applicable Federal rate,
as defined in Section 1274(d) of the Code, (d) at the discretion of the
Committee and consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the Option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise, or (e) at the
discretion of the Committee, by any combination of (a), (b), (c) and (d) above.
The holder of an Option shall not have the rights of a shareholder with respect
to the shares covered by such Option until the date of issuance of a stock
certificate to such holder for such shares. Except as expressly

<PAGE>

provided in any Agreement or above in paragraph 13 with respect to changes in
capitalization and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued.

15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on
April 14, 1998. The Plan shall expire at the end of the day on April 14, 2008
(except as to Options outstanding on that date). The Board may terminate or
amend the Plan in any respect at any time. Except as otherwise provided in this
paragraph 15, in no event may action of the Board or stockholders alter or
impair the rights of an optionee, without his or her consent, under any Option
previously granted to such optionee.

16. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted under the Plan shall be used for
general corporate purposes.

17. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the grant or exercise of
an Option, the vesting or transfer of an Option pursuant to an arm's-length
transaction, the vesting or transfer of restricted stock or securities acquired
upon the exercise of an Option hereunder, or the making of a distribution or
other payment with respect to such stock or securities, the Company may withhold
taxes in respect of amounts that constitute compensation includible in gross
income. The Committee in its discretion may condition (i) the grant or exercise
of an Option, (ii) the transfer of an Option or (iii) the vesting or
transferability of restricted stock or securities acquired by exercising a
Option, on the optionee's making satisfactory arrangement for such withholding.
Such arrangement may include payment by the optionee in cash or by check of the
amount of the withholding taxes or, at the discretion of the Committee, by the
optionee's delivery of previously held shares of Common Stock or the withholding
from the shares of Common Stock otherwise deliverable upon exercise of a Option
shares having an aggregate fair market value equal to the amount of such
withholding taxes.

18. DETERMINATION OF FAIR MARKET VALUE OF COMMON STOCK. Unless otherwise
provided in an Agreement, whenever it is necessary or desirable hereunder to
determine the fair market value of the Company's Common Stock, the Committee
shall make such determination in accordance with this Section. "Fair Market
Value" shall be determined as of the last business day for which the prices or
quotes discussed in this sentence are available prior to the date such Option is
granted and shall mean (i) the average of the high and low prices of the Common
Stock for the five prior business days on which the Common Stock was traded on
the principal national securities exchange on which the Common Stock is traded,
if the Common Stock is then traded on a national securities exchange; or (ii)
the average of the last reported sale prices of the Common Stock for the five
prior business days on which the Common Stock was traded on the Nasdaq National
Market or the Nasdaq SmallCap Market, as the case may be, if the Common Stock is
not then traded on a national securities exchange; or (iii) the closing bid
price (or average of bid prices) last quoted for the five prior business days on
which the Common Stock was traded by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the Nasdaq
National Market or the Nasdaq SmallCap Market, as the case may be. However, if
the Common Stock is not publicly traded at the time an Option is granted under
the Plan, "fair market value" shall be deemed to be the fair value of the Common
Stock (on that date) as determined by the Committee after taking into
consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.

19. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.

Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
file tax information returns reporting the income received by optionees in
connection with the Plan.

20. GOVERNING LAW. The validity and construction of the Plan and the
instruments evidencing Options shall be governed by the laws of State of
Delaware, or the laws of any jurisdiction in which the Company or its successors
in interest may be organized.

Exhibit 10.5

AMENDMENT NO. 1 TO LICENSE AGREEMENT

THIS AMENDMENT NO. 1 TO LICENSE AGREEMENT (this "Amendment") is made as of
the 10th day of September, 1998 by and between Oracle Corporation, a Delaware
corporation ("Oracle"), and Versatility Inc., a Delaware corporation
("Versatility").

WHEREAS, Oracle and Versatility are parties to a Technology License
Agreement dated as of August 20, 1998 (the "Agreement"); and

WHEREAS, the parties hereto desire to amend certain provisions of the
Agreement as hereinafter set forth in order to correct a typographical error in
the Agreement.

NOW, THEREFORE, in consideration of the foregoing, the mutual promises and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:

1. Section 5.2.B of the Agreement is hereby deleted in its entirety and the
following provision inserted in lieu thereof:

"5.2.B Acceptance of Superior Offer
If (i) the Merger Agreement is being or has been terminated and Versatility
is obligated to pay Oracle a Termination Fee (as defined in the Merger
Agreement) under the Merger Agreement, (ii) Versatility refunds to Oracle
all of the Prepaid Sublicense Fees prior to or simultaneously with the
payment of such Termination Fee, and (iii) the Termination Fee is paid in
accordance with the terms of the Merger Agreement, then this Agreement
shall terminate upon repayment by Versatility of such Prepaid Sublicense
Fees and payment of the Termination Fee."

2. Except as specified herein, the parties hereby ratify and affirm each of
the other provisions of the Agreement referred to therein.

3. This Amendment may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Each counterpart shall be
an original. A facsimile signature appearing on a facsimile document shall be
given the same effect as if it were an original signature on an original
document.

<PAGE>

IN WITNESS WHEREOF, Oracle and Versatility have duly executed this
Amendment, or caused it to be duly executed, under seal as of the date first set
forth above.

VERSATILITY INC.

By: /s/ Kenneth T. Nelson
________________________________
Name: Kenneth T. Nelson
Title: SVP Finance

ORACLE CORPORATION

By: /s/ David J. Roux
________________________________
Name: David J. Roux
Title: Executive Vice President

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
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<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 879,037
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<RECEIVABLES> 4,457,334
<ALLOWANCES> 802,557
<INVENTORY> 0
<CURRENT-ASSETS> 7,946,057
<PP&E> 4,413,876
<DEPRECIATION> (2,369,865)
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0
0
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 14,742,713
<SECURITIES> 5,987,436
<RECEIVABLES> 4,441,532
<ALLOWANCES> 934,501
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0
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<COMMON> 73,812
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<TOTAL-COSTS> 3,939,869
<OTHER-EXPENSES> 5,893,257
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<EPS-PRIMARY> (0.50)
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</TABLE>