XYVISION INC, 10-K/A, 1997-07-15

XYVISION INC
10-K/A, 1997-07-15
COMPUTER INTEGRATED SYSTEMS DESIGN

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT #1

FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended March 31, 1997
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

FOR THE TRANSITION PERIOD FROM ------------- to-------------
Commission File No. 0-14747

XYVISION, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 04-2751102
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

101 EDGEWATER DRIVE, WAKEFIELD, MA 01880-1291

(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 245-4100

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

SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:

COMMON STOCK $.03 PAR VALUE

PREFERRED STOCK PURCHASE RIGHTS

(Title of class)

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

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

The aggregate market value of Common Stock held by non-affiliates on May
31, 1997 was $2,082,445.

The aggregate market value of Series B Preferred Stock held by
non-affiliates on May 31, 1997 was $81,178.

As of May 31, 1997, the registrant had 14,263,192 shares of Xyvision, Inc.
Common Stock, $.03 par value, outstanding.

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Part II, Item 5 of the Annual Report on Form 10-K of Xyvision, Inc. (the
"Company") for the fiscal year ended March 31, 1997, as filed with the
Commission on July 2, 1997 (the "Form 10-K") is hereby amended and restated in
its entirety as follows:

PART II

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

The Company's Common Stock is currently traded on the Nasdaq system under
the symbol "XYVI". The price per share of the Company's Common Stock is
reported on the OTC Bulletin Board over a level 2 or level 3 Nasdaq workstation
and through the National Quotation Bureau Pink Sheets.

The following table sets forth the reported high and low sales prices for
the Company's Common Stock for the periods indicated.

<TABLE>
<S> <C> <C>
HIGH--- LOW---
FISCAL YEAR ENDED MARCH 31, 1996--------------------------
April 1 - June 30 .......................................... $ .53 $ .50
July 1 - September 30 ....................................... .79 .47
October 1 - December 31 .................................... .47 .41
January 1 - March 31 ....................................... .34 .22
FISCAL YEAR ENDED MARCH 31, 1997--------------------------
April 1 - June 30 .......................................... $ .36 $ .19
July 1 - September 30 ....................................... .44 .32
October 1 - December 31 .................................... .75 .37
January 1 - March 31 ....................................... .75 .50
</TABLE>

As of June 23, 1997, there were approximately 664 stockholders of record.
No cash dividends have been paid on the Common Stock since Xyvision's
formation. The Company does not expect to pay cash dividends on the Common
Stock in the foreseeable future.

During the fiscal year ended March 31, 1997, the Company continued its
debt restructuring efforts begun in March 1992. Pursuant to these efforts, the
Company consummated exchange transactions during fiscal 1997 with certain
holders of the Company's outstanding 6% Convertible Subordinated Debentures,
15% Promissory Notes and 4% Promissory Notes, pursuant to which the Company
issued various combinations of 4% Promissory Notes, shares of Common Stock and
shares of Series B Preferred Stock in reliance upon the exemption from
registration set forth in Section (a)(9) of the Securities Act. No underwriters
were engaged in connection with such issuances. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

On May 31, 1996, pursuant to, and in consideration for, an amendment to
the Company's line of credit with Tudor Trust, the Company issued to Tudor
Trust warrants for the purchase of 10,000,000 shares of Common Stock at an
exercise price of $.18 per share in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act. No. underwriters
were engaged in connection with such issuance. See Note 7 to Notes to
Consolidated Financial Statements.

2
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Part II, Item 6 of the Form 10-K of the Company is hereby amended and restated
in its entirety as follows:

ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes certain selected financial data and should
be read in conjunction with the financial statements and related notes
appearing elsewhere in this report.

<TABLE>
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED
_____________________________________________________________________
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1993 1994 1995 1996 1997
__________ __________ __________ __________ __________
(in thousands, except per share data)
INCOME STATEMENT DATA
Revenues .............................. $ 23,846 $ 23,865 $ 24,559 $ 22,414 $ 22,234
Gross margin ........................... 10,626 11,907 12,045 10,170 10,406
Operating expenses ..................... 13,833 11,815 11,205 15,077 10,765
Income (loss) from operations ......... (3,206) 92 840 (4,907) (359)
Income (loss) before income taxes
and extraordinary item ............... (4,079) (479) 321 (5,707) (1,359)
Net income (loss) allocable to common
stockholders (1) ..................... 1,631 301 286 (5,793) (1,353)
Net income (loss) per share (1) ...... $ .24 $ .04 $ .03 $ (.66) $ (.11)
Weighted average common and common
equivalent shares outstanding ...... 6,908 8,224 10,033 8,726 12,097
FINANCIAL POSITION
Cash, cash equivalents and short-term
investments ........................... $ 577 $ 312 $ 174 $ 332 $ 261
Working capital (deficit) ............ (4,115) (8,961) (3,200) (6,751) (4,834)
Total assets ........................... 12,846 12,505 13,137 10,281 9,977
Long-term debt ........................ 7,445 1,706 4,655 5,421 165
Stockholders' deficit .................. $ (7,295) $ (6,674) $ (4,116) $ (9,244) $ (1,867)
OTHER INFORMATION
Research and development expenditures,
including capitalized software costs $ 4,041 $ 4,586 $ 4,410 $ 4,512 $ 4,381
</TABLE>

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(1) Fiscal 1993 results include an extraordinary item for a gain of
$5,709, or $.83 per share, from the exchange of Debentures for unsecured,
unsubordinated promissory notes, and shares of common stock (also, see Note 8
of the Notes to Consolidated Financial Statements).

Fiscal 1994 results include an extraordinary item for a gain of $780, or
$.10 per share, from the exchange of Debentures for unsecured, unsubordinated
promissory notes, and shares of common stock (also, see Note 8 of the Notes to
Consolidated Financial Statements).

Fiscal 1997 results include an extraordinary item for a gain of $100, or
$.01 per share, from the exchange of Debentures for unsecured, unsubordinated
promissory notes, and shares of common stock (also, see Note 8 of the Notes to
Consolidated Financial Statements).

3
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Part II, Item 7 of the Form 10-K of the Company is hereby amended and restated
in its entirety as follows:

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

Results of Operations

Revenues decreased 9% from $24,559,000 in fiscal 1995 to $22,414,000 in
fiscal 1996 and decreased 1% from $22,414,000 in fiscal 1996 to $22,234,000 in
fiscal 1997. In fiscal 1996 system revenues decreased 17% from fiscal 1995 due
primarily to reduced sales of Contex Prepress Systems in domestic markets. In
fiscal 1997 system revenues decreased 2% primarily as a result of decreased
Publishing Pacific Rim and Contex Prepress Systems European sales. In fiscal
1996 service revenues increased 6% from fiscal 1995 primarily due to increased
international maintenance, training and integration service revenues in both
Contex and Publishing business groups. In fiscal 1997 service revenue increased
less than 1% primarily due to increased Contex Prepress Systems European
maintenance, training and integration service revenues partially offset by
reduced maintenance revenues in the Contex domestic and Publishing domestic and
European business groups.

Gross margins decreased from 49% of revenues in fiscal 1995 to 45% of
revenues in fiscal 1996 and increased to 47% of revenues in fiscal 1997. System
margins decreased from 58% of revenues in fiscal 1995 to 55% of revenues in
fiscal 1996 and increased to 63% of revenues in fiscal 1997. The decrease in
fiscal 1996 was primarily the result of a combination of decreased operational
efficiencies resulting from the need for senior management to focus on the
restructuring effort and an increase in the proportion of hardware sales in the
European market for the Contex division. The increase in fiscal 1997 was
primarily the result of the increase in the proportion of domestic commercial
software sales. Service margins decreased from 33% of revenues in fiscal 1995
to 32% of revenues in fiscal 1996 and decreased further to 24% of revenues in
fiscal 1997. The decrease in service margins in both fiscal 1996 and fiscal
1997 was the result of a decrease in Publishing division revenues and higher
level of fixed costs, and increased proportion of third party training and
consulting expenses, which have a lower gross margin than the Company's
internal services.

Research and development expenses, including capitalized software
development costs, were $4,410,000, $4,512,000 and $4,381,000 for fiscal 1995,
1996 and 1997, respectively. These amounts represented 18%, 20% and 19% of
revenues, respectively. Capitalized software costs were $1,413,000, $1,087,000
and $1,477,000 in fiscal 1995, 1996 and 1997, respectively. The increase in
research and development expenditures from fiscal 1995 to fiscal 1996 was
mainly the result of increased headcount and its associated costs. The decrease
in research and development expenditures from fiscal 1996 to fiscal 1997 was
primarily due to decreased headcount and other cost control efforts in the
Publishing division. Research and development costs, excluding capitalized
software development costs, were 12%, 15% and 13% of revenues during fiscal
1995, 1996 and 1997, respectively.

Marketing, general and administrative expenses increased from $8,208,000
(or 33% of revenues) in fiscal 1995 to $11,152,000 (or 50% of revenues) in
fiscal 1996 and decreased to $7,861,000 (or 35% of revenues) in fiscal 1997.
During fiscal 1996 significant increases occurred in payroll, travel and trade
show expenses, primarily in Europe, reflecting the Company's strategy to grow
its international markets. The increase in fiscal 1996 also reflects increases
to the Company's bad debts allowances, primarily for the Contex business group.
The decrease from fiscal 1996 to fiscal 1997 was primarily due to cost
awareness and containment.

During fiscal 1996, the Company incurred restructuring charges of
$500,000. Included in the charge were approximately $385,000 of severance and
employee benefits for the December 1995 workforce reduction, a $70,000
write-off of equipment associated with the staff reduction and a write-down of
$45,000 for capital assets not expected to contribute to future operations.

Interest income was $9,000, $7,000 and $7,000 in fiscal 1995, 1996 and
1997, respectively. The low amount of interest income in each of the fiscal
years was due to the Company's low level of cash available for investing.
Interest expense from third parties was $284,000, $424,000 and $263,000 in
fiscal 1995, 1996 and 1997, respectively. Interest expense from third parties
includes the interest obligation on the Company's 6% Convertible Subordinated
Debentures (the "Debentures") and the quarterly interest payments on the 4%
Promissory Notes. The increase in the fiscal 1996 interest expense was
primarily due to the impact of the program to exchange 15% Promissory Notes for
equity securities and 4% Promissory Notes (also, please see Note 8 of the Notes
to Consolidated Financial Statements). Interest expense decreased in fiscal
1997 as a result of the program to exchange the Debentures and 4% Promissory
Notes for equity securities (also please see note 8 of the Notes to
Consolidated Financial Statements) . Interest expense with Tudor Trust, the
largest Stockholder of the Company, was $244,000, $384,000 and $744,000 in
fiscal 1995, 1996 and 1997 (also, please see Note 7 of the Notes to
Consolidated Financial Statements).

4
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During fiscal 1997, the Company entered into exchange transactions with
certain investors holding Debentures in the aggregate principal amount of
$370,000. These Debenture holders exchanged their Debentures for (i) an
unsecured, unsubordinated promissory note of the Company, in the principal
amount equal to 30% of the principal amount of the Debentures delivered for
exchange, which bears interest at 4% per year (payable quarterly) and matures
30 months from issuance, and (ii) 137,000 shares of common stock of the Company
per $1,000,000 principal amount of Debentures exchanged, and (iii) 13,000
shares of Series B preferred stock per $1,000,000 principal amount of
Debentures exchanged. As a result of the 1997 exchanges, the Company realized
an extraordinary gain of $100,000, or $.01 per share.

As a result of the 15% Promissory Note exchange programs described on Note
8 to the consolidated financial statements, the Company accrued dividends of
$35,000, $86,000 and $94,000 on the Series B Preferred Stock during fiscal
1995, 1996 and 1997, respectively.

Net income allocable to common stockholders was $286,000 for fiscal 1995.
The Company recorded net losses allocable to common stockholders of $5,973,000
and $1,353,000 for fiscal 1996 and 1997, respectively.

The Company believes inflation has not had a material effect on its
results of operations to date.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 1997, the Company had cash and cash equivalents of $261,000,
which is a decrease of $71,000 from the previous fiscal year end. Approximately
$35,000 of cash was used by operations and approximately $1,974,000 of cash was
used in investing activities in fiscal 1997. The Company plans to continue its
aggressive efforts of managing working capital.

In fiscal 1997 the Company invested $1,980,000 in capital assets,
including $1,477,000 of capitalized software costs, reflecting the Company's
continuing commitment to its product development programs. The Company
anticipates it will continue to invest in capital assets as required to support
its product development efforts and general business needs in future periods.

As of March 31, 1997, the Company had a $5,000,000 amended line of credit
with Tudor Trust, the largest stockholder of the Company. Mr. Jeffrey L.
Neuman, trustee of Tudor Trust, also serves as Chairman of the Board of
Directors of the Company. This credit line, which is payable on demand, is
secured by substantially all of the assets of the Company and has been used for
working capital and general business purposes. The credit line currently bears
interest at a rate of 8% per year, payable monthly. As of March 31, 1997 the
Company had an outstanding line of credit balance of $4,900,000. In early
fiscal 1998, the Company and the investor agreed in principle on an amendment
to the line of credit that would increase the maximum loan amount thereunder
from $5,000,000 to $6,000,000. Such amendment would also provide that the
investor shall have the sole discretion to decide whether or not to make any
and all advances of funds in excess of $5,000,000, and that the investor shall
have the right to refuse to make any advances of any such funds in excess of
$5,000,000 for any reason or no reason. As of July 15, 1997, the Company was
fully utilizing the credit available under the amended line of credit.

At the beginning of fiscal 1992, the Company had outstanding $22,410,000
of Debentures. This was a significant amount of debt for the Company and
represented an annual cash interest payment obligation of $1,344,600. During
fiscal 1992, the Company began a program to restructure its financial position,
specifically, these Debentures.

Between March 10, 1992 and September 30, 1996, the Company consummated
restructuring transactions with the holders of a total of $19,035,000 principal
amount of Debentures. Substantially all of these transactions involved the
exchange of outstanding Debentures for (i) an unsecured, unsubordinated
promissory note of the Company in a principal amount equal to 30% of the
principal amount of the Debentures delivered for exchange, bearing interest
(payable at maturity) at 15% per year (compounded annually) and maturing 30
months from issuance and (ii) 107,095 shares of common stock of the Company per
$1,000,000 principal amount of Debentures.

During the course of its attempts to restructure the Debentures and
negotiate transactions with Debentureholders, the Company did not make the
interest payment due on the Debentures on May 5 of 1992, 1993, 1994, 1995, 1996
or 1997. Under the terms of the Indenture covering the Debentures, the Trustee
or the holders of not less than 25% of the outstanding principal amount of the
Debentures have the right to accelerate the maturity date of the remaining
Debentures. As of July 15, 1997, no such acceleration had occurred or been
threatened.

5
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In addition, as of March 31, 1997, the Company had issued promissory notes
in an aggregate principal amount of $5,815,000 in connection with the Debenture
exchange transactions described above, the interest on which accrues at a rate
of 15% per year and is $2,452,000 payable at maturity. Such 15% Promissory
Notes in an aggregate principal amount of $4,542,000 were to mature on
September 30, 1994, and the remainder of these 15% Promissory Notes were to
mature at various dates between September 30, 1994 and December 30, 1998. In
order to relieve itself of the payment obligations on the Promissory Notes, in
fiscal 1995 the Company began a program to restructure the Promissory Notes.
Prior to September 30, 1996, the Company closed exchange transactions with 15%
Promissory Note holders of an aggregate principal amount of $5,709,000 and
accrued interest of $2,353,000, in which, in exchange for the delivery of a 15%
Promissory Note (including all rights to receive any interest accrued thereon)
for cancellation, the Company issued (i) a new Promissory Note that will mature
30 months from the date of issuance and bears interest at 4% per annum, (ii)
one share of common stock for each $10.00 of principal amount of 15% Promissory
Note delivered and (iii) one share of Series B Preferred Stock for each $10.00
of interest due on the 15% Promissory Note delivered. The Series B Preferred
Stock accrues a cumulative dividend in the amount of $.40 per share per annum,
whether or not declared, and has a liquidation preference of $12.50 per share,
plus any dividends declared or accrued but unpaid. Each share of Series B
Preferred Stock is convertible into two shares of common stock, subject to
adjustment for certain events. Additionally, holders of outstanding shares of
Series B Preferred Stock are entitled to voting rights equivalent to the rights
attributable to the whole shares of common stock into which the shares of
Series B Preferred Stock are convertible. The exchange transactions were
completed assuming a fair value of $10 per share of Series B Preferred Stock.
As of March 31, 1997, 15% Promissory Notes in an aggregate principle amount of
$60,000 and accrued interest of $26,000 were overdue. The Company may seek to
restructure the remaining 15% Promissory Notes but there can be no assurance
that it will do so.

As of March 31, 1997, the Company has completed transactions with holders
of an aggregate of $4,974,000 principle amount of the then outstanding 4%
Promissory Notes. Under the terms of the exchange agreements, the holders of
the 4% Promissory Notes exchanged their 4% Promissory Notes for such number of
shares of common stock of the Company as is equal to the principal amount of
the 4% Promissory Notes exchanged divided by $2.00 (any accrued but unpaid
interest was paid in cash as the time of such exchange). The Company has
accounted for the conversions as a contribution of capital by significant
shareholders.

On September 30, 1996, the Company completed transactions with investors
holding an aggregate amount of $2,000,000 principal amount of the Debentures.
Under the terms of the agreement, holders of the Debentures exchanged their
Debentures for such number of shares of common stock of the Company as is equal
to the sum of the principal amount of the Debentures exchanged plus the accrued
interest thereon, divided by $3.33. As of March 31, 1997, a total of $1,375,000
principal amount of Debentures remained outstanding. Of such Debentures, the
Company has identified the holders of $315,000 principal amount, leaving the
holders of $1,060,000 principal amount of Debentures unidentified. The Company
has accounted for the conversions as a contribution of capital by significant
shareholders.

The Company continues to negotiate, in good faith, with as many of the
remaining holders of Debentures, 15% Promissory Notes and 4% Promissory Notes
as possible. However, despite the progress that has been made, the Company can
still give no assurance about the outcome of these restructuring efforts and
does not expect the matters to be resolved in the near future. If the Company
is unable to enter into exchange transactions with the remaining holders, and
such holders seek to pursue legal remedies against the Company, the Company may
have to seek protection under applicable laws, including the Bankruptcy Code,
while it develops, analyzes and completes alternative restructuring strategies.

The Company anticipates that its cash requirements for fiscal 1998 will be
satisfied mainly from its credit line, assuming the continued forbearance by
the Debentureholders and the availability of increased borrowings under the
credit line should the Company require them. However, there can be no assurance
that such forbearance will continue or that the investor will advance any funds
in excess of $5,000,000 under the credit line. In addition, the Company
anticipates an increased level of cash requirements in fiscal 1998 and has
begun negotiations to amend its credit line to facilitate increased borrowing.
There can be no assurance, however, that such negotiations will be successful
or that increased borrowings will be available under the Company's credit line.
The above uncertainties raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recovery and classifications of recorded asset
amounts or the amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.

6
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Part II, Item 8 of the Form 10-K of the Company is filed herewith as follows:

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Xyvision, Inc.:

We have audited the accompanying consolidated balance sheets of Xyvision,
Inc. as of March 31, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' deficit and cash flows for each of the
three fiscal years in the period ended March 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to report on these financial statements based on our audits.

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

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred a loss from
operations in fiscal 1997 and has a working capital deficit and a stockholders'
deficit at March 31, 1997 and 1996. On May 5, 1997, 1996, 1995, 1994, 1993, and
1992, the Company elected not to make the interest payment that was due on its
6% Convertible Subordinated Debentures. Under the terms of the Indenture
covering the debentures, the Trustee or the holders of not less than 25% of the
outstanding principal amount of the debentures have the right to accelerate the
maturity date of the remaining debentures. As of July 15, 1997, no such
acceleration had occurred. The Company's attainment of profitable operations
and sufficient additional financing, as well as the continued forbearance of
its Debentureholders, cannot be determined at this time. These uncertainties
raise substantial doubt about the Company's ability to continue as a going
concern. Management's actions in regard to these matters are described in Notes
7 and 8. The financial statements do not include any adjustments relating to
the recovery and classifications of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.

Because of the significance of the uncertainties referred to in the
preceding paragraph, we are unable to express, and we do not express, an
opinion on the consolidated financial statements referred to above.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
July 15, 1997

7
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XYVISION, INC.

CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996

<TABLE>
<S> <C> <C>
ASSETS 1997 1996
______________ ______________
Current assets:
Cash and cash equivalents .................................... $ 261,032 $ 332,021
Accounts receivable:
Trade, less allowance for doubtful accounts of
$649,000 and $938,000 at March 31, 1997 and 1996,
respectively ............................................. 5,544,264 5,888,849
Inventories ................................................ 311,402 376,702
Other current assets ....................................... 727,788 756,040
______________ ______________
Total current assets ....................................... 6,844,486 7,353,612
Property and equipment, net ................................. 732,325 724,089
Other assets, net, principally capitalized software costs ... 2,399,907 2,203,003
______________ ______________
Total assets ................................................ $ 9,976,718 $ 10,280,704
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable to shareholder ................................. $ 4,550,000 $ 3,400,000
Current portion of long-term debt ........................... 2,031,364 4,063,597
Accounts payable and accrued expenses ........................ 2,968,658 3,587,539
Other current liabilities .................................... 2,128,811 3,053,408
______________ ______________
Total current liabilities .................................... 11,678,833 14,104,544
Long-term debt ............................................. 165,000 5,420,500
______________ ______________
Total liabilities .......................................... 11,843,833 19,525,044
______________ ______________
Commitments and contingencies .............................. - -
Stockholders' deficit:
Series preferred stock, $1.00 par value; 2,700,000 shares
authorized; no shares issued and outstanding ............... - -
Series B Preferred Stock, $1.00 par value: 300,000 shares
authorized; 235,299 and 222,943 issued in and outstanding
March 31, 1997 and 1996 (aggregate liquidation
preference of $3,057,327 and $2,786,788), respectively ... 235,299 222,943
Common stock, $.03 par value; 50,000,000 shares authorized;
14,739,857 and 9,300,037 issued and outstanding at March 31,
1997 and 1996, respectively .............................. 442,195 279,001
Additional paid-in capital ................................. 49,575,463 41,262,004
Accumulated deficit .......................................... (50,951,535) (49,599,009)
______________ ______________
(698,578) (7,835,061)
Less:
Treasury stock, at cost; 476,665 and 477,865 shares in March
31,
1997 and 1996 respectively ................................. 1,168,537 1,172,137
Receivable from employee stock ownership plan ............... - 237,142
______________ ______________
Total stockholders' deficit ................................. (1,867,115) (9,244,340)
______________ ______________
Total liabilities and stockholders' deficit .................. $ 9,976,718 $ 10,280,704
============== ==============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

8
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XYVISION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995

<TABLE>
<S> <C> <C> <C>
1997 1996 1995
____________ ____________ ____________
Revenues:
Systems ................................................ $ 12,792,836 $ 13,026,610 $ 15,674,312
Service ................................................ 9,441,164 9,386,903 8,884,796
____________ ____________ ____________
Total revenues ....................................... 22,234,000 22,413,513 24,559,108
____________ ____________ ____________
Cost of sales:
Systems ................................................ 4,679,212 5,852,984 6,527,775
Service ................................................ 7,148,693 6,390,728 5,986,263
____________ ____________ ____________
Total cost of sales ................................. 11,827,905 12,243,712 12,514,038
____________ ____________ ____________
Gross margin .......................................... 10,406,095 10,169,801 12,045,070
____________ ____________ ____________
Expenses:
Research and development .............................. 2,904,137 3,424,797 2,997,285
Marketing, general, and administrative ............... 7,861,312 11,152,172 8,207,762
Restructuring charge ................................. - 499,725
____________ ____________ ____________
Total operating expenses ........................... 10,765,449 15,076,694 11,205,047
____________ ____________ ____________
Net income (loss) from operations ..................... (359,354) (4,906,893) 840,023
____________ ____________ ____________
Other income (expense), net:
Interest income ....................................... 7,486 7,312 9,193
Interest expense - third party ........................ (262,555) (423,657) (284,285)
Interest expense - shareholder ........................ (744,308) (383,752) (244,204)
____________ ____________ ____________
Total other expense, net ........................... (999,377) (800,097) (519,296)
____________ ____________ ____________
Income (loss) before income taxes and
extraordinary item .................................... (1,358,731) (5,706,990) 320,727
Provision for income taxes .............................. -
____________ ____________ ____________
Income (loss) before extraordinary item ............... (1,358,731) (5,706,990) 320,727
Extraordinary item:
Gain on exchange of convertible subordinated
debentures .......................................... 100,000
____________ ____________ ____________
Net income (loss) ....................................... (1,258,731) (5,706,990) 320,727
Series B Preferred Stock Dividends ..................... 93,795 85,916 34,903
____________ ____________ ____________
Net income (loss) allocable to common stockholders ...... $ (1,352,526) $ (5,792,906) $ 285,824
============ ============ ============
Income (loss) per share:
Income (loss) before extraordinary item ............... $ (.12) $ (.66) $ .03
Extraordinary item .................................... .01
____________ ____________ ____________
Income (loss) per share .............................. $ (.11) $ (.66) $ .03
============ ============ ============
Weighted average common and common equivalent
shares outstanding .................................... 12,096,914 8,725,829 10,032,930
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

9
<PAGE>
<PAGE>

XYVISION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995

<TABLE>
<S> <C> <C> <C>
1997 1996 1995
_____________ _____________ _____________
Operations:
Net income (loss) ...................................................... $ (1,258,731) $ (5,706,990) $ 320,727
Adjustments to reconcile net income to net cash
provided from operating activities:
Gain on exchange of convertible subordinated
debentures ............................................................ (100,000) - -
Depreciation and amortization .......................................... 1,939,477 2,205,499 2,137,450
Restructuring charge ................................................... - 499,725 -
Provision for losses on accounts receivable .............................. 483,636 2,015,768 505,554
Loss on disposal of property and equipment .............................. 5,159 6,310 20,030
Operating assets and liabilities:
Accounts receivable ................................................... (139,051) (43,842) (1,393,112)
Retainage ............................................................... - - 526,220
Inventories ............................................................ 65,300 (188,451) (96,850)
Other current assets ................................................... 28,719 426,737 (570,109)
Accounts payable and accrued expenses ................................. (796,492) (595,387) 894,249
Other current liabilities ............................................. (262,909) 400,130 (577,608)
_____________ _____________ _____________
Net cash provided from (used by) operations .............................. (34,892) (980,501) 1,766,551
_____________ _____________ _____________
Investments:
Additions to property and equipment .................................... (503,216) (280,098) (368,982)
Proceeds from sales of property and equipment ........................... 6,621 3,353 225
Additions to customer support spares .................................... - (3,864) (1,358)
Capitalized software costs ............................................. (1,477,154) (1,086,960) (1,412,911)
_____________ _____________ _____________
Net cash provided from (used by) investments ........................... (1,973,749) (1,367,569) (1,783,026)
_____________ _____________ _____________
Financing:
Proceeds from line of credit from a shareholder ........................ 4,000.000 3,900,000 1,800,000
Repayment of line of credit to a shareholder ........................... (2,500,000) (1,600,000) (2,100,000)
Proceeds from issuance of common stock from treasury ..................... 510 33,350 186
Exercise of warrants ................................................... 200,000 - -
Dividends on preferred stock ............................................. - (82,557) (15,967)
Payment on 15% promissory notes .......................................... - (2,134) (62,836)
Loan payment from Employee Stock Ownership Plan ........................ 237,142 257,143 257,143
_____________ _____________ _____________
Net cash provided from (used by) financing .............................. 1,937,652 2,505,802 (121,474)
_____________ _____________ _____________
Net increase (decrease) in cash and cash equivalents ..................... (70,989) 157,732 (137,949)
Cash and cash equivalents at the beginning of the year .................. 332,021 174,289 312,238
_____________ _____________ _____________
Cash and cash equivalents at the end of the year ........................ $ 261,032 $ 332,021 $ 174,289
============= ============= =============
Non-cash Financial Activities:
Conversion of 6% debentures to equity .................................... 2,000,000 - -
Conversion of 4% notes to equity ....................................... 4,973,500 - -
Converstion of accrued interest on 6% debentures to equity ............... 648,658 - -
Conversion of 6% debentures to 15% and 4% notes ........................ 340,000 25,000 30,000
Conversion of 15% notes to 4% notes .................................... 177,000 784,000 4,636,500
Conversion of accrued interest on 15% notes to Series B Preferred Stock 75,460 330,680 1,898,750
Issurance of common stock purchase warrants to shareholder ............... 600,000 - -
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

10
<PAGE>
<PAGE>

XYVISION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997

<TABLE>
<S> <C> <C> <C>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL
_______ ___ _________ ___________
Balance, March 31, 1994 ..................... - $ 262,563 $ 39,367,327
Issuance of common stock with the
exchange of $30,000 of Convertible
Subordinated Debentures, 3,213 shares 96 639
Issuance of common stock with the
exchange of $4,636,500 of promissory
notes, 463,650 shares ........................ 13,910 101,673
Issuance of Series B preferred stock with
the exchange of $4,636,500 of
promissory notes, 189,875 shares ............ 189,875 1,708,875
Issuance of stock from treasury for
employment service awards, 600 shares (1,614)
Payments on receivable from Employee
Stock Ownership Plan ........................
Dividends on Series B preferred stock .........
Net Income ....................................
Balance, March 31, 1995 ..................... 189,875 276,569 41,176,900
___________ _________ ____________
Issuance of common stock with the
exchange of $25,000 of Convertible
Subordinated Debentures, 2,675 shares 80 1,254
Issuance of common stock with the
exchange of $784,000 of Promissory
Notes, 78,400 shares ........................ 2,352 39,268
Issuance of Series B stock with the
exchange of $784,000 of Promissory
Notes, 33,068 shares ........................ 33,068 297,612
Issuance of stock from treasury for
employee stock options, 94,660 shares ...... (250,974)
Issuance of stock from treasury for
employment service awards, 800 shares . (2,056)
Payments on receivable from Employee
Stock Ownership Plan ........................
Dividends on Series B Preferred Stock .........
Net loss ....................................
Balance, March 31, 1996 ..................... 222,943 279,001 41,262,004
___________ _________ ____________
Reduction of common stock with the
reversal of $30,000 of 15% notes
payable to Convertible Subordinated
Debentures, 3,213 shares ..................... (96) (607)
Issuance of common stock with the
exchange of $370,000 of Convertible
Subordinated Debentures into 4% notes
payable, 50,690 shares ..................... 1,521 14,330
Issuance of Series B Preferred stock with
the exchange of $370,000 Convertible
Subordinated Debentures into 4% notes
payable, 4,810 shares ........................ 4,810 43,290
Issuance of common stock with the
exchange of $177,000 15% notes payable
into 4% notes payable, 17,700 shares ...... 531 4,956
Issuance of Series B preferred stock with the
exchange of $177,000 15% notes payable
into 4% notes payable, 7,546 shares ......... 7,546 67,914
Issuance of common stock with the
exchange of $2,000,000 Convertible
Subordinated Debentures into equity,
795,393 shares .............................. 23,862 2,596,607
Issuance of common stock with the
exchange of $4,973,500 4% notes
payable into equity 2,486,750 shares ......... 74,602 4,852,834
Issuance of stock for exercise of warrants,
2,092,500 shares ........................... 62,775 137,225
Issuance of stock from treasury for
employment service awards, 1,200
shares ....................................... (3,090)
Issuance of common stock purchase
warrants to shareholder ..................... 600,000
Payments on receivable from Employee
Stock Ownership Plan ........................
Dividends on Series B Preferred Stock .........
Net loss ....................................
Balance, March 31, 1997 ..................... $ 235,299 $ 442,195 $ 49,575,463
=========== ========= ============

<S> <C> <C> <C> <C>
RECEIVABLE
FROM
EMPLOYEE
STOCK TOTAL
ACCUMULATED TREASURY OWNERSHIP STOCKHOLDERS'
DEFICIT STOCK PLAN DEFICIT
___________ __ _________ ___ ______ ______ _________
Balance, March 31, 1994 ..................... $ (44,091,927) $ (1,460,317) $ (751,428) $ (6,673,782)
Issuance of common stock with the
exchange of $30,000 of Convertible
Subordinated Debentures, 3,213 shares 735
Issuance of common stock with the
exchange of $4,636,500 of promissory
notes, 463,650 shares ........................ 115,583
Issuance of Series B preferred stock with
the exchange of $4,636,500 of
promissory notes, 189,875 shares ............ 1,898,750
Issuance of stock from treasury for
employment service awards, 600 shares 1,800 186
Payments on receivable from Employee
Stock Ownership Plan ........................ 257,143 257,143
Dividends on Series B preferred stock ......... (34,903) (34,903)
Net Income .................................... 320,727 320,727
______________ _______________
Balance, March 31, 1995 ..................... (43,806,103) (1,458,517) (494,285) (4,115,561)
______________ _____________ _____________ _______________
Issuance of common stock with the
exchange of $25,000 of Convertible
Subordinated Debentures, 2,675 shares 1,334
Issuance of common stock with the
exchange of $784,000 of Promissory
Notes, 78,400 shares ........................ 41,620
Issuance of Series B stock with the
exchange of $784,000 of Promissory
Notes, 33,068 shares ........................ 330,680
Issuance of stock from treasury for
employee stock options, 94,660 shares ...... 283,980 33,006
Issuance of stock from treasury for
employment service awards, 800 shares . 2,400 344
Payments on receivable from Employee
Stock Ownership Plan ........................ 257,143 257,143
Dividends on Series B Preferred Stock ......... (85,916) (85,916)
Net loss .................................... (5,706,990) (5,706,990)
______________ _______________
Balance, March 31, 1996 ..................... (49,599,009) (1,172,137) (237,142) (9,244,340)
______________ _____________ _____________ _______________
Reduction of common stock with the
reversal of $30,000 of 15% notes
payable to Convertible Subordinated
Debentures, 3,213 shares ..................... (703)
Issuance of common stock with the
exchange of $370,000 of Convertible
Subordinated Debentures into 4% notes
payable, 50,690 shares ..................... 15,851
Issuance of Series B Preferred stock with
the exchange of $370,000 Convertible
Subordinated Debentures into 4% notes
payable, 4,810 shares ........................ 48,100
Issuance of common stock with the
exchange of $177,000 15% notes payable
into 4% notes payable, 17,700 shares ...... 5,487
Issuance of Series B preferred stock with the
exchange of $177,000 15% notes payable
into 4% notes payable, 7,546 shares ......... 75,460
Issuance of common stock with the
exchange of $2,000,000 Convertible
Subordinated Debentures into equity,
795,393 shares .............................. 2,620,469
Issuance of common stock with the
exchange of $4,973,500 4% notes
payable into equity 2,486,750 shares ......... 4,927,436
Issuance of stock for exercise of warrants,
2,092,500 shares ........................... 200,000
Issuance of stock from treasury for
employment service awards, 1,200
shares ....................................... 3,600 510
Issuance of common stock purchase
warrants to shareholder ..................... 600,000
Payments on receivable from Employee
Stock Ownership Plan ........................ 237,142 237,142
Dividends on Series B Preferred Stock ......... (93,795) (93,795)
Net loss .................................... (1,258,731) (1,258,731)
______________ _______________
Balance, March 31, 1997 ..................... $ (50,951,535) $ (1,168,537) $ - $ (1,867,115)
============== ============= ============= ===============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

11
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

a. NATURE OF BUSINESS: Xyvision, Inc. (the "Company"), which operates in a
single industry segment, designs and markets software for publishing,
document management, color design, and prepress applications.

b. BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Xyvision, Inc. and all its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.

c. CASH: The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or lower to be cash equivalents.

d. INVENTORIES: Inventories are stated at the lower of cost, determined
under the first-in, first-out method, or market.

e. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Major
renewals and improvements are capitalized while repair and maintenance
charges are expensed when incurred. Depreciation and amortization are
computed on a straight-line basis over the useful lives of the assets,
except for leasehold improvements that are amortized over the lesser of
the term of the lease or the estimated useful life of the related asset.
When assets are sold or retired, their cost and related accumulated
depreciation are removed from the accounts. Any gain or loss is included
in income.

The following lives are used to provide for depreciation and amortization:

<TABLE>
<S> <C>
LIVES IN YEARS
______________
Design, test, and manufacturing equipment 2-5
Office furniture and fixtures ............ 7
Leasehold improvements ..................... 2-10
Purchased software ........................ 5
Delivery and service vehicles ............ 3
</TABLE>

f. REVENUE RECOGNITION: Revenues from equipment, software, and supplies are
recognized upon shipment. Maintenance revenues are recognized over the
contractual periods and noncontractual maintenance services are recognized
as the services are provided.

g. SOFTWARE DEVELOPMENT COSTS: Costs for research, design, and development
of software for sale to others incurred prior to the achievement of
"technological feasibility" are charged to expense. The Company
capitalizes certain software costs in accordance with Statement of
Financial Accounting No. 86, "Accounting for costs of computer software to
be sold, leased or otherwise marketed." The Company's policy is to
amortize capitalized software costs by the greater of (a) the ratio that
current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the
straight-line method over the remaining estimated life of the product
including the period being reported on. It is reasonably possible that
those estimates of anticipate future gross revenues, the remaining
estimated economic life of the product, or both will be reduced
significantly in the near term. As a result, the carrying amount of the
capitalized software costs may be reduced materially in the near term.

h. INCOME TAXES: The Company follows the provisions of Financial Accounting
Standards Board Statement ("FAS") No. 109, "Accounting for Income Taxes."
Income tax expense is based on reported earnings before income taxes.
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial statement
purposes and such amounts recognized for tax purposes. These deferred
taxes are measured by applying currently enacted tax rates. Applicable tax
credits are recognized as a reduction in the provision for income taxes in
the year in which they are available.

12
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

i. WARRANTY COSTS: The Company warrants the majority of its products for 90
days from the date of customer acceptance. Estimated warranty costs are
provided at the time of sale. Warranty costs incurred by the Company have
not been significant.

j. EARNINGS (LOSS) PER SHARE: Net income per common share is based upon the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares are included in the per share
calculations where the effect of their inclusion would be dilutive. Net
loss per common share is based upon the wieghted average number of common
shares outstanding during the period. Common equivalent shares result from
the assumed exercise of outsanding stock options, the proceeds of which
are then assumed to have been used to repurchase outstanding common stock
using the treasury method. Fully diluted net income per share is not
materially different from the reported primary net income per share for
all periods presented.

k. CONCENTRATION OF CREDIT RISK: Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally
of trade receivables.

Concentrations of credit risk with respect to trade receivables are due to
the number of customers operating primarily in the electronic publishing
industry, which includes commercial publishers, printers, and trade shops.

l. USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates
included in the financial statements are accounts receivable and sales
allowances, as well as the amount of capitalized software costs. Actual
results could differ from those estimates.

m. NEW ACCOUNTING PRONOUNCEMENT: The Financial Accounting Standards Board
("the FASB") issued Statement No. 128 ("SFAS 128"), "Earnings per Share,"
which modifies the way in which earnings per share ("EPS") is calculated
and disclosed. Currently, the Company discloses primary EPS. Upon adoption
of this standard for the fiscal period ending December 31, 1997, the
Company will disclose basic EPS. Basic EPS excludes dilution and common
stock equivalents and is computed by dividing income available to common
shareholders by the weighted average number of Common Shares outstanding
for the period. The adoption of SFAS 128 is not expected to have a
material impact on the earnings per share calculation. The Company will
implement SFAS 128 as of December 31, 1997.

2. Accounts Receivable

Trade receivables do not contain any material amounts collectible over a
period in excess of one year.

3. Inventories

Inventory consists primarily of finished goods from third party vendors.

4. Property and Equipment

Property and equipment consists of:

<TABLE>
<S> <C> <C>
MARCH 31, 1997 MARCH 31, 1996
________________ ________________
Design, test, and manufacturing equipment $ 2,419,587 $ 2,553,670
Office furniture and fixtures ............ 577,509 1,171,997
Leasehold improvements ..................... 1,260,503 1,209,949
Purchased software ........................ 278,573 219,543
Delivery and service vehicles ............ 9,333 9,333
_______________ _______________
4,545,505 5,164,492
Accumulated depreciation and amortization (3,813,180) (4,440,403)
_______________ _______________
$ 732,325 $ 724,089
=============== ===============
</TABLE>

13
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Depreciation and amortization expense for property and equipment for
fiscal 1997, 1996 and 1995 was $483,000, $777,000 and $919,000, respectively.

5. Other Assets

Other assets consists of the following, which are presented net of any
accumulated amortization

<TABLE>
<S> <C> <C>
MARCH 31, 1997 MARCH 31, 1996
________________ ________________
Capitalized software costs $ 2,269,449 $ 1,944,626
Debenture issuance costs ... 14,242 47,703
Other ..................... 116,216 210,674
_______________ _______________
$ 2,399,907 $ 2,203,003
=============== ===============
</TABLE>

Capitalized software costs amortized and charged to expense were
$1,152,000, $1,357,000, and $1,143,000 in fiscal 1997, 1996, and 1995,
respectively. Capitalized software costs are presented net of accumulated
amortization of $4,447,000 and $3,294,000 at March 31, 1997 and 1996,
respectively.

Debenture issuance costs amortized and charged to expense were $6,000,
$10,000, and $10,000, in fiscal 1997, 1996, and 1995, respectively. In
addition, as a result of the exchange of Debentures in fiscal 1997 related
Debenture issuance costs of $27,000 were written off as a reduction to the
extraordinary gain recognized in fiscal year 1997. The accumulated amortization
of the Debenture issuance costs was $770,000 and $737,000 at March 31, 1997 and
1996, respectively. (See Note 9.)

6. Other Current Liabilities

Other current liabilities consists of:

<TABLE>
<S> <C> <C>
MARCH 31, 1997 MARCH 31, 1996
________________ ________________
Deferred service revenue ...... $ 1,242,825 $ 1,419,587
Interest payable on debentures 487,089 1,093,622
Other ........................... 398,897 540,199
_______________ _______________
$ 2,128,811 $ 3,053,408
=============== ===============
</TABLE>

7. Note Payable to Shareholder

On June 30, 1992, the Company obtained a $2,000,000 line of credit with
Tudor Trust (the "investor"), the largest stockholder of the Company. Mr.
Jeffrey Neuman, trustee of the investor, also, serves as Chairman of the Board
of Directors of the Company. The line, which is payable on demand, is
collateralized by substantially all of the assets of the Company and has been
used for working capital and general business purposes. Interest on the line of
credit is payable monthly. The Company issued 400,000 shares of common stock
and a common stock purchase warrant for 100,000 shares of common stock at an
exercise price of $.50 per share to the investor for no additional
consideration upon signing of the line of credit. In addition, as required by
the line of credit, from September 30, 1992 through June 30, 1993, the Company
granted the investor four additional common stock purchase warrants, each
covering 100,000 shares of common stock. On September 28, 1993, the Company and
the investor amended the line of credit. Under the terms of this amendment: (i)
the amount available under the line of credit was increased from $2,000,000 to
$2,500,000; (ii) the annual interest rate was reduced from 13% to 10%; and
(iii) the term of the line of credit was extended from June 30, 1994 to June
30, 1995. In consideration of such changes, the Company: (i) reduced the
exercise price of 200,000 and 100,000 common stock purchase warrants
exercisable by the investor from $.50 and $.25 per share, respectively, to $.09
per share (the fair market value of the common stock on September 28, 1993);
(ii) issued 200,000 shares of common stock and a warrant to purchase 300,000
shares of

14
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

common stock at an exercise price of $.09 per share to the investor for no
additional consideration; and (iii) agreed to grant the investor up to eight
additional warrants, each covering 125,000 shares of common stock at an
exercise price at the lesser of the fair market value of the common stock on
the date of issue or $1.00 per share.

On December 3, 1993, the Company and the investor entered into an
additional amendment to the line of credit. Under the terms of this amendment,
the amount available under the line of credit was increased to $3,000,000. In
consideration of this change, the Company: (i) issued 100,000 shares of common
stock and a warrant to purchase 500,000 shares of common stock at fair market
value of the common stock on December 3, 1993 and (ii) agreed to grant the
investor up to seven additional common stock purchase warrants between December
31, 1993 and June 30, 1995, each covering 200,000 shares of common stock at an
exercise price at the lesser of the fair market value of the common stock on
the date of grant or $1.00 per share (these warrants are in lieu of the last
seven of the warrants referred to in clause (iii) of the preceding paragraph).

On February 29, 1996, the Company and the investor entered into an
additional amendment to the line of credit. Under the terms on this amendment,
the amount available under the line of credit was increased to $4,000,000 and
the term of the line of credit was extended to December 31, 1997. In
consideration of these changes, the Company granted the investor a common stock
purchase warrant for 200,000 shares of common stock at an exercise price of
$.10 per share (the fair market value of the common stock on the date of
issuance of such warrant) and agreed to continue to grant the investor, for
each fiscal quarter for which amounts are outstanding under the credit line, a
common stock purchase warrant for 200,000 shares of common stock provided that
the number of shares subject to the warrant shall be 325,000 (rather than
200,000 shares in the event that the maximum amount of outstanding credit line
advances on one or more dates during the quarter ending on the issue date of
such warrant exceeds $3,000,000). The exercise price of the first five warrants
(beginning with the warrant for the quarter ended September 30, 1995) will be
at the lesser of the fair market value of the common stock on the date of the
grant or $1.00 per share while the exercise price of the final five warrants
will be the fair market value of the common stock on the date of the grant.

Late in fiscal 1996, management of the Company concluded that, due
principally to the significant losses from operations in the third and fourth
quarters of fiscal 1996 (which amounted to approximately $1.8 million and $2.5
million, respectively), the Company's $4,000,000 credit line would be
insufficient to finance the Company's cash needs during the first quarter of
fiscal 1997. Accordingly, after investigating a number of alternative sources
of financing, the Company entered into an amendment to its line of credit
agreement with Tudor Trust, effective as of May 31, 1996, pursuant to which (a)
Tudor Trust agreed to (i) increase the maximum loan amount to $5,000,000, (ii)
reduce the interest rate on the line of credit from 10% to 8% per annum, (iii)
eliminate any borrowing covenants or conditions that would prevent the Company
from accessing the full $5,000,000 of available credit, and (iv) eliminate the
requirement for the issuance of additional warrants to Tudor Trust under the
line of credit (which were issuable on a quarterly basis), and (b) in
consideration therefor, the Company issued to Tudor Trust warrants for
10,000,000 shares of common stock of the Company at an exercise price of $.10
per share (representing the parties' understanding as to the fair market value
of the common stock of the Company as of the date of warrant issuance). On July
11, 1997, the Company received an independent third-party calculation of the
fair market value of the common stock of the Company as of the date of warrant
issuance of $.18 per share. On July 15, 1997, the Company and Tudor Trust
agreed to amend the warrants to increase the exercise price to $.18 per share.
In connection with this line of credit amendment, Tudor Trust exercised
warrants for the purchase of 2,092,500 shares of common stock of the Company,
for an aggregate purchase price of $200,000.

On July 14, 1997, the Company received an independent third-party
calculation of the value of the common stock purchase warrants as of the date
of warrant issuance of $.06 per warrant. The value of the warrants is being
amortized on a straight-line basis over the two year term of the credit line.
As a result of this calculation, the Company amortized additional interest
expense of $250,000 in the fourth quarter of fiscal 1997.

In early fiscal 1998, the Company and the investor agreed in principle on
an amendment to the line of credit that would increase the maximum loan amount
thereunder from $5,000,000 to $6,000,000. Such amendment would also provide
that the investor shall have the sole discretion to decide whether or not to
make any and all advances of funds in excess of $5,000,000, and that the
investor shall have the right to refuse to make any advances of any such funds
in excess of $5,000,000 for any reason or no reason.

As of March 31, 1997, the Company had an outstanding credit line balance
of $4,900,000. As of July 15, 1997, the Company was fully utilizing the credit
available under the amended line of credit.

15
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. Long-Term Debt

Long-term debt consists of:

<TABLE>
<S> <C> <C>
MARCH 31, MARCH 31,
1997 1996
___________ ___________
6% Convertible Subordinated Debentures ......... $1,375,000 $3,710,000
15% promissory notes, due fiscal 1996 ......... 86,364 353,597
4% promissory notes, due fiscal 1998 and 1999 735,000 5,420,500
___________ ___________
2,196,364 9,484,097
Less: Current portion of long-term debt ...... 2,031,364 4,063,597
___________ ___________
$ 165,000 $5,420,500
=========== ===========
</TABLE>

In May 1987, the Company issued $25,000,000 of Debentures convertible into
common stock at a conversion price of $22.50 per share. Interest on the
Debentures is payable annually (on May 5th) and the Debentures may be called by
the Company under certain conditions. At the beginning of fiscal 1992, the
Company had outstanding $22,410,000 of these Debentures. This was a significant
amount of debt for the Company and represented an annual cash interest payment
obligation of $1,344,600. During fiscal 1992, the Company began a program to
restructure its financial position, specifically, these Debentures.

16
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

of Series B Preferred Stock are entitled to voting rights equivalent to the
rights attributable to the whole shares of common stock into which the shares
of Series B Preferred Stock are convertible. The exchange transactions were
completed assuming a fair value of $10 per share of Series B Preferred Stock.
As of March 31, 1997, 15% Promissory Notes in an aggregate principle amount of
$60,000 and accrued interest of $26,000 were overdue. The Company may seek to
restructure the remaining 15% Promissory Notes but there can be no assurance
that it will do so.

As of March 31, 1997, the Company has completed transactions with holders
of an aggregate of $4,974,000 principal amount of the then outstanding 4%
Promissory Notes. Under the terms of the exchange agreements, the holders of
the 4% Promissory Notes exchanged their 4% Promissory Notes for such number of
shares of common stock of the Company as is equal to the principal amount of
the 4% Promissory Notes exchanged divided by $2.00 (any accrued but unpaid
interest was paid in cash as the time of such exchange). The Company has
accounted for the conversions as a contribution of capital by significant
shareholders.

On September 30, 1996, the Company completed transactions with investors
holding an aggregate amount of $2,000,000 principal amount of the Debentures.
Under the terms of the agreement, holders of Debentures exchanged their
Debentures for such number of shares of common stock of the Company as is equal
to the sum of the principal amount of the Debentures exchanged plus the accrued
interest thereon, divided by $3.33. As of March 31, 1997, a total of $1,375,000
principal amount of Debentures remained outstanding. Of such Debentures, the
Company has identified the holders of $315,000 principal amount, leaving the
holders of $1,060,000 principal amount of Debentures unidentified. The Company
has accounted for the conversions as a contribution of capital by significant
shareholders.

Interest expense amounted to $1,007,000, $807,000, and $528,000, in fiscal
1997, 1996, and 1995, respectively.

9. Income Taxes

For fiscal years 1997, 1996, and 1995 the Company was not required to
provide for income taxes and had no effective income tax rate due to the
utilization of net operating loss carryforwards. The Company was not required
to make an alternative minimum tax payment in fiscal 1996 or 1997. Payment of
alternative minimum tax amounted to $14,000 in fiscal 1995.

As of March 31, 1997, the Company had net operating loss carryforwards of
$48,864,000 expiring at various dates from fiscal 1998 to fiscal 2012,
investment tax credits of $150,000 expiring at various dates from fiscal 1998
to fiscal 2002, and research and development credits of $1,439,000 expiring at
various dates from fiscal 1998 to fiscal 2009. These items are available to
reduce future income taxes payable.

Additionally, the Company has approximately $2,500,000 of net operating
loss carryforwards for regular federal income tax and alternative minimum tax
purposes from the acquisition of Contex Graphics Systems, Inc. These acquired
net operating loss carryforwards, expiring at various dates from fiscal 1998 to
fiscal 2001, have limitations on their use pursuant to the United States
Internal Revenue Code and are available only to offset income from that
subsidiary.

17
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of March 31, 1997, 1996, and 1995 the Company's deferred tax assets of
approximately $20,157,000, $20,214,000 and $18,343,000, respectively, consisted
primarily of its net operating loss carryforwards. Management has assigned a
valuation allowance to fully offset the future tax benefits of these deferred
tax assets.

Under Federal tax laws, certain changes in ownership of the Company, which
may not be within the Company's control, may restrict future utilization of
these carryforwards.

10. Stock Option and Purchase Plans

a. Stock Option Plans

Under the Company's 1982 Stock Option Plan, options to purchase 1,647,057
shares of the Company's Common Stock may be granted to key employees,
consultants, and non-employee directors. Incentive stock options are
granted at a price equal to the fair market value per share on the date of
the grant and non-qualified stock options may be granted at not less than
85% of the fair market value per share on the date of the grant. Options
granted on or after January 1, 1987 generally become exercisable at a rate
of 20% per year over a five-year period with any shares issued upon
exercise not being subject to repurchase by the Company. The 1982 Stock
Option Plan expired on May 5, 1992. No options were granted under the 1982
Stock Option Plan after Ma31, 1992.

At the Company's June 23, 1992 Board of Directors' Meeting, the Board
approved a 1992 Stock Option Plan and an increase in the authorized number
of shares of the Company's Common Stock from 10,000,000 to 15,000,000
shares. The terms of the 1992 Stock Option Plan are essentially the same as
the 1982 Stock Option Plan. At this time the maximum number of options that
could be granted under the 1992 Stock Option Plan was 1,000,000 shares. The
1992 Stock Option Plan and the increase in authorized shares were both
approved by the Company's shareholders at the Company's 1992 Annual Meeting
of Stockholders held on October 21, 1992.

At the 1994 Annual Meeting of Stockholders on September 22, 1994, the
stockholders of the Company approved an amendment to the Company's 1992
Stock Option Plan increasing the number of shares for which options may be
granted from 1,000,000 to 2,000,000.

The following sets forth certain information relating to the 1982 Stock
Option Plan and the 1992 Stock Option Plan for the years ended March
31,1995, 1996, and 1997:

<TABLE>
<S> <C> <C>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
_________ __________________
Options outstanding at March 31, 1994 1,026,750 $.41
Granted ........................... 297,500 .26
Cancelled ........................... (98,633) .35
Exercised ........................... -
_________
Options outstanding at March 31, 1995 1,225,617 .35
Granted ........................... 277,293 .93
Cancelled ........................... (237,895) .48
Exercised ........................... (94,660) .35
_________
Options outstanding at March 31, 1996 1,170,355 .49
Granted ........................... 1,393,000 .50
Cancelled ........................... (460,550) .40
Exercised ........................... -
_________
Options outstanding at March 31, 1997 2,102,805 $.52
=========
</TABLE>

Options were exercisable for 683,308 and 427,094 shares of Common Stock at
March 31, 1996 and 1997, respectively. At March 31, 1996 and 1997, options
for the purchase of 979,906 and 31,096 shares of Common Stock,
respectively, were available for future grants under the 1992 Stock Option
Plan. At March 31, 1997, there were 2,133,901 shares of Common Stock
reserved for issuance under these Plans.

18
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
__________________________________________________________________________ __________________________________
Weighted-Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
_________________ ___________ _________________ _______________ ___________ _______________
$0.19 to $.29 115,000 7.15 $ .26 47,000 $ .26
0.30 to .49 353,260 5.23 .34 312,785 .34
0.50 to .69 1,397,500 9.54 .50 11,000 .52
0.70 to 0.89 7,500 4.46 .81 7,500 .81
0.90 to 5.00 229,545 8.29 1.01 48,809 1.21
___________ ___________
$0.19 to $5.00 2,102,805 8.53 $ 0.52 427,094 $ 0.45
=========== ===========
</TABLE>

On October 21, 1992, the 1992 Director Stock Option Plan was approved by
stockholders of the Company. Under this Plan, options to purchase up to a
total of 150,000 shares of Common Stock may be granted to outside directors
of the Company. On March 31, 1993, an option for 20,000 shares of Common
Stock at an exercise price of $0.25 per share (the fair market value of the
Common Stock on the date of grant) was granted to each of the four outside
directors of the Company. Each outside director who is initially elected to
the Board of Directors after March 31, 1993 will also be granted an option
for 20,000 shares of Common Stock, at an exercise price equal to the fair
market value of the Common Stock on the date of grant. Each option becomes
exercisable in five equal annual installments beginning on the date of
grant, provided that all outstanding options will become exercisable in
full in the event of a "change in control" of the Company (as defined in
the Plan) which is not approved by the Board of Directors. In general, an
optionholder may exercise his option, to the extent vested, only while he
is a director of the Company and for up to three months thereafter. In
connection with the adoption of the 1992 Director Stock Option Plan, the
Company terminated the 1989 Director Stock Option Plan. In addition, each
of the four outside directors who received options under the 1992 Director
Stock Option Plan on March 31, 1993 surrendered for cancellation the option
held by him under the 1989 Director Stock Option Plan.

On January 8, 1990, the Board of Directors granted options to purchase
42,500 shares of the Company's Common Stock to former officers of the
Company. These non-qualified stock options were granted outside the
Company's 1982 Stock Option Plan at an exercise price of $2.50 per share
and are immediately exercisable. At March 31, 1997, there were 42,500
shares reserved for issuance for these options.

In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 is effective for periods beginning after December
15, 1995. SFAS 123 requires that companies either recognize compensation
expense for grants of stock, stock options and other equity instruments
based on fair value, or provide pro forma disclosure of net income and
earnings per share in the notes to the financial statements. The Company
adopted the disclosure provisions of SFAS 123 in 1997 and has applied APB
Opinion 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its stock option
plans. The fair value of each option granted during fiscal 1997 and 1996 is
estimated on the date of the grant using the Black-Scholes pricing model
with the following assumptions:

<TABLE>
<S> <C> <C>
FISCAL FISCAL
1997 1996
_______ ______
Dividend yield ......... none none
Expected volatility ...... 80.0% 80.0%
Risk-free interest rate 6.3% 6.8%
Expected life (years) ... 10.0 10.0
Weighted average fair value of options granted at fair
value during:
Fiscal 1997 ............ $ 0.43
Fiscal 1996 ............ $ 0.79
</TABLE>

19
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Had compensation cost for the Company's fiscal 1997 and 1996 stock option
grants been determined consistent with SFAS No. 123, "Accounting for
Stock-based Compensation, the Company's net loss allocable to common
stockholders and net loss per share would approximate the pro forma
amounts below:

<TABLE>
<S> <C> <C>
NET LOSS
ALLOCABLE TO COMMON NET LOSS
STOCKHOLDERS PER SHARE
______________ ___________
As reported:
Fiscal 1997 $ (1,352,526) (.11)
Fiscal 1996 (5,792,906) (.66)
Pro Forma:
Fiscal 1997 $ (1,453,344) (.12)
Fiscal 1996 (5,820,318) (.67)
</TABLE>

The effects of applying Statement of Financial Accounting Standards No.
123 in this pro forma disclosure are not indicative of future amounts.
Statement of Financial Accounting Standards No. 123 does not apply to
awards made prior to fiscal year 1996. Additional awards in future years
are anticipated.

b. Stock Purchase Plan

In 1990, the Board of Directors adopted and the stockholders approved the
Company's 1990 Employee Stock Purchase Plan (the "1990 Purchase Plan"). The
1990 Purchase Plan covers an aggregate of up to 420,000 shares of Common
Stock to be issued and sold to participating employees of the Company
through a series of six overlapping one-year offerings, commencing six
months apart, beginning August 1, 1990 and ending January 31, 1994. The
1990 Purchase Plan was administered by the Compensation Committee and was
intended to qualify as an "employee stock purchase plan" within the meaning
of Section 423 of the Internal Revenue Code. All employees who have been
employed by the Company (or a qualifying subsidiary) for 30 days on the
date an offering under the 1990 Purchase Plan commences and who ordinarily
work more than 20 hours per week and more than five months per year were
eligible to participate in that offering. The price at which the shares
were offered is 85% of the fair market value of the Common Stock on the
date such offering commences or the date such offering terminates,
which-ever is lower. Each employee could elect to have up to 10% of his
base pay withheld and applied toward the purchase of shares in such
offering. The 1990 Purchase Plan terminated January 31, 1994.

11. Rights Agreement

In October 1988, the Company entered into a Rights Agreement and declared
a dividend distribution of one Right for each share of the Common Stock of the
Company outstanding on October 26, 1988. Each Right entitles the holder to
purchase from the Company 1/100 of a share of $1.00 par value Series A Junior
Participating Preferred Stock at an exercise price of $35.00 per Right, subject
to adjustment. The Rights will not be exercisable or separable from the Common
Stock until ten business days after a party acquires beneficial ownership of
20% or more of the Company's Common Stock or announces a tender offer for at
least 30% of its Common Stock outstanding. Except for Saltzman Partners' and
Tudor Trust's acquisition of 20% of the Company's Common Stock, which have been
exempted by the Board of Directors from the Rights Agreement, the Company is
not aware of the occurrence of any such events. The issuance of the Rights does
not dilute ownership or affect reported earnings per share.

12. Profit-Sharing and Savings Plans

a. Employee Stock Ownership Plan

In fiscal 1990, the Company created the Xyvision, Inc. Employee Stock
Ownership Plan and Trust (the

20
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

"Trust") and entered into a Term Loan Agreement with the Trust whereby the
Trust borrowed $1,800,000 from the Company and paid the proceeds to the
Company to purchase 400,000 shares of the Company's Common Stock at $4.50
per share. The loan, with an interest rate of prime plus one-half of one
percent, is to be repaid over seven years in equal annual installments of
approximately $257,000. The Company is required to make equal annual
contributions to the Trust in the amounts of the Trust's annual principal
installments. The Company also makes monthly contributions to the Trust
which uses such funds to pay monthly interest installments to the Company.
The Plan covers substantially all employees and, as principal payments are
made on the term loan, shares held by the Trust are allocated to eligible
employees. Payments of approximately $237,000 for fiscal 1997 and $257,000
in each of fiscal 1996 and 1995, were made to the Trust, which the Trust
applied against its loan to the Company. These payments caused an
allocation to the eligible employees of 52,698 shares of the Company's
Common Stock for fiscal 1997, and 57,143 shares of the Company's Common
Stock for each of fiscal 1996 and 1995.

The Company charged $87,000 in fiscal 1997 and $257,000 in each of fiscal
1996 and 1995, respectively, to operations for contributions to this trust.

b. Savings Plan

The Company has a 401(k) Savings Plan under which employees may voluntarily
defer a portion of their compensation and the Company matches a portion of
the employee deferral. All employees employed within the United States with
at least three months of continuous service are eligible for the Plan.
Company contributions vest 100% immediately. The Company's contributions to
this Plan and charges to expense amounted to $67,000, $65,000, and $58,000
in fiscal 1997, 1996, and 1995, respectively.

13. Commitments and Contingencies

a. Leases

At March 31, 1997, the Company was committed under operating leases,
principally for building and office space. Certain leases require the
payment of expenses under escalation clauses. The major facilities lease is
for a two year term, ending February 16, 1998.

Future minimum lease payments under all noncancelable leases as of March
31, 1997 are as follows:

<TABLE>
<S> <C>
FISCAL YEAR
____________
1998 ...... 1,014,000
1999 ...... 150,000
2000 ...... 150,000
2001 ...... 150,000
2002 ...... 143,000
Thereafter 257,000
___________
Total $1,864,000
===========
</TABLE>

Rental expense under all operating leases was approximately $742,000,
$1,200,000, and $1,185,000, in fiscal 1997, 1996, and 1995, respectively.

b. Employment Agreements

The Company has entered into employment agreements with certain of its
executive officers which provide for the payment to these executives of up
to twelve months of compensation and the continuation of certain benefits
if there is a change in control of the Company (as defined) or if
employment is terminated without cause. The maximum contingent liability,
at March 31, 1997, under these agreements was approximately $200,000.

21
<PAGE>
<PAGE>

XYVISION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has also instituted a severance benefit plan which covers
substantially all employees. The Plan stipulates, in general, that in the
event of a change in control of the Company (as defined), any employee
terminated within twelve months of such event, without cause, would be
entitled to receive a cash payment equal to his annual base compensation.
The Board of Directors may declare by resolution that an event otherwise
constituting a change in control per this Plan will not be considered a
change in control. Therefore, it can not be reasonably estimated what the
potential liability to the Company would be under this Plan.

c. Contingencies

The Company is party to several pending legal proceedings and claims.
Although the outcome of such proceedings and claims cannot be determined
with certainty, the Company's counsel and management are of the opinion
that the final outcome should not have a material adverse effect on the
Company's operations or financial position.

14. Major Customers and Geographic Revenues

No single customer accounted for more than 10% of revenues in fiscal 1997,
1996, or 1995.
Sales to unrelated customers by geographic region for fiscal 1997, 1996,
and 1995 were as follows:

<TABLE>
<S> <C> <C> <C>
FISCAL 1997 FISCAL 1996 FISCAL 1995
______________ ______________ _____________
North America ... $ 15,537,000 $ 15,578,000 18,080,000
Western Europe 5,312,000 5,339,000 5,182,000
Asia ............ 1,385,000 1,337,000 1,043,000
Australia ...... - 160,000 254,000
_____________ _____________ _____________
Total ......... $ 22,234,000 $ 22,414,000 24,559,000
============= ============= =============
</TABLE>

15. Related Parties

The Company had an agreement to pay consulting fees, which amounted to
$131,000, $194,000, and $148,000 in fiscal 1997, 1996, and 1995, respectively,
to T.H. Conway and Associates, Inc. These amounts are in lieu of salary and
benefit payments to Mr. Conway. Mr. Conway, formerly President, Chief Executive
Officer and Director of the Company, is the President and owner of the firm.

The Company has a line of credit with Tudor Trust, the largest stockholder
of the Company. Mr. Jeffrey Neuman, trustee of Tudor Trust, also serves as
chairman of the Board of Directors of the Company. As a result of the
outstanding line of credit balance, the Company paid Tudor Trust $416,000 in
fiscal 1997 and as a result of the 15% Promissory Note Exchange programs
(described in Note 8 to the consolidated financial statements), the Company
paid an additional $37,000 to Tudor Trust in fiscal 1997.

22
<PAGE>
<PAGE>

Part IV, Item 14 of the Form 10-K of hte Company is hereby amended and restated
in its entirety as follows:

PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

a. (1) Financial Statements

The following financial statements of Xyvision are included in Part II,
Item 8.
PAGE(S) IN
FORM 10-K/A----------
Report of Independent Accountants ....................................7
Consolidated Balance Sheets-March 31, 1997 and 1996 ..................8

Consolidated Statements of Operations
for the years ended March 31, 1997, 1996 and 1995 .....................9

Consolidated Statements of Cash Flows
for the years ended March 31, 1997, 1996 and 1995 .....................10

Consolidated Statements of Changes in Stockholders' Deficit
for the years ended March 31, 1995, 1996 and 1997 ..................11

Notes to Consolidated Financial Statements ........................12-22

a. (2) Financial Statement Schedules

Financial statement schedules have been omitted because they are either not
required, not applicable or because the required information has been
included elsewhere in the financial statements or notes thereto.

b. Reports on Forms 8-K

No reports on Form 8-K were filed in the last quarter of the Company's
fiscal year ended March 31, 1997.

c. Exhibits

The Exhibits listed in the Exhibit Index immediately preceding such
exhibits are filed as part of this Annual Report on Form 10-K/A.

23
<PAGE>
<PAGE>

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-K/A amending its Annual Report on Form
10-K for the fiscal year ended March 31, 1997 to be signed on its behalf by the
undersigned, thereunto duly authorized.
XYVISION, INC.
Date:
July 15, 1997
/s/ Eugene P. Seneta
------------------------------------------------

Eugene P. Seneta

Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)

24
<PAGE>
<PAGE>

XYVISION, INC.

COMMISSION FILE NUMBER 0-14747
FORM 10-K/A
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
INDEX TO EXHIBITS

<TABLE>
<S> <C> <C>
Exhibit
Number Description
- --------------------------------------------------------------------------------
*3.1 - Restated Certificate of Incorporation of the Company .................................
+++3.2 - Certificate of Amendment No. 6 to Certificate of Incorporation of the Company .........
A 3.3 - Certificate of Amendment to Certificate of Incorporation ..............................
A 3.4 - Certificate of Designation to Certificate of Incorporation of the Company designating
Series B Preferred Stock ...............................................................
******3.5 - Amended and Restated By-laws of the Company as amended ..............................
B 3.6 - Certificate of Amendment of Amended & Restated Certificate of Incorporation .........
***4.1 - Indenture dated as of May 5, 1987 between the Company and Bankers Trust Com-
pany, as Trustee, regarding the Company's $25,000,000 principal amount of 6%
Convertible Subordinated Debentures Due 2002 ..........................................
****4.2 - Rights Agreement, dated as of October 19, 1988, between Xyvision, Inc. and the
Connecticut Bank and Trust Company, N.A. ................................................
++4.3 - Amendment No. 1, dated January 8, 1992, to Rights Agreement between Xyvision,
Inc. and Mellon Bank, N.A. (formerly Connecticut Bank and Trust Company,
N.A.) .................................................................................
A 4.4 - Amendment No. 2, dated September 16, 1992, to Rights Agreement between Xyvi-
sion, Inc. and Mellon Bank, N.A. (formerly Connecticut Bank and Trust Company,
N.A.) .................................................................................
A 4.5 - Amendment No. 3, dated January 2, 1996, to Rights Agreement between Xyvision,
Inc. and Mellon Bank, N.A. (formerly Connecticut Bank and Trust Company,
N.A.) .................................................................................
0++10.1 - 1992 Stock Option Plan ...............................................................
** 10.2 - Lease dated April 3, 1985 for the Company's premises at 101 Edgewater Drive,
Wakefield, Massachusetts, between Edward Callan and the Company (the
"Edgewater Lease") .....................................................................
X 10.3 - Form of Lease Amendment No. 2 to the Edgewater Lease .................................
A 10.4 - Form of Sublease Agreement to the Amended Edgewater Lease ...........................
X 10.5 - Secured Advance Facility Loan Agreement between the Company and Tudor Trust
dated July 2, 1992, as amended to date ................................................
A 10.6 - Second Amendment dated February 29, 1996, to the Amended Secured Advance
Facility Loan Agreement between the Company and Tudor Trust ...........................
A 10.7 - Third Amendment dated May 31, 1996, to the Amended Secured Advance Facility
Loan Agreement between the Company and Tudor Trust ....................................
0****** 10.8 - Severence Program for Executive Committee Corporate Officers ........................
0****** 10.9 - Employee Severence Benefit Program ...................................................
0******10.10 - Employee Stock Ownership Plan and Trust .............................................
0*****10.11 - 1992 Director Stock Option Plan ......................................................
XX 10.12 - Form of Exchange Agreement for 15% Promissory Notes .................................
B 10.13 - Form of Exchange Agreement for 4% Promissory Notes ....................................
B 10.14 - Form of Exchange Agreement for 6% Convertible Subordinated Debentures due
2002 .................................................................................
+ 21.1 - List of Subsidiaries ..................................................................
23.1 - Consent of Independent Accountants ...................................................
27 - Financial Data Schedule ...............................................................
- --------------------------------------------------------------------------------
</TABLE>

<TABLE>
<S> <C>
* Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1988.
** Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-6015).
*** Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1987.
**** Incorporated by reference to the Company's Current Report on Form 8-K dated October 19, 1988.
***** Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 33-54018).
****** Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1990.
A Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996.
B Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
</TABLE>

25
<PAGE>
<PAGE>

XYVISION, INC.

COMMISSION FILE NUMBER 0-14747
FORM 10-K/A
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
INDEX TO EXHIBITS (CONT'D)

<TABLE>
<S> <C> <C>
Exhibit
Number Description
- --------------------------------------------------------------------------------
+ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1991.
++ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1992.
+++ Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1993.
0 Management contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant
to Items 14(a) and 14(c) of Form 10-K.
X Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1994.
XX Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1994.
</TABLE>

26
<PAGE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 261
<SECURITIES> 0
<RECEIVABLES> 6,193
<ALLOWANCES> (649)
<INVENTORY> 311
<CURRENT-ASSETS> 729
<PP&E> 14,486
<DEPRECIATION> (11,354)
<TOTAL-ASSETS> 9,977
<CURRENT-LIABILITIES> 11,679
<BONDS> 165
0
235
<COMMON> (933)
<OTHER-SE> (1,169)
<TOTAL-LIABILITY-AND-EQUITY> 9,977
<SALES> 22,234
<TOTAL-REVENUES> 22,234
<CGS> 11,828
<TOTAL-COSTS> 11,828
<OTHER-EXPENSES> 10,766
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 999
<INCOME-PRETAX> (1,359)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 100
<CHANGES> 0
<NET-INCOME> (1,259)
<EPS-PRIMARY> (.011)
<EPS-DILUTED> (.011)

</TABLE>

<PAGE>
CONSENT OF INDEPENDENT ACCOUNTS

We consent to the incorporation by reference in the registration
statements of Xyvision, Inc. on Form S-8 (File Nos. 33-10405, 33--15473,
33-29845, 33-29486, 33-36243, 33-41846, 33-54014, 33-54018 and 333-19529) of
our report dated July 15, 1997, which report disclaims an opinion on
consolidated financial statements of Xyvision, Inc. as of March 31, 1997 and
1996 and for each of the three fiscal years in the period ended March 31,
1997 due to uncertainties as to the Company's ability to continue as a going
concern.
/s/ Coopers & Lybrand L.L.P.

COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
July 15, 1997