PRECISION SYSTEMS INC, 10-K405, 1996-12-12

PRECISION SYSTEMS INC
10-K405, 1996-12-12
TELEPHONE & TELEGRAPH APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-K

<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) FOR THE FISCAL YEAR ENDED AUGUST 31, 1996,
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO.
000-20068 --------------- ---------------
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PRECISION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

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<S> <C>
DELAWARE 41-1425909
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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11800 30TH COURT NORTH, ST. PETERSBURG, FLORIDA 33716
(Address of registrant's principal executive offices, including zip code)

(813) 572-9300
(Registrant's telephone number, including area code)

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

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TITLE OF NAME OF EXCHANGE
EACH CLASS REGISTERED
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None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK, $.01 PAR VALUE

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

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of 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. [X]

As of December 10, 1996, there were outstanding 17,096,795 shares of Common
Stock and 10,000 shares of Series A preferred stock. The aggregate market value
of the voting stock held by non-affiliates of the registrant as of December 10,
1996, was $43,084,388.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes [ ] No [ ]

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DOCUMENTS INCORPORATED BY REFERENCE:

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DOCUMENTS FORM 10-K REFERENCE
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The registrant hereby incorporates by reference in this report the
information required by Part III appearing in the registrant's proxy statement
or information distributed in connection with the 1996 Annual Meeting of
Shareholders of the registrant.

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PRECISION SYSTEMS, INC.

FORM 10-K

TABLE OF CONTENTS

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PAGE NO.
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PART I
Item 1 Business.................................................................. 1
Item 2 Properties................................................................ 11
Item 3 Legal Proceedings......................................................... 11
Item 4 Submission of Matters to a Vote of Security Holders....................... 13
PART II
Item 5 Market Price of and Dividends on the Registrant's Common Stock and Related
Stockholder Matters....................................................... 14
Item 6 Selected Financial Data................................................... 14
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 15
Item 8 Financial Statements...................................................... 23
PART III
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures............................................................... 45
Item 10 Directors and Executive Officers of the Registrant........................ 45
Item 11 Executive Compensation.................................................... 47
Item 12 Security Ownership of Certain Beneficial Owners and Management............ 53
Item 13 Certain Relationships and Related Transactions............................ 54
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 55
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PART I

ITEM 1 -- BUSINESS

GENERAL

Precision Systems, Inc. ("PSI"), together with its direct and indirect
wholly-owned and controlled subsidiaries, (the "Company") collectively provides
solutions that simplify and personalize telecommunications. The Company's range
of software-based products are used by global wireless, wireline, and private
network providers to deploy a wide range of voice, data, and video-based
enhanced services on a common hardware and software platform in more than 600
installations in 35 countries. Headquartered in St. Petersburg, Florida, the
Company has sales and support offices in 15 countries worldwide.

The Company currently provides telecommunications solutions and services in
three primary areas:

- Network-based enhanced services for private and public telecommunications
operators, Regional Bell Operating Companies ("RBOCs"), and carriers;
- Multimedia interactive customer service platforms (advanced call centers)
for large corporate virtual private networks, with emphasis on the
financial, insurance, transportation, retail, and service bureau
industries; and
- Fully-automated Internet and telephony-based enhanced services on a
service bureau basis to government, quasi-governmental agencies, and
corporations (primarily software and technology companies).

On April 16, 1996, the Company acquired substantially all of the capital
stock of Vicorp N.V. ("Vicorp"). Vicorp provides advanced telephony and call
processing solutions to customers in the Americas, Europe, and the Asia/Pacific
regions through its offices worldwide.

On October 7, 1996, the Company acquired BFD Productions, Inc. ("BFD"), a
telecommunications and Internet service bureau that offers call processing via
international, United States, and Canadian 800/900 number and local phone
numbers. BFD combines AT&T's Vari-A-Bill service and other 900 number billing
mechanisms with audiotext for a variety of innovative uses, including customer
service, technical support, and unlocking encrypted software products.

THE COMPANY'S PRODUCTS

The Company's products consist of three key components: middleware software
(developed by the Company); applications software (developed by the Company);
and industry standard hardware with operating system software (provided by
outside vendors).

The Company's middleware consists of two primary products -- BETEX(TM)
Enhanced Services Platform ("BETEX-ESP") and UniPort(TM) Telephony Middleware
("UniPort"). In addition, each middleware product has associated, user-friendly
toolkits -- BETEX QuickScript(TM) and UniPort's Fante application language.

The Company's application software is targeted towards various industry
segments. When combined with the Company's middleware, solution packages are
created including Customer Connect (an advanced call center-based product);
EasyCall (primarily a calling card product for the wireline and wireless
market); Wireless Solutions; and Atlas, a personal communications agent (with
telephony and Internet functionality for wireless and wireline markets).

In addition, the Company provides a third product, the Enhanced Services
Platform ("ESP"). These ESP-related products and associated services are
provided solely to MCI Communications and Home Shopping Network.

The following is a description of the three principal products: BETEX-ESP,
UniPort, and the ESP.
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BETEX Enhanced Services Platform ("BETEX-ESP")

BETEX-ESP delivers a line of modular software products for large scale
voice, data, and video-based applications. This platform fulfills requirements
for Intelligent Network service node platforms and integrated call center
solutions. Applications available on the BETEX-ESP include: Enhanced 800
Services, Calling Cards, Call Completion and Message Delivery, Short Message
Services, and a host of large scale interactive voice response services. Also
included in BETEX-ESP is BETEX QuickScript(TM) -- a graphical, workstation-based
Service Creation Environment that enables developers, third parties, and
customers alike to create services quickly and easily. It provides user-friendly
technology as an interface to the BETEX-ESP.

UniPort Telephony Middleware ("UniPort")

UniPort provides an environment for creating a multi-application call
processing platform that is easily integrated into existing telephony networks.
Using UniPort, third-party developers and customers can build applications using
an application programming interface that includes a scripted 4th generation
language used for developing telephony services.

Enhanced Services Platform ("ESP")

Since the mid 1980s, the Company's original product has been a
comprehensive proprietary hardware and software system called ESP. The system
enables interactive communications to take place between a caller and a
computer-based information source to request merchandise, information, or
services. One of the advantages of the ESP is that it is able to perform in a
network environment of thousands of simultaneous calls, while accessing multiple
scripts and applications concurrently. A single system node is capable of
processing up to 1,056 simultaneous calls; multiple nodes can be networked or
combined to provide for additional call processing during high volume bursts of
telephone traffic.

The ESP operates in an environment where nodes of the system can be
geographically distributed. In this scenario, the platform as a whole can be
managed and controlled from a central location as if all nodes were co-located.
Additionally, the ESP has an application and script building tool which
facilitates the customer's ability to rapidly develop and maintain call
processing applications.

The ESP is designed to facilitate customer revenue generation in an
environment where data throughput, manageability, and ease of application
delivery are required. Installations are scalable due to its modular node
configuration. The ESP incorporates a wide range of available technologies, from
interactive voice response ("IVR") to call processing. The hardware components
of the ESP are engineered for redundancy and system-level fault tolerance.

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APPLICATION SOFTWARE

The Company has bundled together certain application software products into
solution packages that are marketed to the telecommunications and call center
industries. See " Solution Packages".

The following chart identifies the applications that are included in the
Company's four main solution packages. A description of each application
follows.

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SOLUTION PACKAGES
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CUSTOMER WIRELESS
APPLICATIONS CONNECT EASYCALL SOLUTIONS ATLAS
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<S> <C> <C> <C> <C>
Software ACD X
AgentStation X
Calling Cards X X
PrePaid Calling Card X X X
Call Message Delivery X
Voice Activated Dialing X X
Wake-up/Reminder Call X
Information Services X
Single Number Service X X
Short Message Service X
Simultaneous Ring X
Enhanced Messaging X
Conferencing X
Fax Message Center X
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Software Automated Call Distribution ("ACD") (Skill-based Routing)

This application provides automatic call routing to certain individual(s)
in a bank of customer service representatives who either handle specific
accounts, are an expert in a specific area, or have skill sets necessary to
process the call. The call is routed based on the number dialed, time and/or
priority, or via a voice dialogue. The Software ACD is able to determine the
waiting time, call duration, and duration of call post-processing and workload,
based on the entire call path. Other features are available using Software ACD
that further enable call processing control.

AgentStation

AgentStation enables collected information to be forwarded to a customer
service agent, combining the input received from the caller with additional data
records relating to the customer account. The agent is driven from a
centrally-based script. The presentation and functionality available to an agent
may vary according to the customer's needs.

Calling Cards

This application allows card holders to charge national and international
telephone calls to a calling card account and to be billed for the calls at a
later date. Both full-featured and restricted calling cards can be offered. In
order for customers to control calling card usage, restricted calling cards can
be limited to only dial a predetermined list of phone numbers. The calling card
application includes a variety of advanced calling and messaging features that
enhance the service providers' revenue-generating potential.

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PrePaid Calling Card

This application allows users to prepay long distance service by purchasing
a PrePaid Calling Card. As minutes and services are used, the user's account is
debited automatically.

Call Message Delivery ("CMD")

The Call Message Delivery application initiates a call to the subscriber to
deliver messages in contrast to traditional voice mail in which the subscriber
must call to retrieve a recorded message. Call completion gives service
providers a way to capture revenue that would otherwise be lost due to
incomplete calls and allows additional revenue generation from subscribers who
do not have voice mailboxes.

Voice Activated Dialing ("VAD")

This application allows users to dial telephone numbers by simply speaking
the number they would like to dial ("Dial 5-5-5-1-2-3-4") or by speaking the
name of the person they would like to dial ("Call John"). Voice Activated
Dialing increases convenience to subscribers by providing "hands-free" dialing
and eliminates the need to recall numbers for locations to be dialed.

Wake-up/Reminder Call

This application allows card holders to leave a message on the system for
subsequent delivery at a specified time. The system calls the destination number
at the given time, at specified intervals, and with a predetermined number of
attempts. The card holder can also call the system and get a status report on
the messages that he or she has submitted.

Information Services

This application provides callers access to information services such as
weather, sports, news, lottery, astrology, and stock quotes. System access time
is charged to the caller's calling card or prepaid card.

Single Number Service ("SNS")

This application allows callers to locate a subscriber at any of several
locations by dialing a single phone number. When a caller dials the SNS number,
the SNS application dials different numbers to locate the subscriber based on
the time of day and a predetermined schedule or pattern. For service providers,
SNS allows maximum network call completions while providing significant
incremental service revenues. More importantly, SNS increases the loyalty of
high-revenue customers and provides the basis for a wide range of value-added
personal communication and mobile office service offerings.

Short Message Service ("SMS")

This application provides the ability to send and display alphanumeric
messages on a digital cellular phone using existing cellular networks. Two
examples of Short Message Service are digital numeric paging and text messaging.
Using a telephone keypad, callers can enter a number for the subscriber to call,
or select one of several predefined messages to be displayed on the subscriber's
cellular telephone handset.

Simultaneous Ring

This application rings up to eight phones simultaneously whenever the
subscriber's telephone number is dialed. The caller is connected to the first
called party that answers. Service providers can offer Simultaneous Ring to
businesses that require rapid response times to their customer base such as
repair field technicians, real estate agents, and delivery services.

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Enhanced Messaging

This application takes messages when the subscriber is unavailable. It
allows for paging and e-mail notification of new messages. Subscribers can
forward messages to others and place automatic callbacks from voice messages if
the caller leaves their phone numbers. This application also includes Visual
Voicemail, a feature that enables subscribers to manage their voice messages via
the Internet. This includes viewing a list of messages in the subscriber's
mailbox and listening to the messages on a personal computer or laptop. The
subscriber may also decide what to do with each message (e.g. forward, answer,
delete, automatically call back, etc.).

Conferencing

This application allows for joining three or more parties into one phone
call.

Fax Message Center

This application provides the capability to manage all incoming and
outgoing facsimiles via the Internet or telephone interface.

The Company has also developed, based upon a demand for customization, the
following application products.

International Callback

This application provides reduced rate international calling by having the
caller dial a local number that is answered by a callback service. This service
sends a data message to a callback platform in the destination country. The
destination platform then dials the originating platform. The destination
platform also outdials the final called party. The platforms then connect the
called and calling parties.

Enhanced 800 Freephone/Alternate Access

This application enables service providers to offer a wide range of
flexible custom 800 number services that improve service and generate additional
revenue. The cost is paid for by the company receiving the call. Service
providers can also increase revenues by offering network-based IVR for their 800
customers, including menus, PIN dialing, validated account codes, and others.
International Callback is also included in this category.

Generic Intelligent Peripheral

This application integrates open network standards enabling flexible
interactions between a user and the network.

Automated Call Routing

This application automates the process of forwarding a call to another
designated number.

SOLUTION PACKAGES

The following information describes the Company's four main solution
packages that it markets to its customers. These solution packages are comprised
of a combination of the Company's various application products and operate on
the Company's specific middleware platforms.

CUSTOMER CONNECT

Customer Connect is an advanced call center solution package specifically
designed to be used in an integrated call center environment. It is used to set
up and manage telephone and web-based sales, marketing, and services
applications. The Company's Customer Connect solution provides automated call
processing and customer service capabilities for large corporate virtual private
networks and are marketed principally to the

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financial, insurance, airline, retail, and service bureau industries. The
Company's approach to providing solutions is best represented in the network
integration expertise that combines AgentStation, telephony/server, and network
ACD.

Customer Connect runs on BETEX-ESP and provides functionality that allows
for the building of customized applications; the ability to handle complex
databases, multiple call lists, skill-based routing and call events; and
computer-telephony integration.

Customer Connect unifies the three major components of call center
software: the voice processing applications; the switch interface; and the user
applications at attendant workstations. Some of the many benefits provided by
the Company's Customer Connect solution include reduced training costs,
streamlined maintenance activities, system-wide performance tracking, system
expandability, customized alarms, fault tolerance features, efficient and
intelligent transfer of calls from automated voice response applicants to
attendants, and more "self-serve" features for callers freeing up human and
system resources.

EASYCALL

The EasyCall solution package toolkit is targeted to wireline and wireless
providers worldwide for the deployment of calling card, prepaid calling card,
and other prepaid applications. EasyCall facilitates application development
with discrete service independent building blocks ("SIBs") for standard calling
card functions, as well as enhanced options such as message delivery, calling
restrictions, and accounting codes.

WIRELESS SOLUTIONS

Wireless Solutions offer wireless providers a solution package of
applications that help increase airtime through service subscription and a
greater number of completed calls. Service providers derive benefits from
wireless applications that include increased revenue per subscriber by offering
new features, competitive differentiation, limiting fraud, and customer
retention by offering enhanced services that customers want.

ATLAS -- PERSONAL COMMUNICATIONS AGENT

The Atlas solution enables service providers to offer a service to highly
mobile subscribers which will enable them to consolidate their overall
communications needs. Functionality includes voice mail and fax message send and
retrieval, call routing, call screening, and conference calling. Atlas permits
subscribers to activate and deactivate functions so that they control their own
service selections. Atlas' multimedia interface combines voice recognition,
touch tone access, an Internet-based graphical user interface, and fax tone
detection into a product that interfaces with callers and subscribers. Atlas is
a customizable solution package that enables service providers to bundle
applications based on their market requirements which provides additional
sources of revenue through service subscription and increased airtime.

MARKETS

The market for the Company's products has grown due to worldwide changes in
the telecommunications industry. These changes include legislative reforms,
mergers, acquisitions, alliances, and a convergence of previously segmented
technologies.

The global markets for the Company include: private and public
telecommunications operators, RBOCs, and wireless and wireline carriers; large
corporate virtual private networks (with an emphasis on the financial,
insurance, retail, transportation, and service bureau industries); and
government, quasi-governmental agencies, and business corporations (primarily
software and technology companies).

It is the Company's opinion that the convergence of technologies such as
the Internet, computers, cable, and telephony will produce positive conditions
for expanded deployment of enhanced services and call centers.

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Telephone companies typically need large capacity call processing systems
that adhere to stringent engineering requirements for telephone company central
office switching equipment. UniPort, BETEX-ESP, and the ESP have been designed
to meet these requirements. This market typically involves long sales cycles.
The Company also markets its products through companies with which it has
partner relationships. See "Sales", "Customers", "Backlog", and "Partner
Relationships.".

The U.S. Market

The Telecommunications Act of 1996 has changed the landscape of the
communications industry in the United States. This legislation allows vendors in
different industries (e.g. cable) to compete outside of their traditional
service offerings thereby increasing competition. With service providers looking
for ways to become more competitive, the capability to add new services and
enhancements for their customers has become a priority. The Company believes
that its products enable service providers to offer enhanced telecommunications
services.

Another factor affecting the U.S. market is the development of the Personal
Communication Services ("PCS") network infrastructure. The projected growth of
the PCS market and the associated demand for additional technologies is expected
to create demand in the wireless market for enhanced telecommunication services.

The Company plans to begin offering its Customer Connect products to the
call center marketplace in the United States. The advanced call center solutions
that have had success in the Company's European, Asia/Pacific, and other
international markets are suitable for introduction into the U.S. market.
According to industry sources, the installation of call centers in the U.S. is
growing rapidly especially in the financial services, telecom, technical
support, and retail banking sectors. The Company believes that many companies
view call centers as a strategic business asset, as opposed to a back office
function, replacing the face-to-face customer service that many companies can no
longer afford to offer. The Company considers its expertise and experience in
developing and delivering custom solutions for advanced call centers
internationally as a major benefit for introducing this solution in the United
States.

The International Markets

With the acquisition of Vicorp, the Company expanded its market to a
worldwide reach. As in the U.S. market, changes in national legislation,
mergers, acquisitions, alliances, and technology convergence have created new
companies that are offering enhanced communications services to their corporate
and consumer markets in order to differentiate themselves from their
competition.

The deregulation that is underway or proposed in many countries will have
an impact on the Company's success in marketing its products in these countries.
While some countries have adopted a more liberal approach that is opening up
markets to several telecom providers, other countries are proceeding forward at
a slower pace.

The Company's current international product offerings primarily consist of
middleware and applications for the telecommunications industry, advanced call
center applications, voice response systems, and videotext. Growth trends for
the Company are projected to be in wireline and wireless applications and
advanced call center applications. See "Partner Relationships" and "Sales".

European Region

The European Union has targeted January 1, 1998 as the date that member
countries will open their markets to competition. In advance of that target
date, some countries have already moved towards deregulation including the
United Kingdom, Finland, and Sweden. Other countries moving in the direction of
more liberal deregulation, albeit at a slightly slower pace, include Germany and
Denmark. In addition, the Netherlands, France, Switzerland, Spain, and Italy are
expected to permit varying levels of competition prior to the 1998 target date.
Countries that have not shown a strong commitment to introducing deregulation

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include Belgium, Portugal, Greece, Ireland, and Austria. Currently, the Company
is focusing its marketing efforts toward all Western European countries.

Asia/Pacific Region

In the Asia/Pacific region deregulation is being introduced to varying
degrees. Some countries within the Asia/Pacific region have restructured their
state-owned monopolies and invited competitors into their markets. Developing
countries in the process of building out their telecommunications
infrastructures have found that one of the primary factors for success is
capital investment. These infrastructure investments often come from outside
interests, including many Western companies with expertise and experience in
setting up Asia/Pacific telecom companies.

Latin America Region

In Latin America, the Company is primarily marketing in Brazil, Chile, and
Argentina. These countries are in various stages of deregulation and are moving
towards privatization.

COMPETITION

The worldwide telecommunications industry is highly competitive. The
Company believes that the features and functionalities of its products coupled
with its distribution capability, system reliability, service, support, and
pricing, position the Company to compete in the telecommunications industry
worldwide. In addition, the Company is committed to ongoing research and
development ("R&D") efforts and is dedicated to developing new products and
strengthening existing products. The Company views its extensive R&D efforts as
essential to maintaining a competitive position in the industry. See "Research
and New Product Development".

One of the most important competitive advantages for the Company is its
multi-application platform. It is the Company's view that the majority of
service providers purchasing enhanced services now consider it a necessity to
have the ability to run multiple applications on a single platform. If a service
provider introduces an enhanced service that does not deliver the expected
subscriber acceptance, it has the capability to add-on or replace the service
with a different application which can run on the same installed platform. A
multi-application platform diffuses the risk associated with the investment
required to run enhanced services. In addition, the Company's multi-application
platform enables a layered, open architecture design to support the most widely
used hardware solutions (including media servers, switches, voice response
units, and network standards).

The Company's custom development expertise is demonstrated in the Company's
advanced call center solutions that have primarily been sold in the European
market. This ability to provide customized solutions distinguishes the Company
from many of its competitors who are not delivering custom solutions.

In the United States, the manufacturing prohibition that precluded the
RBOCs from manufacturing hardware and software that provide voice processing
services has been lifted. This allows the RBOCs to compete against the Company
for these products. It is the Company's view that the RBOCs will focus their
priorities on protecting their existing customers and markets, moving into their
competitors' markets, and introducing new services. The Company believes that in
order to introduce new services competitively, the RBOCs will contract with
companies, such as Precision Systems, so as to eliminate the large capital
investment, expertise, and time necessary to develop these products. However,
the Company could potentially be competing with the RBOCs for provision of these
types of services.

Internationally, it is the Company's view that the deregulation underway or
proposed in many countries will continue to increase the opportunities for
expansion of markets for the Company's products. The acquisition of Vicorp was a
major factor in establishing an international presence for the Company as Vicorp
is a European-based company that has an existing customer base and strong
partner relationships. See "Markets" and "Sales".

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The Company expects to continue to face substantial competition from
existing and new competitors including other companies with considerably greater
financial, technical, marketing and sales resources. The Company also
anticipates that a number of its competitors will be introducing new or enhanced
products during the next several years. See "Competitors".

Competitors

The Company believes its primary worldwide competition to be Access Line,
Brite Voice Systems, Boston Technology, Centigram, Comverse Technology, Digital
Equipment Corporation, Early Cloud, Ericsson, Genesys, IBM, IMA, Glenayre,
Intellivoice, Intervoice, Nortel, Octel, Open Development Corporation,
Periphonics, Priority Call Management, Rockwell, Siemens, Stratus, Tecnomen,
Telsys, Unisys, and Wildfire. There are also business opportunities that the
Company pursues in partnership with some of these same companies, either
directly or through channel sales. See "Sales".

SALES

The Company principally markets to the telecommunications and call center
industries through direct sales and through business partners, including
international telecommunications and computer equipment providers. The Company
currently utilizes a direct sales force of approximately 20 sales and technical
sales support professionals, each of whom has technical expertise to explain the
operating and architectural advantages of the Company's products. In addition,
the Company has signed Original Equipment Manufacturers ("OEM") agreements,
joint marketing, and teaming arrangements with leading telecommunications
equipment manufacturers, including Tandem, Motorola, AG Communication Systems,
and Hewlett-Packard. Basic terms of these agreements include a one-to-three year
non-exclusive arrangement whereby the Company licenses its software for
integration into these companies' telecommunications products. In addition, such
agreements may require joint sales and marketing efforts and an open exchange of
information regarding potential customers and technology developments.

CUSTOMER SUPPORT

The Company services and supports its customers through customer service
centers ("CSCs") that monitor customer systems and provide first-level telephone
support for customer-deployed systems. The CSCs also have service engineering
and field engineering resources that can be dispatched for additional levels of
in-field support. A configuration management group provides periodic software
releases and updates. Additionally, the Company provides customer and employee
training, as well as documentation for all installed systems.

The Company's products are generally covered by three-month to one-year
warranties. Such warranties include parts and labor and support for software and
hardware components supplied by the Company to its customers. Warranty service
is provided at the customer's site or from one of the Company's service
locations. Generally, the Company recovers such costs through post-installation
customer support agreements. See "Customers".

CUSTOMERS

During fiscal 1996, MCI and HSN represented approximately 50 percent of the
Company's revenue. Historically, the Company primarily sold customized ESP
products and provided support services to MCI and HSN. During the year ended
August 31, 1996, revenue generated by ESP product sales to MCI was $10,339,053,
as compared to $9,722,768 and $2,925,160, respectively, for the years ended
August 31, 1995 and 1994. Service and support revenue from MCI and HSN was
$3,041,006 for the year ended August 31, 1996, as compared to $5,703,090 and
$4,587,908, respectively, for the years ended August 31, 1995 and 1994. The
Company continues to market to MCI and expects to generate revenue from this
source in fiscal 1997. However, there is no assurance that any such negotiation
will result in an order from MCI. The Company does expect to continue providing
MCI with service and support for their ESP products during fiscal 1997. The
Company will continue to provide HSN with service and support services during
fiscal 1997 (approximately

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$480,000); however, management does not anticipate that any additional ESP
product sales will be generated by HSN during fiscal 1997.

UniPort sales represented approximately 8 percent of the Company's revenue
in fiscal 1996. Customers include large multinational telecommunication service
and equipment providers, both domestic and international. The Company expects
additional revenue from the sale of UniPort products during fiscal 1997.

BETEX sales represented approximately 42 percent of the Company's revenue
in fiscal 1996. Customers include large multinational telecommunication service
and equipment providers, both domestic and international.

Because the Vicorp acquisition was accounted for as a purchase, the
Company's consolidated statements of operations include the operations of Vicorp
from the acquisition date of April 16, 1996 through August 31, 1996. The Company
expects the revenue generated from the sale of BETEX products to increase during
fiscal 1997, both in gross terms and as a percentage of total revenue for the
Company.

BACKLOG

The Company's backlog, including service and support agreements, at August
31, 1996, was approximately $11,000,000, compared with approximately $4,000,000
at August 31, 1995. Such amounts include all purchase orders and signed
contracts with scheduled shipments and deliverables.

MANUFACTURING PRODUCT AUDIT

The Company's manufacturing product audit operations consist of integrated
testing and quality assurance. In order to achieve a high standard of quality,
the Company maintains complete control of integrated quality assurance testing.
Sub-assemblies, supplied by local vendors, are frequently tested.

The Company strives to use standard parts and equipment for many of its
products that are readily available through multiple external sources.
Proprietary processing boards used in the ESP are manufactured by several
external vendors to the Company's specified quality control standards. To date,
the Company has been able to obtain adequate supplies of essential components in
a timely manner.

Approximately 20,000 square feet of space at the Company's 50,000 square
foot headquarters is dedicated to system testing, quality control, inventory
storage, and other assembly activities.

PARTNER RELATIONSHIPS

The Company has established worldwide "partner" relationships that expand
its ability to market software products. These partners package the Company's
software with their telecommunication hardware to market comprehensive solutions
to telecom carriers.

RESEARCH AND NEW PRODUCT DEVELOPMENT

As a result of the Vicorp acquisition, the Company has consolidated its
research and new product development efforts into three main areas:

- The Advanced Technologies Group is responsible for identifying and
developing emerging technologies.
- The Systems Level Product Development Group is responsible for product
enhancements that will generate revenue over the 12 to 18 month life cycle
of each product. Each release represents a continuum of product updates
and improvements designed to extend and enhance the comprehensive life of
the product.
- The Application Products Group is responsible for long term development
of value-added tools and subsystems to enhance solutions packages such as
Customer Connect, EasyCall, and Atlas.

In addition to active research and development, the Company also integrates
external technology within its platforms. During the past year, the Company has
integrated new switches, processors, and communications equipment.

10
<PAGE> 13

Part of the Company's research and development activities also include
ongoing efforts to keep abreast of technical developments in the industry. This
is a crucial factor in keeping the Company in step with current and emerging
trends as customers require the integration of solutions and network standard
technology. During the fiscal years ended August 31, 1996, 1995, and 1994, the
company spent approximately $5.2 million, $3.2 million, and $3.9 million,
respectively, on research and development activities.

PRODUCT PROTECTION

The Company relies on a combination of trade secret and copyright laws,
patents, licenses, nondisclosure agreements, and technical measures to protect
its rights in its products. However, there can be no assurance that these
measures will fully protect the Company from the wrongful disclosure or
misappropriation of its proprietary information.

TECHNOLOGY LICENSES

The Company licenses the design for certain components used in BETEX-ESP,
UniPort, and the ESP from third parties. Standard operating system software
utilized in the Company's products is licensed from the manufacturer of the
subsystem. The Company, in turn, assigns or sub-licenses the rights granted by
these third parties to the Company's customers as part of the software license
that accompanies the sale of the product.

EMPLOYEES

As of October 30, 1996, the Company employed 275 people on a full-time
basis and 20 people as independent contractors. The Company believes that its
future growth and success are dependent, in large part, upon its ability to
continue to attract and retain highly qualified personnel.

The Company believes that it offers attractive compensation packages,
including competitive salaries, bonus programs, and health benefits. There has
never been a work stoppage; employee relations are considered to be excellent.
None of the Company's employees is represented by a labor union.

ITEM 2 -- PROPERTIES

The Company's worldwide headquarters consists of approximately 50,000
square feet in St. Petersburg, Florida (USA), that includes administrative,
research, engineering, assembling, and marketing functions. This property was
acquired in November 1990. In addition, the Company leases approximately 5,000
square feet in Campbell, California (for sales, research, and engineering),
approximately 20,000 square feet in Boston, Massachusetts (for sales, research,
engineering, and marketing), approximately 15,000 square feet in Ratingen,
Germany (for sales, research, and engineering), approximately 20,000 square feet
in Utrecht, The Netherlands (for sales, marketing, and administrative), and
approximately 10,000 square feet in Las Vegas, Nevada (for sales, research,
engineering, marketing, and administrative).

In addition, the Company maintains other offices in Dallas, Texas; Oxnard,
California; St. Cloud, Minnesota; Atlanta, Georgia; Brussels, Belgium;
Copenhagen, Denmark; Stockholm, Sweden; Helsinki, Finland; Windsor, United
Kingdom; Paris, France; Madrid, Spain; Milan, Italy; and Singapore.

ITEM 3 -- LEGAL PROCEEDINGS

The Company is subject to certain legal proceedings in the ordinary course
of business. The discussion below summarizes the most material of such
proceedings. In the opinion of management, these and other legal proceedings
will not have a material adverse effect on the operations or the financial
condition of the Company and, therefore, the Company did not accrue for losses
for any such actions as of August 31, 1996.

11
<PAGE> 14

a co-defendant as to Patent 5,469,500 only, and an additional claim of breach of
confidentiality was asserted by INTV against VIS. The Company notified Alta
Investissements, S.A. ("Alta") of the joinder of VIS for purposes of
indemnification of PSI under the terms of the Share Exchange Agreement of April
16, 1996 between the Company and Alta relating to the purchase of a controlling
interest in Vicorp. The parties to the suit are currently in discovery and the
matter is set for trial in September, 1997. The Company has defenses and will
vigorously defend.

Daniel Schultz v. Precision Systems, Inc. et al. On October 8, 1996,
Daniel Schultz, a holder of Vicorp shares and options, filed a three-count
complaint against the Company; Russell I. Pillar; John Loewenberg; Alta; Didier
Primat; Primwest Holding, N.V.; and Ian Dalziel, in a civil action in the United
States District Court for the Middle District of Florida, Tampa Division. In
count one, the plaintiff alleges that the Company and Messrs. Pillar and
Loewenberg fraudulently induced him to assist the Company in its acquisition of
Vicorp by representing to him that he would receive an executive position with
Vicorp if the acquisition was successful. In counts two and three, the plaintiff
alleges that all the defendants intentionally interfered with his prospective
economic advantage, and conspired to do so, by impairing his ability to exercise
his Vicorp options and his ability to convert his Vicorp shares into shares of
the stock of the Company. The complaint alleges that the plaintiff has suffered
damages in excess of $2 million, and requests compensatory and punitive damages.
A motion, filed by the Company and Mr. Pillar, to dismiss the action on the
grounds that the United States District Court lacks jurisdiction over the
subject matter, is now pending, and Mr. Schultz's counsel has filed a notice of
non-opposition to the motion. The Company has defenses and will vigorously
defend.

Daniel Gilbert Schultz v. Vicorp et al. This action was initiated in the
Court of First Instance, Curacao, Netherlands Antilles ("Court"), on March 29,
1996. The plaintiff filed a petition denominated a "complaint in summary
process" against Vicorp and Alta. The Company is not a party to this proceeding.
In this action, the plaintiff alleged that Vicorp had denied him access to the
books and records of Vicorp, and that Alta (as the then controlling shareholder
in Vicorp) had both refused to provide him access to Vicorp's records and
refused to give him information on Alta's negotiations with third parties for
the sale of its shares of Vicorp stock. The plaintiff further alleged that these
actions impaired his ability to exercise certain put and call options that he
held with respect to certain shares of the stock of Vicorp. The plaintiff sought
various court orders requiring Alta and Vicorp to provide certain financial data
to him, to record in the Vicorp share register the option he held, and to accept
and pay for certain of the Plaintiff's shares that were the subject of a put
option. The plaintiff also sought an order prohibiting Alta from reducing its
ownership interest in Vicorp. On May 17, 1996, the Court dismissed all of the
plaintiff's claims. The plaintiff appealed to the Court of Appeals of the
Netherlands Antilles and Aruba on June 3, 1996. The appeal has been fully
briefed and argued, and judgment is expected in early 1997. The Company has
defenses and will vigorously defend.

Daniel Gilbert Schultz v. Alta Investissements, S.A. et al. This action
was initiated in the Court of First Instance, Curacao, Netherlands Antilles on
April 23, 1996. The plaintiff filed a petition denominated a petition "on an
abbreviated term" against Alta, the Company, and Vicorp. In his petition, the
plaintiff sought a court order nullifying both the transfer by Alta to the
Company of Alta's shares of Vicorp stock and the transfer by the Company to Alta
of certain shares of the Company's stock, both of which transfers were carried
out pursuant to the Share Exchange Agreement between the Company and Alta dated
April 13, 1996. The plaintiff alleges that insufficient notice was given to him
of a Vicorp shareholders' meeting at which a resolution approving the share
exchange was adopted, and that consequently the defendants breached a duty of
good faith towards him. The plaintiff seeks court orders annulling the two share
transfers, and prohibiting Vicorp from acting on any instructions received from
the Company. Subsequently, on August 19, 1996, Alta and Vicorp filed a
counterclaim against the plaintiff, seeking damages incurred by each of them as
a result of having to resist the plaintiff's efforts in Curacao to obtain
nullification of the share transfer; Alta and Vicorp claim that the plaintiff's
actions constitute violations of various agreements between him and them, as
well as violations of the principles of good faith. The action has been fully
briefed and argued and is awaiting decision by the Court. The Company has
defenses and will vigorously defend.

12
<PAGE> 15

S.A. and Vicorp Asia Holding arising out of his employment relationships with
companies in the Vicorp Group. The Company is not a party to this proceeding.
The Plaintiff has alleged that the two defendants are liable to him, under
provisions of French law, for damages for dismissal without real and serious
cause, for damages for abusive indemnity, for dismissal indemnities, and for a
paid vacation indemnity. A hearing is scheduled for March of 1997. Under the
terms of the Share Exchange Agreement between the Company and Alta, Alta has
agreed to indemnify the Company and Vicorp against any damages or liability
imposed against Vicorp in connection with this action.

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

None.

13
<PAGE> 16

PART II

ITEM 5 -- MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS

<TABLE>
<CAPTION>
1996 HIGH LOW
----------------------------------------------------------------- ------- -------
<S> <C> <C>
First Quarter.................................................... $13.840 $ 9.840
Second Quarter................................................... $13.000 $ 9.630
Third Quarter.................................................... $14.960 $11.130
Fourth Quarter................................................... $11.540 $ 6.630
</TABLE>

<TABLE>
<CAPTION>
1995 HIGH LOW
----------------------------------------------------------------- ------- -------
<S> <C> <C>
First Quarter.................................................... $ 3.125 $ 2.000
Second Quarter................................................... $ 3.750 $ 2.000
Third Quarter.................................................... $ 5.625 $ 2.750
Fourth Quarter................................................... $ 8.625 $ 4.500
</TABLE>

The bid prices reported for these periods reflect inter-dealer prices
without retail markup, markdown, or commissions, and may not represent actual
transactions. The Company's closing trading price was $5.38 on December 2, 1996.
The total number of shareholders of record as of September 30, 1996, was
approximately 5,950.

The Company has paid no cash dividends on its Common Stock to date. Any
payments of future dividends and the amounts thereof will be dependent upon the
Company's earnings, financial requirements, and other factors deemed relevant by
the Board of Directors.

The terms of the Company's Series A Preferred Stock precludes the
declaration of dividends on Common Stock for so long as dividends (and any
interest accrued on unpaid dividends) with respect to such preferred stock
remain unpaid.

On July 1, 1996, RMS Limited Partnership, the sole owner of the Company's
Class B Common Stock, elected to convert all of its Class B Common Stock into an
equal number of shares of the Company's Common Stock. The Class B Common Stock
converted was retired and is not subject to reissue.

ITEM 6 -- SELECTED FINANCIAL DATA

The selected historical financial data for all fiscal years presented has
been derived from the audited financial statements of the Company. This
historical data may not necessarily reflect the results of operations or
financial position had the Company been a separate stand-alone company for the
year ended August 31,1992.

The Company's historical revenue and net loss activity has shown
significant fluctuations due primarily to the Company's reliance on a limited
customer base and to the large amount of funds expended on research and
development activities.

14
<PAGE> 17

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statements of operations:
Revenues................. $ 26,702,827 $ 21,521,733 $ 8,890,595 $ 18,352,502 $ 18,645,081
Loss from continuing
operations............ $(34,693,961) $ (2,515,789) $(17,656,211) $ (6,012,189) $ (2,697,517)
Net loss................. $(34,693,961) $ (2,648,344) $(18,640,263) $ (6,231,906) $ (2,697,517)
Loss from continuing
operations per
share................. $ (2.36) $ (.23) $ (1.98) $ (.68) $ (.31)
Net loss per share....... $ (2.36) $ (.24) $ (2.09) $ (.71) $ (.31)
Balance sheet data at year
end:
Net working capital...... $ 3,773,780 $ 10,074,716 $ 3,579,444 $ 14,827,434 $ 20,779,413
Total assets............. $ 47,557,346 $ 27,372,925 $ 30,410,378 $ 32,282,062 $ 38,146,099
Long-term debt........... $ 280,727 $ -- $ -- $ -- $ --
Stockholders' equity..... $ 27,848,808 $ 22,962,099 $ 19,439,897 $ 28,976,438 $ 35,589,678
</TABLE>

During the fourth quarter of 1996, the Company recorded certain revenue and
cost adjustments to reflect a change in estimates for certain amounts recorded
during the Company's May 31, 1996 Form 10-Q relating to Vicorp's operations. The
Company's revenue and costs were reduced by approximately $3,700,000 with no
material affect on the Company's recorded net loss.

The net loss of $34,693,961 for the year ended August 31, 1996, includes
large write-offs for purchased in-process technology relating to the Vicorp
acquisition ($19,500,000), goodwill write-down ($3,829,000), and certain
restructuring changes ($1,093,000).

The net loss for fiscal 1995 decreased dramatically when compared to fiscal
1994 due to higher revenue streams from both the UniPort and the ESP products
and to successful efforts by the Company to manage and control costs. The net
loss of $18,640,263 for the year ended August 31, 1994, includes the effects of
the Company's changing its estimated average useful lives used to compute
depreciation for its computer equipment from five to six years to three years.
The effect of this change in estimate was to increase the Company's net loss by
approximately $4,000,000, or $.45 per share. The change did not affect cash
flow.

Net loss per share for the years ended August 31, 1996, 1995 and 1994, is
based upon the weighted average common and common equivalent shares outstanding.
Loss per share for the year ended August 31, 1992, has been computed based upon
8,779,471 shares of Common Stock outstanding; this represents the number of
shares issued on the Distribution Date (as defined below) outstanding as of
August 31, 1992, the date the Company was spun-off from HSN. The net loss per
share calculation does not include stock options, convertible securities and
warrants, which are Common Stock equivalents, as their inclusion would be anti-
dilutive.

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

In July 1987, HSN purchased and retired 100 percent of the issued and
outstanding stock of Precision Software, Inc., which was originally purchased by
HSN for the technology it created to support voice response units developed for
use in the operations of Home Shopping Club, Inc., a wholly-owned subsidiary of
HSN. The Company's name was subsequently changed to Precision Systems, Inc. This
original product line was the predecessor to the ESP. In June 1990, the Company
was awarded a contract for approximately $15,600,000 by MCI to adapt the ESP for
use in the carrier's long-distance network. The contract was subsequently
amended to increase the contract price to approximately $34,000,000.

On July 31, 1992 (the "Distribution Date"), HSN distributed 100 percent of
the stock of Precision Systems, Inc., to its existing shareholders on a one for
ten pro-rata basis.

During fiscal 1996, the Company's business strategy included focusing on
core products and technologies, developing strategic business relationships with
several international telecommunications and computer

15
<PAGE> 18

equipment providers, improving marketing and sales efforts, and realigning cost
structures to improve cash flow. The Company also pursued opportunities for
additional growth through acquisitions and/or strategic investments. The Company
acquired Vicorp during fiscal 1996 and, since the Vicorp acquisition was
accounted for as a purchase, the Company's statements of operations include the
operations of Vicorp since the acquisition date of April 16, 1996. Therefore,
the Company's past financial performance should not be considered a reliable
indication of future performance. See also the "Subsequent Event" discussion
below regarding the BFD Productions acquisition.

A number of uncertainties exist that could have an impact on the Company's
future operating results, and financial condition including:

- Technological changes and the requirement for the Company to expend funds
to develop new products

- Market changes and the ability of the Company to adapt its products to
such changes

- Intense competition

- Ability of the Company to properly estimate costs under fixed price
contracts

- Increased risk to patent infringement in the Company's industry

- Ability to retain its larger customers, including MCI

- Availability of certain hardware and software components which are
incorporated with the Company's products and are purchased from a limited
number of vendors

- Ability of the Company to hire and retain qualified personnel

- Legislative changes affecting the Company's markets, including the
Telecommunications Act of 1996

- Given the Company's acquisition of Vicorp and its large presence in
international markets, regulatory, monetary and inflationary factors can
negatively impact the Company's operations in the future.

Many of such uncertainties are outside the Company's control and could
postpone, delay, or eliminate potential sales opportunities. These
uncertainties, therefore, can affect the Company's ability to sell, deliver, and
install its products in a consistent manner. Consequently, the Company's past
financial performance should not be considered a reliable indication of future
performance and investors should not use historical trends to anticipate results
or trends in future periods. See "Financial Position, Liquidity and Capital
Resources."

FISCAL YEARS ENDED AUGUST 31, 1996, 1995, AND 1994

Contract Revenues and Costs

Contract revenues were $13,724,228 in fiscal 1996 compared to $15,337,054
in fiscal 1995 and $2,925,160 in fiscal 1994. Correspondingly, contract costs
were $6,023,989 in fiscal 1996 compared to $7,824,646 in fiscal 1995, and
$3,092,445 in fiscal 1994. The decrease in contract revenue during fiscal 1996
versus 1995 is primarily due to lower ESP product related sales to MCI and to
lower UniPort product sales in total. The decrease in ESP product sales for
fiscal 1996 was due to a sale to MCI in fiscal 1995 that did not recur in fiscal
1996. The decrease in UniPort product related contract revenue ($2,122,874 for
fiscal 1996 versus $5,614,286 for fiscal 1995) was due to lower customer
deliveries for the product. Contract revenue and costs for fiscal 1994 related
primarily to a contract with MCI (the "MCI Contract"). Revenues under this
contract for the year ended August 31, 1994, were $2,925,160. Costs under this
contract for the same period were $3,092,445.

Contract revenues associated with Vicorp's BETEX products were
approximately $1,839,859 for the period from the acquisition date to August 31,
1996. Since the Vicorp acquisition was accounted for as a purchase, the
Company's consolidated statements of operations include the operations of Vicorp
since the acquisition date. The Company expects the revenue generated from the
sale of BETEX products to increase during 1997.

16
<PAGE> 19

Revenues from MCI represented 44 percent, 60 percent, and 64 percent of the
Company's fiscal 1996, 1995, and 1994 revenues, respectively. See "Customers."

Service and Support

Revenues from service and support were $9,220,291, $5,741,646, and
$4,587,908 in fiscal 1996, 1995, and 1994, respectively. During fiscal 1994, the
Company entered into a joint development agreement with MCI relating to the ESP.
This agreement generated $2,863,000 and $1,352,000 of service and support
revenue for fiscal 1995 and 1994, respectively. In addition, beginning in fiscal
1993, the Company began earning maintenance fees on the ESP products delivered
to MCI. For the years ended August 31, 1996, 1995 and 1994, MCI maintenance fees
were approximately $1,249,000, $930,000 and $824,000, respectively. Service and
support revenue relating to this maintenance increased during fiscal 1996 and
1995 as additional ESP nodes were delivered to MCI and these nodes required
maintenance services. Service and support provided to HSN decreased to
$1,448,088 in fiscal 1996 compared to $1,909,354 for fiscal 1995. HSN's service
and support contract was renegotiated in fiscal 1995, which resulted in a
reduction of both the level of maintenance services and the revenue earned.
UniPort service and support revenue for each of fiscal 1996 and fiscal 1995 was
less than $100,000. Such service and support revenue for UniPort customers is
expected to increase during fiscal 1997 as additional products, which will
require maintenance support, are delivered.

Service and support revenue for Vicorp's BETEX products was $6,523,638 from
the acquisition date to August 31, 1996. Vicorp's service and support revenue
includes maintenance and custom software development services provided to its
customers.

License Fees

Revenues from license fees were $3,758,308, $436,800, and $914,510 in
fiscal 1996, 1995 and 1994, respectively. Under the terms of the MCI Contract,
the Company charged MCI a software license fee for use of its proprietary
software. During fiscal 1996, 1995 and 1994, the Company recognized license fee
revenues from this source of $0, $316,800 and $782,510, respectively. The
Company does not anticipate generating future license fee revenue for its ESP
equipment. License fee for fiscal 1996 relating to its UniPort product line were
$921,911 and $2,836,397 for the BETEX product line. The Company anticipates
generating future license fee revenue for its BETEX and UniPort products,
although no assurance can be given that such future revenue will be generated.

Other Income

Other income represents miscellaneous hardware, software, and service
activity charged to customers.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased to $23,849,385, in
fiscal 1996 from $9,034,490 in fiscal 1995 and $12,304,191 in fiscal 1994. As a
percentage of revenues, these expenses were 89 percent, 61 percent, and 222
percent in fiscal 1996, 1995, and 1994, respectively.

During the year ended August 31, 1996, selling, general, and administrative
expenses increased for several reasons:

- The Company increased its sales and marketing force in order to generate
additional revenue opportunities.

- The Company increased its advertising and trade show expenditures by
approximately $700,000 in order to increase market awareness of the
Company's products and to announce the Vicorp acquisition.

- The Company increased its bad debt reserve by approximately $1,000,000
during the year ended August 31, 1996, relating to uncollectible
receivables.

- Selling, general and administrative expense in connection with the
acquisition of Vicorp was $9,297,164 from the acquisition date to August
31, 1996.

17
<PAGE> 20

- As of August 31, 1996, the Company accrued $1,093,341 in restructuring
charges (the "Restructuring"), which relate primarily to termination
benefits, including severance pay. The total number of employees
terminated was approximately 55.

During fiscal 1995 and 1994, the Company's selling, general and
administrative expenses were impacted by the following:

- During fiscal 1995, the Company continued managing and controlling costs
in order to improve the alignment of cost outlays against potential
revenue opportunities.

- During fiscal 1995, the Company renegotiated all major maintenance
agreements for its development and test facility, thereby generating
approximately $200,000 in savings.

- During fiscal 1995, the Company improved its controls and accountability
for use of third party professional vendors (legal, public relations,
management consultants, etc.), which generated approximately $450,000 in
savings.

- During fiscal 1994, the Company recorded a reserve for obsolescence on
its materials inventory. The effect of this reserve was to increase the
Company's selling, general, and administrative expenses by approximately
$890,000.

- During December 1993, Vernon Troupe, Chairman of the Board, and
Jacqueline Soechtig, President/Chief Executive Officer and Board member,
resigned from the Company. John D. Loewenberg was named Chairman of the
Board and Russell I. Pillar, a director, was named President and Chief
Executive Officer. In connection with her resignation, Ms. Soechtig and
the Company entered into a Settlement Agreement and Mutual General Release
which provides for, among other things, severance of $442,500, legal fees
of $25,000, accelerated vesting of 20,000 restricted shares of Common
Stock, accelerated vesting of options to purchase 110,000 shares of Common
Stock, and the transfer of a country club membership. Likewise, the
Company entered into a Settlement Agreement and Mutual General Release
with Mr. Troupe, the terms of which provide for severance of $200,000,
accelerated vesting of 10,000 restricted shares of Common Stock, and
accelerated vesting of options to purchase 75,000 shares of Common Stock.
The effect of these settlement agreements was to increase the Company's
selling, general, and administrative expenses by approximately $770,000
for fiscal 1994.

- During the first three quarters of fiscal 1994, the Company terminated
the employment of approximately 100 individuals. The effect of severance
charges associated with these terminations was to increase the Company's
selling, general, and administrative expenses by approximately $1,000,000.

Considering the impact of Vicorp operations, the Company expects that its
selling, general and administrative expenses will increase in the future.

Research, Engineering, and Development

Research, engineering, and development expenses increased to $5,249,377 in
fiscal 1996 from $3,172,185 in fiscal 1995, and $3,876,413 in fiscal 1994. As a
percentage of revenues, these expenses were 20 percent, 15 percent, and 44
percent in fiscal 1996, 1995, and 1994, respectively. The increase in research
engineering and development expenses in 1996 versus 1995 relates to further
development work associated with the Company's UniPort and BETEX products.
Resources will continue to be directed toward product improvements and
enhancements for future product releases of the Company's products. The Company
expects its research, engineering, and development costs for fiscal 1997 to be
higher than that expended in fiscal 1996.

The Company believes that it operates in a highly competitive market and,
in order to maintain a competitive position, that its existing products must be
continually improved and new products must be developed. See "Competition." The
amount and timing of future research, engineering, and development expenditures
will depend upon, among other factors, future new contract activity and the
Company's ability to fund these costs from future operating cash flow and bank
or other forms of financing. See "Financial Position, Liquidity, and Capital
Resources."

18
<PAGE> 21

Purchased Research and Development

Purchased research and development expense of $19,500,000 for the year
ended August 31, 1996, represents the purchase price allocation to in-process
research and development acquired through the Company's acquisition of Vicorp.

Goodwill Write-down

During fiscal 1996, the Company reevaluated the realizability of the
goodwill associated with its fiscal 1994 acquisition of The Renaissance Group
("TRG"). Based on a review of the expected future discounted cash flows of TRG,
the Company determined that a material impairment of the TRG associated goodwill
existed. Consequently, a $3,829,424 write-down of the goodwill balance was
recorded during fiscal 1996.

Depreciation and Amortization

Depreciation and amortization was $4,714,227 in fiscal 1996 compared to
$4,007,208 in fiscal 1995 and $7,458,928 in fiscal 1994. The increase in fiscal
1996 relates primarily to the amortization expense associated with recorded
goodwill from the Vicorp acquisition, which closed during the third quarter of
the year. During fiscal 1994, the Company changed its estimated average useful
lives used to compute depreciation for its computer equipment as the change
better aligns the allocation of equipment costs with its expected use and
results in useful lives more consistent with industry practice for this type of
equipment. The effect of this change was to increase the Company's depreciation
and amortization expenses by approximately $4,000,000 in fiscal 1994.

Investment Gain on Marketable Equity Securities

The Company's investment gain of $1,262,414 relates to its $7,296,034
purchase of marketable equity securities. Such securities were bought and sold
during fiscal 1996. The investment gains associated with these securities are
included in the Company's consolidated statements of operations.

Interest Income/Expense

For the year ended August 31, 1996, net interest income was $507,200
compared to $1,007 in fiscal 1995 and $185,171 in fiscal 1994. Net interest
income increased in fiscal 1996 due to the increase in the Company's interest
bearing cash balances.

Discontinued Operations

Effective April 30, 1995, certain assets, liabilities, and the business of
Interactive Services, Inc., were sold for approximately $1,000,000 in cash and
the assumption of certain liabilities. The gain on disposition of such activity
has been accounted for as a gain from sales of discontinued operations.

Income Tax Expense

The Company uses the asset and liability method to account for deferred
income taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities. Under FAS No. 109, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.

Litigation

The Company is subject to certain legal actions arising in the normal
course of business. After taking into consideration legal counsel's evaluation
of such actions, management is of the opinion that their final resolution will
not have any significant adverse effect upon the Company's business or its
consolidated financial statements. See "Legal Proceedings."

19
<PAGE> 22

Financial Position, Liquidity, and Capital Resources

At August 31, 1996, the Company had net working capital of $3,773,780
versus $10,074,716 at August 31, 1995. The decrease in net working capital is
primarily due to the cash required to fund the Company's net loss from
operations. The Company expects that with the acquisition of Vicorp and BFD, as
described below, its working capital requirements will increase significantly
over prior periods and that it will be able to fund its operating and investing
activities for fiscal 1997 through the use of its current working capital,
including the collection of existing accounts receivables, and the generation of
future revenues. In the event that such sources prove to be insufficient, the
Company may be required to seek additional debt or equity financing.

The Company's accounts and contracts receivable increased to $7,749,076 as
of August 31, 1996, from $5,566,832 as of August 31, 1995. The increase is
primarily associated with the Company's substantial increase in revenues for
fiscal 1996.

The Company's supplies and other current assets increased to $1,491,020 as
of August 31, 1996, from $1,164,511 as of August 31, 1995. The increase is
primarily due to the Vicorp acquisition.

The Company's costs and earnings in excess of billings on uncompleted
contracts increased to $3,232,534 as of August 31, 1996, from $0 as of August
31, 1995. The increase is primarily associated with certain of Vicorp's software
development contracts in process for its customers. Such amounts as of August
31, 1996, are expected to be fully billed by Vicorp by December 31, 1996.

The Company's current portion of long-term debt increased to $2,845,598 as
of August 31, 1996, from $0 as of August 31, 1995. The Company's long-term debt
increased to $280,727 as of August 31, 1996, from $0 as of August 31, 1995. The
increase is primarily due to certain debt assumed by the Company in connection
with the Vicorp acquisition.

The Company's accounts payable increased to $3,295,066 as of August 31,
1996, from $1,331,784 as of August 31, 1995. The increase is primarily due to
the Vicorp acquisition and the higher associated operating expenses.

The Company's accrued expenses increased to $3,511,764 as of August 31,
1996, from $526,394 as of August 31, 1995. The increase is primarily due to the
Vicorp acquisition.

The Company's accrued payroll and related expenses increased to $4,664,537
from $651,401 as of August 31, 1995, primarily due to the Vicorp acquisition and
to the $1,093,341 restructuring accrual relating to fiscal 1996's head count
reduction plan.

The Company's billings in excess of costs and earnings on uncompleted
contracts increased to $2,896,178 as of August 31, 1996, from $0 as of August
31, 1995. The increase is primarily associated with certain of Vicorp's software
development contracts in process for its customers.

The Company's deferred revenue balance increased to $2,114,896 as of August
31, 1996, from $1,801,475 (which includes the non-current amount of $471,895) as
of August 31, 1995. The Company's deferred revenue balance primarily represents
prepaid maintenance contracts for services to be provided to its customers. The
increase is primarily due to the Vicorp acquisition.

The Company's capital stock and additional paid-in capital accounts
increased by $39,194,580 during fiscal 1996 primarily due to the issuance of
Common Stock in connection with the Vicorp acquisition and to the receipt of
funds from the sale of 1,500,000 shares of Common Stock to Vulcan Ventures
Incorporated ("Vulcan") for $8,625,000. Additionally, the Company received
$927,866 during fiscal 1996 from the exercise of vested stock options.

The Company's accumulated preferred stock dividend balance increased to
$946,556 as of August 31, 1996, from $596,673 as of August 31, 1995. The
dividends associated with the Company's Series A, 6 percent, cumulative
convertible, preferred stock were accrued throughout fiscal 1995 with no cash
payments made.

20
<PAGE> 23

During fiscal 1996, cash used by operations was $7,112,438. The Company
funded this cash flow usage primarily through the proceeds generated through
issuance of Common Stock as discussed above.

During fiscal 1995, cash used by operations was $4,201,123. The Company
funded this cash flow usage primarily through the proceeds generated through
issuance of Common Stock.

During fiscal 1994, cash used by operations was $3,045,087. In addition,
the Company utilized $3,750,000 in cash when it purchased TRG during July 1994.
These cash flow usages were primarily funded through the issuance of $5,800,000
of Preferred Stock and to the draw-down of $5,000,000 on a line of credit with
HSN. The $5,000,000 line of credit with HSN was repaid during fiscal 1995.

During November 1995, Vulcan exercised warrants to purchase 500,000 shares
of the Company's Common Stock at $5.00 per share, 500,000 shares of Common Stock
at $6.00 per share, and 500,000 shares of Common Stock at $6.25 per share,
thereby generating additional capital to the Company of $8,625,000. Vulcan's
third tier warrants for the purchase of 500,000 shares originally were for Class
B Common Stock at $7.00 per share or, if an amendment to the Certificate of
Incorporation of the Company increasing the authorized number of shares of Class
B Common Stock had not been effected by the date of exercise, then the warrants
to purchase 500,000 of the Company's Common Stock were to be exercised at $6.25
per share.

During April 1995, Vulcan purchased 1,250,000 shares of the Company's
Common Stock, par value $.01, in exchange for $5,000,000 ($4.00 per share).
Vulcan also acquired warrants to purchase 500,000 shares of Common Stock at
$5.00 per share; 500,000 shares of Common Stock at $6.00 per share; and 500,000
shares of Class B Common Stock at $7.00 per share. The issuance of additional
shares of Class B Common Stock was subject to shareholder approval; if such
approval was not obtained, Vulcan had the ability to purchase Common Stock in
lieu of Class B Common Stock for $6.25 per share.

Management is actively involved in discussions with several potential
sources of capital investment. Although management feels that the Company will
be able to fund its operating and investing activities through fiscal 1997
through the use of its current working capital, including the collection of
existing accounts receivables and the generation of future revenues, additional
sources of capital are being investigated for future requirements. However,
there is no assurance that any such discussion will result in additional capital
sources for the Company.

The Company incurred approximately $1,995,353 in expenditures for capital
assets for the year ended August 31, 1996. Future levels of capital expenditures
will be dependent upon cash availability from operating activities and
additional sources of bank funding or other forms of financing which may or may
not be available to the Company upon acceptable terms and conditions. Management
expects that expenditures for fiscal 1997 will approximate the balance expended
for fiscal 1996.

As of August 31, 1996, the Company had net operating loss carryforwards of
approximately $33,000,000 for federal income tax purposes expiring through 2010
and $10,100,000 for foreign tax purposes expiring through 2011.

Subsequent Events

The Company acquired BFD Productions, Inc. ("BFD") in October 1996 for
approximately $1,500,000 in cash and approximately 275,000 shares of
newly-issued Common Stock for a total purchase price of approximately $3,200,000
in exchange for all of the capital stock of BFD. The acquisition will be
accounted for using the purchase method of accounting. BFD offers
fully-automated enhanced services on a service bureau basis to individuals and
corporations. BFD provides a wide range of Internet and telephony-based services
primarily to software and technology companies and government and
quasi-governmental agencies. The BFD offerings include a full range of
fully-automated Internet access and related World Wide Web services, 800/900
numbers, and fax abilities, all of which run on the Company's UniPort product
line. BFD has focused on selling fully-automated services to software and
technology companies. Its success in the fully-automated help and hint industry
is represented by a customer list that includes Sega of America, Sony Video
Games, Activision, Electronic Arts, Spectrum Holobyte, Virgin Interactive, and
more than 40 others.

21
<PAGE> 24

On September 30, 1996, the Company elected to change its year end from
August 31 to December 31. The change is effective January 1, 1997.

On October 25, 1996, Russell I. Pillar resigned as the Company's President
and Chief Executive Officer. On December 10, 1996 Mr. Pillar resigned from the
Company's Board of Directors.

New Accounting Pronouncements

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("FAS No. 121") effective for fiscal years beginning after December 15, 1995.
FAS No. 121 requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Management believes that the adoption of FAS No. 121 will not
have a material impact on the financial condition or the results of operations
of the Company.

In October 1995, FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123") effective for
transactions entered into after December 15, 1995. FAS No. 123 provides
alternatives for the methods used by entities to record compensation expense
associated with its stock-based compensation plans. Additionally, FAS 123
provides further guidance on the disclosure requirements relating to stock-based
compensation plans that are effective for fiscal years beginning after December
15, 1995. The adoption of FAS No. 123 has not had a material impact on the
financial condition or the results of operations of the Company.

Forward-looking Information

The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements that reflect management's current views with respect to future events
and the financial performance and condition of the Company. Such statements
involve risks and uncertainties, and there are certain important factors that
could cause actual results to differ materially from those anticipated. Some of
the important factors that could cause actual results to differ materially from
those anticipated include:

- Technological changes and the requirement for the Company to expend funds
to develop new products

- Market changes and the ability of the Company to adapt its products to
such changes

- Intense competition

- Ability of the Company to properly estimate costs under fixed price
contracts

- Increased risk to patent infringement in the Company's industry

- Ability to retain its larger customers, including MCI

- Availability of certain hardware and software components which are
incorporated with the Company's products and are purchased from a limited
number of vendors

- Ability of the Company to hire and retain qualified personnel

- Legislative changes affecting the Company's markets, including the
Telecommunications Act of 1996

Many of such uncertainties are outside the Company's control and could
postpone, delay, or eliminate potential sales opportunities and, therefore,
affect the Company's operations. Due to such uncertainties and risk, readers are
cautioned not to place undue reliance on such forward-looking statements, which
speak only as of the date hereof.

22
<PAGE> 25

ITEM 8 -- FINANCIAL STATEMENTS

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... 24
Independent Auditors' Report.......................................................... 25
Consolidated Balance Sheets........................................................... 26
Consolidated Statements of Operations................................................. 27
Consolidated Statements of Stockholders' Equity....................................... 28
Consolidated Statements of Cash Flows................................................. 29
Notes to Consolidated Financial Statements............................................ 30
</TABLE>

23
<PAGE> 26

INDEPENDENT AUDITORS' REPORT

Board of Directors
Precision Systems, Inc.

We have audited the accompanying consolidated balance sheets of Precision
Systems, Inc. and subsidiaries (the "Company") as of August 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended August 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the consolidated
financial statements of Vicorp N.V. (a consolidated subsidiary), which
statements reflect total assets constituting 41 percent of consolidated total
assets as of August 31, 1996, and total revenues constituting 42 percent of
consolidated total revenues for the year ended August 31, 1996. The financial
statements of Vicorp N.V. were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for such company, is based solely on the report of such other auditors.

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

In our opinion, based on our audits and the report of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company at August 31, 1996 and 1995, and the results
of its operations and its cash flows for each of the three years in the period
ended August 31, 1996, in conformity with generally accepted accounting
principles.

Tampa, Florida
October 31, 1996

24
<PAGE> 27

INDEPENDENT AUDITORS REPORT

To the Shareholder and Directors of
Vicorp Group

1. We have audited the accompanying Vicorp Group 1996 consolidated reporting
package comprising the consolidated balance sheet as of August 31, 1996, the
consolidated profit and loss account for the eight month period ended August 31,
1996 and supporting schedules including a schedule showing the split of the
results to the three months ended March 31, 1996 and the five months ended
August 31, 1996 respectively. 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 audit.

2. We conducted our audit 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 presentations. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial presentation. We
believe that our audit provides a reasonable basis for our opinion.

3. This 1996 consolidated reporting package has been prepared for consolidation
purposes into the consolidated financial statements of Precision Systems Inc, St
Petersburg, Florida, USA for the year ended August 31, 1996 and includes only
the information necessary for that purpose. The 1996 consolidated reporting
package has been drawn up on the basis of International Accounting Standards
(IAS), and in accordance with Vicorp Group Accounting Policies. The Vicorp Group
Accounting Policies do not lead to material departure from US GAAP.

4. In our opinion, except as noted in the preceding paragraph, the 1996
consolidated reporting package prepared for consolidation purposes presents
fairly, in all material respects, the consolidated financial position of Vicorp
Group as of August 31, 1996, and the result for the three month period ended
March 31, 1996 and the five month period ended August 31, 1996 in conformity
with International Accounting Standards and Vicorp Group Accounting Policies.

Utrecht, October 31, 1996

/s/ Coopers & Lybrand N.V.
- ---------------------------------------------------------
Coopers & Lybrand N.V.

25
<PAGE> 28

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................................................ $ 12,174,250 $ 7,702,535
Accounts and contracts receivable........................................... 6,275,370 4,427,583
Due from employees.......................................................... 28,417 51,664
Supplies and other current assets........................................... 1,491,020 1,164,511
Costs and earnings in excess of billings on uncompleted contracts........... 3,232,534 1,139,249
----------- -----------
Total current assets............................................... 23,201,591 14,485,542
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land and improvements....................................................... 1,134,955 1,134,955
Buildings and improvements.................................................. 2,871,896 2,597,712
Computer equipment.......................................................... 24,685,816 17,298,890
Furniture and office equipment.............................................. 3,183,309 1,914,323
----------- -----------
31,875,976 22,945,880
Less accumulated depreciation............................................... (23,357,434) (16,517,312)
----------- -----------
8,518,542 6,428,568
----------- -----------
INTANGIBLE ASSETS, net...................................................... 15,837,213 6,458,815
----------- -----------
$ 47,557,346 $ 27,372,925
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt........................................... $ 2,845,598 $ --
Accounts payable............................................................ 3,295,066 1,331,784
Accrued expenses............................................................ 3,511,764 526,394
Accrued payroll and related liabilities..................................... 4,664,537 651,401
Customer deposits........................................................... 99,772 99,772
Billings in excess of costs and earnings on uncompleted contracts........... 2,896,178 --
Deferred revenue............................................................ 2,114,896 1,329,580
----------- -----------
Total current liabilities.......................................... 19,427,811 3,938,931
----------- -----------
DEFERRED REVENUE -- NON-CURRENT............................................. -- 471,895
----------- -----------
Long-term debt.............................................................. 280,727 --
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Non-redeemable preferred stock -- $.01 par value; Series A 6 percent
Cumulative Convertible Preferred Stock; convertible at $4.76 per share,
authorized 50,000 shares, issued and outstanding 10,000 shares;
liquidation preference $5,800,000......................................... 100 100
Common stock -- $.01 par value; authorized 30,000,000 shares, issued
172,666,382 and 9,733,525 shares, respectively............................ 172,667 97,335
Class B -- convertible common stock -- $.01 par value, authorized 2,415,945
shares, issued and outstanding 0 and 2,415,945 shares, respectively....... -- 24,159
Additional paid-in capital.................................................. 106,884,212 67,740,805
Deficit..................................................................... (79,768,574) (45,074,613)
Treasury stock (132,937 shares) -- at cost.................................. (422,360) (422,360)
Accumulated preferred stock dividend........................................ 946,556 596,673
Cumulative foreign currency translation adjustment.......................... 355,416 --
Unearned compensation....................................................... (319,209) --
----------- -----------
Total stockholders' equity......................................... 27,848,808 22,962,099
----------- -----------
$ 47,557,346 $ 27,372,925
=========== ===========
</TABLE>

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

26
<PAGE> 29

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
REVENUES
Contract revenues..................................... $ 13,724,228 $15,337,054 $ 2,925,160
Service and support................................... 9,220,291 5,741,646 4,587,908
License fees.......................................... 3,758,308 436,800 914,510
Other income.......................................... -- 6,233 463,017
------------ ----------- ------------
26,702,827 21,521,733 8,890,595
------------ ----------- ------------
COST AND EXPENSES
Contract costs........................................ 6,023,989 7,824,646 3,092,445
Selling, general and administrative................... 23,849,385 9,034,490 12,304,191
Research, engineering and development................. 5,249,377 3,172,185 3,876,413
Depreciation and amortization......................... 4,714,227 4,007,208 7,458,928
Purchased research and development.................... 19,500,000 -- --
Goodwill write-down................................... 3,829,424 -- --
------------ ----------- ------------
63,166,402 24,038,529 26,731,977
------------ ----------- ------------
Operating loss........................................ (36,463,575) (2,516,796) (17,841,382)
Interest income, net.................................. 507,200 1,007 185,171
Gain on sale of marketable equity securities.......... 1,262,414 -- --
------------ ----------- ------------
Loss before income taxes.............................. (34,693,961) (2,515,789) (17,656,211)
Income tax benefit.................................... -- -- --
------------ ----------- ------------
LOSS FROM CONTINUING OPERATIONS....................... (34,693,961) (2,515,789) (17,656,211)
------------ ----------- ------------
Loss from discontinued operations:
Loss from operations of discontinued subsidiary..... -- (661,974) (984,052)
Gain from sale of discontinued subsidiary........... -- 529,419 --
------------ ----------- ------------
-- (132,555) (984,052)
------------ ----------- ------------
NET LOSS.............................................. (34,693,961) (2,648,344) (18,640,263)
Preferred stock dividend requirements................. (349,883) (347,048) (249,625)
------------ ----------- ------------
NET LOSS APPLICABLE TO COMMON STOCK................... $(35,043,844) $(2,995,392) $(18,889,888)
============ =========== ============
EARNINGS (LOSS) PER SHARE:
Loss from continuing operations....................... $ (2.36) $ (.23) $ (1.98)
============ =========== ============
Loss from discontinued operations..................... -- (.01) (.11)
============ =========== ============
Net loss applicable to common stock................... $ (2.39) $ (.27) $ (2.12)
============ =========== ============
</TABLE>

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

27
<PAGE> 30

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NON-
REDEEMABLE COMMON CLASS B
PREFERRED STOCK CONVERTIBLE ADDITIONAL
STOCK $.01 $.01 PAR COMMON PAID-IN TREASURY
PAR VALUE VALUE STOCK CAPITAL DEFICIT STOCK
---------- -------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1993.............. $ -- $ 63,882 $24,159 $ 53,243,385 $(23,786,006) $(454,140)
Adjustment of common stock and
compensation related to restricted
stock grants.......................... -- 600 -- (83,100) -- --
Amortization of unearned compensation... -- -- -- -- -- --
Issuance of common stock upon exercise
of stock options...................... -- 530 -- 92,220 -- --
Issuance of preferred stock............. 100 -- -- 5,799,900 -- --
Issuance of common stock upon
acquisition of The Renaissance
Group................................. -- 13,986 -- 3,132,864 -- --
Net loss for the year ended August 31,
1994.................................. -- -- -- -- (18,640,263) --
Dividends on preferred stock............ -- -- -- (249,625) -- --
Treasury stock contribution to
retirement plan....................... -- -- -- -- -- 31,780
---- -------- ------- ------------ ------------ ---------
Balance at August 31, 1994.............. 100 78,998 24,159 61,935,644 (42,426,269) (422,360)
Issuance of common stock upon exercise
of stock options...................... -- 5,837 -- 1,202,221 -- --
Issuance of common stock upon exercise
of stock options...................... -- 12,500 -- 4,987,500 -- --
Legal expenses associated with issuance
of common stock....................... -- -- -- (37,512) -- --
Dividends on preferred stock............ -- -- -- (347,048) -- --
Net loss for the year ended August 31,
1995.................................. -- -- -- -- (2,648,344) --
---- -------- ------- ------------ ------------ ---------
Balance at August 31, 1995.............. 100 97,335 24,159 67,740,805 (45,074,613) (422,360)
Issuance of common stock upon exercise
of stock options...................... -- 5,155 -- 922,711 -- --
Conversion of Class B Common Stock...... -- 24,159 (24,159) -- -- --
Issuance of common stock upon
acquisition of Vicorp................. -- 31,018 -- 29,490,559 -- --
Foreign currency translation
adjustment............................ -- -- -- -- -- --
Unearned compensation relating to
restricted stock grants............... -- -- -- 470,020 -- --
Amortization of unearned compensation... -- -- -- -- -- --
Issuance of common stock................ -- 15,000 -- 8,610,000 -- --
Dividends on preferred stock............ -- -- -- (349,883) -- --
Net loss for the year ended August 31,
1996.................................. -- -- -- -- (34,693,961) --
---- -------- ------- ------------ ------------ ---------
Balance at August 31, 1996.............. $100 $172,667 $ -- $106,884,212 $(79,768,574) $(422,360)
==== ======== ======= ============ ============ =========

CUMULATIVE
ACCUMULATED CURRENCY
PREFERRED TRANSACTION UNEARNED
DIVIDENDS ADJUSTMENT COMPENSATION TOTAL
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at August 31, 1993.............. $ -- $ -- $ (114,842) $ 28,976,438
Adjustment of common stock and
compensation related to restricted
stock grants.......................... -- -- 82,500 --
Amortization of unearned compensation... -- -- 32,342 32,342
Issuance of common stock upon exercise
of stock options...................... -- -- -- 92,750
Issuance of preferred stock............. -- -- -- 5,800,000
Issuance of common stock upon
acquisition of The Renaissance
Group................................. -- -- -- 3,146,850
Net loss for the year ended August 31,
1994.................................. -- -- -- (18,640,263)
Dividends on preferred stock............ 249,625 -- -- --
Treasury stock contribution to
retirement plan....................... -- -- -- 31,780
-------- -------- --------- -----------
Balance at August 31, 1994.............. 249,625 -- -- 19,439,897
Issuance of common stock upon exercise
of stock options...................... -- -- -- 1,208,058
Issuance of common stock upon exercise
of stock options...................... -- -- -- 5,000,000
Legal expenses associated with issuance
of common stock....................... -- -- -- (37,512)
Dividends on preferred stock............ 347,048 -- -- --
Net loss for the year ended August 31,
1995.................................. -- -- -- (2,648,344)
-------- -------- --------- -----------
Balance at August 31, 1995.............. 596,673 -- -- 22,962,099
Issuance of common stock upon exercise
of stock options...................... -- -- -- 927,866
Conversion of Class B Common Stock...... -- -- -- --
Issuance of common stock upon
acquisition of Vicorp................. -- -- -- 29,521,577
Foreign currency translation
adjustment............................ -- 355,416 -- 355,416
Unearned compensation relating to
restricted stock grants............... -- -- (470,020) --
Amortization of unearned compensation... -- -- 150,811 150,811
Issuance of common stock................ -- -- -- 8,625,000
Dividends on preferred stock............ 349,883 -- -- --
Net loss for the year ended August 31,
1996.................................. -- -- -- (34,693,961)
-------- -------- --------- -----------
Balance at August 31, 1996.............. $ 946,556 $ 355,416 $ (319,209) $ 27,848,808
======== ======== ========= ===========
</TABLE>

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

28
<PAGE> 31

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Cash Flows -- Operating Activities:
Net loss............................................ $(34,693,961) $(2,648,344) $(18,640,263)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 4,714,227 4,007,208 7,458,928
Purchased research and development............... 19,500,000 -- --
Goodwill write-down.............................. 3,829,424 -- --
Provision for losses on accounts receivable...... 1,196,412 159,387 37,335
Provision for materials obsolescence............. -- 885,002
Gain from sale of discontinued subsidiary........ -- (529,419) --
Amortization of unearned compensation............ 150,811 -- 32,342
Realization of deferred revenue.................. (1,448,588) (539,821) --
Treasury stock activity.......................... -- 31,780
Change in current assets and liabilities, net of
business acquisitions:
(Increase) decrease in accounts and contracts
receivable..................................... 7,745,048 (1,012,144) (1,056,632)
(Increase) decrease in costs and estimated
earnings in excess of billings................. (2,093,285) (1,139,249) 5,817,184
Increase in supplies and other current assets.... 519,491 568,160 218,527
Increase (decrease) in accounts payable.......... (3,403,718) (1,706,670) 1,720,600
Increase (decrease) in accrued expenses.......... (2,546,486) (577,440) 293,095
Increase (decrease) in customer deposits......... -- (355,991) 299,772
Increase in billings in excess of earnings on
incomplete contracts........................... 2,896,178 -- --
Increase (decrease) in deferred revenue.......... (3,477,991) (426,800) (142,757)
----------- ----------- ------------
Net cash used in operating activities....... (7,112,438) (4,201,123) (3,045,087)
----------- ----------- ------------
Cash Flows -- Investing Activities:
Purchase of property, plant and equipment........... (1,995,353) (1,514,475) (2,305,220)
Purchase of other assets............................ (226,685) -- --
Purchase of consolidated subsidiaries, net of cash
acquired......................................... -- -- (3,346,913)
Cash acquired in acquisition........................ 4,403,000 -- --
Proceeds from sale of discontinued subsidiary....... -- 1,009,756 --
----------- ----------- ------------
Net cash provided by (used in) investing
activities................................ 2,180,962 (504,719) (5,652,133)
----------- ----------- ------------
Cash Flows -- Financing Activities:
Proceeds from note payable.......................... -- -- 5,000,000
Repayment of note payable........................... (149,675) (2,952,933) (97,820)
Proceeds from issuance of capital stock............. 9,552,866 6,170,546 5,892,750
----------- ----------- ------------
Net cash provided by financing activities... 9,403,191 3,217,613 10,794,930
----------- ----------- ------------
Net increase (decrease) in cash..................... 4,471,715 (1,488,229) 2,097,710
Cash at beginning of period......................... 7,702,535 9,190,764 7,093,054
----------- ----------- ------------
Cash at end of period............................... $ 12,174,250 $ 7,702,535 $ 9,190,764
=========== =========== ============
Supplemental Noncash Information:
Accrued dividends on preferred stock................ $ 349,882 $ 347,048 $ 249,625
Issuance of stock for purchase of subsidiary........ $ 29,521,577 $ -- $ 3,375,000
Conversion of note payable to deferred revenue...... $ -- $ 2,047,067 $ --
Issuance of common stock as compensation............ $ 470,020 $ 33,726 $ --
</TABLE>

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

29
<PAGE> 32

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Precision Systems, Inc. ("PSi" or the "Company") provides solutions that
simplify and personalize telecommunications. The Company's range of
software-based products are used by global wireless, wireline and private
network providers to deploy a wide range of voice, data and video-based enhanced
services on a common hardware and software platform. In addition, the Company
supports its products through maintenance contracts.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of the significant accounting policies of the
Company consistently applied in the preparation of the accompanying consolidated
financial statements:

CONSOLIDATION

The accompanying consolidated financial statements include the consolidated
operations of PSi and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated.

ESTIMATES AND ASSUMPTIONS

Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses. Examples include provisions for bad debts, depreciable lives for
property, plant, and equipment, amortization period for intangible assets, and
costs and profits associated with long-term contracts. Actual results may differ
from these estimates.

LONG-TERM CONTRACT

Certain of the Company's contract revenues and anticipated profits are
recognized using the percentage-of-completion method, based on contract costs
incurred to date compared with the Company's estimate of total contract costs
and profit. Contract costs include all direct materials and labor costs and
those indirect costs related to contract performance such as indirect labor,
supplies and depreciation. Revisions in estimated profits are made in the month
in which the circumstances requiring the revision become known. Should a loss on
the contract become anticipated, the entire amount of estimated loss on the
contract would be recorded in the period in which it became known.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation on
property and equipment is provided for in amounts sufficient to allocate the
costs of depreciable assets to operations over their estimated service lives as
follows:

<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Land improvements.......................................................... 18
Building and improvements.................................................. 10 to 30
Computer equipment......................................................... 3 to 4
Furniture and office equipment............................................. 5 to 10
</TABLE>

For income tax reporting purposes, certain of these assets are depreciated
using accelerated methods.

PRODUCT WARRANTY

The Company warrants its products for between three-month to one-year
periods of time after the initial sale. Estimated costs related to such warranty
are accrued when the products are sold.

30
<PAGE> 33

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE RECOGNITION

Revenues, other than from long-term contracts, generally are recognized
when the products are delivered or the service has been rendered. Revenue from
certain contracts are recognized under the percentage-of-completion method on
the basis of physical completion to date. This method is used because management
considers physical completion to be the best available measure of the progress
on these contracts. Related contract costs include all direct material and labor
costs and those indirect costs related to contract performance and are included
in contract costs in the consolidated statements of operations. Revenue from
post-contract customer support is recognized ratably over the service period.
Revenue from software licenses is recognized upon delivery of the software.

FOREIGN CURRENCIES

Assets and liabilities recorded in foreign currencies on the books of
foreign subsidiaries are translated at the exchange rate on the balance sheet
date. Translation adjustments resulting from this process are charged or
credited to stockholders' equity. Revenue, costs, and expenses are translated at
average rates of exchange prevailing to the applicable period. Gains and losses
on foreign currency transactions are included in non-operating expenses.

CREDIT RISK

The Company extends unsecured credit to customers in the United States.
Financial instruments which potentially expose the Company to concentration of
credit risk, as defined by Statement of Financial Accounting Standards No. 105,
consist primarily of cash investments and accounts receivable. The Company
places its cash investments with a high-credit quality financial institution.
For its accounts receivable, the Company extends unsecured credit to both
domestic and international customers. While the Company does have a
concentration of credit with respect to these cash investments and accounts
receivable, the Company does not feel that it is exposed to significant risk of
loss from such.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of the Company's cash and long-term debt approximates
their fair values at August 31, 1996 and 1995.

INCOME TAX EXPENSE

The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities. Under FAS No. 109, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to expense as incurred.

LOSS PER SHARE

Loss per share for the fiscal years ended August 31, 1996, 1995, and 1994,
has been computed based upon the weighted average common shares outstanding of
14,677,220, 10,965,640, and 8,936,003, respectively. The loss per share
calculation does not include preferred convertible securities and stock options,
which are common stock equivalents, as their inclusion would be anti-dilutive.

31
<PAGE> 34

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RESTRUCTURING CHARGES

During fiscal 1996, in an effort to reduce overhead and cut costs, the
Company terminated the employment of approximately 55 individuals. The effect of
the severance charges associated with these terminations was to increase the
Company's selling, general and administrative expenses by approximately
$1,100,000. As of August 31, 1996, approximately $1,100,000 of such charges are
included in accrued payroll and related liabilities on the Company's balance
sheet.

RECLASSIFICATIONS

Certain amounts for previous years have been reclassified to conform with
the 1996 presentation.

3. ACCOUNTS AND CONTRACTS RECEIVABLE

<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Accounts and contracts receivables......................... $ 7,528,717 $4,581,144
Allowance for doubtful accounts............................ (1,253,347) (153,561)
----------- ----------
$ 6,275,370 $4,427,583
========== =========
</TABLE>

4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Expenditures on uncompleted contracts...................... $ 2,979,877 $ 854,437
Estimated earnings on uncompleted contracts................ 252,657 284,812
----------- ----------
3,232,534 1,139,249
Less actual and allowable billings on uncompleted
contracts................................................ (2,896,178) --
----------- ----------
$ 336,356 $1,139,249
=========== ==========
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 3,232,534 $1,139,249
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... (2,896,178) --
----------- ----------
$ 336,356 $1,139,249
=========== ==========
</TABLE>

5. SUPPLIES AND OTHER CURRENT ASSETS

Supplies and other current assets consist of the following:

<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Materials to be used in fulfilling contracts............... $ 550,067 $ 999,846
Prepaid expenses........................................... 940,953 164,665
----------- ----------
$ 1,491,020 $1,164,511
=========== ==========
</TABLE>

32
<PAGE> 35

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INTANGIBLE ASSETS

Intangible assets consist of the following:

<TABLE>
<CAPTION>
AUGUST 31,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Goodwill (see Note 16)..................................... $20,316,703 $6,981,714
Developed technology value................................. 3,090,000 --
Assembled work force value................................. 890,000 --
Software licenses.......................................... 312,443 --
Patents.................................................... -- 49,862
----------- ----------
24,609,146 7,031,576
Less accumulated amortization.............................. 8,771,933 572,761
----------- ----------
$15,837,213 $6,458,815
=========== ==========
</TABLE>

Goodwill associated with acquired subsidiaries is amortized over five to
fifteen-year periods. At each balance sheet date, the Company evaluates the
realizability of goodwill based on expectations of future discounted cash flows.
Based upon its most recent analysis, the Company determined that a material
impairment of goodwill related to its purchase of The Renaissance Group exists
and the Company recorded a provision of $3,829,424 to write down such goodwill
to its realizable value at August 31, 1996. Software licenses and patent costs
are recorded at cost and amortized over the expected useful lives of the assets,
varying from two to five years. Amortization expenses associated with intangible
assets were $2,389,848, $551,607, and $188,486 in fiscal 1996, 1995, and 1994,
respectively.

7. INCOME TAXES

The components of income tax (benefit) are as follows:

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Currently payable............................................ $ -- $ -- $ --
Deferred..................................................... -- -- --
---- ---- ----
$ -- $ -- $ --
==== ==== ====
</TABLE>

33
<PAGE> 36

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of total income tax expense (benefit) to amounts computed
by applying the statutory federal income tax rate to losses before income taxes
is as follows:

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------------------------------------------
1996 1995 1994
-------------------- ----------------- -------------------
AMOUNTS % AMOUNTS % AMOUNTS %
------------ ----- --------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Income tax benefit at the
federal statutory rate... $(12,129,302) (35.0%) $(880,526) (35.0%) $(6,524,092) (35.0%)
Amortization and write-off
of goodwill and other
acquired intangibles..... 8,868,990 26.0% -- -- -- --
Increase in valuation
allowance................ 4,200,372 12.0% 880,526 35.0% 6,524,092 35.0%
State income taxes, net of
federal tax benefit...... (344,910) (1.0%) -- -- -- --
Foreign tax rate
differential............. (108,960) (0.3%) -- -- -- --
Other...................... (486,190) (1.7%) -- -- -- --
------------ ----- --------- ----- ----------- -----
$ -- -- $ -- -- $ -- --
=========== ===== ========= ===== ========== =====
</TABLE>

At August 31, 1996, the Company had net operating loss carryforwards of
approximately $33,000,000 for federal income tax purposes expiring through 2010
and $10,100,000 for foreign tax purposes expiring through 2011. The Company
intends to reinvest foreign earnings in the companies from which they
originated.

Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and (b)
operating loss carryforwards. The tax effects of significant items comprising
the Company's deferred tax asset at August 31, 1996 and 1995, are as follows:

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax asset:
Tax loss carryforwards.................................. $ 15,457,000 $ 9,920,000
Depreciation............................................ 639,000 345,000
Reserves not currently deductible....................... 566,000 415,000
Stock option compensation............................... 787,000 --
Other................................................... 331,000 131,000
------------ ------------
Total gross deferred tax asset.................. 17,780,000 10,811,000
Less: valuation allowance............................... (17,780,000) (10,811,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>

A portion of the deferred tax asset in the amount of $787,000 is related to
the tax effects of stock option compensation. This benefit, when recognized will
be classified in the equity section of the balance sheet.

Pursuant to the Distribution, the Company and HSN have entered into a Tax
Sharing Agreement ("Tax Sharing Agreement"). The Tax Sharing Agreement provides
that if, as a result of adjustments to HSN's tax position for periods prior to
the Distribution, caused by a tax audit or otherwise, there would have been a
corresponding increase or decrease in the deferred tax liability account of the
Company as of the date of Distribution, then the Company will receive a cash
payment from HSN (or make a cash payment to HSN) in the amount of such increase
(or decrease). During the year ended August 31, 1996, HSN paid the Company
approximately $430,000 relating to the Tax Sharing Agreement.

34
<PAGE> 37

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
AUGUST 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Note payable to shareholder, interest at 6 percent,
unsecured and due January, 1997........................... $ 1,148,127 $ --
----------- -----------
Note payable, interest at 5 percent, and due February,
1997...................................................... 1,269,475 --
Capital lease obligation, interest rates varying from 6
percent to 9 percent; collateralized by assets with net
book value of approximately $500,000...................... 708,723 --
----------- -----------
3,126,325 --
Less current portion........................................ (2,845,598) --
----------- -----------
$ 280,727 $ --
=========== ===========
</TABLE>

Annual principal maturities for years subsequent to August 31, 1996, are as
follows:

9. COMMITMENTS AND CONTINGENCIES

The Company has annual commitments under non-cancellable operating leases
for years subsequent to August 31, 1996 (rental expense of $1,279,622, $375,662
and $211,261 for the years ended August 31, 1996, 1995, and 1994, respectively)
as follows:

<TABLE>
<S> <C>
1997............................................................. $1,666,757
1998............................................................. 784,865
1999............................................................. 304,876
2000............................................................. 53,538
2001 and thereafter.............................................. --
-----------
$2,810,036
===========
</TABLE>

10. STOCKHOLDERS' EQUITY

The Company's amended Certificate of Incorporation provides that the
holders of both classes of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available for the payment of dividends. During July 1996, RMS Limited
Partnership, the sole owner of the Company's Class B Common Stock, elected to
convert all of its Class B Common Stock into an equal number of shares of the
Company's regular Common Stock in accordance with the provisions of the
Company's Certificate of Incorporation. The Class B Common Stock converted was
retired and is not subject to reissue. As a consequence of the conversion, all
of the Company's Common Stock currently outstanding or eligible to be issued
under the Company's restated Certificate of Incorporation now votes as a single
class on an one vote per share basis on all matters submitted to shareholders.

Pursuant to the Company's Stock Option and Restricted Stock Plan, 100,000
and 50,000 shares of restricted stock were granted in October 1992 to the
Company's former Chairman of the Board and to the President and Chief Executive
Officer, respectively. In connection therewith, the Company recorded $140,625

35
<PAGE> 38

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of unearned compensation and a corresponding amount to additional paid-in
capital based on the price of the shares at the grant dates. The shares vest in
five equal installments beginning July 13, 1993. The amount amortized relating
to the unearned compensation was $32,342 for the year ended August 31, 1994. In
connection with the resignation of certain officers of the Company, 90,000
shares of restricted stock were retired during the year ended August 31, 1994.
As a result, unearned compensation of $82,500 was eliminated and restored to
additional paid-in capital, along with the par value of $600. During the year
ended August 31, 1995, the restriction on the remaining 60,000 shares were
rescinded by the Company's Board of Directors.

During the year ended August 31, 1996, the Company issued 27,450 shares of
restricted stock to three of its executive officers. In connection therewith,
the Company recorded $243,618 of unearned compensation and a corresponding
amount to additional paid-in capital based on the price of the shares at the
grant date. The shares originally vested in three equal installments beginning
February 1996. In connection with the recognition of certain officers of the
Company, 11,764 shares of the restricted stock became automatically fully
vested. As a result, compensation expense of $150,811 was recognized during the
year ended August 31, 1996, in connection with such restricted stock grants.

During the year ended August 31, 1996, certain management personnel of the
Company agreed to 15 percent pay reductions in exchange for the grant of
restricted stock. In connection with such Salary Exchange Program, the Company
recorded $226,402 of unearned compensation and a corresponding amount to
additional paid-in capital based on the price of the shares at the grant date.
The shares vest in two equal installments beginning August 1997.

In November 1992, the Board of Directors authorized the Company to proceed
with a program to purchase odd lot shareholdings of common stock from
shareholders holding less than 100 shares. In connection therewith, the Board of
Directors authorized the purchase of up to 250,000 shares of common stock at
prevailing market prices. The Program was consummated in January 1993 with
142,940 shares being purchased at $2.50 per share. The purchased shares along
with acquisition costs are recorded as treasury stock.

During the year ended August 31, 1994, the Company issued shares of
treasury stock to The Precision Systems, Inc. Retirement Savings plan.
Accordingly, $31,780 of compensation expense and a corresponding reduction in
the treasury stock balance was recorded during the year ended August 31, 1994.

On December 13, 1993, RMS Limited Partnership ("RMS") purchased 10,000
shares of the Company's non-voting Series A Preferred Stock, par value $.01 per
share with a liquidation preference of $580 per share (the "Stated Value") from
PSi for $5,800,000. The preferred shares are convertible into Common Stock of
the Company at the election of the holders at any time following December 31,
1994, at a conversion price of $4.76 per share. A cumulative dividend of 6
percent per year is payable quarterly on the preferred shares prior to the
payment of any other dividends. Interest accrues on accumulated but unpaid
dividends at the rate of 6 percent yearly compounded quarterly. The Series A
Preferred Stock is redeemable, in whole or part, at the option of the Company
following December 31, 1994, at 100 percent of the Stated Value plus accrued
dividends and interest. The designation of preferences relating to the Series A
Preferred Stock include restrictions relating to the issuance of any shares
senior to the preferred shares, the increase in the authorized number of
preferred shares, the payment of dividends on junior classes of stock and the
increase in indebtedness.

The Company acquired The Renaissance Group, Inc. ("TRG") in July 1994 in
exchange for $3,750,000 in cash, 1,398,600 shares of PSI common stock and
options to acquire 101,400 shares of PSi common stock (see Note 16).

During November 1995, Vulcan Ventures, Incorporated ("Vulcan") exercised
warrants to purchase 500,000 shares of the Company's common stock at $5.00 per
share, 500,000 shares of common stock at $6.00 per share, and 500,000 shares of
common stock at $6.25 per share, thereby generating additional capital to the
Company of $8,625,000. Vulcan's third tier warrants for the purchase of 500,000
shares originally were for

36
<PAGE> 39

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Class B Common Stock at $7.00 per share or, if an amendment to the Certificate
of Incorporation of the Company increasing the authorized number of shares of
Class B Common Stock had not been effected by the date of exercise, then the
warrants to purchase 500,000 of the Company's Common Stock were to be exercised
at $6.25 per share.

The Company acquired Vicorp, N.V. ("Vicorp") in April 1996 in exchange for
3,135,467 shares of newly issued common stock in exchange for substantially all
of the outstanding shares of Vicorp. In addition, the Company assumed certain
outstanding obligations of Vicorp and converted options issued to Vicorp
employees into options to purchase the Company's stock.

Vicorp shareholders received 29.46 shares of the Company's common stock for
each share of Vicorp stock they own. The discounted exchange value of the shares
to be issued to Vicorp holders and the value of options to be issued to Vicorp
employees, together with an agreement to pay certain obligations of Vicorp,
equals approximately $32,000,000. The agreement includes a lock-up provision and
a right of first refusal back to the Company on certain shares of the Company's
stock that, as a result of this transaction, will be held by certain current
Vicorp shareholders. The acquisition has been accounted for using the purchase
method of accounting.

11. STOCK OPTIONS AND RESTRICTED STOCK

The Company has granted options to purchase common stock under option plans
as follows:

The Stock Option and Restricted Stock Plan (the "Employee Plan") provides
for the grant to key employees of options to purchase Common stock at prices as
established by the Compensation/Benefits Committee (the "Committee") of the
Board of Directors. The options generally become exercisable with respect to
one-fifth of the shares covered by each option each year over a five-year period
beginning one year from the date of grant. In most cases, the options expire
five years from the date they vest and become exercisable. The Employee Plan
also allows the Committee to grant shares of restricted stock to key employees
subject to such terms and conditions as may be established from time to time by
the Committee.

The Stock Option Plan for Outside Directors (the "Directors' Plan")
provides for the grant of options to outside directors. The exercise price of
options granted under the Directors' Plan will be the fair market value on the
date of grant. The options vest and become exercisable equally over three years
beginning on the date of grant. All of the options expire five years from the
date they vest and become exercisable.

37
<PAGE> 40

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
STOCK OPTION PLAN
---------------------------------
EMPLOYEE PLAN DIRECTORS' PLAN TOTAL
-------------- ---------------- ---------
<S> <C> <C> <C>
Authorized......................................... 4,000,000 500,000 4,500,000
============== ================ =========
Outstanding -- August 31, 1993..................... 899,000 50,000 949,000
Granted............................................ 1,521,450 50,000 1,571,450
Exercised ($1.75 per share)........................ (53,000) -- (53,000)
Canceled........................................... (645,934) -- (645,934)
-------------- ---------------- ---------
Outstanding -- August 31, 1994..................... 1,721,516 100,000 1,821,516
Granted............................................ 544,988 50,000 594,988
Exercised ($.01 to $4.88 per share)................ (667,749) (25,000) (692,749)
Canceled........................................... (184,239) -- (184,239)
-------------- ---------------- ---------
Outstanding -- August 31, 1995..................... 1,414,516 125,000 1,539,516
Granted............................................ 1,231,371 50,000 1,281,371
Exercised ($.01 to $15.50 per share)............... (348,470) (25,000) (373,470)
Canceled........................................... (158,636) -- (158,636)
-------------- ---------------- ---------
Outstanding -- August 31, 1996..................... 2,138,781 150,000 2,288,781
============== ================ =========
Number exercisable................................. 1,204,553 86,665 1,291,218
============== ================ =========
Exercise price at August 31, 1994.................. $.875 - $4.875 $ 1.98 - $3.2125
============== ================
Exercise price at August 31, 1995.................. $ .01 - $7.50 $ 1.98 - $7.375
============== ================
Exercise price at August 31, 1996.................. $.01 - $14.625 $1.980 - $14.500
============== ================
</TABLE>

12. BENEFITS PLANS

The Company's Board of Directors authorized the establishment of the
Precision Systems, Inc. Retirement Savings Plan pursuant to Internal Revenue
Code Section 401(k) covering substantially all employees. Matching employer
contributions are set at the discretion of the Board of Directors. Matching
employer contributions made during fiscal 1996, 1995 and 1994 were $0, $0 and
$31,780, respectively.

In association with the Vicorp acquisition, certain United States based
employees are covered by the Vicorp Interactive Systems ("VIS") Retirement
Savings Plan pursuant to Internal Revenue Code Section 401(k). Under such plan,
participating employees may defer a certain percent of their pre-tax salary but
not more than statutory limits. VIS contributes $.25 for each $1.00 a
participant contributes within a maximum contribution of 3 percent of a
participant's earnings. Matching employer contributions made during fiscal 1996
were approximately $40,000.

Additionally, the Company's Board of Directors authorized adoption of the
Employee Stock Ownership Plan which provides for contributions of shares of
common stock to the plan in amounts as authorized by the Board of Directors. To
date, no common stock has been contributed to the plan.

13. RELATED PARTY TRANSACTIONS

During the year ended August 31, 1995, the Company issued 7,596 shares of
restricted stock (exercise price of $4.44 per share) to one of the members of
the Company's Board of Directors. The effect of this issuance was to increase
the Company's compensation expense by $33,726.

Historically, activity with Home Shopping Network ("HSN") had been
presented as affiliate transactions. Due to ownership interest changes of former
common shareholders, HSN is no longer considered a

38
<PAGE> 41

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

related party and all amounts of disclosures relating to the change have been
reclassified and/or modified. The following information relates to certain
historical relationships between the Company and HSN.

DISTRIBUTION AGREEMENT

The Company and HSN entered into the Distribution Agreement, which provides
for, among other things, the principal corporate transaction required to effect
the Distribution, the division between HSN and the Company of certain
liabilities, and certain other agreements governing the relationship between HSN
or its subsidiaries and the Company following the Distribution.

The Distribution Agreement provides for cooperation between HSN and the
Company in obtaining initial insurance coverage for the Company after the
Distribution and provides for allocation of benefits under existing insurance
policies between HSN and the Company. To date, no claim has resulted which would
be governed by the Distribution Agreement.

Moreover, the Distribution Agreement provides for each party to indemnify
the other against certain liabilities that may arise in connection with the
Distribution or from the Company's business prior to or following the
Distribution. In particular, HSN will indemnify the Company against losses from
existing or future claims relating to the Company's voice processing business
prior to the Distribution other than warranty or contract claims of the
Company's customers arising in connection with the sale, lease or license of
VRUs or the Enhanced Services Platform ("ESP") prior to or following the
Distribution. The Company will indemnify HSN, however, against certain
liabilities including any claims to contractual, warranty or indemnification
obligations of the Company arising in connection with the sale, lease or license
of VRUs or the ESP and against any claims that may be asserted that any hardware
manufactured or assembled by the Company's customers relating to the service
bureau business conducted by the Company prior to the Distribution, and each
party will indemnify the other against claims relating to misstatements or
omissions of material facts provided by such party in the Information Statement
or in the Form 10 of which it is a part, filed pursuant to the Distribution.

To date, certain situations have occurred in the ordinary course of
business that were covered under the Distribution Agreement. In particular, in
1993 the Company received $222,500 from HSN pursuant to the indemnification
provisions of the Distribution Agreement. This related to certain claims and
actions brought against the Company while a wholly-owned subsidiary of HSN.
These claims and actions have been settled.

SOFTWARE LICENSE AGREEMENTS

The Company licensed certain software and patented technology used in the
ESP to HSN. The license is non-transferable, perpetual and HSN is the exclusive
licensee of the software and patented technology for use in the televised
electronic retail industry.

Additionally, HSN also licensed from the Company the proprietary operating
and application software used in the VRUs developed by the Company for HSN.
During fiscal 1994, $132,000 was paid to the Company under this agreement. HSN
is also the exclusive licensee of this software in the televised electronic
retail industry.

SYSTEMS MAINTENANCE AND SUPPORT AGREEMENT

The Company and HSN have also entered into an agreement pursuant to which
the Company will complete the final modifications of HSN's ESP platform and
provide maintenance and support services for the platform. The maintenance
agreement has an initial term of one year that is automatically extended for
additional one-year terms at the discretion of both parties. The maintenance
agreement is terminable if the Company fails to provide the maintenance services
specified by the agreement or, with prior notice, at the end of the initial term
of any subsequent extension.

39
<PAGE> 42

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CREDIT AGREEMENT

The Company entered into an unsecured line of credit agreement with HSN in
the amount of $5,000,000. The interest rate was prime plus 1 percent. Principal
and interest were due on July 31, 1995, or one year from the date of the first
draw, whichever is earlier. Restrictions contained in the agreement include, but
are not limited to, the payment of dividends, certain redemption of capital
stock of the Company, and the incurrence of senior debt. The Company received
$5,000,000 from HSN during August 1994 relating to this line of credit agreement
and such amounts were repaid during fiscal 1995.

14. SEGMENT INFORMATION

<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Revenues:
U.S. operations..................................... $ 18,275,706 $21,521,733 $ 8,890,595
European operations................................. 15,359,123 -- --
Other international operations...................... 326,454 -- --
Eliminations........................................ (7,258,456) -- --
------------ ----------- ------------
Total....................................... $ 26,702,827 $21,521,733 $ 8,890,595
============ =========== ============
Operating loss:
U.S. operations..................................... $(14,581,367) $(2,516,796) $(17,841,382)
European operations................................. (21,768,987) -- --
Other international operations...................... (113,221) -- --
Eliminations........................................ -- -- --
------------ ----------- ------------
Total....................................... $(36,463,575) $(2,516,796) $(17,841,382)
============ =========== ============
Identifiable assets:
U.S. operations..................................... $ 16,876,684 $27,327,925 $ 30,410,378
European operations................................. 29,193,442 -- --
Other international operations...................... 1,487,220 -- --
Eliminations........................................ -- -- --
------------ ----------- ------------
Total....................................... $ 47,557,346 $27,327,925 $ 30,410,378
============ =========== ============
</TABLE>

15. SIGNIFICANT CUSTOMERS

For each of the fiscal years ended August 31, 1996, 1995 and 1994 a
substantial portion of the Company's revenues have come from MCI and HSN and its
various affiliates. The dollar and percentage amounts are as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ -----------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE
----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
MCI......................... $11,875,428 44.5% $13,683,303 63.6% $6,238,601 70.2%
HSN......................... 1,504,632 5.6% 1,909,354 8.9% 2,544,032 28.6%
Other customers............. 13,322,767 49.9% 5,929,076 27.5% 107,962 1.2%
----------- ----- ----------- ----- ---------- -----
Total............. $26,702,827 100.0% $21,521,733 100.0% $8,890,595 100.0%
=========== ===== =========== ===== ========== =====
</TABLE>

16. BUSINESS ACQUISITIONS/DISPOSALS

On June 30, 1993, the Company acquired Active Designs Inc. for
approximately $150,000 in cash, assumption of $150,000 in accounts payable and a
$100,000 non-interest bearing note due January 1, 1994. Subsequent to the
acquisition, Active Designs, Inc. was renamed Interactive Services, Inc.
Effective April 30,

40
<PAGE> 43

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1995, certain assets, liabilities, and the business of Interactive Services,
Inc., were sold to EarthCall Communications Corporation for approximately
$1,000,000 in cash and the assumption of certain liabilities. The gain on
disposition of such activity in the amount of $529,419 has been accounted for as
a gain from sale of discontinued subsidiary. Revenues of Interactive Services,
Inc., for the years ended August 31, 1996, 1995 and 1994, were $0, $1,607,100,
and $789,555, respectively.

The Company acquired The Renaissance Group, Inc. in July 1994 in exchange
for $3,750,000 in cash, 1,398,600 shares of PSI common stock with a market value
of $3,375,000 and options to acquire 101,400 shares of PSI common stock for $.01
per share, which collectively is a purchase price of $7,125,000. Additionally,
during the year ended August 31, 1995, PSI paid state and federal income taxes
of $138,547 relating to the operation of TRG for the period from January 1,
1994, through July 24, 1994. TRG provides enhanced services for network based
platforms and applications. This acquisition has been accounted for using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets acquired (approximately $638,000) and the liabilities
assumed ($363,817) based on the estimated fair values at the date of
acquisition. The purchase price associated with the acquisition exceeded the net
assets of TRG by approximately $6,900,000 which was assigned to goodwill. The
operating results of TRG for the year ended August 31, 1994 are included in the
Company's consolidated results of operations from July 25, 1994 to August 31,
1994.

The Company acquired substantially all of the capital stock of Vicorp, N.V.
("Vicorp") in April 1996 by issuing 3,135,467 shares of newly issued common
stock. In addition, the Company assumed certain outstanding obligations of
Vicorp and converted options issued to Vicorp employees into options to purchase
the Company's stock.

Vicorp shareholders received 29.46 shares of the Company's common stock for
each share of Vicorp stock they owned. The discounted exchange value of the
shares issued to Vicorp holders and the value of options issued to Vicorp
employees, together with an agreement to pay certain obligations of Vicorp,
equaled approximately $31,000,000. The agreement includes a lock-up provision
and a right of first refusal back to the Company on certain shares of the
Company's stock that, as a result of this transaction, will be held by certain
current Vicorp shareholders. The acquisition was accounted for by the purchase
method of accounting. The purchase price of $32,434,985 was comprised of Company
Common Stock valued at $29,521,577, Company stock options with in-the-money
value of $1,469,321, and other direct acquisition costs totaling $1,444,087.

41
<PAGE> 44

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The preliminary purchase price allocation among the assets acquired and
liabilities assumed in the acquisition of Vicorp are as follows:

<TABLE>
<S> <C>
Cash........................................................... $ 4,403,000
Accounts receivable............................................ 10,766,000
Other current assets........................................... 846,000
------------
Total current assets................................. 16,015,000
------------
Accounts payable............................................... 5,367,000
Accrued expenses............................................... 6,514,000
Other current liabilities...................................... 5,240,000
------------
Total current liabilities............................ 17,121,000
------------
Net current liabilities.............................. (1,106,000)
------------
Long-term assets............................................... 5,386,000
Long-term liabilities.......................................... (3,749,000)
Developed technology value..................................... 3,090,000
Assembled work force value..................................... 890,000
Purchased research and development............................. 19,500,000
Residual goodwill.............................................. 8,423,985
------------
Total purchase price................................. $ 32,434,985
============
</TABLE>

The following unaudited pro-forma summary presents the Company's results of
operations as if the acquisition had occurred at the beginning of the period
presented. This summary does not purport to be indicative of what would have
occurred had the acquisition been made as of this date or of results which may
occur in the future. This method of combining the companies is for the
presentation of unaudited pro-forma summary results of operations. Actual
statements of operations of the Company and of Vicorp were combined from the
effective date of the acquisition forward, with no retroactive restatement.

<TABLE>
<CAPTION>
PRO-FORMA
UNAUDITED
YEAR ENDED
AUGUST 31, 1996
-----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Revenue.................................................. $ 50,621,909
===========
Net loss................................................. $ (35,639,010)
===========
Net loss per common share................................ $ (2.13)
===========
</TABLE>

17. OTHER MATTERS

Effective August 31, 1996, John Hindman, Chief Operating Officer, Mike
Felix, Vice President of Marketing, and Alan Donahue, Vice President of Sales,
resigned or were terminated from the Company.

The Company entered into a settlement agreement with Mr. Hindman, the terms
of which provide for severance pay of $50,000 and a six-month consulting
agreement for approximately $87,000. A consulting agreement was also entered
into with Mr. Felix for three months for $37,500. Additionally, the Company
automatically fully vested certain restricted stock originally granted to Mr.
Hindman and Mr. Felix (See Note 10).

John D. Loewenberg did not stand for reelection as Chairman of the Board of
the Company. Richard T. Liebhaber was elected as the Company's new Chairman of
the Board of the Company as of June 1996.

42
<PAGE> 45

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. LEGAL PROCEEDINGS

The Company is subject to certain legal proceedings in the ordinary course
of business. The discussion below summarizes the most material of such
proceedings. In the opinion of management, these and other legal proceedings
will not have a material adverse effect on operations or the financial condition
of the Company.

Intervoice, Inc. v. Precision Systems, Inc. and Vicorp Interactive Systems,
Inc. On April 11, 1996 Intervoice, Inc. ("INTV") filed suit against Precision
Systems, Inc. ("PSI") in the Federal District Court for the Northern District of
Texas (Dallas) alleging infringement of various U.S. Patents owned by INTV,
namely Patents 5,469,500, 5,255,305, and 5,243,643. These Patents encompass
certain call processing methods and technologies. The suit prays for an
unspecified amount of damages and for injunctive relief. On August 20, 1996,
Vicorp Interactive System, Inc. ("VIS"), a wholly-owned subsidiary of Vicorp,
was joined in the suit as a co-defendant as to Patent 5,469,500 only, and an
additional claim of breach of confidentiality was asserted by INTV against VIS.
The Company notified Alta Investissements, S.A. ("Alta") of the joinder of VIS
for purposes of indemnification of PSI under the terms of the Share Exchange
Agreement of April 16, 1996 between the Company and Alta relating to the
purchase of a controlling interest in Vicorp. The parties to the suit are
currently in discovery and the matter is set for trial in September, 1997. The
Company has defenses and will vigorously defend.

Daniel Gilbert Schultz v. Vicorp et al. This action was initiated in the
Court of First Instance, Curacao, Netherlands Antilles ("Court"), on March 29,
1996. The plaintiff filed a petition denominated a "complaint in summary
process" against Vicorp and Alta. The Company is not a party to this proceeding.
In this action, the plaintiff alleged that Vicorp had denied him access to the
books and records of Vicorp, and that Alta (as the then controlling shareholder
in Vicorp) had both refused to provide him access to Vicor's records and refused
to give him information on Alta's negotiations with third parties for the sale
of its shares of Vicorp stock. The plaintiff further alleged that these actions
impaired his ability to exercise certain put and call options that he held with
respect to certain shares of the stock of Vicorp. The plaintiff sought various
court orders requiring Alta and Vicorp to provide certain financial data to him,
to record in the Vicorp share register the option he held, and to accept and pay
for certain of the Plaintiff's shares that were the subject of a put option. The
plaintiff also sought an order prohibiting Alta from reducing its ownership
interest in Vicorp. On May 17, 1996, the Court dismissed all of the plaintiff's
claims. The plaintiff appealed to the Court of Appeals of the Netherlands
Antilles and Aruba on June 3, 1996. The appeal has been fully briefed and
argued, and judgment is expected in early 1997. The Company has defenses and
will vigorously defend.

43
<PAGE> 46

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transfer by the Company to Alta of certain shares of the Company's stock, both
of which transfers were carried out pursuant to the Share Exchange Agreement
between the Company and Alta dated April 13, 1996. The plaintiff alleges that
insufficient notice was given to him of a Vicorp shareholders' meeting at which
a resolution approving the share exchange was adopted, and that consequently the
defendants breached a duty of good faith towards him. The plaintiff seeks court
orders annulling the two share transfers, and prohibiting Vicorp from acting on
any instructions received from the Company. Subsequently, on August 19, 1996,
Alta and Vicorp filed a counterclaim against the plaintiff, seeking damages
incurred by each of them as a result of having to resist the plaintiff's efforts
in Curacao to obtain nullification of the share transfer; Alta and Vicorp claim
that the plaintiff's actions constitute violations of various agreements between
him and them, as well as violations of the principles of good faith. The action
has been fully briefed and argued and is awaiting decision by the Court. The
Company has defenses and will vigorously defend.

Daniel Gilbert Schultz v. Vicorp France S. A. et al. This action was
initiated in the French Labor Court (the "Conseil de Prud'hommes") on March 7,
1996. The Plaintiff filed claims against both Vicorp France S.A. and Vicorp Asia
Holding arising out of his employment relationships with companies in the Vicorp
Group. The Company is not a party to this proceeding. The Plaintiff has alleged
that the two defendants are liable to him, under provisions of French law, for
damages for dismissal without real and serious cause, for damages for abusive
indemnity, for dismissal indemnities, and for a paid vacation indemnity. A
hearing is scheduled for March of 1997. Under the terms of the Share Exchange
Agreement between the Company and Alta, Alta has agreed to indemnify the Company
and Vicorp against any damages or liability imposed against Vicorp in connection
with this action.

19. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE

The Company acquired BFD Productions, Inc. ("BFD") in October 1996 for
approximately $1,500,000 in cash and approximately 275,000 shares of
newly-issued common stock for a total purchase price of approximately $3,200,000
in exchange for all of the capital stock of BFD. The acquisition will be
accounted for using the purchase method of accounting. BFD offers
fully-automated enhanced services on a service bureau basis to individuals and
corporations. BFD provides a wide range of Internet and telephony-based services
primarily to software and technology companies and government and
quasi-governmental agencies. The BFD offerings include a full range of
fully-automated Internet access and related World Wide Web services, 800/900
numbers, and fax abilities, all of which run on the Company's UniPort product
line. BFD has focused on selling fully-automated services to software and
technology companies. Its success in the fully-automated help and hint industry
is represented by a customer list that includes Sega of America, Sony Video
Games, Activision, Electronic Arts, Spectrum Holobyte, Virgin Interactive, and
more than 40 others.

On September 30, 1996, the Company elected to change its year end from
August 31 to December 31. The change will be effective January 1, 1997.

On October 25, 1996, Russell I. Pillar resigned as the Company's President
and Chief Executive Officer. On December 10, 1996, Mr. Pillar resigned from the
Company's Board of Directors.

44
<PAGE> 47

PART III

ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

INFORMATION REGARDING DIRECTORS

RICHARD T. LIEBHABER, 61, became the Chairman of the Board of the Company
effective June 19, 1996 and has been a member of the Board of Directors since
June 1995. From December 1985 to May 1995, Mr. Liebhaber was with MCI
Telecommunications, Inc. where he most recently served as its Chief Strategy and
Technology Officer, as a member of its Management Committee and its Board of
Directors. He was the founding Chairman of Prodigy, an on-line computer service
and served on that board for more than ten years. Mr. Liebhaber is also a
Director of Geotek Communications, Alcatel Network Systems, U.S., Objective
Communications Company and Scholz Design, Inc.

RUSSELL I. PILLAR, 31, was President and Chief Executive Officer of the
Company from December 20, 1992 to October 25, 1996 and was a member of the
Company's Board of Directors from August 1992 until December, 1996. Mr. Pillar
is a founding partner in Critical Mass, an investment partnership which provides
strategic planning and related advisory services to emerging technology
companies, and he served in such position with Critical Mass and its predecessor
companies from October 1991 through December 1993. From April 1989 through
October 1991 he served in a number of executive positions, most recently as
President, with Japanese Critical Affiliates, Inc., an international merchant
bank. In addition to his service as Director of the Company, Mr. Pillar is a
Director of Silver King Communications, Inc. and Paracel, Inc. He also is a
Director of Suncoast Ronald McDonald House, Inc. and is a Director of Emeritus
of Eyecycle, Inc., two non-profit organizations.

KWANG-I YU, PH.D., 46, joined the Company as a member of the Board of
Directors in June 1994. Dr. Yu, who received a Ph.D. in Computer Science from
the California Institute of Technology, is President of Paracel, Inc., a leader
in the development of massively parallel computing systems. Prior to founding
Paracel, Inc., Dr. Yu was a TRW Fellow and headed TRW's high-speed computing
research and development effort.

HECTOR ALCALDE, 63, joined the Company as a member of the Board of
Directors in January 1994. In 1973, Mr. Alcalde founded the firm Alcalde & Fay,
and government and public affairs consulting firm in Washington, D.C., and
serves as its President and Chief Executive Officer. He has provided consulting
services to numerous national and international organizations and has served on
numerous public and corporate boards.

BERT KOLDE, 42, was appointed to the Company's Board of Directors in June
1995. Mr. Kolde also has been a member of the Paul Allen Group since 1994. Prior
to joining the Paul Allen Group, Mr. Kolde was the President of Asymetrix
Corporation from 1993 to 1994. From 1985 to 1993, Mr. Kolde was Executive Vice
President of Asymetrix. In addition, Mr. Kolde currently is Vice Chairman of the
Portland Trail Blazers and is a Director of Asymetrix Corporation, MetaTools,
Inc., and the Oregon Arena Corporation.

IAN M. DALZIEL, 49, was appointed to the Company's Board of Directors in
June of 1996. Since 1992, Mr. Dalziel has served as Chairman of the Board at
C.S.I., Inc. In addition, since 1989 Mr. Dalziel has also served as a Director
at Lepercq-Amcur Fund N.V. and as Chairman at Continental Assets Trust PLC. He
also was a member of the European Parliament from 1979 to 1984.

45
<PAGE> 48

EXECUTIVE OFFICERS

The following is a list of the current senior executives of the Company who
do not serve on the Board of Directors:

WILLIEM HUISMAN, 61, became President and Chief Executive Officer of
the Company during October 1996 and has been with the Company since April
1996. Prior to joining the Company, Mr. Huisman held several key positions
at a wide variety of large corporations. Most recently, he was Chairman of
the Board of Management at RAET N.N., a Dutch corporation specializing in
automation and software. Other previous positions include Chairman and CEO
at Philips Communication Systems Division; Chairman and CEO at Philips
Defense and Control Systems Division, Executive Vice President at AT&T
Philips Joint Venture; and Managing Director of Telecommunications Cables
at NFK Cable.

STEVEN H. GRANT, 36, Executive Vice President, Chief Financial
Officer, Treasurer and Corporate Secretary joined the Company in July 1996.
Prior to joining the Company, he served as Executive Vice President, Chief
Financial/Administrative Officer and Treasurer for Silver King
Communications, Inc. from 1992 to 1996. He also served as Director of
Corporate Finance, Investor Relations and Assistant Treasurer at Home
Shopping Network from 1989 to 1992. Mr. Grant is a Director of Silver King
Communications, Inc.

KENNETH M. CLINEBELL, 35, joined the Company in January 1994 and
currently serves as Vice President of Finance and Controller. Prior to
joining the Company, Mr. Clinebell spent five years at Kimmins
Environmental Services Corp. of Tampa, where he held the position of
Controller. Prior to Kimmins, Mr. Clinebell was with Laventhol and
Horwarth, CPAs for five years where he held the position of Manager of the
firm's audit and accounting division.

GREG L. BALTZER, 30, joined the Company in November 1995 and currently
serves as Executive Vice President. Prior to joining the Company, Mr.
Baltzer spent eight years with Brite Voice Systems where he most recently
held the position of Vice President and General Manager.

TED L. GRIGGS, 29, joined the Company in August of 1994 through the
acquisition of The Renaissance Group. He currently serves as the Company's
Chief Technologist and is responsible for Precision Systems' technical
direction. Prior to joining Precision Systems, Mr. Griggs was co-founder of
The Renaissance Group and chief software developer of the first
multi-thousand interactive voice response system.

46
<PAGE> 49

ITEM 11 -- EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table provides information on the compensation received by
the former Chief Executive Officer ("CEO") and the four other highly compensated
executive officers (the "Executive Officers") for the fiscal year ended August
31, 1996, 1995 and 1994.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ----------------------
OTHER ANNUAL RESTRICTED ALL OTHER
NAME AND FISCAL COMPENSATION STOCK OPTIONS/ COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) AWARD ($) SARS ($)
- ----------------------------- ------ ---------- --------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Russell I. Pillar............ 1996 220,857 140,000 -- 139,213(7) -- --
Former President and Chief 1995 166,846 -- -- -- 45,000 --
Executive Officer(1) 1994 127,626 30,000 7,296(2) -- 510,000 --
Michael T. Felix(4).......... 1996 149,882 63,000 -- 52,203(8) -- --
Senior Vice President 1995 134,365 -- -- -- 25,740 --
1994 113,847 19,500 -- -- 75,000 --
John R. Hindman.............. 1996 167,510 63,000 -- 52,203(8) 100,000 --
Senior Vice President and 1995 128,219 -- -- -- 25,740 --
Chief Operating 1994 88,588 19,500 -- -- 105,000 --
Officer(3)(4)
Alan R. Donahue(4)(5)........ 1996 125,192 -- 35,000(2) -- 100,000 --
Senior Vice President 1995 -- -- -- -- -- --
1994 -- -- -- -- -- --
Kenneth M. Clinebell......... 1996 88,881 25,000 -- -- 0 --
Vice President(6) 1995 82,269 10,009 -- -- 15,000 --
1994 46,712 330 -- -- 25,700 --
</TABLE>

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

(1) Mr. Pillar commenced employment with the Company in December 1993 and
resigned during October, 1996.
(2) Represents relocation expense reimbursement.
(3) Mr. Hindman's employment commenced in October 1993. As a result, no
information regarding compensation prior to such date is provided herein.
(4) Employment terminated during August 1996.
(5) Mr. Donahue's employment commenced in October 1995. As a result, no
information regarding compensation prior to such date is provided herein.
(6) Mr. Clinebell's employment commenced in January 1996. As a result, no
information regarding compensation prior to such date is provided herein.
(7) As of August 31, 1996, the restricted stock had a fair market value of
$96,077. During October, 1996, Mr. Pillar resigned from the Company and, as
a part of his severance agreement, all restricted stock grants were
automatically advance vested.
(8) As of August 31, 1996, the restricted stock had a fair market value of
$36,027. During August, 1996, Mr. Hindman and Mr. Felix resigned from the
Company and, as a part of their severance agreements, all restricted stock
grants were automatically advance vested.

47
<PAGE> 50

The following table summarizes stock options granted to the Executive
Officers in fiscal 1996. The amount shown as potentially realizable values of
these options are based on assumed annual rates of appreciation in the price of
the Company's Common Stock of 5 and 10 percent over the terms of the options and
are not intended to forecast future appreciation of the Company's stock price:

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL OPTIONS PRICE APPRECIATION FOR
GRANTED TO OPTION TERM(3)
EMPLOYEES IN EXERCISE OR EXPIRATION ----------------------
NAME AND PRINCIPAL POSITION OPTIONS GRANTED(1) FISCAL YEAR BASE PRICE(2) DATE 5 PERCENT 10 PERCENT
- ----------------------------- ------------------ ------------- ------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
John R. Hindman.............. 100,000 7.81% $ 14.50 6/13/06 $ 911,000 $2,311,000
Senior Vice President and
Chief Operating Officer
Alan R. Donahue.............. 100,000 7.81% $ 14.25 11/23/05 $ 897,000 $2,271,000
Senior Vice President
</TABLE>

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

(1) Under the terms of the Employee Stock Option and Restricted Option Plan, the
Compensation and Benefits Committee retains discretion, subject to plan
limits, to modify the terms of outstanding options and to reprice such
options.
(2) Options were granted at an exercise price equal to the closing price of the
Common Stock on the date prior to the date of grant.
(3) Potential realizable value is based on fair market value of stock on grant
date compounded annually at the rates shown in column heading, for option
term, less total exercise price. These rates of appreciation are mandated
by the rules of the Securities and Exchange Commission, and do not
represent an estimate or projection of future prices for the Company's
Common Stock.

The following table summarizes the net value realized on the exercise of
options in fiscal 1996, and the value of outstanding options as of August 31,
1996 for the named Executive Officers:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
SHARES ACQUIRED VALUE REALIZED --------------------------- ---------------------------
NAME ON EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Russell I. Pillar.......... -- -- 585,228 18,403 $ 2,425,022 $ 112,718
Michael T. Felix........... 105,900 470,283 0 0 $ 0 $ 0
John R. Hindman............ -- -- 136,700 99,922 $ 423,125 $ 69,022
Alan R. Donahue............ -- -- 20,000 80,000 $ 0 $ 0
Kenneth M. Clinebell....... -- -- 18,700 23,865 $ 53,775 $ 82,673
</TABLE>

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

(1) Difference between the fair market value of the underlying Common Stock and
the exercise price, for in-the-money options, on August 31, 1996.

48
<PAGE> 51

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the fiscal year ended August 31, 1996, the Compensation Committee
for the Company was comprised of Kwang-I Yu (serving as Chairman of the
Committee), Richard T. Liebhaber and Hector Alcalde. Russell I. Pillar serves as
a Director of Paracel, Inc.

COMPENSATION AND BENEFITS COMMITTEE
REPORT ON EXECUTIVE COMPENSATION

The Compensation and Benefits Committee of the Board of Directors (the
"Committee") is responsible for reviewing and approving the compensation and
severance arrangements for each of the Company's executive officers and the
individual managers reporting directly to the Chief Executive Officer and for
granting shares of restricted stock and options to purchase shares of Common
Stock under the Company's Employee Stock Option and Restricted Stock Option Plan
(the "Employee Plan"). The goal of the Committee is to maintain executive
compensation programs and policies which enable the Company to attract and
retain the services of highly-qualified executives. Awards of incentive
compensation in the form of discretionary cash bonuses and periodic grants of
stock options and/or restricted stock grants are designed to reward and
incentivize individual initiative and achievement.

SALARY

In 1992 the Company undertook to establish a salary program in connection
with William M. Mercer, Inc., a compensation consulting firm. They reviewed
salary practices of various industry groups in the local Tampa/St. Petersburg
market, the southeastern region and nationally. In addition, in July 1995, the
Committee updated such study with additional work by Pearl Meyer Associates
which explored industry comparables in depth. Based on these studies, the
Company established a salary grade matrix which includes matrices for merit and
promotional increases which were set at the median compensation amounts
identified in the study. Salaries paid to executive officers are based upon the
Committee's subjective assessment of the nature of the position, individual and
corporate performance, individual experience and expertise, attainment of
specific performance-related targets, and Company tenure of the executive. All
salary recommendations of the individuals reporting directly to the Chief
Executive Officer are presented by the Chief Executive Officer to the Committee,
which is responsible for approving or disapproving those recommendations.

INCENTIVE BONUS

Near the beginning of each fiscal year, the Board asks the Chief Executive
Officer to submit to the Committee a strategic and tactical plan for the coming
fiscal year. Following each fiscal year, the Chief Executive Officer develops
individual bonus recommendations for executives based upon the Chief Executive
Officer's evaluation of each executive's contribution to the Company. No
specific formula is used; however, the Chief Executive Officer and the Committee
review factors which may include achieving specific objectives developed by the
executive and the Chief Executive Officer relating to achievement of budgeted
goals of revenue, profitability, new product development, cost containment, new
customer development, and other similar factors. Such factors are linked to
specific performance related targets and given specific weight.

In January 1996, the Committee adopted a bonus plan for fiscal year linking
targeted bonus amounts, determined as a percentage (ranging from 30% to 100%) of
base salary, to the achievement of certain corporate objectives with a portion
of each executive's targeted bonus allocable to achievement of the specific
objectives. For fiscal 1996, these objectives included the achievement of
certain financial, tactical and strategic goals including targeted revenue
growth, increased cash flow and net income, new product development and improved
realization on marketing efforts. Certain of such goals were achieved by the
Company in fiscal 1996; however, due to the Company's failure to meet a number
of financial goals, the Committee declined to award bonuses associated with
those goals and reduced by approximately 50% the targeted bonuses payable under
the Company's incentive bonus program for all other goals. The Committee
determined on a subjective basis to increase or decrease the bonus amounts paid
with respect to the goals achieved by the Company and in certain cases no
bonuses were granted.

49
<PAGE> 52

STOCK OPTIONS AND RESTRICTED STOCK

The Committee is authorized to grant incentive and non-qualified stock
options, as well as shares of restricted stock, to key employees of the Company,
including executives. Such grants are intended to provide additional long-term
incentive to key employees. No specific formula is used to determine grants made
to any particular person (including executives); however, grants are based
generally on factors such as the length of employment, promotion, contribution
toward Company performance, and expected contribution toward meeting long-term
strategic goals of the Company, together with a review of outstanding options or
restricted stock grants. The Company has adopted guidelines regarding
appropriate stock option grants for employees. Option grants typically vest over
a five-year period and expire at the end of ten years. The number of stock
options granted during fiscal year 1996 to executive officers other than the
Chief Executive Officer was based upon the recommendation of the Chief Executive
Officer's subjective evaluation of the contribution of such officers to the
Company during the fiscal year. The number of stock options granted during
fiscal 1996 to the Chief Executive Officer was based on the recommendation of
the Compensation Committee after consideration of the Chief Executive Officer's
base salary and the Compensation Committee's subjective evaluation of the
contribution of the Chief Executive Officer to the Company during the fiscal
year. During fiscal 1996, Russell I. Pillar, former Chief Executive Officer
("Former CEO"), was granted 15,686 shares of restricted stock. Additionally John
R. Hindman and Michael T. Felix were each granted 5,882 shares of restricted
stock.

COMPENSATION OF CHIEF EXECUTIVE OFFICER

Compensation of the Former CEO was determined based on negotiations by the
Former CEO and the Compensation Committee and ratified by the Board of
Directors. The Chairman of the Board and the Compensation Committee considered
the compensation studies, among other factors, as a basis for determining the
CEO's compensation package. The Former CEO was also eligible for the payment of
a discretionary annual bonus for achieving revenue and other performance
criteria.

For fiscal 1996, the Former CEO was paid a bonus at a reduced level
consistent with the methodology described above in an amount equal to
approximately 15% of his base salary. The Committee determined that while the
Company achieved certain financial, strategic and tactical goals identified for
the fiscal year, the overall performance of the Company did not warrant the
payment of the Former CEO's targeted bonus amount of 100% of base salary. (No
options were granted to the Former CEO during fiscal 1996.) Following the end of
the fiscal year, Mr. Pillar resigned as CEO of the Company and Willem Huisman
was named the Current Chief Executive Officer. For fiscal 1996, the Current
CEO's compensation was determined in a manner similar to that of the Former CEO.
During fiscal 1996, the Current CEO was granted 100,000 options to purchase the
Company's Common Stock at an exercise price of $11.50 per share. No restricted
stock was granted to the Current CEO during fiscal 1996.

COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)

Section 162(m) of the Internal Revenue code, enacted in 1993, generally
disallows tax deduction to public companies for compensation over $1 million
paid to the corporation's Chief Executive Officer and four other most highly
compensation Executive Officers. Qualifying performance-based compensation will
not be subject to the deduction limit if certain requirements are met. The
Committee intends to consider the provisions of Section 162(m) in connection
with the performance-based portion of the compensation of its executives (which
currently consists of stock option grants, restricted stock grants, and annual
bonuses described above); however, the Committee does not necessarily intend to
structure compensation to its executives to avoid disallowance of any tax
deductions in the future in light of the Company's current net operating losses
and the necessity to meet all of the requirements imposed by Section 162(m) and
the proposed regulations thereunder for compensation fully to be deductible for
federal income tax purposes.

Members of the Compensation and Benefits
Committee

Kwang-I Yu, Chairman
Richard T. Liebhaber
Hector Alcalde

50
<PAGE> 53

STOCK PERFORMANCE

The following information compares the Company's cumulative stockholder
return on its Common Stock since its spin off from Home Shopping Network, Inc.
on July 31, 1992, through August 31, 1996, with the return on the NASDAQ Market
Index, the S&P 500 Index, and the S&P High Technology Composite Index. To date,
no dividends have been paid with respect to the Common Stock of the Company.

[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
NASDAQ
Measurement Period Precision NASDAQ Stock Computer In-
(Fiscal Year Covered) Systems, Inc. Index dex
<S> <C> <C> <C>
7/31/92 100.00 100.00 100.00
8/31/92 35.00 96.94 96.06
8/31/93 215.00 127.89 110.51
8/31/94 122.50 133.11 115.18
8/31/95 285.00 179.26 202.26
8/31/96 245.00 202.13 241.54
</TABLE>

COMPENSATION OF DIRECTORS

The Company pays an annual fee of $10,000 ($2,500 per quarter) to each
director not employed as an officer of the Company. It also pays each director
not employed as an officer of the Company $1,000 for each meeting of the Board
of Directors which he or she attends in person or $500 for each telephonic
meeting, plus reimbursement for all reasonable expenses incurred by such
director in connection with his or her attendance at any meeting of the Board of
Directors. Furthermore, the Company pays each member of a committee of the Board
of Directors not employed by the Company as an officer $1,000 for each meeting
of a committee of the Board of Directors which he or she attends in person, or
$500 for each telephonic meeting, plus reimbursement for any expenses incurred
in connection with his or her attendance at any committee meeting. The outside
directors of the Company also participate in the Stock Option Plan for Outside
Directors (the "Directors' Plan") pursuant to which each outside director has
been granted an option to purchase 25,000 shares of Common Stock. During fiscal
year 1996 Richard T. Liebhaber was granted an option to purchase 50,000 shares
at an exercise price of $14.50.

Under the Directors' Plan, options to purchase up to 500,000 shares of
Common Stock may be granted to directors who are not employees of the Company.
The Directors' Plan provides that each director who is not a full-time employee
of the Company shall automatically be granted an initial option to purchase
25,000 shares of Common Stock. A Tenure Option to purchase an additional 25,000
shares of Common Stock is automatically granted to a director who is not an
employee of the Company and who has served one full year as a director. The
exercise price for options issued under the Directors' Plan is to be equal to
the fair market value of Common Stock on the date prior to the date of grant, or
in the case of options granted as of July 31,

51
<PAGE> 54

1992, the average of the last sale prices for the ten trading days immediately
following July 31, 1992. The closing price for the Company's Common Stock on
July 31, 1992 was $2.50 per share.

Options granted under the Directors' Plan are subject to the terms of a
stock option agreement and vest and become exercisable equally over three years
beginning on the date of grant for the initial option. The Tenure Option vests
over a five year period. All options expire five years from the date of grant.
Options granted under the Directors' Plan expire 90 days after the resignation
of a director from the Board of Directors. The number of shares issuable under
the Directors' Plan and the exercise price for options granted under the
Directors' Plan are subject to adjustment as the result of stock splits, stock
dividends, recapitalization or mergers or other similar changes affecting the
number of outstanding shares of Common Stock. No options may be granted under
the Directors' Plan after the tenth anniversary of its adoption.

In connection with their resignations from the Company, Russell I. Pillar,
John R. Hindman, and Michael T. Felix were provided severance agreements. Mr.
Pillar received a lump sum payment of one year's salary ($230,000), a six-month
consulting agreement for $19,167 per month and the right to reimbursement of
health insurance premiums for up to one year post employment. Mr. Hindman was
provided a lump sum payment of $50,000 and a six-month consulting agreement for
$14,583 per month. Mr. Felix was provided a three-month consulting agreement for
$12,500 per month. Additionally, Mr. Pillar, Mr. Hindman and Mr. Felix received
automatic advance vesting on fiscal 1996 restricted stock grants. See
"Compensation and Benefits Committee Report on Executive Compensation."

52
<PAGE> 55

ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table and accompanying footnotes set forth information
concerning ownership of the Company's Common Stock as of December 5, 1996. The
table also shows information concerning beneficial ownership by all directors
and nominees, by each of the current executive officers named in the Summary
Compensation Table (the "Summary Compensation Table") that follows and by all
directors and executive officers as a group. The number of shares beneficially
owned by each director or executive officer is determined under rules of the
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares to which the individual has the sole or shares voting power or
investment power and also any shares which the individual has the right to
acquire within sixty days of November 30, 1996, though exercise of any stock
option or other right. Unless otherwise indicated, each person has sole
investment and voting power (or shares such power with his or her spouse) with
respect to the shares set forth in the following table (see next page).

TABLE OF SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT OF CLASS
- ---------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Alta Investissments SA.......................................... 2,808,427 15.26
8 Boulevard Emmanuel Servais
L-2535 Luxembourg
Vulcan Ventures Incorporated.................................... 2,750,000 14.94
110-110th Avenue NE, Suite 530
Bellevue, Washington 98004
RMS Limited Partnership(1)...................................... 2,415,945 13.12
50 West Liberty Street, Suite 650
Reno, Nevada 89501
Willem Huisman(2)............................................... 50,000 *
Russell I. Pillar............................................... 612,631 3.33
Hector Alcalde(3)............................................... 35,000 *
Bert Kolde(4)................................................... 21,666 *
Richard T. Liebhaber(5)......................................... 31,666 *
Kwang-I Yu(6)................................................... 30,000 *
Ian M. Dalziel(7)............................................... 8,333 *
Greg L. Baltzer(8).............................................. 26,000 *
Steven H. Grant(9).............................................. 20,001 *
Kenneth M. Clinebell(10)........................................ 18,700 *
Ted Griggs(11).................................................. 434,900 2.36
All officers and directors as a group (eleven persons).......... 1,288,897 7.00
</TABLE>

The following table sets forth information relating to the beneficial
ownership of the Company's Series A Preferred Stock:

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT OF CLASS
-------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
RMS Limited Partnership................................. 10,000 100.0
50 West Liberty Street, Suite 650
Reno, Nevada 89501
</TABLE>

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

* Represents less than 1 percent
(1) RMS Limited Partnership is a limited partnership organized under the laws
of the State of Nevada, the managing general partner of which is Crystal
Diamond, Inc. Roy M. Speer is the sole stockholder of Crystal Diamond,
Inc., and the non-managing general partner of RMS Limited Partnership.
Richard W. Baker, as trustee under an InterVivos Trust agreement dated
January 1, 1967, with Roy M. Speer, is a limited partner of RMS Limited
Partnership. All or any portion of Series A Preferred Stock may be

53
<PAGE> 56

converted at any time, into shares of Common Stock at a conversion price of
$4.76 per share. The shares of Series A Preferred Stock may be converted
into 1,218,487 shares of Common Stock or approximately 6.2 percent of the
class. Assuming conversion of all the outstanding shares of Series A
Preferred Stock, RMS Limited Partnership would own 3,634,432 shares,
representing approximately 18.5 percent of the class. Mr. Speer and Crystal
Diamond, Inc. share beneficial ownership of the Common Stock and Series A
Preferred Stock held by RMS Limited Partnership. Does not include 17,213
shares of Common Stock held by Richard W. Baker, individually and as
trustee for certain irrevocable trusts established for the benefit of
certain members of Roy M. Speer's family.
(2) Does not include non-vested option to purchase 175,000 shares pursuant to
the Company's Employee Stock Option and Restricted Stock Plan.
(3) Does not include non-vested options to purchase 15,000 shares of Common
Stock granted pursuant to the Company's Stock Option Plan for Outside
Directors.
(4) Does not include non-vested options to purchase 28,334 shares of Common
Stock granted pursuant to the Company's Stock Option Plan for Outside
Directors.
(5) Does not include non-vested options to purchase 28,334 shares of Common
Stock granted pursuant to the Company's Stock Option Plan for Outside
Directors and 40,000 shares of Common Stock granted pursuant to the
Company's Employee Stock Option and Restricted Stock Plan.
(6) Does not include non-vested options to purchase 20,000 shares of Common
Stock granted pursuant to the Company's Stock Option Plan for Outside
Directors.
(7) Does not include non-vested options to purchase 16,667 shares of Common
Stock granted pursuant to the Company's Stock Option Plan for Outside
Directors.
(8) Does not include non-vested options to purchase 66,280 shares of Common
Stock granted pursuant to the Company's Employee Stock Option and
Restricted Stock Plan.
(9) Does not include non-vested options to purchase 82,591 shares of Common
Stock granted pursuant to the Company's Employee Stock Option and
Restricted Stock Plan.
(10) Does not include non-vested options to purchase 23,865 shares of Common
Stock granted pursuant to the Company's Employee Stock Option and
Restricted Stock Plan.
(11) Does not include non-vested options to purchase 56,373 shares pursuant to
the Company's Employee Stock Option and Restricted Stock Plan.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, officers, and persons who own more than 10 percent of
the Company's Common Stock, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission and the NASD.
Such persons are required by the Commission's regulations to furnish the Company
with copies of all Section 16(a) reports which they file.

Based solely on its review of the copies of such forms received by it with
respect to fiscal 1996 or written representation from certain reporting persons,
the Company believes that all filing requirements applicable to its directors,
officers, and persons who own more than 10 percent of the Company's Common Stock
has been complied with.

ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During December, 1996, the Company prepaid $450,000 of the note payable
with Alta (originally due in January, 1997). The prepayment was made in exchange
for the abatement of interest associated with the prepayment amount.

54
<PAGE> 57

PART IV

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

(a) List of Documents filed as part of this Report

(1) Financial statements
Independent Auditors' Report -- Deloitte & Touche LLP
Independent Auditors' Report -- Coopers & Lybrand N.V.
Consolidated Balance Sheets as of August 31, 1996 and 1995
Consolidated Statements of Operations for the years ended August 31,
1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
August 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended August 31,
1996, 1995, and 1994
Notes to Consolidated Financial Statements

(2) Financial Statement Schedules

<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER NUMBER
- -------- ------
<S> <C> <C>
II Valuation and Qualifying Accounts.................... S-1
</TABLE>

The report of the Company's independent auditors with respect to the above
listed financial statement schedules appears on page 56 hereof.

All other financial statements and schedules not listed have been omitted
since the required information is included in the financial statements or the
notes thereto or is not applicable or required.

(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S> <C>
2.0 -- Merger Agreement and Plan of Reorganization between the Registrant and The
Renaissance Group filed in Exhibit 99.1 to the Company's Form 8-K, as amended, is
incorporated herein by reference
2.1 -- Share Exchange Agreement between the Registrant and Alta Investissements S.A. filed
in Exhibit 99.1 to the Company's Form 8-K, as amended, is incorporated herein by
reference
3.1 -- Restated Certificate of Incorporation of the Registrant filed as Exhibit 3.1 to the
Company's Registration Statement on Form 10, as amended, is incorporated herein by
reference
3.2 -- Restated bylaws of the Registrant filed as Exhibit 3.2 to the Company's
Registration Statement on Form 10, as amended, is incorporated herein by reference
21 -- Subsidiaries of the Registrant
22 -- Proxy Statement of the Registrant dated June 13, 1996 is incorporated herein by
reference
27 -- Financial Data Schedule (for SEC use only)
</TABLE>

55
<PAGE> 58

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, hereunto duly authorized.

December 11, 1996

PRECISION SYSTEMS, INC.

By: /s/ STEVEN H. GRANT
-----------------------------------
Steven H. Grant
Chief Financial Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON DECEMBER 11, 1996.

<TABLE>
<C> <S>
/s/ RICHARD T. LIEBHABER Chairman of the Board and Director
- ---------------------------------------------
Richard T. Liebhaber

/s/ STEVEN H. GRANT Chief Financial Officer
- ---------------------------------------------
Steven H. Grant

/s/ KENNETH M. CLINEBELL Vice President and Controller
- --------------------------------------------- (Principal Accounting Officer)
Kenneth M. Clinebell

/s/ KWANG-I YU Director
- ---------------------------------------------
Kwang-I Yu

/s/ HECTOR ALCADE Director
- ---------------------------------------------
Hector Alcade

/s/ BERT KOLDE Director
- ---------------------------------------------
Bert Kolde

/s/ IAN DALZIEL Director
- ---------------------------------------------
Ian Dalziel
</TABLE>

56
<PAGE> 59

INDEPENDENT AUDITORS' REPORT

Board of Directors
Precision Systems, Inc.

We have audited the consolidated financial statements of Precision Systems, Inc.
and subsidiaries (the "Company") as of August 31, 1996 and 1995, and for each of
the three years in the period ended August 31, 1996, and have issued our report
thereon dated October 31, 1996; such consolidated financial statements are
incorporated herein by reference. Our audits also included the consolidated
financial statement schedule of the Company as of August 31, 1996 and 1995,
listed in Item 14, and for each of the three years in the period ended August
31, 1996. The consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. We did not audit the consolidated financial statements of Vicorp
N.V. (a consolidated subsidiary), which statements reflect total assets
constituting 41 percent of consolidated total assets as of August 31, 1996, and
total revenues constituting 42 percent of consolidated total revenues for the
year ended August 31, 1996. Such financial statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Vicorp N.V., is based solely on the report
of such other auditors. In our opinion, based on our audits and the report of
other auditors, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

Tampa, Florida
October 31, 1996

57
<PAGE> 60

SCHEDULE II

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- ------------------------------------- ---------- ------------ -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year ended August 31, 1996......... $ 153,561 $ 1,196,412 $ -- $ (96,626) $1,253,347
Year ended August 31, 1995......... 37,335 116,226(1) -- -- 153,561
Year ended August 31, 1994......... -- 37,335(1) -- -- 37,335
Obsolescence reserve
Year ended August 31, 1996......... $ -- $ -- $ -- $ -- $ --
Year ended August 31, 1995......... 885,002 -- -- -- --
Year ended August 31, 1994......... -- 885,002 -- -- 885,002
</TABLE>

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

(1) Represents write-off of uncollectible accounts.

<PAGE> 1

EXHIBIT 21

List of Subsidiaries of Precision Systems, Inc. as of August 31, 1996:

<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION
- --------------------------------------------- ---------------------------------------------
<S> <C>
The Renaissance Group Delaware
Vicorp, N.V. The Netherlands Antilles
Vicorp Europe Holding B.V. The Netherlands
Vicorp Benelux B.V. The Netherlands
Vicorp International Services Nederland B.V. The Netherlands
Vicorp International Services S.A. Belgium
Vicorp France S.A. France
Vicorp Scandinavia A/S Denmark
Vicorp Scandinavia A.B. Sweden
Vicorp U.K. Limited England
Vicorp Finland OY Finland
Vicorp Interactive Systems, Inc. Massachusetts
Vicorp Deutschland GmbH Germany
Vicorp Asia Holding Limited Hong Kong
Vicorp Asia-Pacific Services Pte Ltd. Singapore
Vicorp Geminus GmbH Germany
Belle System Networking ApS. Denmark
</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 12,174,250
<SECURITIES> 0
<RECEIVABLES> 7,528,717
<ALLOWANCES> 1,253,347
<INVENTORY> 0
<CURRENT-ASSETS> 23,201,591
<PP&E> 31,875,976
<DEPRECIATION> 23,357,434
<TOTAL-ASSETS> 47,557,346
<CURRENT-LIABILITIES> 19,427,811
<BONDS> 0
0
100
<COMMON> 172,667
<OTHER-SE> 27,676,041
<TOTAL-LIABILITY-AND-EQUITY> 47,557,346
<SALES> 13,724,228
<TOTAL-REVENUES> 26,702,827
<CGS> 6,023,989
<TOTAL-COSTS> 6,023,989
<OTHER-EXPENSES> 57,142,413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (34,693,961)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,693,961)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,693,961)
<EPS-PRIMARY> (2.39)
<EPS-DILUTED> (2.39)

</TABLE>