INSCI CORP, 10KSB, 1998-06-29

INSCI CORP
10KSB, 1998-06-29
COMPUTER INTEGRATED SYSTEMS DESIGN

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER
MARCH 31, 1998 1-12966
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INSCI CORP
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(Exact name of registrant specified in its charter)

DELAWARE TWO WESTBOROUGH BUSINESS PARK, WESTBOROUGH, MA 06-1302773
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(State or other (Address of Principal executive offices) (I.R.S. Employer
jurisdiction of Identification
incorporation No.)
or organization)

01581
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Zip Code
(508) 870-4000
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(Registrant's Telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Title of each class

COMMON STOCK, $.01 PAR VALUE
REDEEMABLE WARRANTS

(REDEEMABLE BY COMPANY BASED ON A FORMULA, OR TWO WARRANTS CAN BE EXERCISED
AT AN AGGREGATE PRICE OF $9.00 FOR ONE SHARE OF COMMON STOCK)

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

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

The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the average of the closing bid and asked
quotations for the Common Stock on June 15, 1998, as reported by NASDAQ, was
approximately $6,839,037. As of June 15, 1998, registrant had outstanding
6,839,037 shares of Common Stock

Revenues for the fiscal year ended March 31, 1998 were $9,805,000.

Part III incorporates information by reference to the registrant's definitive
proxy statement for its 1998 Annual Meeting of Stockholders to be filed with the
Commission within 120 days following March 31, 1998.

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INSCI CORP
FORM 10-KSB
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
INDEX

PART I
Page
Item 1. Business....................................................... 3

Item 2. Properties..................................................... 14

Item 3. Legal Proceedings.............................................. 14

Item 4. Submission of Matters to a Vote of Securities Holders.......... 15

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .......................................... 16

Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 16

Item 7. Financial Statements........................................... 22

Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures........................... 22

PART III

Item 9. Directors and Executive Officers of the Registrant............. 23

Item 10. Executive Compensation......................................... 23

Item 11. Security Ownership of Certain Beneficial Owners and Management 23

Item 12. Certain Relationships and Related Transactions................. 23

Item 13. Exhibits and Reports on Form 8-K............................... 23

SIGNATURES................................................................ 24

EXHIBIT INDEX........................................................ See List

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PART I

ITEM 1. BUSINESS

Overview

INSCI Corp (INSCI or the Company) develops, markets, implements and
services a family of integrated document management software products designed
to meet the enterprise-wide needs of organizations which rely on documents for
the conduct of business. The Company provides its customers with the ability to
electronically capture and store computer output and source documents and to
enable access and delivery of these documents electronically or via reprints in
a fashion that lowers cost, improves quality, improves service and provides
greater competitive advantage. The Company markets its products in more than 40
countries through a combination of direct sales and reseller channels.

During fiscal 1997 and 1998, the Company's operations were focused in
four areas; (1) expansion of the functionality and performance of its existing
Unix based products, (2) development of it core technology products to operate
on the Windows NT platform, (3) expansion of indirect sales channels, and (4)
expansion of its services infrastructure. The Company's management believes that
the financial investments made in these four areas are vital to attaining a
sustainable long term competitive advantage.

During fiscal 1997 and 1998, the Company announced the addition of six
new products to its offerings; WebCOINS, an Internet product; COINSflow, a
workflow product; Advanced COINSCAN, an imaging product; Advanced COINSERV, a
document archive and retrieval product; COINS Demander, a database interface;
and Setup Expert, an application set up interface. The Company also released a
major new product in its third fiscal 1998 quarter, COINSERV for Windows NT, an
electronic digital document repository with Internet access and integrated
imaging and workflow. This software product can archive and retrieve high
volumes of documents operating on the NT platform.

The market for INSCI's Products is found within those parts of an
organizations' operations where the electronic availability of customer-facing
documents, source documents, and reports is necessary to support the business
function. Customer-facing documents vary from industry to industry but generally
include invoices, statements, purchase orders, bills, policies, and transaction
confirmation documents which are produced in high volume on high speed printers.
They require electronic indexing and storage to enable retrieval and viewing for
customer support functions and to satisfy regulatory archiving requirements.
Source documents include new account applications, signature cards, purchase
orders, signed bills of lading, insurance claim forms, and other paper based
documents which, through the use of INSCI's products can be electronically
captured, indexed, stored, routed and displayed in support of the business
process. The result of putting these document types in electronic form is
improved efficiency, cost reduction, and ability of an organization to more
effectively serve its internal and external customers.

Electronic commerce is rapidly becoming a market requirement. New
capabilities such as electronic bill presentment, customer access to statements
and bills and integrated invoicing and marketing extend the value of
conventional printing and distribution of customer-facing documents. INSCI's
products deliver the capability for document enabled electronic commerce.

INSCI offers numerous services including software installation,
training, software maintenance, support and systems integration. INSCI's
advanced systems integration services division works with its customers to
integrate these various technologies into existing technical environments to
leverage investments in technology. INSCI's current business strategy is to
develop and provide document management solutions in a fully integrated and
customized manner that enables customers to improve their business processes and
competitive position.

MANAGEMENT CHANGES

Mr. Roger C. Kuhn was appointed Vice-President and Chief Financial
Officer of the Company in July 1996.

In October of 1997 at the Company's annual meeting for Shareholders
Messrs. E. Ted Prince, Leonard Gartner, Richard Gerstner, Francis X. Murphy,
Andre Daniel-Dreyfus, and Mitchell Klein were elected by Shareholders to serve
as directors of the Company for the ensuing year. Mr. Robert Oxenberg did not
stand for reelection as a director.

On June 18, 1998, Messrs. Gerstner, Gartner and Klein resigned from the
Board. Their resignations were not as a result of a disagreement with the
Company's operations, policies or practices but rather a difference of opinion
with respect to the exercise of their business judgment concerning the extension
and renewal of the employment agreement of the Company's Chief Executive
Officer, Mr. E. Ted Prince. Following their resignations, the Board appointed
two new independent Directors, Thomas Farkas and Robert F. Little. The
restructured Board resolved to renew Dr. E. Ted Prince's contract as INSCI's
Chairman, CEO and acting President.

SOFTWARE PRODUCTS AND SERVICES

INSCI COINSERV SUITE OF PRODUCTS

INSCI's COINSERV (Computer Output Information Server) suite of products
provides a family of integrated software components which enable its customers
to accomplish client/server-based COLD (Computer Output to Laser Disk),
electronic printing and document management utilizing optical disk, CD and
automated tape libraries to index, archive, retrieve and distribute
computer-generated documents and scanned images including statements, reports,
invoices and transaction data. This capability of a Digital Document Repository
provides on-demand viewing, printing, Internet access, CD distribution and the
ability to re-purpose documents for interactive Internet presentment and other
E-commerce functions. The COINSERV suite of products enables organizations to
use their existing print applications as a gateway to implementing digital
document repositories, a key point which allows them to enter electronic
commerce without losing their massive investment in these legacy applications.

The COINSERV suite of software is a series of integrated software
components consisting of: server software that provides the core document
repository management functions; additional server functions to ingest,
interpret and index various format document data streams; client software for
accessing, retrieving, viewing and printing the stored documents; client
software for Internet-enabled access to stored documents; client software for
analyzing and extracting information from stored documents; image capture
software for bringing source paper or other image documents into the system for
storage; workflow software for document routing, business process automation and
document-activated activity processes; CD distribution software for packaging
and distributing self-contained sets of archive documents for use by
non-networked users; and application integration capabilities for enabling tight
links with other systems and processes which may exist within the business
environment.

COINSERV client/server products are currently installed at over 450
customer sites worldwide which include vertical industry segments and which
range from departmental systems to enterprise-wide deployments. The server
software is supported both on Microsoft Windows NT Server and on many UNIX
platforms and provides LAN/WAN and Internet/Intranet/Extranet connectivity. A
wide variety of devices can gain access to the COINSERV digital document
repository, including Windows PCs and Web browsers on any platform. In addition,
legacy system terminal connectivity is provided for UNIX terminals and mainframe
systems, including IBM CICS 3270, IBM AS/400 5250, UNISYS A-series/V-series, and
UNISYS 1100/2200 series systems.

Digital document repository solutions require a number of
characteristics if they are to be robust enterprise-class solutions, offer high
performance and be long-lived. INSCI has designed its digital document
repository products with architectures, features and functions to meet this
requirement. Among the characteristics that the COINSERV document repository
products possess are the following:

DIVERSE DATA FORMATS. Support for a wide variety of diverse data
formats, including: IBM mainframe formats, UNISYS mainframe formats,
UNIX and PC print output formats; intelligent data streams including
IBM Advanced Function Presentation (AFP), Xerox Metacode and DJDE, PCL,
and Adobe PDF; and scanned documents in TIFF format.

POWERFUL INDEXING. Sophisticated and powerful page-matching and
indexing capabilities for determining how to identify, divide,
interpret, search for, locate and distribute documents.

FOREVER VIEW. A "Forever View" of documents without having to purge
archived documents over time. To accomplish this, COINSERV products
provide a data and index management engine designed to handle large
scale storage requirements without experiencing performance degradation
or "topping-out" as the index volume continues to increase. Also
provided is Hierarchical storage management that allows users to stage
data archives so that they utilize the media that is most responsive to
an application's data access requirements and yet provide
cost-effective storage options. INSCI believes that archive data is a
vital and valuable corporate asset and designs its products to provide
long-term data storage and access without any compromise.

CLIENT/SERVER ARCHITECTURE. A true client/server architecture built on
open systems distributed processing principles allowing for seamless
data access from host-computer based legacy systems (without emulation)
as well as state-of-the-art LAN/WAN and Internet/Intranet environments.
COINSERV users can take advantage of the investments they have made
through the years in their legacy systems' hardware, software, and
networks, while at the same time supporting implementations of LAN/WAN
and Internet/Intranet distributed processing topologies.

The COINSERV software suite provides a variety of products that can all
work together to provide an integrated output management and document repository
solution. COINSERV software products include:

COINSERV FOR WINDOWS NT

The newest addition to the COINSERV family of products, INSCI launched
this product in fiscal 1998. COINSERV for Windows NT is a powerful, high-speed
document archive and retrieval system that uses magnetic disk, RAID storage, and
high-density, low-cost optical discs in a client-server environment based on
Microsoft Windows NT server. It is designed to maximize the processing power of
the Windows NT Server through the use of its architectural features and a design
that supports and utilizes multiprocessor enterprise-class systems. At the same
time, it also utilizes the graphical user interface and monitoring capabilities
of the Windows NT environment to provide an easy-to-use administrative interface
and lights-out operation. While this is a new product, it incorporates the
extensive document archive and retrieval experience gained from the UNIX-based
product and incorporates many of its features on this new platform.

ADVANCED COINSERV FOR UNIX

INSCI's flagship digital document repository product has received
updates and enhancements in fiscal 1998 to maintain its position as a powerful
and mature product. Key platform additions, including a port to the HP/UX
operating system and the addition of new 8X 5 1/4" optical disk technology
(5.2GB per platter) mean that an even wider range of system and storage options
are supported. INSCI offers Advanced COINSERV on the following UNIX platforms:
IBM AIX, Sun Solaris, HP HP/UX, SCO UnixWare and Unisys SVR4. Advanced COINSERV
is a, high-speed document archive and retrieval system that uses magnetic disk,
RAID storage, and high-density, low-cost optical discs in a client-server
environment. The predecessor to this product was originally released in 1991 and
INSCI has provided a constant stream of improvements, enhancements, and
extensions to the product.

WEBCOINS

WebCOINS provides access to COINSERV digital document repositories
through Web browsers. This software client module meets the need for Internet,
Intranet, and Extranet access to archived documents managed by a COINSERV
system.. WebCOINS delivers archived documents in formats which are widely used.
For plain-text documents, it uses HTML which is directly displayable by a
browser such as Microsoft Internet Explorer or Netscape Navigator/Communicator;
for intelligent data streams it uses Adobe PDF format which is displayable in
the browser through the use of the Adobe Acrobat Reader, a widely used free
component and de facto industry standard. WebCOINS is a client component that
operates on a Web server and which accesses the digital document repository on
behalf of the user. This allows a client/server model to be in place without
placing a burden on the user's workstation and without requiring any custom
software or plug-in at the user's workstation. In the case of intelligent data
stream display or form overlay display, WebCOINS performs the data stream
transformation or forms merging on the web server and sends the composed PDF
result to the browser for display. WebCOINS provides an effective Internet
distribution capability for the growing E-commerce and customer self-service
imperatives that companies are adopting.

WINCOINS32

WinCOINS32 is the dedicated client software for accessing COINSERV
document repositories from a 32-bit workstation running Microsoft Windows 95 or
Windows NT. WinCOINS32 provides access to the entire document repository with an
easy-to-use interface for display, print, fax, or export of documents at any
workstation. WinCOINS32 provides a unified interface for retrieving all formats
that may exist in the document repository. WinCOINS32 contains API-level
embedded viewing technology for interpreting, displaying and printing native
intelligent data streams at the workstation, unlike WebCOINS which converts them
to PDF at the Web server. Data streams such as AFP, Metacode, PCL, PDF, and TIFF
images are all handled by the WinCOINS32 software. WinCOINS32 was the first and
only dedicated client provided for COINSERV for Windows NT. At the end of fiscal
1998, INSCI was working to provide WinCOINS32 for the Advanced COINSERV for UNIX
product. This will replace the previous WinCOINS (16-bit) dedicated client which
has been available for the UNIX-based document repository for quite some time,
and will provide a single look and feel for all dedicated client access of any
COINSERV document repository. For environments where there are "power" users,
WinCOINS32 is the perfect method of achieving enhanced access to and use of
COINSERV documents.

COINSPDF

COINSPDF is a form overlay option that allows customers to create Adobe
PDF-based form overlays from any original document source and to use those form
overlays with their archived plain-text documents. When retrieving from the
document repository, COINSPDF provides presentation and display of the retrieved
documents with all of the visual attributes that Adobe PDF offers. Customers can
now provide an archived document display to their users, with the ability to
alter the appearance and re-purpose documents where appropriate. COINSPDF
includes a form configuration tool that associates text data with a PDF form,
and it provides a merging component used by WinCOINS32 and WebCOINS to combine
the form and retrieved text at viewing time. With the growing need to display
documents for customer service or other purposes, COINSPDF enables easy and
rapid deployment of user-focused displays and printing.

ADVANCED COINSCAN

Advanced COINScan is a full-featured image capture solution based on a
modular and systematic approach to the scanning, image processing, and indexing
of images stored in COINSERV digital document repository systems. Release 2.0 of
this product, introduced in March 1998, provides individual components for
scanning, image processing, indexing, and uploading functions. These functions
may be deployed on individual workstations or consolidated systems and are not
necessarily tied to the storage system on which the images will ultimately
reside. The scanning component enables source document scanning from a wide
variety of industry-standard scanners, from low-volume to high-volume, at rated
speeds. The indexing component allows operators to apply or correct index values
to batches of scanned images. The product has been architected to be scaleable
and configurable to meet the specific volume and indexing needs of many
different document imaging profiles. As such, multiple scan stations and index
stations participate in a group, each performing their individual functions, and
feeding a central image management and processing server that performs batch
functions. These batch functions include image enhancement (despeckle, deskew,
deshade, line removal, rotation, etc.), optical character recognition (OCR),
intelligent character recognition (ICR), bar code recognition (BCR), and upload
to COINSERV document repository systems or other storage systems. There are also
capabilities for custom validation, scripting, and custom indexing screen
design. Advanced COINScan's image capture provides an integrated source document
feed into the digital document repository.

COINSFLOW

COINSflow is a customer-focused, service-oriented workflow system
designed on a case management model. COINSflow can be used both as a true
workflow system for implementing business process and as a means to route,
track, notify and perform other actions based on documents contained in or
arriving at the COINSERV digital document repository. In effect, COINSflow can
turn passive documents into pro-active ones. COINSflow allows users to access
the workflow system's various functions through the representation of a
simulated office scene. The case server also performs unattended tasks that are
part of a workflow process and require no user interface. Managers can build
business processes, using a graphical flow-charting concept, from a library of
pre-defined tasks customized to a particular business. COINSflow builds,
executes and analyzes business processes in a highly graphical environment,
bringing together customer information from disparate sources and presenting it
as a case folder which may be tracked and accessed throughout a customer's
organization. Whether used for business process implementation or for
document-oriented activities, COINSflow provides integrated process management
functions that further enhance the value of the digital document repository.

MONARCH FOR COINSERV

Monarch for COINSERV is a Data Mining software product that provides
workstation-based report mining and analysis. This tool is a private-label
version of Datawatch's Monarch product. Monarch for COINSERV enables users to
identify, extract, and analyze the contents of documents from the COINSERV
digital document repository. The document information can be manipulated into
field-oriented data on a PC workstation, generate calculated fields, provide
graphic representations of the analyzed data, and export results to other
desktop tools such as spreadsheets and databases. For situations where report
data is regularly transcribed and used to analyze or summarize results, Monarch
for COINSERV is a way of accessing and extracting knowledge from the corporate
"memory" contained in the document repository.

COINS-CD

COINS-CD is Windows NT-based software for CD-R distribution of archived
documents; in effect providing a smaller-scope CD-based document repository. The
product combines INSCI's core technology with CD-R for purposes of data
distribution to remote users, external customers, non-networked users, or anyone
who needs specific access to documents independent of a central document
repository. COINS-CD processes computer generated output, either from magnetic
tapes, file transfer, or extracted from the main COINSERV document repository.
COINS-CD performs the same reading, extracting, and indexing that the COINSERV
products perform and then records the information on CD-R, including the
document pages, indexes, and retrieval and viewing software. During fiscal 1998,
COINS-CD software was enhanced substantially in several ways. The first
enhancement provided integration with automated CD-R production hardware.
COINS-CD provides full support for the Rimage Perfect Image Producer with which
it can create multiple, labeled CDs, of varying content, in an automatic and
unattended operation. This provides a larger-scale orientation than using
individual manual CD recorders and printers. The second major enhancement was
the addition of full-text indexing and full-text retrieval of documents. With
this optional capability, users are able to search documents on the CD for any
text in any location. This differs from both traditional index search and
traditional text search in that a specific index is created of all text
contained in the archived documents. Distribution is becoming an important part
of any document repository strategy, and COINS-CD provides a powerful means of
fulfilling this requirement.

SETUP EXPERT

Setup Expert is a wizard-like graphical interface that leads a user
through the steps to create an application definition file. The purpose of this
software is to simplify the process of setting up or modifying a document
archive and retrieval application. Setup Expert allows the administrator or
analyst to graphically set up document parameters such as: type, location,
makeup and size of primary key and secondary filter indexes; directory paths to
the source files; text expressions and patterns typical of what will be searched
for; and page types and overlays associated with each page type. Setup Expert
removes the burden of working with a text editor or having to measure the
locations of fields on a screen. Setup Expert was enhanced during fiscal 1998 to
further improve its user interface and make it capable of providing definitions
for both COINSERV for Windows NT and Advanced COINSERV for UNIX.

INSCI SYSTEMS INTEGRATION SERVICES

Utilizing INSCI's core products and technologies and the capabilities
of its consulting resources, INSCI has developed specialized systems integration
approaches and methodologies that allow it to carry out the implementation of
advanced solutions within large and complex client environments. The
methodologies encompass project management, project direction, quality assurance
and control, and testing disciplines that are essential for mission-critical and
industrial-strength solutions in large organizations with massive data stores
and critical processing time frames. Based upon expertise in integrated output
management, electronic printing, imaging, document management, on-demand
printing, data storage, and data mining, INSCI provides services and solutions
to global problems in the customer service and data storage areas. It is these
project management skills, as well as its technical, product and architectural
skills that allow INSCI to offer a unique set of solutions to organizations that
are seeking more than purely a software product to satisfy their organizational
requirements.

PRODUCT DEVELOPMENT

The market for data storage and retrieval products is highly competitive
and characterized by frequent technological change. Consequently, INSCI must
continually enhance its products and continue to develop new products. INSCI
Corp. utilizes its staff of development engineers and customer support personnel
to identify, design, and develop product enhancements and new products. The
company has additionally increased the amount of development it performs by
locating some work offshore where resources are less costly, thus enabling the
company to compete more effectively against many competitors with far greater
resources than it possesses.

MARKETING AND SALES

INSCI markets its COINSERV products through its own sales force in
combination with strategic alliances and value added resellers. Marketing
activities include trade journal advertising, distribution of sales and product
literature describing the COINSERV products, their applications and benefits,
attendance at trade shows and conferences, sponsoring or supporting seminars for
customers and prospects, and on-going communications with the established base
of customers via newsletters, new product announcements, direct mail and
telemarketing. Public relations activities include speaking at trade group
meetings, publishing of technical articles, publishing of user success stories,
and distributing of press releases about the Company and its products.

INSCI's direct sales force focuses on prospects for its products that
are particularly in high volume, high performance environments. Sales
representatives initiate contacts with prospective end user customers and make
direct sales of COINSERV products to those prospects. They also provide
assistance and make joint presentations with the Company's resellers and
strategic business alliances. Additionally, they frequently work with INSCI's
systems engineers to provide high level technical consulting services both
before and after a sale.

INSCI has developed several strategic business alliances through which
the Company generates sales. During fiscal 1997, the Company announced new sales
alliances with Xerox Corporation, Storage Technology Corporation, Moore
Corporation, as well as others. In addition, Unisys Corporation, an existing
reseller of the Company's products, announced a program to dedicate additional
resources to selling and marketing INSCI's products. In March, 1998 Xerox
Corporation selected the Company as one of seven participants in Xerox's
Docuworld initiative, which provides a worldwide forum for selected companies to
present information regarding their networked digital printing products in
conjunction with Xerox Corporation.

INSCI currently has agreements with a limited number of VARs. VARs
generally are organizations that sell their own computer application software
systems to special vertical markets, such as banks, health care organizations or
credit unions. VARs sell INSCI's products as part of an integrated system of
hardware and software for the VAR's customers. INSCI sells its products directly
to VARs for resale to the VARs' customers.

The Company believes that COLD and electronic printing are emerging
technologies and that it is likely to enter into additional marketing alliances
that will have the potential to generate further significant sales. In
particular it believes that companies in the imaging, workflow, information
retrieval, electronic commerce, Internet and printing areas are likely to
require COLD technology in order to meet their own objectives. It intends to
continue discussions with such companies with a view to closing further such
alliances.

CUSTOMER SUPPORT AND SERVICE

INSCI's in-house technical support personnel provide pre-sale support
to assist in product selection and configuration, installation support assisting
in technical integration of COINSERV with a customer's existing computer system,
and post-sale telephone support (included in the customer's maintenance support
agreement) assisting in the ongoing use of the COINSERV system. INSCI's
post-sale support also includes software maintenance, software updates and
technical support pursuant to renewable one-year contracts. VARs and
distributors generally handle service and support for their customers. INSCI
intends to expand this level of support both through traditional approaches and
through non-traditional ones. In this regard the Company has set up a Web site
and intends to use this as a medium for customer information and support.

The computer hardware utilized in COINSERV systems is generally covered
by warranties granted directly by the hardware manufacturer to the customer, and
INSCI does not assume responsibility for support or maintenance of this
equipment. Maintenance and technical support for the optical disk drive
components in all INSCI systems are provided by a third party contractor which
specializes in providing service for optical disk drives and jukeboxes.

VENDORS AND SUPPLIERS

INSCI has reduced it sales of third party hardware in order to focus on
sales of its own software and services products, which generate higher gross
margins. Typically, the hardware that hosts INSCI's software products is either
owned or purchased directly by INSCI's customers. Accordingly, sales of third
party hardware are not material and INSCI has no material dependence on third
party hardware suppliers in order to attain its revenues.

COMPETITION

There are a number of suppliers offering COLD, CD-R, imaging,
information retrieval and print-on-demand systems. In many cases, the company
believes that it offers advantages over the competition. In the case of COLD
systems, most systems in the market are departmentally-based and do not offer
the performance at the enterprise level characterized by COINSERV. Nor, in most
cases, do they offer the support for intelligent data streams offered by INSCI.

Competition among companies providing document storage, indexing and
retrieval solutions is intense. Numerous competitors market computer document
storage, indexing and retrieval systems utilizing optical disk drive technology.
Many of the Company's primary competitors have substantially greater financial
resources, more personnel, greater access to related products and broader
contact with potential customers than the Company.

The principle competitive factors in the document storage, indexing and
retrieval business include performance, functionality regarding document data
types, document archival and access speed, cost, strategic alliance
relationships and open systems connectivity. The Company believes that product
offerings compete favorably with products offered by its primary competitors.

PROPRIETARY INFORMATION

INSCI does not hold any patents and currently relies upon a combination of
trademarks, contractual rights, trade secrets and copyright laws to protect its
proprietary rights in its products. INSCI seeks to protect its proprietary
rights in its COINSERV software through restrictions on disclosure and use set
forth in customer agreements and employee nondisclosure agreements.
Additionally, INSCI requires that all of its employees execute confidentiality,
trade secret and invention agreements in connection with their employment by
INSCI. Despite these precautions, it may be possible for third parties, without
authorization, to copy or duplicate INSCI's proprietary software or to obtain
and use its proprietary information. Existing copyright laws afford only limited
practical protection for computer software, and the laws of certain foreign
countries do not protect INSCI's proprietary rights in its products to the same
extent as the laws of the United States. Because of the rapid pace of
technological change in INSCI's industry, INSCI believes that the legal
protection for its products are less significant for the Company's success than
the knowledge, technical expertise and marketing skills of INSCI's personnel,
the frequency of product enhancements and the timeliness and quality of support
services provided by the Company.

EMPLOYEES

The Company employed 73 persons as of March 31, 1998. The Company's future
success depends, in part, on its ability to retain existing and to attract new
management and technical employees. The Company has no collective bargaining
agreements and considers its relationships with its employees to be good.

ITEM 2. PROPERTIES

Effective October 1, 1994, INSCI entered into a ten year lease for
approximately 21,650 square feet of office space located in Westborough,
Massachusetts. On November 1, 1995, the Company subleased for a five year term
approximately 4,315 square feet of its Westborough office space. The Company
also entered into a lease for 3,196 square feet of office space for its
Courtland Imaging Division's office in Columbia, Maryland which expired in
February 1998. Management considers its present office space adequate for the
Company's foreseeable needs.

In June 1995, the Company commenced an interim office sharing
arrangement for a New York office facility on a month-to- month basis from Perth
Ventures, Inc. at a monthly charge of $2,000. Dr. Prince, who is President,
Chief Executive Officer and Chairman of the Board of Director's of the Company
is 100% owner in and is President of Perth Ventures, Inc. In May 1997 the
Company assumed the full rental cost of this New York office at an approximate
cost of $3,300 per month based upon the Company's exclusive use of this space.
The lease for this office expired in March, 1998 and has not been renewed. See
"Certain Relationships and Related Transactions"

ITEM 3. LEGAL PROCEEDINGS

The Securities and Exchange Commission (the "Commission")issued an
order, dated April 13, 1995, authorizing a private investigation of Information
Management Technologies Corporation ("Imtech") INSCI's former majority
shareholder) and INSCI, and its officers and directors during the period from
March, 1993 and continuing until April 13, 1995. The order of investigation
inquired into whether the Company and its then officers and directors engaged in
violations of Rule 10b-5 of the Securities Exchange Act of 1934 (the "Exchange
Act"); failed to file annual reports and other information as required by the
rules and regulations of the Commission. On September 10, 1996 the Company was
informed by the Commission that the staff inquiry relating to these matters had
been terminated and that no enforcement action had been recommended at that
time.

On October 6,1997 the Securities and Exchange Commission declared
effective the Form S-1 Registration Statement (File Number 333-22187) that the
Company filed with the Commission for 16,769,991 shares of common stock, of
which 4,000,000 are reserved for acquisitions, 2,860,565 for selling
shareholders and the balance of 9,909,426 for potential issuance pursuant to
rights granted to unit holders, convertible preferred stockholders, and warrants
and options issued by the Company. The registration includes "piggyback" shares
pursuant to rights that the Company has granted to the holders of certain
warrants and shares of the Company's stock. The Company did not file its
Registration Statement within the time specified within its registration rights
agreements and as a result, could be subject to claims by security holders that
they were unable to convert their securities into shares of registered Common
Stock.

A claim was asserted by Norcross Securities and its Successors (the
"Warrant Holders"), who are holders of 187,500 Warrants, with respect to the
delay in the registration of the underlying shares related to the Warrants. The
Company has agreed to resolve the claim by issuing an aggregate of 70,000 shares
of its common stock to Norcross Securities and its Successors in consideration
of the Warrant Holders surrendering their warrants for cancellation by the
Company. The Company has not finalized the settlement agreement.

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

Not applicable.

<PAGE>

PART II

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

On April 21, 1994, INSCI closed an initial public offering of the
Company's Units (the "Units"), with each Unit consisting of one share of the
Company's common stock and one redeemable common stock purchase warrant (each
warrant entitles the holder thereof to purchase one-half of one share of the
Company's common stock). Since the closing of the initial public offering, the
Company's Units traded in the over-the-counter market and were included in the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
under the symbol "INSIU". Effective December 13, 1995, the Company's Common
Stock (symbol:"INSI") and the Company's Warrants (symbol:"INSIW") began trading
separately, and trading in the Units ceased.

The Company's common stock has been traded on the NASDAQ Small Cap
Market since April 14, 1994, the effective date of the Company's initial public
offering. The table below shows the high and low bid prices as reported in
NASDAQ's informational reports. These prices represent prices between dealers,
do not include retail mark-up, mark-down or commissions, and may not necessarily
represent actual transactions.

FISCAL 1997 FISCAL 1998
Common Stock Price
Quarter High Low High Low
First $6.75 $4.75 $3.44 $2.13
Second 7.50 4.75 2.69 2.13
Third 6.25 4.38 2.50 1.00
Fourth 5.00 3.13 1.81 1.00

Warrant Price
Quarter High Low High Low
First $1.25 $0.81 $0.56 $0.25
Second 1.81 0.63 0.31 0.13
Third 1.38 0.56 0.13 0.06
Fourth 0.81 0.25 - -

On June 12, 1998, the closing bid and ask prices of the common stock
were $1.00 and $1.00. The Company's warrants were deleted from the NASDAQ Small
Cap Market on January 30, 1998 due to the lack of market makers registered to
trade these warrants. As of May 27, 1998, the Company had 115 holders of record
of its common stock.

The Company currently intends to retain its earnings (when realized) to
finance future growth and therefore does not anticipate paying any cash
dividends on its common stock for the foreseeable future.

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

GENERAL
The Company was incorporated on December 20, 1989 as a wholly owned
subsidiary of Imtech. Effective December 1, 1989, the Company consummated an
acquisition (the "Acquisition") of certain assets from Acctex for a purchase
price paid by delivery to Acctex of 144,865 shares of Imtech's Class A Common
Stock which were contributed by Imtech to the Company and valued at $335,000,
and the assumption of capital lease liabilities valued at $73,000. Assets
purchased from Acctex included computer software, customer support and
maintenance agreements and certain trade names. Prior to the Acquisition, Acctex
marketed its single user stand-alone software document indexing, storage and
retrieval software primarily to end users and distributors. Following the
Acquisition, the Company engaged in substantial efforts to expand the size and
geographical coverage of its direct sales force and its network of distributors.
The Company also engaged in efforts to enhance the acquired software with
additional functions and features and marketed the stand-alone single user
software under the COINSERV trademark. Imtech provided working capital for
operations through periodic advances to the Company.

At the end of fiscal 1991, the Company revised its business objectives
by changing its primary focus to a strategy of developing and marketing more
complex client/server software that is designed to be integrated into a
customer's existing local or wide area network and to receive computer generated
documents directly from the customer's existing host computer. During this
period, the Company also undertook to develop significant additional software
functions, to develop additional COINSERV versions that operate compatibly with
the computer operating systems and equipment of additional vendors of computer
servers and optical disk drives. The Company believed it was in its best
long-term interest to adopt a strategy of focusing on the development and sale
of client/server software in order to serve a larger potential market for
document storage, indexing and retrieval software that can be used concurrently
by multiple computer operators connected to the COINSERV server through a
customer's existing local or wide area network.

On April 21, 1994, the Company received net proceeds of approximately
$7,159,000 from an initial public offering of its equity securities. The Company
used the proceeds of its public offering to enhance the COINSERV software and
develop new products, hire software developers, system engineers, and customer
support personnel and significantly increase marketing spending. The following
discussion should be read in conjunction with the financial statements and notes
thereto contained elsewhere in this document.

On March 28, 1996 the Company acquired certain assets from a
non-affiliated company known as Courtland Group, Inc. ("Courtland"). The
purchase of assets transaction involved the payment by the Company to or on
behalf of Courtland of the sum of $679,000 in cash, common stock, and a note
payable, plus assumption of $96,000 in accrued liabilities.

On September 12, 1996 the Company completed a private placement
financing under Regulation "D". Proceeds from this offering, before underwriting
commissions and expenses, totaled $5,000,000. On September 20, 1996 the Company
completed a private placement financing under Regulation "D" for the sum of
$1,350,000, before underwriting commissions and expenses.

On March 3, 1997 the Company acquired certain assets and business from
non-affiliated entities, known as Action Computer Supplies Holdings PLC
("Action") and DSI Data Systems International, Ltd. ("DSI") , both United
Kingdom -based companies. On March 31, 1997 the Company also purchased the
assets of a company known as Philippines Business Automation Systems, Inc.
("PBAS"), a corporation organized under the laws of the Republic of the
Philippines. The acquisition cost of Action, DSI and PBAS totaled approximately
$170,000 and is not considered significant by the Company.

RESULTS OF OPERATIONS, OVERVIEW

<PAGE>

COMPARISON OF RESULTS OF OPERATIONS, FISCAL YEARS ENDED MARCH 31, 1998 VERSUS
MARCH 31, 1997

The following table sets forth, for the periods indicated, the
percentage relationship that certain items of the Company's results of
operations bear to revenue:

PERCENT OF REVENUES

FISCAL YEAR ENDED MARCH 31,
---------------------------
1998 1997
---------- ---------
% %
Revenue 100 100
---------- ---------
Gross margin 53 59
---------- ---------
Expenses
Sales and marketing 41 32
Product development 20 19
General and administrative 19 17
Non-recurring charges 1 -
---------- ---------
Total expenses 81 68
---------- ---------
Loss from operations (28) (9)
Interest income (expense) net 2 1
========== =========
Net loss (26) (8)
========== =========

REVENUE INSCI develops, sells, installs and supports electronic
document repository software with integrated Internet, imaging, workflow,
print-on-demand, electronic distribution and archive (COLD) software for the
enterprise level (high volume production) market. INSCI's software products
enable customers to improve their services through electronic access to
documents (e.g. invoices, statements, reports, etc.); provide financial saving
through elimination of paper and microfiche; and provide the foundation for the
digital document "back office" for electronic commerce applications. Sales to
end users generally include software, systems integration and consulting
services, installation, and training. Post-installation maintenance and customer
support is available under the terms of a separate contract at an additional
charge. INSCI sells its products through a combination of a direct sales force
and indirectly through VAR's, distributors and sales alliances with companies
including Unisys Corporation, Xerox Corporation and Moore Corporation. Revenue
is net of discounts and allowances given to third party VARs and distributors.

The following table compares INSCI's revenue for fiscal 1998 versus
fiscal 1997 (in thousands):

Fiscal Year Ended March 31,
-------------------------------------
1998 1997 % Change
-------- -------- -------------
Software $ 4,451 $ 5,236 (15%)
Hardware 153 501 (69)
------- -------
Total product revenue 4,604 5,737 (20)
------- -------
Services 2,787 3,522 (21)
Maintenance 2,414 2,122 14
------- -------
Total services revenue 5,201 5,644 (8)
======= =======
Total revenue $ 9,805 $11,381 (14%)
======= =======

The following table compares total revenues by quarter for fiscal 1997 and
1998:

TOTAL REVENUES BY QUARTER
($000)
FISCAL 1997 FISCAL 1998
- ------------------------------------ ----------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2,936 2,085 3,360 3,000 1,803 1,897 2,788 3,317

Revenues for fiscal 1998 totaled $9,805,000 and decreased by 14% as
compared to revenues of $11,381,000 for fiscal 1997. The decrease in fiscal 1998
revenues, both for product and services, was primarily the result of lower
revenues in the first and second quarters of this year. Two factors impacted the
Company's revenues during these quarters. One, the Company's sales and technical
personnel spent an increased amount of their time in providing technical, sales
and training support to the Company's indirect sales channels. This channel
support time resulted in less time available for closing direct sales accounts,
with a corresponding impact of lower revenues. Two, part of the Company's market
has been transitioning to products that run on the Windows NT platform. The
Company's newly developed NT product was not available for sale until the fourth
quarter of fiscal 1998. Consequently, the Company lost revenue to competitors'
NT products in the first and second quarters. The Company's revenues increased
in the third and fourth quarter of fiscal 1998, with a fourth quarter historical
high, and reflect increases from the Company's indirect sales channels,
increased international revenues, and revenues from new NT products. Maintenance
revenues increased by 14% in fiscal 1998 and reflect the growth in the Company's
installed base of customers, most of which renew their maintenance contracts on
an annual basis.

The Company's management believes that its new NT products have high
volume archival capabilities that provide favorable performance differentiation
from competitors' NT products. This differentiation combined with the investment
the Company has made in expanding its indirect sales channels, will potentially
help the Company's future revenues to grow as a result of greater sales coverage
and an NT product family that addresses the fastest growing segment of the
Company's market.

COST OF REVENUE. Total cost of revenue for fiscal 1998 was $4,621,000
or 47% of revenue, compared to $4,626,000 or 41% of revenue, for fiscal 1997.
The increase in the cost of revenue percentage for fiscal 1998 is primarily the
result of lower revenues available to absorb systems integration infrastructure
costs and increases in software amortization.

Cost of revenue for product sales was $1,991,000 or 43% of product
revenue for fiscal 1998 compared to $1,634,000 or 28% of product revenue in
fiscal 1997. Costs associated with product sales include the costs of hardware
and software products purchased from third parties for resale, and amortization
of capitalized software development and capitalized purchased software costs.
Costs of product revenue varies depending upon the mix of software and hardware
included in total systems revenue. The increase in the product cost of revenue
percentage is primarily the result of increases in amortization of capitalized
software, which totaled $1,215,000 for fiscal 1998 compared to $929,000 for
fiscal 1997, reflecting amortization increases for the Company's Unix based
products, which are maturing, combined with the initial amortization of the
Company's new NT based products, which have been under development during the
last two years. To the degree that the Company's product revenues grow in future
periods, cost of revenue as a percentage of product revenue is expected to
decrease as increased revenues are available to absorb amortization costs.

Costs associated with service revenues principally reflect the costs of
systems integration, consulting, and customer support personnel, and the cost of
third-party services and hardware maintenance subcontracts. Cost of services
revenues was $2,630,000 or 51% of services revenues for fiscal 1998 compared to
$2,992,000 or 53% for fiscal 1997, respectively. The decline in the service cost
of revenue percent for fiscal 1998 reflects increased productivity for the
departments that provide maintenance and systems integration services.

SALES AND MARKETING. Sales and marketing expenses were $3,935,000 or
41% of revenues for fiscal 1998 compared to $3,693,000, or 32% of revenue, for
fiscal 1997. Expense increases for fiscal 1998 resulted from increased support
of the Company's indirect sales channels, activities associated with the
introduction of the Company's new NT, Web, workflow and imaging products
combined with expenses to support international sales activities. The Company
expects that future expenditures for sales and marketing expenses as a
percentage of revenues will decrease based upon potential increases in the
growth rate of the Company's revenues.

PRODUCT DEVELOPMENT. The Company's product development program has been
directed toward creating a suite of complementary products to meet customer and
marketplace requirements for a more complete electronic document management
solution. This development program includes enhancement of existing Unix based
products combined with development of new NT based products. During fiscal 1998,
the Company announced the addition of six new products to its offerings;
WebCOINS, an Internet product; COINSflow, a workflow product; Advanced COINSCAN,
an imaging product; Advanced COINSERV, a document archive and retrieval product;
COINS Demander, a database interface; and Setup Expert, an application set up
interface. The Company also released a major new product in October, 1997,
COINSERV for Windows NT, an electronic document repository with Internet access
and integrated imaging and workflow. This software product can archive and
retrieve high volumes of documents operating on the NT platform.

The additions to INSCI's product offerings, along with enhancements to
existing products, have been funded by the Company's gross expenditures for
software products. Gross product development expenses for fiscal 1998 were
$3,574,000, before capitalization of software expenses of $1,616,000, for net
product development expenses of $1,958,000. Gross product development expenses
for fiscal 1997 were $3,167,000, before capitalization of software expenses of
$997,000, for net product development expenses of $2,170,000. The increase in
gross expenditures for fiscal 1998 primarily reflects increased development in
the Company's NT based products, where market analysts forecast future growth
rates to be high. The Company continued its programs to reduce product
development expense rates by having selected development performed under a fixed
price contract basis by a programming company in Sri Lanka. The Company plans to
continue its expenditures for product development in fiscal 1999 at
approximately the same levels as fiscal 1998, in order to add additional
products and enhance existing products.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1,861,000 or 19% of revenue for fiscal 1998 and decreased by $82,000 as
compared to $1,943,000, or 17% of revenue, for fiscal 1997. This decrease
reflects a cost savings program that the Company has put into effect during the
current fiscal year. A significant portion of the cost savings reflects
decreases in professional fees combined with increased utilization of the
Company's internal staff for functions that were performed by outside services
last year.

NON-RECURRING CHARGES. During fiscal 1998, the Company established a
plan and provided charges in the amount of $139,000 to discontinue activities of
it Philippines operations, which provided sales and technical support intended
to expand Far East revenues. This action was taken as the result of lower
revenue opportunities in the region as the result of the Asian economic crisis.
The Company intends to provide continued support of Far East revenue
opportunities though through increased utilization of its regional indirect
sales channels.

INTEREST INCOME/EXPENSE. Interest income in fiscal 1998 was $169,000,
partially offset by $3,000 in interest expense for net interest income of
$166,000. Interest income in fiscal 1997 was $127,000 partially offset by
$12,000 in interest expense for net interest income of $115,000. The increase in
interest income in fiscal 1998 reflects the full year impact of interest earned
on funds received from two regulation D security offerings completed by the
Company in September and November, 1996

NET LOSS. Net loss for fiscal 1998 was $2,543,000 compared to a net
loss of $936,000 for fiscal 1997. The increase in net loss is primarily the
result of lower revenues in the first and second quarters of fiscal 1998.

YEAR 2000 COMPUTER SOFTWARE CONVERSION. Many computer systems will
experience problems handling dates beyond the year 1999. Therefore, some
computer hardware and software will need to be modified prior to the year 2000
in order to remain functional. The Company is assessing both internal readiness
of its computer systems and the compliance of its computer software sold to
customers for its ability to process the year 2000. The Company expects to
successfully implement the systems and programming changes necessary to address
the 2000 issues, and does not believe that the cost of such actions will have a
material effect on the Company's results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with the implementation of such changes. The
Company's inability to implement such changes could have an adverse effect on
future results of operations.

FORWARD LOOKING COMMENTS
During fiscal 1998, as previously discussed, the Company's revenues
were impacted by reduced demand for its Unix based software products during the
first and second fiscal quarters. To offset this reduced demand and participate
in the rapidly growing Windows NT based market, the Company introduced a Windows
NT based product in October, 1997. In addition, during fiscal 1998, a
significant portion of the Company's sales and technical resources were directed
toward increased support of the Company's indirect sales channels, at the cost
of reducing the Company's direct sales activities. The Company believes that
opportunities to increase future revenues are best served by supporting these
sales channels due to the existing customer relationships that these channels
have and the relatively large number of sales personnel that the channels can
direct to selling the Company's products, as compared to much lower sales
coverage of the Company's internal direct sales force. The Company is not able
to predict when and to what degree revenue increases from its NT based products
or increased use of sales channels may occur.

LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998 the Company had $2,596,000 of cash and cash
equivalents and working capital of $2,116,000 in comparison to $5,068,000 of
cash and cash equivalents and working capital of $4,724,000 as of March 31,
1997. The present cash reserves of the Company are believed to be sufficient to
meet the foreseeable needs of the Company. Accounts receivable were $2,904,000
with weighted days outstanding of 34 as of March 31, 1998 compared to
receivables of $2,491,000 with weighted days outstanding of 38, as of March 31,
1997. The Company targets average collections at 45 days. Amounts below this
number represent favorable receivable mix and collection performance.

The Company's cash flows are summarized below for the periods indicated (in
thousands):

FISCAL YEAR ENDED MARCH 31,
1998 1997
---- ----
Cash provided by (used in)
Operating activities $ (590) $ 422
Investing activities (1,984) (1,505)
Financing activities 102 5,715
-------- ------
Increase(decrease) in cash and cash equivalents $ (2,472) $4,632
======== ======
Cash and cash equivalents at end of period $ 2,596 $5,068

The Company used cash of $590,000 in operating activities for fiscal
1998, primarily as the result of its operating loss, partially offset by
non-cash charges for depreciation and software amortization. Net cash used in
investing activities was $1,984,000, primarily from additions from purchased and
capitalized software, which increased as a result of the Company's expanded
product development program. Cash generated from financing activities was
$102,000, and reflects proceeds from the issuance of common stock.

On March 28, 1997 the Company completed a credit facility with Silicon
Valley Bank ("SVB") for a working capital line of $1,500,000 and an equipment
financing line of $250,000. This credit facility expired on March 28, 1998. The
Company had no borrowings against the credit facility with SVB during fiscal
1998.

In June, 1998 the Company received a proposal from SVB for a new
$1,500,000 working capital credit facility for a term of one year. The terms of
this proposal provide for working capital advances up to seventy five percent of
the Company's eligible domestic accounts receivable under ninety days from
invoice date. Collateral for the line, which is secured by a lien, is comprised
of all Company assets. The rate of interest to be paid to SVB is prime plus one
percent. In order to borrow against the line, the Company is required to meet
certain covenants which include minimum tangible net worth of $2 million and a
quick ratio of 1:50 to 1. The Company, at its option, may terminate the credit
facility with SVB without penalty. The Company expects to contractually complete
this proposed line of credit in July, 1998.

As of March 31, 1998, the Company had securities outstanding which, if
all securities become vested and are in the money, provide potential sources of
future financing as outlined below:

Potential
Securities Shares Proceeds
- ------------------------- ------ -----------

Warrants, IPO related 851,772 $ 6,399,066
10% Convertible Preferred
Stock, placement agent 112,000 560,000

Warrants, 8% Convertible
Preferred Stock 1,466,667 7,400,002
Stock options 4,470,386 9,037,044
--------- -----------
Total 6,900,825 $23,396,112
========= ===========

As of March 31, 1998, there are no securities that are vested and in
the money. There can be no assurance that the Company will obtain any future
proceeds from the exercise of the above securities.

The Company anticipates that its working capital and sources of
capital, such as a new credit facility, will be adequate to fund the Company's
currently proposed activities for at least the next twelve months. The Company
anticipates using financing vehicles such as bank debt, leasing and other
sources of funding, including additional equity offerings, to fund its
operations. There can be no assurance that the Company will be successful in
obtaining funds from any such sources. If additional funds are raised by issuing
equity securities, dilution to the Company's stockholders may result. If
additional funds are not available, the Company may be required to delay
execution of its business plan.

CONVERTIBLE PREFERRED STOCK The Company issued $1,200,000 of ten
percent (10%) Convertible Preferred Stock in connection with a Private Placement
of 90-Day Subordinated Notes in June 1995 (convertible into shares of Common
Stock at a fifty percent [50%] discount to market on a schedule of conversion
basis); $1,350,000 of ten percent (10%) Convertible Preferred Stock (convertible
at thirty percent [30%] discount to market at time of conversion) in September
1996; and in November 1996, 1,333,334 Units, of eight percent (8%) Convertible
Preferred Stock and Warrants exercisable over a period of three (3) years into
shares of Common Stock. In two of these Private Placement Offerings, the Holders
can convert their shares of Preferred Stock at a discount to market, and in the
third Offering, Units of eight percent (8%) Preferred Stock and Warrants into
shares of Common Stock.

In all three Private Placement Offerings, the Company agreed to use its
best efforts to register the underlying shares of Common Stock on a cost-free
basis to the Holders of Convertible Preferred Stock. While the Company has filed
a Registration Statement on Form S-1 with the Securities and Exchange Commission
("SEC") that was declared effective on October 6, 1997, for all of the
underlying shares with respect to all three (3) Private Placements Offerings,
Holders may assert a claim against the Company for the delay in filing the
Registration Statement, based upon the Company's agreement to file the
Registration Statement within specific prescribed periods of time from the
closing date of each placement. (See Notes I and K to the Financial Statements)

The Convertible Preferred Stock in two (2) of the Placements is based
upon a discount to the trading market price at the time of conversion and the
Company believes it has sufficient authorized shares of Common Stock to be
issued to Holders of Preferred Stock that convert their Preferred Shares into
shares of Common Stock. (See Note I to the Financial Statements).

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT:
With the exception of historical information, the matters discussed in
this report are "forward looking statements" as the term is defined in Section
21E of the Securities Exchange Act of 1934. While the Company believes that its
strategic plan is on target and the business outlook remains strong, several
important factors, many of which are beyond the control of the Company, have
been identified which could cause results to differ materially from historical,
planned, implied or predicted results of the Company. While the Company has
achieved an operating income in some past quarters, INSCI historically has been
unable to generate sales volumes necessary to achieve profitability on a
sustained basis. INSCI has experienced, and may in the future experience,
significant quarter to quarter fluctuations in revenues and the results of
operations. Such fluctuations may result in volatility in the market price of
the Company's Common Stock.

Quarterly revenues and results of operations may fluctuate as the
result of a variety of factors, including the lengthy sales cycle for the
Company's products, the proportion of revenues attributable to software license
fees versus services, the amount of revenue generated by alliances with other
companies selling INSCI's products, demand for the Company's products, the size
and timing of individual license transactions, the introduction of new products
and product enhancements by the Company or its competitors, changes in customer
budgets, competitive conditions in the industry and general economic conditions.
Additionally, the sale of the Company's products generally involves a
significant commitment of capital by its customers and may be delayed due to
time consuming authorization procedures within an organization. Other factors
affecting the Company's operating results include INSCI's ability to design and
introduce on a timely basis new products which compete effectively on the basis
of price and performance and which address customer requirements, product
obsolescence, technological changes, competition and competitive pressures on
price, the ability to hire and retain qualified personnel and general economic
conditions affecting the investment by potential customers in peripheral
computer devices. There is no assurance that the company can maintain or
increase its sales volume going forward or that it will be able to achieve a
profit in the marketing of its products.

ITEM 7. FINANCIAL STATEMENTS

The information required by this Item is incorporated by reference to
the Table of Contents to Financial Statements and appears on page F-1 hereof.

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

None

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1998 under the
captions "Election of Directors," and "Directors and Executive Officers of the
Registrant" and is incorporated herein by this reference as if set forth in full
herein.

ITEM 10. EXECUTIVE COMPENSATION

The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1998 under the
captions "Summary Compensation Table," "Option Grants in Last Fiscal Year,"
"Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values," and "Directors' Compensation" and is incorporated herein by this
reference as if set forth in full herein.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1998 under the
caption "Security Ownership of Certain Beneficial Owners" and is incorporated
herein by this reference as if set forth in full herein.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days following March 31, 1998 under the
caption "Certain Relationships and Related Transactions" and is incorporated
herein by this reference as if set forth in full herein.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits: Incorporated by reference to the Index of Exhibits appearing
at the end of this Report on Form 10-KSB. Also incorporated by reference all
exhibits filed on the Company's Registration Statement on Form S-1.

Reports: There were no Form 8-K's filed in the fourth quarter of the
fiscal year ended March 31, 1998.

<PAGE>

SIGNATURES

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

INSCI CORP.

By: /s/ Dr. E. Ted Prince
----------------------
Dr. E. Ted Prince, President
& Chief Executive Officer

Dated: June 29, 1998

<PAGE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and Dr. E. Ted Prince as his attorney-in-fact, with
the power of substitution, for him in any and all capacities, to sign any
attached amendments to this Report on Form 10-KSB, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.

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

SIGNATURE TITLE DATE
--------- ----- ----
/S/ Dr. E. TED PRINCE President & Chief Executive June 29, 1998
- ------------------------- Officer, and Director
Dr. E. Ted Prince

/S/ ANDRE DANIEL-DREYFUS Director June 29, 1998
- -------------------------
Andre Daniel-Dreyfus

Director June 29, 1998
- -------------------------
Leonard Gartner (1)

Director June 29, 1998
- -------------------------
Richard Gerstner (1)

Director June 29, 1998
- -------------------------
Mitchell Klein (1)

/S/ FRANCIS X. MURPHY Director June 29, 1998
- -------------------------
Francis X. Murphy

/S/ JOHN L. GILLIS Executive Vice President June 29, 1998
- ------------------------- & Chief Operating Officer
John L. Gillis

/S/ ROGER C. KUHN Vice President-Finance & June 29, 1998
- ------------------------- Administration Chief
Roger C. Kuhn Financial and Accounting Officer

(1) Resigned from Board on June 18, 1998

<PAGE>

INSCI Corp
EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS

Dr. E. Ted Prince
Chairman of the Board
President & Chief Executive Officer

Andre Daniel-Dreyfus 1,2
Leonard Gartner 1,2,3 Richard Gerstner 2,3
Mitchell Klein 1,3 Francis X. Murphy

Thomas Farkas 4 Robert F. Little 4

1 Member of the Audit Committee
2 Member of the Compensation Committee
3 Resigned from the Board on June 18, 1998
4 Joined INSCI Board on June 18, 1998

EXECUTIVE OFFICERS

Dr. E. Ted Prince
Chairman of the Board
President & Chief Executive Officer

John L. Gillis Roger C. Kuhn
Executive Vice President Vice President, Finance &
& Chief Operating Officer Administration & Chief Financial
& Accounting Officer

AUDITORS: TRANSFER AGENT:
Pannell Kerr Forster PC First Union National Bank
420 Lexington Avenue 1525 West W. T. Harris Blvd. - 3C3
New York, NY 10170 Charlotte, NC 28288

<PAGE>

INDEX OF EXHIBITS

The following Exhibits are filed as part of, or incorporated by reference into,
this Report on Form 10-KSB, as indicated below (footnote explanations are at end
of Index):

Sequential
Page Number
- ------------

EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ---------- -----------------------
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
3.3 Amendment to Certificate of Incorporation of the Company
Creating Preferred Stock.
3.4 Certificate of Amendment to the Certificate of Incorporation.
10.1 1992 Stock Option Plan.
10.2 1992 Directors Option Plan.
10.3 1992 Advisory Committee Plan.
10.4 Accounts Financing Agreement between the Registrant and Congress
Financial Corporation, and related documents.
10.5 Form of 1991 Option.
10.6 Form of 1992 Warrants.
10.7 Form of 1992 Convertible Subordinated Note.
10.8 Form of 1992 Contingent Warrants.
10.9 Form of 1993 Warrant -- Version A.
10.10 Form of 1993 Release Agreement.
10.11 Form of Management Agreement between the Registrant and Imtech.
10.12 Form of Tax Sharing Agreement between the Registrant and Imtech.
10.13 Form of Indemnification Agreement with the Registrant's
Directors.
10.14 Marketing Associate Solution Alliance Agreement between UNISYS
Corporation and Registrant.
10.16 Data General Value Added Reseller Discount Purchase Agreement.
10.17 Data General Optical Systems and Software Agreement.
10.18 Distribution Agreement between Fiserv CIR, Inc. and Registrant.
10.19 Lease Agreement relating to the Company's White Plains, New York
headquarters.
10.20 Forms of Customer License Agreements used by the Company.
10.21 Forms of Employee Confidentiality Agreements used by the
Company.
10.22 Nondisclosure and Noncompetition Agreement between the
Registrant, Imtech and Mason Grigsby.
10.23 Form of 1993 Warrant - Version B.
10.24 Employment Agreement between the Company and John L. Gillis.
10.25 Employment Agreement between the Company and Kris Canekeratne.
10.26 Form of 1993 Exchange Agreement and Investor Suitability
Representations.
10.27 Form of 1993 Conversion Agreement.
10.28 Waivers by Congress Financial Corporation.
10.29 Form of Investor's Warrant Agreement.
10.30 Form of Representative's Warrant Agreement.
10.31 License Agreement between Bull HN Information Systems, Inc. and
Registrant.
10.33 Loan Agreement between BNY Financial Corporation and Registrant.
10.34 Preferred Stock Subscription Agreement between the Company and
Imtech relating to Preferred Stock.
10.35 Business Partner Agreement between International Business
Machines Corporation and Registrant.
10.36 Waiver by BNY Financial Corporation.
10.37 Stock Escrow Agreement between Registrant, Imtech and First
Union National Bank of North Carolina (as Escrow Agent)
10.39 Promissory Note to the Company from John L. Gillis and Sandra
Gillis.
10.40 Stock pledge agreement by John L. Gillis and Sandra Gillis in
favor of the Registrant.
10.41 Amendment to Loan Agreement between BNY Financial Corporation
and Registrant.
10.42 Lease agreement relating to the Company's Westborough, MA
headquarters.
10.43 Employment agreement with Jack Steinkrauss.
10.44 First amendment to employment agreement with John Gillis.
10.45 First amendment to employment agreement with Kris Canekeratne.
10.46 Agreement for system purchase by The Northern Trust Company.
10.47 Preferred stock conversion agreement.
10.48 Technology and Reseller Agreement with Elixir Technologies, Inc.
10.49 Private Placement Term Sheet and Exhibits for offering of 90-Day
10% Subordinated Notes. Repayable in Cash or in Shares of the
Company's Proposed 10% Convertible Preferred Stock.
10.50 First Amendment to Private Placement Term Sheet and Exhibits.
10.51 Employment agreement with Edward J. Prince.
10.52 Release by BNY Financial Corporation of the Company's guarantee
of the obligations of Imtech under the shared credit facility
agreement.
10.53 Employment Contract with George Trigilio, Jr.
10.54 Amendment to Employment Contract for Dr. E. Ted Prince, CEO.
10.55 Warrant Exchange Agreement with Norcross & Company
10.56 Asset Purchase Agreement between the Company and Courtland
Group, Inc.
10.57* 10% Convertible Preferred Stock Private Placement Term Sheet and
Exhibits
10.58* Unit Private Placement Term Sheet and Exhibits
10.59 Credit Line Agreement between the Company and Silicon Valley
Bank
16.1 Letter regarding change in certifying accountants

*/ Intended to be filed as an amendment pursuant to Regulation S-T
Rule 202

<PAGE>

TABLE OF CONTENTS TO FINANCIAL STATEMENTS

Financial Statements Page

Independent Auditor's Report F-2

Balance Sheet as of March 31, 1998 F-3

Statements of Operations for the Years Ended
March 31, 1998 and 1997 F-4

Statements of Stockholders' Equity for the Years
Ended March 31, 1998 and 1997 F-5

Statements of Cash Flows for the Years Ended
March 31, 1998 and 1997 F-6

Notes to Financial Statements F-8

<PAGE>

Independent Auditor's Report

To the Stockholders and
Board of Directors of
INSCI Corp

We have audited the accompanying balance sheet of INSCI Corp as of March
31, 1998 and the related statements of operations, stockholders' equity, and
cash flows for each of the two years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of INSCI Corp as of
March 31, 1998 and the results of its operations and its cash flows for each of
the two years in the period ended March 31, 1998 in conformity with generally
accepted accounting principles.

/s/ Pannell Kerr Forster PC

New York, New York
June 19, 1998

<PAGE>

<TABLE>
<CAPTION>
INSCI Corp
BALANCE SHEET
March 31, 1998
(in thousands, except share amounts)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (Notes B-3 and B-9) $ 2,596
Accounts receivable, net of allowance for doubtful accounts of $100 (Note B-9) 2,904
Inventory (Note B-4) 1
Prepaid expenses and other current assets 153
--------
Total current assets 5,654
Property and equipment, net (Notes B-6 and D) 639
Capitalized software development costs,
net of accumulated amortization of $590 (Note B-5) 711
Purchased software, net of accumulated amortization of $1,008 (Note B-5) 1,452
Other 142
--------
Total assets $ 8,598
========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 881
Accrued compensation 496
Accrued vacation 281
Accrued commissions 313
Accrued and other liabilities 653
Deferred maintenance revenue (Note B-2) 914
--------
Total current liabilities 3,538
--------

Commitments and contingencies (Notes E,F,G,I,J and K)

Stockholders' equity (Notes B-12,I, J,K and L)
Convertible preferred stock, $.01 par value, authorized 10,000,000 shares, issued:
10% Convertible redeemable preferred stock, 551,937 shares issued and
outstanding, liquidation preference of $552 6
10% Convertible preferred stock, 1,050,000 shares issued and outstanding, liquidation
preference $1,050 10
8% Convertible redeemable preferred stock, 1,588,835 shares issued and outstanding,
no liquidation preference 16
Common stock, $.01 par value: authorized 40,000,000 shares: issued and outstanding
5,205,130 shares 52
Additional paid-in capital 26,145
Accumulated deficit (21,169)
--------
Total stockholders' equity 5,060
--------
Total liabilities and stockholders' equity $ 8,598
========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

INSCI Corp
STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)

Years ended March 31,
------------------------
1998 1997
-------- --------
Revenue (Notes B-2 and M)
Product $ 4,604 $ 5,737
Services 5,201 5,644
-------- --------
Total revenue 9,805 11,381
-------- --------
Cost of revenue (Note B-5)
Product 1,991 1,634
Services 2,630 2,992
-------- --------
Total cost of revenue 4,621 4,626
-------- --------

Gross margin 5,184 6,755
-------- --------

Expenses
Sales and marketing 3,935 3,693
Product development 1,958 2,170
General and administrative 1,861 1,943
Non-recurring charges (Note C) 139 -
-------- --------
Total expenses 7,893 7,806
-------- --------

Loss from operations (2,709) (1,051)
-------- --------

Interest income (expense)
Interest income 169 127
Interest expense (3) (12)
-------- --------
Interest income (expense) net 166 115
-------- --------
Net loss (2,543) (936)
Preferred stock dividend (Notes B-12 and I) (847) (1,543)
-------- --------

Net loss applicable to common shares $ (3,390) $ (2,479)
======== ========
Net loss per common share - basic (Note B-8) $ (0.73) $ (0.62)
======== ========

Weighted average common
shares outstanding (Note B-8) 4,615 4,022
======== ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

<TABLE>
<CAPTION>
INSCI Corp
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended March 31, 1998 and 1997
(in thousands, except share amounts)

COMMON STOCK PREFERRED STOCK ADDITIONAL
---------------------- ------------------------ PAID-IN ACCUMULATED
NO. OF SHARES AMOUNT NO. OF SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------------- ------ ------------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 3,864,011 $ 38 1,160,950 $ 12 $ 17,769 $ (15,300) $ 2,519

10% Convertible preferred stock issued - - 1,350,000 14 1,245 - 1,259
Common stock issued as underwriting fees
related to 10% Convertible Preferred stock 30,000 - - - - - -
8% Convertible redeemable preferred stock
issued - - 1,333,334 13 4,206 - 4,219
10% preferred stock conversion to common
stock 84,337 1 (206,668) (2) 2 - 1
Common stock issued as dividend
on 10% preferred stocks 70,093 1 - - 1,314 (1,314) 1
Common stock accrued as dividend
on 10% preferred stock - - - - 33 (33) -
Preferred stock issued as dividend on 8%
convertible redeemable preferred stock - - 53,557 - 196 (196) -
Common stock issued for purchase of assets 27,500 - - - 110 - 110
Exercise of stock warrants 37,188 1 - - 110 - 111
Exercise of stock options 110,981 1 - - 167 - 168
Net loss - - - - - (936) (936)

-----------------------------------------------------------------------------------
Balance, March 31, 1997 4,224,110 42 3,691,173 37 25,152 (17,779) 7,452

10% Preferred stock conversion to
common stock 590,325 6 (702,345) (7) 1 -
8% Preferred stock conversion to
common stock 53,520 1 (49,999) (1) -
Common stock issued as dividend
on 10% preferred stocks 157,254 2 394 (396) -
Common stock accrued as dividend
on 10% preferred stock 26 (26) -
Preferred stock issued as dividend on 8%
convertible redeemable preferred stock 251,943 3 422 (425) -
Issuance of shares 149,588 1 112 113
Exercise of stock options 30,333 - 38 38
Net loss - - - - - (2,543) (2,543)

-----------------------------------------------------------------------------------
Balance, March 31, 1998 5,205,130 $ 52 3,190,772 $ 32 $ 26,145 $ (21,169) $ 5,060
===================================================================================
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

INSCI Corp
STATEMENTS OF CASH FLOWS
(in thousands)

Years ended March 31,
1998 1997
--------- -------
Cash flows from operating activities:
Net loss $ (2,543) $ (936)
Reconciliation of net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 405 511
Amortization of software costs 1,215 929
Non-recurring charges 139
Changes in assets and liabilities:
Accounts receivable (413) (389)
Inventory 46 (35)
Prepaid expenses and other current assets 4 (17)
Accounts payable 53 167
Accrued and other liabilities 348 (71)
Deferred maintenance revenue 77 263
Other assets 79 -
-------- -------
Net cash provided by (used in) operating activities (590) 422
-------- -------

Cash flows from investing activities:
Additions to capitalized software development costs (567) (615)
Additions to purchased software costs (1,049) (382)
Capital expenditures (368) (385)
Other assets - (123)
-------- -------
Net cash (used in) investing activities (1,984) (1,505)
-------- -------

Cash flows from financing activities:
Proceeds from issuance of common stock 150 279
Proceeds from sale of preferred stock - 6,350
Payment of stock issuance costs - (870)
Payment of note payable (48) (44)
-------- -------
Net cash provided by financing activities 102 5,715
-------- -------

Net change in cash and cash equivalents (2,472) 4,632
Cash and cash equivalents at beginning of year 5,068 436
-------- -------
Cash and cash equivalents at end of year $ 2,596 $ 5,068
======== =======

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

INSCI CORP
STATEMENTS OF CASH FLOWS
(CONTINUED)

Supplemental disclosure of non cash financing and investing activities:

During fiscal years 1998 and 1997, preferred stock dividends were accrued in the
amount of $26,000 and $33,000 respectively

During fiscal years 1998 and 1997, the Company issued 801,099 and 154,430 shares
respectively, of its common stock in payment of dividends due and conversions of
its preferred stocks (Notes I and J)

Dividends were accreted on beneficial conversion features of preferred stock and
amounted to $235,000, and $1,132,000 in fiscal 1998 and 1997 respectively (Notes
B-12 and I)

During fiscal years 1998 and 1997, the Company issued 251,943 and 53,557 shares
of its 8% Convertible Redeemable Preferred Stock in payment of the dividends due
on this stock. (Notes I and J)

During fiscal year 1997, the Company acquired certain assets in exchange for
27,500 shares of its common stock

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>
INSCI CORP
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998

NOTE A - BUSINESS

The Company develops, markets and supports client/server electronic
printing and document management software utilizing optical disk and CD storage
technology to store, index, archive, retrieve, and distribute computer generated
documents and scanned images including statements, reports, invoices and
transaction data. The Company also provides an extensive range of systems
integration and consulting services based upon its expertise in integrated
output management, electronic printing, print-on-demand, data storage, data
warehousing and data mining.

In March, 1997, the Company formed subsidiaries in both the United
Kingdom and the Philippines concurrent with the acquisitions of certain assets
and businesses. The purchase consideration for these acquisitions approximated
$170,000. The operating results of these subsidiaries were not significant to
overall operations of the Company in fiscal 1998.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:

1. Basis of presentation

The accompanying financial statements include the accounts of the
Company and its United Kingdom and Philippine subsidiaries. All intercompany
transactions and balances have been eliminated in the preparation of the
financial statements.

The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

2. Revenue Recognition

The Company recognizes revenue in accordance with the provisions of
American Institute of Certified Public Accountants Statement of Position No.
91-1 ("SOP 91-1"), Software Revenue Recognition. Product revenues from the sale
of software licenses are recognized upon shipment if collection is probable and
remaining vendor obligations are insignificant. The Company's software license
agreement does not (i) entitle the buyer to any right of return or exchange, or
(ii) grant the customer any right to product upgrades or enhancements.

Software maintenance revenue is recognized ratably over the contract
period, generally one year. The Company has arranged with third party providers
to perform all customer support obligations under its hardware maintenance
contracts. Consequently, the Company recognizes hardware maintenance revenue
upon commencement of the contract period.

Services revenue from consulting and systems integration is recognized
upon performance of the services where the customer contract is of a time and
material nature and there are no significant remaining obligations, and upon
acceptance of the completed project where the contract is of a short duration
for a fixed price.

Advance payments required from customers under contractual agreements
which have not been fulfilled are classified as customer deposits.

Statement of Position No. 97-2 ("SOP 97-2") "Software Revenue
Recognition" was issued in October 1997 and superseded SOP 91-1. SOP 97-2 has
not changed the basic rules of revenue recognition but does provide more
guidance particularly with respect to multiple deliverables and "when and if
available" products. Statement of Position 98-4 was issued in March 1998 which
delays for one year the implementation of certain provisions of SOP 97-2. SOP
97-2 is effective for transactions entered into for the annual periods beginning
after December 15, 1997. The Company will adopt SOP 97-2 in fiscal 1999 and has
not yet determined its impact.

3. Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with
insignificant interest rate risk and original maturities of three months or
less. They are carried at cost which approximates market value.

4. Inventory

Inventory, consisting primarily of computer hardware and software
products purchased from third parties, is stated at the lower of cost or market.
Cost is determined by the specific identification method.

5. Intangible Assets

a. Capitalized Software Development Costs

The Company capitalizes the qualifying costs of developing its software
products. Capitalization of costs requires that technological feasibility has
been established. Development costs incurred prior to the establishment of
technological feasibility are expensed as incurred. When the software is fully
documented and available for unrestricted sale, capitalization of development
costs ceases, and amortization commences and is computed on a product-by-product
basis, based on either a straight-line basis over the economic life of the
product or the ratio of current gross revenues to the total current and
anticipated future gross revenues, whichever is greater. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technologies.

Realization of capitalized software development costs is subject to the
Company's ability to market its software products in the future and generate
cash flows sufficient to support future operations. Capitalized software
development costs totaled $567,000 and $615,000 during the years ended March 31,
1998 and 1997, respectively. Amortization of capitalized software development
costs totaled $517,000 and $587,000 during the years ended March 31, 1998 and
1997, respectively, and is included in cost of revenue in the accompanying
statement of operations.

b. Purchased Software

The Company capitalizes as purchased software the costs associated with
software products either purchased from other companies for resale or developed
by other companies under contract with the Company (see Note E-5). The cost of
the software is amortized on the same basis as capitalized software costs. The
amortization period is re-evaluated quarterly with respect to certain external
factors, including, but not limited to, technological feasibility, anticipated
future gross revenues, estimated economic life and changes in software and
hardware technologies. Purchased software costs totaled $1,049,000 and $382,000
during the years ended March 31, 1998 and 1997, respectively. Amortization of
purchased software costs totaled $698,000 and $342,000 during the years ended
March 31, 1998 and 1997, respectively, and is included in cost of revenue in the
accompanying statement of operations.

6. Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the related assets.
Upon retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation and amortization are removed from the accounts and any
resulting gain or loss is included in the determination of net income. The
estimated useful lives are as follows:

Furniture and fixtures................. 5-7 years
Equipment.............................. 3-5 years
Leasehold improvements................. Life of lease

7. Translation into U.S. dollars

The assets and liabilities of the Company's subsidiaries are translated
into U.S. dollars at exchange rates in effect at the balance sheet date for
monetary items and at historical rates for non-monetary items. Revenue and
expense accounts are translated at the average exchange rate in effect during
each month. The cumulative foreign currency translation adjustment at March 31,
1998 and March 31, 1997 were not material.

8. Loss Per Share

In 1997, the Financial Accounting Standards Board issued Statement No.
128 (SFAS 128), "Earnings per Share." SFAS 128 replaced the calculation of
primary and fully diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of stock options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. For fiscal years
1998 and 1997, diluted loss per share is the same as basic loss per share since
the inclusion of stock options, warrants and convertible securities would be
antidilutive, and therefore has not been presented.

The computation of net loss per common share has been calculated on the
basis of the weighted average number of common shares outstanding during the
year.

9. Concentrations of Credit Risk

Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and accounts receivable.
The Company maintains its cash balances in one financial institution. These
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. At March 31, 1998, the uninsured amounts held at these financial
institutions were approximately $2,490,000. The Company has not experienced any
losses on these investments to date.

The Company has not experienced significant losses relating to
receivables. The Company performs ongoing credit evaluations of its customers
and maintains reserves for potential credit risks as determined by management.
Accounts receivable consists of geographically and industry dispersed customers.

10. Impairment of Long-Lived Assets

In the event that facts and circumstances indicate that the cost of an
asset may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market or discounted cash flow value is required. No such
write-downs were required in fiscal 1998 and 1997.

11. Fair Value of Financial Instruments

Financial assets for which carrying values approximate fair value
include cash, and trade and other receivables. Financial liabilities for which
carrying values approximate fair value include trade and other payables and
accrued expenses and other liabilities.

The Company estimates that the carrying values approximate fair value
due to the short maturity or market rates of interest. However, considerable
judgment is required in interpreting market data to develop estimates of fair
value. Therefore, the estimates are not necessarily indicative of the amounts
which could be realized or would be paid in a current market exchange. The
effect of using different market assumptions and/or estimation methodologies may
be material to the estimated fair value amount.

12. Convertible Preferred Stock

The beneficial conversion feature of convertible preferred stock (see
Note I) is accounted for as a dividend to preferred shareholders and amortized
over the period from the date of issue through the date the security is first
convertible. This policy conforms to the accounting for these transactions
announced by the SEC Staff in March, 1997.

13. Accounting for Stock Options and Warrants

All stock options and warrants that have been granted by the Company
have been at or above fair market value of the Company's Common Stock at the
time of grant. As a result, no compensation expense or other accounting relating
to the Company's stock options and warrants has been required to be recorded
within the financial statements of the Company.

The foregoing accounting is in accordance with Accounting Principles
Board Opinion No. 25 (APB Opinion No. 25) and related interpretations. The
Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation, " (SFAS
123). The Company has included in Note L the impact of the fair value of
employee stock-based compensation plans on net loss and net loss per share on a
pro forma basis for awards granted pursuant to SFAS 123.

NOTE C - NON-RECURRING CHARGES

During fiscal 1998, the Company's Board of Directors approved closing
its Philippine subsidiary. As a result, the accompanying Statement of Operations
for the year ended March 31, 1998 reflects a write-off of approximately $69,000
representing the subsidiary's net assets at March 31, 1998 and an accrual for
estimated closing costs of $70,000. Included in the Company's Statement of
Operations is $139,000 in revenue and $246,000 in loss from operations relating
to the Philippine subsidiary.

NOTE D - PROPERTY AND EQUIPMENT

Property and equipment at March 31, 1998 consist of the following (in
thousands):

Furniture and fixtures $ 271
Leasehold improvements 105
Equipment 2,012
--------
2,388
Less accumulated depreciation and amortization (1,749)
--------
$ 639
========

Depreciation and amortization expense was $405,000 and $511,000 for fiscal
years 1998 and 1997, respectively.

NOTE E - RELATED PARTY TRANSACTIONS

(1) In April, 1994, the Company loaned John L. Gillis, presently the
Company's Executive Vice President and Chief Operating Officer, and his wife,
the amount of $150,000 to purchase a residence in Westborough, Massachusetts.
During fiscal 1996 the Company established an allowance for loan loss as the
underlying collateral had minimal value. However, Mr. Gillis has been repaying
this loan through a surrender of a combination of stock options, salary and
bonuses. During fiscal 1998 and 1997, the loan was reduced by $16,119 and
$55,860 respectively. Interest on the loan was $7,434 and $9,522 during fiscal
1998 and 1997 respectively. The outstanding loan balance as of March 31, 1998 is
$71,640 and is offset by an allowance for loan losses of the same amount.

(2) In June 1995, the Company commenced an interim office sharing
arrangement on a month-to-month basis with Perth Ventures at a monthly charge of
$2,000 per month. Dr. E. Ted Prince, who is President, Chief Executive Officer
and Chairman of the Board of Directors of the Company, is 100% owner in and is
President of Perth Ventures. In May, 1997 the Company increased its payment to
Perth Ventures for this office to $3,300 per month based upon dedicated
utilization of the space for Company business. The Company terminated its use of
this office and reimbursement to Perth Ventures in March, 1998, upon expiration
of Perth's lease for this space. Dr. Prince is also an investor in one $25,000
unit of the Company's 10% convertible preferred stock.

(3) The Company engaged Emerging Technology Ventures, Inc. ("ETVI") to
manage its acquisition and strategic alliance activities. Mr. Francis X. Murphy
("Mr. Murphy"), who is President of ETVI, became a director of the Company in
September, 1995. ETVI is paid a monthly retainer of $6,000. In addition, during
fiscal 1998, ETVI was paid an additional $26,000 in connection with consulting
services performed for the Company on behalf of the Company's Executive
Committee. In October, 1995, ETVI was granted an incentive stock option to
acquire 400,000 shares of the Company's Common Stock at an exercise price of
$2.31 per share. These options are only exercisable to the extent that
transactions are completed in accordance with the terms of the agreement. For
completed transactions ETVI will receive a commission, which is offset against
cumulative retainer fees paid and a portion of the stock options granted will
vest concurrent with the date of the completed transaction. The arrangement with
ETVI also provides that a portion of the stock options granted will vest upon
arranging strategic sales alliances for the Company and that ETVI will receive
2% of the revenues generated from these alliances. During fiscal 1998, ETVI had
50,000 options vest as the result of strategic alliances established. The fair
value of the 50,000 options vested were estimated to be approximately $20,000.
Amounts earned related to the 2% of revenues from strategic alliances in fiscal
1998 were $2,967. As the result of the Company acquiring certain assets and
business in fiscal 1997, ETVI received a success fee of $25,000 which was offset
against the retainer and had an additional 14,262 options vested. At March 31,
1998, the remaining unvested options were 267,201. Subsequent to March 31, 1998,
as the result of establishing additional strategic alliances, 75,000 options
were vested.

(4) The Company engages Gartner and Associates as financial consultants
to advise the Company. Mr. Leonard Gartner ("Mr. Gartner"), principal of Gartner
and Associates, is a former director of the Company. Gartner and Associates is
paid a monthly retainer of $6,000 plus expenses. In addition, during fiscal 1998
and 1997, Gartner and Associates was paid approximately $22,000 and $61,000
respectively in fees related to additional assignments for the preparation of
the Company's annual report and Form S-1 Registration Statement.

(5) The Company has entered into an agreement with Technology Providers
Ltd. ("TPL") of Sri Lanka under which TPL will provide computer programming
services for certain software products under development and for selected
customer application projects. Payments to TPL totaled $1,078,000 in fiscal
1998, and $652,000 in fiscal 1997. TPL is owned by family members of Mr. Krishan
A. Canekeratne who is the Company's Senior Vice President of Development. Mr.
Canekeratne has no direct ownership interest in TPL. In the opinion of
management, the fees paid under this agreement are at fair market value rates.
The Company has issued approximately $487,000 in purchase orders for services to
be performed by TPL in fiscal 1999.

(6) During fiscal 1998, Richard Gerstner (Mr. Gerstner) a former
director of the Company was granted stock options to acquire 100,000 shares of
the Company's common stock at an exercise price equal to the current market
price as of the date granted. Subsequently, these options were re-priced to an
exercise price of $2.25 per share with the provision that these options can only
be exercised in the event that the Company's ten day trading price exceeds $3.38
per share. These options are only exercisable based upon the completion of a
distributor agreement. None of these options have vested as of March 31, 1998.
In addition, Mr. Gerstner was paid fees in the amount of $11,500 for consulting
work performed for the Company during fiscal 1998.

(7) In June, 1997, Andre Daniel-Dreyfus and Mitchell Klein joined the
Company's Board of Directors and each was granted 100,000 stock options vesting
over three years at $3.38 per share and $3.25 per share, respectively, the fair
market value at time of grant. In November, 1997 the options for these directors
were re-priced to $2.25 per share, the fair market value in November, 1997, with
the provision that these options can only be exercised in the event that the
Company's ten day trading price exceeds $3.38 per share.

(8) In October, 1997, the Company's outside directors, Messrs.
Daniel-Dreyfus, Gartner, Gerstner, Klein and Murphy were each granted 20,000
stock options vesting over three years at $2.25 per share, the fair market value
at the time of grant, for their activities as members of the Company's
executive, compensation and audit committees. In addition, during fiscal 1997,
Mr. Gartner received a grant of 40,000 options at $4.06 per share in connection
with his assistance in the audit and compensation committees.

(9) During fiscal 1998, Mitchell Capital, Inc., whose principal
shareholder is Mitchell Klein and a former director of the Company, was paid
consulting fees in the amount of $22,000 for work performed for the Company.

(10) During fiscal 1998 and 1997, Terry Prince, the wife of the
Company's Chief Executive Officer, E. Ted Prince, was paid $5,200 and $7,640
respectively, for services performed on behalf of the Company.

NOTE F - LEASE COMMITMENTS

The Company's lease for its Massachusetts headquarters expires in
September, 2004. As of March 31, 1998, future minimum rental payments under
these operating leases are as follows (in thousands):

Year ending:

March 31, 1999..................................$ 263
March 31, 2000.................................. 283
March 31, 2001.................................. 307
March 31, 2002.................................. 317
March 31, 2003.................................. 326
Thereafter...................................... 506
-------
$ 2,002
=======

Total rent expense, was approximately $344,000 and $291,000 for the
years ended March 31, 1998 and 1997, respectively.

NOTE G - REVOLVING CREDIT FACILITY

In June, 1998 the Company received a proposal from Silicon Valley Bank
for a new $1,500,000 working capital credit facility for a term of one year. The
terms of this proposal provide for working capital advances up to seventy five
percent of the Company's eligible domestic accounts receivable under ninety days
from invoice date. Collateral for the line, which is secured by a lien, is
comprised of all Company assets. The rate of interest to be paid to SVB is prime
plus one percent. In order to borrow against the line, the Company is required
to meet certain covenants which include minimum tangible net worth of $2 million
and a quick ratio of 1:50 to 1. The Company, at its option, may terminate the
credit facility with SVB without penalty. The Company expects to contractually
complete this proposed line of credit in July, 1998.

NOTE H - INCOME TAXES

At March 31, 1998, the Company had available net operating loss ("NOL")
carryforwards of approximately $15,800,000 resulting from accumulated operating
losses through fiscal 1998. The NOL carryforwards for tax reporting purposes
expire in various amounts through the year 2013. The Company believes that an
"Ownership Change" occurred in January 1996 within the meaning of Section 382 of
the IRS Code. Under an ownership change, the Company will be permitted to
utilize approximately $13,000,000 in NOL carryforwards (available on the date of
such change) in any year thereafter to reduce its income to the extent that the
amount of such income does not exceed the product of (the "Section 382 limit")
the fair market value of the Company's outstanding equity at the time of the
ownership change and long-term tax exempt rate published by the IRS.

The Company's Section 382 limits in fiscal 1999 and beyond will be
approximately $900,000 per year, and accordingly, the Company will not be able
to utilize its full NOL benefits. From January 1996 through March 31, 1998, the
Company has NOL carryforwards of approximately $2,800,000 which are available to
offset future income and expire in 2011 through 2013. The Company has fully
reserved the tax benefits of these operating losses because the likelihood of
realization of the tax benefits cannot be determined.

NOTE I - PREFERRED STOCK

1. 8% Convertible Redeemable Preferred Stock

On November 11, 1996, the Company completed 1,333,334 Units of a
Regulation "D" Private Placement Offering of 8% Convertible Redeemable Preferred
Stock. Proceeds from this offering, before underwriting commissions and
expenses, totaled $5,000,000. Each Unit consists of one share of 8% Preferred
Stock and one Warrant to purchase one share of Common Stock for $5.00 per share
for a period of three years expiring on October 1, 1999. The 8% Convertible
Preferred Stock and Warrants contain limited anti-dilution protection and
adjustment rights granted to purchasers of the Units. Each 8% convertible share
of preferred stock is convertible into one share of common stock.

Additionally, the Company paid to J. Michael Reisert & Co., Inc., the
placement agent, a commission of 8% per Unit, or the sum of $400,000, on the
completion of the minimum offering, in addition to approximately $87,500 in
expenses, as well as granting 133,333 Warrants to purchase 133,333 Units
comprised of 133,333 shares of 8% Preferred Stock, convertible into shares of
Common Stock and 133,333 warrants to purchase shares of Common Stock at $5.50
per share for a period of three years from the date of closing of the minimum
offering.

Dividends can be paid in cash or 8% Preferred Stock at the option of the
Company. The 8% Preferred Stock payable as dividends is to be valued at the
lessor of $3.75 or the average bid price for Common Stock for twenty consecutive
trading days prior to the end of the quarter (see Note J-4). In the event that
the average bid price for Common Stock during any sixty day period commencing
August 1, 1998 is $2.75 or less, holders of a majority of outstanding 8%
Preferred Stock can elect to have dividends paid in cash for the balance of the
life of the 8% Preferred Stock (the Cash Election). If the Company fails to
honor the Cash Election, the Company must pay dividends in shares of 8%
Preferred Stock and a majority of holders of 8% Preferred Stock shall have the
right to designate one Board Member and the Company shall immediately appoint a
designee and use its best efforts to cause the election of the designee for so
long as twenty-five percent of the 8% Preferred Stock remains outstanding. In
the further event the average bid price for Common Stock during the last thirty
day period of any quarter commencing with the thirty day period beginning
September 1, 1998 is $3.75 or less, annual dividends on 8% Preferred Stock will
be automatically readjusted to 11% per annum for the balance of the period
that any 8% Preferred Stock is outstanding.

The Company granted, as a part of the terms of the Placement, cost-free
registration rights with respect to the underlying shares for the Convertible
Redeemable Preferred Stock, the Unit Warrants and the Warrants granted to the
Placement Agent. The terms of the Placement involve the imposition of a penalty
of a reduction in the conversion price of the $3.75 Unit of 2% per month after
nine months from the date of closing with a maximum of 10%. The registration of
the underlying shares for this Placement was completed in the Company's Form S-1
Registration Statement that was declared effective on October 6, 1997. An
adjustment of 8% of the Unit conversion price is in effect as a result of this
provision. During fiscal 1998, shareholders of this preferred stock converted
49,995 preferred shares into 53,520 shares of common stock.

2. 10% Convertible Preferred Stock

On September 20, 1996 the Company completed a Private Placement
financing under Regulation "D" for the sum of $1,350,000. The Company issued
1,350,000 shares of 10% Convertible Preferred Stock to accredited investors at
$1.00 per share. Each 10% convertible share of Preferred Stock is convertible
into a share of Common Stock of the Company for a period of three years, at a
30% discount (the beneficial conversion feature) to the trading market of the
Company's Common Stock. The conversion price will be limited to a maximum of
$8.00 per share. The 10% Preferred Stock is automatically converted into shares
of Common Stock at the expiration of the three year term. The Company has
granted cost-free registration rights to the holders of the Preferred Stock who
have converted into Common Stock. The underlying shares of Common Stock
convertible under this Preferred Stock were included in the Company's S-1
Registration Statement declared effective on October 6, 1997. The Company
intends to amend this S-1 to include additional shares of underlying Common
Stock as required based upon changes in the market price of the Company's Common
Stock. Three hundred thousand shares of the preferred stock have been converted
into 174,371 shares of common stock as of March 31, 1998. The remaining
1,050,000 shares of preferred stock were converted into 1,377,504 shares of
common stock subsequent to March 31, 1998.

Dividends can be paid in cash or common stock. Dividends paid are
determined by the average of the trading market price of the Company's common
shares during ten trading days immediately preceding the dividend payment date
(see Note J-3).

The Company entered into an agreement with Amerivet/Dymally Securities,
Inc. to act as Placement Agent for the 10% Convertible Preferred Stock and paid
as compensation to the Placement Agent 30,000 shares of restricted Common Stock
with cost-free registration rights in addition to $23,000 in commissions and
112,000 warrants to purchase 112,000 shares of Common Stock at $5.00 per share
for a period of 3 years expiring October 1999. Additionally, the Company paid to
the Placement Agent's counsel the sum of $28,500 for legal fees and expenses
during fiscal 1997.

3. 10% Convertible Redeemable Preferred Stock

On June 15, 1995, the Company completed a private placement of 90-Day
Subordinated Notes (the "Notes") which were repayable in cash or in shares of
the Company's 10% Convertible Redeemable Preferred Stock ("10% Preferred
Stock"). A total of $1,200,000 of Notes were sold with net proceeds to the
Company of approximately $950,000.

In October 1995, the Company notified all holders of the Notes that it
was exchanging shares of the Company's 10% Preferred Stock in the amount of one
share for each $1.00 of principal and accrued interest balances due on the
Notes. Effective October 15, 1995 the Company exchanged 1,240,000 shares of the
Company's 10% Preferred Stock in the amount of one share for each $1.00 of
principal and accrued interest due on the Notes for the principal of its 90-Day
Subordinated Notes and the accrued interest payable thereon. The Preferred Stock
is convertible at the option of the holders into the Company's Common Stock. The
holder is able to convert an amount equal to the greater of either $.10, or 50%
(the beneficial conversion feature) of the average closing bid price of the
Common Stock during the 20 days immediately preceding the date that the
conversion notice is given. The underlying shares of Common Stock convertible
under this Preferred Stock were included in the Company's S-1 Registration
Statement declared effective on October 6, 1997. The Company intends to amend
this S-1 to include additional shares of underlying Common Stock as required
based upon changes in the market price of the Company's Common Stock. During
fiscal 1998, individuals who were employees of an investment firm that assisted
in this offering exercised their rights to acquire shares of the Company's
common stock at a price equal to the conversion features of the preferred stock.
As a result, these individuals acquired 149,588 shares of common stock for
$113,750. As of March 31, 1998, these individuals have remaining rights to
purchase Common Stock of the Company for an amount of $57,000, the amount of
shares to be determined at 50% of the market price of the Company's Common Stock
at the time of exercise.

Dividends can be paid in cash or common stock. Dividends paid in common
stock are determined based upon a discount to the average trading price of the
Company's common stock during the twenty trading days immediately preceding the
payment date (see Note J-2).

In accordance with the terms of the conversion, a total of 402,345
shares of preferred stock have been surrendered and converted into 415,954
shares of the Company's Common Stock during the fiscal year ended March 31,
1998. During the fiscal year ended March 31, 1997, 206,668 shares of preferred
stock were surrendered and converted into 84,337 shares of the Company's Common
Stock. Subsequent to March 31, 1998, 30,067 shares of preferred stock were
converted into 55,474 shares of common stock.

NOTE J- STOCKHOLDERS' EQUITY

(1) On April 21, 1994, the Company received net proceeds of
approximately $7,159,000 from its initial public offering ("IPO") of 1,250,000
units ("Units"). Each Unit consists of one share of the Company's Common Stock
and one redeemable Common Stock purchase warrant. Each warrant entitles the
holder thereof to purchase one-half of one share of Common Stock. Two warrants
may be exercised at an aggregate exercise price of $9.00, subject to adjustment
under certain circumstances, at any time after the warrants become separately
transferable, until 48 months from the date of the offering. The warrants are
redeemable by the Company at $.05 per warrant upon 30 days notice mailed within
20 days after the closing bid price of the Common Stock has equaled or exceeded
$11.25 for a period of 20 consecutive trading days. On April 9, 1998, the
Company extended the terms of the warrants from April 14, 1998 until December
31, 1998, with all terms and conditions of the warrants remaining the same.

(2) During fiscal year 1998, a total of 402,345 shares of 10%
Convertible Redeemable Preferred Stock were surrendered and converted into
415,954 shares of the Company's Common Stock. In addition, during the fiscal
year ended March 31, 1998, the Company issued 98,038 shares of Common Stock in
lieu of paying cash dividends on its 10% Convertible Redeemable Preferred Stock.
During fiscal year 1997, a total of 206,668 shares of 10% Convertible Redeemable
Preferred Stock were surrendered and converted into 84,337 shares of the
Company's Common Stock. In addition, during the fiscal year ended March 31,
1997, the Company issued 60,288 shares of Common Stock in lieu of paying cash
dividends on its 10% Convertible Redeemable Preferred Stock.

(3) During fiscal year 1998, in accordance with the terms of its 10%
Convertible Preferred Stock, the Company issued 59,216 shares of Common Stock in
lieu of paying cash dividends on its 10% Convertible Preferred Stock. During
fiscal 1998, 300,000 shares of this Preferred Stock were surrendered and
converted into 174,371 shares of the Company's Common Stock. During fiscal year
1997, the Company issued 9,805 shares of Common Stock in lieu of paying cash
dividends on its 10% Convertible Preferred Stock.

(4) During fiscal year 1998, in accordance with the terms of its 8%
Convertible Redeemable Preferred Stock, the Company issued 251,943 shares of 8%
Convertible Redeemable Preferred Stock in lieu of paying cash dividends on this
preferred stock. During fiscal 1998, 49,999 shares of this Preferred Stock
were surrendered and converted into 53,520 shares of the Company's Common Stock.
During fiscal year 1997 the Company issued 53,557 shares of 8% Convertible
Redeemable Preferred Stock in lieu of paying cash dividends on this preferred
stock.

(5) During fiscal 1998, the Company issued 149,588 shares of Common
Stock for $113,750 and options were exercised to purchase 30,333 shares of
common stock for $37,663.

(6) In March 1997 the Company issued 27,500 shares of Common Stock in
conjunction with the acquisition of certain assets.

(7) The Company granted three-year warrants to the Underwriters of its
April 1994 IPO to purchase up to 125,000 Units at an exercise price of $7.70 per
unit, and had granted registration rights relating to the underlying securities.
In addition, the Company has agreed to indemnify the Underwriter against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended. In May 1996, the Underwriters surrendered these warrants and waived and
terminated any and all anti-dilution rights with respect to the number of shares
to be issued pursuant to these warrants, in exchange for new warrants, which
expire on April 15, 1998 and have no anti-dilution rights, to purchase 187,500
shares of Common Stock at an exercise price of $3.50 per share. The Company
granted cost-free registration rights to the underlying Common Stock shares of
these warrants and has included these underlying Common Stock shares in the Form
S-1 Registration Statement that was declared effective on October 6, 1997.

(8) As of March 31, 1998, 5,205,130 shares of the Company's common stock
were outstanding. As of June 15, 1998, 6,839,037 shares of common stock were
outstanding. The increase in shares resulted from conversions on the Company's
10% Convertible Redeemable Preferred Stock and 10% Convertible Preferred Stock
subsequent to March 31, 1998. Of these conversions, one individual received
1,321,039 shares of the Company's common stock as a result of his conversion.

(9) The following is a summary of the Company's stock warrant activity:

<TABLE>
<CAPTION>
WARRANTS OUTSTANDING Number Price Expiration
of Shares of Shares Date
<S> <C> <C> <C>
Balance, March 31, 1996 789,272 $3.00 to $9.00 December, 1998
Fiscal 1997 activity:
Issued
Underwriters exchange, initial public offering 187,500 $3.50 December, 1998
10% Convertible Preferred Stock, placement agent 112,000 $5.00 October, 1999
8% Convertible Redeemable Preferred Stock 1,333,334 $5.00 October, 1999
8% Convertible Redeemable Preferred Stock, placement agent 133,333 $5.50 September, 1999
---------
Total issued 1,766,167
Canceled (125,000) $7.70
Exercised 0
---------
Balance (and exercisable) , March 31, 1997 2,430,439

Fiscal 1998 activity:
Issued 0
Canceled 0
Exercised 0
---------
Balance (and exercisable) , March 31, 1998 2,430,439
=========
</TABLE>

NOTE K - COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Securities and Exchange Commission issued an order, dated April 13,
1995, authorizing a private investigation of Imtech (the Company's former
majority shareholder) and the Company, and its officers and directors during the
period from March, 1993 and continuing until April 13, 1995. The order of
investigation inquired into whether the Company and its then officers and
directors engaged in violations of Rule 10b-5 of the Securities Exchange Act of
1934 (the "Exchange Act"); failed to file annual reports and other information
as required by the rules and regulations of the Commission. On September 10,
1996 the Company was informed by the Commission that the staff inquiry relating
to these matters had been terminated and that no enforcement action had been
recommended at this time.

A claim was asserted by holders of 187,500 Warrants, with respect to the
delay in the registration of the underlying shares related to the warrants. The
Company has agreed to resolve the claim by issuing an aggregate of 70,000 shares
of its common stock in consideration of the warrant holders surrendering their
warrants for cancellation by the Company. The Company has not finalized the
settlement agreement.

Registration Rights

On October 6,1997 the Securities and Exchange Commission declared
effective the Form S-1 Registration Statement that the Company filed with the
Commission for 16,769,991 shares of common stock, of which 4,000,000 are
reserved for acquisitions, 2,860,565 for selling shareholders and the balance of
9,909,426 for potential issuance pursuant to rights granted to unit holders,
convertible preferred stockholders, and warrants and options issued by the
Company. The registration includes "piggyback" shares pursuant to rights that
the Company has granted to the holders of certain warrants and shares of the
Company's stock. The Company did not file its Registration Statement within the
time specified within its registration rights agreements and as a result, could
be subject to claims by security holders that they were unable to convert their
securities into registered shares of Common Stock.

Employment Agreements

Effective June 15, 1995, the Company entered into an employment
agreement for a period of three years with Dr. E. Ted Prince ("Dr. Prince"), the
Company's Chairman of the Board of Directors, President and Chief Executive
Officer. Dr. Prince's employment agreement, as amended, provides for a base
salary of $200,000 per annum to be paid through the term of the agreement,
annual incentive bonuses based upon attainment of defined profitability
criteria, 250,000 vested stock options to purchase 250,000 shares of Common
Stock at an exercise price of $2.00 per share, and 950,000 vested stock options
to purchase 950,000 shares of Common Stock at an exercise price of $1.66 per
share. With respect to the latter options, if the employment of Dr. Prince is
terminated for any reason during the thirty-six month period of the employment
agreement, then he must return to the Company a pro-rata portion of the 950,000
options. The portion to be returned would be determined based upon the number of
months remaining in the agreement after his termination date as a percent of the
original term of thirty-six months. In the event of a change of control of the
Company through merger or acquisition, the provisions with respect to return of
the stock options would be waived. In May, 1997, Dr. Prince was granted a
management incentive bonus in the form of a 75,000 stock option grant at $3.75
per share related to achievements in fiscal 1997. As of June 18, 1998 the
Company's Board of Directors resolved to extend Dr. Prince's employment
contract, with terms to be finalized during July, 1998.

The Company has employment agreements with its other executive officers
which also include annual incentive bonuses based upon attainment of defined
profitability criteria and other performance related objectives. If an executive
officer's employment is terminated for any reason other than voluntary
resignation or for cause (as defined in the agreements) then a severance benefit
will be paid. The severance benefit varies from officer to officer, but is not
greater in any instance than six month's salary and benefits. Exclusive of Dr.
Prince, certain key members of management have been granted stock options as
part of their compensation package. Mr. John L. Gillis and Mr. Krishan
Canekeratne have 298,336 and 350,000 options, respectively.

Employee Benefit Plan

The Company maintains a defined contribution plan for the benefit of its
eligible employees pursuant to Section 401K of the Internal Revenue Code.
Contributions to the Plan by the Company will be made at its sole discretion.
Participants may also make contributions to the Plan. The Company did not make
any contributions to the Plan for fiscal years 1998 and 1997.

<PAGE>

NOTE L - STOCK OPTION PLANS

The following is a summary of the Company's stock option activity:

<TABLE>
<CAPTION>
1992 STOCK OPTION PLAN 1992 DIRECTORS OPTION PLAN
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1996 922,065 2.78 95,000 2.58
Granted 77,000 6.25 -
Canceled (310,186) 3.33 (18,333) 3.79
Exercised (79,314) 1.60 (31,667) 1.28
--------- ---------
Outstanding at March 31, 1997 609,565 3.17 45,000 3.01
Granted - 200,000 2.25
Canceled (249,432) 5.03 (15,000) 6.67
Exercised (5,333) 1.77 (25,000) 1.13
--------- ---------
Outstanding at March 31, 1998 354,800 1.75 205,000 2.23
--------- ---------

<CAPTION>
1997 EQUITY INCENTIVE PLAN OTHER STOCK OPTIONS
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1996 - 2,990,076 2.12
Granted 225,800 5.43 440,000 6.14
Canceled (5,000) 5.43 (224,134) 4.15
Exercised - -
--------- ---------
Outstanding at March 31, 1997 220,800 5.43 3,205,942 2.53
Granted 1,390,082 2.62 200,000 2.39
Canceled (555,299) 4.41 (550,939) 5.39
Exercised - -
--------- ---------
Outstanding at March 31, 1998 1,055,583 2.26 2,855,003 1.95
--------- ---------

The following table summarizes information about stock options outstanding and exercisable at March 31, 1998.

<CAPTION>
1992 STOCK 1992 DIRECTORS 1997 EQUITY OTHER STOCK
OPTION PLAN OPTION PLAN INCENTIVE PLAN OPTIONS

Outstanding
- ------------
<S> <C> <C> <C> <C>

Option Price Range $1.50 - 3.00 $1.44 - 2.25 $1.06 - 3.75 $1.44 - 5.09
Number of Shares 354,800 205,000 1,055,583 2,855,003
Weighted Average Life 7.3 4.1 8.9 4.4
Weighted Average Exercise Price $1.75 $2.23 $2.26 $1.95

Exercisable
- -----------

Number of Shares 258,300 5,000 0 1,754,469
Weighted Average Exercise Price $1.77 $1.44 $0.00 $1.86
</TABLE>

Employee Stock Option Plans

On July 29, 1996 the Company adopted the 1997 Equity Incentive Plan (97
Plan) authorizing 3,000,000 shares of Common Stock to replace the remaining and
ungranted shares under the 1992 Stock Option Plan that was terminated. The 97
Plan permits the Company to provide its employees with incentive compensation
opportunities which are highly motivational. On October 7, 1997, the Company
adopted a plan that allowed employees, at their election, to exchange existing
outstanding stock options for reissued stock options at an exercise price of
$2.25 per share, provided that these shares could not be exercised for a period
of three years or until the ten day average market price of the Company's
Commons Stock was $4.50 per share or higher. On October 7, 1997, the market
price of the Company's common stock was $2.13. Approximately 650,000 options
were exchanged and are included in the "granted" and "canceled" columns in the
tables for the 1992 and 1997 Plans.

Directors and Other Stock Options

The Directors Option Plan (the "Directors Plan") was adopted by the
Board of Directors to make service on the Board more attractive to present and
prospective directors. The Plan was amended in September 1995 to increase the
number of shares authorized to 1,000,000. On July 29, 1996 the Directors Plan
was amended so that each new director receive 100,000 stock options upon being
appointed to the Board of Directors. In addition, the current change of control
provision was modified to reflect immediate vesting.

The Directors Plan is administered by a committee made up of at least
two members of the Board of Directors. The exercise price per share of any
option granted under the Directors Plan shall not be less than the fair market
value of such shares on the date of grant. Eligible directors include all
members of the Board of Directors who are not also employees of the Company or
any parent or subsidiary of the Company. Options expire five years from the date
of grant, subject to earlier termination in accordance with the terms of the
Directors Plan. All rights to exercise options terminate 90 days following the
date the optionee ceases to serve as a director of the Company with certain
exceptions.

Stock Based Compensation

The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans and, accordingly, no compensation cost has
been recognized because stock options granted under the plans were at exercise
prices which were equal to or greater than the market value at date of grant.
Had compensation expense been determined as provided in SFAS 123 for stock
options using the Black-Sholes option pricing model, the pro forma effect would
have been:

Fiscal 1998 Fiscal 1997
----------- -----------
Net loss applicable to common shares - as reported $(3,390,000) $(2,479,000)
Net loss applicable to common shares - pro forma (5,220,000) (4,162,000)
Net loss per common share - as reported (.73) (.62)
Net loss per common share - pro forma (1.13) (1.03)

The fair value of each option grant is calculated using the following weighted
average assumptions:

Fiscal 1998 Fiscal 1997
----------- -----------
Expected life (years) 5 5
Interest rate 6.92% 6.01%
Volatility 77% 82%
Dividend yield 0 0

NOTE M - SEGMENT AND CUSTOMER INFORMATION

The Company is active in only one business segment: developing,
marketing and supporting imaging, document and data management, and archival
software products and related services. For the year ended March 31, 1998 sales
made to UNISYS and to customer leads furnished by UNISYS accounted for
approximately 18% of the Company's total revenues. Amounts due from customers as
a percent of the Company's accounts receivable balance as of March 31, 1998
were, in approximate percentages, Lason Inc. 17% and Putnam Trust Company, 11%.
For the year ended March 31, 1997 sales made to UNISYS and to customer leads
furnished by UNISYS accounted for approximately 13% of the Company's total
revenues and revenues to OCE Printing Systems accounted for approximately 11% of
the Company's total revenues. Amounts due from customers as a percent of the
Company's accounts receivable balance as of March 31, 1997 were, in approximate
percentages, UNISYS 16%, Employees Insurance of Wausau 17% and First Data
Investor Service 16%.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
10-KSB FOR INSCI'S 1998 FISCAL YEAR
</LEGEND>
<CIK> 0000878612
<NAME> m7rpwrt@

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