SYNCRONYS SOFTCORP, 10KSB40/A, 1997-05-15

SYNCRONYS SOFTCORP
10KSB40/A, 1997-05-15
PREPACKAGED SOFTWARE

Previous: SYNCRONYS SOFTCORP, 10QSB/A, 1997-05-15

Next: SYNCRONYS SOFTCORP, 10QSB/A, 1997-05-15

<PAGE> 1

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

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-KSB/A

AMENDMENT NO. 1

ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED: JUNE 30, 1996

COMMISSION FILE NUMBER 0-25736
------------------------

SYNCRONYS SOFTCORP
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
NEVADA 33-0653223
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3958 INCE BOULEVARD
CULVER CITY, CA 90232
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 842-9203

SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE

SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $.0001 PAR VALUE
------------------------

Indicate by check mark whether the Issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Issuer 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 there is no disclosure of delinquent filers in
response to item 405 of Regulation S-B contained herein, and no disclosure will
be contained, to the best of the Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or in any amendment to this Form 10-KSB. X

The aggregate market value of the Issuer's Common Stock, $.0001 Par Value, held
by non-affiliates(1) of the Issuer, based on the closing sale price of the
Common Stock on September 20, 1996 as reported on the OTC Bulletin Board, was
$5,774,178.

As of September 20, 1996 there were 14,799,452 shares of the Issuer's Common
Stock, $.0001 Par Value, outstanding.

The Issuer's revenues for its most recent fiscal year were $12,797,786.

Transitional Small Business Disclosure Format (check one): Yes ___ No X

- ---------------
(1) Excludes the Common Stock, $.0001 Par Value, held by executive officers,
directors and shareholders whose ownership exceeds 5% of the Common Stock,
$.0001 Par Value, outstanding at September 20, 1996. Exclusion of such shares
should not be construed to indicate that any such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Issuer or that such person is controlled by or under common
control with the Issuer.
================================================================================
<PAGE> 2

SYNCRONYS SOFTCORP
FORM 10-KSB

TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
PART I
Item 1. The Business................................................................ 1
Item 2. Description of Properties................................................... 7
Item 3. Legal Proceedings........................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......................... 9

PART II
Item 5. Market for the Issuer's Common Equity and Related Shareholder Matters....... 10
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 10
Item 7. Financial Statements and Supplementary Data................................. 15
Item 8. Changes in and Disagreements with Accountants and Financial Disclosures..... 15

PART III
Item 9. Directors, Executive Officers and Control Persons; Compliance with Section 16
16(a) of the Exchange Act...................................................
Item 10. Executive Compensation...................................................... 18
Item 11. Security Ownership of Certain Beneficial Owners and Management.............. 19
Item 12. Certain Relationships and Related Transactions.............................. 20
Item 13. Exhibits and Reports on Form 8-K............................................ 22
Signatures.................................................................. 23
</TABLE>

<PAGE> 3

EXPLANATORY NOTE

This 10-KSB/A is being filed to amend the report on Form 10-KSB for the
period ended June 30, 1996 (the "Original Report") and to report the restatement
of certain financial information included in the Original Report.

In March 1997, the Securities and Exchange Commission issued a new
interpretation (the "Interpretation") for the accounting for convertible
preferred stock and convertible debt instruments issued with provisions
providing for conversion into common stock at a discount from the market price
of the common stock. The Interpretation provides that assured incremental yield
embedded in the conversion terms' discount from fair market value should be
accounted for as an additional interest expense in the case of convertible debt
and as a dividend to preferred shareholders in the case of convertible preferred
stock. Accordingly, the Company has restated its consolidated financial
statements for the year ended June 30, 1996 and for each of the two unaudited
quarters ended December 31, 1996. See Note 17 to the accompanying financial
statements. At June 30, 1996, compliance with the Interpretation resulted in a
non-cash charge to interest expense of $1.3 million, and accounted for a $0.10
increase in the Company's loss per share.

The Company believes that all material adjustments to the Company's
previously reported financial statements necessary for compliance with the
Interpretation have been recorded. This 10-KSB/A includes only the changes
necessary to reflect the restatement of the financial statements included in the
Original Report and the matters addressed in Note 17 of the Consolidated
Financial Statements, and does not address any other developments subsequent to
the date of the Original Report. For a discussion of other developments
subsequent to the date of the Original Report, including, but not limited to
pending litigation, registration of the Company's 1995 Stock Option Plan,
changes in management and acquisitions and licensing deals, see the Company's
most recent reports and other filings with the Securities and Exchange
Commission.

PART I

ITEM 1. THE BUSINESS

THE COMPANY

Syncronys Softcorp ("Syncronys" or the "Company") develops and markets
software products. The Company assumed its present form in May, 1995 as a result
of the merger of Seamless Software Corporation ("Seamless"), a Nevada
corporation, into the Company (then named Redstone Capital, Inc.). The Company
changed its name to Syncronys Softcorp immediately after the merger.

The Company was originally incorporated in Colorado in 1986 under the name
Signum, Inc. ("Signum"). Signum completed a public offering in December 1986,
but ceased all of its then-existing business operations (related to developing a
secure modem product to protect computer-based information) in 1988. In May
1994, Signum was reincorporated in Nevada under the name Redstone Capital, Inc.,
with its stock reverse split 1 for 400. All financial information and share data
contained herein has been adjusted to reflect this reverse stock split.

Seamless was a software developer and publisher with an office in Culver
City, California. Seamless was originally incorporated in Delaware on May 11,
1993 under the name Hypro Technologies, Inc. ("Hypro"). In March, 1995, Hypro
merged with a newly formed Nevada corporation for the purpose of changing its
domicile to Nevada and changing its name to Seamless. In April 1995, Seamless
acquired Autoship Systems Corporation ("Autoship"), a British Columbia
corporation engaged in the research, development and marketing of software for
the marine industry. In May 1995, Seamless merged into the Company. The Company
subsequently sold its investment in the Autoship subsidiary on March 1, 1996
(see "Part II -- Item 12. Certain Relationships and Related Transactions -- Sale
of Autoship Subsidiary", below for further discussion of this transaction).

1
<PAGE> 4

SOFTRAM95 PRODUCT RECALL

The Company announced on October 20, 1995 that it had identified a problem
with SoftRAM95, the net result of which is that RAM compression was not being
delivered to the Windows 95 operating system. The Company also announced a
comprehensive consumer program which included refunds, extended toll-free
customer assistance and a program to re-sticker all product in the retail
channel informing consumers that SoftRAM95 was suitable for Windows 3.1 only. As
this stickering program did not result in complete coverage of all inventory, on
December 18, 1995, the Company decided to avoid any potential consumer confusion
and/or liability and initiated the recall of SoftRAM95 from the retail channel.
As of September 20, 1996, approximately 200,000 units of SoftRAM and SoftRAM95
have been returned pursuant to the recall. While the Company believes that this
recall has been effectively completed, the Company anticipates some on-going
returns in minimal quantities. The Company has taken one time charges totaling
$12,344,652 in fiscal 1996 to provide for the costs of this recall, including
product returns in excess of normal reserves, legal fees and expenses and
settlement costs for litigation related to SoftRAM and SoftRAM95. Although the
Company believes that it has resources sufficient to pay these costs, the
ultimate impact of the recall on the Company's finances and results of
operations cannot be predicted with any certainty. Further, there can be no
assurances that the adverse consequences will not be severe. At this time the
Company is not distributing any of either its SoftRAM or SoftRAM95 product.

The SoftRAM95 problem resulted in several private lawsuits as well as
inquiries by the New York Regional Office of the Federal Trade Commission and
the Florida Attorney General's Office with respect to SoftRAM and/or SoftRAM95
(see "Item 3. Legal Proceedings", below). This problem and the related
litigation could have a material adverse effect on the reputation of the Company
and its products, the Company's ability to profitably market future versions of
SoftRAM and/or other products and/or the Company's financial condition and
results of operations.

PRODUCT DEVELOPMENT

The Company's development team is working on a new version of SoftRAM to be
known as SoftRAM3.0, which is designed to deliver RAM compression functionality
for Windows 95 and an improved version of SoftRAM for Windows 3.1. The Company
is also developing and licensing from third party developers several other new
products.

The Company has not met a series of announced release dates and targets for
SoftRAM3.0 (formerly known as SoftRAM96) and currently has no announced release
date. This slippage is due to the complexity of the technological challenges
faced in RAM compression, particularly under Windows 95. As previously
announced, the Company has identified and pursued the development of various
independent components designed to add significant performance under Windows 3.1
and Windows 95. Many of these components are by nature technologically novel and
more extensive than originally expected. The Company has released a beta version
of one of these components. Management is not able to predict a release date for
SoftRAM3.0. Accordingly, there can be no assurance as to when, or if at all,
SoftRAM3.0 will be released. Certain of the Company's distributors and several
software retailers have indicated a willingness to restock SoftRAM when and if
the new version is available and its functionality is demonstrated.

There can be no assurance that SoftRAM3.0 or other new products will be
released by the Company or if released, that such release will be on a timely
basis. Nor can there be any assurance that any products will achieve any
significant degree of market acceptance or that such acceptance, if attained,
will be sustained for any significant period. As well, the Company's success
will depend in part on its ability to respond promptly to market feedback and
provide adequate technical support and service to customers and there can be no
assurance that the Company will be successful in so responding. There can be no
assurance that a market will develop for the Company's products, or that, if a
market does develop, that such products will be profitable or

2
<PAGE> 5

that profitability, if attained, can be sustained. Failure to complete on a
timely basis, or lack of demand for SoftRAM3.0 or other new products upon
completion and distribution, would have a material adverse effect upon the
Company and such adverse effect would be severe. If SoftRAM3.0 or other new
products do not achieve a significant degree of market acceptance, the adverse
consequences upon the Company would be severe.

The Company believes continued investment in research and development to
develop state-of-the-art technology for incorporation into its products is
required if it is to remain competitive in the marketplace. As well, the Company
must also maintain good relations with PC platform, operating system and
peripheral equipment vendors to enable it to develop and market competitive
software products.

The Company spent $1,521,374 and $676,037 on research and development
during fiscal years 1996 and 1995, respectively. None of the Company's research
and development costs for fiscal years 1996 or 1995 were borne directly by the
Company's customers.

As of September 20, 1996 the Company had a research and development staff
of 13 persons, comprised of both employees and consultants. In order to expand
the Company's product line, the Company intends to increase its research and
development staff during fiscal 1997. The market for persons with the skills
needed to develop technologically advanced software products is highly
competitive and any delay in hiring such persons could have an adverse impact on
the Company's ability to bring new products, including SoftRAM3.0, to market on
a timely basis.

The Company depends on the successful development of new products,
including both new titles and the adaptation of existing titles to new platforms
and technologies to expand its product offerings and to augment revenues from
products introduced in prior years that have declined in revenue prospects. The
Company also depends on upgrades of existing products to lengthen the life cycle
of such products. Finally, the Company must continually anticipate and adapt its
products to emerging personal computer platforms and environments. If the
Company's products become outdated and lose market share, or if new products or
existing product upgrades are not introduced when planned or do not achieve the
revenues anticipated by the Company, the Company's operating results could be
materially adversely affected.

The length of time required to develop the Company's products and product
upgrades typically ranges from nine to 24 months, as is common in the software
industry. In the past, the Company has experienced delays in the planned release
of new products or product upgrades from one to 12 months as a result of
completing development, product testing and quality assurance. There can be no
assurance that such delays from the planned product release dates will not occur
in the future. Additionally, there can be no assurance that the Company will be
able to release new products on schedule or that such new products, if released,
will achieve market acceptance. If a product's release is delayed, it may miss
an important selling season and the Company's expected return on its investment
in the product could be materially delayed or diminished.

MARKETING AND DISTRIBUTION

The Company sells its software products in the consumer market primarily
through distributors to retail chains, computer superstores, specialty software
stores, mass merchandisers, discount warehouse stores and mail order houses. The
Company has entered into distribution agreements with the leading U.S. software
distributors, Ingram Micro, Inc. ("Ingram Micro"), Tech Data Corporation ("Tech
Data") and Navarre Corporation ("Navarre"), as well as other distributors, to
distribute its products in the U.S. and Canada. The Company has also entered
into an agreement with two sales representation companies to sell its products
to U.S. and Canadian retailers. The Company has limited distribution agreements
to sell its products outside the U.S. and Canada.

A significant portion of the Company's net revenues arise from sales to a
limited number of distributors. This is expected to continue in the future.
During fiscal 1996 three customers, Ingram Micro, Tech Data and Navarre,
accounted for approximately 37%, 30% and 11% of net revenues, respectively.
During fiscal 1995 these same three customers accounted for approximately 21%,
45% and 0% of net revenues, respectively. During fiscal 1995 and 1996, no other
customer's purchases constituted 10% or more of the Company's net

3
<PAGE> 6

revenues. The Company generally has entered into non-exclusive distribution
agreements with its distributors and retailers which specify payment terms,
return provisions, coop advertising provisions and pricing. There are no
contractual minimum purchase obligations for any such principal distributor or
retailer. If the Company were to lose all or a significant portion of the
revenue attributable to any of its principal distributors or retailers, or if
its principal distributors were to lose sales of the Company's products to any
of their principal accounts, the loss could have a material adverse effect on
the Company's operating results. The Company's distributors also carry products
produced by competitors of the Company.

The Company uses various marketing and merchandising techniques designed to
promote brand awareness and recognition and to maximize the acquisition of shelf
space in retail outlets. The Company promotes its products directly to consumers
through direct mailings, participation in dealer and industry trade shows and
advertising in computer and consumer publications. The Company also occasionally
utilizes special promotions with other hardware or software vendors.

The distribution channels through which software products are sold have
been characterized by rapid change, including the consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as mass merchandisers. In addition, there are an increasing
number of companies competing for access to these channels. The Company is
subject to intense competition for access to distribution channels. Retailers of
the Company's products typically have a limited amount of shelf space and
promotional resources, and there is intense competition for adequate levels of
shelf space and promotional support from retailers. Since the Company's products
constitute a relatively small percentage of most retailer's sales volume, there
can be no assurance that such retailers will continue to purchase the Company's
products or to provide the Company's products with continued high quality and
adequate levels of shelf space and promotional support.

Products are generally shipped as orders are received and the Company has
historically operated with a minimal volume of backorders. Because of the
generally short cycle between order and shipment, the Company does not believe
that its backorders as of any particular date are meaningful.

As of September 20, 1996, the Company had a marketing and sales staff of 9,
comprised of both employees and consultants. The Company anticipates that it
will be required to expand this staff during fiscal 1997 in order to support the
anticipated release of new products.

MANUFACTURING AND TECHNICAL SUPPORT

All manufacturing, fulfillment and technical support for the Company's
products are provided on a contract basis by unrelated third parties. While the
Company believes that these third parties have excess capacity should the need
arise, there can be no assurance that they will be able to meet future demand
for manufacturing and technical support services. The Company believes that its
relations with these third parties are good and that, while it has no reason to
expect the termination of these relationships, alternative means for providing
these services are readily available at comparable cost to the Company. If
alternative arrangements for manufacturing or technical support are required,
the Company may incur additional costs and expenses or product delays which
could adversely affect operating results.

The Company's third party manufacturer purchases numerous disks for the
Company's software products from various suppliers. Because of the availability
of numerous alternative sources of supply, the Company believes it is not
necessary to enter into written agreements with disk suppliers. Nevertheless,
the Company may be vulnerable to changes in product quality and pricing by its
disk suppliers. Future disruptions in the supply of suitable disks from the
Company's principal suppliers, if prolonged, could have an adverse effect upon
the Company's results of operations unless and until suitable replacements were
obtained.

COMPETITION

The software industry is intensely competitive and consumer demand for
particular software products may be adversely affected by the increasing number
of competitive products from which to select. The Company has numerous
competitors of varying sizes and resources for its current and future products.

4
<PAGE> 7

Competitors to SoftRAM include Helix Software, Connectix and Quarterdeck. As
well, SoftRAM faces indirect and increasing competition with manufacturers of
physical RAM, particularly given declining prices for physical RAM.

Existing competitors may broaden their product lines and potential
competitors (including large computer or software manufacturers) may enter or
increase their focus in the areas that the Company's current and future products
compete in, which could result in greater competition for the Company. Many of
the Company's competitors or potential competitors may market, or can
potentially market, their products to the end users of such products more
effectively than can the Company and may have more ability to control pricing
and marketing decisions. To the extent that competitors achieve either a
performance, price or distribution advantage, the Company could be adversely
affected.

Among the Company's potential competitors is Microsoft Corporation, the
dominant supplier of computer operating systems. Microsoft frequently
coordinates its operating system marketing efforts with those for its
applications software. Microsoft could seek to design its products so as to be
incompatible with the Company's products, including products under development,
or to incorporate features which duplicate features of the Company's products.
Microsoft could also seek to market its products to original equipment
manufacturers in such a manner that the market for the Company's products would
be diminished. There can be no assurance that competition from PC hardware
suppliers, Microsoft or others would not render the Company's current or future
products non-competitive or obsolete.

Competitive pressures could result not only in decline in the Company's
sales volume but also in price reductions that could materially adversely affect
the Company's operating results. In particular, competition among developers of
Windows applications is intensifying, and the "competitive upgrade" price
discounting among the major firms is eroding the traditional pricing structures.
These competitive pressures may adversely affect industry-wide operating
margins. There can be no assurance of price-stability or that price reductions
would result in an increase in unit sales volume. Price reductions would lead to
a decrease in the revenues from, and gross margin on, sales of the Company's
products in the future and could result in lower cash flow or operating margins.

The Company believes that the principal competitive factors in the software
industry include product features, quality, ease of use, access to distribution
channels, relationships with other hardware and software manufacturers, brand
name recognition, quality of support services and price. Increased competition
may result in the loss of shelf space, reduction in sell-through of the
Company's products at retail stores, reduction in access to alternative
marketing channels (such as bundling with complementary products) or additional
price competition, any of which could have a material adverse effect on the
Company's results.

PROPRIETARY RIGHTS

The Company regards the software that it owns as proprietary and relies
primarily on a combination of copyrights, pending patents, trademarks, trade
secret laws, employee and third-party nondisclosure agreements along with other
methods to protect its proprietary rights(1). The Company has filed an
application with the United States Patent and Trademark Office requesting patent
protection for the SoftRAM technology, but there is no assurance that a patent
will be issued. None of the Company's other products are covered by patents or
patent applications. The Company believes that, due to the rapid rate of
technological change within the industry, copyrights, trademarks and patents are
important, but are less significant to the Company's success than factors such
as the knowledge, ability and experience of the Company's personnel, the quality
of its customer service, research and development, brand name recognition and
product loyalty.

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

1 Syncronys Software, the Syncronys logo, SoftRAM, SoftRAM95, RAM Analyst and
Dont Run Windows Without It are trademarks, and MacAccess is a registered
trademark of the Company. The Company intends to pursue each of these trademarks
through to a registration, although there can be no assurance that the
registrations will be granted.

5
<PAGE> 8

The Company's products do not include any meaningful mechanisms to prevent
or inhibit unauthorized copying and, on a going forward basis, the Company does
not expect regularly to include these mechanisms in new product or product
updates. The Company is aware that unauthorized copying occurs within the
software industry, but policing unauthorized use of the Company's products is
difficult. While the Company is unable to determine the extent to which software
piracy of its products occurs, software piracy can be expected to be a
persistent issue. If a significant amount of unauthorized copying were to occur,
the Company's operating results could be adversely affected.

The Company believes that its products and other proprietary rights do not
infringe upon the proprietary rights of any third parties. As the number of
software products in the industry increases and the functionality of these
products further overlaps, software developers generally including the Company
may increasingly become subject to infringement claims. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future, with respect to current or future products, or that any
such assertion may not require the Company to enter into royalty arrangements or
to defend costly litigation.

EMPLOYEES

As of September 20, 1996, the Company had a staff of 30 people, comprised
of both employees and consultants, including 13 in research and development, 9
in sales and marketing, and 8 in administration. The Company believes that its
relations with employees are good. The employees and the Company are not parties
to any collective bargaining agreements.

The Company's future success depends in large part on the continued service
of its key employees and its ability to continue to attract, motivate and retain
highly qualified employees. In particular, the Company is highly dependent on
the management services of Rainer Poertner, Daniel Taylor and David Gatto. These
and the Company's other key employees could voluntarily terminate their
employment with the Company at any time. Competition for such employees is
intense, and the process of locating key technical and management personnel with
the combination of skills and attributes required to execute the Company's
strategy is often lengthy. Accordingly, the loss of the services of key
employees could have a material adverse effect upon the Company's research and
development efforts, operations and results. The Company does not currently
maintain key person life insurance covering its executive officers or other key
employees.

GROWTH, ACQUISITIONS AND STRATEGIC ALLIANCES

The Company is currently experiencing a period of growth that could place a
strain on the Company's financial, management and other resources. This growth
has resulted in an increase in the level of responsibility for both existing and
new management personnel.

Management believes that the Company's existing internal controls are
sufficient for the current size and level of operations. Nevertheless, the
Company's ability to manage its growth and integrate any newly-acquired business
effectively will require it to continue to improve its operational, financial
and management information systems and to continue to attract, develop,
motivate, manage and retain key employees. If the Company's management becomes
unable to manage growth effectively, the Company's business, operating results
and financial condition could be adversely affected.

Moreover, one component of the Company's business strategy is to complement
internal growth with strategic acquisitions or alliances. The Company plans to
regularly evaluate such opportunities that fit within its strategy. Acquisitions
and alliances involve numerous risks, including potential difficulties in the
assimilation of acquired operations, diversion of management's attention away
form normal operating activities, negative financial impacts based upon the
amortization of acquired intangible assets and potential loss of key employees
of the acquired operation.

The Company has recently entered into separate license and development
relationships with Jump Development Group, Inc. and PowerPro Software Inc. to
develop Windows and Macintosh software for distribution by the Company. The
first product from these relationships is RAM Charger, a memory management
software for the Macintosh platform which was released in August 1996. There can
be no

6
<PAGE> 9

assurance that the Company will generate revenue or profits as a result of these
licensing and development relationships. To date revenue recognized from RAM
Charger has been insignificant.

The Company has also recently entered into an agreement to acquire a
foreign software developer, whose development expertise and product roster is
complimentary to the Company's development and marketing strengths. This
transaction would provide for a share swap whereby the developer would become a
wholly owned subsidiary of the Company. This transaction is subject to due
diligence, various governmental approvals and other conditions, and accordingly,
there can be no assurance that this transaction will be consummated.

ITEM 2. DESCRIPTION OF PROPERTIES

The Company currently leases approximately 5,600 square feet of office
space in Culver City, California, pursuant to a lease agreement. The monthly
rent for this space is approximately $9,000. The lease agreement provides for a
three year lease term to expire in October 1998.

The Company believes that these facilities will be adequate for its current
needs. The Company has no present understandings, commitments or agreements,
other than as stated above, regarding any alternative facilities arrangements.
The Company believes that suitable additional or alternative space will be
available as needed at commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

SETTLED ACTIONS

Mobius Capital Corp. ("Mobius") (a significant shareholder of the Company),
Daniel G. Taylor (an officer of the Company) and certain others commenced an
action in July 1995 in the British Columbia Supreme Court against Rob Keenan,
Dev Randhawa and MacKenzie Ward & Company Inc. ("MacKenzie") in which Mobius
alleged, among other things, that the defendants engaged in an unlawful and
fraudulent conspiracy to attempt to take control of Mobius. MacKenzie commenced
a counterclaim on September 25, 1995 against Mobius, the Company and certain
current or former officers of the Company (Mr. Taylor and Kevin P. O Neill) and
alleged that it was entitled, among other things, to a payment of shares of the
Company's Common Stock, $.0001 Par Value, arising from the merger of the Company
and Seamless. In the counterclaim, MacKenzie sought specific performance,
unspecified damages, costs, interest and unspecified other relief. ON CONSENT OF
ALL PARTIES, THE CLAIM AND COUNTERCLAIM WERE SETTLED WITHOUT COSTS TO ANY PARTY
AND WERE DISMISSED WITH PREJUDICE ON MAY 3, 1996.

The Company, a software retailer and "Doe" defendants were named as
defendants in an action commenced on November 1, 1995 by Carol Levy in the
Superior Court of the State of California for Alameda County. Ms. Levy contended
that advertising by the defendants of SoftRAM95 was false, deceptive and
misleading. Ms. Levy sought injunctive relief, restitution, costs and attorney's
fees.

The Company and certain other parties, including several software retailers
and distributors, certain officers of the Company (Rainer Poertner and Wendell
Brown) and "Doe" defendants, were named as defendants in a putative class action
lawsuit commenced by Douglas K. Martin and various other individuals on January
2, 1996 in the Superior Court of the State of California for Alameda County. In
Mr. Martin's complaint, the putative plaintiff class was described as including
all persons in the world who had purchased Syncronys and was estimated in the
complaint to include more than 100,000 members. Mr. Martin contended that the
defendants breached the warranty of merchantability and that the collective
defendants were engaged in a conspiracy to defraud the class members through
false representations related to SoftRAM. The complaint also included a claim of
unfair competition. Additionally, Mr. Martin contended that some putative class
members suffered damage to their computer systems as a result of their use of
SoftRAM. For himself and the putative plaintiff class, Mr. Martin sought damages
of an unspecified amount, punitive damages, injunctive relief, restitution,
costs and attorney's fees.

THE LEVY AND MARTIN ACTIONS WERE SETTLED TOGETHER AND WERE DISMISSED WITH
PREJUDICE BY THE SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR ALAMEDA COUNTY ON
MARCH 14, 1996. PURSUANT TO THE TERMS OF THE

7
<PAGE> 10

SETTLEMENT WITHOUT ANY ADMISSION OF LIABILITY WHATSOEVER, THE COMPANY PAID
PLAINTIFFS $250 EACH, FOR A TOTAL OF $8,750, AND ATTORNEY'S FEES OF $100,000.

The Company was named as defendant in a putative class action lawsuit
commenced by James Marotto on December 7, 1995 in the Court of Common Pleas of
Lackawanna County, Pennsylvania. In Mr. Marotto's complaint, the putative
plaintiff class on whose behalf the action was brought was described as
including all persons in the United States who purchased SoftRAM, SoftRAM95 or
any updates thereof between March 1, 1995 and November 13, 1995, for use on any
personal computer utilizing any generation of Windows software, and was
estimated in the complaint to include more than 600,000 members. Mr. Marotto
contended that the Company breached certain warranties relating to SoftRAM, made
fraudulent misrepresentations concerning SoftRAM and SoftRAM95, and that the
Company's marketing and sale of SoftRAM and SoftRAM95 comprised unlawful conduct
of trade or commerce. For himself and the putative plaintiff class, Mr. Marotto
sought damages of an unspecified amount (but at least $100 per class member)
including punitive damages, costs and attorney's fees. THIS ACTION WAS SETTLED
AND DISMISSED WITH PREJUDICE ON APRIL 12, 1996. PURSUANT TO THE TERMS OF THE
SETTLEMENT WITHOUT ANY ADMISSION OF LIABILITY WHATSOEVER, THE COMPANY PAID THE
REPRESENTATIVE NAMED PLAINTIFF $2,000 AND ATTORNEY'S FEES OF $35,000.

The Company and a software retailer were named as defendants in a putative
class action lawsuit commenced by Michael R. Seigel on December 21, 1995 in the
Circuit Court of Cook County, Illinois. In Mr. Seigel's complaint, the putative
plaintiff class on whose behalf the action was brought was described as
including all purchasers, owners, lessees, lessors or users of SoftRAM95 in the
United States and the world from its date of introduction. The complaint
estimated that 700,000 copies of SoftRAM95 had been sold. Mr. Seigel contended
that the Company breached certain warranties relating to SoftRAM, breached its
contract with purchasers and that the Company's and the software retailer's
advertising and promotion of SoftRAM was an unfair method of competition, and
that they made misrepresentations. Additionally, Mr. Seigel contended that the
use of the Company's product caused the loss of data on his personal computer
and the system to crash. For himself and the putative plaintiff class, Mr.
Seigel sought damages of an unspecified amount, injunctive relief, costs and
attorney's fees. THE COMPANY HAS ENTERED INTO A SETTLEMENT IN THIS CASE WHICH
THE COURT APPROVED JUNE 24, 1996. PURSUANT TO THE TERMS OF THE SETTLEMENT
WITHOUT ANY ADMISSION OF LIABILITY WHATSOEVER, THE COMPANY PAID PLAINTIFF'S
COUNSEL $400,000 IN ATTORNEY'S FEES AND HAS OR WILL PROVIDE BENEFITS TO THE
REPRESENTATIVE PLAINTIFF AND CLASS MEMBERS. THE PRIMARY BENEFITS TO THE
REPRESENTATIVE PLAINTIFF AND THE CLASS MEMBERS ARE THAT THE COMPANY HAS OR WILL
PROVIDE TO THOSE WHO RETURN A PROOF OF CLAIM FORM BY AUGUST 31, 1996, EITHER A
FULL REFUND OR UPGRADE ON SOFTRAM PRODUCTS AND COUPONS FOR SYNCRONYS' PRODUCTS.

The Company, a retailer and a software company were named as defendants in
a putative class action commenced on February 8, 1996 by Nathaniel O'Seep in the
Fifth Judicial Circuit in Marion County, Florida. In Mr. O'Seep's complaint, the
putative plaintiff class on whose behalf the action is brought was described as
including all persons and entities in the United States that presently own
SoftRAM, which is estimated in the complaint to include approximately 700,000
members. The complaint excluded certain persons from the putative class,
including the defendants, persons who retained counsel prior to the date of
filing this complaint, persons who timely opt out and persons who gave valid
reasons to all of the defendants. Mr. O'Seep contended that the defendants
breached certain warranties relating to SoftRAM, that the Company and the
software company made misrepresentations and failed to disclose material facts
in marketing and selling SoftRAM and that the Company breached its contract with
purchasers. The complaint also alleged that the Company's activities constituted
a violation of civil RICO under a Florida statute. Additionally, Mr. O'Seep
contended that the use of the Company's product caused damage to the user's
computer system. For himself and the putative plaintiff class, Mr. O'Seep sought
damages of an unspecified amount, costs and attorney's fees. THIS ACTION WAS
SETTLED AND DISMISSED WITH PREJUDICE ON JUNE 24, 1996. PURSUANT TO THE TERMS OF
THE SETTLEMENT WITHOUT ANY ADMISSION OF LIABILITY WHATSOEVER, THE COMPANY PAID
THE PLAINTIFF $1,000 AND ATTORNEY'S FEES OF $120,000.

The Company and several software retailers were named as defendants in an
action commenced on April 1, 1996 by Henri Carnal in the Superior Court of the
State of California for San Francisco County. Mr. Carnal contended that the
defendants engaged in deceptive, unfair and unlawful business practices in

8
<PAGE> 11

connection with marketing SoftRAM95. Mr. Carnal sought injunctive relief,
restitution, costs and attorney's fees. THIS ACTION WAS SETTLED AND DISMISSED
WITH PREJUDICE ON JUNE 27, 1996. PURSUANT TO THE TERMS OF THE SETTLEMENT AND
WITHOUT ANY ADMISSION OF LIABILITY, THE COMPANY PAID PLAINTIFF $1,000 AND
ATTORNEY'S FEES OF $30,000.

PRELIMINARILY SETTLED ACTIONS

The Company and certain current or former directors and officers of the
Company (Daniel G. Taylor, Rainer Poertner, Wendell Brown and Kevin P. O'Neill)
have been named as defendants in a putative class action lawsuit commenced by
Julie Marshall on December 14, 1995 in the United States District Court, Central
District of California, Western Division. In Ms. Marshall's complaint, the
putative plaintiff class on whose behalf the action is brought is described as
all persons who purchased Syncronys common stock between June 1, 1995 and
December 7, 1995, inclusive, and suffered damages as a result thereof which is
estimated in the complaint to be hundreds of persons. Excluded from the putative
class are the named defendants, members of the immediate families of each
defendant, any entity in which any defendant has a controlling interest, and the
legal representatives, heirs, successors, predecessors in interest, or assigns
of any of the defendants. Ms. Marshall contends that the individual defendants
engaged in various forms of misconduct in violation of the Securities Exchange
Act of 1934 and a Rule of the Securities Exchange Commission promulgated
thereunder, including misrepresenting the readiness and abilities of Syncronys'
products, in order to inflate the market price of Syncronys common stock, which
resulted in the putative class members purchase of Syncronys common stock at
artificially inflated prices. For herself and the putative plaintiff class, Ms.
Marshall is seeking damages of an unspecified amount, injunctive relief and the
costs and expenses of litigation including attorney's fees. THE COMPANY HAS
ENTERED INTO A SETTLEMENT IN THIS CASE, WHICH WAS SUBMITTED TO THE COURT ON
SEPTEMBER 27, 1996. PURSUANT TO THE TERMS OF THE SETTLEMENT AND WITHOUT ANY
ADMISSION OF LIABILITY WHATSOEVER, THE DEFENDANTS WOULD PAY $3.25 MILLION IN
FULL SATISFACTION OF THE ACTION, INCLUSIVE OF ATTORNEY'S FEES AND ALL COSTS
ASSOCIATED WITH THE ADMINISTRATION OF THE SETTLEMENT. THE COMPANY'S PRIMARY
DIRECTOR'S AND OFFICER'S INSURANCE CARRIER HAS AGREED TO CONTRIBUTE UP TO $2
MILLION TO THE SETTLEMENT. THE COMPANY'S EXCESS DIRECTOR'S AND OFFICER'S
INSURANCE CARRIER HAS AGREED TO CONTRIBUTE UP TO $1.25 MILLION TO THE
SETTLEMENT, BUT HAS PRESERVED ITS COVERAGE DEFENSES AND HAS RESERVED ITS RIGHT
TO BRING A DECLARATORY ACTION AGAINST THE COMPANY TO RECOVER ITS CONTRIBUTIONS.
ANY SETTLEMENT IS SUBJECT TO NOTICE AND COURT APPROVAL.

The Company has been in contact with the New York Regional Office of the
Federal Trade Commission which made an inquiry into the SoftRAM product line.
THE COMPANY COOPERATED WITH THE FTC'S INQUIRIES AND THE COMPANY AND CERTAIN OF
ITS OFFICERS (RAINER POERTNER, DANIEL G. TAYLOR AND WENDELL BROWN) RECENTLY
ENTERED INTO A CONSENT DECREE WITH THE FTC PURSUANT TO WHICH THEY AGREED TO
COMPLY WITH FTC REGULATIONS IN RESPECT TO ALL FUTURE PRODUCTS. THE DECREE WILL
BECOME FINAL ONLY UPON COMMISSION APPROVAL, WHICH BY LAW MAY OCCUR AFTER
PUBLICATION IN THE FEDERAL REGISTER AND AN OPPORTUNITY FOR PUBLIC COMMENT.

The Florida Attorney General's Office has initiated a civil investigation
relating to the SoftRAM products and served a subpoena requesting documents and
information from the Company. The Company has been in contact and working with
that office in an effort to resolve any concerns about SoftRAM. THE FLORIDA
ATTORNEY GENERAL'S OFFICE AND THE COMPANY HAVE BEEN ENGAGED IN SETTLEMENT
DISCUSSIONS. THE PARTIES ARE CURRENTLY WORKING ON THE SETTLEMENT PAPERS.

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

There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders, through the
solicitation of proxies or otherwise.

9
<PAGE> 12

PART II

ITEM 5. MARKET FOR THE ISSUER'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Principal Market or Markets. The Company's Common Stock, $.0001 Par Value
("Common Stock"), is traded on the over-the-counter market under the symbol
"SYCR" and is quoted on the OTC Bulletin Board. The following table sets forth
the closing high and low bid quotations for the Company's securities as reported
by the OTC Bulletin Board since May 11, 1995. There were no quotations on the
OTC Bulletin Board for the Company's common stock during the last two fiscal
years prior to May 11, 1995. These prices are believed to be representative
inter-dealer quotations, without retail markup, markdown or commissions, and may
not represent actual transactions.

<TABLE>
<CAPTION>
BID
-----------------
QUARTER ENDED LOW HIGH
------------------------------------------- ------ ------
<S> <C> <C>
June 30, 1995.............................. $ 6.00 $12.75
September 30, 1995......................... 13.00 31.75
December 31, 1995.......................... 2.37 10.25
March 31, 1996............................. 1.81 4.00
June 30, 1996.............................. 2.25 6.75
</TABLE>

Approximate Number of Holders of Common Stock. The number of record
holders of the Company's Common Stock as of September 20, 1996 was 335 and the
number of beneficial holders of the Company's Common Stock is estimated to be
more than 1,000.

Dividends. Holders of common stock are entitled to receive such dividends
as may be declared by the Company's Board of Directors. No dividends have been
paid or declared with respect to the Company's common stock and no dividends are
anticipated to be paid in the foreseeable future.

Description of Debt Securities. The Company completed a $13 million
private placement on May 22, 1996. The private placement consists of a
combination of Convertible Debentures and Warrants to purchase the Company's
Common Stock, $.0001 Par Value. The Convertible Debentures were issued at 100
percent of principal amount and carry an interest rate of ten percent, with
interest deferred until the earliest of the date of conversion, redemption or
May 17, 1999. The Debentures are initially convertible beginning in 45 days into
free trading shares of the Company's Common Stock, $.0001 Par Value, at the
lesser of $5.50 per share or eighty five percent of the market price of the
Company's Common Stock, $.0001 Par Value, at the time of conversion.

Each Convertible Debenture carries a Warrant entitling its Holder to
initially purchase a number of shares of the Company's Common Stock, $.0001 Par
Value, equal to the aggregate amount of such Debenture divided by $5.50.
Warrants are not exercisable for 105 days from the date of issuance, have a
five-year term and are exercisable at a purchase price of $5.50 per share.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following information should be read in conjunction with the Company's
financial statements and the notes thereto for its fiscal year ended June 30,
1996 ("FY 1996"). The analysis set forth below is provided pursuant to
applicable Securities and Exchange Commission regulations and is not intended to
serve as a basis for projections of future events.

FORWARD-LOOKING STATEMENTS

EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED
IN THIS FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND
UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THE COM-

10
<PAGE> 13

PANY'S DEPENDENCE ON THE TIMELY DEVELOPMENT, INTRODUCTION AND CUSTOMER
ACCEPTANCE OF PRODUCTS (INCLUDING SOFTRAM), THE IMPACT OF COMPETITION AND
DOWNWARD PRICING PRESSURES, THE ABILITY OF THE COMPANY TO REDUCE ITS OPERATING
EXPENSES AND RAISE ANY NEEDED CAPITAL, THE EFFECT OF CHANGING ECONOMIC
CONDITIONS, RISKS IN TECHNOLOGY DEVELOPMENT AND THE EFFECTS OF OUTSTANDING
LITIGATION. OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS INCLUDE THE RISKS AND
UNCERTAINTIES DETAILED IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION FROM TIME TO TIME.

OVERVIEW

The Company is a pioneer in the development of RAM compression software
technology -- a technology that did not exist two to three years ago. Much like
disk compression products, the early progress in RAM compression software has
proven extremely challenging. While it can provide no assurance, the Company
believes that the market for RAM compression software technology and its many
potential applications is considerable. Although the Company has been in
existence since 1986, its current operations have been in place only since its
merger with Seamless in May 1995. Accordingly, the Company is still in many
respects subject to many of the risks and uncertainties inherent to a new
enterprise. Among these is the risk that the Company's initial performance may
not necessarily be indicative of its performance in the future.

The Company released SoftRAM for Windows 3.1 in late May of 1995, and
SoftRAM95 for Windows 95 and 3.1 in August of 1995. This program was designed to
increase the Random Access Memory ("RAM") that a personal computer ("PC") can
make available to Windows applications through proprietary memory compression
technology which allocates a PC's physical RAM in a manner that optimizes space
and speed. A significant portion of the Company's net revenues were derived from
SoftRAM during FY 1996 (approximately 96%) and the Company depends on SoftRAM
and related products to provide a substantial portion of the Company's future
revenues. However, the Company announced on October 20, 1995 that it had
identified a problem with SoftRAM95, the net result of which is that RAM
compression was not being delivered to the Windows 95 operating system. The
Company also announced a comprehensive consumer program which included refunds,
extended toll-free customer assistance and a program to re-sticker all product
in the retail channel informing consumers that SoftRAM95 was suitable for
Windows 3.1 only. As this stickering program did not result in complete coverage
of all inventory, on December 18, 1995, the Company decided to avoid any
potential consumer confusion and/or liability and initiated the recall of
SoftRAM95 from the retail channel (see "SoftRAM95 Product Recall", above). The
Company is now not distributing any SoftRAM, SoftRAM95 or a material amount of
other products, has experienced a significant reduction in revenues as a result
and expects to generate little or no revenues until the new version of SoftRAM
or other new products are put into distribution.

The Company's development team is working on a new version of SoftRAM, to
be known as SoftRAM3.0, which is designed to deliver RAM compression
functionality for Windows 95 and an improved version of SoftRAM for Windows 3.1
(see "Product Development", above). The Company is also developing and licensing
from third party developers several other new products. However, there can be no
assurance that SoftRAM3.0 or other new products will be released by the Company
or if released, that such release will be on a timely basis. Nor can there be
any assurance that any products will achieve any significant degree of market
acceptance or that such acceptance, if attained, will be sustained for any
significant period. Failure to complete on a timely basis or lack of demand for
SoftRAM3.0 or other new products upon completion and distribution would have a
material adverse effect upon the Company and such adverse effect would be severe
(see "Liquidity and Capital Resources", below). In addition, if any new version
of SoftRAM or other new products do not achieve a significant degree of market
acceptance, the adverse consequences upon the Company would be severe.

11
<PAGE> 14

FLUCTUATIONS IN OPERATING RESULTS

Although the Company's revenues for FY 1996 increased dramatically as
compared to the prior year, these revenues were realized primarily during the
first two fiscal quarters prior to the SoftRAM95 recall. As a result, there were
little or no revenues in the third and fourth quarters of fiscal 1996.
Accordingly, the Company does not anticipate recognizing any revenues, until
SoftRAM3.0 or other products are released. There can be no assurance that
SoftRAM3.0 or other new products will be released or if released, that such
release will be on a timely basis. Nor can there be any assurance that any
products will achieve any degree of market acceptance or that such acceptance,
if attained, will be sustained for any significant period. Additionally, there
can be no assurance that a market will develop for the Company's products, or
that if a market does develop that such products will be profitable or that
profitability, if attained, can be sustained. Although the Company's expenses
are, to a significant extent, fixed in advance, the Company is making efforts to
adjust spending to compensate for the expected shortfall in net revenues.
However, the Company expects to generate a significant operating loss in the
first quarter of FY 1997 and until such time, if any, as SoftRAM3.0 and other
new products are released and accepted by the marketplace. As well, the
Company's success will depend in part on its ability to respond promptly to
market feedback and provide adequate technical support and service to customers
and there can be no assurance that the Company will be successful in so
responding. Failure to complete on a timely basis, or lack of demand for
SoftRAM3.0 or other new products upon completion and distribution, would have a
material adverse effect upon the Company and such adverse effect would be
severe. If SoftRAM3.0 or other new products do not achieve a significant degree
of market acceptance, the adverse consequences upon the Company would be severe.

The Company has in the past experienced fluctuations in its quarterly
operating results and expects such fluctuations to continue, to varying and
unpredictable degrees, in the future. Factors that contribute to fluctuations in
the Company's quarterly operating results include the timing of new product
introductions, competitive offerings, product shipments, product returns,
promotional programs, seasonality and general economic conditions. In addition,
quarterly operating results are affected by changes in market acceptance and
sales of existing products. There can be no assurance that new products will be
introduced by the Company in a timely manner or that these products will achieve
any significant degree of market acceptance, or that such acceptance will be
sustained for any significant period. Historically, seasonality has not been a
significant factor for the Company.

Moreover, because the Company generally ships its software products within
a short period after receipt of an order, it typically does not maintain a
material backlog of unfilled orders. As a result, revenues in any quarter or
other period are substantially dependent upon orders booked in that period.
Orders booked during any particular period are substantially dependent upon
numerous factors, including the scheduled release of new products and product
enhancements and updates by the Company and its competitors; the release or
anticipated release of complementary products by other software suppliers;
market acceptance of such products, enhancements and updates; delays in customer
orders in anticipation of industry developments and numerous other factors, many
of which are beyond the Company's control.

Accordingly, the Company's revenues are difficult to forecast and may vary
significantly from quarter to quarter. In addition, the Company expense levels
for each quarter are, to a significant extent, fixed in advance based upon the
Company's expectation as to the net revenues to be generated during that
quarter. The Company therefore is generally unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in net revenues.
Further as a result of these factors any delay in product introductions, whether
due to internal delays or delays caused by third party difficulties, or any
significant shortfall or demand in relation to the Company's expectations would
have an almost immediate adverse impact on the Company's operating results and
on its ability to maintain profitability in a quarter.

CONSOLIDATED RESULTS OF OPERATIONS

Net Revenues

<TABLE>
<CAPTION>
FY 1996 INCREASE FY 1995
------------ -------- -----------
<S> <C> <C> <C>
Net Revenues before product recall
returns............................... $12,797,786 >100% $3,580,404
</TABLE>

12
<PAGE> 15

The Company has derived substantially all of its software revenues from
sales of SoftRAM and SoftRAM95 to software distributors, computer superstores
and mass merchandisers in North America. The growth in revenues during FY 1996
was primarily attributable to the introduction of SoftRAM which began shipping
in May 1995 and SoftRAM95 which began shipping in August 1995. Sales of SoftRAM
and SoftRAM95 constituted roughly 96% and 71% of the Company's revenues during
FY 1996 and FY 1995, respectively. There were little or no sales in the third
and fourth quarters of FY 1996 due to the Company's announcement that it had
identified a problem with SoftRAM95 on October 20, 1995, and its subsequent
recall of SoftRAM95 towards the end of the second quarter (see "SoftRAM95
Product Recall", above).

In connection with the recall of product initiated by the Company, return
and repurchase of product totaled $5,767,375 in FY 1996. Other charges for legal
fees, settlements and upgrades have been charged as operating
expenses -- nonrecurring charges.

Cost of Revenues

<TABLE>
<CAPTION>
FY 1996 INCREASE FY 1995
------------ -------- -----------
<S> <C> <C> <C>
Cost of Revenues........................ $1,251,126 >100% $280,195
Percentage of Net Revenues.............. 10% 8%
</TABLE>

Cost of revenues consists of direct manufacturing costs for the Company's
software products. Cost of revenues as a percentage of net revenues increased to
10% during FY 1996, from 8% in FY 1995, primarily due to the Company's write off
of approximately $325,000 in CD ROM inventories in the fourth quarter of FY 1996
along with a $150,000 charge to cost of revenues during the second quarter of FY
1996 to reflect the write-off of existing inventories of SoftRAM and SoftRAM95
(see "SoftRAM95 Product Recall", above). The overall increase in the cost of
revenues in FY 1996 is directly attributable to the increase in net revenues.

Research and Development Expenses

<TABLE>
<CAPTION>
FY 1996 INCREASE FY 1995
------------ -------- -----------
<S> <C> <C> <C>
Research and Development Expenses....... $1,521,374 >100% $676,037
Percentage of Net Revenues.............. 12% 19%
</TABLE>

Research and development expenses increased from $676,037 in FY 1995 to
$1,521,374 in FY 1996. This increase is primarily attributable to expenses
associated with the development of SoftRAM3.0 and to the increase in the number
of research and development projects. Although the Company's research and
development expenses increased in FY 1996 as compared to the same period in the
prior year, as a percentage of net revenues, research and development expenses
decreased to 12% from 19% due to the even greater growth in the Company's net
revenues. Although the Company is making efforts to adjust its spending to
compensate for the expected shortfall in net revenues until SoftRAM3.0 or other
new products are released, the Company expects research and development expenses
to continue to increase during FY 1997 primarily due to the anticipated increase
in the number of research and development staff and projects.

In accordance with Statement of Financial Accounting Standards No. 86 (FASB
86), the Company examines the software development costs after technological
feasibility has been established to determine if the amounts are significant
enough to require capitalization. Through the end of FY 1996, these amounts have
not been deemed significant, and substantially all software development costs
have been expensed in the period incurred. None of the Company's research and
development costs for FY 1996 or 1995 were borne directly by the Company's
customers.

Marketing and Selling Expenses

<TABLE>
<CAPTION>
FY 1996 INCREASE FY 1995
----------- -------- ---------
<S> <C> <C> <C>
Marketing and Selling Expenses............. $6,199,631 >100% $797,845
Percentage of Net Revenues................. 48% 22%
</TABLE>

13
<PAGE> 16

Marketing and selling expenses are comprised mainly of salaries and
commissions, advertising and promotions, trade shows, and customer service and
technical support expenses. Marketing and selling expenses increased in FY 1996
primarily due to expenses associated with the introduction of SoftRAM95 in
August of 1995, and due to other expenses required to support the increase in
net revenues. While the Company expects marketing and selling expenses to
continue at reduced levels until the release of SoftRAM3.0 or other new
products, the Company expects that additional marketing and selling expenses
will be required to support the launch of SoftRAM3.0 and the release of other
new products during FY 1997.

General and Administrative Expenses

<TABLE>
<CAPTION>
FY 1996 INCREASE FY 1995
----------- -------- ---------
<S> <C> <C> <C>
General and Administrative Expenses........ $2,694,776 >100% $547,642
Percentage of Net Revenues................. 21% 15%
</TABLE>

General and administrative expenses increased in FY 1996 due primarily to
increases in direct and indirect expenses required to support the increase in
net revenues, the facilities expansion, the increased number of support and
management staff and the corporate structure. Although the Company's expenses
are, to a significant extent, fixed in advance, the Company is making efforts to
adjust spending to compensate for the expected shortfall in net revenues until
SoftRAM3.0 or other new products are released.

Nonrecurring Charge -- SoftRAM95 Product Recall

Although the final cost of the SoftRAM95 product recall cannot be estimated
with any certainty, the Company has taken one time charges totaling $12,344,652
in FY 1996 to provide for the expected costs of this recall, including costs of
product returned under the recall in excess of normal returns reserves
aggregating $5,767,375, and legal fees and expenses and the cost of settlements
for SoftRAM and SoftRAM95 related litigation aggregating $6,577,277. See
"SoftRAM95 Product Recall", above, for a detailed discussion of this issue.

Other Income (Expense), Net

<TABLE>
<CAPTION>
FY 1996 INCREASE FY 1995
----------- -------- ---------
<S> <C> <C> <C>
Other Income (Expense), Net................ $(1,192,772) >100% $(63,034)
</TABLE>

Other income and expense consists largely of interest income and expense,
additionally, other income and expense for FY 1996 includes the approximately
$202,000 gain on the sale of the Company's Autoship subsidiary (see "Part III.
Item 12. Certain Relationships and Related Transactions -- Sale of Autoship
Subsidiary", below, for further discussion of this transaction) and a $1.3
million non-cash charge to interest expense related to the issuance of
convertible debentures. (See Note 17 to the Company's financial statements).

Net (Loss), Income

For the reasons outlined above the Company realized a $12,021,950 net loss
in FY 1996 as compared to net income of $692,348 in FY 1995.

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operating activities for FY 1996 was $1,861,698. However, cash
and cash equivalents increased $9,321,420 from June 30, 1995 to June 30, 1996
due primarily to the $11,570,000 in cash provided by the Company's issuance of
convertible debentures in May of 1996 (see "Part I -- Item 5. Market For Common
Equity and Related Shareholder Matters", above, for further discussion of
convertible debentures). Over the same period, the Company's working capital
increased by only $1,792,509 (from $2,294,166 at June 30, 1995 to $4,086,675 at
June 30, 1996) due primarily to the offsetting effects of the Company's recall
of its SoftRAM product (see "Part I -- Item 1. SoftRAM Product Recall and
"Nonrecurring Charge -- SoftRAM95 Product Recall", above, for a detailed
discussion of this issue). The Company uses its working

14
<PAGE> 17

capital to finance ongoing operations and the development and marketing of its
software products. Additionally, the Company evaluates from time to time
acquisitions of products or companies that could complement the Company's
business, expand its product line, or augment its revenues and cash flows. The
Company has no plans, commitments or agreements with respect to any such
transactions as of the date of this report other than those discussed above (see
"Part I -- Item 1. The Business -- Growth and Acquisitions and Strategic
Alliances").

The Company's success and ongoing financial viability is contingent upon
its selling of its products and the related generation of cash flows. The
Company is currently generating little or no revenue and related cash flows and
anticipates generating little or no revenue or cash flows until SoftRAM3.0 or
other new products are released. Management believes that its existing cash and
working capital balances will be sufficient to meet its working capital needs
for the balance of FY 1997. The Company generally receives cash from sales 90
days after shipping its product. Should the receipt of cash from the release of
SoftRAM3.0 or other new products exceed this twelve month period the adverse
consequences would be severe. The Company evaluates its liquidity and capital
needs on a continuous basis and based on the Company's requirements and capital
market conditions may, from time to time, raise working capital through
additional debt or equity financing. There is no assurance that such financing
will be available in the future to meet additional capital needs of the Company,
or as to the terms or conditions of any such financing that is available. Should
there be any significant delays in the release of SoftRAM3.0 or other new
products or the Company's working capital needs otherwise exceed its resources,
the adverse consequences would be severe. Both the management of the Company's
current growth and the expansion of the Company's current business involve
significant financial risk and require significant capital investment.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," in
March 1995 which is effective for fiscal years beginning after December 15,
1995. SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
these assets and certain identifiable intangibles to be disposed of. Since the
Company's current policy is consistent with the provisions of SFAS No. 121, the
Company's management does not anticipate that the new pronouncement will impact
its Financial Statements.

In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
SFAS No. 123 established a fair value-based method of accounting for
compensation cost related to stock options and other forms of stock-based
compensation plans. However, SFAS No. 123 allows an entity to continue to
measure compensation costs using the principles of Accounting Principles Board
Opinion 25 ("APB No. 25") if certain pro forma disclosures are made. SFAS No.
123 is effective for fiscal years beginning after December 15, 1995. While the
Company is still evaluating SFAS No. 123, it currently expects to elect to
continue to measure and to recognize costs under APB No. 25 and to comply with
the pro forma disclosure requirements of SFAS No. 123. If the Company makes this
election, SFAS No. 123 will have no impact on the Company's Financial
Statements.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Please see pages F-1 through F-15.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

15
<PAGE> 18

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The Directors and Executive Officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
- -------------------------------- --- -------------------------------------------------
<S> <C> <C>
Daniel G. Taylor................ 38 Chairman of the Board, Executive Vice President
of Marketing and Secretary
Rainer Poertner................. 48 Chief Executive Officer, President and a Director
David F. Gatto.................. 35 Chief Operating Officer
Barbara Velline................. 31 Chief Financial Officer
Wendell Brown................... 35 Vice President of Technology and a Director
Myles Lawrence.................. 49 Vice President of Engineering
John Shaw....................... 39 Vice President of Corporate Communications
Roy Belosic..................... 51 Vice President of Marketing
Lloyd I. Baron.................. 49 Director
Jon D. Sawyer................... 50 Director
</TABLE>

Daniel G. Taylor has served as Secretary and a Director of the Company
since May 8, 1995, and as Chairman of the Board and Executive Vice President of
Marketing since July 1, 1995. He also served as Chief Executive Officer from May
8, 1995 until June 30, 1995. Mr. Taylor was President and a Director of Autoship
Systems Corporation from 1993 to December of 1995. From February 1995 until its
merger with the Company on May 8, 1995, he also served as Chief Executive
Officer and a Director of Seamless Software Corporation. From 1988 to 1992, Mr.
Taylor was engaged with Cineplex Odeon Corporation with the head office in
Toronto, Ontario, and on assignment with its UK subsidiary in London, England.
Mr. Taylor was in the development side of the business, culminating in his
appointment as Vice President of Development. Prior to joining Cineplex, he was
a senior litigation associate for five years with the Toronto-based law firm of
Fasken Campbell Godfrey where he participated in a broad variety of corporate
and commercial litigation including corporate takeovers, shareholder actions and
asset purchases. Mr. Taylor received his law degree from Osgoode Hall in 1982.

Rainer Poertner has served as President and a Director of the Company since
May 8, 1995, and as Chief Executive Officer since July 1, 1995. He co-founded
Seamless Software Corporation ("Seamless") and served as a Director and as
President of Seamless from its inception in May 1993 until its merger with the
Company on May 8, 1995. Mr. Poertner has over 15 years of business experience in
the international business community. After having held several positions in the
European and US entertainment industries, he founded Hybrid Arts, Inc. in 1986
by arranging venture financing for ADAP -- the first Direct-To-Disk Digital
Recording System. After arranging Hybrid Arts' sale in 1991, Mr. Poertner became
CEO of Hydra Systems, Inc. which developed and marketed ANDOR -- a fully
functional Macintosh CPU on a PC peripheral card. Hydra Systems subsequently
sold the technology and the inherent rights to a company in Seoul, Korea in 1992
as part of a Chapter 7 voluntary liquidation. Mr. Poertner received degrees in
economics from the University of Frankfurt in 1975 and the Klinger Business
School in 1973.

David F. Gatto has served as Chief Operating Officer of the Company since
July 8, 1996. Mr. Gatto most recently served as Executive Vice President of L.A.
Gear, Inc., from September of 1991 to June of 1996, where he was responsible for
the overall supervision of the company's sales, merchandising and operations
function. Prior to joining L.A. Gear, from August of 1988 to September of 1991
Mr. Gatto served as a manager at the L/E/K Partnership, an international
management consulting firm which specializes in developing strategic plans for
Fortune 500 and emerging growth companies. Earlier, he was a consultant with
Bain & Company's San Francisco and London offices. Mr. Gatto holds a Master of
Science Degree in Management from M.I.T.'s Sloan School of Management (1988) and
a Bachelor of Sciences Degree in Nuclear Engineering and Industrial Engineering
from the University of California, Berkeley (1984).

16
<PAGE> 19

Barbara Velline has served as Chief Financial Officer of the Company since
December 1995. She also served as Vice President of Finance and Controller from
September through December 1995. From January of 1987 to April of 1990, Ms.
Velline was an auditor for Price Waterhouse in Los Angeles. From April 1990 to
August 1994, Ms. Velline was a manager at Pioneer Electronics (USA) Inc.. In
August 1994, Ms. Velline relocated with her family to Piemonte, Italy. Ms.
Velline received her Bachelor of Sciences Degree in Business Administration/
Accounting from the University of Southern California in December of 1986. Ms.
Velline was certified as a public accountant by the State of California in 1992.

Wendell Brown has served as a Director of the Company since May 8, 1995,
and as Vice President of Technology since June 1, 1995. Mr. Brown co-founded
Seamless Software Corporation with Rainer Poertner in May 1993 and served as a
Director until February 1995. Prior, from 1990 to 1993, Mr. Brown was an
independent consultant. From 1989 to 1990, Mr. Brown was President of Hydra
Systems Inc. which subsequently filed for Chapter 7 voluntary liquidation in
1992. From 1986 to 1989, Mr. Brown was Vice President of Research and
Development of Amtel Video Inc., a developer of advanced video and audio
products, which he also co-founded. Mr. Brown has also served as President and
co-founder of Hippopotamus Software, as an engineering manager at Imagic Corp.,
as a Hughes Fellow at Hughes Aircraft Company Ground Systems Group and as a
software developer with Chrysler Corporation. Mr. Brown attended Cornell
University.

Myles Lawrence has served as Vice President of Engineering of the Company
since August 12, 1996. Previously, he held various managerial positions with
Micro Design International, from 1992 to August 1996, most recently Director of
Technical Services in which he managed all technical departments including sales
engineering, product management, corporate MIS, and technical support. Prior to
Micro Design, Mr. Lawrence served as a Vice President of Product Development at
AutoScan Systems from 1990 to 1992, and Director of Product Development at
Integrated Computer Graphics from 1989 to 1990. His earlier experience includes
Application Engineering Manager at Intergraph Corporation; Application Engineer
with General Electric's CALMA Division; and CAD/CAM Manager with Parsons
Corporation. Mr. Lawrence received his Bachelor of Sciences Degree in
Engineering from Merrimack College in 1969.

John Shaw has served as Vice President of Corporate Communications of the
Company since August 1, 1996. Previously, he served as a Vice President in the
investor relations practice of Sitrick and Company, from August 1995 to July
1996, where his account management responsibilities included Syncronys. Previous
to Sitrick and Company, Mr. Shaw served as an Account Group Supervisor at the
Financial Relations Board, from February 1992 to August 1995. Prior he worked as
a business journalist including on-air with a CBS affiliate and as a print
journalist with Gannett News. From 1981 to 1985, Mr. Shaw worked as a
stockbroker with E.F. Hutton. He also served as a Captain and Communications
Officer in the United States Marine Corps from 1978 to 1982. Mr. Shaw holds a
Masters Degree in Management from Webster College (1981) and a Bachelor of Arts
Degree in Psychology from the University of Arizona (1978).

Roy Belosic has served as Vice President of Marketing of the Company since
May 31, 1996. Mr. Belosic has more than 25 years experience as a marketing
executive and most recently served as Senior Partner at Lysander, Nicholas and
Company, a marketing and communications consulting firm from April 1993 to May
1996. Previously, Mr. Belosic served as a Managing Director at Profile
Communications, from June 1991 to April 1993, and Vice President of Marketing at
Bear Computer Systems, from January 1990 to March 1991. In addition, he has
taught at Santa Monica City College for the past 26 years as an adjunct
Professor of Business. Mr. Belosic holds a Master of Science Degree in Marketing
from UCLA's Anderson School of Management (1968) and a Bachelor of Science
Degree in Business Administration from UCLA (1967).

Lloyd I. Baron, Ph.D., was elected a Director of the Company on October 16,
1995 by the Company's Board of Directors to fill one of two vacancies created by
the expansion of the board from three to five members. Dr. Baron has been
working in the field of international business and enterprise development for
over 25 years. During this period he has served as advisor to private and public
sector organizations throughout North America as well as in Asia, Africa, the
Caribbean and Latin America. In 1985, he founded Horizon Pacific International
("HPI") and since has been its managing director, creating a diverse and highly
regarded team of consultants that specialize in facilitating the creation of
joint ventures between emerging

17
<PAGE> 20

Asian enterprises and their counterparts in America. Under Dr. Baron's
leadership, HPI has over the last five years focused on the internationalization
of the delivery of advanced medical services. With his guidance, a large network
of world class teaching hospitals have been linked to exploit the rapidly
expanding market demands from newly industrializing economies in the Pacific
rim. Dr. Baron is a graduate of Michigan University, M.A. economics, and McGill
University, Ph.D. economics.

Jon D. Sawyer was elected a Director of the Company on October 16, 1995 by
the Company's Board of Directors to fill one of two vacancies created by the
expansion of the board from three to five members. He has been engaged in the
private practice of law specializing in securities and corporate law since 1979,
and has worked with the firm of Jon D. Sawyer P.C. since January 1993. From 1976
until 1979 he served as a trial attorney with the Denver Regional Office of the
Securities and Exchange Commission. Mr. Sawyer received his law degree from the
University of Wyoming in 1974. He served as securities and corporate counsel for
the Company from its inception in 1986 until 1988, and from March 1995 to
October 15, 1995.

There are no family relationships among the executive officers and
directors.

The Company's Directors hold office until the next annual meeting of the
shareholders and until their successors have been elected and qualified. The
Officers of the company are elected by the Board of Directors at the first
meeting after each annual meeting of the Company's shareholders, and hold office
until they shall resign or have been removed from office. The date of the next
annual meeting of the Company will be determined by the Company's Board of
Directors in accordance with Nevada law. The Company has no audit, compensation
or nominating committee.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Based solely on a review of Forms 3 and 4, and amendments thereto furnished
to the Company during its most recent fiscal year; Forms 5 and amendments
thereto furnished to the Company with respect to its most recent fiscal year;
and certain written representations, the Company believes that all required
reports were filed on a timely basis during the last fiscal year.

ITEM 10. EXECUTIVE COMPENSATION

The following summary compensation table sets forth information regarding
executive compensation for the Company's Chief Executive Officer and other
highly compensated Executive Officers for the years ended June 30, 1996 and
1995. No executive officer received compensation in excess of $100,000 for the
year ended June 30, 1995:

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------
------------------- OPTIONS/
FISCAL SARS
YEAR SALARY (NUMBER)
------ -------- ----------------------
<S> <C> <C> <C>
Rainer Poertner,............................ 1995 $ 71,000 150,000
Chief Executive Officer & President 1996 187,500 -0-
Daniel G. Taylor............................ 1995 $ 61,000 150,000
Executive Vice President of Marketing 1996 150,000 -0-
Wendell Brown............................... 1995 $ 12,000 150,000
Vice President of Technology 1996 146,000 -0-
</TABLE>

The Company has entered into employment agreements with Rainer Poertner
(May 8, 1995), Daniel G. Taylor (May 8, 1995), and Wendell Brown (June 1, 1995).
The initial term under these agreements is through June 30, 2000, but unless
either party gives the other written notification 60 days prior to termination
of the initial term or any renewal thereof, the agreements will be extended for
an additional four year term. Nevertheless, these executive officers may
voluntarily terminate their employment with the Company at any time. The
agreement with Mr. Poertner provides for an annualized base salary of $187,500
and $239,000 for FY 1996 and 1997, respectively, with increases of $39,000 each
year thereafter. The agreement with

18
<PAGE> 21

Mr. Taylor provides for an annualized base salary of $150,000 and $185,000 for
FY 1996 and 1997, respectively, with increases of $30,000 each year thereafter.
The agreement with Mr. Brown provides for an annualized base salary of $146,000
and $185,000 during FY 1996 and 1997, respectively, with increases of $30,000
each year thereafter. In addition, all three agreements provide for bonuses to
be paid from time to time in amounts to be determined by the Company's Board of
Directors, and for car allowances of $500 per month. Each of these agreements
provides that during the term of the individual's employment by the Company, and
for a period of two years following the termination of such employment, they
will hold in confidence all knowledge and information of a confidential nature
with respect to the Company's business, and will not engage in any business,
directly or indirectly, under any corporate or trade name used by the Company
without the Company's prior consent.

In addition, at June 30, 1996 the following officers and a former officer
of the company had outstanding loans to the company in the amounts set forth
below in the form of a demand note which bears interest at the rate of prime
plus 2%: Rainer Poertner ($45,000), Daniel G. Taylor ($34,500), Wendell Brown
($34,500) and Kevin P. O'Neill ($34,500).

STOCK OPTION PLAN

In May 1995, the Board of Directors adopted a Stock Option Plan (the
"Plan") which was approved by the Company's shareholders on November 28, 1995.
The Plan allows the Board to grant stock options from time to time to employees,
directors and consultants to the Company. The Board has the power to determine
at the time the option is granted whether the option will be an Incentive Stock
Option (an option which qualifies under Section 422 of the Internal Revenue Code
of 1986) or an option which is not an Incentive Stock Option. Incentive Stock
Options will only be granted to persons who are employees or officers of the
Company. Vesting provisions are determined by the Board at the time options are
granted. On August 1, 1996 the Board approved an increase in the total number of
options to be granted under the plan from 1,200,000 to 1,700,000 (subject to
adjustment in the event of certain recapitalizations, stock splits,
reorganizations and similar transactions). This increase in total number of
options to be granted under the plan must be approved by the Company's
Shareholders. The option price must be satisfied by the payment of cash. The
Board of Directors may amend the Plan at any time, provided that the Board may
not amend the Plan to materially increase the benefits accruing to participants
under the Plan, or materially change the eligible classes of participants
without shareholder approval.

No options were granted to the Company's Chief Executive Officer or named
Executive Officers during fiscal 1996. During fiscal 1996, the Company granted
non-qualified stock options to purchase an aggregate number of 145,000 shares of
Common Stock to other employees, outside directors and consultants to the
Company with the exercise prices equal to the fair market value on the date of
grant with vesting provisions at varying intervals through 1999.

DIRECTOR'S COMPENSATION

Compensation is not provided for directors of the Company who are employee
directors. However, the Company granted each of its two outside directors 15,000
non-qualified stock options on November 7, 1995. These options were granted at
an exercise price of $6.50 which was equal to the fair market value on the date
of grant and were fully vested on the date of grant.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of September 20, 1996, the stock
ownership of each person known by the Company to be the beneficial owner of five
percent or more of the Company's Common Stock, each named Executive Officer and
Director individually and all Executive Officers and Directors of the Company as
a group, in each case on a fully diluted basis including shares underlying stock
options. Each person listed holds sole voting and investment power with respect
to the shares shown, except as noted.

19
<PAGE> 22

The Company does not know of any existing agreements, the operation of
which may at subsequent date result in a change in control of the Company.

<TABLE>
<CAPTION>
ADDRESS OF AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- -------------------------------------- ----------------------- -------------------- --------
<S> <C> <C> <C>
Rainer Poertner....................... c/o Syncronys 2,599,965(1) 17.6%
Softcorp(*)
Wendell Brown......................... c/o Syncronys 1,725,000(2) 11.7%
Softcorp(*)
Daniel G. Taylor...................... c/o Syncronys 6,625,035(3) 44.8%
Softcorp(*)
Lloyd I. Baron........................ c/o Syncronys 15,000(4) 0.1%
Softcorp(*)
Jon D. Sawyer......................... c/o Syncronys 15,000(5) 0.1%
Softcorp(*)
Mobius Capital Corp. ................. Continental Building 6,475,035 43.8%
3rd Floor 25 Church
Street
Hamilton, HMLX Bermuda
All Executive Officers and Directors
as a Group (10 Persons)............. c/o Syncronys 11,570,000(1)(2) 78.2%
Softcorp(*)
(3)(4)
(5)(6)
</TABLE>

- ---------------
(*) 3958 Ince Boulevard, Culver City, CA 90232.

(1) Includes 150,000 shares underlying stock options held by Mr. Poertner, all
of which are fully vested.

(2) Includes 150,000 shares underlying stock options held by Mr. Brown, all of
which are fully vested.

(3) Includes 6,475,035 shares held by Mobius Capital Corp. in which Mr. Taylor
has an indirect beneficial interest and includes 150,000 shares underlying
stock options held by Mr. Taylor, all of which are fully vested.

(4) Includes 15,000 shares underlying stock options held by Mr. Baron, all of
which are fully vested.

(5) Includes 15,000 shares underlying stock options held by Mr. Sawyer, all of
which are fully vested.

(6) Includes 590,000 shares underlying stock options held by other officers and
directors of the Company, which vest in varying intervals through 1999.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SALE OF AUTOSHIP SUBSIDIARY

On January 15, 1996 the Company entered into an agreement with a British
Columbia company (the "Purchaser") to sell the shares in its wholly owned
subsidiary, Autoship Systems Corporation ("Autoship"). This agreement, as
amended February 26, 1996, provides for a purchase price of approximately
$440,000 which is comprised of the forgiveness of an approximately $220,000 note
payable due the purchaser and cash payments over time of approximately $220,000.
The transaction closed on February 29, 1996 and was approved by a committee of
the Company's Board of Directors upon their evaluation of a fairness opinion
issued by an independent investment firm which reviewed and evaluated the
agreement and amendment.

The Purchaser is wholly owned by Dr. Lloyd Baron, an outside member of the
Company's Board of Directors who is not part of the committee of the Company's
Board of Directors which approved this transaction. In March 1995, the Purchaser
sold the Company an 80% interest in Autoship for consideration of approximately
$245,000, comprised mainly of an approximately $220,000 note payable. Also in
March 1995, the remaining 20% interest in Autoship was purchased from an
unaffiliated third party for approximately $120,000 in a convertible debenture
which was subsequently converted to common stock. In March 1995, Daniel G.
Taylor, currently an officer and director of the Company, and Kevin O'Neill, a
former officer of the Company, had an interest in the Purchaser. These interests
were subsequently acquired by Dr. Baron.

The Company believes that this transaction is in the best interests of the
Company and its shareholders. Autoship is not a strategic part of the Company's
business nor has it been a significant source of revenues, profits or cash for
the Company. During the first eight month period of FY 1996 Autoship contributed
approximately 3.8% of the Company's revenues and 1.3% of the Company's losses,
and generated a net use of

20
<PAGE> 23

cash of approximately $14,000. Moreover, the Company believes that this
transaction will improve its financial condition via the forgiveness of debt and
the cash receipts over time.

MERGER WITH SEAMLESS SOFTWARE CORPORATION

On May 8, 1995, the Company completed a merger with Seamless in which the
Company was the surviving corporation. The Company issued a total of 10,500,000
shares (approximately 90%) of its common stock to the shareholders of Seamless.

The 10,500,000 shares issued in the merger with Seamless were issued to the
following shareholders of Seamless in the amounts set forth below:

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
--------------------------------------------- ----------------
<S> <C>
Rainer Poertner.............................. 2,449,965
Wendell Brown................................ 1,575,000
Mobius Capital Corp.(1)...................... 6,475,035
----------
10,500,000
</TABLE>

- ---------------
(1) Daniel G. Taylor, an executive officer and director of the Company, has an
indirect beneficial interest in the 6,475,035 shares held by Mobius Capital
Corp.

TRANSACTIONS INVOLVING SEAMLESS

Since its incorporation in May 1993, Seamless issued 500 shares of its
common stock to each of its two founders, Rainer Poertner and Wendell Brown, for
a cash consideration of $500 each, or a total of $1,000. During February 1995,
Messrs. Poertner and Brown sold 267 and 350 shares of their stock, respectively,
to Mobius Capital Corp.

During the period from Seamless' inception through December 31, 1994, a
company affiliated by the common ownership of Rainer Poertner manufactured
Seamless' software product (MacAccess). This same company also purchased this
product from Seamless and distributed it to software distributors and retailers.
Seamless' sales to this affiliated company totaled $107,545 for the period from
May 23, 1993 to December 31, 1994. During this same period of time, the
affiliated company charged Seamless $57,553 for manufacturing costs for this
product. During the first quarter of calendar 1995, the affiliated company
discontinued its operations and Seamless took over full responsibility for
manufacturing and marketing its products. All balances due and owing between
these parties have been settled.

21
<PAGE> 24

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION LOCATION PAGE NUMBER
- ------ --------------------------------- --------------------------------- -----------
<C> <S> <C> <C>
3.1 Articles of Incorporation Incorporated by reference to the
(Nevada) and Bylaws of Redstone Issuer's Form 10-KSB dated
Capital, Inc. October 4, 1995
3.2 Articles of Merger dated May 5, Incorporated by reference to the
1995, merging Seamless Software Issuer's Form 8-K dated May 8,
Corporation into Redstone 1995
Capital, Inc. and changing its
name to Syncronys Softcorp
10.1 Stock Option Plan Incorporated by reference to the
Issuer's Form 10-KSB dated
October 4, 1995
10.2 Agreement dated April 6, 1995 Incorporated by reference to the
among Redstone Capital, Inc., Issuer's Form 8-K dated May 8,
Seamless Software Corporation, 1995
Mobius Capital Corp., Rainer
Poertner, Wendell Brown and
Mark Moldenhauer
10.3 Agreements dated February 24, Incorporated by reference to the
1995 and March 10, 1995 among Issuer's Form 10-KSB dated
Seamless Software Corporation and October 4, 1995
Hypro Technologies, Inc. and
Seamless Software Corporation and
Grayshire Research LTD.
10.4 Agreement dated January 15, 1996 Incorporated by reference to the
as amended February 26, 1996 Issuer's Form 10-KSB dated
among Syncronys Softcorp and September 30, 1996
Seamless Software Corporation
10.5 Employment Agreement with Incorporated by reference to the
Rainer Poertner Issuer's Form 10-KSB dated
October 4, 1995
10.6 Employment Agreement with Incorporated by reference to the
Daniel G. Taylor Issuer's Form 10-KSB dated
October 4, 1995
10.7 Employment Agreement with Wendell Incorporated by reference to the
Brown Issuer's Form 10-KSB dated
October 4, 1995
10.8 Employment Agreement with Incorporated by reference to the
David F. Gatto Issuer's Form 10-KSB dated
September 30, 1996
10.9 Employment Agreement with Incorporated by reference to the
Jon Jackson Issuer's Form 10-KSB dated
September 30, 1996
11 Statement re: Computation of Per Incorporated by reference to the
Share Earnings Issuer's Form 10-KSB dated
September 30, 1996
21 Subsidiaries of registrant Incorporated by reference to the
Issuer's Form 10-KSB dated
September 30, 1996
27 Financial Data Schedule Incorporated by reference to the
Issuer's Form 10-KSB dated
September 30, 1996
</TABLE>

(b) Reports on Form 8-K

During the last quarter of the period covered by this Report the Company
filed two reports on Form 8-K dated December 18, 1995 and June 12, 1996, to
report under Item 5 the SoftRAM Product Recall, FTC Investigation and Legal
Proceedings and the Completion of Private Placement of $13 Million Aggregate
Principal Amount of Debentures, respectively.

22
<PAGE> 25

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

SYNCRONYS SOFTCORP

Dated: May 15, 1997 By: /s/ DANIEL G. TAYLOR

------------------------------------
Daniel G. Taylor, Chairman of the
Board

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

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ ----------------------------------- --------------

<C> <S> <C>
/s/ DANIEL G. Chairman of the Board, Executive May 15, 1997
TAYLOR Vice President of Marketing and
- ------------------------------------------ Secretary
Daniel G. Taylor

/s/ RAINER Chief Executive Officer, President May 15, 1997
POERTNER and a Director
- ------------------------------------------
Rainer Poertner

/s/ BARBARA Chief Financial Officer (Principal May 15, 1997
VELLINE Accounting Officer)
- ------------------------------------------
Barbara Velline

/s/ LLOYD I. Director May 15, 1997
BARON
- ------------------------------------------
Lloyd I. Baron

/s/ JON D. Director May 15, 1997
SAWYER
- ------------------------------------------
Jon D. Sawyer
</TABLE>

23
<PAGE> 26

INDEPENDENT AUDITOR'S REPORT

The Board of Directors and Stockholders
Syncronys Softcorp:

We have audited the accompanying consolidated balance sheet of Syncronys
Softcorp and subsidiary as of June 30, 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended June 30, 1996 and 1995, which financial statements have been restated as
described in Note 17. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Syncronys
Softcorp and subsidiary as of June 30, 1996 and the results of their operations
and their cash flows for the years ended June 30, 1996 and 1995 in conformity
with generally accepted accounting principles.

/s/ KPMG PEAT MARWICK LLP

Long Beach, California

August 16, 1996, except for Note 17,

as to which the date is May 15, 1997

F-1
<PAGE> 27

SYNCRONYS SOFTCORP

CONSOLIDATED BALANCE SHEET
JUNE 30, 1996

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 10,027,386
Trade accounts receivable,net........................................ 128,427
Other receivables.................................................... 2,242,236
Income tax refund receivable......................................... 903,112
Prepaid expenses and other current assets............................ 229,946
------------
Total current assets......................................... 13,531,101
Property and equipment, net............................................ 123,017
Note receivable, excluding current portion............................. 146,670
Unamortized debt issuance and debt discount costs...................... 2,000,930
Amounts due from related parties, principally shareholders............. 148,500
------------
$ 15,950,218
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Trade accounts payable............................................... $ 1,040,471
Accrued expenses..................................................... 5,042,198
Product recall liability............................................. 3,361,757
------------
Total current liabilities.................................... 9,444,426
------------
Convertible debentures................................................. 13,167,596
Stockholders' deficiency:
Common stock, $.0001 par value. Authorized 75,000,000 shares;
issued and outstanding 13,971,011 shares.......................... 1,397
Additional paid in capital........................................... 4,981,856
Preferred stock, $.0001 par value. Authorized 10,000,000 shares; zero
shares issued and outstanding..................................... --
Accumulated deficit.................................................. (11,645,057)
------------
Total stockholders' deficiency............................... (6,661,804)
------------
Commitments and contingencies
$ 15,950,218
============
</TABLE>

See accompanying notes to consolidated financial statements

F-2
<PAGE> 28

SYNCRONYS SOFTCORP

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995 AND 1996

<TABLE>
<CAPTION>
1995 1996
---------- ------------
<S> <C> <C>
Net revenues before product recall returns........................ $3,580,404 12,797,786
Product recall returns............................................ -- 5,767,375
Cost of revenues.................................................. 280,195 1,251,126
----------- ------------
Gross profit............................................ 3,300,209 5,779,285
----------- ------------
Operating expenses:
Research and development........................................ 676,037 1,521,374
Marketing and selling........................................... 797,845 6,199,631
General and administrative...................................... 547,642 2,694,776
Nonrecurring charge -- product recall........................... -- 6,577,277
----------- ------------
Total operating expenses................................ 2,021,524 16,993,058
----------- ------------
Operating income (loss)................................. 1,278,685 (11,213,773)
Other (expense) income:
Amortization of discount on convertible
debentures charged to interest expense....................... -- (1,298,593)
Other........................................................... (63,034) 105,821
----------- ------------
Total other (expense) income............................ (63,034) (1,192,772)
Income (loss) before income taxes....................... 1,215,651 (12,406,545)
Income tax expense (benefit)...................................... 523,303 (384,595)
----------- ------------
Net income (loss)....................................... $ 692,348 (12,021,950)
=========== ============
Net earnings (loss) per share..................................... $ .05 (.87)
=========== ============
Weighted average number of common shares and
common share equivalents used in computation
of net earnings (loss) per share................................ 13,251,693 13,849,136
=========== ============
</TABLE>

See accompanying notes to consolidated financial statements

F-3
<PAGE> 29

SYNCRONYS SOFTCORP

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)

YEARS ENDED JUNE 30, 1995 AND 1996

<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK ADDITIONAL EARNINGS FOREIGN STOCKHOLDERS'
------------------- PAID IN (ACCUMULATED CURRENCY EQUITY
SHARES AMOUNT CAPITAL DEFICIT) TRANSLATION (DEFICIENCY)
---------- ------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994............ 12,956,574 $1,296 $ 258,745 $ (315,455) $ -- $ (55,414)
Common stock issued for cash........ 804,437 80 1,608,794 -- -- 1,608,874
Debenture converted to common
stock............................. 60,000 6 119,994 -- -- 120,000
Foreign currency translation
adjustment........................ -- -- -- -- (9,496) (9,496)
Net income.......................... -- -- -- 692,348 -- 692,348
---------- ----- --------- ----------- ------ -----------
Balance at June 30, 1995............ 13,821,011 1,382 1,987,533 376,893 (9,496) 2,356,312
Issuance of common stock in exchange
for consulting services........... 150,000 15 356,235 -- -- 356,250
Issuance of stock options in
exchange for consulting
services.......................... -- -- 717,633 -- -- 717,633
Foreign currency translation
adjustment........................ -- -- -- -- 9,496 9,496
Discount on issuance of convertible
debentures........................ -- -- 1,920,455 -- -- 1,920,455
Net loss............................ -- -- -- (12,021,950) -- (12,021,950)
---------- ----- --------- ----------- ------ -----------
Balance at June 30, 1996............ 13,971,011 $1,397 $4,981,856 $(11,645,057) $ -- $ (6,661,804)
========== ===== ========= =========== ====== ===========
</TABLE>

See accompanying notes to consolidated financial statements

F-4
<PAGE> 30

SYNCRONYS SOFTCORP

CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1996

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $(12,021,950)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount on convertible debentures charged to interest
expense.................................................................. 1,298,593
Depreciation and amortization............................................. 181,390
Gain on sale of subsidiary................................................ (202,616)
Change in deferred taxes.................................................. 230,000
Non-cash expense related to the issuance of stock and stock options....... 1,073,883
Accrued interest on debentures............................................ 167,596
Other..................................................................... (3,485)
Changes in operating assets and liabilities:
Trade accounts receivable................................................. 2,457,077
Other receivables......................................................... (2,266,987)
Income tax refund receivable.............................................. (903,112)
Inventories............................................................... 27,733
Prepaid expenses and other current assets................................. (62,831)
Amounts due from related parties, principally shareholders................ (148,500)
Accounts payable.......................................................... 846,226
Accrued expenses.......................................................... 4,828,522
Product recall liability.................................................. 3,361,757
Taxes payable............................................................. (724,994)
-----------
Net cash used in operating activities................................ (1,861,698)
-----------
Net cash used in investing activities:
Capital expenditures......................................................... (293,201)
-----------
Net cash used in investing activities................................ (293,201)
Net cash provided in financing activities:
Issuance of debentures, net of issuance costs................................ 11,570,000
Principal payments on long-term debt......................................... (93,681)
-----------
Net cash provided by financing activities............................ 11,476,319
Net increase in cash and cash equivalents............................ 9,321,420
Cash and cash equivalents at beginning of year................................. 705,966
-----------
Cash and cash equivalents at end of year....................................... $ 10,027,386
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes was $903,112
No cash was paid during the year for interest
Supplemental disclosure of non-cash activities:
Forgiveness of indebtedness in conjunction with sale of
Subsidiary -- $220,000
</TABLE>

See accompanying notes to consolidated financial statements

F-5
<PAGE> 31

SYNCRONYS SOFTCORP

CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1995

<TABLE>
<S> <C>
Cash flows from operating activities:
Net income..................................................................... $ 692,348
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization............................................... 91,538
Increase in deferred tax assets............................................. (230,000)
Increase in allowance for doubtful accounts and returns..................... 375,000
Changes in operating assets and liabilities:
Accounts receivable......................................................... (2,793,663)
Inventories................................................................. (27,733)
Prepaid expenses and other current assets................................... (100,106)
Other assets................................................................ 5,872
Accounts payable............................................................ 238,854
Accrued expenses............................................................ 213,676
Taxes payable............................................................... 724,994
----------
Net cash used in operating activities.................................. (809,220)
----------
Net cash used in investing activities:
Capital expenditures........................................................... (37,603)
Net cash provided by financing activities:
Issuance of debentures, net of issuance costs.................................. 1,608,874
Principal payments on long-term debt........................................... (57,600)
----------
Net cash provided by financing activities.............................. 1,551,274
Effect of exchange rate changes on cash and cash equivalents..................... (9,496)
Net increase in cash and cash equivalents.............................. 694,955
Cash and cash equivalents at beginning of year................................... 11,011
----------
Cash and cash equivalents at end of year......................................... $ 705,966
==========
Supplemental disclosure of cash flow information:
No cash was paid during the year for income taxes or interest
Supplemental disclosure of non-cash activities:
The Company issued 60,000 shares of common stock in exchange for redemption of a
$120,000 debenture issued in connection with the purchase of the remaining
minority interest of Autoship Systems Corporation
</TABLE>

See accompanying notes to consolidated financial statements

F-6
<PAGE> 32

SYNCRONYS SOFTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION

Syncronys Softcorp (the "Company") develops and markets software products
for sale principally to software distributors and retailers in the U.S. and
Canada. The Company was originally incorporated under the laws of the State of
Colorado on May 2, 1986, under the name "Signum Inc." for the purpose of
evaluating, structuring and completing a merger with, or acquisition of, a
business opportunity. In December 1986, the Company completed an initial public
offering of its securities. In November 1987, the Company completed the
acquisition of certain assets and entered into the business of attempting to
develop a secure modem product designed to protect computer based information.
The business ceased operations during 1988 when the Company had depleted its
working capital.

The Company remained inactive until April, 1994 when it arranged for the
receipt of a limited amount of funds to recommence minimal operations. On May 9,
1994 the shareholders of the Company approved a name change to "Redstone
Capital, Inc." ("Redstone"), a merger with a newly formed Nevada corporation,
for the purpose of changing the Company's state of domicile to Nevada and a
reduction of the shares outstanding through a 1 for 400 reverse stock split. All
financial information and share data contained herein has been adjusted to
reflect the reverse split.

On May 4, 1995, the Company's shareholders approved a merger with Seamless
Software Corporation ("Seamless") and a change of the Company's name to
Syncronys Softcorp. The merger with Seamless was completed on May 8, 1995, with
the Company being the surviving corporation. Seamless was a software developer
and publisher with offices in Culver City, California and Vancouver, British
Columbia. Seamless was incorporated in Delaware on May 11, 1993, under the name
Hypro Technologies, Inc. ("Hypro"), and in March 1995, Hypro effected a merger
with a newly formed Nevada corporation for the purposes of changing its domicile
to Nevada and changing its name to Seamless Software Corporation. In April 1995,
Seamless acquired all of the outstanding common stock of Autoship Systems
Corporation ("Autoship"), a company engaged in research, development and
marketing of computer software for the marine industry. On March 1, 1996 the
Company sold its interest in the Autoship subsidiary and recognized a gain on
the sale of approximately $202,000.

At the time of the acquisition of Autoship by Seamless the defacto
controlling beneficial shareholder and chief executive officer of Autoship also
owned an indirect majority beneficial interest in Seamless. Redstone shares were
issued to a corporation in which this individual has an indirect beneficial
interest. In connection with the merger with Seamless the shares issued to the
corporation aggregated 6,475,035 or approximately 55% of total common shares
outstanding. Subsequent to such merger an additional 4,024,965 shares, or
approximately 35% of total outstanding shares, were issued to the two remaining
shareholders of Seamless. Accordingly, the historical financial statements of
the Company (formerly "Redstone"), as successor to the Seamless and Autoship
businesses, include the combined operations of Seamless for all periods
presented and Autoship through February 29, 1996. Additionally, assets and
liabilities are recorded at the original accounting basis prior to the merger.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash and cash equivalents includes certificates of deposit with an initial
term of less than three months.

Revenue Recognition

The Company recognizes revenues as products are shipped, net of allowances
for returns, provided that no significant vendor obligations remain and
collection of the resulting receivable is deemed probable by management. The
Company provides customer support as an accommodation to purchasers of its
products for

F-7
<PAGE> 33

SYNCRONYS SOFTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

a limited time. Costs associated with such post sale customer support have been
provided for in accrued expenses on the accompanying balance sheet.

Revenue Related Reserves

Reserves for sales returns are established based upon historical experience
and management's estimates as shipments are made. The allowance for sales
returns totaled $1,166,387 at June 30, 1996, and is shown as a reduction of
accounts receivable on the accompanying balance sheet.

Net revenues before product recall returns in 1995 and 1996 are net of
recurring product return reserves expense of $340,000 and $1,166,387,
respectively. Direct costs incurred by the Company for repurchase of products
under the product recall program initiated by the Company, which aggregated
$5,767,375 in 1996, are classified as product recall returns (note 9).

Research and Development Costs

Costs related to designing, developing and testing new software products
are expensed as research and development as incurred. Although costs incurred
subsequent to establishing technological feasibility of software products are
permitted capitalization pursuant to Statement of Financial Accounting Standards
("SFAS") No. 86 (Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed), the Company has not capitalized any software
development costs since the impact to the financial statements for the periods
presented has been immaterial. Research and development costs aggregated
$676,037 and $1,521,374 for the fiscal years ended June 30, 1995 and 1996,
respectively.

Depreciation and Amortization

Property and equipment are stated at cost. Depreciation is provided on
furniture and equipment using the straight-line method over the estimated
economic life of the assets, generally three years. Depreciation is provided on
leasehold improvements using an accelerated method over the estimated economic
life or the lease term, whichever is shorter.

Income Taxes

The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109).
Statement 109 requires that deferred income taxes be recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.

Net Earnings (Loss) per Share

Net earnings per share are based on the weighted average number of common
and common equivalent shares outstanding during each period. Additionally,
common shares issued in the merger of Seamless into the Company (note 1) have
been assumed to be outstanding for all periods presented. Common stock
equivalents and convertible debentures have been excluded from the computation
for the year ended June 30, 1996, a loss period, as their inclusion would be
anti-dilutive.

Financial Instruments

The Financial Accounting Standards Board's SFAS No. 107 (Disclosures about
Fair Value of Financial Instruments) defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The Company's carrying value of trade and
other accounts receivables, income tax receivable, notes receivable, accounts
payable, accrued expenses, product

F-8
<PAGE> 34

SYNCRONYS SOFTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recall liability and convertible debentures approximates fair value because the
instrument has a short-term maturity or because applicable interest rates are
comparable to current borrowing rates.

Long-Lived Assets

In March 1995, SFAS No. 121 (Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of) was issued. This statement
provides guidelines for recognition of impairment losses related to long-term
assets and is effective for fiscal years beginning after December 15, 1995. The
Company's management does not believe that the adoption of this new standard
will have a material effect on the Company's financial statements.

Accounting for Stock Options

In October 1995, SFAS No. 123 (Accounting for Stock-Based Compensation) was
issued. This statement encourages, but does not require, a fair value based
method of accounting for employee stock options and will be effective for fiscal
years beginning after December 15, 1995. While the Company is still evaluating
SFAS No. 123, it currently expects to elect to continue to measure and to
recognize compensation costs under APB Opinion No. 25 (Accounting for Stock
Issued to Employees) and to comply with the pro forma disclosure requirements of
SFAS No. 123. If the Company makes this election, SFAS No. 123 will have no
impact on the Company's financial statements.

Use of Estimates

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

(3) OTHER RECEIVABLES

Other receivables at June 30, 1996 consists primarily of a $2,000,000
receivable from the Company's primary director's and officer's insurance carrier
for reimbursement of a lawsuit settlement. As discussed at note 15, the Company
has reached a settlement in principle whereby the Company would pay $3,250,000
as full settlement. The Company's primary director's and officer's insurance
carrier has agreed to contribute $2,000,000 to the settlement pursuant to the
terms of the insurance policy.

(4) UNAMORTIZED DEBT ISSUANCE COSTS

Unamortized debt issuance costs of $1,379,068 at June 30, 1996 represent
the unamortized portion of fees and expenses related to the Company's issuance
of $13 million in convertible debentures (see note 10). The debt issuance costs
will be amortized through the date of conversion or the maturity date, whichever
is earlier.

F-9
<PAGE> 35

SYNCRONYS SOFTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) PROPERTY AND EQUIPMENT

Property and equipment at June 30, 1996 consists of the following:

<TABLE>
<S> <C>
Computer and office equipment..................................... $ 33,341
Furniture and equipment........................................... 92,241
Leasehold improvements............................................ 73,551
--------
199,133
Less accumulated depreciation and amortization.................... (76,116)
--------
$123,017
========
</TABLE>

(6) NOTE RECEIVABLE FROM RELATED PARTY

On March 1, 1996, the Company sold Autoship, its wholly-owned subsidiary,
(see note 1) to a British Columbia company in which an outside director of the
Company is the sole shareholder. Pursuant to the sale agreement, the Company
received forgiveness of indebtedness of CDN$300,000 (or approximately
US$220,000) and a note for CDN$300,000 (or approximately US$220,000). The
Company believes that the terms of the sale are comparable to those applicable
under an arms-length transaction.

The note receivable bears no interest, is secured by the assets of Autoship
and requires annual principal payments of CDN$100,000 on March 1 1997, 1998 and
1999. The long-term portion of the note receivable totaled USD$146,670 at June
30, 1996. The current portion of $73,330 at June 30, 1996 is reflected in other
receivables on the accompanying balance sheet.

(7) AMOUNTS DUE FROM RELATED PARTIES, PRINCIPALLY SHAREHOLDERS

At June 30, 1996 the Company had $148,500 in amounts due from certain
officers and shareholders, and a former officer of the Company. The loans bear
interest at a rate of prime plus 2% with the principal amount of the loan to be
paid on demand. The Company does not anticipate collecting the amounts within
the next twelve months.

(8) ACCRUED EXPENSES

Accrued expenses at June 30, 1996 consist of the following:

<TABLE>
<S> <C>
SoftRAM litigation and settlement costs.......................... $4,299,318
Sales and marketing expenses..................................... 484,386
Other............................................................ 258,494
----------
$5,042,198
==========
</TABLE>

(9) PRODUCT RECALL LIABILITY

The Company announced on October 20, 1995 that it had identified a problem
with the Windows 95 version of its primary product SoftRAM (SoftRAM95), the net
result of which is that Random Access Memory ("RAM") was not being delivered to
the Windows 95 operating system. On December 18, 1995, the Company initiated the
recall of SoftRAM95 from the retail channel. As a result of the product problem
and recall, various third parties asserted legal claims against the Company (see
note 15). Although the final cost of the recall cannot be estimated with
certainty, the Company has taken one time charges totalling $12,344,652

F-10
<PAGE> 36

SYNCRONYS SOFTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

during fiscal 1996 to provide for the expected costs of this recall. The
nonrecurring charge consists of the following:

<TABLE>
<S> <C>
Estimated returns related to product recall..................... 5,767,375
Refund and upgrade obligation arising from legal settlement..... $ 2,358,200
Other legal settlements and related fees........................ 4,219,077
-----------
$12,344,652
===========
</TABLE>

The product recall liability at June 30, 1996 consists of the following:

<TABLE>
<S> <C>
Sales returns on collected sales................................. $1,003,557
Refund and upgrade obligation arising from legal settlement...... 2,358,200
----------
$3,361,757
==========
</TABLE>

(10) CONVERTIBLE DEBENTURES

On May 22, 1996, the Company completed a $13 million private placement of
convertible debentures. The convertible debentures were sold at 100 percent of
principal amount and carry an interest rate of ten percent, with interest
deferred until the earliest of the date of conversion, redemption or May 17,
1999. The debentures are initially convertible at the option of the holder
beginning in 45 days from the closing date into free trading shares of the
Company's common stock at the lessor of $5.50 per share or eighty five percent
of the market price of the Company's common stock at the time of conversion. Any
debentures not converted by May 22, 1999 and related accrued interest will
automatically be converted into common stock based on the conversion rate, as
defined.

Each convertible debenture carries a warrant entitling its holder to
initially purchase a number of shares of the Company's common stock, equal to
the aggregate principal amount of such debenture divided by $5.50. Warrants are
not exercisable for 105 days from the date of issuance, have a five-year term
and are exercisable at a purchase price of $5.50 per share. The value ascribed
to the warrants was not material to the Company's consolidated financial
statements.

(11) INCOME TAXES

Income tax expense (benefit) for the years ended June 30, 1995 and 1996 is
as follows:

<TABLE>
<CAPTION>
1995
-------------------------------------
CURRENT DEFERRED TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Federal................................. $ 608,821 $(195,000) $ 413,821
State................................... 144,482 (35,000) 109,482
-------- --------- --------
$ 753,303 $(230,000) $ 523,303
======== ========= ========
</TABLE>

<TABLE>
<CAPTION>
1996
-------------------------------------
CURRENT DEFERRED TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Federal................................. $(530,546) $ 195,000 $(335,546)
State................................... (84,049) 35,000 (49,049)
--------- --------- ---------
$(614,595) $ 230,000 $(384,595)
========= ========= =========
</TABLE>

F-11
<PAGE> 37

SYNCRONYS SOFTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income tax expense differs from the amount computed by applying the Federal
statutory tax rate of 34% to income (loss) before income taxes as shown below:

<TABLE>
<CAPTION>
1995 1996
-------- -----------
<S> <C> <C>
Computed "expected" income tax (benefit) expense.... $413,321 $(4,218,225)
Nondeductible items -- compensation expense......... -- 365,120
Nodeductible items -- amortization of discount on
convertible debentures............................ -- 441,521
Change in the valuation allowance................... -- 3,433,000
State income taxes, net of Federal benefit.......... 109,482 10,443
Carryback and refund of taxes from prior year....... -- (413,821)
Other............................................... 500 (2,633)
----------
-
--------
$523,303 $ (384,595)
=========== ========
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at June 30, 1995
and 1996 are presented below:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves.................... $ 127,500 $ 94,000
Inventory....................................... -- 131,000
Net operating loss carryforwards................ -- 2,665,000
Accrued expenses................................ 68,000 520,000
Other........................................... 34,500 23,000
-------- -----------
Total gross deferred tax asset.................... 230,000 3,433,000
Less: valuation allowance......................... -- (3,433,000)
-------- -----------
Net deferred tax asset............................ $ 230,000 $ --
======== ===========
</TABLE>

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this
assessment. Based on the level of historical taxable income and projections for
future taxable income over the periods in which the level of deferred tax assets
are deductible, management believes that it is not more likely than not that the
Company will realize the benefits of these deductible differences at June 30,
1996. Accordingly, a valuation allowance has been provided for the total
deferred tax assets.

(12) STOCK OPTION PLAN

In May, 1995 the Board of Directors (the "Board") of the Company adopted
the "1995 Stock Option Plan" (the "Plan") which was approved by the Company's
shareholders on November 28, 1995. The Plan allows the Board to grant stock
options from time to time to employees, officers, directors of the Company and
consultants to the Company. At the time of grant of the options the Board
determines whether the options are to be "Incentive Stock Options" or
"Non-Qualified Stock Options". Incentive Stock Options may only be granted to
employees of the Company. The options vest over periods prescribed by the Board
at the time of grant. The Plan may be amended at any time by the Board of
Directors of the Company under certain restrictions. All options granted through
June 30, 1996 have been granted at exercise prices equal to the fair market
value at the date of grant. In addition, the Company grants stock options to
third parties from time to time under an informal option plan.

F-12
<PAGE> 38

SYNCRONYS SOFTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock option activity under the Plans follows:

<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
--------- -----------
<S> <C> <C>
Balance at June 30, 1995............................ 703,000 $ 6.50
Options granted..................................... 980,000 2.625-6.50
Options terminated.................................. (56,918) 6.50
------- -----------
Balance at June 30, 1996............................ 1,626,082 $2.625-6.50
======= ===========
</TABLE>

Under the terms of the plans 818,000 options are fully vested as of June
30, 1996. The remaining 808,082 options issued to employees or consultants vest
at varying intervals through 1999. On August 1, 1996, the Board approved an
increase in the total number of options to be granted under the plan from
1,200,000 to 1,700,000 (subject to adjustment in the event of certain
recapitalizations, stock splits, reorganizations and similar transactions). This
increase in total number of options to be granted under the plan must be
approved by the Company's Shareholders.

During the year ended June 30, 1996 the Company granted 935,000 options to
non-employees in exchange for certain product licensing agreements and services.
In accordance with SFAS No. 123 provisions requiring recording of the fair value
of services received for options granted to non-employees, the Company recorded
compensation expense of $717,633 for the vested portion of the estimated fair
value of the stock options at the date of grant. Unvested options with a value
at the grant date of $574,462 will be expensed over the vesting period,
generally one to three years. The fair value of each option grant was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected volatility of 70%; risk-free
interest rates of 6.25%; and expected lives ranging from two to three years.

(13) SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND OTHER
CONCENTRATIONS

Significant Customers

The Company has three significant customers that comprised 37%, 30% and
11%, respectively, of net sales for the year ended June 30, 1996. During the
year ended June 30, 1995 sales to two customers comprised 45% and 21%,
respectively, of net sales.

Concentration of Credit Risk

Certain financial instruments subject the Company to credit risk. These
financial instruments consist primarily of trade receivables. The Company sells
its products primarily to software distributors and resellers. The Company
performs ongoing credit evaluations of its customers and maintains reserves,
including reserves to estimate the potential for future product returns.

Other Concentrations

The Company's SoftRAM product line represents 96% and 71% of the Company's
net sales for the years ended June 30 1996 and 1995, respectively. As a result
of the Company's recall of SoftRAM, the Company's future revenues are dependent
upon the Company's ability to develop new products, including the new version of
SoftRAM.

F-13
<PAGE> 39

SYNCRONYS SOFTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) SCHEDULE OF VALUATION AND QUALIFYING ACCOUNT

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COST AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1996
Allowance for doubtful accounts....... $ 35,000 -- (35,000) $ --
Allowance for sales reserves.......... 340,000 5,930,205(1)(3) 5,103,818(2) 1,166,387
</TABLE>

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

(1) $1,166,387 has been charged against net sales and $4,763,818 has been
recorded as a nonrecurring charge.
(2) Actual returns and product recalled by the Company during the year ended
June 30, 1996.
(3) An additional $1,003,557 has been charged as expense and recorded as product
recall liability as of June 30, 1996.

(15) COMMITMENTS AND CONTINGENCIES

The Company rents its facility under an informal lease arrangement which
requires monthly payments ranging from $8,900 to $10,500 over the three year
lease term expiring in December 1998. Rent expense for the years ended June 30,
1995 and 1996 were $32,436 and 71,908, respectively. The minimum lease
commitments under the lease aggregate as follows:

<TABLE>
<S> <C>
For the year ended June 30:
1997.............................................................. $111,000
1998.............................................................. 121,000
1999.............................................................. 63,000
--------
Total minimum lease commitments.............................. $295,000
========
</TABLE>

The Company is obligated under employment agreements with certain officers
of the Company which have initial terms through 2000 and renewal options for
each four year period thereafter.

The Company has been engaged in various lawsuits arisng from the product
recall during the year ended June 30, 1996. As of June 30, 1996, the Company has
reached settlement in principle on two of its lawsuits. In one of the lawsuits,
the Company and certain current or former directors and officer of the Company
have been named as defendants in a putative class action lawsuit commenced on
December 14, 1995 in the United States District Court. The complaint claims that
purchasers of the Company's common stock between June 1, 1995 and December 7,
1995 suffered damages. The putative class is seeking damages of an unspecified
amount, injunctive relief and the costs and expenses of litigation including
attorneys fees. The parties have reached settlement in principle, whereby the
defendants would pay $3,250,000 in full settlement. The Company's primary
director's and officer's insurance carrier has agreed to contribute up to
$2,000,000 to the settlement. The Company's excess director's and officer's
insurance carrier has agreed to contribute up to $1,250,000 to the settlement,
but has preserved its coverage defenses and has reserved its right to bring a
declaratory action against the Company to recover its contributions. The parties
have submitted the settlement papers to the court. Any settlement is subject to
notice and court approval. The Company has provided for the $3,250,000 in
accrued expenses on the accompanying balance sheet and has recorded a receivable
for the $2,000,000 to be reimbursed by the primary insurance carrier (see note
3). In the second lawsuit, the Company has agreed to pay an immaterial amount,
which the Company has provided for in accrued expenses in the accompanying
balance sheet. The Company has secured final settlement on all other lawsuits
arising from the product recall and has provided for the settlement costs in
full as of June 30, 1996. Although the

F-14
<PAGE> 40

SYNCRONYS SOFTCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company is not aware of any other asserted or unasserted legal claims, there can
be no assurance that other claims relating to the product recall will not be
asserted in the future.

(16) SUBSEQUENT EVENTS

On August 5, 1996, the Company entered into an agreement to acquire a
foreign software developer. As part of the agreement, the Company will issue
400,000 shares of its common stock upon the closing of the transaction and will
issue up to 600,000 shares in future periods if certain performance milestones,
as defined in the agreement, are achieved. This transaction is subject to due
diligence, various governmental approvals and other conditions, and accordingly,
there can be no assurance that this transaction will be consummated. The
transaction, if consummated, will be accounted for under the purchase method.

(17) RESTATEMENT OF FINANCIAL STATEMENTS

In March 1997, the Securities and Exchange Commission issued a new
interpretation for the accounting for convertible preferred stock and
convertible debt instruments issued with provisions providing for conversion
into common stock at a discount from the market price of the common stock. The
new interpretation provides that assured incremental yield embedded in the
conversion terms' discount from fair market value should be accounted for as an
additional interest expense in the case of convertible debt and as a dividend to
preferred shareholders in the case of convertible preferred stock. Accordingly,
the Company has restated its financial statements for the year ended June 30,
1996. At June 30, 1996, compliance with this new ruling resulted in a non-cash
charge to interest expense of $1.3 million, and accounted for a $0.10 per share
increase in the Company's net loss per share. Additional charges aggregating
$621,862 relating to the original issue discount will be amortized as interest
expense over the remaining conversion period of the debenture, approximately
three months. This unamortized discount has been classified as prepaid expenses
and other current assets on the accompanying consolidated financial statements.

A summary of the impact of such restatement on the financial statements for
the year ended June 30, 1996 is as follows:

<TABLE>
<CAPTION>
PREVIOUSLY
REPORTED AS RESTATED
----------- -----------
<S> <C> <C>
Net loss.................................................. (10,723,357) (12,021,950)
Net loss per share........................................ (.77) (.87)
Assets.................................................... 15,328,356 15,950,218
Stockholders' deficiency.................................. (7,283,666) (6,661,804)
</TABLE>

F-15

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, THE CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 10,027,386
<SECURITIES> 0
<RECEIVABLES> 3,273,775
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,531,101
<PP&E> 123,017
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,950,218
<CURRENT-LIABILITIES> 9,444,426
<BONDS> 13,167,596
0
0
<COMMON> 1,397
<OTHER-SE> (6,663,201)
<TOTAL-LIABILITY-AND-EQUITY> 15,950,218
<SALES> 12,797,786
<TOTAL-REVENUES> 7,030,411
<CGS> 1,251,126
<TOTAL-COSTS> 16,993,058
<OTHER-EXPENSES> (1,192,772)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,406,545)
<INCOME-TAX> (384,595)
<INCOME-CONTINUING> (12,021,950)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,021,950)
<EPS-PRIMARY> (.87)
<EPS-DILUTED> 0

</TABLE>