BITWISE DESIGNS INC, 10KSB, 1999-10-05

BITWISE DESIGNS INC
10KSB, 1999-10-05
ELECTRONIC COMPUTERS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM 10-KSB
(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
| X | SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended June 30, 1999
------------------------------------

| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from _______________ to _______________

Commission File No. 0-20190

BITWISE DESIGNS, INC.
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(Exact Name of Issuer as Specified in Its Charter)

Delaware 14-1673067
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2165 Technology Drive Schenectady, N.Y. 12308
(Address of principal executive offices) (Zip Code)

Issuer's telephone number, including area code (518) 346-7799
- -----------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Exchange Act:

Name of Each Exchange on
Title of Each Class Which Registered
- ------------------- ------------------------

Common Stock, $.001 par value Pacific Stock Exchange
- ----------------------------- ----------------------

Securities registered pursuant to Section 12(g) of the Exchange Act:

NONE
- --------------------------------------------------------------------------------
(Title of class)

- --------------------------------------------------------------------------------
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(Title of class)
[Cover Page 1 of 2 Pages]
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Check whether Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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

Check if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained in this form, and no disclosure
will 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-K
or any amendment to this Form 10-K. [ ]

The Issuer's revenues for its most recent fiscal ended June
30, 1999 were $17,094,765.

On September 29, 1999, the aggregate market value of the
voting stock of Bitwise Designs, Inc. (consisting of Common Stock, $.001 par
value) held by non-affiliates of the Registrant (approximately 6,943,000 shares)
was approximately $8,456,000 based on the closing price for such Common Stock
($.9375) on said date as reported by the Nasdaq SmallCap Market.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

On September 29, 1999, there were 7,410,745 shares of Common
Stock, $.001 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

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[Cover Page 2 of 2 Pages]
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Table of Contents

PART I
PAGE
----

Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders

PART II

Item 5. Market For the Company's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplemental Data
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure

PART III

Item 10. Directors and Executive Officers of the Company
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions

PART IV

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

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PART I

THIS ANNUAL REPORT ON FORM 10-KSB, INCLUDING ITEM 1 ("BUSINESS") AND ITEM 7
("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"), CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT, THE WORDS "BELIEVE,"
"ANTICIPATE," "THINK," "INTEND," "PLAN," "WILL BE," "EXPECT", AND SIMILAR
EXPRESSIONS IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REGARDING
FUTURE EVENTS AND/OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD CAUSE ACTUAL EVENTS OR THE
ACTUAL FUTURE RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANY
FORWARD-LOOKING STATEMENT. SUCH RISKS AND UNCERTAINTIES INCLUDE AMONG OTHER
THINGS, THE AVAILABILITY OF ANY NEEDED FINANCING, THE COMPANY'S ABILITY TO
IMPLEMENT ITS BUSINESS PLAN FOR VARIOUS APPLICATIONS OF ITS TECHNOLOGIES, THE
IMPACT OF COMPETITION, THE MANAGEMENT OF GROWTH, AND OTHER RISKS AND
UNCERTAINTIES THAT MAY BE DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. IN LIGHT OF THE SIGNIFICANT
RISKS AND UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN, THE INCLUSION OF SUCH STATEMENTS SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS
OF THE COMPANY WILL BE ACHIEVED.

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

Bitwise Designs, Inc. ("Bitwise"), and its wholly-owned subsidiary DJS
Marketing Group, Inc. ("DJS") (Bitwise and DJS are sometimes collectively
referred to herein as the "Company")are engaged in the manufacture and
distribution of document imaging systems, computer systems and related
peripheral equipment, components, and accessories and network and internet
services.

The Company has also recently established a majority owned subsidiary
named Authentidate.Com LLC to engage in a new business line of providing end
users with a service which will (a) accept and store e-mail from networks and
personal computers throughout the world and from different operating systems
via the Internet,

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(b) allow for confirmation of acceptance of all e-mails sent to the system; (c)
allow for a secure payment system, including use of credit cards; and (d)
produce confirmations of receipt of e-mail. See "The Business - Formation of New
Authentidate Business Line" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations"

In June 1998, the Company sold a subsidiary, System Solutions
Technology, Inc. ("SST") which had been acquired by the Company in August 1994.
SST is a value added distributor of advanced technology industrial computers and
computer peripheral. In April 1997, the Company sold a subsidiary, Electrograph
Systems, Inc. ("ESI"). ESI was acquired in August 1994 and is a value-added
distributor of monitors and other microcomputer peripherals, components and
accessories. The Company's financial statements and discussion under the heading
"Management Discussion and Analysis" includes the results of operations for both
ESI and SST to the date of their divestiture.

In March 1996, the Company acquired DJS, a system integrator, computer
reseller and personal computer manufacturer in Albany, New York. DJS is an
authorized sales and support provider for Novell, Microsoft Solutions and Lotus
Notes, as well as a member of Microage Infosystems.

The Company was organized in August 1985 and reincorporated under the
laws of the state of Delaware in May 1992. The Company's executive offices are
located at 2165 Technology Drive, Schenectady, New York 12308, and its telephone
number is (518) 346-7799.

GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR

In June 1998, the Company sold SST to United Strategies, Inc. ("USI")
for $4,000,000. The Company received approximately $3,600,000 in cash and
approximately $400,000 worth of SST inventory and receivables. The transaction
was in the form of a stock purchase. During the year ended June 30, 1999, the
Company received certain claims from USI for indemnification under the
agreements governing the sale. The Company agreed to pay USI $341,000 to settle
these claims to be paid over 15 months accruing interest of 6%. The Company
realized a loss of approximately $597,000 on the sale.

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INDUSTRY OVERVIEW

The market for the Company's products is highly competitive and rapidly
changing. A primary focus of the Company is the manufacturing and distribution
market for document imaging systems, personal computers, workstations and
portable personal computers as well as microcomputer peripherals, networks,
components accessories, and Internet/Intranet development. These markets have
experienced significant growth over the last decade, and the Company believes
such growth will continue, particularly in the document imaging market.

.....Document Imaging and Management

In January, 1996, the Company, on a national level, introduced its
document imaging system called DocStar ("DocStar"). The Company designs and
manufactures DocStar which enables a user to scan paper documents onto an
optical disk, hard disk drive or other storage medium. The Company's DocStar
product line consists of a personal computer, proprietary software and a
scanner. This system can be utilized as a "stand-alone" system or as part of a
network installation.

The Company believes that the emerging document imaging market will be
one of its primary businesses and a basis for growth during the next few years.
This is an evolving market which will experience significant growth in the
future. The Company believes that this emerging market can provide the Company
with significant profits. However, there can be no assurance that the Company's
efforts in this emerging market will result in profits, income or significant
revenues to the Company.

.....Computer Products and Integration Services

The Company purchases personal computers and peripheral computer
products from many different suppliers. Peripheral computer products are
products that operate in conjunction with computers, including but not limited
to, printers, monitors, scanners, modems and software. A systems integrator,
such as DJS, configures various computer hardware and peripheral products such
as software together, to satisfy a customer's individual needs. The Company
believes the market for personal computers and computer integration services
will continue to grow the next several years.

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.....Networks

DJS also designs and installs network systems which involves network
software being installed on a fileserver computer with less powerful computers
sharing information from the fileserver. Applications that the network system
provides include E-mail, accounting systems, word processing, communication and
any other applications that require the sharing of information. Although
Management believes that designing and installing network systems may be an area
of growth for DJS, there can be no assurance that growth in the network market
will be realized.

.....Internet/Intranet Development

The Internet/Intranet is a computer based communication system, with
international applicability, which provides customers with the ability to
advertise products, provide news and stock market products, provide educational
data bases, as well as one on one and Group Communications. The Company, through
DJS, provides customer Internet services, including installation of web pages.

BITWISE DESIGNS, INC.

PRODUCTS

Document Imaging and Management

In January 1996, Bitwise, on a national level, introduced its document
imaging management system under the tradename DocStar which enables users to
scan paper documents onto an optical disk, hard drive or other storage medium
from which they can be retrieved in seconds. This system allows users to
eliminate or significantly reduce paper filing systems. The Company believes
that a broad spectrum of businesses and governmental agencies experience the
problem of storage, management and security of paper documents. The DocStar
product line is intended to provide a cost effective method of reducing the
space necessary to store documents while granting a user the ability to
instantly retrieve documents.

The operation of a document management system is similar to the
operation of a facsimile machine. Documents are fed into an optical scanner that
reads the documents and stores the information on one of several alternative
mass storage devices. Documents can

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also be transmitted from or to the system via facsimile machine or modem.
Documents can be retrieved almost instantaneously for viewing, printing or
faxing thereby offering a significant timesaving tool to the modern office.

The main components of a document management system are a personal
computer, a high speed electronic document scanner, a laser printer capable of
reproducing documents quickly, and a software package which controls scanning,
indexing, storage and reproduction. Bitwise purchases scanners, laser printers
and other essential hardware from unaffiliated third parties and manufactures
the PC's for the system. The software utilized in DocStar consists of various
versions of existing software from other developers, as well as software
developed by the Company. The Company offers the DocStar System in four models:
System 15, System 25X2, System 50, and the DocStar DCL. The DocStar System 15 is
the base model. The Systems 25X2 and 50 offer faster advanced processors or
scanners, and increased storage capacity. Options and accessories include a
jukebox, an optical disk tower, additional software, scanner upgrades, monitor
upgrades and hardware upgrades. The DCL connects DocStar electronic imaging
capabilities with the network scanning and printing functions of Xerox
Corporation's Document Centre digital copiers.

The Company markets the document management system under the tradename
DocStar through a national dealer network. The Company owns one dealership in
the Albany, New York region, which also serves as a test market for new
applications and software.

BACKLOG

The Company normally ships products within 5 days after receipt of an
order and typically has no more than two weeks of sales in backlog at any time.
The amount of backlog fluctuates but usually is not material.

RESEARCH AND DEVELOPMENT

The market for the Company's products is characterized by rapid
technological change involving the application of a number of advanced
technologies, including those relating to computer hardware and software, mass
storage devices, and other peripheral components. The Company's ability to be
competitive depends upon

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its ability to anticipate and effectively react to technological change, as well
as the application requirements of its customers.

Since inception, the Company has devoted efforts to research and
development activities in an effort to improve its current products and
introduce new products. Current development efforts are directed toward
improving ease of use, adding system enhancements and increasing performance.
Product development expense was $248,801 and $230,652 for fiscal years 1999 and
1998, respectively. The Company will continue to improve its document imaging
products in an effort to satisfy the needs of an ever changing marketplace.

QUALITY CONTROL AND SERVICE

Quality control by the Company is administered at each of the three
levels of the production process. First, components considered for use in
standard systems are tested for compatibility by the research staff. Second,
incoming components receive a physical damage inspection on receipt and again at
the start of the production process. Each memory module is electronically tested
prior to assembly. Each complete unit is then functionally tested at the end of
the assembly process to demonstrate that all components are engaged and fully
operational.

Third, each complete unit is "burned-in" from eight to twelve hours.
This process involves running a component test program which sequentially tests
each memory bit, processor circuit, and drive memory track to verify correct
operation in a temperature-controlled chamber. This test is repeated
continuously over the burn-in period. Since electronic components have their
greatest failure risk during the first few hours of active operation, management
believes that the burn-in process reveals nearly all faulty components before
they reach the end user.

The Company's dealers provide service to the end users. All dealers
receive service training from the national service staff. The Company provides
the dealer with replacement parts free of charge for 13 months after date of
shipment. The Company's vendors provide a similar warranty for failed
components. The Company offers liberal telephone support service to its dealers.

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MANUFACTURING AND SUPPLIERS

The Company's products have been designed to enable a variety of system
configurations to be assembled from a few basic modules. The Company's
manufacturing operations consist primarily of the assembly, test and quality
control of all parts, components, subassemblies and systems.

The Company uses standard parts and components in its existing product
lines which it purchases from unaffiliated third party suppliers. The Company,
however, does not have any contractual arrangements with its current suppliers.
Although the Company has never experienced material delays in deliveries from
its suppliers, shortages of component parts could occur and delay or interrupt
the Company's manufacture and delivery of products and adversely affect the
Company's operating results. The Company believes adequate alternative suppliers
are available to mitigate the potentially adverse effect of supply
interruptions, but there can be no assurance that such components will be
available as and when needed.

All peripheral computer products available through the Company, such as
monitors and scanner/printer units, are manufactured by third parties. The
Company only assembles the computer which is part of the DocStar system and the
optical disk tower option.

PATENTS AND TRADEMARKS

The Company has one patent pending and has registered the logo "BitWise
Designs" and Bitwise's associated trademarks, "DocStar" and "Authentidate." The
patent pending is for innovative technology that can verify the authenticity of
digital images by employing a secure clock to stamp the date and time on each
image captured. The product name is Authentidate(TM) Image Marking. No assurance
can be given that registration will be effective to protect the Company's
trademarks. The Company believes the tradenames are material to its business.

SALES AND MARKETING

The Company's products are primarily being distributed through a
national dealer network and through a dealership owned by the

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Company in its local market area. The Company believes that it has achieved a
national sales presence through national advertising, favorable reviews in
industry publications, newspapers, magazines, press releases and other
periodicals utilized by the document imaging industry. Moreover, the Company
offers direct mail and tele-marketing services to selected qualified dealers in
their market area. Management intends to increase the number of dealer locations
for the current fiscal year, although there can be no assurance it will be
successful in such efforts.

The Company's products are usually sold on credit terms or through a
floor planning finance company (to qualified accounts), and are warranted
against defects in materials and workmanship for a period of 13 months from
purchase. The Company currently employs five regional sales directors, one
district sales manager and three direct sales managers, to cover the significant
markets of the country.

COMPETITION

The market for the Company's products is rapidly changing and highly
competitive. The competition is direct (i.e., companies that make similar
products) and indirect (i.e., companies that participate in the market, but are
not direct competitors of the Company). The Company competes with major document
imaging manufacturers such as Panasonic, Sharp and Mita. Many of the Company's
current and prospective competitors have significantly greater financial,
technical, manufacturing and marketing resources, as well as a larger installed
base, than the Company.

EMPLOYEES

Bitwise employs 50 full-time employees including its executive
officers. No employees are covered by a collective bargaining agreement, and the
Company believes its employee relations are satisfactory.

FORMATION OF NEW AUTHENTIDATE BUSINESS LINE

The Company has recently established a majority owned subsidiary named
Authentidate.Com LLC to engage in a new business line of providing end users
with a service which will (a) accept and store e-mail from networks and
personal computers throughout

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the world and from different operating systems via the Internet, (b) allow for
confirmation of acceptance of all e-mails sent to the system; (c) allow for a
secure payment system, including use of credit cards; and (d) produce
confirmations of receipt of e-mail.

The Company anticipates that Authentidate will commence offering
services through its Authentidate.com Internet site within the next 45 to 90
days. The Company intends to market the Authentidate services through
traditional print and media advertising and banner advertising and links on
other Internet provider home pages. To date, Authentidate's operations have been
limited to developing the technology for its services and home page. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

DJS MARKETING GROUP, INC.

DJS (d/b/a "Computer Professionals") is a network and systems
integrator of computer and peripheral products to a variety of customers,
including corporations, schools, government agencies, manufacturers and
distributors. DJS is the largest systems integrator in the Albany, New York
region.

DJS provides network integration, Internet/Intranet development,
accounting solutions, service, consultation, document management and video
conferences. DJS also services the products it sells by employing factory
trained computer technicians and network engineers.

PRODUCTS

Network Integration

DJS' network integration group designs, implements, installs, manages
and supports enterprise networks with products from Novell, Microsoft, UNIX,
Tricord, Synoptics, Compaq, Cisco and others.

DJS designs customized solutions for its clients with precise
objectives and its engineers analyze hardware, software, and cabling to ensure
effective and affordable solutions.

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Internet/Intranet Development

DJS offers services related to the Internet, including Internet
connectivity, web page development, and hardware installation. Additionally, DJS
assists its clients through the buying and implementation process with
Internet/Intranet training and ongoing support.

Accounting Solutions

DJS also markets accounting systems from State-of-the-Art to various
end-users such as distributors, manufacturers and wholesalers. DJS analyzes each
particular client's needs and custom designs an accounting system to satisfy
these needs.

Service and Consultation

DJS's service department is authorized to repair and maintain all major
brand products sold by DJS, including warranty and post-warranty equipment. DJS
generally guarantees a four (4) hour response time for all service calls, with
an average resolution time of next day.

DJS's engineers also provide complete system configuration services,
which includes installation of all hardware, including memory, disk drives,
network or communication adapters, as well as any associated software or driver.
All units are thoroughly tested after configuration and all malfunctioning units
are eliminated.

Document Management

DJS also offers document imaging services which it believes is an
efficient and financially attainable alternative to conventional, costly paper
trails. Management believes digital documents can be stored, searched, retrieved
and edited in a fraction of the time with complete access to the network and
quality control features. Among other product lines, DJS offers customers the
Company's DocStar line.

SALES AND MARKETING

DJS markets its products and services throughout New York
State, parts of Vermont and Massachusetts. DJS intends to expand

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its national and international sales and marketing departments. Clients include
corporations, small office/home office owners, schools, government agencies,
manufacturers and distributors.

COMPETITION

DJS is one of the oldest and largest network and systems integrators in
the Capital District of Albany, New York, and works on many diverse platforms.
While management believes that no other computer company in the Albany, New York
region offers the extensive services that DJS offers, competitors in computer
sales, service and support in general, include Computerland, Computers Etc.,
CompUSA, Entex and Ameridata.

EMPLOYEES

DJS has 34 full-time staff members, including two (2) executive
officers. None of the employees of DJS are represented by a collective
bargaining agreement. DJS believes that its employee relations are good.

CAUTIONARY STATEMENTS

As provided for under the Private Securities Litigation Reform Act of
1995, the Company wishes to caution stockholders and investors that the
following important factors, among others discussed throughout this Report on
Form 10-KSB, in some cases have affected and in some cases could affect the
Company's actual results of operations and cause such results to differ
materially from those anticipated in forward looking statements made herein.

SIGNIFICANT LOSSES

The Company has incurred losses of $3,166,488 and $5,464,059,
respectively, for its fiscal years ended June 30, 1999 and 1998. The Company
began marketing its DocStar line of document imaging systems on a national basis
in January 1996 which has led to increased costs associated with the product
line. The Company will continue to incur these costs in future as it attempts to
increase market awareness and sales. Moreover, the Company's prospects should be
considered in light of the difficulties frequently encountered in connection
with the establishment of a

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new business line and the competitive environment in which the Company operates.
There can be no assurance that the Company will be able to achieve profitable
operations in future operating periods.

POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SMALLCAP MARKET;PENNY STOCK RULES

The Company's Common Stock is listed for trading on the Nasdaq
SmallCap Market. In order to continue to be listed on Nasdaq, however, the
Company must meet certain criteria including one of the following: (i)
maintaining $2,000,000 in net tangible assets or (ii) having a market
capitalization of at least $35,000,000 or (iii) having net income of $500,000.
In addition, the minimum bid price of the Company's Common Stock must be at
least $1.00 per share and the market value of the public float must be at least
$1,000,000. As of June 30, 1999, the Company had net tangible assets of
approximately $1,994,000 and did not satisfy the requirements for market
capitalization or net income. As of October 4, 1999, the Company had net
tangible assets of approximately $3,000,000. The failure to meet these
maintenance criteria may result in the delisting of the Company's Common Stock
from Nasdaq, and trading, if any, in the Company's securities would thereafter
be conducted in the non-Nasdaq over-the-counter market. As a result of such
delisting, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's securities.

The Company has recently completed a private offering whereby its sold
certain of its securities and a percentage interest in its new formed
subsidiary, Authentidate.com LLC. The Company realized gross proceeds of
approximately $2,000,000. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation".

Although the Company anticipates that the Common Stock will be continue
to be listed for trading on Nasdaq, if the Common Stock were to become delisted
from trading on Nasdaq and the trading price of the Common Stock were to fall
below $5.00 per share on the date the Common Stock was delisted, trading in such
securities would also be subject to the requirements of certain rules
promulgated under the Exchange Act, which require additional

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disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith, and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from effecting transactions in the Company's
securities, which could severely limit the market price and liquidity of such
securities and the ability of purchasers to sell their securities of the Company
in the secondary market.

NEED FOR ADDITIONAL FINANCING

The Company's capital requirements have been and will continue to be
significant. The Company has been substantially dependent upon public offerings
and private placements of its securities and on short-term and long-term loans
from lending institutions to fund such requirements. The Company is expending
significant amounts of capital to promote and market DocStar and due to these
expenditures, has incurred significant losses to date. The Company, in the
future, will need additional funds from loans and/or the sale of equity
securities. No assurance can be given that such funds will be available or, if
available, will be on commercially reasonable terms satisfactory to the Company.
In the event such funds are not available, the Company may be forced to curtail
operations, or, in an extreme situation, cease operations.

AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK.

The Company's Certificate of Incorporation authorizes the Company's
Board of Directors to issue up to 5,000,000 shares of Preferred Stock, from time
to time, in one or more series. The Board of Directors is authorized, without
further approval of the stockholders, to fix the dividend rights and terms,
conversion rights, voting rights, redemption rights and terms, liquidation

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preferences, and any other rights, preferences, privileges and restrictions
applicable to each new series of Preferred Stock. The Company has previously
established 200 shares of Series A Preferred Stock which are owned by John
Botti and Ira Whitman, founders and officers of the Company. The Series A
Preferred Stock entitled the holders to elect a majority of the Board of
Directors. The existence of such stock could adversely affect the voting power
of the holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to gain control of the Company, discourage bids for
the Common Stock at a premium, or otherwise adversely affect the market price of
the Common Stock.

In addition to the 200 outstanding shares of Series A Preferred Stock,
the Company has recently created a Series B Preferred Stock. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation."

UNCERTAINTY OF WIDESPREAD MARKET ACCEPTANCE OF NEW PRODUCTS

The Company introduced the DocStar system on a national level in
January, 1996. As expected with new products, demand and market acceptance for
the DocStar imaging system is subject to a high level of uncertainty. Achieving
widespread acceptance of this product line will require substantial marketing
efforts and the expenditure of significant funds to create brand recognition and
customer demand for such products. There can be no assurance that adequate
marketing arrangements will be made for such products. Moreover, there can be no
assurance that these products will ever achieve widespread market acceptance or
increased sales or that the sale of such products will be profitable.

COMPETITION

The Company and its subsidiaries are engaged in the highly competitive
businesses of manufacturing and distributing document imaging systems, computer
hardware and software as well as technical support services for such businesses.
The document imaging business is competitive and the Company competes with major
manufacturers such as Sharp, Panasonic and Mita. All of these companies have
substantially more experience, greater sales, as well as greater financial and
distribution resources than those of the Company. The Company also competes with
many independent imaging software companies, smaller than those mentioned, many
of

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which also have substantially greater sales, financial resources and experience
than those of the Company. The most significant aspects of competition are the
quality of products, including advanced capabilities, and price. There can be no
assurance the Company can effectively continue to compete in the future.

The Company's subsidiary, DJS, is engaged in the highly competitive
business of systems integration, computer services and computer reselling. DJS
competes with many small and local companies which provide similar technical
services to those offered by DJS. Additionally, DJS must compete with other
computer resellers, many of whom have greater financial and technical resources.
There can be no assurance that DJS will be able to compete successfully with
these competitors.

CONTROL BY PRESENT MANAGEMENT

John T. Botti and Ira C. Whitman, the Company's Chairman, Chief
Executive Officer and President and Senior Vice-President, respectively, are
currently entitled to elect a majority of the directors of the Company through
the exercise of the rights and preferences accorded holders of the Company's
Series A Preferred Stock. The Series A Preferred Stock allows Messrs. Botti and
Whitman to elect a majority of the Company's Board of Directors, subject to
certain conditions. The Series A Preferred Stock may make the Company a less
attractive acquisition candidate and such power may also discourage or impede
offers to acquire the Company not approved by the Board of Directors, including
offers for some or all of the shares of the Company's Common Stock at
substantial premiums above the then current market value of such shares.

NO DIVIDENDS

The Company has not paid any dividends on its Common Stock since its
inception and does not contemplate or anticipate paying any dividends on its
Common Stock in the foreseeable future. Earnings, if any, will be used to
finance the development and expansion of the Company's business.

15
<PAGE> 20
ITEM 2. DESCRIPTION OF PROPERTIES

The Company's executive offices and production facilities are
located at 2165 Technology Drive, Schenectady, New York 12308. The
Company owns the 26,000 square foot building.

A New York State agency awarded the Company a $1,000,000 grant to build
a this facility, which was recently completed.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings which could have a
material adverse effect on its operations.

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

Not Applicable

16
<PAGE> 21
PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Upon the effectiveness of the Company's public offering on May 13,
1992, its Common Stock commenced trading in the over-the-counter market and was
listed on the SmallCap Market of the Nasdaq Stock Market ("NASDAQ") under the
symbol "BTWS." On August 11, 1994, the Common Stock commenced trading on the
Boston Stock Exchange under the symbol BTW. On June 25, 1996, the Company
withdrew its listing on the Boston Stock Exchange. On April 24, 1996, the
Company's Common Stock commenced trading on the Pacific Stock Exchange.

The following is the range of high and low closing prices for the
Company's Common Stock on the Nasdaq SmallCap Market for the periods indicated
below:

<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Common Stock
Fiscal Year 1999
1st Quarter......................................... 1-1/2 7/8
2nd Quarter......................................... 1-7/8 23/32
3rd Quarter......................................... 1-5/8 7/8
4th Quarter......................................... 1-1/2 15/16

Fiscal Year 1998
1st Quarter......................................... 4 2-3/4
2nd Quarter......................................... 4-5/16 2-3/32
3rd Quarter......................................... 3-3/4 2-7/16
4th Quarter......................................... 2-7/8 1-9/16

Fiscal Year 1997
1st Quarter......................................... 5-13/16 3-1/4
2nd Quarter......................................... 6-1/4 4-1/4
3rd Quarter......................................... 6-1/2 3-1/8
4th Quarter......................................... 3-9/16 2-3/4
</TABLE>

17
<PAGE> 22
The above quotations represent prices between dealers and do not
include retail mark-ups, mark-downs, or commissions, and do not necessarily
represent actual transactions.

As of September 23, 1999, there were approximately 372 holders of
record of the Company's Common Stock. The Company believes there are more than
500 beneficial holders of the Company's Common Stock.

DIVIDEND POLICY

The Company has not paid any dividends upon its Common Stock since its
inception. The Company does not expect to pay any dividends upon its Common
Stock in the foreseeable future and plans to retain earnings, if any, to finance
the development and expansion of its business. Further, the Company's
Certificate of Incorporation authorizes the Company's Board of Directors to
issue Preferred Stock with a preferential right to dividends. There are no
outstanding shares of Preferred Stock with dividend rights.

18
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction
with the Consolidated Financial Statements, including the related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales $ 17,094,765 $ 33,755,625 $ 53,109,469 $ 30,611,258 $23,949,368
Gross Profit 5,615,468 8,092,566 10,006,736 4,826,693 3,956,846
Net (Loss)/Net (3,166,488) (5,464,059) (2,143,159) (2,961,039) 3,681
Income
Basic and Diluted
Net(Loss)/Net Income
Per Common Share (0.43) (0.74) (0.30) (0.55) 0.00

BALANCE SHEET DATA:
Current Assets 9,857,681 12,138,995 13,622,171 13,101,722 8,216,505
Current Liabilities 6,225,966 4,789,896 7,730,498 7,234,849 4,189,083
Working Capital 3,631,715 7,349,099 5,891,673 5,866,873 4,027,422
Total Assets 14,484,984 14,708,454 18,924,765 19,880,037 13,095,479
Total Long Term
Liabilities 5,327,901(1) 3,975,000(2) 1,297 17,949 59,824
Stockholders' Equity 3,335,705 6,478,226 11,192,970 12,627,239 8,846,572
</TABLE>

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

(1) Long-term liabilities excluding discount of $404,588.

(2) Long-term liabilities excluding discount of $534,668.

19
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

The following analysis of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
financial statements, including the notes thereto, contained elsewhere in this
Report on Form 10-KSB.

RESULTS OF OPERATIONS

Fiscal Year 1999 Compared to Fiscal Year 1998

Fourth Quarter Adjustments

The Company realized a consolidated net loss of $3,166,488 ($.43 per
share) compared to a consolidated net loss of $5,464,059 ($.74 per share) for
the fiscal years ended June 30, 1999 and 1998, respectively. Consolidated net
sales totaled $17,094,765 and $33,755,625 for the fiscal years ended June 30,
1999 and 1998, respectively. During the fourth quarter of 1999, the Company
recorded an adjustment increasing its net loss for sales made with the right of
return by approximately $1,350,000 for which income will not be recognized until
sale of the product by the customer. Additionally, a reserve of approximately
$186,000 was recorded for claims arising from the sale of SST.

The consolidated sales decrease is due to the sale of one of the
Company's subsidiaries, System Solutions Technology, Inc. (SST) in June 1998 and
reductions in DocStar sales. SST had sales of $13,915,029 for the fiscal year
ended June 30, 1998. Bitwise sales of the DocStar product line were $7,674,451
and $9,002,203 for fiscal years ended June 30, 1999 and 1998, respectively. In
addition, the Company had returnable sales of $3,829,052 which were not
recognized as sales. These returnable sales will be recognized when the
customers accept the sales as final. The Company's subsidiary DJS Marketing
Group, Inc. (DJS) sales were $9,536,994 and $11,219,497 for the fiscal years
ended June 30, 1999 and 1998, respectively.

The Company's net loss improvement is due to a combination of a
reduction in Bitwise operating costs and increase in profits from DJS. DJS
realized a reduction in sales, however profits increased due to an increase in
gross profit margins as DJS shifted its business from hardware sales to a
business model that produced more service revenue such as network and Internet
services in addition to hardware sales. DJS was also able to reduce operating
costs.

Consolidated gross profit for the fiscal years ended June 30, 1999 and
1998 was $5,615,468 and $8,092,566, respectively. This reduction is mainly due
to the sale of SST in June 1998. The

20
<PAGE> 25
consolidated profit margin was 32.8% and 24.0% for the fiscal years ended June
30, 1999 and 1998, respectively. Gross profit margin is defined as gross profit
as a percentage of sales. The increase in gross profit margin is due to the sale
of SST. Bitwise and its DocStar product has significantly higher gross profit
margins than products and services provided by both SST and DJS.

Selling, general and administrative expenses (S,G&A) consist of all
other Company expenses except product development costs and interest. S,G&A
expenses amounted to $7,765,234 and $12,251,515 for the fiscal years ended June
30, 1999 and 1998, respectively. S,G&A expenses decreased as a result of the
sale of SST, which incurred S,G&A expenses of $2,891,409 for the fiscal year
ended June 30, 1998. The remainder of the decrease is due to cost cutting by
Bitwise and DJS

As a percentage of sales, S,G&A costs increased from 36.3% in 1998 to
45.4% in 1999. This increase is due to the sale of SST. Bitwise historically has
had higher S,G&A expenses than any of the subsidiary companies because of its
organization structure which includes sales, training and service personnel
stationed around the country to serve the national dealer network. This has
resulted in high payroll and travel and living expenses. In addition, Bitwise
incurs significant advertising and marketing costs to market DocStar nationally.
The subsidiaries typically sell in a localized area and only employ personnel in
their local region and incur minimal advertising and marketing costs.

Interest expense totaled $630,396 and $939,595 for fiscal years ended
June 30, 1999 and 1998, respectively. The decrease is due to the sale of SST
which incurred $202,198 of interest expense during the fiscal year ended June
30, 1998. The decrease was also due to lower borrowing levels for DJS offset by
higher borrowing levels for Bitwise. Interest rates decreased during the fiscal
year ended June 30, 1999 compared to the prior year.

Product development expenses, excluding capitalized costs and including
amortization of capitalized costs relate to software development for the DocStar
product line incurred by Bitwise. These costs increased from $230,652 to
$248,801 for the fiscal years ended June 30, 1998 and 1999, respectively.
Bitwise has a policy of capitalizing qualified software development costs and

21
<PAGE> 26
amortizing those costs over three years as product development expense.

Fiscal Year 1998 Compared to Fiscal Year 1997
Fourth Quarter Adjustments

The Company realized a consolidated net loss of $5,464,059, $.74 per
share compared to $2,143,159, $.30 per share for the years ended June 30,1998
and 1997, respectively. Consolidated net sales totaled $33,755,625 and
$53,109,469 for the years ended June 30,1998 and 1997, respectively. During the
fourth quarter, the Company recognized some unusual expenses, including the loss
on the sale of SST ($256,000), an increase in the reserves for obsolete
inventory ($588,000), and an increase in the allowance for bad debts ($170,000).
In addition, net sales for the fourth quarter 1998 aggregated 5,708,000,
approximately 6,600,000 below net sales for the fourth quarter 1997.

The sales decrease is due to the sale of ESI in April 1997. During the
fiscal year ended June 30,1997 ESI had sales of $17,156,187. The sales decrease
is offset somewhat by the growth in the Company's DocStar product line. DocStar
sales totaled $9,002,203 for the year ended June 30, 1998 compared to $7,792,125
for the prior year.

Gross profit for the fiscal year ended June 30,1998 was $8,092,566
compared to $10,006,736 for the prior year. The gross profit margin was 24.0%
and 18.8% for years ended June 30,1998 and 1997, respectively. The gross profit
margin increased in fiscal 1998 compared to the prior year due to the growth of
the Company's DocStar product line which has significantly higher margins than
other product lines of the Company. Additionally, the sale of ESI resulted in a
lower gross profit.

Selling, general and administrative expenses ("S,G&A") consist of all
other Company expenses except product development costs and interest. S,G&A
expenses amounted to $12,251,515 and $11,834,173 for the years ended June 30,
1998 and 1997, respectively. S,G&A expenses increased mainly due to increased
selling and marketing expenses for the DocStar product line. The increase was
offset somewhat by the sale of ESI. There were also increases in S,G&A expenses
in the Company's other divisions as well.

22
<PAGE> 27
As a percentage of sales, S,G&A costs increased from 22.3% to 36.3%
from fiscal 1997 to fiscal 1998. The Company's DocStar product line has not yet
achieved sufficient sales volume to cover all S,G&A expenses and thereby
generate a profit.

Interest expenses totaled $939,595 and $444,918 for the years ended
June 30,1998 and 1997, respectively. The increase in interest costs is due to
the issuance of $4 million of convertible notes in August 1997. The increase is
also due to increased borrowing on the Company's lines of credit during the
year. Interest rates increased slightly compared to the prior year.

Product development expenses relate primarily to software development
of the Company's DocStar product line and increased from $176,539 to $230,652
for the year ended June 30, 1998 compared to the prior year. The Company has a
policy of capitalizing software development costs and amortizing those costs
over three years as product development expense.

23
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of funds to date have been the issuance
of equity and the incurrence of third party debt. The principal balance of
long-term debt at June 30, 1999 totaled approximately $4,947,000, net of
discounts; $3,975,000 of this amount, undiscounted, relates to convertible notes
payable which mature on August 11, 2002 and $1,210,712 relates to a mortgage
loan.

The Company's subsidiary, DJS may utilize a line of credit facility
totaling $625,000, of which approximately $256,000 was available at June 30,
1999. This facility is a wholesale inventory credit facility which is supported
by a guaranty furnished by one of DJS's vendors and expressly limited for
purchase from this vendor. This line is non-interest bearing and payment terms
are net 40. The line is collateralized by all assets of DJS.

The Company's other line of credit for $1,500,000 was terminated by
its lender as a result of the Company not being in compliance with all of its
loan covenants. At June 30, 1999 the balance was approximately $1,300,000.
Subsequent to year end, the Company entered into an agreement with the lender
to extend repayment of the outstanding balance until September 30, 2000. The
Company was required to make a partial payment to the lender of $600,000 on
October 4, 1999 for the repayment of the remaining balance from the proceeds of
its recently completed private offering. See "Recently Completed Private
Offering". The remaining balance is being paid in weekly installments over one
year with interest at prime plus 4%. The President of the Company, John Botti,
also agreed to guarantee repayment of the loan balance. The line of credit is
secured by the Company's account receivables and inventory, and does not
include its new office building which is secured by a mortgage. The Company is
attempting to locate a new lender for its inventory financing. There can be no
assurance that the Company will be successful in its efforts to obtain
alternative inventory financing, and the failure to obtain inventory financing
may have an adverse material effect upon the Company's operations.

25
<PAGE> 29
In August 1997, the Company concluded an offering with an offshore bank
for $4,000,000 in gross proceeds ($3,600,000 net proceeds after expenses) in the
form of unsecured, convertible, bearer notes, payable in its entirety on August
11, 2002, with 400,000 detachable Common Stock Purchase Warrants. The $650,411
value of the warrants has been recorded as discount on the debt and is being
amortized over the term of the debt. The Notes accrue interest at 8%, payable
semiannually in arrears. The holder of $25,000 principal amount or more may
convert the notes into common stock commencing November 1, 1997 until August 11,
2002 at the rate of $3.25 per share. As of June 30, 1999, 7,692 common shares
were issued pursuant to the conversion of $25,000 of convertible debt into
common stock. The principal balance of this debt at June 30, 1999 totaled
approximately $3,570,000 net of discounts. The Company did not make its interest
payment in the amount of approximately $159,000 to the debtholders which was due
on September 1, 1999 until October 1, 1999 but no default has been declared.

In June 1998, the Company sold SST for $4,000,000 in a stock sale. The
Company received approximately $3,600,000 in cash and approximately $400,000
worth of inventory and receivables. In 1999, the Company received a claim for
indemnity from the purchaser of SST under the terms of the agreement. The
Company has agreed to pay $341,000 over the next fifteen months to settle this
claim.

Property, plant and equipment expenditures totaled $2,402,661 for the
year ended June 30, 1999. There were no purchase commitments outstanding. The
Company completed the construction of a new office/production facility for
approximately $2,300,000 in Schenectady, N.Y. The Company was awarded a grant
totalling $1,000,000 from an agency of New York State to be used towards the
construction of the facility. The funding is being received in stages as costs
are incurred and submitted for reimbursement. The grant stipulates that the
Company is obligated to achieve certain annual employment levels at the new site
between January 1, 2001 and January 1, 2005 or some or all of the grant will
have to be repaid. As of June 30, 1999, $142,189 had been received and is
recorded as deferred revenue. The remainder of the financing, $1,400,000, was
provided by a local financial institution in the form of a mortgage loan.

During the fiscal year ended June 30, 1999 the Company incurred a net
loss of $3,166,488, and cash used by operating activities totaled $1,864,509.
The Company's available cash balance at June 30, 1999 totaled approximately
$549,000. At September 30, 1999 the Company's available cash balance was
approximately $415,000. One of the Company's lines of credit has been terminated
by its lender and the Company is currently paying off the outstanding balance.
To date, the Company has been largely dependent on its ability to sell
additional shares of its common stock or other financing to fund its operating
deficits. Under its current operating plan to obtain a national acceptance of
the DocStar product line and to introduce the new Authentidate technology, the
Company's ability to improve operating cash flow is highly dependent on the
market acceptance of its products and the Company's ability to reduce overhead
costs. If the Company is unable to attain projected sales levels for DocStar and
other products, or is unable to implement cost reduction strategies, it may be
necessary to raise additional capital to fund operations and meet its
obligations. There is no assurance that such funding will be available, if
needed.

26
<PAGE> 30
system and the Company's ability to reduce overhead costs. If the Company is
unable to attain projected sales levels for its DocStar systems, is unable to
implement cost reduction strategies, or fails to comply with debt covenant
requirements, it may be necessary to raise additional capital to fund operations
and meet its obligations.

RECENTLY COMPLETED PRIVATE OFFERING

On October 4, 1999, the Company closed three concurrent private
offerings. In the first offering, the Company sold 740,000 units at an aggregate
offering price of $740,000, each unit consisting of two shares of common stock
and two Series B common stock purchase warrants (the "Series B Warrants"). The
Series B Warrants entitle the holder to purchase one share of common stock at an
exercise price of $1.375 per share during the offering period commencing on the
date of issuance and terminating five years thereafter. The Series B warrants
are redeemable at any time commencing one year after issuance at the option of
the Company with not less than 30 nor more than 60 days written notice to the
registered holders at a redemption price of $.05 per warrant provided; (i) The
public sale of the shares of common stock issuable upon exercise of the Series B
warrants are covered by a tentative registration statement; and (ii) During each
of the immediately preceding 20 consecutive trading days ending within 10 days
of the date of the notice of redemption, the closing bid price of the Company's
common stock is at least $3.25 per share.

27
<PAGE> 31
provided, however, that the holders are not entitled to convert more than 20% of
the Series B preferred shares held by such holder on the third anniversary of
the date of issuance per month. The Series B Preferred Stock is redeemable at
any time commencing one year after issuance or not less than 30 nor more than 60
days written notice at a redemption price of $25 plus accrued and unpaid
dividends provided; (i) the public sale of the shares of common stock issuable
upon conversion of the Series B preferred Stock (the "Conversion Shares") are
covered by an effective registration statement or are otherwise exempt from
registration; and (ii) during the immediately preceding 20 consecutive trading
days ending within 10 days of the date of the notice of redemption, the closing
bid price of the Company's Common Stock is not less than $3.75 per share.

Commencing 34 months after the Closing, the Series B Preferred Stock is
redeemable at the option of the Company without regard to the closing price of
the Company's Common Stock.

The Company also created a new subsidiary, Authentidate.Com, LLC
through which it will market its new Internet service which allows for the
verification of the authenticity of digital images. In connection with the above
offerings, the purchasers were granted the right to purchase 20% of
Authentidate.Com, LLC for $100,000. In addition, the purchasers were issued an
aggregate of 999,999 Series C common stock purchase warrants (the "Series C
Warrants"). The Series C Warrants are redeemable at any time commencing six
months after issuance, on not less than 30 nor more than 60 days written notice
to registered holders at a redemption price equal to $.05 per Warrant, provided
(i) the public sale of the shares of common stock issuable upon exercise of the
Series C Warrants (the "Warrant Shares") are covered by an effective
registration statement or are otherwise exempt from registration; and (ii)
during each of the immediately preceding 20 consecutive trading days ending
within 10 days of the date of the notice of redemption, the closing bid price of
the Company's common stock is not less than 120% of the current exercise price
of the Series C Warrants.

The Series C Warrants were also divided into three equal classes of
333,3333 each to provide for varying exercise prices. The exercise price of the
Series C Warrants is as follows:

28
<PAGE> 32
Class I $1.50 per share of Common Stock, increasing
(i) $.75 per share thirty days after the
effective date of the registration statement
covering the underlying shares (the
"Registration Statement"); (ii) an additional
$.75 per share seven months after the
effective date of the Registration Statement;
and (iii) an additional $.75 per share 13
months after the effective date of the
Registration Statement, subject to adjustment
for stock splits and corporate
reorganizations.

Class II $1.50 per share of Common Stock, increasing
(i) $.75 per share sixty days after the
effective date of the Registration Statement;
(ii) an additional $.75 per share seven months
after the effective date of the Registration
Statement; and (iii) an additional $.75 per
share 13 months after the effective date of
the Registration Statement, subject to
adjustment for stock splits and corporate
reorganizations.

Class III $1.50 per share of Common Stock, increasing
(i) $.75 per share ninety days after the
effective date of the Registration Statement;
(ii) an additional $.75 per share seven months
after the effective date of the Registration
Statement; and (iii) an additional $.75 per
share 13 months after the effective date of
the Registration Statement, subject to
adjustment for stock splits and corporate
reorganizations.

The Company received gross proceeds of approximately $2,000,000. The
Company has utilized the proceeds of the three offerings as follows:
approximately $600,000 has been utilized to repay a portion of the Company's
line of credit; approximately $400,000 will be utilized to develop the
Authentidate.com business; approximately $160,000 was utilized to make a past
due interest payment on the Company's outstanding 8% convertible notes, and the
remainder has been reserved for working capital. The Company incurred offering
expenses of approximately $60,000.

EFFECTS OF INFLATION AND CHANGING PRICES

The impact of general inflation on the Company's operations has not
been significant to date and the Company believes inflation will continue to
have an insignificant impact on the Company. However, price deflation in the
major categories of components purchased by the Company has been substantial and
is anticipated to continue through fiscal 2000. Typically, new components such
as

29
<PAGE> 33
new generations of microprocessors and new optical disk drive technologies etc.
are introduced at premium prices, by its vendors. During this period, the
Company earns lower margins on its products. As the life cycle progresses
competitive pressures could force vendor prices down and thus improve the
Company's profit margins. The Company does not believe that competitive
pressures will require it to lower its DocStar selling price. Because much of
DJS's business is service-related, price deflation has less of an impact on
DJS's profits.

NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 requires reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. This
statement became effective for annual and interim financial statements beginning
the fiscal year ending June 30, 1999, and will require reclassifications of
prior periods. The Company had no other comprehensive income to report for the
years ended June 30, 1999 and 1998.

In June 1997, The Financial Accounting Standards Board also issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 requires expanded reporting of information about operating segments
in interim and annual financial statements, including certain descriptive
information about products and services, geographic areas, and major customers.
This statement became effective for annual financial statements beginning the
fiscal year ending June 30, 1999, and for interim periods beginning the fiscal
year ending 2000.

In June 1998, the Financial Accounting Standards Board (FASB or the
"Board") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133 or the "Statement") SFAS 133 establishes a new model for
accounting for derivatives and hedging activities. This statement is effective
for fiscal years beginning June 30, 2000. The adoption of this standard is not
expected to have a significant impact on the Company's consolidated financial
statements.

30
<PAGE> 34
YEAR 2000 COMPLIANCE

The Year 2000 creates risks for the Company if the computers, software
and other equipment utilizing microprocessors do not correctly recognize and
process date information beyond the year 1999. The Company is addressing this
issue by performing a survey on all of their desktops and servers to ensure Year
2000 compliance. The survey concluded that all of the Company's in-house work
systems use hardware that is that 100% Year 2000 compliant. Most of the
Company's software and operating systems are Microsoft(TM) based and are
believed to be Year 2000 compliant. The Company's product hardware is fully Year
2000 compliant and the software is Year 2000 compliant in the latest version
2.30. Because the DocStar System is a relatively new system, it was designed to
handle a four (4) digit year. In addition, the Company is in the process of
surveying their critical vendors for Year 2000 compliance. However, the Company
does not believe there would be significant difficulties finding alternate
supply services should the need arise.

Achieving Year 2000 compliance is dependant on many factors, some of
which are not completely within the Company's control. If the Company's internal
systems or the internal systems of the significant vendors or suppliers fail to
achieve Year 2000 compliance, the Company's business and its results of
operations could be adversely affected.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The Financial Statements and Supplementary Data Schedule
are annexed hereto.

31
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

32
<PAGE> 36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
John T. Botti 35 President, Chief Executive
Officer and Chairman of the
Board

Ira C. Whitman 36 Senior Vice-President--Research
and Development, Secretary and
Director

Steven A. Kriegsman 56 Director

J. Edward Sheridan 62 Director

Charles C. Johnston 63 Director
</TABLE>

All directors hold office until the next annual meeting of shareholders
or until their successors are elected and qualify. Officers are elected annually
by, and serve at the discretion of, the Board of Directors. There are no
familial relationships between or among any officers or directors of the
Company.

In connection with the Company's private placement through Whale
Securities Co., L.P. ("Whale"), completed in December 1995, the Company granted
Whale the right to nominate one person to the Company's Board of Directors, or
in the alternative, a person to attend meetings of the Board of Directors. Whale
has selected Steven Kriegsman as its representative on the Board.

John T. Botti, a co-founder, has served as President, Chief Executive
Officer and Director since the incorporation of the Company in August 1985. Mr.
Botti graduated from Rensselaer Polytechnic Institute ("RPI") with a B.S. degree
in electrical engineering in 1994 with a concentration in computer systems
design and in 1996 earned a Master of Business Administration degree from RPI.

33
<PAGE> 37
Ira C. Whitman, a co-founder, is Senior Vice-President of Research and
Development and a Director of the Company since the incorporation of the Company
in August 1985. Mr. Whitman graduated from RPI in 1984 with a B.S. in Computer
and Systems Engineering and in 1990 he earned a Masters in Engineering from RPI.

J. Edward Sheridan joined the Board of Directors in June, 1992. From
1985 to the present, Mr. Sheridan served as the President of Sheridan Management
Corp. From 1975 to 1985, Mr. Sheridan served as the Vice President of Finance
and Chief Financial Officer of AMF. From 1973 to 1975, he was Vice President and
Chief Financial Officer of Fairchild Industries. From 1970 to 1973 he was the
Vice President, Corporate Finance of F.S. Smithers. From 1967 to 1970 Mr.
Sheridan was the Director of Acquisitions of Westinghouse Electric. From 1964 to
1967 he was employed by Corporate Equities, Inc., a venture capital firm, Mr.
Sheridan holds an M.B.A. from Harvard University and a B.A. from Dartmouth
College.

Steven A. Kriegsman joined the Board of Directors in December, 1997. In
1989, Mr. Kriegsman founded The Kriegsman Group, a private financial consulting
services firm and has served as its President since such time. In 1981 Mr.
Kriegsman co-founded ANA Financial Services, Inc., a holding company engaged,
through its subsidiaries, in securities brokerage, financial planning and
investment advisory services and franchising of certified public accountants.
Mr. Kriegsman served as Chairman and Chief Executive Officer of ANA Financial
until 1989. Mr. Kriegsman is a former Certified Public Accountant. Mr. Kriegsman
holds a B.S. from New York University.

Charles C. Johnston joined the Board of Directors in December, 1997.
Mr. Johnston has been the Chairman of Ventex Technology, Inc., a privately-held
neon light transformer company. since July 1993. Mr. Johnston has also served as
Chairman of AFD Technologies, a private corporation since 1994 and J&C Resources
a private corporation, a position that he has held since 1987. Mr. Johnston
serves as a Trustee of Worcester Polytechnic Institute ("WPI") and earned his
B.S. degree from WPI in 1957.

34
<PAGE> 38
COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has three (3) Committees: Audit, Compensation
and Executive Committee.

Audit Committee. The members of the Audit Committee are J. Edward
Sheridan and Charles Johnston. The Audit Committee acts to: (i) acquire a
complete understanding of the Corporation's audit functions; (ii) review with
management the finances, financial condition and interim financial statements of
the Corporation; (iii) review with the Corporation's independent auditors the
year-end financial statements; and (iv) review implementation with the
independent auditors and management any action recommended by the independent
auditors. During the fiscal year ended June 30, 1999, the Audit Committee met on
one occasion.

Executive Committee. The members of the Executive Committee are John
Botti and Ira C. Whitman. The Executive Committee has all of the powers of the
Board of Directors except it may not; (i) amend the Certificate of Incorporation
or Bylaws; (ii) enter into agreements to borrow money in excess of $250,000;
(iii) to grant security interests to secure obligations of more than $250,000;
(iv) authorize private placements or public offerings of the Company's
securities; (v) authorize the acquisition of any major assets or business or
change the business of the Corporation; or (vi) authorize any employment
agreements in excess of $75,000. The Executive Committee meets when actions must
be approved in an expedient manner and a meeting of the Board of Directors
cannot be convened. During Fiscal 1999, the Executive Committee did not deem it
necessary to meet.

Compensation Committee. The members of the Compensation Committee are
Steven Kriegsman and J. Edward Sheridan. The Compensation Committee functions
include administration of the Corporation's 1992 Employee Stock Option Plan and
Non-Executive Director Stock Option Plan and negotiation and review of all
employment agreements of executive officers of the Corporation. During the
fiscal year ended June 30, 1999, the Compensation Committee held one meeting.

35
<PAGE> 39
MEETINGS OF THE BOARD OF DIRECTORS

During the fiscal year ended June 30, 1999, the Board of Directors of
the Company met on three occasions and voted by unanimous written consent on two
occasions. No member of the Board of Directors attended less than 50% of the
aggregate number of (i) the total number of meetings of the Board of Directors
or (ii) the total number of meetings held by all Committees of the Board of
Directors.

CERTAIN REPORTS

Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's Directors and officers, and persons who own, directly or
indirectly, more than 10% of a registered class of the Corporation's equity
securities, to file with the Securities and Exchange Commission ("SEC") reports
of ownership and reports of changes in ownership of common stock and other
equity securities of the Company. Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms that they file. Based solely on review of the copies
of such reports received by the Company, the Company believes that all Section
16(a) filing requirements applicable to officers, directors and 10% shareholders
were complied with during the 1999 fiscal year.

SIGNIFICANT EMPLOYEES

Dennis H. Bunt has been Chief Financial Officer of the Company since
September 1992. From January to September 1992 Mr. Bunt was an independent
financial consultant. From 1986 to January 1992, Mr. Bunt was Chief Financial
Officer for The Michaels Group Inc., a homebuilding/development company. Prior
to that, Mr. Bunt was a Division Controller for Mechanical Technology Inc. a
high tech manufacturing company where he was employed from 1980 to 1986. Mr.
Bunt is a certified public accountant and was employed by KPMG Peat Marwick from
1976-1979. He graduated with an M.B.A. from Babson College in 1979 and a B.S. in
Accounting from Bentley College in 1976.

John Matyka has been Vice President of Marketing of the Imaging
Division since November 1995. Mr. Matkya brings over 25 years of management
experience in marketing, sales and

36
<PAGE> 40
communication for the office equipment industry with Ricoh Corp., IBM and Savin
Corp. Mr. Matyka has an M.B.A. from Fairleigh Dickinson University and a B.B.A
degree from Pace University.

ITEM 11. EXECUTIVE COMPENSATION

The following table provides certain information concerning all Plan
and Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation
awarded to, earned by, paid by the Company during the years ended June 30, 1998,
1997 and 1996 to each of the named executive officers of the Company.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS

NO. OF
SECURITIES
NAME AND OTHER RESTRICTED UNDERLYING
PRINCIPAL FISCAL ANNUAL STOCK OPTIONS/
POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) SARS
<S> <C> <C> <C> <C> <C> <C>
John Botti 1999 $132,794(1) 0(1) $1,702(2) 0(3) 0
Chairman, 1998 $121,000 0 $1,702 0 0
President and 1997 $110,000 0 $1,415 0 0
Chief Executive
Officer
</TABLE>

(1) Pursuant to the terms of his employment agreement dated July 1, 1995,
Mr. Botti is to receive a cash bonus each year during the term of
agreement equal to 3% of the pre-tax profits of the Company, which
criteria was not met in 1998, 1997 or 1996, therefore, no bonuses were
issued. Additionally, Mr. Botti is entitled to receive approximately
$132,000 in salary per year. See "Employment Agreements."

(2) Includes: (i) for 1999, an automobile and expenses of $1,500 and the
payment of premiums on term life insurance policy of $202; (ii) for
1997, an automobile and expenses of $1,500 and the payment of premiums
on a term life insurance policy of $202; and (iii) for 1997, an
automobile and expenses of $1,213 and the payment of premiums on a term
life insurance policy of $202.

(3) No restricted stock awards were granted to Mr. Botti in fiscal 1999.
Mr. Botti, however, owned 233,853 restricted shares of the Company's
Common

37
<PAGE> 41
Stock on June 30, 1999, the market value of which was approximately
$226,604 on such date, without giving effect to the diminution in value
attributed to the restriction on such shares.

38
<PAGE> 42
OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
Potential Alternative
Individual Grants Realizable Value At to
Assumed Annual (f) and (g)
Rates of Stock Grant Date
Price Appreciation Value
For Option
Term
Percent of
Number of Total Exercise
Securities Option/ of
Underlying SARs Granted Base
Option/SARs To Employees Price Expiration
Name Granted (#) In Fiscal (S/Sh) Date
(a) (b) Year (d) (c)
(C)
Grant Date
5% ($) 10% ($) Present
(f) (g) Value $
(h)
<S> <C> <C> <C> <C> <C> <C> <C>
John Botti 225,000 23.9% $3.125 7/23/02 $35,156 $70,313
</TABLE>

No Stock Appreciation Rights were granted to any of the named executive
officers during the last fiscal year.

AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES

The following table contains information with respect to the named
executive officers concerning options held as of the year ended June 30, 1998.

AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised In-the-
Acquired Options as of June 30, Money Options
on Value 1999 at June 30, 1999(1)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C>
John T. Botti 0 -- 835,185/0 6,406/0
</TABLE>

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

(1) Based upon the closing bid price ($.969 per share) of the Company's
Common Stock on June 30, 1999 less the exercise price for the aggregate
number of shares subject to the options.

EMPLOYMENT AGREEMENTS

Effective July 1, 1995, the Company entered into a new employment
agreement with Mr. Botti for a five year term ending

39
<PAGE> 43
June 30, 2000. The employment agreement provides for (i) annual compensation of
$100,000 for the first year of the agreement, increasing by 10% in each year
thereafter; (ii) a bonus of 3% of the Company's pre-tax net income, with such
additional bonuses as may be awarded in the discretion of the Board of
Directors; (iii) the award of non-qualified stock options to purchase 600,000
shares of the Company's common stock at an exercise price of $1.5625 per share
of which 100,000 vested in on June 30, 1995, 125,000 vested on June 30, 1996 and
125,000 vest on each of June 30, 1997, 1998 and 1999; (iv) certain insurance and
severance benefits and (v) automobile and expenses.

COMPENSATION OF DIRECTORS

Directors were compensated for their services during the last fiscal
year in the amount of $5,000 annually. The Directors receive options to purchase
10,000 shares for each year of service under the Non-Executive Director Stock
Option Plan ("Stock Options") and are reimbursed for expenses incurred in order
to attend meetings of the Board of Directors. Directors also receive 20,000
Stock Options upon being elected to the Board.

STOCK OPTION PLANS

In April 1992, the Company adopted the 1992 Employees Stock Option Plan
(the "1992 Plan") which provided for the grant of options to purchase up to
600,000 shares of the Company's Common Stock. On January 26, 1995, the
stockholders of the Company approved an amendment to the 1992 Plan to increase
the number of shares of Common Stock available under the 1992 Plan to 3,000,000
shares. Under the terms of the 1992 Plan, options granted thereunder may be
designated as options which qualify for incentive stock option treatment
("ISOs") under Section 422A of the Code, or options which do not so qualify
("Non-ISOs"). As of June 30, 1999, there were outstanding 1,984,870 options
under the 1992 Plan with exercise prices ranging from $.34 to $7.125.

The 1992 Plan is administered by a Compensation Committee designated by
the Board of Directors. The Compensation Committee has the discretion to
determine the eligible employees to whom, and the times and the price at which,
options will be granted. Whether such options shall be ISOs or Non-ISOs; the
periods during which each option will be exercisable; and the number of shares
subject

40
<PAGE> 44
to each option, shall be determined by the Committee. The Board or Committee
shall have full authority to interpret the 1992 Plan and to establish and amend
rules and regulations relating thereto.

Under the 1992 Plan, the exercise price of an option designated as an
ISO shall not be less than the fair market value of the Common Stock on the date
the option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the 1992 Plan) such exercise
price shall be at least 110% of such fair market value. Exercise prices of
Non-ISOs options may be less than such fair market value. The aggregate fair
market value of shares subject to options granted to a participant which are
designated as ISOs which become exercisable in any calendar year shall not
exceed $100,000. The "fair market value" will be the closing NASDAQ bid price,
or if the Company's Common Stock is not quoted by NASDAQ, as reported by the
National Quotation Bureau, Inc., or a market maker of the Company's Common
Stock, or if the Common Stock is not quoted by any of the above, by the Board of
Directors acting in good faith.

The Compensation Committee may, in its sole discretion, grant bonuses
or authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.

Unless sooner terminated, the 1992 Plan will expire in April, 2002.

In April, 1992, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan") which was approved by the
Company's stockholders in May, 1992. With the approval of the shareholders, the
Director Plan was amended in December, 1997. Options are granted under the
Director Plan until April, 2002 to (i) non-executive directors as defined and
(ii) members of any advisory board established by the Company who are not
full-time employees of the Company or any of its subsidiaries. The Director Plan
provides that each non-executive director will automatically be granted an
option to purchase 20,000 shares, upon joining the Board of Directors, and
10,000 shares on each September 1st thereafter, provided such person has served
as a director for the 12 months immediately prior to such September 1st. Each
eligible director of an advisory board will receive, upon joining the advisory
board, and on each September 1st

41
<PAGE> 45
thereafter, an option to purchase 5,000 shares of the Company's Common Stock,
providing such person has served as a director of the advisory board for the
previous 12 month period.

As of June 30, 1999, there are outstanding 130,000 options under the
Director Plan with exercise prices from $1.00 to $5.13.

The exercise price for options granted under the Director Plan is 100%
of the fair market value of the Common Stock on the date of grant. The "fair
market value" is the closing NASDAQ bid price, or if the Company's Common Stock
is not quoted by NASDAQ, as reported by the National Quotation Bureau, Inc., or
a market maker of the Company's Common Stock, or if the Common Stock is not
quoted by any of the above by the Board of Directors acting in good faith. Until
otherwise provided in the Stock Option Plan the exercise price of options
granted under the Director Plan must be paid at the time of exercise, either in
cash, by delivery of shares of common Stock of the Company or by a combination
of each. The term of each option commences on the date it is granted and unless
terminated sooner as provided in the Director Plan, expires five years from the
date of grant. The Director Plan is administered by a committee of the board of
directors composed of not fewer than three persons who are officers of the
Company (the "Committee"). The Committee has no discretion to determine which
non-executive director or advisory board member will receive options or the
number of shares subject to the option, the term of the option or the
exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan are not qualified for incentive stock option treatment.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of September 23,
1998 with respect to (i) each director and each executive officer, (ii) all
directors and officers as a group, and (iii) the persons (including any "group"
as that term is used in Section l3(d)(3) of the Securities Exchange Act of
l934), known by the Corporation to be the beneficial owner of more than five
(5%) percent of the Corporation's Common Stock and Series A Preferred Stock.

42
<PAGE> 46
<TABLE>
<CAPTION>
TYPE OF NAME AND ADDRESS OF AMOUNT AND NATURE PERCENTAGE
CLASS BENEFICIAL HOLDER OF BENEFICIAL OF CLASS
OWNERSHIP (1)
<S> <C> <C> <C>
Common John T. Botti 944,683 (2) 10.8%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308

Common Ira C. Whitman 667,239 (3) 7.6%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308

Common Steven Kriegsman 40,000 (4) 0.5%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308

Common Dennis Bunt 74,216 (5) 0.8%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308

Common J. Edward Sheridan 70,000 (6) 0.8%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308

Common Charles Johnston 40,000 (4) 0.5%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308

Series A John T. Botti 100 (7) 50%
Preferred c/o Bitwise Designs
Stock 2165 Technology Drive
Schenectady, NY 12308

Series A Ira C. Whitman 100 (8) 50%
Preferred c/o Bitwise Designs
Stock 2165 Technology Drive
Schenectady, NY 12308

Directors/Officers as a group 1,836,338 20.7%
(2)(3)(4)(5)(6)(7)(8)
</TABLE>

(1) Unless otherwise indicated below, each director, officer and 5%
shareholder has sole voting and sole investment power with respect to
all shares that he beneficially owns.

43
<PAGE> 47
(2) Includes vested stock options to purchase 710,185 shares of
Common Stock.

(3) Includes vested stock options to purchase 435,185 shares of
Common Stock.

(4) Includes vested options to purchase 40,000 shares of Common
Stock.

(5) Includes vested options to purchase 71,333 shares of Common Stock and
excludes nonvested options to purchase 6,667 shares of Common Stock.
Includes 1,000 shares of Common Stock owned by Mr. Bunt's wife.

(6) Includes vested options to purchase 70,000 shares of Common
Stock.

(7) See footnote (2). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.

(8) See footnote (3). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.

*Percentage not significant.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except as disclosed herein, the Company has not entered into any
material transactions or series of similar transactions with any director,
executive officer or any security holder owning 5% or more of the Company's
Common Stock.

On July 17, 1995, the Company entered into an agreement with Whale
Securities Co., L.P. pursuant to which Whale Securities has been retained as the
Company's financial consultant and investment banker for a one-year period.
Under the terms of the consulting agreement, Whale Securities received five-year
warrants to purchase 200,000 shares of Common Stock at an exercise price of
$1.50 per share.

In connection with the December 1995 private offering, the Company
issued to Whale Securities Co. L.P. and its designees, for

44
<PAGE> 48
services Whale provided as placement agent, warrants (the "Placement Agent
Warrants") to purchase (i) 214,884 shares of common Stock and (ii) Warrants to
purchase 214,884 Unit Warrants. The terms of the Warrants issued to Whale are
similar to those sold to the investors in the December private offering, in that
they are exercisable for a period of five years, and have an exercise price of
$4.50 per share. The Warrants issued to Whale and its designees are not
redeemable by the Company. The Warrants issued to Whale contain certain
anti-dilution provisions.

For information concerning employment agreements with, and compensation
of, the Company's executive officers and directors, see "MANAGEMENT -- Executive
Compensation."

ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K

a)(1) Financial Statements

The following Financial Statements of the Company are included
in Part II, Item 8 of this report:

Report of Independent Accountants
Consolidated Balance Sheets as of June 30, 1999 and 1998
Consolidated Statements of Operations for the years ended June
30, 1999 and 1998
Consolidated Statements of Shareholders'
Equity for the years ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended June
30, 1999 and 1998
Notes to Consolidated Financial Statements

a)(2) Financial Statement Schedules

The following consolidated financial statements schedule for
each of the two years in the period ended June 30, 1999 is included pursuant
to item 14 (d):

Report of PricewaterhouseCoopers LLP on Financial Statements
Schedule

45
<PAGE> 49
Schedule II, Valuation and Qualifying Accounts

(b) Reports on Form 8-K

During the quarter ended June 30, 1999 the Company filed the
following reports: None

The following exhibits, designated by an asterisk (*), have
been previously filed with the Commission and, pursuant to 17
C.F.R. Section230.411, are incorporated by reference to the
document referenced in brackets following the descriptions of
such exhibits.

Exhibit No. Description

2.1* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Electrograph Systems, Inc. dated February 7, 1994

2.2* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Systems Solutions, Inc. dated April 29, 1994

3.1* Certificate of Incorporation of Bitwise Designs, Inc.-
Delaware (Exhibit 3.3.1 to Registration Statement on Form
S-18, File No. 33-46246-NY)

3.1.1* Certificate of Designation of Series B Preferred Stock

3.2* By-Laws (Exhibit 3.2 to Registration Statement on Form S-
18, File No. 33-46246-NY)

4.1* Form of Common Stock Certificate (Exhibit 4.1 to Registration
Statement on Form S-18, File No. 33-46246- NY)

46
<PAGE> 50
4.2* Form of Series A Preferred Stock Certificate (Exhibit 4.2
to Registration Statement on Form S-18, File No. 33-
46246-NY)

4.3* Form of Warrant issued to Berkeley Securities Corp. (Exhibit
4.3 to Registration Statement on Form S-18, File No.
33-46246-NY)

4.4* Form of Warrant issued to certain individuals in April,
1992 (Exhibit 4.4 to Registration Statement on Form S-18,
File No. 33-46246-NY)

4.5* Form of Series B Preferred Stock Certificates (Exhibit 4.5 to
the Registration Statement on form SB-2, File No.
33-76494)

4.6* Form of Warrant to be issued to Berkeley Securities
Corp.(Exhibit 4.6 to the Registration Statement on form SB-2,
File No. 33-76494)

4.7* Form of Note and Warrant Purchase, Paying and
Conversion/Exercise agency agreement dated as of August 8,
1997 between the Company and Banca del Gottardo (Exhibit 4.7
to the Company's Form 10-KSB dated June 30, 1997).

4.8* Terms of 8% Convertible Notes due August 11, 2002 (Exhibit 4.8
to the Company's Form 10-KSB dated June 30, 1997).

4.9* Terms of Warrants and Global Warrant expiring August 11,
2002 (Exhibit 4.9 to the Company's Form 10-KSB dated June
30, 1997).

10.1* Lease agreement with Rotterdam Industrial Park, dated August
7, 1991 (Exhibit 10.1 to Registration Statement on Form S-18,
File No. 33-46246-NY)

10.1.1* Lease warrant waiver agreement (Exhibit 10.1.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)

47
<PAGE> 51
10.2* Lease with Siemens Credit Corporation for telephone system
dated November 25, 1991 (Exhibit 10.2 to Registration
Statement on Form S-18, File No. 33-46246-NY)

10.3* Lease agreement with Apple Commercial Credit for laser
printer, dated June 23, 1987 (Exhibit 10.3 to Registration
Statement on Form S-18, File No. 33-46246-NY)

10.4* Leases with Adirondack Leasing Associates, Ltd. (Exhibit 10.4
to Registration Statement on Form S-18, File No. 33-46246-NY)

10.5* Loan agreement with U.S. Small Business Administration and
Norstar Bank, dated April 4, 1991 (Exhibit 10.5 to
Registration Statement on Form S-18, File No. 33-46246-NY)

10.6* Loan agreement with Schenectady Economic Development
Corporation, dated August 7, 1991 (Exhibit 10.6 to
Registration Statement on Form S-18, File No. 33-46246-NY)

10.8* Employment agreement with John T. Botti, dated April, 1992
(Exhibit 10.8 to Registration Statement on Form S- 18, File
No. 33-46246-NY)

10.9* Employment agreement with Ira C. Whitman, dated April, 1992
(Exhibit 10.9 to Registration Statement on Form S- 18, File
No. 33-46246-NY)

10.10* 1992 Employee stock option plan (Exhibit 10.10 to
Registration Statement on Form S-18, File No. 33-46246-NY)

10.11* 1992 Nonexecutive Directors stock option plan (Exhibit 10.11
to Registration Statement on Form S-18, File No.
33-46246-NY)

10.13* Loan agreement with Norstar Bank dated February 6, 1992
(Exhibit 10.13 to Registration Statement on Form S-18,
File No. 33-46246-NY)

48
<PAGE> 52
10.13.1* Norstar Bank waiver agreement (Exhibit 10.13.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)

10.14* Agreement with Prime Computer, Inc. (Exhibit 10.14 to
Registration Statement on Form S-18, File No. 33-46246-NY)

10.15* Agreement with Mentor Computer Graphics Ltd. (Exhibit 10.15 to
Registration Statement on Form S-18, File No. 33-46246-NY)

10.16* Agreement with Robert W. Schwartz, Inc. dated February 10,
1992 (Exhibit 10.16 to Registration Statement on Form S-18,
File No. 33-46246-NY)

10.17* Form of Financial Consulting Agreement with the Underwriter
(Exhibit 10.17 to the Registration Statement on form SB-2,
File No. 33-76494)

10.18* Financing Agreement by and among Maryland Industrial
Development Financing Authority, JED Associates, State
National Bank of Maryland, Electronic Marketing Associates,
Inc. (name was changed to System Solutions Technology, Inc.),
Trimarc Systems Incorporated and Intermec Mid-Atlantic
Corporation dated December 11, 1985 (Exhibit 10.18 to the
Registration Statement on form SB- 2, File No. 33-76494)

10.19* Maryland Industrial Development Financing Authority Limited
Obligation Economic Development Revenue Bond (Exhibit 10.19 to
the Registration Statement on form SB- 2, File No. 33-76494)

10.20* Cross-Collateral Security Agreement between NationsCredit
Corporation, Bitwise Designs, Electrograph Systems, Inc. and
System Solutions Technology, Inc. dated July 18, 1995.

10.21* Subcontract dated September 28, 1995 between PRC, Inc. and
System Solutions Technology, Inc.

49
<PAGE> 53
10.22* Financial Consulting Agreement dated July 17, 1995 between the
Company and Whale Securities, Co.

10.23* Agreement and Plan of Merger by and among Bitwise Designs,
Inc., Bitwise DJS, Inc., certain individuals and DJS Marketing
Group, Inc. dated March 6, 1996 (Exhibit 2 to Form 8-K dated
March 22, 1996)

10.24* Form of Conversion Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit 10.24
to Form 10-KSB dated June 30, 1997).

10.25* Form of Warrant Agency Agreement between the Company and Banca
del Gottardo dated as of August 8, 1997 (Exhibit to Form
10-KSB dated June 30, 1997).

10.26* Stock Purchase and Merger Agreement dated April 7, 1998
between the Company USI and SST. (Exhibit A to Proxy Statement
dated May 8, 1998).

11 Statement re: Computation of Per Share Earnings

21 Subsidiaries of Registrant

23 Consent of PricewaterhouseCoopers, LLP

27 Financial Data Schedule

50
<PAGE> 54
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.

BITWISE DESIGNS, INC.

By: /s/John T. Botti
--------------------------
John T. Botti
President, Chairman of the
Board and Chief Executive
Officer
Dated: October 4, 1999

Pursuant to the requirements of the Securities Act of 1933, this Report
has been signed below by the following persons in the capacities and on the
dates indicated:

<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/John T. Botti President, Chairman October 4, 1999
- ------------------------ of the Board and Chief ------------------
John T. Botti Executive Officer

/s/Ira C. Whitman Senior Vice President October 4, 1999
- ------------------------ and Director ------------------
Ira C. Whitman

/s/Steven A. Kriegsman Director October 4, 1999
- ------------------------ ------------------
Steven A. Kriegsman

/s/J. Edward Sheridan Director October 4, 1999
- ------------------------ ------------------
J. Edward Sheridan

/s/Charles C. Johnston Director October 4, 1999
- ------------------------ ------------------
Charles C. Johnston

/s/Dennis H. Bunt Chief Financial October 4, 1999
- ------------------------ Officer and Principal ------------------
Dennis H. Bunt Accounting Officer
</TABLE>

51
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors and
Shareholder of Bitwise Designs and Subsidiaries, Inc.

Our audits of the consolidated financial statements referred to in our report
dated August 23, 1999, except for Note 5 and Note 18 for which the date is
October 4, 1999, appearing in the 1999 Annual Report to Shareholders of Bitwise
Designs, Inc. and Subsidiaries (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Albany, New York
October 4, 1999

52
<PAGE> 56
BITWISE DESIGNS, INC. AND SUBSIDIARIES

VALUATIONS AND QUALIFYING ACCOUNTS SCHEDULE II

<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------

Additions
Balance at Additions Charged to
Beginning Charged To Other Balance At End
Description of Period Expense Accounts (a) Deductions (b) Of Period
----------- --------- ---------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts

Year ended June 30:
1999 . . . . . . . 480,229 145,983 - (205,194) 421,018
1998 . . . . . . . 189,126 416,780 - (125,677) 480,229

Reserve for slow moving
or obsolete inventory

Year ended June 30:
1999 . . . . . . . 714,385 258,854 - (697,605) 275,634
1998 . . . . . . . 301,370 726,705 - (313,690) 714,385
</TABLE>

- ----------
(a) Additions related to acquisition of subsidiaries
(b) Deductions due to writedowns and sales of subsidiaries

53
<PAGE> 57
BITWISE DESIGNS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

(AND REPORTS OF INDEPENDENT ACCOUNTANTS)

<PAGE> 58

CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS F-1

CONSOLIDATED FINANCIAL STATEMENTS

Balance sheets F-2

Statements of operations F-3

Statements of shareholders' equity F-4

Statements of cash flows F-5

Notes to consolidated financial statements F-6-22
</TABLE>

<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Shareholders
Bitwise Designs, Inc. and Subsidiaries

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Bitwise
Designs, Inc. and its subsidiaries at June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the two years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

August 23, 1999, except for Note 5 and
Note 18, for which the date is
October 4, 1999

F-1
<PAGE> 60
BITWISE DESIGNS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998

<TABLE>
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 549,097 $ 4,000,370
Accounts receivable, net of allowance for doubtful accounts of
$421,018 in 1999 and $480,229 in 1998 5,141,178 4,609,807
Due from related parties 48,094 48,422
Inventories 3,824,387 3,210,868
Income taxes receivable 12,130 3,291
Prepaid expenses and other current assets 282,795 266,237
------------ ------------
Total current assets 9,857,681 12,138,995

Property and equipment, net 2,949,458 776,925

Other assets:

Software development costs, net of accumulated amortization of
$300,510 in 1999 and $185,818 in 1998 129,993 88,391
Excess of cost over net assets of companies acquired, net 1,341,239 1,422,526
Deferred financing costs 165,989 244,109
Other assets 40,624 37,508
------------ ------------
Total assets $ 14,484,984 $ 14,708,454
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Borrowings under lines of credit $ 1,274,779 $ 1,673,275
Current portion of mortgage payable 23,781
Accounts payable 3,852,032 2,294,192
Accrued expenses and other current liabilities 1,075,374 822,429
------------ ------------
Total current liabilities 6,225,966 4,789,896

Long-term debt, net 4,781,124 3,440,332
Deferred grant 142,189
------------ ------------
Total liabilities 11,149,279 8,230,228
------------ ------------

Commitments

Shareholders' equity
Preferred stock, Series A - $.10 par value,
5,000,000 shares authorized:
200 shares issued and outstanding ($1.00 liquidation value) 20 20
Common stock, $.001 par value; 20,000,000 shares authorized:
7,410,745 shares issued 7,411 7,411
Additional paid-in capital 19,846,126 19,822,159
Accumulated deficit (16,441,133) (13,274,645)
------------ ------------
3,412,424 6,554,945
Less cost 28,082 shares of common stock in treasury (76,719) (76,719)
------------ ------------
Total shareholders' equity 3,335,705 6,478,226
------------ ------------

Total liabilities and shareholders' equity $ 14,484,984 $ 14,708,454
============ ============
</TABLE>

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

F-2
<PAGE> 61
BITWISE DESIGNS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales $ 17,094,765 $ 33,755,625

Cost of goods sold 11,479,297 25,663,059
---------- ----------

Gross profit 5,615,468 8,092,566
----------- -----------

Selling, general and administrative expenses 7,765,234 12,251,515

Product development expenses 248,801 230,652
----------- -----------

Total operating expenses 8,014,035 12,482,167
----------- -----------

Loss from operations (2,398,567) (4,389,601)
----------- -----------

Other income (expense):

Interest and other income 107,208 163,126

Loss on sale of subsidiary (249,568) (255,888)

Interest expense (630,396) (939,595)
----------- -----------
(772,756) (1,032,357)
----------- -----------
Loss before income taxes (3,171,323) (5,421,968)

Income tax (benefit) expense (4,835) 42,101
----------- -----------
Net loss $(3,166,488) $(5,464,059)
=========== ===========
Per share amounts:

Net loss per common share $ (.43) $ (.74)
=========== ===========
</TABLE>

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

F-3
<PAGE> 62
BITWISE DESIGNS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------ --------------------
NUMBER OF $.10 PAR NUMBER OF $.001 PAR
SHARES VALUE SHARES VALUE
--------- ------------ --------- ---------
<S> <C> <C> <C> <C>

Balance, July 1, 1997 200 $ 20 7,367,720 $ 7,368

Stock options exercised 35,333 35

Detachable warrants issued in connection with
convertible note

Warrants issued for non-employee services

Acquisition of shares through note default (27,744 shares)

Conversion of debt to common shares 7,692 8

Net loss
--- ------------ --------- ------------

Balance, June 30, 1998 200 $ 20 7,410,745 $ 7,411

Warrants issued for non-employee services

Net loss
--- ------------ --------- ------------

Balance, June 30, 1999 200 $ 20 7,410,745 $ 7,411
=== ============ ========= ============
</TABLE>

TOTAL
PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
CAPITAL DEFICIT STOCK EQUITY
------- ------------ -------- -------------
<S> <C> <C> <C> <C>

Balance, July 1, 1997 $ 18,996,591 $ (7,810,586) $ (423) $ 11,192,970

Stock options exercised 82,255 82,290

Detachable warrants issued in connection with
convertible note 650,411 650,411

Warrants issued for non-employee services 67,910 67,910

Acquisition of shares through note default (27,744 shares) (76,296) (76,296)

Conversion of debt to common shares 24,992 25,000

Net loss (5,464,059) (5,464,059)
------------ ------------ ------------ ------------

Balance, June 30, 1998 $ 19,822,159 $(13,274,645) $ (76,719) $ 6,478,226

Warrants issued for non-employee services 23,967 23,967

Net loss (3,166,488) (3,166,488)
------------ ------------ ------------ ------------

Balance, June 30, 1999 $ 19,846,126 $(16,441,133) $ (76,719) $ 3,335,705
============ ============ ============ ============
</TABLE>

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

F-4
<PAGE> 63
BITWISE DESIGNS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,166,488) $(5,464,059)
Adjustments to reconcile net loss to net cash
used in operating activities:

Depreciation and amortization 637,186 813,392
Provision for doubtful accounts receivable (60,694) 416,780
Loss on sale of subsidiary 249,568 255,888
Non-cash compensation expense 67,910
Changes in operating assets and liabilities:

Accounts receivable and due from related parties (470,349) (741,608)
Inventories (613,519) (1,482,031)
Prepaid expenses and other current assets 7,409 (113,863)
Accounts payable and accrued expenses 1,561,217 1,301,813
Income taxes receivable (8,839) 5,359
---------- ----------
Net cash used in operating activities (1,864,509) (4,940,419)
---------- ----------

Cash flows from investing activities:

Purchases of property and equipment (2,402,661) (250,162)
Trademarks acquired (2,500)
Patent costs (17,105)
Software development costs (156,293) (77,392)
Proceeds from sale of businesses 3,600,000
Other 13,609 (1,500)
---------- ----------
Net cash provided by (used in) investing
activities (2,564,950) 3,270,946
---------- ----------

Cash flows from financing activities:

Increase (decrease) in borrowings under line of credit, net (398,496) (873,836)
Proceeds from borrowings on long-term debt 4,000,000
Proceeds from borrowings on mortgage obligation 1,234,493
Principal payments on long-term debt (1,601)
Receipt of deferred revenue from economic development grant 142,189
Principal payments on capital lease obligations (10,277)
Stock options exercised 82,290
Payment of deferred offering and financing costs (390,580)
---------- ----------
Net cash provided by financing activities 978,186 2,805,996
---------- ----------
Net increase (decrease) in cash and cash equivalents (3,451,273) 1,136,523

Cash and cash equivalents, beginning of year 4,000,370 2,863,847
---------- ----------

Cash and cash equivalents, end of year $549,097 $4,000,370
========== ==========
</TABLE>

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

F-5
<PAGE> 64
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business and business continuity:

Bitwise Designs, Inc. (Bitwise) and its subsidiary DJS Marketing
Group, Inc. (DJS), collectively referred to as the "Company," are
engaged in the manufacture and distribution of document imaging
systems, personal computers and related peripheral equipment,
components and accessories as well as network integration and Internet
services and products. Bitwise sells a line of document imaging
systems which it markets nationally under the tradename "DocStar."

In August 1994, Bitwise acquired Electrograph Systems, Inc.
(Electrograph), a value-added distributor of microcomputer
peripherals, components and accessories throughout the East Coast of
the United States. In April 1997, Bitwise sold Electrograph, which was
structured as an asset sale with all liabilities assumed by the
purchaser. Simultaneously with its acquisition of Electrograph in
1994, Bitwise acquired System Solutions Technology, Inc. (SST), a
value-added distributor of advanced technology industrial computers
and computer peripherals. In June 1998 Bitwise sold SST in a stock
sale.

In March 1996, Bitwise acquired DJS Marketing Group, Inc. DJS
distributes personal computer systems, workstations and peripheral
equipment. In addition, DJS offers systems integration, network,
internet and hardware repair services. Subsequent to the acquisition
of DJS, Bitwise transferred its personal computer division to DJS.

In June 1999, Bitwise established a majority owned subsidiary,
Authentidate.com LLC (Authentidate), to engage in a new business line
of providing end users with a service which will (a) accept and store
e-mail from networks and personal computers throughout the world and
from different operating systems via the internet, (b) allow for
confirmation of acceptance of all e-mails sent to the system, (c)
produce confirmation of receipt of e-mail, and (d) provide a
technology that can verify the authenticity of digital images by
employing a secure clock that will date stamp the images when
received. To date, Authentidate's operations have been limited to
developing the technology for its services and home page.

During the fiscal year ended June 30, 1999 the Company incurred a net
loss of $3,166,488, and cash used by operating activities totaled
$1,864,509. The Company's available cash balance at June 30, 1999
totaled approximately $549,000. One of the Company's lines of credit
has been terminated by its lender and the Company is currently paying
off the outstanding balance (see Note 5). To date, the Company has
been largely dependent on its ability to sell additional shares of its
common stock or other financing to fund its operating deficits. Under
its current operating plan to obtain a national acceptance of the
DocStar product line and to introduce the new Authentidate technology,
the Company's ability to improve operating cash flow is highly
dependent on the market acceptance of its products and the Company's
ability to reduce overhead costs. If the Company is unable to attain
projected sales levels for DocStar and other products, or is unable to
implement cost reduction strategies, it may be necessary to raise
additional capital to fund operations and meet its obligations. There
is no assurance that such funding will be available, if needed.

Principles of consolidation:

The consolidated financial statements include the accounts of Bitwise
Designs, Inc. and its subsidiaries, which are wholly-owned. The
accounts of the subsidiaries have been consolidated since the
acquisition date. All material intercompany balances and transactions
have been eliminated in consolidation.

F-6

<PAGE> 65
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

Cash equivalents:

The Company considers all highly liquid debt instruments with original
maturities not exceeding three months to be cash equivalents. At June
30, 1999 and 1998, cash equivalents were composed primarily of
investments in commercial paper and overnight deposits.

Inventories:

Inventories are stated at the lower of average cost or market.

Property and equipment:

Property and equipment are stated at cost. Depreciation and
amortization are determined using the straight-line method. Estimated
useful lives of the assets range from three to seven years.

Repairs and maintenance are charged to expense as incurred. Renewals
and betterments are capitalized. When assets are sold, retired or
otherwise disposed of, the applicable costs and accumulated
depreciation or amortization are removed from the accounts and the
resulting gain or loss, if any, is recognized.

Deferred licensing costs:

Costs incurred in connection with the licensing of the Company's
products by the Federal Communications Commission are reported net of
accumulated amortization and are amortized using the straight-line
method over the products' estimated life of three years.

Software development costs:

Software development and modification costs incurred subsequent to
establishing technological feasibility are capitalized and amortized
based on anticipated revenue for the related product with an annual
minimum equal to the straight-line amortization over the remaining
economic life of the related products (generally three years).
Software development costs capitalized during 1999 and 1998 amounted
to $156,293 and $77,392, respectively. Amortization expense related to
software development costs for the years ended June 30, 1999 and 1998
was $114,692 and $70,060, respectively.

Excess of cost over net assets of companies acquired:

Excess of cost over net assets of companies acquired (goodwill) is
being amortized on a straight-line basis over 20 years.

The Company periodically reviews goodwill to assess recoverability,
and impairments would be recognized in operating results if a
permanent diminution in value were to occur. The amortization charged
against earnings in 1999 and 1998 was $81,287 and $234,380,
respectively. Accumulated amortization at June 30, 1999 and 1998 was
$282,002 and $200,715, respectively.

F-7

<PAGE> 66
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

Income taxes:

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

Revenue recognition and warranty provisions:

Revenue from the sale of products is recognized when the products are
shipped to customers unless such shipments are with right of return,
in which case, revenue is recognized upon sale of the product. The
Company provides a one year warranty on products it manufactures. On
products distributed for other manufacturers, the original
manufacturer warranties the product. Warranty expense was not
significant to any of the years presented.

New accounting pronouncements:

In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
(SFAS 133). SFAS 133 establishes a new model for accounting for
derivatives and hedging activities. This statement is effective for
fiscal years beginning June 30, 2000. The adoption of this standard is
not expected to have a significant impact on the Company's
consolidated financial statements.

In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires
reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general
purpose financial statements. This statement is effective for annual
and interim financial statement beginning the fiscal year ending June
30, 1999, and requires reclassifications of prior periods. The Company
had no other comprehensive income to report for the years ended June
30, 1999 and 1998.

Advertising expenses:

The Company recognizes advertising expenses as incurred. Advertising
and promotion expense for 1999 and 1998, was approximately $331,000
and $1,175,000, respectively.

Fourth quarter adjustments:

The Company realized a consolidated net loss of $3,166,488, or $.43
per share, compared to a consolidated net loss of $5,464,059, or $.74
per share, for the years ended June 30, 1999 and 1998, respectively.
Consolidated net sales totaled $17,094,765 and $33,755,625 for the
years ended June 30, 1999 and 1998, respectively. During the fourth
quarter of 1999, the Company recorded an adjustment to net
loss for sales made with the right of return of approximately
$1,761,000 for which income will not be recognized until sale of the
product by the customer. Additionally, a reserve of approximately
$183,000 was recorded for claims arising from the sale of SST. During
the fourth quarter 1998, the Company's operating results included the
loss on the sale of SST ($256,000), an increase in the reserves for
obsolete inventory ($588,000), and an increase in the allowance for
bad debts ($170,000).

F-8

<PAGE> 67
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

Use of estimates:

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

Reclassifications:

It is the Company's policy to reclassify, where appropriate, prior
year financial statements to conform to the current year presentation.

2. LOSS PER SHARE

The following is basic and diluted loss per share information:

<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss $(3,166,488) $(5,464,059)
Less preferred stock dividends
----------- -----------
Net loss applicable to common stockholders $(3,166,488) $(5,464,059)
Weighted average shares 7,410,745 7,380,484
Basic and diluted loss per share (.43) (.74)
</TABLE>

The impact of options, warrants and convertible notes was antidilutive
to the calculation of basic and dilutive loss per share, and were
accordingly excluded from the calculation.

3. INVENTORIES

Inventories at June 30, 1999 and 1998 consist of:

<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Purchased components and raw materials $1,197,192 $2,860,591
Finished goods - in stock 559,508 350,277
- held by resellers 2,067,687
---------- ----------
$3,824,387 $3,210,868
========== ==========
</TABLE>

F-9

<PAGE> 68
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4. PROPERTY AND EQUIPMENT

Property and equipment at June 30, 1999 and 1998 consists of the following:

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1999 1998 IN YEARS
---- ---- --------
<S> <C> <C> <C>

Land $ 651,932 $ N/A
Building 1,580,191 40
Machinery and equipment 1,433,904 1,253,958 3-6
Demonstration and rental computers 179,752 200,747 5-6
Furniture and fixtures 247,273 237,515 5-7
Leasehold improvements 83,692 84,021 6
Vehicles 15,090 15,089 5
4,191,834 1,791,330
Less accumulated depreciation and
amortization (1,242,376) (1,014,405)
---------- ----------
$2,949,458 $ 776,925
========== ==========
</TABLE>

In June 1999, the Company completed construction of a new office/production
facility in Schenectady, New York for approximately $2,400,000. The Company
was awarded a grant totaling $1,000,000 from the Empire State Development
Corporation (an agency of New York State) to be used towards the
construction of the facility. The funding is being received in stages as
costs are incurred and submitted for reimbursement. The grant stipulates
that the Company is obligated to achieve certain annual employment levels
at the new site between January 1, 2001 and January 1, 2005 or some or all
of the grant will have to be repaid. As of June 30, 1999, $142,189 had been
received and is recorded as deferred revenue. The remainder of the
financing, totaling $1,400,000, is being provided by a local financial
institution in the form of a mortgage loan (See Note 6).

Depreciation and amortization expense on property and equipment for the
years ended June 30, 1999 and 1998 was $230,127 and $321,041, respectively.

5. LINE OF CREDIT

The Company's subsidiary DJS may utilize a line of credit in the amount of
$625,000, of which approximately $256,000 was available at June 30, 1999.
This facility is a wholesale inventory credit facility which is supported
by a guaranty furnished by one of DJS's vendors and expressly limited for
purchases from this vendor. The line is non-interest bearing and payment
terms are net 40. The line is collateralized by all assets of DJS.

In May 1999, the Company's other line of credit for $1,500,000 was
terminated by its lender as a result of the Company not being in compliance
with all of its financial covenants. At June 30, 1999, the balance
outstanding was approximately $1,300,000. Subsequent to year-end, the
Company entered into an agreement with the lender to extend repayment of
the outstanding balance until September 30, 2000. The Company was required
to make a partial payment to the lender of $600,000 by October 4, 1999 with
the remainder to be paid off in weekly installments of $11,778 plus
interest. Interest accrues at the prime rate plus 4%. The agreement has
been guaranteed by the President of the Company and is collateralized by
all of the Company's accounts receivable and inventory.

F-10

<PAGE> 69
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

6. LONG-TERM DEBT

Long-term debt at June 30, 1999 and 1998 consists of the following:

Convertible notes payable with 400,000 detachable common stock purchase
warrants. Interest accrues at 8%, payable semi-annually, in arrears. Each
note is in the denomination of $5,000 and holders may convert at the rate
of $3.25 per share until August 11, 2002 when the notes mature. The
warrants may also be exercised at $3.25 per share of common stock until
August 11, 2002. The warrants were valued at $650,411 upon issuance and
were recorded as a discount to the face value of the debt and as a charge
to paid in capital. The discount is being amortized to interest expense
over the term of the note. During 1998, 7,692 shares were issued upon
conversion of a portion of the outstanding debt. $ 3,975,000 $ 3,975,000

Mortgage payable with Central National Bank in the original amount of
$1,400,000 (when fully advanced) with interest, adjusted every five years,
equal to the five-year Treasury Bill rate plus 2.5%, not to be less than
8.25% (8.25% at June 30, 1999), payable in monthly installments through
October 2018. The mortgage is collateralized by a first mortgage lien on
the Company's headquarters. 1,234,493 -
----------- -----------
5,209,493 3,975,000
Less current portion (23,781)

Less unamortized discount (404,588) (534,668)
----------- -----------

Long-term debt, net of current portion $ 4,781,124 $ 3,440,332
=========== ===========
</TABLE>

The aggregate principle maturities of long-term debt for each of the
subsequent five years and thereafter, assuming the convertible notes are
not converted into common stock by August 11, 2002 are as follows:

<TABLE>
<S> <C>
2000 $23,781
2001 30,335
2002 32,934
2003 4,010,757
2004 38,821
Thereafter 1,072,865
----------
$5,209,493
==========
</TABLE>

7. INCOME TAXES

Income tax expense (benefit) for the years ended June 30, 1999 and 1998
consists of currently payable state and local income taxes.

F-11

<PAGE> 70
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7. INCOME TAXES, CONTINUED

At June 30, 1999, the Company has federal net operating loss carryforwards
for tax purposes approximating $11,570,000. The years in which the net
operating loss carryforwards expire are as follows: 2000-$124,000;
2001-$684,000; 2002-$48,000; 2003-$3,000; 2004-$6,000; 2008-$1,568,000;
2009-$867,000; 2011-$2,762,000; 2012-$686,000 and 2013-$3,197,000 and
2019-$1,625,000.

The following table reconciles the expected tax benefit at the federal
statutory rate of 34% to the effective tax rate.

<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Computed expected tax benefit $ (1,078,250) $ (1,843,466)
Increase in valuation allowance 1,198,438 867,815
Additional tax gain on sale of subsidiary 393,666
Nondeductible goodwill amortization 27,638 79,689
Adjustment to prior years' taxes (167,436)
Loss of NOL carryforward on sale of subsidiary 470,221
State income taxes, net of federal benefit (3,191) 42,101
Other nondeductible expenses 17,966 32,075
------------- -------------
$ (4,835) $ 42,101
============= =============
</TABLE>

The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of June 30, 1999 and 1998 are
presented below:

<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred income tax asset:
Allowance for doubtful accounts $ 143,146 $ 179,187
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 and inventory reserves 176,026 264,368
Other liabilities 186,790 180,724
Deferred revenue 639,904
Net operating loss carryforward 3,970,517 3,350,234
---------- ----------
Total gross deferred tax assets 5,116,383 3,974,513
Less valuation allowance (5,095,274) (3,896,836)
---------- ----------
Net deferred tax asset 21,109 77,677
Deferred income tax liability:
Equipment, principally due to differences in
depreciation methods (21,109) (77,677)
---------- ----------
Net deferred income taxes $ -0- $ -0-
========== ==========
</TABLE>

The valuation allowance for deferred tax assets as of July 1, 1999 and 1998
was $5,095,274 and $3,896,836, respectively. The net change in the total
valuation allowance for the years ended June 30, 1999 and 1998 was an
increase of $1,198,438 and $867,815, respectively.

F-12

<PAGE> 71
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

8. LEASE COMMITMENTS

The Company is obligated under operating leases for certain equipment and
facilities expiring at various dates through the year 2001.

As of June 30, 1999, future minimum payments by year, and in the aggregate,
noncancelable operating leases with initial terms of one year or more
consist of the following:

Fiscal year ending June 30:

Rental expense was approximately $216,000 and $309,000 for the years ended
June 30, 1999 and 1998, respectively.

9. PREFERRED STOCK

The Board of Directors is authorized to issue shares of preferred stock,
$.10 par value per share, from time to time in one or more series. The
Board may issue a series of preferred stock having the right to vote on any
matter submitted to shareholders including, without limitation, the right
to vote by itself as a series, or as a class together with any other or all
series of preferred stock. The Board of Directors may determine that the
holders of preferred stock voting as a class will have the right to elect
one or more additional members of the Board of Directors, or the majority
of the members of the Board of Directors. The Board of Directors has
designated a series of preferred stock which has the right to elect a
majority of the Board of Directors. The holders of preferred stock which
have the right to elect a majority of the Board of Directors are therefore
able to control the Company's policies and affairs.

The Board of Directors may also grant to holders of any series of preferred
stock, preferential rights to dividends and amounts payable in liquidation.
Furthermore, the Board of Directors may determine whether the shares of any
series of preferred stock may be convertible into common stock or any other
series of preferred stock of the Company at a specified conversion price or
rate, and upon other terms and conditions as determined by the Board of
Directors.

The Board of Directors has designated 200 shares of preferred stock as
Series A Preferred stock, of which 100 shares have been issued to each of
the chairman/chief executive officer and senior vice president of the
Company. The holders of the Series A Preferred Stock have the right to
elect a majority of the Board of Directors as long as each holder remains,
subject to certain conditions, an officer, director and at least 5%
shareholder of the Company. During such time as the Series A Preferred
Stock is outstanding, the holders have the right to elect a majority of the
Board of Directors. To date, the holders of the Series A Preferred Stock
have not exercised such right. The Series A Preferred Stock is entitled to
vote as a group. The holders of the Series A Preferred Stock have a
preference on liquidation of $1.00 per share and no dividend or conversion
rights.

F-13

<PAGE> 72
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

10. STOCK OPTION PLANS AND STOCK WARRANTS

A) 1992 Employees Stock Option Plan:

In May 1992, the shareholders approved the 1992 Employees Stock Option
Plan (the "1992 Plan"). The Plan provided for the grant of options to
purchase 600,000 shares of the Company's common stock. In January
1995, the shareholders approved an amendment to the Plan to increase
the number of shares of common stock available under the Plan to
3,000,000 shares. Under the terms of the 1992 Plan, options granted
thereunder may be designated as options which qualify for incentive
stock option treatment ("ISO") under Section 422A of the Internal
Revenue Code, or options which do not so qualify ("non-ISOs"). In
1997, the Company filed a registration statement with the SEC to
register the shares issued under the 1992 Plan.

The 1992 Plan is administered by a Compensation Committee designated
by the Board of Directors. The Board or the Committee, as the case may
be, has the discretion to determine eligible employees and the times
and the prices at which options will be granted, whether such options
shall be ISOs or non-ISOs, the period during which each option will be
exercisable and the number of shares subject to each option. Options
generally begin to vest one year after the date of grant. Vesting
occurs one-third per year over three years. The Board or the Committee
has full authority to interpret the 1992 Plan and to establish and
amend rules and regulations relating thereto. Under the 1992 Plan, the
exercise price of an option designated as an ISO may not be less than
the fair market value of the Company's common stock on the date the
option is granted. However, in the event an option designated as an
ISO is granted to a ten percent shareholder, the exercise price shall
be at least 110% of such fair market value. The aggregate fair market
value on the grant date of shares subject to options which are
designated as ISOs which become exercisable in any calendar year,
shall not exceed $100,000 per optionee.

The Board or the Committee may in its sole discretion grant bonuses or
authorize loans to or guarantee loans obtained by an optionee to
enable such optionee to pay any taxes that may arise in connection
with the exercise or cancellation of an option.

Unless sooner terminated, the 1992 Plan will expire in the year 2002.

<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE OPTION
SHARES PRICE PER SHARE
------ ---------------
<S> <C> <C>
Outstanding at July 1, 1997 1,939,370 $3.53
Options granted equal to market price 973,833 2.93
Options exercised (35,333) 2.33
Options canceled or surrendered (539,000) 4.79
---------

Outstanding at June 30, 1998 2,338,870 2.99
Options granted equal to market price 50,500 1.39
Options canceled or surrendered (404,500) 3.48
---------

Outstanding at June 30, 1999 1,984,870 2.85
=========
</TABLE>

F-14

<PAGE> 73
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, CONTINUED

10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED

A) 1992 Employees Stock Option Plan, Continued:

The following is a summary of the status of employee stock options at June
30, 1999:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
----------------------------------- ---------------------

AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$ .34 - 2.00 961,870 1.3 $1.54 888,037 $1.54
2.01 - 4.00 675,500 3.1 3.04 561,333 3.09
4.01 - 8.00 347,500 1.6 6.10 343,333 6.11
</TABLE>

As of June 30, 1999 and 1998, 1,792,703 shares and 1,587,703 shares,
respectively, were exercisable under the 1992 Employees Stock Option Plan.

B) Non-Executive Director Stock Option Plan:

In April 1992, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan") which was approved by
the Company's stockholders in May 1992. With the approval of the
shareholders, the Director Plan was amended in December 1997. Options
are granted under the Director Plan until April 2002 to (i)
non-executive directors as defined and (ii) members of any advisory
board established by the Company who are not full-time employees of
the Company or any of its subsidiaries. The Director Plan provides
that each non-executive director will automatically be granted an
option to purchase 20,000 shares upon joining the Board of Directors
and 10,000 on each September 1 thereafter, provided such person has
served as a director for the 12 months immediately prior to such
September 1st. Each eligible director of an advisory board will
receive, upon joining the advisory board, and on each September 1st
thereafter, an option to purchase 5,000 shares of the Company's common
stock, providing such person has served as a director of the advisory
board for the previous 12-month period.

The exercise price for options granted under the Director Plan is 100%
of the fair market value of the common stock on the date of grant. The
"fair market value" is the closing NASDAQ bid price, or if the
Company's common stock is not quoted by NASDAQ, as reported by the
National Quotation Bureau, Inc., or a market maker of the Company's
common stock, or if the common stock is not quoted by any of the above
by the Board of Directors acting in good faith. Until otherwise
provided in the Stock Option Plan, the exercise price of options
granted under the Director Plan must be paid at the time of exercise,
either in cash, by delivery of shares of common stock of the Company
or by a combination of each. The term of each option commences on the
date it is granted and unless terminated sooner, as provided in the
Director Plan, expires five years from the date of grant. The Director
Plan is administered by a committee of the board of directors composed
of not fewer than three persons who are officers of the Company (the
"Committee"). The Committee has no discretion to determine which
non-executive director or advisory board member will receive options
or the number of shares subject to the option, the term of the option
or the exercisability of the option. However, the Committee will make
all determinations of the interpretation of the Director Plan. Options
granted under the Director Plan are not qualified for incentive stock
option treatment.

F-15

<PAGE> 74
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED

B) Non-Executive Director Stock Option Plan, Continued

A schedule of director stock option activity is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OPTION
OF PRICE
SHARES PER SHARE
------ ---------
<S> <C> <C>
Outstanding July 1, 1997 200,000 3.59
Options granted equal to market price 70,000 2.94
Options cancelled or surrendered (130,000) 4.17
--------

Outstanding June 30, 1998 140,000 3.67
Options granted equal to market price 50,000 1.00
Options cancelled or surrendered (60,000) 3.70
--------

Outstanding June 30, 1999 130,000 2.54
======== ====
</TABLE>

The options range in price from $1.00 to $5.13 per share and have a
weighted average remaining contractual life of 2.6 years.

C) Common Stock Warrants:

A schedule of common stock warrant activity is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WARRANT
OF PRICE
SHARES PER SHARE
------ ---------
<S> <C> <C>
Outstanding July 1, 1997 2,326,995 $ 4.23
Warrants granted equal to market price 40,000 3.44
Warrants granted less than market price 400,000 3.25
---------

Outstanding June 30, 1998 2,766,995 4.07
Warrants granted equal to market price 232,000 3.02
Warrants cancelled or surrendered (100,000) 7.50
---------

Outstanding June 30, 1999 2,898,995
=========
</TABLE>

F-16

<PAGE> 75
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED

C) Common Stock Warrants, continued:

In August 1997, the Company issued 400,000 detachable common stock
purchase warrants in connection with $4.0 million of convertible debt.
Other warrants issued during the years ended June 30, 1999 and 1998
were to various firms providing services to the Company.

The following is a summary of the status of common stock warrants at
June 30, 1999:

<TABLE>
<CAPTION>
OUTSTANDING WARRANTS EXERCISABLE WARRANTS
----------------------------------- ---------------------

WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
------ ---- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$1.50 - 4.00 1,151,284 2.7 $2.87 1,151,284 $2.87
4.01 - 8.00 1,747,711 1.5 4.53 1,747,711 4.53
</TABLE>

D) Options and warrants valuation:

The per share weighted average fair value for all common stock options
granted to employees during fiscal 1999 and 1998 was $2.79 and $1.15,
respectively. These amounts were determined using the Black Scholes
option-pricing model which values options based on the stock price at the
grant date, the expected life of the option, the estimated volatility of
the stock, expected dividend payments and the risk-free interest rate over
the expected life of the option or warrant. The dividend yield was zero in
1999 and 1998. The expected volatility was based on the stock prices for
the period beginning in May 1992 when the Company completed its first
public offering. The expected volatility was 75.0% and 68.7% for 1999 and
1998, respectively. The risk-free interest rate was the rate available on
zero coupon U.S. government issues with a term equal to the remaining term
for each grant. The risk free rate ranges from 4.3% to 5.4% in 1999 and
5.5% to 6.3% in 1998, respectively. The expected life of the option was
estimated based on the exercise history from previous grants and is
estimated to be five years.

The Company applies APB No. 25 in accounting for its stock option and stock
warrant plans and, accordingly, no compensation cost has been recognized in
the Company's financial statements for stock options under any of the stock
plans. However, compensation cost has been recognized for warrants granted.
If under SFAS No. 123, the Company determined compensation cost based on
the fair value at the grant date for its stock options and warrants, net
loss and loss per share would have been increased to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
---- ----
<S> <C> <C>
Net loss
As reported $ (3,166,488) $ (5,464,059)
Pro forma (2,960,231) (6,160,155)

Basic and diluted loss per share
As reported $ (.43) $ (.74)
Pro forma (.40) (.83)
</TABLE>

F-17

<PAGE> 76
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED

D) Options and Warrants Valuation, Continued

Under SFAS No. 123, stock options and warrants granted prior to fiscal
1996 are not required to be included as compensation in determining
pro forma net earnings. To determine pro forma net earnings, reported
net earnings have been adjusted for compensation costs calculated for
vested stock options granted during fiscal 1999 and 1998.

The effects of applying SFAS 123 on providing pro-forma disclosures
are not necessarily likely to be representative of the effects on
reported net income for future years.

11. COMMITMENTS

Employment Agreements:

Effective July 1, 1995, the Company entered into a new employment
agreement with its chief executive officer for a five-year term ending
June 30, 2000. The employment agreement provides for (i) annual
compensation of $100,000 for the first year of the agreement,
increasing by 10% each year thereafter; (ii) a bonus of 3% of the
Company's pre-tax income, with such additional bonuses as may be
awarded at the discretion of the Board of Directors; (iii) the award
of non-qualified stock options to purchase 600,000 shares of the
Company's common stock at an exercise price of $1.5625 per share of
which increments of 100,000 shares vested on June 30, 1995, and the
remainder vests in increments of 125,000 shares on each of June 30,
1996, 1997, 1998 and 1999; (iv) certain insurance and severance
benefits and (v) an automobile and expenses.

12. CASH FLOWS - SUPPLEMENTAL INFORMATION

Cash flows:

The Company paid interest in the amounts of $451,387 and $639,446 for
the years ended June 30, 1999 and 1998, respectively. Income taxes
paid aggregated $4,304 and $27,254 during the years ended June 30,
1999 and 1998, respectively.

Noncash investing and financing activities:

During the year ended June 30, 1998, the Company received common
shares of the Company's stock with a market value of $76,296 in
satisfaction of a note receivable with the former shareholders of DJS
Marketing Group, Inc. of $145,657.

In March 1998, the Company issued 7,692 common shares of the Company's
stock pursuant to the conversion of $25,000 of convertible debt into
common stock.

F-18
<PAGE> 77
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS, CONTINUED

13. RELATED PARTIES

At June 30, 1999 and 1998, "Due from related parties" included non-interest
bearing advances of $48,094 and $48,422, respectively, from employees and
officers of the Company.

14. EMPLOYEE BENEFIT PLAN

Effective July 1, 1993, the Company implemented a qualified defined
contribution 401(k) profit sharing plan for all eligible employees. The
Company can make contributions in percentages of compensation, or amounts
as determined by the Company. The Company did not contribute to the plan
during the years ended June 30, 1999 and 1998.

15. SALE OF BUSINESS

In June 1998, the Company sold SST in a stock sale. The Company received
approximately $3.6 million in cash and approximately $400,000 in accounts
receivable and inventory. In 1999, the Company received certain claims from
the buyer of SST for indemnification under the agreements governing its
sale. A settlement was negotiated and the Company agreed to pay the buyer
$341,000 to be paid monthly over fifteen months accruing interest at 6%. An
additional reserve of approximately $250,000 was recorded in 1999 related
to these claims. The Company realized a loss of approximately $505,000 on
the sale.

16. FINANCIAL INSTRUMENTS

Concentrations of credit risk:

Financial instruments which subject the Company to concentrations of
credit risk consist of cash and cash equivalents and trade accounts
receivable. To reduce credit risk, the Company places its temporary cash
investments with high credit quality financial institutions. The
Company's credit customers are not concentrated in any specific industry
or business. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers,
historical trends and other information.

Fair value:

The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value.

Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses and other current liabilities. The carrying amount of
cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses and other current liabilities approximates fair value
because of the short maturity of these instruments.

Lines of credit and long-term debt. The interest rates on the Company's
lines of credit are reset according to changes in the current market.
The remaining balance of long-term debt approximates fair value based on
its discounted face amount. Consequently, the carrying value of the
borrowings under lines of credit and long-term debt approximates fair
value.

F-19
<PAGE> 78
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

17. SEGMENT REPORTING

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 is effective for
fiscal years beginning after December 15, 1997. SFAS 131 establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports.

The Company has two reportable segments: Bitwise, a document imaging
company and DJS Marketing Group, Inc. (DJS), a computer systems integrator.
Bitwise produces a product called DocStar which is a document storage and
retrieval business and DJS markets computer services including network
services, internet services and software installation and integration. In
addition, DJS sells a complete line of personal computers and peripheral
equipment.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.

The Company's reportable segments are separate companies which are managed
separately. In prior years the Company owned two other subsidiary
companies, Electrograph Systems, Inc. which was sold in April 1997 and
Systems Solutions Technology, Inc. which was sold in June 1998. Both
companies marketed personal computers and peripheral equipment. Those
companies are included in the "All Other" column for fiscal years ending
June 30, 1998 and 1997, respectively.

<TABLE>
<CAPTION>
SEGMENT INFORMATION:

June 30, 1999 Bitwise DJS All Other Totals
------- --- --------- ------
<S> <C> <C> <C>
Revenues from external customers $ 7,674,451 $ 9,420,314 $ 17,094,765
Intersegment revenues 116,680 116,680
Interest and other revenue 107,208 107,208
Interest expense 595,345 35,051 630,396
Depreciation and amortization 586,591 50,595 637,186
Segment profit/(loss) (3,331,296) 392,854 (2,938,442)
Segment assets 11,831,310 2,667,161 14,498,471

June 30, 1998

Revenues from external customers $ 9,002,203 $ 11,159,759 $13,593,663 $ 33,755,625
Intersegment revenues 59,738 321,366 381,104
Interest and other revenue 156,241 400 6,485 163,126
Interest expense 511,414 225,983 202,198 939,595
Depreciation and amortization 686,804 59,642 66,946 813,392
Segment profit/(loss) (4,196,227) (594,609) (128,593) (4,919,429)
Other significant non cash items:
Receipt of common shares with a
market value of $76,296 in satisfaction
of a note receivable 145,657 145,657
Segment assets 12,463,515 2,274,346 14,737,861
</TABLE>

F-20
<PAGE> 79
BITWISE DESIGNS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

17. SEGMENT REPORTING, CONTINUED

<TABLE>
<CAPTION>
RECONCILIATIONS: June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Revenues:
Total revenues for reportable segments $ 17,211,445 $ 34,136,729
Elimination of intersegment revenues (116,680) (381,104)
------------ ------------

Total consolidated revenues $ 17,094,265 $ 33,755,625
============ ============

Profit or (Loss):

Total profit or loss for reportable segments $ (2,938,442) $ (4,919,429)
Product development expenses (248,801) (230,652)
Gain or loss on sale of subsidiary (255,888)
Elimination of intersegment profits 15,920 (15,989)
------------ ------------

Loss before income taxes $ (3,171,323) $ (5,421,958)
============ ============
Assets:
Total assets for reportable segments $ 14,498,471 $ 14,737,861
Elimination of intersegment profit (13,487) (29,407)
------------ ------------

Consolidated total assets $ 14,484,984 $ 14,708,454
============ ============
</TABLE>

18. SUBSEQUENT EVENTS

On October 4, 1999, the Company closed three concurrent private
offerings. In the first offering, the Company sold 740,000 units at an
aggregate offering price of $740,000, each unit consisting of two shares of
common stock and two Series B common stock purchase warrants (the "Series B
Warrants"). The Series B Warrants entitle the holder to purchase one share
of common stock at an exercise price of $1.375 per share during the
offering period commencing on the date of issuance and terminating five
years thereafter. The Series B warrants are redeemable at any time
commencing one year after issuance at the option of the Company with not
less than 30 nor more than 60 days written notice to the registered holders
at a redemption price of $.05 per warrant provided; (i) The public sale of
the shares of common stock issuable upon exercise of the Series B warrants
are covered by a tentative registration statement; and (ii) During each of
the immediately preceding 20 consecutive trading days ending within 10 days
of the date of the notice of redemption, the closing bid price of the
Company's common stock is at least $3.25 per share.

In the second offering, the Company sold 50,000 shares of a newly created
class of Series B convertible cumulative preferred stock (the "Series B
Preferred Stock). The Series B preferred stock was sold at $25.00 per share
for an aggregate offering price of $1,250,000. Dividends on the Series B
Preferred Stock are payable at the rate of 10% per annum, semi-annually in
cash. Each share of Series B Preferred Stock is convertible into shares of
the Company's common stock or is converted into such number of shares of
the common stock as shall equal $25.00 divided by the conversion price of
$1.875 per share subject to adjustment under certain circumstances.
Commencing three years after the closing, the conversion price shall be the
lower of $1.875 per share or the average of the closing bid and asked price
of the Company's common stock for the 10 consecutive trading days
immediately ending one trading day prior to the notice of the date of
conversion; provided, however, that the holders are not entitled to convert
more than 20% of the Series B preferred shares held by such holder on the
third anniversary of the date of issuance per month. The Series B Preferred
Stock is redeemable at any time commencing one year after issuance or not
less than 30 nor more than 60 days written notice at a redemption price of
$25 plus accrued and unpaid dividends provided; (i) the public sale of the
shares of common stock issuable upon conversion of the Series B preferred
Stock (the "Conversion Shares") are covered by an effective registration
statement or are otherwise exempt from registration; and (ii) during the
immediately preceding 20 consecutive trading days ending within 10 days of
the date of the notice of redemption, the closing bid price of the
Company's Common Stock is not less than $3.75 per share.

Commencing 34 months after the Closing, the Series B Preferred Stock is
redeemable at the option of the Company without regard to the closing price
of the Company's Common Stock.

The Company also created a new subsidiary, Authentidate.Com, LLC through
which it will market its new Internet service which allows for the
verification of the authenticity of digital images. In connection with the
above offerings, the purchasers were granted the right to purchase 20% of
Authentidate.Com, LLC for $100,000. In addition, the Purchasers were issued
an aggregate of 999,999 Series C common stock purchase warrants (the
"Series C Warrants"). The Series C Warrants are redeemable at any time
commencing six months after issuance, on not less than 30 nor more than 60
days written notice to registered holders at a redemption price equal to
$.05 per Warrant, provided (i) the public sale of the shares of common
stock issuable upon exercise of the Series C Warrants (the "Warrant
Shares") are covered by an effective registration statement or are
otherwise exempt from registration; and (ii) during each of the immediately
preceding 20 consecutive trading days ending within 10 days of the date of
the notice of redemption, the closing bid price of the Company's common
stock is not less than 120% of the current exercise price of the Series C
Warrants.

The Series C Warrants were also divided into three classes to provide for
varying exercise prices. The exercise price of the Series C Warrants is as
follows:

Class I - $1.50 per share of Common Stock, increasing (i) $.75 per share
thirty days after the effective date of the registration statement covering
the underlying shares (the "Registration Statement"); (ii) an additional
$.75 per share seven months after the effective date of the Registration
Statement; and (iii) an additional $.75 per share 13 months after the
effective date of the Registration Statement, subject to adjustment for
stock splits and corporate reorganizations.

Class II - $1.50 per share of Common Stock, increasing (i) $.75 per share
sixty days after the effective date of the Registration Statement; (ii) an
additional $.75 per share seven months after the effective date of the
Registration Statement; and (iii) an additional $.75 per share 13 months
after the effective date of the Registration Statement, subject to
adjustment for stock splits and corporate reorganizations.

Class III - $1.50 per share of Common Stock, increasing (i) $.75 per share
ninety days after the effective date of the Registration Statement; (ii) an
additional $.75 per share seven months after the effective date of the
Registration Statement; and (iii) an additional $.75 per share 13 months
after the effective date of the Registration Statement, subject to
adjustment for stock splits and corporate reorganizations.

The Company received gross proceeds of approximately $2,000,000. The
Company has utilized the proceeds of the three offerings as follows:
approximatley $600,000 has been utilized to repay a portion of the
Company's line of credit; approximatley $400,000 will be utilized to
develop the Authentidate.com business; approximatley $160,000 was utilized
to make a past due interest payment on the Company's outstanding 8%
convertible notes, and the remainder has been reserved for working
capital. The Company included offering expenses of approximatley $60,000.

F-21
<PAGE> 80
EXHIBIT INDEX

Item No. Description
- -------- -----------

2.1* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Electrograph Systems, Inc. dated February 7, 1994

2.2* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Systems Solutions, Inc. dated April 29, 1994

3.1* Certificate of Incorporation of Bitwise Designs, Inc.-
Delaware (Exhibit 3.3.1 to Registration Statement on Form
S-18, File No. 33-46246-NY)

3.1.1* Certificate of Designation of Series B Preferred Stock

3.2* By-Laws (Exhibit 3.2 to Registration Statement on Form S-
18, File No. 33-46246-NY)

4.1* Form of Common Stock Certificate (Exhibit 4.1 to Registration
Statement on Form S-18, File No. 33-46246- NY)

4.2* Form of Series A Preferred Stock Certificate (Exhibit 4.2
to Registration Statement on Form S-18, File No. 33-
46246-NY)