PRECISION SYSTEMS INC, 10-K, 1999-03-31

PRECISION SYSTEMS INC
10-K, 1999-03-31
TELEPHONE & TELEGRAPH APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------------
FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) for the Fiscal Year
Ended December 31, 1998, of the Securities Exchange Act of 1934 [Fee
Required]

[ ] 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)

Delaware 41-1425909
-------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

11800 30th Court North, St. Petersburg, Florida 33716
--------------------------------------------------------------
(Address of registrant's principal executive offices, including zip code)

(727) 572-9300
-------------------------
(Registrant's telephone number, including area code)

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

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

None

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. [ ]<PAGE>

As of March 26, 1999, there were outstanding 17,886,707 shares of
Common Stock, 10,000 shares of Series A Preferred Stock and 4,500 shares
of Series B Preferred Stock. The aggregate market value of the voting
stock held by non-affiliates of the registrant as of March 26, 1999, was
$14,488,233.

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 [ ]

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

DOCUMENTS INCORPORATED BY REFERENCE:

Documents Form 10-K Reference
---------- ----------------------

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 1999 Annual
Meeting of Shareholders of the registrant.<PAGE>

PRECISION SYSTEMS, INC.

Form 10-K

TABLE OF CONTENTS

PAGE NO.
--------
PART I
Item 1 Business . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2 Properties . . . . . . . . . . . . . . . . . . . . . . 14
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . 14
Item 4 Submission of Matters to a vote of
Security Holders . . . . . . . . . . . . . . . . . . 15

PART II
Item 5 Market Price of and Dividends on the Registrant's
Common Stock and Related Stockholder Matters . . . . 16
Item 6 Selected Financial Data . . . . . . . . . . . . . . . 18
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 21
Item 8 Financial Statements . . . . . . . . . . . . . . . . . 42

PART III
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures . . . . . . . . 93
Item 10 Directors and Executive Officers of the Registrant . . 93
Item 11 Executive Compensation . . . . . . . . . . . . . . . . 93
Item 12 Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . 93
Item 13 Certain Relationships and Related Transactions . . . . 93

PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . 94<PAGE>

PART I

Item 1 - Business

GENERAL

Precision Systems, Inc. (the "Company" or "PSI"), is a global
company that, together with its subsidiaries, delivers telecommunications
solutions to service providers and corporations. The Company offers three
categories of products: (1) network-based telecommunications products;
(2) customer premises equipment products; and (3) service bureau
transactional offerings. Headquartered in St. Petersburg, Florida, the
Company has sales and support offices worldwide.

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 world wide.

On October 7, 1996, the Company acquired BFD Productions, Inc.
("BFD"), a telecommunications service bureau that offers call processing
in the United States and Canada via 800, 888, 900, and local phone
numbers.

The Company has chosen to use its Vicorp(TM) brand name to sell its
network-based platforms and its customer premises equipment products. The
Company uses its BFD Productions brand name to sell its service bureau
products.

THE COMPANY'S PRODUCTS

The Company's products fall into three categories: network-based
telecommunications products, customer premises equipment products, and
service bureau transactional offerings. The Company supplies different
combinations of products to each of these three categories.

In each of the three categories mentioned above, the Company has a
different set of customers and uses its core technology to deliver unique
solutions.

CATEGORY CUSTOMER SET PRODUCTS

1. Network-based Large Enhanced services
telecommunications telecommunications including calling
products carriers cards, prepaid cards,
prepaid wireless,
enhanced toll-free,
and general purpose
service nodes

1<PAGE>
2. Customer premises Call centers and Multimedia interactive
equipment products customer contact customer service
centers in platforms that manage
corporations call routing, present
scripted customer data
on the terminals of
service
representatives, and
provide management
reporting capabilities

3. Service bureau Government and Fully-automated
transactional corporations telephony-based
offerings enhanced services

NETWORK-BASED TELECOMMUNICATIONS PRODUCTS

The Company's two primary network-based telecommunications products
are an enhanced calling suite, consisting of calling cards, prepaid
cards, and prepaid wireless and enhanced toll-free routing.

Enhanced Calling Suite. The Company refers to its enhanced calling
suite as Lydian(TM). In a typical Lydian calling card installation, the
carrier requires their calling card customers to dial a toll-free number
(800 or 888 in the United States, standards vary per country
internationally) and enter a secured personal identification number
("PIN") to make calls. These toll-free calls are routed to a Lydian
platform where the PIN is processed and the customer is allowed to make
outgoing calls.

Typically, calling card users are billed at month-end for all of the
usage they incur during the month. Lydian also uses specific PINs to
support prepaid calling for callers with limited credit. These prepaid
customers pay in advance for long distance calling, and they are allowed
to use their account until the advance payment is exhausted. The Lydian
prepaid calling card application is available to wireline and wireless
telecommunications companies.

Lydian is designed with built-in flexibility. This allows
telecommunications carriers to modify menus and prompts using the
Company's graphical service creation environment (see "QuickScript" under
the "Middleware" section below). In addition, configurable options in
Lydian let carriers add enhanced features, such as project accounting
codes and special pricing promotions.

Enhanced Toll-Free Routing. The Company's enhanced toll-free routing
application allows telecommunications carriers to tailor toll-free
(800/888/freephone) services to the needs of their customers. In a
typical example, a caller to an enhanced 800 number is asked to press 1
to go to sales or 2 to transfer to the service center.

The Company has been a pioneer in the field of enhanced toll-free
services with its first installations at MCIWorldCom in 1992. In 1998,
three of the five largest long distance carriers in North America used
the Company's technology in some portion of their enhanced toll-free
solution.

2<PAGE>
CUSTOMER PREMISES EQUIPMENT PRODUCTS

The Company's intelligent call center solution encompasses a range
of features and functionality designed to fit customer service needs. The
Company's VACCS(TM) product is its call center offering. VACCS manages
call routing and matches the call to information from the corporate data
warehouse, which can be presented on the screen of the customer service
representative. The VACCS product also can perform intelligent
skill-based routing, and can handle distributed call centers and remote
agents. The Company offers a range of call center options, up to a fully
integrated multimedia call center solution.

The Company's call center solutions are used in the financial,
insurance, airline, retail, telco, and service bureau industries. The
benefits of the Company's intelligent call center solutions include
reduced training costs, streamlined maintenance activities, system-wide
performance tracking, system expandability, intelligent call transfer to
attendants, and more self-serve features for callers freeing up human and
system resources.

VACCS uses the Company's graphical service creation environment,
QuickScript, with a call center specific scripting library. This enables
the creation of inbound, outbound, CTI, agent assist, and Interactive
Voice Response ("IVR") services from one single environment. The
flexibility of QuickScript allows companies to develop custom scripts for
their agents. Two key components of the VACCS product, its software
automated call distribution and AgentStation, are described below.

Software Automated Call Distribution ("ACD") (Skill-based Routing).
This product 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.

AgentStation. AgentStation presents any necessary information about
the call to the terminal of the customer service agent. This information
might include data entered by the caller, such as an account number,
and/or data retrieved from a corporate database, such as account history.
This allows the customer service agent to modify the conversation
according to the customers and their needs.

SERVICE BUREAU TRANSACTIONAL OFFERING

The Company's third product category, its service bureau, is sold
through its BFD Productions, Inc. subsidiary. BFD sells 800, 888, and 900
services directly to corporations and other entities. BFD's customers
include government agencies and large software entertainment companies
who use BFD to provide video game hint lines.

BFD offers custom applications to customers, but it has also
developed a suite of standard products that customers can select. These
standard products include:

Info-line/Lead Generator. This application can provide product or
service information to callers, and allows the callers to leave addresses
to receive more information.

3<PAGE>
Teleconferencing/Digital Playback. The basic form of this
application digitally records conference calls while they are in
progress. Later, the conference can be played back for review.

Dealer Locator. This application uses the caller's area code (which
is captured with Automatic Number Identification) and locates the nearest
retailer in the caller's geographic region.

Tele-survey/Agent Testing. This application conducts automated
surveys, testing, and other related applications. Results are available
immediately for analysis and can even be displayed over the Internet.

Credit Card Transactions. BFD has the ability to process credit card
transactions over 900, 800, and Internet so they can be incorporated into
any type of application.

Polling. Polling applications, which usually ask simple yes or no
questions, are very prevalent within the television and cable markets and
demand higher capacity call capability, which BFD can offer.

Fundraising. BFD's fundraising applications allow non-profit groups
to collect pledges by having contributors dial 900 numbers.

Broadcast Fax. BFD can deliver up to 12,000 simultaneous faxes.

Authorized Access/Pin Codes. By encoding parameters within personal
identification numbers, access to an application can be controlled.
Extensive tracking is also available.

Voice Messaging/Agent Alert. These products provide instantaneous
up-to-date information via pagers, telephones, fax machines, and
computers.

Summary of Products

As mentioned earlier, the Company's products are segmented into
three main categories: (1) Network-based telecommunications products,
which include Lydian Enhanced Calling and Enhanced Toll-Free Routing; (2)
Customer premises equipment products consisting of the VACCS suite of
call center applications; and (3) Service bureau transactional offerings
that include Info-line/Lead Generator, Teleconferencing/Digital Playback,
Dealer Locator, Tele-survey/Agent Testing, Credit Card Transactions,
Polling, Fundraising, Broadcast Fax, Authorized Access/PIN Codes, and
Voice Messaging/Agent Alert.

COMPONENT TECHNOLOGIES

Underlying all of these products are telephony platforms that have
three key components: applications, middleware, and hardware.
Applications are software programs that provide specific product
capabilities (such as prepaid calling features), from basic telephony
building blocks provided by the middleware. The middleware is a software
layer between the applications and the underlying computer operating

4<PAGE>
system. Middleware adds telephony features, such as switch control, to
these operating systems. The hardware, and its associated operating
system, are industry standard, non-proprietary solutions from third
parties.

This underlying platform infrastructure can be illustrated through
the use of an example. The table below shows a typical Lydian prepaid
platform.

COMPONENT
TECHNOLOGIES EXAMPLE EXPLANATION

Application Lydian Prepaid Software that combines
Calling basic telephony features
provided by the middleware
into sophisticated end user
features. For prepaid
calling this includes:
rating, card management,
and call dialogues.

Middleware QuickScript, Adds basic telephony
BETEX(TM)-ESP features, such as switch
control, to an industry-
standard operating system,
such as UNIX(R).

Hardware Server The Tandem NSK(R), UNIX(R)
or Windows NT(R)operating
system and computer that
runs the software
(Middleware and
application). The software
is the brains that tells the
other components what to do.

Vicorp Voice Provides interactivity with
Response Units the user, stores voice
prompts, and recognizes
user key strokes.

Programmable Connects platform to the
Switch Server telephone network.

MIDDLEWARE COMPONENTS

Middleware adds telephony control features to the basic features
provided by industry standard operating systems and hardware. The Company
uses several different variations of its middleware depending on the
exact needs of the customer and the application.

5<PAGE>
The Company's middleware solution is its BETEX(TM)-Enhanced Services
Platform ("ESP"). The BETEX-ESP middleware provides application
processing functions, controls matrix switch resources, and controls
voice/media resources in a service node architecture. Middleware software
includes network and device driver layers, an open application
programming interface, and a SQL database for storing service data such
as application scripts and user profiles.

The BETEX-ESP platform offers:

* A co-processing architecture supporting scalable, modular growth
* The ability to run multiple services on a common software
and hardware platform
* Support for integrated voice, data, and multimedia applications
* The ability to develop and integrate advanced consumer features
with advanced customer service interfaces
using a single service creation environment
* Support for more than 15 different languages
* Support for SS7, ISDN (national and international standards),
E1, T1, and R2 signalling

BETEX-ESP applications are built using QuickScript, a graphical
service creation environment for building applications and creating
automated call dialogues.

QuickScript's capabilities can be easily expanded using C or C++ to
write custom QuickScript icons. QuickScript allows for prototyping and
rapid application development of BETEX-ESP services.

The Company's Lydian enhanced calling suite and the VACCS call
center solution were both built using QuickScript. Customers using these
products often utilize QuickScript to build customized versions of these
products. The customers can perform the customization themselves, but in
many cases they rely on the Company's integration and development
expertise to build the final application.

Customers also use the Company's middleware as a starting point for
creating their own applications. Some of these customers rely on the
Company's application and telephony expertise to build their custom
applications. Others purchase the Company's middleware and build the
applications themselves.

The Company's UniPort(R) middleware product provides an environment
for creating a multi-application call processing platform that can be
integrated into existing telephony networks. Companies using UniPort can
build applications using an application programming interface.

HARDWARE COMPONENTS

In addition to applications and middleware, the third component to
the Company's platforms is the hardware. The hardware has three elements:
(1) a telephony network interface, (2) Voice Response Units (VRUs); and
(3) a server.

6<PAGE>
The telephony network interface in many of the Company's
applications is provided by a programmable switch from either Cisco
Systems, Inc. (formerly Summa Four) or Excel Switching Corporation. This
switch provides highly reliable, large-scale interconnections at a cost-
effective price point. However, as circumstances require, the Company
utilizes VRUs to connect directly to the network, or develops interfaces
for connecting to a customer's existing switch hardware.

The VRUs, which are assembled by the Company, provide many of the
enhanced features of the Company's solution platforms. They play and
record prompts, detect DTMF tones, and can even receive/send faxes or
perform voice recognition. The VRUs incorporate industry-standard
hardware, including Pentium processors and standard backplanes. The
Company's VRUs are available in high-availability configurations that
include redundant, hot-pluggable power supplies and disk drives.

The servers in the Company's platforms run the actual application
software code. They contain the instructions that tell the programmable
network interfaces and VRUs what to do: what prompts to play, when to
record input from callers, and where to route the calls. They can also
act as application processors. The exact configuration depends upon the
demand of the application. The Company supports servers that run UNIX and
fault-tolerant servers, such as NonStop servers from Compaq/Tandem.

MARKETS

The market for the Company's products has grown primarily 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 trends in
telecommunications continue to promote the use of enhanced services as a
way for companies to differentiate themselves from competition and
possibly generate additional revenue. In addition, companies in diverse
industries worldwide are seeking ways to improve customer service
functions to expand their markets, sell more products or services, and
improve efficiency.

The global markets for the Company's products include: private and
public telecommunications operators, RBOCs, and wireline and wireless
carriers; and large corporate virtual private networks (with an emphasis
on the financial, insurance, retail, transportation, and service bureau
industries). An emerging class of carriers, the Competitive Local
Exchange Carriers (CLECs), is providing additional markets for the
Company's products, while increasing the market's interest in services
that lead to differentiation.

Management believes 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.

7<PAGE>
Telephone companies typically need large capacity call processing
systems that adhere to stringent engineering requirements for telephone
company central office switching equipment. The Company's platforms 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," and "Backlog."

The market for BFD's service bureau transactional offerings is
currently the United States and Canada and is focused primarily on
government, quasi-governmental agencies, and business corporations
(primarily software and technology companies).

See financial information about operating segments in Note 14 of the
consolidated financial statements.

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. Management believes that the Company's products enable
service providers to offer enhanced telecommunications services.

Another factor affecting the U.S. market is the continued
development of the wireless network infrastructure. The projected growth
of the wireless market and the associated demand for additional
technologies is expected to create continued demand for enhanced
telecommunication services.

The International Markets

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.

In 1997, a new international General Agreement on Trade and Tariff
("GATT") treaty was passed that Management believes will lead to
deregulation of over 95 percent of the world's telecommunications
markets. The FCC has forecasted that this treaty will lead to an 80
percent drop in international telecommunications rates. Based on
information released by the Clinton Administration in 1997, the Company
believes that this increased deregulation will open markets worldwide.
However, just as is the case with the U.S. Telecommunications Act of
1996, the impact of GATT will occur gradually over the next two to five
years with the rate of change differing by country.

8<PAGE>
International growth trends for the Company are projected to be in
wireline and wireless applications.

European Region

The European Union targeted January 1, 1998, as the date that member
countries will open their markets to competition. Some countries, most
notably the United Kingdom, Finland, and Sweden have shown more
aggressive moves to open their markets. Other countries moving in the
direction of more liberal deregulation, albeit at a slightly slower pace,
include Germany and Denmark. Currently, the Company is focusing its
European marketing efforts toward the Western European countries.

Asia-Pacific Region

In the Asia-Pacific region, deregulation is being introduced in
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. The wireless marketplace in Asia-Pacific is a hotbed
of activity and competition. Prepaid wireless is expected to be an
important application for the Company.

Latin America Region

In Latin America, the Company is primarily marketing in Chile,
Brazil, Mexico and Argentina. These countries are in various stages of
deregulation and have taken steps towards privatization of their
telephone networks.

COMPETITION

The worldwide telecommunications industry is highly competitive.
Management believes that the Company's main strengths include its
worldwide reach, the flexibility of its solutions, its network-grade
platforms, and its innovative approach. In addition, the Company is
committed to ongoing research and development ("R&D") efforts to
strengthen existing products and develop new products. Management views
the Company's R&D efforts as essential to maintaining a competitive
position in the industry. See "Research and New Product Development."

Worldwide Reach: The Company's worldwide reach includes product
support for international languages and interconnection standards, as
well as the Company's international sales and support organizations.

Flexibility: The flexibility of the Company's products, as embodied
by its QuickScript service creation environment, allows its customers to
develop custom applications that are built on the core of a reliable
product.

9<PAGE>
Network Grade: The Company's customers have looked for highly
reliable products, and the Company's network-grade approach is apparent
from the reliability of its software to the fault-tolerant Tandem servers
that are available options in the Company's platforms.

Innovative: The flexibility of the Company's solutions allows its
customers to build custom solutions that address their emerging business
needs. Furthermore, since the Company uses open, off-the-shelf hardware,
not proprietary solutions, the Company is able to adapt its platforms to
keep up with emerging technology.

It is hoped that the deregulation underway or proposed in many
countries will continue to increase the opportunities for expansion of
markets for the Company's products.

Competitors

The Company believes its primary worldwide competition for Vicorp is
Brite Voice Systems, Centigram, Comverse Technology, Early Cloud,
Ericsson, Genesys, IBM, IMA, Glenayre, Intellivoice, InterVoice,
Magellan, Octel, Periphonics, Priority Call Management, Rockwell,
Siemens, Stratus, Tecnomen, Telsys, and Unisys. 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."

The Company's primary United States and Canadian competition for BFD
in the telco market is Ameritech, AT&T, MCIWorldCom, Sprint, Pacific
Bell; and in IVR call centers is Call Interactive, Sheerers, ICG, ICN,
Ideal Dial, Infoworks, and West Interactive.

The Company will continue to face substantial competition from
existing and new competitors including other companies with considerably
greater financial, technical, marketing and sales resources. It is
anticipated that a number of the Company's competitors will be
introducing new or enhanced products during the next several years.

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 both a direct sales force 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 joint marketing
and teaming arrangements with leading telecommunications equipment
manufacturers including Compaq/Tandem. 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.

10<PAGE>
The Company's Original Equipment Manufacturers ("OEM") Partners
Program enables telco manufacturers to augment their current product
offerings by incorporating the Company's applications into their own
enhanced services platforms. The Company's OEM teams work with its telco
partners to determine program goals, application strategy, market
positioning, and program support requirements. Applications may be
delivered via the Company's middleware solution or through OEM specific
APIs. 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.

BFD primarily markets to high technology, software,
telecommunications and call center industries.

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.

For those carriers whose product installations require more
extensive system integration, the Company offers product support through
local offices in North America, Europe, and the Asia-Pacific region. The
Company's teams of experienced software and network engineers are
available to assist customers with application development, deployment,
and system maintenance.

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."

BFD provides 24 x 7 support (24 hours per day, 7 days per week) to
its customers through customer service professionals, a team of project
managers, and after hours on-call personnel.

CUSTOMERS

During the years ended December 31, 1998 and 1997, the four months
ended December 31, 1996, and the year ended August 31, 1996, MCIWorldCom
and the Home Shopping Network ("HSN") combined represented approximately
4 percent, 6 percent, 9 percent, and 50 percent, respectively, of the
Company's revenue. Historically, the Company primarily sold customized
ESP products and provided support services to MCIWorldCom and HSN. During

11<PAGE>
the years ended December 31, 1998 and 1997, revenue generated by ESP
product sales to MCIWorldCom was $0 and $759,185, respectively, as
compared to $229,590 and $10,339,053 for the four months ended December
31, 1996, and the year ended August 31, 1996, respectively. Service and
support revenue from MCIWorldCom and HSN was $1,486,106 and $1,994,616,
respectively, for the years ended December 31, 1998 and 1997, as compared
to $1,125,499 and $3,041,006 for the four months ended December 31, 1996,
and the year ended August 31, 1996, respectively. The Company continues
to market to MCIWorldCom and expects to generate revenue from this
source. However, there is no assurance that any such negotiation will
result in an order from MCIWorldCom. The Company does expect to continue
providing MCIWorldCom with service and support for their ESP products.

UniPort sales represented approximately 13 percent, 6 percent, 8
percent, and 8 percent, respectively, of the Company's revenue for the
years ended December 31, 1998 and 1997, the four months ended December
31, 1996, and the year ended August 31, 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 1999.

BETEX sales represented approximately 76 percent, 80 percent, 80
percent, and 42 percent, of the Company's revenue for the years ended
December 31, 1998 and 1997, the four months ended December 31, 1996, and
the year ended August 31, 1996, respectively. 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
and comprehensive income include the operations for the year ended August
31, 1996, of Vicorp from the acquisition date of April 16, 1996, through
August 31, 1996.

Service bureau sales represented approximately 11 percent, 8 percent
and 2 percent, respectively, of the Company's revenue for the years ended
December 31, 1998 and 1997, and the four months ended December 31, 1996.
Customers include governments, quasi-governmental agencies, and
corporations. Because the BFD acquisition was accounted for as a
purchase, the Company's consolidated statements of operations and
comprehensive income include the operations for the four months ended
December 31, 1996, of BFD from the acquisition date of October 1996
through December 31, 1996.

BACKLOG

The Company's backlog, including service and support agreements, at
December 31, 1998, was approximately $8,500,000 compared with
approximately $10,000,000 at December 31, 1997. Such amounts include all
purchase orders and signed contracts with scheduled shipments and
deliverables.

12<PAGE>
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. 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 building is dedicated to system testing, quality
control, inventory storage, and other assembly activities.

RESEARCH AND NEW PRODUCT DEVELOPMENT

The Company has consolidated its research and new product
development efforts into an integrated development group with primary
control for the BETEX and Lydian products based in the United Kingdom. In
addition, regional personnel are responsible for customizing core
products for customer specific needs.

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. 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 December 31, 1998 and 1997, the four months ended
December 31, 1996, and the fiscal year ended August 31, 1996, the Company
spent approximately $3.2 million, $4.7 million, $2.0 million, and $5.2
million, respectively, on research and development activities.

PRODUCT PROTECTION

The Company relies on a combination of trade secret, copyright,
trademark and patent laws; licenses; non-disclosure 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 or rights.

TECHNOLOGY LICENSES

The Company acquires licenses from third parties for certain
components used in its middleware. Standard operating system software
utilized in the Company's products is licensed from various
manufacturers. 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.

13<PAGE>
EMPLOYEES

As of March 5, 1999, the Company employed 187 people on a full-time
basis and 32 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 good. None of the Company's employees are 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 6,785 square feet
in Wexham, United Kingdom (for sales, research, engineering, and
marketing), approximately 20,000 square feet in Utrecht, The Netherlands
(for sales, marketing, engineering, and administration), and
approximately 10,000 square feet in Las Vegas, Nevada (for sales,
research, engineering, marketing, and administration).

In addition, in 1998 the Company maintained other leased offices in
Dallas, Texas; San Antonio, Texas; LaJolla, California; New York, New
York; Brussels, Belgium; Copenhagen, Denmark; Stockholm, Sweden;
Helsinki, Finland; Wexham, 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.

Rachael Lefkovits v. Hector Acalde, Bert Kolde, Kwang-I Yu, Willem
Huisman, Ian Dalziel, Francis R. Santangelo, and Precision Systems, Inc.
On March 11, 1998, a class action lawsuit was filed in the Court of
Chancery of the State of Delaware in and for New Castle County, alleging
breach of fiduciary duty by the Directors of Precision Systems, Inc. in
regard to the Exchange Transaction proposed by Speer Communication
Limited Partnership and Speer Virtual Media Limited Partnership. The
Complaint was dismissed by the Plaintiff during 1999.

14<PAGE>
Daniel Schultz v. Precision Systems, Inc. et al. On December 13,
1996, following the dismissal of his federal court action alleging
similar claims, 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 Circuit Court of the Sixth Judicial
Circuit In and For Pinellas County, Florida. The complaint was later
amended to allege seven counts. In Counts One and Two, 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 Three through Six,
the plaintiff alleges that all the defendants intentionally interfered
with his prospective economic advantage and contractual relationships,
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. In Count Seven, plaintiff alleges that the Company
and Messrs. Pillar and Loewenberg breached an oral contract to employ the
plaintiff in an executive position. The case is in discovery. 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. The French Labor Court
dismissed the plaintiff's claims, and the plaintiff has appealed. 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.

Claim of Robert Maube. On March 13, 1997, Mr. Maube, a former
employee of Vicorp N.V., initiated an action in the Labour Court of
Brussels, Belgium, against the Belgian, Dutch and Swiss subsidiaries of
Vicorp N.V. In the action, Mr. Maube is seeking 34,166,134 Belgian Francs
(approximately $979,900) in connection with the termination of his
employment. Such amount includes claims for gross payments as indemnity
in lieu of notice, holiday payments, year-end premium payments, damages
for an alleged abusive dismissal, additional compensation and a prorated
bonus. The Court has ruled in favor of the defendants and dismissed all
the plaintiff's claims, except those relating to the amounts to be paid
as indemnity in lieu of notice and as a prorated bonus. With respect to
the remaining issues, the claim for a termination indemnity and the claim
for a prorated bonus, the Court has reopened its hearings to receive
additional evidence. The Company has defenses and will defend vigorously.

Item 4 - Submission of Matters to a Vote of Securities Holders

None.

15<PAGE>
PART II

Item 5 - Market Price of and Dividends on the Registrant's
Common Stock and Related Stockholder Matters

1998 High Low
------------------------------------------------ --------- --------
From January 1, 1998, to March 31, 1998 . . . . $ 2.250 $ .750
From April 1, 1998, to June 30, 1998 . . . . . 2.688 1.063
From July 1, 1998, to September 30, 1998 . . . 2.156 .813
From October 1, 1998, to December 31, 1998 . . 1.938 .938

1997 High Low
------------------------------------------------ --------- --------
From January 1, 1997, to March 31, 1997 . . . . $ 5.875 $ 3.875
From April 1, 1997, to June 30, 1997 . . . . . 5.125 2.688
From July 1, 1997, to September 30, 1997 . . . 4.375 2.313
From October 1, 1997, to December 31, 1997 . . 5.063 2.000

The Company's common stock trades on the Nasdaq Stock Market's
SmallCap Market(SM) under the symbol "PSYS." "The Nasdaq Stock Market's
SmallCap Market" or "Nasdaq" is a highly-regulated electronic securities
market comprised of competing Market Makers whose trading is supported by
a communications network linking them to quotation dissemination, trade
reporting, and order execution systems. The Company's closing trading
price was $0.81 on March 26, 1999. The total number of shareholders of
record as of December 31, 1998, was approximately 5,319. The Company has
been notified by The Nasdaq Stock Market that it no longer meets the net
tangible assets, market capitalization, and net income requirements for
continued listing on The Nasdaq SmallCap Market under Marketplace Rule
4310(c)(2). The Company has set up a meeting with Nasdaq on April 30,
1999, to discuss methodologies to correct such deficiencies. If the
Company cannot meet the requirements of The Nasdaq SmallCap Market, the
Company's common stock will be delisted. If such event occurs, the
Company anticipates trading its common stock on The OTC Bulletin Board.

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 and Series B 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.

16<PAGE>
In April 1998, the Company announced that its Board of Directors
approved and the Company entered into a definitive agreement (the
"Agreement") with various privately held entities controlled by Roy M.
Speer to acquire a controlling interest in the Company. The transaction
was valued at approximately $100,000,000 and was subject to shareholder
and certain antitrust and regulatory approvals and other customary
conditions.

Under the terms of the Agreement, which was initially proposed on
March 6, 1998, the Speer entities (Speer Communication Holdings Limited
Partnership, Speer World Wide Digital Transmission and Vaulting Limited
Partnership, Speer Virtual Media Limited Partnership, and Speer
Productions Limited Partnership) had proposed to contribute to the
Company $15,000,000 in cash and their digital storage, audiovisual
production and telecommunications assets and businesses in Nashville,
Tennessee and Washington, D.C. in exchange for approximately 105,000,000
shares of the Company's common stock (the "Property Contribution"). The
Agreement permitted Speer, in its sole discretion, to consummate an
alternative transaction in lieu of the Property Contribution, whereby
Speer could have elected to transfer all of the assets and liabilities of
Speer Virtual Media Limited Partnership, plus $36,000,000 in cash in
exchange for 41,000,000 shares of common stock of the Company (the "Cash
Contribution"). The Agreement further contemplated that all debt and
preferred stock of the Company held by its major stockholders would be
converted into common stock at the rate of $1.00 per share. The
Agreement provided for a $5,000,000 line of credit to be made available
by Speer upon signing of the Agreement for operating capital
requirements. As of December 31, 1998, the Company's outstanding balance
owed on the line of credit was $3,750,000. After the transaction, Mr.
Speer would have controlled over 80 percent of the outstanding stock of
the Company. Mr. Speer currently controls RMS Limited Partnership, an
entity that is one of the Company's major stockholders. RMS L.P. would
have also contributed certain real estate in Nashville as part of the
transaction.

In February 1999, the Company announced that its Board of Directors
received from Speer Communications Holdings Limited Partnership ("Speer")
notice of termination of the Contribution Agreement dated April 22, 1998.
In addition, RMS Limited Partnership ("RMS") delivered notice that RMS
elected to terminate both the Real Estate Transfer Agreement and Plan of
Recapitalization between RMS and the Company.

17<PAGE>
with a line of credit with available borrowings of $1,250,000 to be
extended by Anschutz. The transaction is subject to shareholder and
certain antitrust and regulatory approvals and other customary
conditions. Anschutz is an affiliate of the Anschutz Company whose
operating divisions and wholly-owned subsidiaries engage in
telecommunications, natural resources, transportation, real estate, and
sports entertainment businesses. Anschutz has entered into a definitive
agreement with Speer and RMS to acquire the media and telecommunications
assets held by Speer and RMS, including RMS' interest in the Company.

Item 6 - Selected Financial Data

Precision Systems, Inc. is a global company that, together with its
subsidiaries, Vicorp N.V. and BFD Productions, Inc., delivers
telecommunications solutions to service providers and corporations.
Vicorp's software and hardware products support enhanced calling and
prepaid services, toll-free services, and advanced call center
applications. BFD Productions is a service bureau specializing in
audiotext and Internet applications. Headquartered in St. Petersburg,
Florida (USA), Precision Systems meets the needs of customers in more
than thirty countries.

As discussed in Note 1 to the consolidated financial statements, on
September 30, 1996, the Company elected to change its year end from
August 31 to December 31. This change was effective December 31, 1996.
The selected historical financial data for all fiscal years presented has
been derived from the audited financial statements of the Company.

18<PAGE>
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.

Years ended Four Months
December 31, Ended
--------------------------- December 31,
1998 1997 1996
------------- ------------- --------------

Statements of operations
and comprehensive income:
Revenues . . . . . . . . . $ 33,451,391 $ 40,612,387 $ 14,862,023
Loss from continuing
operations . . . . . . . (11,358,389) (26,058,716) (3,466,815)
Net loss . . . . . . . . . (11,358,389) (26,058,716) (3,466,815)
Basic and diluted loss from
continuing operations per
share . . . . . . . . . (.64) (1.48) (.20)
Basic and diluted net
loss per share . . . . . (.64) (1.48) (.20)

Balance sheet data at
year end:
Net working capital
(deficiency) . . . . . . (11,168,209) 3,591,655 355,645
Total assets . . . . . . . 20,033,422 28,475,553 49,194,375
Long-term debt . . . . . . 154,137 6,240,184 369,377
Stockholders' equity
(deficit) . . . . . . . (4,462,783) 6,273,122 27,461,113

19<PAGE>
Years ended August 31,
-----------------------------------------
1996 1995 1994
------------- ------------- -------------

Statements of operations
and comprehensive income:
Revenues . . . . . . . . . $ 26,702,827 $ 21,521,733 $ 8,890,595
Loss from continuing
operations . . . . . . . (34,693,961) (2,515,789) (17,656,211)
Net loss . . . . . . . . . (34,693,961) (2,648,344) (18,640,263)
Basic and diluted loss from
continuing operations per
share . . . . . . . . . (2.36) (.23) (1.98)
Basic and diluted net loss
per share . . . . . . . (2.36) (.24) (2.09)

Balance sheet data at
year end:
Net working capital
(deficiency) . . . . . . 3,773,780 10,074,716 3,579,444
Total assets . . . . . . . 47,557,346 27,372,925 30,410,378
Long-term debt . . . . . . 280,727 - -
Stockholders' equity
(deficit) . . . . . . . 27,848,808 22,962,099 19,439,897

The net loss of $11,358,389 for the year ended December 31, 1998,
includes restructuring charges of $2,437,933 associated with certain
office closings, employee-related layoffs and subsidiary liquidations.
The net loss of $26,058,716 for the year ended December 31, 1997,
includes intangible asset write-downs of $14,285,907 and restructuring
charges of $654,722. The net loss of $34,693,961 for the year ended
August 31, 1996, includes write-offs for purchased in-process technology
relating to the Vicorp acquisition ($19,500,000), goodwill write-down
($3,829,000), and restructuring charges ($1,093,000). The net loss for
the year ended August 31, 1995, decreased significantly when compared to
the year ended August 31, 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.

Basic and diluted net loss per share is based upon the weighted
average common and common equivalent shares outstanding. The diluted 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.

20<PAGE>
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 MCIWorldCom 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 pro-rata basis.

During 1996, the Company's business strategy included focusing on
core products and technologies, developing strategic business
relationships with several international telecommunications and computer
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 and BFD during 1996. Since the
Vicorp and BFD acquisitions were accounted for as purchases, the
Company's statements of operations and comprehensive income include the
operations of Vicorp since its acquisition date in April 1996, and the
operations of BFD since its acquisition date in October 1996. Therefore,
the Company's past financial performance should not be considered a
reliable indication of future performance.

In April 1998, the Company announced that its Board of Directors
approved and the Company entered into a definitive agreement (the
"Agreement") with various privately held entities controlled by Roy M.
Speer to acquire a controlling interest in the Company. The transaction
was valued at approximately $100,000,000 and was subject to shareholder
and certain antitrust and regulatory approvals and other customary
conditions.

21<PAGE>
Speer Virtual Media Limited Partnership, plus $36,000,000 in cash in
exchange for 41,000,000 shares of common stock of the Company (the "Cash
Contribution"). The Agreement further contemplated that all debt and
preferred stock of the Company held by its major stockholders would be
converted into common stock at the rate of $1.00 per share. The
Agreement provided for a $5,000,000 line of credit to be made available
by Speer upon signing of the Agreement for operating capital
requirements. As of December 31, 1998, the Company's outstanding balance
owed on the line of credit was $3,750,000. After the transaction, Mr.
Speer would have controlled over 80 percent of the outstanding stock of
the Company. Mr. Speer currently controls RMS Limited Partnership, an
entity that is one of the Company's major stockholders. RMS L.P. would
have also contributed certain real estate in Nashville as part of the
transaction.

In March 1999, the Company announced that its Board of Directors
unanimously approved and the Company has entered into a definitive merger
agreement (the "Agreement") with Anschutz Digital Media, Inc.
("Anschutz"). Under the terms of the Agreement, which was initially
proposed on February 17, 1999, Anschutz would acquire all of the
outstanding common stock of the Company in a transaction wherein the
Company would be merged with a subsidiary of Anschutz, and holders of the
Company's common stock would receive $1.00 per share in cash. The
Agreement further contemplates that all debt to the Company's
shareholders will be repaid and the Company's preferred stock will be
canceled for an amount equal to its liquidation preference, plus accrued
dividends and interest thereon. The Agreement also provides the Company
with a line of credit with available borrowings of $1,250,000 to be
extended by Anschutz. The transaction is subject to shareholder and
certain antitrust and regulatory approvals and other customary
conditions. Anschutz is an affiliate of the Anschutz Company whose
operating divisions and wholly-owned subsidiaries engage in
telecommunications, natural resources, transportation, real estate, and
sports entertainment businesses. Anschutz has entered into a definitive
agreement with Speer and RMS to acquire the media and telecommunications
assets held by Speer and RMS, including RMS' interest in the Company.

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

* The Company competes in an industry marked by frequent
technological changes which will force the Company to expend
funds to develop new products and implement new technologies

* The various markets into which the Company sells its products are
undergoing significant changes with increasing demands for
product innovations

22<PAGE>
* The Company must be successful in competing against many
competitors, many of which have significantly greater financial,
technical, marketing, and sales resources than the Company

* The Company will be required to properly estimate costs under
fixed price contracts

* Increased risk of litigation in the Company's industry resulting
from aggressive prosecutions of intellectual property claims

* The Company's ability to retain its larger customers, including
MCIWorldCom

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

* The Company's ability 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

* The Company's reliance on large sales orders that increase the
risk of significant revenue fluctuations, from quarter to quarter
and year to year

* The ability of the Company and its significant suppliers and
large customers to address the Year 2000 issue

* The Company's ability to generate sufficient cash, from
operations or from external sources, to fund its global
operations. See "Financial Statements," including Report of
Independent Accountants

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 December 31, 1998 and 1997

Total Revenues

Total revenues decreased to $33,451,391 in fiscal 1998 compared to
$40,612,387 in fiscal 1997. The various components of revenue fluctuated
as explained below:

23<PAGE>
Contract Revenue

Contract revenue, consisting primarily of telecommunications
equipment hardware sales, increased to $6,647,200 in fiscal 1998 compared
to $6,203,229 in fiscal 1997. The increase is primarily due to an
increase in contract revenues associated with Vicorp's BETEX products of
$6,615,800 in fiscal 1998 compared to $5,419,591 in fiscal 1997.
Offsetting the increase in contract revenues associated with Vicorp's
BETEX products is a decrease in contract revenues generated by ESP
product sales to MCIWorldCom. ESP product sales to MCIWorldCom generated
no revenue in fiscal 1998 compared to $759,185 in fiscal 1997. The
Company hopes to generate future contract revenue from the sale of BETEX
products, although no assurance can be given for such future revenue.

Service and Support

Service and support revenue, consisting primarily of custom
development services, maintenance services, and service bureau services,
decreased to $19,651,125 in fiscal 1998 compared to $23,813,564 in fiscal
1997.

Service and support provided to MCIWorldCom decreased to $1,486,106
in fiscal 1998 compared to $1,994,616 in fiscal 1997 due to the
customer's request for a lower level of support to be provided by the
Company in 1998 compared to 1997. Maintenance revenue generated from
MCIWorldCom relating to its ESP equipment was $1,479,634 in fiscal 1998
compared to $1,846,080 in fiscal 1997. In addition, the Company's service
and support revenue relating to its software development services
provided to MCIWorldCom decreased to $6,472 in fiscal 1998 from $148,536
in fiscal 1997.

Service and support revenue for Vicorp BETEX products was
$14,253,414 in fiscal 1998 compared to $18,480,724 in fiscal 1997.
Vicorp's service and support revenue includes maintenance and custom
development services provided to its customers.

Service and support revenue for BFD was $3,619,297 in fiscal 1998
compared to $3,338,224 in fiscal 1997. BFD's service and support revenue
primarily includes interactive voice response service bureau activity.

License Fee Revenue

License fee revenue decreased to $7,153,066 in fiscal 1998 compared
to $10,595,594 in fiscal 1997. License fee revenue for fiscal 1998,
relating to its BETEX product line, was $4,582,374 and $2,570,692 for the
UniPort product line. The primary reason for the decrease in license fee
revenue for fiscal 1998 relates to a lower level of BETEX licenses sold
in the American and European markets versus prior periods. The Company
hopes to generate future license fee revenue for its BETEX and UniPort
products, although no assurance can be given for such future revenue.

24<PAGE>
Cost of Sales

Cost of sales decreased to $16,978,499 (51 percent of revenue) in
fiscal 1998 compared to $18,099,533 (45 percent of revenue) in fiscal
1997. The primary reason for the decrease in the Company's cost of sales
dollar amount is a decrease in the Company's total revenue. The increase
in the Company's cost of sales percentage is primarily associated with a
change in product mix. A greater portion of the Company's revenue in
fiscal 1998 related to lower margin hardware sales versus the same period
in 1997.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased to
$20,053,742 in fiscal 1998 compared to $22,171,534 in fiscal 1997. The
decrease is primarily due to the Company's efforts at managing and
controlling costs in order to improve the alignment of cost outlays
against potential revenue opportunities. Specific cost savings include
the following:

* The Company reduced its payroll and related costs due to
consolidation and elimination of certain functions (i.e., sales
and marketing, product management, customer service) and office
closings, with related headcount reductions of 58 individuals
during 1998 that generated approximately $3,800,000 in cost
savings.

* The Company reduced its occupancy expenses due to certain office
closings in the U.S. and European markets, which generated
approximately $267,000 in cost savings.

* The Company canceled certain maintenance contracts relating to
its lab equipment during fiscal 1998, which generated
approximately $240,000 in cost savings.

* The Company reduced its employee recruitment efforts during
fiscal 1998, which generated approximately $344,000 in cost
savings.

* The Company reduced its travel expenses due to increased controls
and a decrease in the Company's employee base, which generated
approximately $654,000 in cost savings.

* The Company reduced its bad debt expense by approximately
$841,000 due to improved results of receivable collection
efforts.

25<PAGE>
The decrease in selling, general and administrative expenses during
1998 is offset by restructuring charges of $2,437,933 associated with
certain office closings, employee-related layoffs and subsidiary
liquidations. Although the Company has separate restructuring charges in
both 1998 and 1997, the most recent year's charges were approximately
$1,800,000 greater than 1997. In addition, the Company incurred
approximately $1,100,000 in fiscal 1998 for legal, consulting, and
investment banking related expenses associated with a proposed
transaction between the Company and various privately-held entities
controlled by Roy M. Speer. Such proposed transaction was terminated
during 1999.

Research, Engineering and Development

Research, engineering and development expenses decreased to
$3,229,366 in fiscal 1998 compared to $4,719,489 in fiscal 1997. The
decrease in research, engineering and development expenses primarily
relates to the reduction in development work associated with the
Company's BETEX and UniPort products. The Company has reduced its
research and development efforts on UniPort due to reduced sales and
marketing opportunities for the product and to focus future activities on
BETEX and BETEX-related products, such as Lydian and VACCs. Although the
Company is reducing its research and development activities for BETEX and
BETEX-related products, it does not anticipate a material negative effect
on its customer-related revenue opportunities. Resources will continue to
be directed toward product improvements and enhancements for future
purchased releases of the Company's products. In addition, the Company
will continue to evaluate its different product lines to maximize the
impact of the research, engineering and development expenditures.

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

Depreciation and Amortization

Depreciation and amortization decreased to $3,201,616 in fiscal 1998
compared to $7,042,929 in fiscal 1997. The decrease is primarily due to
amortization expenses incurred during fiscal 1997 relating to intangible
assets acquired with The Renaissance Group, Vicorp and BFD acquisitions
that were written off during the fourth quarter of 1997 and, therefore,
created no amortization during fiscal 1998.

Impairment of Intangible Assets

In 1997, the Company reevaluated the recoverability of its recorded
intangible assets associated with its 1996 acquisitions of Vicorp and
BFD. Based on a review of the expected future discounted cash flows of
the Company, it was determined that a permanent impairment of the Vicorp
and BFD associated intangible assets existed. Consequently, the Company
recorded a provision of $14,285,907 to write off the net book value of
all intangible assets associated with these acquisitions.

26<PAGE>
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. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.

Interest Expense

In fiscal 1998, net interest expense was $1,346,557 compared to
$351,711 in fiscal 1997. The increase in net interest expense is
primarily due to the decrease in the Company's interest-bearing cash and
cash equivalent amounts and the issuance of promissory notes of
$6,000,000 on September 30, 1997, that bear interest at 8 percent and
notes of $3,750,000 issued during 1998 that bear interest at 9.5 percent.

Fiscal Years Ended December 31, 1997 and December 31, 1996 (unaudited)

Total Revenues

Total revenues increased to $40,612,387 in fiscal 1997 compared to
$36,372,805 in fiscal 1996. The various components of revenue fluctuated
as explained below:

Contract Revenue

Contract revenue, consisting primarily of telecommunications
equipment hardware sales, decreased to $6,203,229 in fiscal 1997 compared
to $11,055,923 in fiscal 1996. The decrease is primarily due to certain
ESP product sales to MCIWorldCom completed in 1996 which did not recur
during the same period in 1997. Offsetting the overall decrease in ESP
product sales is an increase in contract revenues associated with
Vicorp's BETEX products of $5,419,591 in fiscal 1997 compared to
$3,797,166 in fiscal 1996. Since the Vicorp acquisition was accounted for
as a purchase, the Company's consolidated statements of operations and
comprehensive income include the operations of Vicorp since the
acquisition date in April 1996. The Company expects the revenue generated
from the sale of BETEX products to increase during 1998.

Service and Support

Service and support revenue, consisting primarily of custom
development services, maintenance services, and service bureau services,
increased to $23,813,564 in fiscal 1997 compared to $17,539,456 in fiscal
1996.

Service and support provided to MCIWorldCom decreased to $1,994,616
in fiscal 1997 compared to $2,097,900 in fiscal 1996. While total
maintenance revenue increased due to additional MCIWorldCom ESP equipment
that is subject to the Company's maintenance services, the overall
decrease is due to certain non-recurring development projects delivered
to MCIWorldCom which occurred in fiscal 1996.

27<PAGE>
Service and support provided to HSN decreased to $0 in fiscal 1997
compared to $1,450,896 in fiscal 1996. The Company's HSN maintenance
agreement ended December 31, 1996.

Service and support revenue for Vicorp BETEX products was
$18,480,724 in fiscal 1997 compared to $12,988,430 in fiscal 1996.
Vicorp's service and support revenue includes maintenance and custom
development services provided to its customers.

Service and support revenue for BFD was $3,338,224 in fiscal 1997
compared to $789,035 in fiscal 1996. Since the BFD acquisition was
accounted for as a purchase, the Company's consolidated statements of
operations and comprehensive income include the operations of BFD since
its acquisition date in October 1996. BFD's service and support revenue
primarily includes interactive voice response service bureau activity.

License Fee Revenue

License fee revenue increased to $10,595,594 in fiscal 1997 compared
to $7,777,426 in fiscal 1996. License fee revenue for fiscal 1997,
relating to its BETEX product line, was $8,358,077 and $2,237,517 for the
UniPort product line. The primary reason for the increase in license fee
revenue for fiscal 1997 relates to a higher level of BETEX products sold
in the American and European markets versus prior periods. The Company
anticipates generating future license fee revenue for its UniPort and
BETEX products, although no assurance can be given for such future
revenue.

Cost of Sales

Cost of sales increased to $18,099,533 (45 percent of revenue) in
fiscal 1997 compared to $11,529,527 (32 percent of revenue) in fiscal
1996. The primary reason for the increase in the Company's cost of sales
dollar amount is an increase in the Company's total revenue. The increase
in the Company's cost of sales percentage is primarily associated with a
change in product mix. A greater portion of the Company's revenue in
fiscal 1997 related to lower margin service and support services versus
the same period in 1996.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased to
$22,171,534 in fiscal 1997 compared to $27,164,205 in fiscal 1996. The
decrease is primarily due to the Company's efforts at managing and
controlling costs in order to improve the alignment of cost outlays
against potential revenue opportunities. Specific cost savings include
the following:

* In the U.S. market, the Company decreased its payroll and related
costs due to consolidation and elimination of certain functions
(i.e., sales and marketing, product management, customer
service), which generated approximately $550,000 in savings.

28<PAGE>
* The Company improved its controls and accountability for use of
third party professional vendors (legal, public relations,
management consultants, etc.), which generated approximately
$650,000 in savings.

* The Company had a marketing partnership in 1997 where the partner
helped fund approximately $215,000 of the Company's marketing. In
addition, the Company had a more targeted marketing approach in
1997 that allowed for a reduction in broad-based advertising and
tradeshow expenditures of approximately $280,000.

* The Company reduced its bad debt expense by approximately
$550,000 due to improved results of receivable collection
efforts.

* Although the Company has separate restructuring charges in both
1997 and 1996, the most recent year's charges were $450,000 less
than 1996 due to a smaller number of headcount reductions.

* The Company eliminated certain lab and development equipment,
which reduced the related maintenance contract expense by
approximately $250,000.

The decrease in selling, general and administrative expenses is
offset by the increase relating to the acquisition of BFD. Selling,
general and administrative expenses associated with the acquisition of
BFD was approximately $3,335,433 in fiscal 1997 compared to $606,197 for
the period in 1996 that BFD was included in the Company's consolidated
statements of operations and comprehensive income.

Research, Engineering and Development

Research, engineering and development expenses decreased to
$4,719,489 in fiscal 1997 compared to $5,988,089 in fiscal 1996. The
decrease in research, engineering and development expenses primarily
relates to the reduction in development work associated with the
Company's BETEX and UniPort products. Resources will continue to be
directed toward product improvements and enhancements for future
purchased releases of the Company's products. In addition, the Company
will continue to evaluate its different product lines to maximize the
impact of the research, engineering and development expenditures.

Depreciation and Amortization

Depreciation and amortization increased to $7,042,929 in fiscal 1997
compared to $6,208,328 in fiscal 1996. The increase is primarily due to
amortization expense associated with intangible assets acquired with the
Vicorp and BFD acquisitions.

29<PAGE>
Purchased Research and Development

Purchased research and development expense of $19,500,000 in fiscal
1996 represents the purchase price allocation to in-process research and
development acquired through the Company's acquisition of Vicorp that had
not yet reached technological feasibility and had no alternative future
use.

In April, 1996, the Company acquired substantially all the common
stock of Vicorp N.V. by issuing 3,135,467 shares of newly issued common
stock. In addition, the Company assigned certain outstanding obligations
of Vicorp N.V. and converted options issued to Vicorp employees into
options to purchase the Company's common stock. The Company originally
allocated the excess purchase price over the fair value of net tangible
assets acquired to identifiable intangible assets. In performing this
allocation, the Company considered, among other factors, the operating
performance of Vicorp N.V.'s technologies being sold to its customer
base, and the research and development projects in-process at the date of
the acquisition. With regard to the in-process research and development
projects, the Company considered, among other factors, the stage of
development of in-process projects at the time of the acquisition, the
business-related importance of each project to the overall research and
development plan, and the projected incremental cash flows from the in-
process projects when completed and any associated risks. Associated
risks include the inherent difficulties and uncertainties in completing
each project and thereby achieving technological feasibility and risks
related to the impact of potential changes in future target markets.

The Company intended to incur in excess of $5 million, relating to
payroll and related costs, to develop the in-process technology into
commercially viable products from the acquisition date to 1999. The
Company expected to benefit from the purchased in-process research and
development by 1999.

If these projects were not successfully developed, the Company might
not realize the value assigned to the in-process research and development
projects. In addition, the value of other acquired intangible assets
might also become impaired. The unsuccessful completion of these in-
process research and development efforts might have a material adverse
effect on the Company's financial position and operations.

30<PAGE>
Company's ability to deliver products to its current customer base. In
addition, the Company originally anticipated development efforts to
combine the Company's UniPort product with Vicorp's BETEX products and
associated revenue opportunities. Due to significant development problems
and delays from the BETEX-ESP project, combined with the Company's
negative operating cash flow results (with resultant impact on cash
resources), the Company discontinued efforts at the UniPort/BETEX
integration project during 1997. The Company does not anticipate any
future development efforts or revenue opportunities from the
UniPort/BETEX integration project. Additionally, due to the Company's
continued negative results from operations, the remaining acquired
intangible assets were written-off in full during the fourth quarter of
1997.

Impairment of Intangible Assets

In 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 in fiscal 1996.

Income Tax Expense

Investment Gain on Marketable Equity Securities

In fiscal 1996, the Company had an investment gain of $371,218
relating to its sale of marketable equity securities. No such gain
occurred in fiscal 1997.

Interest (Expense) Income

In fiscal 1997, net interest expense was $351,711 compared to net
interest income of $658,468 in fiscal 1996. The increase in net interest
expense is primarily due to certain interest expense associated with debt
assumed by the Company in connection with the Vicorp and BFD
acquisitions. Additionally, the Company issued promissory notes of
$6,000,000 on September 30, 1997, that bear interest at 8 percent.

31<PAGE>
Four Months Ended December 31, 1996 and December 31, 1995 (unaudited)

Total Revenues

Total revenues increased to $14,862,023 for the four months ended
December 31, 1996, compared to $5,191,615 for the four months ended
December 31, 1995. The primary reason for the increase in revenue was
that the Company acquired Vicorp and BFD during 1996. Since the Vicorp
and BFD acquisitions were accounted for as purchases, the Company's
consolidated statements of operations and comprehensive income include
the operations of Vicorp since the acquisition date in April 1996 and the
operations of BFD since its acquisition date in October 1996. The various
components of revenue fluctuated as explained below:

Contract Revenue

Contract revenue, consisting primarily of telecommunications
equipment hardware sales, was $3,729,171 during the four months ended
December 31, 1996, compared to $4,110,355 for the four months ended
December 31, 1995. The decrease in contract revenue during the four
months ended December 31, 1996, compared to the four months ended
December 31, 1995, is primarily due to certain ESP product sales to
MCIWorldCom completed in 1995 that did not recur during the same period
in 1996.

Contract revenue associated with Vicorp's BETEX products was
approximately $2,717,818 for the four months ended December 31, 1996.
Since the Vicorp acquisition was accounted for as a purchase, the
Company's consolidated statements of operations and comprehensive income
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. Contract revenue for the four months ended December 31,
1995, represented certain ESP product sales to MCIWorldCom that did not
recur during the same period in 1996.

Service and Support

Service and support revenue, consisting primarily of custom
development services, maintenance services, and service bureau services,
increased to $7,959,984 for the four months ended December 31, 1996,
compared to $956,539 for the four months ended December 31, 1995.

Service and support provided to MCIWorldCom increased to $653,734
for the four months ended December 31, 1996, compared to $477,581 for the
four months ended December 31, 1995. Maintenance revenue generated from
MCIWorldCom regarding its ESP equipment increased to $519,648 for the
four months ended December 31, 1996, compared to $335,920 for the four
months ended December 31, 1995. The increase in maintenance revenue
primarily relates to additional ESP equipment delivered to MCIWorldCom
during 1996 that is subject to the Company's maintenance services.

Service and support provided to HSN increased to $481,766 for the
four months ended December 31, 1996, compared to $478,958 for the four
months ended December 31, 1995.

32<PAGE>
Service and support revenue for Vicorp BETEX products was $6,035,449
for the four months ended December 31, 1996. Vicorp's service and support
revenue includes maintenance and custom development services provided to
its customers.

Service and support revenue for BFD was $789,035 from the
acquisition date to December 31, 1996. BFD's service and support revenue
primarily includes interactive voice response service bureau activity.

License Fee Revenue

License fee revenue for the four months ended December 31, 1996 was
$3,172,868 compared to $124,721 for the four months ended December 31,
1995. License fee revenue for the four months ended December 31, 1996,
relating to its UniPort product line was $69,600 and $3,103,268 for the
BETEX product line. The Company hopes to generate future license fee
revenue for its UniPort and BETEX products, although no assurance can be
given for such future revenue.

Cost of Sales

Cost of sales increased to $3,442,705 (23 percent of revenue) during
the four months ended December 31, 1996, compared to $2,013,379 (39
percent of revenue) during the four months ended December 31, 1995. The
primary reason for the increase in the Company's cost of sales dollar
amount is an increase in the Company's total revenue. The decrease in the
Company's cost of sales percentage is primarily associated with a change
in product mix. A greater portion of the Company's revenue for the four
months ended December 31, 1995, related to lower margin hardware sales
compared to the four months ended December 31, 1996.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to
$10,899,572 for the four months ended December 31, 1996, compared to
$3,474,272 for the four months ended December 31, 1995. The increase in
selling, general and administrative expenses for the four months ended
December 31, 1996 is primarily due to the following:

* Selling, general and administrative expenses associated with the
acquisition of Vicorp was approximately $5,771,270.

* Selling, general and administrative expenses associated with the BFD
acquisition was approximately $606,197 from the acquisition date to
December 31, 1996.

Although overall selling, general and administrative expenses from
continuing operations increased during the four months ended December 31,
1996, in comparison to the previous period, the Company has made efforts
at managing and controlling costs in order to improve the alignment of
cost outlays against potential revenue opportunities. Considering the
impact of the Vicorp and BFD acquisitions, the Company expects its
selling, general and administrative expenses to increase in the future.

33<PAGE>
Research, Engineering and Development

Research, engineering and development expenses increased to
$1,964,284 for the four months ended December 31, 1996, compared to
$1,258,439 for the four months ended December 31, 1995. The increase in
research, engineering and development expenses primarily 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 purchased releases of the
Company's products. Additionally, the Company will continue to evaluate
its different product lines to maximize the impact of the research,
engineering and development expenditures.

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

Depreciation and Amortization

Depreciation and amortization was $2,265,126 for the four months
ended December 31, 1996, compared to $770,506 for the four months ended
December 31, 1995. The increase is primarily due to amortization expenses
associated with intangible assets acquired during the Vicorp and BFD
acquisitions.

Income Tax Expense

Investment Gain on Marketable Equity Securities

For the four months ended December 31, 1995, the Company's
unrealized investment gain of $891,196 relates to its purchase of
marketable equity securities. No such gain occurred during the same
period in 1996.

Interest Income

For the four months ended December 31, 1996, net interest income was
$124,561 compared to $90,124 during the four months ended December 31,
1995.

34<PAGE>
Financial Position, Liquidity, and Capital Resources

At December 31, 1998, the Company had a working capital deficiency
of $11,168,209 compared to net working capital of $3,591,655 at December
31, 1997. The decrease in net working capital is due in part to notes of
$6,000,000 maturing in April 1999 issued to the Company's shareholders in
September 1997. The Company expects that in 1999, as in 1998, the Company
will require additional external sources of capital to fund its
operations, including working capital needs. The Company's Board of
Directors formed a special committee for the purpose of analyzing
additional external sources of capital that may be available to the
Company. The Company has taken steps regarding the improvement of its
cash flow and cash position, including:

* Retained an investment banking firm to assist in the development and
evaluation of future strategic initiatives, including potential
financing opportunities;

* Analyzed opportunities to sell certain non-core assets, including
real estate; and

* Implemented a restructuring plan to reduce operating expenses.

However, there is no assurance that the Company will be able to
obtain additional financing on acceptable terms and conditions or that
its existing working capital will be sufficient to fund its operating and
investing activities for 1999. See "Financial Statements," including
Report of Independent Accountants.

35<PAGE>
Agreement provided for a $5,000,000 line of credit to be made available
by Speer upon signing of the Agreement for operating capital
requirements. As of December 31, 1998, the Company's outstanding balance
owed on the line of credit was $3,750,000. After the transaction, Mr.
Speer would have controlled over 80 percent of the outstanding stock of
the Company. Mr. Speer currently controls RMS Limited Partnership, an
entity that is one of the Company's major stockholders. RMS L.P. would
have also contributed certain real estate in Nashville as part of the
transaction.

The Company's accounts and contracts receivable decreased to
$6,823,640 as of December 31, 1998, compared to $9,657,355 as of December
31, 1997. The decrease is primarily due to the collection of certain
receivables outstanding at December 31, 1997, as well as an overall
reduction in revenue during 1998.

The Company's supplies and other current assets increased to
$2,337,961 as of December 31, 1998, compared to $1,970,407 as of December
31, 1997. The increase is primarily due to an increase in inventory and
prepaid expenses.

36<PAGE>
The Company's costs and earnings in excess of billings on
uncompleted contracts decreased to $1,425,303 as of December 31, 1998,
compared to $3,333,339 as of December 31, 1997. The decrease is primarily
associated with the completion of certain BETEX product delivery
contracts that were in process for its customers. Such amounts as of
December 31, 1998, are expected to be fully billed by the Company by June
30, 1999.

The Company's current portion of long-term debt increased to
$9,864,171 as of December 31, 1998, compared to $294,375 as of December
31, 1997. The Company's long-term debt decreased to $154,137 as of
December 31, 1998, compared to $6,240,184 as of December 31, 1997. The
increase in the current portion of long-term debt and the decrease in
long-term debt is primarily due to a reclassification of $6,000,000 in
promissory notes maturing in April 1999 and to the Company's borrowing of
an additional $3,750,000 in short-term notes during 1998 to fund working
capital needs.

The Company's accounts payable increased to $5,758,372 as of
December 31, 1998, compared to $5,505,996 as of December 31, 1997. The
increase is primarily due to the timing of certain vendor payments.

The Company's accrued expenses increased to $5,496,658 as of
December 31, 1998, compared to $3,531,249 as of December 31, 1997. The
increase is primarily due to accrued restructuring charges of $922,050 as
of December 31, 1998, and an increase of $690,487 in accrued interest on
shareholder notes. In addition, certain acquisition related expenses of
approximately $325,000 are accrued as of December 31, 1998.

The Company's accrued payroll and related expenses decreased to
$1,488,723 as of December 31, 1998, compared to $2,579,551 as of December
31, 1997, due primarily to a decrease in the Company's employee base
during 1998.

The Company's billings in excess of costs and earnings on
uncompleted contracts decreased to $1,010,680 as of December 31, 1998,
compared to $2,780,251 as of December 31, 1997. The decrease is primarily
associated with the completion of certain BETEX software development
contracts in process for its customers.

The Company's deferred revenue balance decreased to $723,464 as of
December 31, 1998, compared to $1,270,825 as of December 31, 1997. The
Company's deferred revenue balance primarily represents prepaid
maintenance contracts for services to be provided to its customers.

During the year ended December 31, 1998, cash used by operations was
$4,112,005. The Company funded this cash flow usage primarily through
debt funding of $3,750,000 that was received from one of the Company's
shareholders, RMS Limited Partnership, during 1998. During the year ended
December 31, 1997, cash used by operations was $5,098,537. The Company
funded this cash flow usage primarily through the net equity and debt
funding of $4,400,000 and $5,974,130, respectively, that was received
from shareholders during the second and third quarters of 1997,
respectively. During the four months ended December 31, 1996, cash used
by operations was $5,849,184. The Company funded this cash flow usage

37<PAGE>
primarily through its cash funds. During the year ended August 31, 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.

The Company incurred $1,577,844 in expenditures for capital assets
for the year ended December 31, 1998. 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 1999 will be approximately $2,900,000.

As of December 31, 1998, the Company had net operating loss
carryforwards of approximately $49,000,000 for federal income tax
purposes expiring through 2018 and $22,900,000 for foreign tax purposes,
of which $17,700,000 is expiring through 2008 and $5,200,000 is available
indefinitely.

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

New Accounting Pronouncements

In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
effective for periods beginning after December 15, 1997, requiring
reclassification of earlier financial statements for comparative
purposes. SFAS No. 130 requires that changes in the amounts of certain
items, including foreign currency translation adjustments and gains and
losses on certain securities, be shown in the financial statements. SFAS
No. 130 does not require a specific format for the financial statement in
which comprehensive income is reported; however, it does require that an
amount representing total comprehensive income be reported in that
statement. The adoption of SFAS No. 130 did not have a material effect on
the financial condition or the results of operations of the Company.

Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), effective for periods beginning
after December 15, 1997. SFAS No. 131 changes the way public companies
report information about segments of their business in annual financial
statements and requires them to report selected segment information in
their quarterly reports issued to stockholders. It also requires entity-
wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its
major customers. SFAS No. 131 is effective for the Company's fiscal year
1998. The adoption of SFAS No. 131 did not have a material effect on the
financial condition or the results of operations of the Company.

38<PAGE>
In October 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," effective for transactions entered into
in fiscal years beginning after December 15, 1997. SOP 97-2 supercedes
SOP 91-1, "Software Revenue Recognition" and provides guidance on when
and in what amounts revenue should be recognized for the licensing,
selling, leasing or marketing of computer software. The adoption of SOP
97-2 did not have a material impact on the financial condition or the
results of operations of the Company.

In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"), effective for periods
beginning after December 15, 1997. The adoption of SFAS No. 132 had no
effect on the financial condition or the results of operations of the
Company.

In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), effective for periods beginning after June
15, 1999. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Company
believes that the adoption of SFAS No. 133 will not have a material
effect on the financial condition or the results of operations of the
Company.

In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," ("SFAS No. 134"), effective for periods beginning
after December 15, 1998. The Company believes the adoption of SFAS No.
134 will not have a material effect on the financial condition or the
results of operations of the Company.

Readiness for Year 2000

The Company is in the process of developing a plan to identify and
resolve all of its issues relating to the "Year 2000" problems relating
to its business. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the
applicable year. Software programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a major system failure or miscalculations. This
issue affects the Company's internal information systems and could impact
software systems sold and delivered to customers. Various task forces
have been formed to assess the scope of the Company's risks in this area
and bring applications into compliance. To date, the Company has
experienced very few problems relating to Year 2000 testing and those
identified have been fixed in the Company's day-to-day operating
environment. The Company has also started coordinating with vendors about
their progress in identifying and addressing problems that their computer
systems may face in correctly processing date information relating to the

39<PAGE>
Year 2000. The Company intends to continue its efforts to monitor the
Year 2000 compliance of vendors. In the event any third parties cannot
timely provide the Company with products that meet the Year 2000
requirements, then the Company's abilities to offer its products and
services could be materially adversely affected. The cost incurred by the
Company during 1998 to address Year 2000 compliance was less than
$500,000. The Company estimates it will incur less than $500,000 in
direct costs during 1999 to support its compliance initiatives. Although
the Company expects its systems to be Year 2000 compliant on or before
December 31, 1999, it cannot predict the outcome or the success of its
Year 2000 programs, or that third party systems are or will be Year 2000
compliant, or that the costs required to address the Year 2000 issue will
not exceed its estimates, or that the impact of a failure to achieve
substantial Year 2000 compliance will not have a material adverse effect
on the Company's businesses, financial conditions, or results of
operations. In addition, the Company's business may be materially
adversely affected in the event that its customers' systems are not Year
2000 compliant to the extent that such (i) customers' systems are not
compatible with those products or services offered by the Company or (ii)
customers delay purchase of products or services from the Company while
such customers' systems are made Year 2000 compliant. The Company has not
adopted a contingency plan to address possible risks to its systems.

Forward-looking Information

Certain statements in this report are forward-looking statements
within the meaning of the federal securities laws. Such forward-looking
statements reflect management's current views with respect to future
events and the financial performance and condition of the Company.
However, 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:

* The Company competes in an industry marked by frequent
technological changes which will force the Company to expend
funds to develop new products and implement new technologies

* The various markets into which the Company sells its products are
undergoing significant changes with increasing demands for
product innovations

* The Company must be successful in competing against many
competitors, many of which have significantly greater financial,
technical, marketing, and sales resources than the Company

* The Company will be required to properly estimate costs under
fixed price contracts

* Increased risk of litigation in the Company's industry resulting
from aggressive prosecutions of intellectual property claims

* The Company's ability to retain its larger customers, including
MCIWorldCom

40<PAGE>
* Availability of certain hardware and software components which
are incorporated with the Company's products and are purchased
from a limited number of vendors

* The Company's ability 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

* The Company's reliance on large sales orders that increase the
risk of significant revenue fluctuations, from quarter to quarter
and year to year

* The ability of the Company and its significant suppliers and
large customers to address the Year 2000 issue.

* The Company's ability to generate sufficient cash, from
operations or from external sources, to fund its global
operations. See "Financial Statements," including Report of
Independent Accountants.

Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various
factors. All forward-looking statements included in this document are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking
statement. Among the factors that could cause actual results to differ
materially are the factors detailed in Items 1 through 3 and 7 of this
report and the risks discussed under the caption "Risk Factors" included
in the Company's filings under the Securities Act of 1933. Prospective
investors should also consult the risks described from time to time in
the Company's Reports on Form 10-Q, 8-K, and 10-K and Annual Reports to
Shareholders.

41<PAGE>
Item 8 - Financial Statements

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----

Report of Independent Accountants . . . . . . . . . . . . . . . . . . 43

Report of Independent Accountants . . . . . . . . . . . . . . . . . . 44

Report of Independent Accountants . . . . . . . . . . . . . . . . . . 45

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . 46 - 47

Consolidated Statements of Operations and Comprehensive Income . 48 - 49

Consolidated Statements of Stockholders' Equity . . . . . . . . . 50 - 57

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . 58 - 60

Notes to Consolidated Financial Statements . . . . . . . . . . . . . 61

42<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Precision Systems, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive income,
of stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Precision Systems, Inc., and its
subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the two
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 20 to
the financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 20. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP

Tampa, Florida
February 12, 1999, except for the information in
Notes 19 and 20, for which the date is March 15, 1999

43<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
Precision Systems, Inc.

We have audited the accompanying consolidated statements of operations
and comprehensive income, stockholders' equity and cash flows for the
four months ended December 31, 1996, and for each of the two years in the
period ended August 31, 1996, of Precision Systems, Inc. and subsidiaries
(the "Company"). 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
revenues constituting 80 percent and 42 percent of consolidated total
revenues for the four months ended December 31, 1996, and for the year
ended August 31, 1996, respectively. 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
Vicorp N.V., 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
and the report of the other auditors provide a reasonable basis for our
opinion.

In our opinion, based on our audits and the report of the other auditors,
such consolidated financial statements present fairly, in all material
respects, the results of the Company's operations and its cash flows for
the four months ended December 31, 1996, and for the year ended August
31, 1996, in conformity with generally accepted accounting principles.

Deloitte & Touche LLP

Tampa, Florida
March 27, 1997

44<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors
Precision Systems, Inc.

Board of Directors
Vicorp N.V.

We have audited the consolidated balance sheet of Vicorp N.V. and
subsidiaries as of December 31, 1996, and the related consolidated
statements of earnings, stockholder's equity, and cash flows for the four
months ended December 31, 1996, and the year ended August 31, 1996. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Vicorp N.V. and subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the
four months ended December 31, 1996, and the year ended August 31, 1996,
in conformity with generally accepted accounting principles in the United
States.

PRICEWATERHOUSECOOPERS LLP
Utrecht
Holland
March 27, 1997

45<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,
----------------------------
1998 1997
ASSETS -------------- -------------
Current Assets
Cash and cash equivalents . . . . . . . . $ 2,543,763 $ 4,582,757
Accounts and contracts receivable, net . . 6,823,640 9,657,355
Due from employees . . . . . . . . . . . . 43,192 10,044
Supplies and other current assets . . . . 2,337,961 1,970,407
Costs and earnings in excess of billings
on uncompleted contracts . . . . . . . . 1,425,303 3,333,339
-------------- -------------
Total current assets . . . . . . . . . 13,173,859 19,553,902
-------------- -------------
Property, Plant and Equipment, at Cost
Land and improvements . . . . . . . . . . 1,134,955 1,134,955
Buildings and improvements . . . . . . . . 3,034,703 3,083,401
Computer equipment . . . . . . . . . . . . 26,433,111 28,078,975
Furniture and office equipment . . . . . . 3,331,312 3,237,280
-------------- -------------
33,934,081 35,534,611
Less accumulated depreciation . . . . . . (27,112,340) (26,665,434)
-------------- -------------
6,821,741 8,869,177
-------------- -------------
Intangible assets, net . . . . . . . . . . 37,822 52,474
-------------- -------------
$ 20,033,422 $ 28,475,553
============== =============

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

46<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

December 31,
----------------------------
LIABILITIES AND 1998 1997
STOCKHOLDERS' EQUITY (DEFICIT) -------------- -------------

Current Liabilities
Current portion of long-term debt . . . . $ 9,864,171 $ 294,375
Accounts payable . . . . . . . . . . . . . 5,758,372 5,505,996
Accrued expenses . . . . . . . . . . . . . 5,496,658 3,531,249
Accrued payroll and related liabilities . 1,488,723 2,579,551
Billings in excess of costs and earnings
on uncompleted contracts . . . . . . . . 1,010,680 2,780,251
Deferred revenue . . . . . . . . . . . . . 723,464 1,270,825
-------------- -------------
Total current liabilities . . . . . . . 24,342,068 15,962,247
-------------- -------------
Long-term debt . . . . . . . . . . . . . . 154,137 6,240,184
-------------- -------------
Commitments and Contingencies
(Notes 9, 18, and 19)
Stockholders' Equity (Deficit)
Non-redeemable preferred stock $.01 par
value; authorized 50,000 shares:
Series A 6 percent Cumulative
Convertible Preferred Stock;
convertible at $4.76 per share,
issued and outstanding 10,000 shares;
liquidation preference $5,800,000 . . 100 100
Series B 8 percent Cumulative
Convertible Preferred Stock;
convertible at $4.47 per share,
issued and outstanding 4,500 shares;
liquidation preference $4,500,000 . . 45 45
Common stock $.01 par value; authorized
30,000,000 shares, issued 17,986,106
and 17,906,025 shares, respectively . . . 179,861 179,060
Additional paid-in capital . . . . . . . . 113,554,218 114,000,072
Accumulated deficit . . . . . . . . . . . (120,652,494) (109,294,105)
Treasury stock (132,937 shares) -
at cost . . . . . . . . . . . . . . . . (422,360) (422,360)
Accumulated preferred stock dividends . . 2,379,549 1,675,201
Accumulated other comprehensive income . . 512,048 312,609
Unearned compensation . . . . . . . . . . (13,750) (177,500)
-------------- -------------
Total stockholders' equity (deficit) . . (4,462,783) 6,273,122
-------------- -------------
$ 20,033,422 $ 28,475,553
============== =============

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

47<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
Year Year Four Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1998 1997 1996 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues
Contract revenues . . . . . $ 6,647,200 $ 6,203,229 $ 3,729,171 $ 13,724,228
Service and support . . . . 19,651,125 23,813,564 7,959,984 9,220,291
License fee revenue . . . . 7,153,066 10,595,594 3,172,868 3,758,308
-------------- ------------- -------------- -------------
33,451,391 40,612,387 14,862,023 26,702,827
Cost of sales, exclusive -------------- ------------- -------------- -------------
of depreciation and
amortization shown
separately below . . . . . 16,978,499 18,099,533 3,442,705 6,023,989
-------------- ------------- -------------- -------------
Operating Expenses
Selling, general and
administrative . . . . . . 20,053,742 22,171,534 10,899,572 23,849,385
Research, engineering
and development . . . . . 3,229,366 4,719,489 1,964,284 5,249,377
Depreciation and
amortization . . . . . . . 3,201,616 7,042,929 2,265,126 4,714,227
Purchased research and
development . . . . . . . - - - 19,500,000
Impairment of intangible
assets . . . . . . . . . . - 14,285,907 - 3,829,424
-------------- ------------- -------------- -------------
26,484,724 48,219,859 15,128,982 57,142,413
-------------- ------------- -------------- -------------
Operating loss . . . . . . . (10,011,832) (25,707,005) (3,709,664) (36,463,575)
Interest income
(expense), net . . . . . . (1,346,557) (351,711) 124,561 507,200
Gain on sale of marketable
equity securities . . . . . - - - 1,262,414
Loss before income -------------- ------------- -------------- -------------
taxes . . . . . . . . . . . (11,358,389) (26,058,716) (3,585,103) (34,693,961)
Income tax benefit . . . . . - - 118,288 -
-------------- ------------- -------------- -------------
Net Loss . . . . . . . . . . (11,358,389) (26,058,716) (3,466,815) (34,693,961)

</TABLE>

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

48<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(continued)

<TABLE>
<CAPTION>
Four
Year Year Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1998 1997 1996 1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Other Comprehensive Income
Foreign currency
translation adjustments . 199,439 (43,139) 332 355,416
-------------- ------------- -------------- -------------
Comprehensive Loss . . . . . $ (11,158,950) $(26,101,855) $ (3,466,843) $(34,338,545)
============== ============= ============== =============

Net Loss Applicable to
Common Stock
Net loss . . . . . . . . . $ (11,358,389) $(26,058,716) $ (3,466,815) $(34,693,961)
Preferred stock dividend
requirements . . . . . . (704,348) (612,327) (116,318) (349,883)
-------------- ------------- -------------- -------------
$ (12,062,737) $(26,671,043) $ (3,583,133) $(35,043,844)
============== ============= ============== =============
Basic and Diluted Loss
Per Share
Net loss . . . . . . . . . $ (.64) $ (1.48) $ (.20) $ (2.36)
Net loss applicable to ============== ============= ============== =============
common stock . . . . . . $ (.68) $ (1.51) $ (.21) $ (2.39)
============== ============= ============== =============
</TABLE>

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

49<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Non- Non-
Redeemable Redeemable
Series A Series B
Preferred Preferred Common Class B
Stock Stock Stock Convertible Additional
$.01 Par $.01 Par $.01 Par Common Paid-in Accumulated
Value Value Value Stock Capital Deficit
----------- ----------- --------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
September 1,
1995 . . . $ 100 $ - $ 97,335 $ 24,159 $ 67,740,805 $ (45,074,613)
Issuance of
common stock
upon exercise
of stock
options . . - - 5,152 - 922,714 -
Conversion of
Class B
common stock - - 24,159 (24,159) - -
Issuance of
common stock
upon
acquisition
of Vicorp . - - 31,018 - 29,490,559 -
Other
comprehensive
income . . - - - - - -
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)
----------- ----------- --------- ------------ -------------- ---------------

</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.

50<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)

<TABLE>
<CAPTION>
Non- Non-
Redeemable Redeemable
Series A Series B
Preferred Preferred Common Class B
Stock Stock Stock Convertible Additional
$.01 Par $.01 Par $.01 Par Common Paid-in Accumulated
Value Value Value Stock Capital Deficit
----------- ----------- --------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
August 31,
1996 . . . 100 - 172,664 - 106,884,215 (79,768,574)
Issuance of
common stock
upon exercise
of stock
options . . - - 1,577 - 1,222,286 -
Issuance of
common stock
upon
acquisition
of BFD
Productions,
Inc. . . . - - 2,723 - 1,653,110 -
Other
comprehensive
income . . - - - - - -
Amortization
of unearned
compensation - - - - - -
Dividends on
preferred
stock . . . - - - - (116,318) -
Net loss for
the four
months ended
December 31,
1996 . . . - - - - - (3,466,815)
----------- ----------- --------- ------------ -------------- ---------------

</TABLE>

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

51<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)

<TABLE>
<CAPTION>
Non- Non-
Redeemable Redeemable
Series A Series B
Preferred Preferred Common Class B
Stock Stock Stock Convertible Additional
$.01 Par $.01 Par $.01 Par Common Paid-in Accumulated
Value Value Value Stock Capital Deficit
----------- ----------- --------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996 . . . 100 - 176,964 - 109,643,293 (83,235,389)
Issuance of
common stock
upon exercise
of stock
options . . - - 2,096 - 467,578 -
Issuance of
preferred
stock . . . - 45 - - 4,499,955 -
Legal expenses
associated
with issuance
of preferred
stock . . . - - - - (175,927) -
Other
comprehensive
income . . - - - - - -
Amortization
of unearned
compensation - - - - - -
Dividends on
preferred
stock . . . - - - - (612,327) -
Unearned
compensation
relating to
restricted
stock grants - - - - 177,500 -
Net loss for
the year
ended
December 31,
1997 . . . - - - - - (26,058,716)
----------- ----------- --------- ------------ -------------- ---------------

</TABLE>

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

52<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)

<TABLE>
<CAPTION>
Non- Non-
Redeemable Redeemable
Series A Series B
Preferred Preferred Common Class B
Stock Stock Stock Convertible Additional
$.01 Par $.01 Par $.01 Par Common Paid-in Accumulated
Value Value Value Stock Capital Deficit
----------- ----------- --------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1997 . . . 100 45 179,060 - 114,000,072 (109,294,105)
Issuance of
common stock
upon exercise
of stock
options . . - - 579 - 333,716 -
Issuance of
common stock - - 222 - (222) -
Other
comprehensive
income - - - - - -
Amortization
of unearned
compensation - - - - - -
Cancellation
of restricted
stock grants - - - - (75,000) -
Dividends on
preferred
stock . . . - - - - (704,348) -
Net loss for
the year
ended
December 31,
1998 . . . - - - - - (11,358,389)
----------- ----------- --------- ------------ -------------- ---------------
Balance at
December 31,
1998 . . . $ 100 $ 45 $179,861 - $ 113,554,218 $ (120,652,494)
=========== =========== ========= ============ ============== ===============

</TABLE>

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

53<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)

Balance at
September 1, 1995 .$ (422,360) $ 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
Other comprehensive
income . . . . . . - - 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 . . (422,360) 946,556 355,416 (319,209) 27,848,808

</TABLE>

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

54<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)

<TABLE>
<CAPTION>
Accumulated Accumulated
Preferred Other
Treasury Stock Comprehensive Unearned
Stock Dividends Income Compensation Total
----------- ------------ -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of
common stock
upon exercise of
stock options . . . - - - - 1,223,863
Issuance of
common stock upon
acquisition of BFD
Productions, Inc. . - - - - 1,655,833
Other comprehensive
income . . . . . . - - 332 - 332
Amortization of
unearned
compensation . . . - - - 199,092 199,092
Dividends on
preferred stock . . - 116,318 - - -
Net loss for the
four months ended
December 31, 1996 . - - - - (3,466,815)
----------- ------------ ------------- --------------- -------------
Balance at
December 31, 1996 . (422,360) 1,062,874 355,748 (120,117) 27,461,113

</TABLE>

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

55<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)

<TABLE>
<CAPTION>
Accumulated Accumulated
Preferred Other
Treasury Stock Comprehensive Unearned
Stock Dividends Income Compensation Total
----------- ------------ -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of
common stock
upon exercise of
stock options . . . - - - - 469,674
Issuance of
preferred stock . . - - - - 4,500,000
Legal expenses
associated with
issuance of
preferred stock . . - - - - (175,927)
Other comprehensive
income . . . . . . - - (43,139) - (43,139)
Amortization
of unearned
compensation . . . - - - 120,117 120,117
Dividends on
preferred stock . . - 612,327 - - -
Unearned compensation
relating to
restricted
stock grants . . . - - - (177,500) -
Net loss for the
year ended
December 31, 1997 . - - - - (26,058,716)
----------- ------------ ------------- --------------- -------------
Balance at
December 31, 1997 . (422,360) 1,675,201 312,609 (177,500) 6,273,122

</TABLE>

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

56<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)

<TABLE>
<CAPTION>
Accumulated Accumulated
Preferred Other
Treasury Stock Comprehensive Unearned
Stock Dividends Income Compensation Total
----------- ------------ ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of
common stock
upon exercise of
stock options . . . - - - - 334,295
Issuance of
common stock . . . - - - - -
Other comprehensive
income . . . . . . - - 199,439 - 199,439
Amortization of
unearned
compensation . . . - - - 88,750 88,750
Cancellation of
restricted
stock grants . . . - - - 75,000 -
Dividends on
preferred stock . . - 704,348 - - -
Net loss for the
year ended
December 31, 1998 . - - - - (11,358,389)
----------- ------------ ------------- --------------- -------------
Balance at
December 31, 1998 .$ (422,360) $ 2,379,549 $ 512,048 $ (13,750) $ (4,462,783)
=========== ============ ============= =============== =============

</TABLE>

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

57<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Year Four Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1998 1997 1996 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash Flows Operating
Activities:
Net loss . . . . . . . . . $ (11,358,389) $(26,058,716) $ (3,466,815) $(34,693,961)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization . . . . . 3,201,616 7,042,929 2,265,126 4,714,227
Purchased research and
development . . . . . . - - - 19,500,000
Impairment of intangible
assets . . . . . . . . - 14,285,907 - 3,829,424
Provision for losses on
accounts receivable . . 85,611 926,689 278,687 1,196,412
Loss on sale of property,
plant, and equipment . 93,057 44,630 - -
Amortization of unearned
compensation . . . . . 88,750 120,117 199,092 150,811
Realization of deferred
revenue . . . . . . . . - - (481,272) (1,448,588)
Change in current
assets and liabilities,
net of business
acquisitions:
Accounts and
contracts
receivable . . . . 2,748,104 1,815,956 (5,796,096) 7,745,048
Costs and estimated
earnings in excess
of billings . . . . 1,908,036 (268,361) 167,556 (2,093,285)
Supplies and other
current assets . . (421,397) (268,707) (129,440) 519,491
Accounts payable . . 252,376 1,110,868 139,256 (3,403,718)
Accrued expenses . . 1,607,163 (1,458,749) (937,652) (2,546,486)
Billings in excess of
cost and earnings
on incomplete
contracts . . . . . (1,769,571) (972,881) 856,954 2,896,178

</TABLE>

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

58<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

<TABLE>
<CAPTION>
Year Year Four Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1998 1997 1996 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Deferred revenue . . (547,361) (1,418,219) 1,055,420 (3,477,991)
-------------- -------------- -------------- --------------
Net cash used in
operating
activities . . . . (4,112,005) (5,098,537) (5,849,184) (7,112,438)
-------------- -------------- -------------- --------------
Cash Flows Investing
Activities:
Purchase of property, plant
and equipment . . . . . (1,577,844) (3,203,564) (513,598) (1,995,353)
Purchase of other assets . - - - (226,685)
Purchase of consolidated
subsidiaries, net of cash
acquired . . . . . . . . - - (1,447,466) -
Cash acquired in
acquisition . . . . . . - - - 4,403,000
Proceeds from sale of
property, plant, and
equipment . . . . . . . 139,976 24,742 - -
-------------- -------------- -------------- --------------
Net cash (used in)
provided by investing
activities . . . . . (1,437,868) (3,178,822) (1,961,064) 2,180,962
-------------- -------------- -------------- --------------
</TABLE>

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

59<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

<TABLE>
<CAPTION>
Year Year Four Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1998 1997 1996 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash Flows Financing
Activities:
Proceeds from notes
payable, net . . . . . . 3,750,000 5,974,130 - -
Repayment of notes
payable . . . . . . . . (256,025) (2,337,042) (986,047) (149,675)
Proceeds from issuance of
capital stock . . . . . 16,904 4,621,210 1,223,863 9,552,866
-------------- -------------- -------------- --------------
Net cash provided by
financing
activities . . . . . 3,510,879 8,258,298 237,816 9,403,191
-------------- -------------- -------------- --------------
Net (decrease) increase in
cash and cash
equivalents . . . . . . . (2,038,994) (19,061) (7,572,432) 4,471,715
Cash and cash equivalents at
beginning of period . . . 4,582,757 4,601,818 12,174,250 7,702,535
-------------- -------------- -------------- --------------
Cash and cash equivalents at
end of period . . . . . . $ 2,543,763 $ 4,582,757 $ 4,601,818 $ 12,174,250
============== ============== ============== ==============

Supplemental Non-Cash
Information:
Accrued dividends on
preferred stock . . . . $ 704,348 $ 612,327 $ 116,318 $ 349,883
Issuance of stock for
purchase of subsidiary . $ - $ - $ 1,655,833 $ 29,521,577
Issuance of common stock
as compensation . . . . $ - $ - $ - $ 470,020
</TABLE>

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

60<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND DISTRIBUTION

Precision Systems, Inc. (the "Company" or "PSI") is a global company
that, together with its subsidiaries, Vicorp N.V. and BFD Productions,
Inc., delivers telecommunications solutions to service providers and
corporations. Vicorp's software and hardware products support enhanced
calling and prepaid services, toll-free services, and advanced call
center applications. BFD Productions is a service bureau specializing in
audiotext and Internet applications. Headquartered in St. Petersburg,
Florida (USA), Precision Systems meets the needs of customers in more
than thirty countries.

On September 30, 1996, the Company elected to change its year end
from August 31 to December 31. This change was made effective December
31, 1996.

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 the Company and its subsidiaries. All
significant intercompany transactions and accounts have been eliminated.

Estimates and Assumptions

The preparation of the consolidated 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 periods for intangible assets, and costs and
profits associated with long-term contracts. Actual results may differ
from these estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and commercial
paper with original maturities at time of acquisition of three months or
less.

61<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:
Years
--------
Land improvements . . . . . . . . . . . . . . . . . . . . . . . 18
Building and improvements . . . . . . . . . . . . . . . . 10 to 30
Computer equipment . . . . . . . . . . . . . . . . . . . . . 3 to 4
Furniture and office equipment . . . . . . . . . . . . . . . 5 to 10

For income tax reporting purposes, certain of these assets are
depreciated using accelerated methods. Depreciation expense for the years
ended December 31, 1998 and 1997, the four months ended December 31,
1996, and the year ended August 31, 1996, approximated $3,166,000,
$3,055,000, $1,039,000, and $2,369,000, respectively. Gains and losses
on disposals of property, plant, and equipment are recognized in the
period in which they are incurred and are included in the Company's
selling, general, and administrative expenses.

Inventories

Inventories are stated at the lower of cost or market determined
using the standard cost method and are included in the Company's supplies
and other current assets.

Product Warranties

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

Revenue Recognition

Revenues, other than from long-term contracts, generally are
recognized when the products are delivered or the service has been
rendered. Revenues from long-term contracts are recognized under the
percentage-of-completion method, based on contract costs incurred to date
compared with the Company's estimate of total contract costs and profit.
Related contract costs include all direct material and labor costs and
those indirect costs related to contract performance and are included in
cost of sales in the consolidated statements of operations and
comprehensive income. Software revenue is recognized in accordance with
the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2, "Software Revenue Recognition."
Revenue from post-contract customer support is recognized ratably over
the service period. Revenue from software licenses is recognized upon
delivery of the software.

62<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Long-Term Contracts

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 becomes known.

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 components of other comprehensive income. Revenues, 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

Financial instruments which potentially expose the Company to
concentration of credit risk, 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 December 31, 1998 and 1997.

Income Taxes

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. The effect on deferred income
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.

63<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Research and Development

Research and development costs are charged to expense as incurred.

Comprehensive Income

In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," which the Company adopted in 1998. This statement
establishes rules for the reporting of comprehensive income and its
components. Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the consolidated
statements of operations and comprehensive income. The adoption of SFAS
130 had no impact on total stockholders' equity. Prior year financial
statements have been reclassified to conform to the SFAS 130
requirements.

Basic and Diluted Loss Per Share

Basic and diluted loss per share for the fiscal years ended December
31, 1998 and 1997, the four months ended December 31, 1996, and the
fiscal year ended August 31, 1996, has been computed based upon the
weighted average common shares outstanding of 17,825,079, 17,630,068,
17,428,861, and 14,677,220, respectively. The diluted 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. The basic and diluted net loss per share applicable to
common stock for the years ended December 31, 1998 and 1997, the four
months ended December 31, 1996, and the fiscal year ended August 31,
1996, has been computed based upon the preferred stock dividend
requirements of $704,348, $612,327, $116,318, and $349,883, respectively.

The following table provides information on the weighted average
shares of dilutive securities which are not included in the diluted loss
per share calculation because their inclusion would be anti-dilutive:

Four Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, August 31,
1998 1997 1996 1996
------------- ------------- ------------- -------------

Preferred
convertible
securities . . 3,500,198 2,460,098 1,218,487 1,530,815

Stock options
and restricted
stock . . . . 1,142,682 1,502,496 2,087,561 1,724,584
------------- ------------- ------------- -------------
4,642,880 3,962,594 3,306,048 3,255,399
============= ============= ============= =============

64<PAGE>

65<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restructuring Charges

During the year ended December 31, 1998, in an effort to reduce
overhead and cut costs, the Company terminated the employment of 58
individuals, which approximated the estimate for the total number of
employee terminations under the original restructuring plan, and closed
several offices worldwide. The effect of the restructuring charges (and
related adjustments) associated with these headcount reductions and
office closings was to increase the Company's selling, general and
administrative expenses by approximately $2,438,000 during fiscal 1998.
The following table provides an itemization of the costs included in the
restructuring liability based on original estimates, the amounts paid and
charged against the liability, adjustments made to the original
estimates, and the residual value of the restructuring liability as of
December 31, 1998:

Liability
as of
Original December 31,
Estimate Charges Adjustments 1998
------------ ------------ ------------ -------------
Employee
termination
benefits . . . . . $ 950,000 $ (788,916) $ (21,158) $ 139,926
Non-cancellable
operating
leases . . . . . . 524,000 (250,663) 709 274,046
Asset
impairments,
including
leasehold
improvements . . . 775,000 (430,088) 2,454 347,366
Professional
services . . . . . 251,000 (46,216) (44,072) 160,712
------------ ------------ ------------ -------------
$ 2,500,000 $(1,515,883) $ (62,067) $ 922,050
============ ============ ============ =============

The "Charges" column above represents the actual cash payments made
to employees for restructuring plan termination benefits and lease
payments associated with office closures made subsequent to the
restructuring plan. In addition, the "Charges" column represents certain
asset write-offs disposed of regarding such office closures. The asset
write-offs included in the restructuring plan primarily represent the
historical net book value of certain furniture, leasehold improvements,
and other miscellaneous equipment associated with the office closures.
The Company does not expect to generate any material proceeds from the
sale of such assets upon disposal.

66<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The restructuring plan liability as of December 31, 1998, represents
management's estimate of the remaining portion of the cash to be paid out
to employees regarding termination benefits, non-cancellable operating
leases for offices closed, and legal and accounting fees associated with
the completion of the restructuring plan. All cash payments to be made
for employee termination benefits and legal and accounting fees are
expected to be made by September 30, 1999. In addition, all cash payments
on non-cancellable operating leases are expected to be completed by
December 31, 1999. No cash payments will occur as a result of the asset
impairments.

The Company's restructuring plan did not discontinue any corporate
business activities with separately identifiable operations. The
restructuring plan was initiated to reduce the Company's operating
expenses to better match the Company's expected revenue and gross margin
opportunities. In addition, the Company centralized its BETEX and Lydian
product development efforts to its United Kingdom office (versus separate
offices, Boston and United Kingdom, prior to the restructuring).

During the year ended December 31, 1997, in an effort to reduce
overhead and cut costs, the Company terminated the employment of
approximately 30 individuals worldwide. During the year ended August 31,
1996, 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 $650,000 and $1,100,000 in 1997
and 1996, respectively. The number of employees terminated and the actual
costs associated with the terminations approximated the original
estimates under the restructuring plans for both the years ended December
31, 1997 and August 31, 1996. As a result, no adjustments to the original
estimates were made.

Reclassifications

Certain amounts for previous periods have been reclassified to
conform with the December 31, 1998, presentation. Such reclassifications
had no impact on the Company's total assets, equity, net loss or cash
flows in the previous periods.

3. ACCOUNTS AND CONTRACTS RECEIVABLE

December 31,
----------------------------
1998 1997
-------------- --------------

Accounts and contracts receivables . . $ 7,520,543 $ 10,896,552
Allowance for doubtful accounts . . . (696,903) (1,239,197)
-------------- --------------
$ 6,823,640 $ 9,657,355
============== ==============

67<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

December 31,
----------------------------
1998 1997
-------------- --------------

Expenditures on uncompleted contracts $ 1,610,578 $ 2,869,480
Estimated net (losses) earnings on
uncompleted contracts . . . . . . . (185,275) 463,859
-------------- --------------
1,425,303 3,333,339
Less actual and allowable billings on
uncompleted contracts . . . . . . . (1,010,680) (2,780,251)
-------------- --------------
$ 414,623 $ 553,088
============== ==============

Costs and estimated earnings net of actual and allowable billings on
uncompleted contracts of $414,623 and $553,088, not billed as of December
31, 1998 and 1997, respectively, are comprised principally of revenue
recognized on contracts for which billings had not been presented to the
customer because the amounts were not billable at the balance sheet date.
These amounts will be billable based on the terms of the contract,
generally including the attainment of certain project milestones,
installation of the product, the completion of certain performance
testing, and acceptance of the product by the customer. The net
receivables, as of December 31, 1998 and 1997, are expected to be fully
billed by June 30, 1999 and 1998, respectively.

5. SUPPLIES AND OTHER CURRENT ASSETS

December 31,
----------------------------
1998 1997
-------------- --------------

Materials to be used in fulfilling
contracts . . . . . . . . . . . . . . $ 1,184,449 $ 995,401
Prepaid expenses . . . . . . . . . . . 1,153,512 975,006
-------------- --------------
$ 2,337,961 $ 1,970,407
============== ==============

68<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. INTANGIBLE ASSETS

December 31,
----------------------------
1998 1997
-------------- --------------
Goodwill (see Note 16) . . . . . . . . $ 24,275,032 $ 24,275,032
Developed technology value . . . . . . 3,090,000 3,090,000
Assembled work force value . . . . . . 890,000 890,000
Software licenses . . . . . . . . . . 121,769 121,769
-------------- --------------
28,376,801 28,376,801
Less accumulated amortization . . . . 28,338,979 28,324,327
-------------- --------------
$ 37,822 $ 52,474
============== ==============

Goodwill associated with acquired subsidiaries is amortized over
five-year to fifteen-year periods. At each balance sheet date, the
Company evaluates the realizability of goodwill based on expectations of
future discounted cash flows. In 1997, the Company determined that, based
on negative operating performance and its effect on future operational
performance, a permanent impairment of the Vicorp and BFD intangible
assets existed and recorded a provision of $14,285,907 to write off the
net book value of all intangible assets associated with these
acquisitions. In August 1996, the Company determined that a material
impairment of goodwill related to its purchase of The Renaissance Group
existed and recorded a provision of $3,829,424 to write down such
goodwill to its realizable value. 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 $14,652, $3,987,964, $1,225,708, and
$2,389,848, for the years ended December 31, 1998 and 1997, for the four
months ended December 31, 1996, and the year ended August 31, 1996,
respectively.

7. INCOME TAXES

The components of income tax benefit are as follows:

Four Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, August 31,
1998 1997 1996 1996
------------- ------------- ------------- ------------
Current payable
(receivable) . . $ - $ - $ (118,288) $ -
Deferred . . . . - - - -
------------- ------------- ------------- ------------
$ - $ - $ (118,288) $ -
============= ============= ============= ============

69<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
--------------------- ----------------------
Amounts % Amounts %
------------- ------- ------------- --------
<S> <C> <C> <C> <C>
Income tax benefit at the
federal statutory rate . . . . . . . . $ (3,975,436) (35.0%) $ (9,120,550) (35.0%)
Amortization and write-off of
goodwill and other acquired
intangibles . . . . . . . . . . . . . . - 0.0% 5,511,582 21.2%
Increase in valuation allowance . . . . . 2,109,157 18.6% 3,959,471 15.2%
Foreign income tax rate differential and
other on permanently reinvested
earnings . . . . . . . . . . . . . . . 1,892,879 16.7% 744,063 2.9%
State income taxes, net of
federal tax benefit . . . . . . . . . . 14,893 0.1% (373,753) (1.4%)
Other . . . . . . . . . . . . . . . . . . (41,493) (0.4%) (720,813) (2.9%)
------------ -------- ------------- --------
$ - - % $ - - %
============ ======== ============= ========
</TABLE>

70<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Four Months Ended Year Ended August 31,
December 31, ----------------------
1996 1996 1996
------------------- ------------- --------
Amounts % Amounts %
------------ ------- ------------- --------
<S> <C> <C> <C> <C>
Income tax benefit at the
federal statutory rate . . . . . . . . $(1,293,014) (35.0%) $(12,129,302) (35.0%)
Amortization and write-off of
goodwill and other acquired
intangibles . . . . . . . . . . . . . . 333,012 9.0% 8,868,990 26.0%
Increase in valuation allowance . . . . . 760,166 20.6% 4,200,372 12.0%
Foreign income tax rate differential and
other on permanently reinvested
earnings . . . . . . . . . . . . . . . - - - -
State income taxes, net of federal tax
benefit . . . . . . . . . . . . . . . . - - (344,910) (1.0%)
Other . . . . . . . . . . . . . . . . . . 81,548 2.2% (595,150) (2.0%)
------------ ------- ------------- --------
$ (118,288) (3.2%) $ - - %
============ ======= ============= ========
</TABLE>

At December 31, 1998, the Company had net operating loss
carryforwards of approximately $49,000,000 for U.S. federal income tax
purposes expiring through 2018 and $22,900,000 for foreign tax purposes
of which $17,700,000 is expiring through 2008 and $5,200,000 is available
indefinitely. The Company intends to continue to indefinitely reinvest
earnings of its foreign subsidiaries, which reflect full provision for
non-U.S. income taxes, to expand its international operations.
Accordingly, no provision has been made for U.S. income taxes that might
be payable upon repatriation of such earnings. In the event any earnings
of non-U.S. subsidiaries are repatriated, the Company will provide U.S.
income taxes upon repatriation of such earnings which will be offset by
applicable foreign tax credits, subject to certain limitations.

71<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 are as follows:

December 31,
----------------------------
1998 1997
-------------- --------------

Tax loss carryforwards . . . . . . . . $ 22,070,000 $ 19,859,000
Depreciation . . . . . . . . . . . . . (89,000) (232,000)
Reserves not currently deductible . . 500,000 805,000
Stock option compensation . . . . . . 1,449,000 1,358,000
Other . . . . . . . . . . . . . . . . 166,000 197,000
-------------- --------------
Total gross deferred tax asset . . . . 24,096,000 21,987,000
Less: valuation allowance . . . . . . (24,096,000) (21,987,000)
-------------- --------------
$ - $ -
============== ==============

A portion of the deferred tax asset in the amount of $1,448,479 is
related to the tax effects of stock option compensation. This benefit,
when recognized, will be classified in the stockholders' equity section
of the balance sheet.

Pursuant to the Distribution (see Note 13), 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).

72<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. LONG-TERM DEBT

December 31,
-----------------------------
1998 1997
-------------- --------------

Notes payable to shareholders,
interest at 8 percent, with
detachable warrants convertible into
825,000 shares of common stock at
$4.00 per share, uncollateralized,
and due April 1999 . . . . . . . . . $ 6,000,000 $ 6,000,000

Notes payable to shareholder, interest
at 9.5 percent, uncollateralized,
and due upon demand; the Company
has $1,250,000 of available funding
remaining on these notes as of
December 31, 1998 . . . . . . . . . 3,750,000 -

Capital lease obligations, interest
rates varying from 6 percent to 9
percent; collateralized by certain
assets with net book value of
$350,000 for 1998 and 1997 and
maturing through the year 2001 . . 268,308 534,559
-------------- --------------
10,018,308 6,534,559
Less current portion . . . . . . . . . (9,864,171) (294,375)
-------------- --------------
$ 154,137 $ 6,240,184
============== ==============

Annual principal maturities for years subsequent to December 31,
1998, are as follows:

1999 . . . . . . . . . . . . . . . . . . . . . . . . $ 9,864,171
2000 . . . . . . . . . . . . . . . . . . . . . . . . 127,777
2001 . . . . . . . . . . . . . . . . . . . . . . . . 26,360
--------------
$ 10,018,308
==============

73<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. COMMITMENTS AND CONTINGENCIES

The Company has annual commitments under non-cancelable operating
leases for years subsequent to December 31, 1998 (rental expense of
approximately $2,141,000, $2,121,000, $383,000, and $1,280,000 for the
years ended December 31, 1998 and 1997, for the four months ended
December 31, 1996, and for the year ended August 31, 1996, respectively)
approximated as follows:

1999 . . . . . . . . . . . . . . . . . . . . . . . . $ 1,754,000
2000 . . . . . . . . . . . . . . . . . . . . . . . . 1,198,000
2001 . . . . . . . . . . . . . . . . . . . . . . . . 896,000
2002 . . . . . . . . . . . . . . . . . . . . . . . . 649,000
2003 . . . . . . . . . . . . . . . . . . . . . . . . 324,000
Thereafter . . . . . . . . . . . . . . . . . . . . . 736,000
--------------
$ 5,557,000
==============

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 a one vote per share basis on all matters submitted to
shareholders.

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 resignation of certain officers of the Company, 11,764 and
15,686 shares of the restricted stock became automatically fully vested
during the year ended August 31, 1996, and the four months ended December
31, 1996, respectively. As a result, compensation expense of $150,811 and
$92,807 was recognized during the year ended August 31, 1996, and the
four months ended December 31, 1996, respectively, in connection with
such restricted stock grants.

74<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 originally vested in two equal
installments beginning August 1997. In connection with the resignation of
certain officers of the Company, 9,688 shares of the restricted stock
became automatically vested. As a result, compensation expense of $59,324
was recognized during the four months ended December 31, 1996, in
connection with such restricted stock grants. In connection with the
resignation of certain management personnel of the Company, 7,670 shares
of restricted stock were retired during the four months ended December
31, 1996. As a result, unearned compensation of $46,961 was eliminated
and restored to additional paid-in capital, along with the par value of
$77. During the year ended December 31, 1997, the restriction on the
remaining 19,617 shares was rescinded by the Company's Board of
Directors. As a result, compensation expense of $120,117 was recognized
during the year ended December 31, 1997.

During the year ended December 31, 1997, the Company issued 44,375
shares of restricted stock to three of its executive officers. In
connection therewith, the Company recorded $177,500 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 two equal installments beginning February 1998. As a result,
compensation expense of $88,750 was recognized during the year ended
December 31, 1998, in connection with the restricted stock grants. In
connection with the resignation of certain officers of the Company,
18,750 shares of non-vested restricted stock were canceled during the
year ended December 31, 1998. As a result, unearned compensation of
$75,000 was eliminated and restored to additional paid-in capital.

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 the Company 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 incurrence of indebtedness.

75<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. 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, equal 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, are held by certain current Vicorp shareholders. The
acquisition has been accounted for using the purchase method of
accounting.

The Company acquired BFD Productions, Inc. ("BFD") in October 1996
for approximately $1,500,000 in cash and approximately 272,000 shares of
newly-issued common stock for a total purchase price of approximately
$3,400,000 in exchange for all of the capital stock of BFD. The
acquisition was accounted for using the purchase method of accounting.

During April 1997, the Company completed a $4,500,000 financing with
three of its shareholders: RMS Limited Partnership, Vulcan Ventures,
Inc., and Primwest Holding N.V. (the "Shareholders"). In connection with
the financing, each Shareholder invested $1,500,000 and received 1,500
shares of a newly designated class of preferred stock. The Series B
Preferred Stock carries a cumulative 8 percent dividend. Each Shareholder
will be entitled to convert the Series B Preferred Stock into common
stock after December 31, 1998, at approximately $4.47 per share. In
addition to the Series B Preferred Stock, each of the Shareholders
received a warrant to purchase 150,000 shares of common stock. The
warrants will be exercisable for a five-year period beginning April 1998
at approximately $6.09. The Company granted the Shareholders certain
registration and anti-dilution rights in connection with the transaction.

76<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On September 30, 1997, the Company completed a $6,000,000 financing
with RMS Limited Partnership ("RMS"), Vulcan Ventures, Inc. ("Vulcan"),
and Mr. Didier Primat (the "Shareholders"). RMS and Vulcan are existing
shareholders of the Company, and Mr. Primat is the beneficial owner of
shares of the Company's stock held by Alta Investissements S.A. In
connection with the financing, each Shareholder invested $2,000,000 and
received a promissory note (the "Note") for $2,000,000. The Notes
originally matured on January 1, 1999, and bear interest from the
issuance date on the unpaid principal amount until such amount is paid at
a rate per annum equal to 8 percent. Interest was originally due on
September 30, 1998, and on the maturity date. In December 1998, the
Shareholders signed the First Amendment to the Loan Agreement that
extended the maturity date and interest payment dates to April 1, 1999.
In addition to the Notes, each of the Shareholders received a warrant to
purchase 275,000 shares of common stock. The warrants will be exercisable
for a five-year period beginning October 1998 at $4.00. The Company
granted the Shareholders certain registration rights with respect to the
shares of common stock underlying the warrants.

11. STOCK OPTIONS AND RESTRICTED STOCK

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.

77<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
Stock Option Plan Weighted
------------------------------------- Average
Employee Directors' Exercise
Plan Plan Total Price
------------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Authorized . . . . . . . . . . . . . 4,000,000 500,000 4,500,000
------------- ---------- ------------
Outstanding September 1, 1995 . . 1,414,516 125,000 1,539,516 $ 2.76
Granted . . . . . . . . . . . . . . 1,426,356 125,000 1,551,356 8.89
Exercised ($.01 to $15.50 per share) (348,470) (25,000) (373,470) 2.14
Canceled . . . . . . . . . . . . . . (158,636) - (158,636) 4.97
------------- ---------- ------------
Outstanding August 31, 1996 . . . 2,333,766 225,000 2,558,766 6.26
Granted . . . . . . . . . . . . . . 397,000 - 397,000 6.73
Exercised ($.01 to $9.00 per share) (112,154) - (112,154) 1.52
Canceled . . . . . . . . . . . . . . (236,964) - (236,964) 10.31
------------- ---------- ------------
Outstanding December 31, 1996 . . 2,381,648 225,000 2,606,648 6.17
Granted . . . . . . . . . . . . . . 1,183,923 50,000 1,233,923 3.21
Exercised ($.01 to $2.50 per share) (242,631) (10,000) (252,631) 1.25
Canceled . . . . . . . . . . . . . . (1,148,697) (50,000) (1,198,697) 7.73
------------- ---------- ------------
Outstanding December 31, 1997 . . 2,174,243 215,000 2,389,243 4.10
Granted . . . . . . . . . . . . . . 80,000 25,000 105,000 1.50
Exercised ($.01 to $1.63 per share) (90,305) - (90,305) .72
Canceled . . . . . . . . . . . . . . (1,180,047) (56,667) (1,236,714) 4.07
------------- ---------- ------------
Outstanding December 31, 1998 . . 983,891 183,333 1,167,224 3.46
============= ========== ============
</TABLE>

At December 31, 1998, December 31, 1997, December 31, 1996, and
August 31, 1996, the number of exercisable options were 824,692,
1,192,947, 1,355,906, and 1,291,218, respectively. The weighted average
fair value of options granted during the years ended December 31, 1998
and 1997, the four months ended December 31, 1996, and the year ended
August 31, 1996, were $1.07 per share, $2.31 per share, $4.49 per share,
and $6.08 per share, respectively.

78<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------
Weighted Options Exercisable
Average Weighted ---------------------------
Remaining Average Weighted
Range of Number Contractual Exercise Number Average
Exercise Prices Outstanding Life Price Exercisable Exercise Price
------------------ ----------- ------------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ .01 - 1.98 342,922 8.21 years $ 1.60 283,084 $ 1.62
2.03 - 3.94 650,302 9.46 3.19 406,942 3.16
4.00 - 5.50 97,000 9.33 4.38 78,466 4.39
6.13 - 7.75 1,500 9.81 6.13 900 6.13
8.88 - 9.00 25,000 9.08 9.00 15,000 9.00
11.50 - 12.38 500 9.01 12.38 300 12.38
14.50 - 15.75 50,000 9.38 15.13 40,000 14.97
----------- -----------
$ .01 - 15.75 1,167,224 824,692
=========== ===========
</TABLE>

The Company applies Accounting Principles Board Opinion 25 and
related Interpretations in accounting for its stock option and restricted
stock plans. Had compensation costs for the Company's stock option and
restricted stock plans been determined based on the fair value at the
grant dates for awards under these plans consistent with the method
prescribed by Financial Accounting Standard Board Statement No. 123, the
Company's net loss and earnings per share on a pro forma basis would have
been:

Four
Year Year Months Year
Ended Ended Ended Ended
December 31, December 31, December 31, August 31,
1998 1997 1996 1996
-------------- -------------- -------------- --------------
Basic and
diluted
net loss
applicable
to common
stock . . . . $ (14,418,439) $ (29,786,989) $ (4,404,318) $ (36,756,883)

Basic and
diluted net
loss per
share . . . . (.81) (1.69) (.25) (2.50)

79<PAGE>

80<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair value of each stock option and restricted stock grant was
estimated using the Black-Scholes options-pricing model. The following
assumptions were used for the years ended December 31, 1998 and 1997, the
four months ended December 31, 1996 and the year ended August 31, 1996,
respectively: (1) risk-free interest rates of 5.4 percent, 6.2 percent,
5.7 percent, and 6.0 percent; (2) volatility of 87.2 percent, 92.0
percent, 68.4 percent, and 68.8 percent; (3) dividend yield of zero for
all periods; and (4) expected lives of 5.0 years, 5.0 years, 2.6 years,
and 2.9 years. Results can vary materially depending on the assumptions
applied within the model and the resulting compensation expense may not
be representative of compensation expense to be incurred on a pro forma
basis in the future.

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 were set at the discretion of the Board
of Directors.

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

Effective April 1998, the Precision Systems, Inc., and Vicorp
Interactive Systems plans were merged to form a new plan called Precision
Systems, Inc. Inside the U.S. 401(k) Savings Plan. Under the new plan,
participating employees may defer a certain percent of their pre-tax
salary within statutory limits. Matching employer contributions are set
at the discretion of the Board of Directors. During 1998, the Company
contributed $.50 for each $1.00 a participant contributed with a maximum
contribution of 6 percent of a participant's earnings. Matching employer
contributions for all plans combined made during the years ended December
31, 1998 and 1997, during the four months ended December 31, 1996, and
for the year ended August 31, 1996, were approximately $104,000, $64,000,
$26,000 and $40,000, respectively.

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.

81<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. RELATED PARTY TRANSACTIONS

During the year ended December 31, 1998, the Company incurred
expenses of approximately $60,000 for consulting services provided by one
of the employees of a subsidiary of RMS Limited Partnership ("RMS").
These expenses were offset by charges for accounting services provided by
the Company to two entities controlled by RMS.

During the years ended December 31, 1998 and 1997, the four months
ended December 31, 1996, and the year ended August 31, 1996, the Company
recorded expenses of $0, $120,000, $40,000, and $70,000, respectively,
for consulting services provided by one of the members of the Company's
Board of Directors.

Historically, activity with Home Shopping Network, Inc. ("HSN") had
been presented as affiliate transactions. Due to ownership interest
changes of former common shareholders, HSN is no longer considered a
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 in July
1992 (the "Distribution"), 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.

82<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

14. SEGMENT INFORMATION

In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which the
Company adopted in 1998.

83<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company identifies such segments based on a combination of
factors including the products and services from which the Company
derives its revenues, management responsibility and geographic areas of
operations. The Company has three reportable segments: The U.S.
operations segment produces network-based telecommunications products for
sale to large telecommunications carriers. In addition to network-based
telecommunications products, the international operations segment
produces customer premises equipment products that are marketed to call
centers and customer contact centers in the financial, insurance,
airline, retail, telco, and service bureau industries. The third product
category is the service bureau segment, which is sold through the
Company's subsidiary, BFD Productions, Inc. ("BFD"). BFD sells 800, 888
and 900 services to corporations and other entities, including government
agencies and large software entertainment companies. The accounting
policies of the segments are the same as those described in the "Summary
of Significant Accounting Policies." The Company accounts for
intercompany sales at a discounted price. Intercompany revenues and the
related cost of sales are eliminated in the Company's consolidated
financial statements.

<TABLE>
<CAPTION>
Fiscal year ended December 31, 1998
-----------------------------------

Telecommunications
Products
---------------------------
U.S. International Service Intercompany
Operations Operations Bureau Eliminations Consolidated
------------ -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues from
external
customers . . . $10,509,123 19,322,971 3,619,297 - $ 33,451,391
Revenues from
other segments . $ 1,631,864 - - (1,631,864) $ -
Total revenues $12,140,987 19,322,971 3,619,297 (1,631,864) $ 33,451,391
Depreciation and
amortization . . $ 1,671,762 1,061,498 468,356 - $ 3,201,616
Operating loss . $(4,985,887) (4,428,553) (597,392) - $(10,011,832)
Interest expense $ (765,511) (560,693) (20,353) - $ (1,346,557)
Total assets . . $ 26,402,434 10,190,932 1,809,326 (18,369,270) $ 20,033,422

</TABLE>

84<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Fiscal year ended December 31, 1997
-----------------------------------

Telecommunications
Products
---------------------------
U.S. International Service Intercompany
Operations Operations Bureau Eliminations Consolidated
------------ -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues from
external
customers . . . $12,668,289 24,605,874 3,338,224 - $ 40,612,387
Revenues from
other segments . $ 1,124,798 - - (1,124,798) $ -
Total revenues $13,793,087 24,605,874 3,338,224 (1,124,798) $ 40,612,387
Depreciation and
amortization . . $ 2,004,825 4,130,781 907,323 - $ 7,042,929
Operating loss . $(7,797,543) (14,051,923) (3,857,539) - $(25,707,005)
Interest income
(expense) . . . $ 45,632 (342,726) (54,617) - $ (351,711)
Total assets . . $ 26,963,716 12,830,703 2,301,764 (13,620,630) $ 28,475,553

Four months ended December 31, 1996
-----------------------------------

Telecommunications
Products
--------------------------
U.S. International Service Intercompany
Operations Operations Bureau Eliminations Consolidated
------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues from
external
customers . . . $ 4,629,505 9,443,483 789,035 - $14,862,023
Revenues from
other segments . $ 262,925 - - (262,925) $ -
Total revenues $ 4,892,430 9,443,483 789,035 (262,925) $14,862,023
Depreciation and
amortization . . $ 750,651 1,344,031 170,444 - $ 2,265,126
Operating income
(loss) . . . . . $(3,489,977) (232,081) 12,394 - $(3,709,664)
Interest income
(expense) . . . $ 142,677 7,222 (25,338) - $ 124,561
Total assets . . $ 25,772,496 25,293,175 5,122,825 (6,994,121) $49,194,375

</TABLE>

85<PAGE>

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Fiscal year ended August 31, 1996
----------------------------------

Telecommunications
Products
----------------------------
U.S. International Service Intercompany
Operations Operations Bureau Eliminations Consolidated
------------- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues from
external
customers . . . $ 18,206,261 8,496,566 - - $ 26,702,827
Revenues from
other segments . $ 114,816 - - (114,816) $ -
Total revenues $ 18,321,077 8,496,566 - (114,816) $ 26,702,827
Depreciation and
amortization . . $ 3,614,820 1,099,407 - - $ 4,714,227
Operating loss . $(15,731,381) (20,732,194) - - $(36,463,575)
Interest income . $ 487,358 19,842 - - $ 507,200
Total assets . . $ 16,876,684 30,680,662 - - $ 47,557,346

</TABLE>

15. SIGNIFICANT CUSTOMERS

During the years ended December 31, 1998 and 1997, the four months
ended December 31, 1996, and the year ended August 31, 1996, a
substantial portion of the Company's revenues has come from MCIWorldCom
in the U.S. operations segment. The dollar and percentage amounts are as
follows:

December 31, December 31,
1998 1997
--------------------- ---------------------
Amounts % Amounts %
------------- ------- ------------- -------

MCIWorldCom . . . . . . . . $ 1,486,106 4.5% $ 2,753,801 6.8%
Other customers . . . . . . 31,965,285 95.5% 37,858,586 93.2%
------------- ------- ------------- -------
$ 33,451,391 100.0% $ 40,612,387 100.0%
============= ======= ============= =======

86<PAGE>

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, August 31,
1996 1996
--------------------- ---------------------
Amounts % Amounts %
------------- ------- ------------- -------

MCIWorldCom . . . . . . . . 873,324 5.9% $ 11,875,428 44.5%
Other customers . . . . . . 13,988,699 94.1% 14,827,399 55.5%
------------- ------- ------------- -------
$ 14,862,023 100.0% $ 26,702,827 100.0%
============= ======= ============= =======

16. BUSINESS ACQUISITIONS

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.

The Company allocated the excess purchase price over the fair value
of net tangible assets acquired to the following identifiable intangible
assets--developed technology value, assembled work force value, goodwill
and purchased in-process research and development. As of the acquisition
date, technological feasibility of the in-process technology had not been
established and the technology had no alternative future use. Therefore,
the Company expensed the amount of the Vicorp purchase price allocated to
in-process research and development of $19,500,000 as of the date of the
acquisition in accordance with generally accepted accounting principles.

87<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amount of the purchase price allocated to in-process research
and development was determined by estimating the stage of development of
in-process research and development projects at the date of acquisition,
estimating cash flows resulting from the expected revenues generated from
such projects, and discounting the net cash flows back to their present
value using a discount rate of 20 percent, which represents a premium to
the Company's cost of capital. The estimated revenues assume annual
revenue growth rates of between approximately 15 to 40 percent during
1999 to 2005. Estimated revenues peek in 2005 and decline thereafter as
other new products are introduced. These projections were based on
management's estimate of market size and growth, expected trends in
technology and the expected timing of new product introductions. The
remaining identifiable intangible assets from the Vicorp acquisition are
amortized on a straight-line basis over lives ranging from three to seven
years. If these in-process research and development projects are not
successfully developed, the Company may not realize the value assigned to
the in-process research and development projects. In addition, the value
of the other acquired intangible assets may also become impaired.

From the April 1996 acquisition date through December 1997, the
Company's efforts at completing certain of such in-process research and
development projects were unsuccessful and produced negative cash flows
that significantly impacted the Company's financial position and
operations. The Company originally projected that it would generate
approximately $25,000,000 of revenue from projects representing in-
process research and development from the April 16, 1996, acquisition of
Vicorp N.V. The actual results were approximately $15,000,000,
significantly lower than original expectations. The primary reason for
the lower performance relates primarily to slower than expected
development efforts for BETEX-ESP and its negative effects on the
Company's commercial efforts. These delayed development efforts not only
negatively impacted new customer opportunities but it also inhibited the
Company's ability to deliver products to its current customer base. In
addition, the Company originally anticipated development efforts to
combine the Company's UniPort product with Vicorp's BETEX products and
associated revenue opportunities. Due to significant development problems
and delays from the BETEX-ESP project, combined with the Company's
negative operating cash flow results (with resultant impact on cash
resources), the Company discontinued efforts at the UniPort/BETEX
integration project during 1997. The Company does not anticipate any
future development efforts or revenue opportunities from the
UniPort/BETEX integration project. Additionally, due to the Company's
continued negative results from operations, the remaining acquired
intangible assets were written-off in full during the fourth quarter of
1997.

88<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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
Goodwill . . . . . . . . . . . . . . . . . . . . . . 8,423,985
--------------
Total purchase price . . . . . . . . . . . . . . $ 32,434,985
==============

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 and comprehensive income
of the Company and of Vicorp were combined from the effective date of the
acquisition forward, with no retroactive restatement.

Pro-Forma Unaudited Year Ended August 31, 1996

Revenue . . . . . . . . . . . . . . . . . . . . . . $ 50,621,909
==============
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (35,639,010)
==============
Net loss per common share . . . . . . . . . . . . . $ (2.13)
==============

89<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company acquired BFD in October 1996 for cash and approximately
272,000 shares of newly-issued common stock for a total purchase price of
approximately $3,400,000 in exchange for all of the capital stock of BFD.
The acquisition was accounted for using the purchase method of
accounting. This purchase price of $3,394,749 was comprised of $1,500,000
in cash, Company common stock valued at $1,655,833, and other direct
acquisition costs totaling $238,916.

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

Current assets . . . . . . . . . . . . . . . . . . . $ 697,000
Current liabilities . . . . . . . . . . . . . . . . (1,392,000)
--------------
Net current liabilities . . . . . . . . . . . . . . (695,000)
Long-term assets . . . . . . . . . . . . . . . . . . 832,000
Long-term liabilities . . . . . . . . . . . . . . . (337,000)
Goodwill . . . . . . . . . . . . . . . . . . . . . . 3,594,749
--------------
Total purchase price . . . . . . . . . . . . . . $ 3,394,749
==============

The following unaudited pro-forma summary presents the Company's
results of operations as if the BFD 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 that 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 and
comprehensive income of the Company and of BFD were combined from the
effective date of the acquisition forward, with no retroactive
restatement.

Pro-Forma Unaudited Four Months Ended December 31, 1996

Revenues . . . . . . . . . . . . . . . . . . . . . . $ 15,119,530
==============
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (3,510,055)
==============
Net loss per common share . . . . . . . . . . . . . $ (.20)
==============

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.

90<PAGE>

PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company entered into a settlement agreement with Mr. Hindman,
the terms of which provided 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).

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. The Company entered into
a settlement agreement with Mr. Pillar, the terms of which provide for
severance pay of $230,000 and a six-month consulting agreement for
approximately $115,000. Additionally, the Company fully vested certain
restricted stock originally granted to Mr. Pillar (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. During February
1997, Mr. Liebhaber resigned as Chairman of the Board and was replaced by
Willem Huisman.

On July 14, 1998, Willem Huisman resigned as Chairman of the Board
and on August 24, 1998, he resigned as the Company's President and Chief
Executive Officer. The Company entered into a settlement agreement with
Mr. Huisman, the terms of which provide for severance pay of $40,000.

On September 11, 1998, Gregory L. Baltzer resigned as the Company's
Chief Operating Officer. The Company entered into a settlement agreement
with Mr. Baltzer, the terms of which provide for severance pay of
$87,500.

18. LEGAL PROCEEDINGS

91<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Daniel Schultz v. Precision Systems, Inc. et al. On December 13,
1996, following the dismissal of his federal court action alleging
similar claims, 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 Circuit Court of the Sixth Judicial
Circuit In and For Pinellas County, Florida. The complaint was later
amended to allege seven counts. In Counts One and Two, 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 Three through Six,
the plaintiff alleges that all the defendants intentionally interfered
with his prospective economic advantage and contractual relationships,
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. In Count Seven, plaintiff alleges that the Company
and Messrs. Pillar and Loewenberg breached an oral contract to employ the
plaintiff in an executive position. The case is in discovery. The Company
has defenses and will vigorously defend.

92<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. SUBSEQUENT EVENT

In March 1999, the Company announced that its Board of Directors
unanimously approved and the Company has entered into a definitive merger
agreement dated as of March 15, 1999 (the "Agreement") with Anschutz
Digital Media, Inc. ("Anschutz"). Under the terms of the Agreement, which
was initially proposed on February 17, 1999, Anschutz would acquire all
of the outstanding common stock of the Company in a transaction wherein
the Company would be merged with a subsidiary of Anschutz, and holders of
the Company's common stock would receive $1.00 per share in cash. The
Agreement further contemplates that all debt to the Company's
shareholders will be repaid and the Company's preferred stock will be
canceled for an amount equal to its liquidation preference, plus accrued
dividends and interest thereon. The Agreement also provides the Company
with a line of credit with available borrowings of $1,250,000 to be
extended by Anschutz. The transaction is subject to shareholder and
certain antitrust and regulatory approvals and other customary
conditions. Anschutz is an affiliate of the Anschutz Company whose
operating divisions and wholly-owned subsidiaries engage in
telecommunications, natural resources, transportation, real estate, and
sports entertainment businesses. Anschutz has entered into a definitive
agreement with Speer and RMS to acquire the media and telecommunications
assets held by Speer and RMS, including RMS' interest in the Company.

20. GOING CONCERN

As shown in the accompanying consolidated financial statements, the
Company has incurred recurring losses from operations and has experienced
negative cash flow. These factors raise substantial doubt about the
Company's ability to operate as a going concern. Management has taken
steps regarding the improvement of its cash flow and cash position,
including:

* Retained an investment banking firm to assist in the development
and evaluation of future strategic initiatives, including
potential financing opportunities;

* Analyzed opportunities to sell certain non-core assets, including
real estate;

* Implemented a restructuring plan to reduce operating expenses;
and,

* Entered into a definitive merger agreement with Anschutz Digital
Media, Inc., ("Anschutz") as discussed in Note 19.

93<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the 1998
financial statements. The paragraph states that the Company's recurring
losses and net capital deficiency raise substantial doubt about the
Company's ability to continue as a going concern and cautions that the
financial statements do not include adjustments that might result from
the outcome of this uncertainty.

Existing credit facilities are not expected to be sufficient to
cover liquidity requirements after December 31, 1998, and the Company is
currently facing the prospect of not having adequate funds to operate its
business. There can be no assurance that additional facilities can be
arranged, or that any restructuring plan can be successfully implemented,
or that the merger agreement with Anschutz (Note 19) will successfully
close, in which case the Company may be compelled to pursue a bankruptcy
filing in absence of additional funding.

Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has developed a business plan that, if
successfully funded and executed as part of the merger with Anschutz, can
significantly improve operating results. The support of the Company's
vendors, customers, lenders, stockholders and employees will continue to
be key to the Company's future success.

94<PAGE>
PART III

Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures

None.

Item 10 - Directors and Executive Officers of the Registrant

Reference is made to the Company's 1999 Proxy Statement.

Item 11 - Executive Compensation

Reference is made to the Company's 1999 Proxy Statement.

Item 12 - Security Ownership of Certain Beneficial Owners and Management

Reference is made to the Company's 1999 Proxy Statement.

Item 13 - Certain Relationships and Related Transactions

Reference is made to the Company's 1999 Proxy Statement.

95<PAGE>
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
Report of Independent Accountants - PricewaterhouseCoopers LLP
Report of Independent Accountants - Deloitte & Touche LLP
Report of Independent Accountants - PricewaterhouseCoopers LLP
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations and
Comprehensive Income for the years ended
December 31, 1998 and December 31, 1997,
for the four months ended December 31, 1996,
and for the year ended August 31, 1996
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998 and 1997,
for the four months ended December 31, 1996,
and for the year ended August 31, 1996
Consolidated Statements of Cash Flows
for the year ended December 31, 1998
and December 31, 1997, for the
four months ended December 31, 1996,
and for the year ended August 31, 1996
Notes to Consolidated Financial Statements

(2) Financial Statement Schedule

Schedule Page
Number Number
---------- --------
II Valuation and Qualifying Accounts . . S-1

The report of the Company's independent auditors with respect to the
above listed financial statement schedule appears on page 97 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.

96<PAGE>
(3) Exhibits (numbered in accordance with
Item 601 of Regulation S-K)

Exhibit
Number
-------

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

10.0 Key Executive Severance Agreement

16 Letter to Securities and Exchange Commission from Deloitte &
Touche LLP filed in Exhibit 16.1 to the Company's Form 8-K is
incorporated herein by reference

21 Subsidiaries of the Registrant

22 Proxy Statement of the Registrant dated April 15, 1997, is
incorporated herein by reference

27 Financial Data Schedule (for SEC use only)

(b) Reports on Form 8-K

On May 6, 1998, the Company filed a report on Form 8-K announcing
its Board of Directors approved and the Company entered into a definitive
agreement with various privately-held entities controlled by Roy M. Speer
to acquire a controlling interest in the Company.

In February 1999, the Company announced that its Board of Directors
received notice from the entities controlled by Roy M. Speer of
termination of the definitive agreement.

97<PAGE>
SIGNATURES

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

PRECISION SYSTEMS, INC.

By: /s/ KENNETH M. CLINEBELL
-------------------------
Kenneth M. Clinebell
Interim President and
Chief Financial Officer

March 31, 1999

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 March 31,
1999.

Signature Title
----------------------------------- ---------------------------

/s/ KENNETH M. CLINEBELL Interim President and
------------------------------------ Chief Financial Officer
Kenneth M. Clinebell (Principal Financial Officer)

/s/ CARLA K. NEWSOME Controller
------------------------------------ (Principal Accounting Officer)
Carla K. Newsome

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

/s/ IAN DALZIEL Director
------------------------------------
Ian Dalziel

/s/ FRANCIS SANTANGELO Director
------------------------------------
Francis Santangelo

98<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Precision Systems, Inc.

Our report on the consolidated financial statements of Precision Systems,
Inc. and subsidiaries is included on page 43 of this Form 10-K. In
connection with our audit of such financial statements, we have also
audited the related financial statement schedule as of December 31, 1997
and 1998, and for the years then ended listed in the index on page 94 of
this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information
required to be included therein.

PRICEWATERHOUSECOOPERS LLP

Tampa, Florida
February 12, 1999

99<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Precision Systems, Inc.

We have audited the consolidated financial statements of Precision
Systems, Inc. and subsidiaries (the "Company") for the four months ended
December 31, 1996, and for the year ended August 31, 1996, and have
issued our report thereon dated March 27, 1997; such consolidated
financial statements are included herein. Our audits also included the
consolidated financial statement schedule of the Company listed in Item
14 for the four months ended December 31, 1996, and for the year 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 revenues constituting 80 percent and 42 percent
of consolidated total revenues for the four months ended December 31,
1996 and for the year ended August 31, 1996, respectively. 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.

Deloitte & Touche LLP

Tampa, Florida
March 27, 1997

100<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II

<TABLE>
<CAPTION>
Charged
Balance at to Charged Balance
Beginning Costs and to Other at End of
of Period Expenses Accounts Deductions Period
------------ ---------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
Year ended
December 31, 1998 . . $ 1,239,197 $ 85,611 $ - $ (627,905) (1) $ 696,903
Year ended
December 31, 1997 . . 1,532,134 926,689 - (1,219,626) (1) 1,239,197
Four months ended
December 31, 1996 . . 1,253,347 278,787 - - 1,532,134
Year ended
August 31, 1996 . . . 153,561 1,196,412 - (96,626) (1) 1,253,347

</TABLE>

(1) Represents write-off of uncollectible accounts

S-1<PAGE>
EXHIBIT 21

List of Subsidiaries of Precision Systems, Inc. as of December 31, 1998.

Name of Subsidiary State or Country of Incorporation
-------------------------------------------------------------------------
BFD Productions, Inc. . . . . . . . . . . . . . . . . . . . . . . Nevada

Vicorp Canada Incorporated . . . . . . . . . . . . . . . . . . . Canada

Vicorp Systems Espana, S.A. . . . . . . . . . . . . . . . . . . . . Spain

Vicorp Italia, s.r.l. . . . . . . . . . . . . . . . . . . . . . . . Italy

Interactive Services, Inc. . . . . . . . . . . . . . . . . . . Delaware

The Renaissance Group . . . . . . . . . . . . . . . . . . . . California

Vicorp, N.V. . . . . . . . . . . . . . . . . . The Netherlands Antilles

Vicorp Europe Holding B.V. . . . . . . . . . . . . . . . The Netherlands

Vicorp Nederland B.V. . . . . . . . . . . . . . . . . . . The Netherlands

Vicorp International Services Nederland B.V. . . . . . . The Netherlands

Vicorp International Services, Belux. . . . . . . . . . . . . . . Belgium

Vicorp France S.A. . . . . . . . . . . . . . . . . . . . . . . . France

Vicorp Danmark A/S . . . . . . . . . . . . . . . . . . . . . . . Denmark

Vicorp Sweden A/B . . . . . . . . . . . . . . . . . . . . . . . . Sweden

Vicorp U.K. Holding . . . . . . . . . . . . . . . . . . . . . . . England

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

102<PAGE>
EXHIBIT 10.0

KEY EXECUTIVE SEVERANCE AGREEMENT

This Key Executive Severance Agreement (this "Agreement") is dated
as of February 20, 1998, and is made by and between Precision Systems,
Inc., a Delaware corporation (the "Company"), and Kenneth M. Clinebell,
who is presently the Chief Financial Officer of the Company
("Executive").

WITNESSETH:

WHEREAS:

Executive is a principal officer of the Company and an integral
part of the Company's management.

The Company wishes to assure both itself and the Executive of
continuity of management generally, including continuity of management in
the event of any actual or threatened change in control of the Company.

NOW, THEREFORE, in consideration of the mutual covenants herein
contained and in further consideration of services performed and to be
performed by Executive for the Company, it is hereby agreed by and
between the parties as follows:

Company's Right to Terminate. The Company (or its subsidiaries) may
not terminate the employment of Executive unless the Company provides the
benefits hereinafter specified in accordance with the terms hereof.

Change in Control. For purposes of this Agreement, a "Change in
Control" of the Company shall mean a change in control (other than in
favor of an Existing Affiliate) of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); provided that, without limitation, such a change in
control shall be deemed to have occurred if (a) a tender offer shall be
made and consummated (other than by an Existing Affiliate) for the
ownership of outstanding voting securities of the Company having forty
percent (40%) or more of the combined voting power of the Company except
and so long as more than 50 percent (50%) of the combined voting power of
the Company is held by Existing Affiliates, (b) the Company shall be
merged or consolidated with another corporation and as a result of such
merger or consolidation outstanding voting securities of the surviving or
resulting corporation having less than 50% of its combined voting power
shall be owned in the aggregate by the former shareholders of the Company
(including the Existing Affiliates), other than affiliates (within the
meaning of the Exchange Act) of any party to such merger or
consolidation, as the same shall have existed immediately prior to such
merger or consolidation, (c) the Company shall sell, lease, exchange or
transfer substantially all of its assets to another corporation, entity
or person which is not a wholly-owned subsidiary or as to which a
majority of its combined voting power is not held by the Company or an
Existing Affiliate, (d) a person, as defined in Sections 13(d) and 14(d)
(as in effect on the date hereof) of the Exchange Act, other<PAGE>

than an Existing Affiliate, shall acquire outstanding voting securities
of the Company (whether directly, indirectly, beneficially or of record)
having forty percent (40%) or more of the combined voting power of the
Company, (e) the shareholders of the Company approve a plan or proposal
for the liquidation or dissolution of the Company, or (f) during any
period of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors cease for any reason to
constitute at least a majority thereof unless the election, or the
nomination for election by the Company's shareholders, of each new
director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
For purposes hereof, ownership of voting securities shall take into
account and shall include ownership as determined by applying the
provisions of Rule 13d-3 (as in effect on the date hereof) under the
Exchange Act. A sale or other change in control of any subsidiary of the
Company by which Executive is employed shall not be deemed a Change in
Control of the Company for purposes of this Agreement. As used herein,
the term "Existing Affiliate" shall mean (i) RMS Limited Partnership, Roy
M. Speer or any entity controlled by Roy M. Speer and as to which he has
sole voting and dispositive power over the voting securities of the
Company held by such entity, (ii) Vulcan Ventures Incorporated, Paul G.
Allen or any entity controlled by Paul G. Allen and as to which he has
sole voting and dispositive power over the voting securities of the
Company held by such entity, (iii) Alta Investissements S.A., Primwest
Holding, N.V., Didier Primat or any entity controlled by Didier Primat
and as to which he has sole voting and dispositive power over the voting
securities of the Company held by such entity or (iv) any executive
officer of the Company on the date hereof or any entity controlled by
such executive officer and as to which he has sole voting and dispositive
power over the voting securities of the Company held by such entity.

Termination of Employment

(a) If a Change in Control of the Company shall have occurred
while Executive is an employee of the Company upon the subsequent
Termination of the Employment (as defined below) of Executive within one
(1) year of such Change in Control (a "Change is Control Termination"),
Executive shall be entitled to receive the benefits provided in Section
4(a) hereof.

(b) If there shall be a Termination of the Employment of
Executive under any circumstances other than as set forth in Section 3(a)
hereof (a "Non-change in Control Termination"), Executive shall be
entitled to receive the benefits provided in Section 4(b) hereof.

(c) The phrase "Termination of the Employment" of Executive
for purposes of this Agreement shall mean (in the case of both a Change
in Control Termination and a Non-Change in Control Termination):

(i) Termination by the Company of the employment of
Executive for any reason other than death, Disability, Retirement or for
Cause as defined below; or<PAGE>

(ii) Termination by the Executive of his employment by
the Company within sixty (60) days of the occurrence of any of the
following events:

(A) The assignment to Executive of any duties
materially inconsistent with his positions, duties, responsibilities and
status with the Company and its subsidiaries immediately prior to date
hereof (other than promotions in the ordinary course of business), or a
material diminution in Executive's responsibilities, as in effect
immediately prior to date hereof, except in connection with the
termination of Executive's employment due to death, Disability,
Retirement or for Cause;

(B) A reduction by the Company in the Executive's
base salary as in effect on the date hereof or as the same may be
increased from time to time;

(C) A failure by the Company to continue any bonus
plans in which Executive is presently entitled to participate (the "Bonus
Plans") as the same may be modified from time to time but substantially
in the forms currently in effect unless replaced by benefits
substantially comparable to or greater than such plans, or a failure by
the Company to continue Executive as a participant in the Bonus Plans (or
substitute benefits) on at least the same basis as he presently
participates in accordance with the Bonus Plans;

(D) Without his express written consent, the
Company requiring Executive to be based anywhere other than within
thirty-five (35) miles of Executive's present office location, except for
required travel on the Company's business to an extent substantially
consistent with Executive's present business travel obligations;

(E) Subsequent to a Change in Control of the
Company, the failure by the Company to continue in effect any benefit or
compensation plan, stock ownership plan, stock purchase plan, stock
option plan, life insurance plan, health-and-accident plan or disability
plan in which Executive is participating at the time of a Change in
Control of the Company (or plans providing him with substantially similar
or greater benefits), the taking of any action by the Company which would
adversely affect Executive's benefits under any of such plans or deprive
Executive of any material fringe benefit enjoyed by him at the time of
the Change in Control, or the failure by the Company to provide Executive
with the number of paid vacation days to which he is then entitled in
accordance with the Company's normal vacation policy in effect on the
date hereof;

(F) Subsequent to a Change in Control of the
Company, the failure by the Company to obtain the assumption of this
Agreement by any successor as contemplated in Section 6 hereof; or

(G) Any purported termination of Executive's
employment which is not effected pursuant to a Notice of Termination (as
hereinafter defined) satisfying the requirements of Section 3(e) below
(and, if applicable, Section 3(d) below); and for purposes of this
Agreement, no such purported termination shall be effective.<PAGE>

(d) The Executive shall not be entitled to receive any
benefits under this Agreement if the Company terminates Executive's
employment because of the death, Disability or Retirement of Executive or
upon the termination of Executive's employment for Cause. The words
"Disability," "Retirement" and "Cause" for purposes of this Agreement
shall mean:

(i) Disability. Termination by the Company of
Executive's employment based on "Disability" shall mean termination
because of Executive's absence from his duties with the Company on a
full-time basis for one hundred thirty (130) consecutive business days,
as a result of incapacity due to physical or mental illness, unless
within thirty (30) days after Notice of Termination is given following
such absence Executive shall have returned to the full-time performance
of his duties.

(ii) Retirement. Termination by the Company of
Executive's employment based on "Retirement" shall mean termination in
accordance with the Company's retirement policy, including early
retirement, generally applicable to its salaried employees.

(iii) Cause. Termination by the Company of Executive's
employment for "Cause" shall mean termination upon (A) the willful and
continued failure by Executive to substantially perform his duties with
the Company other than any such failure resulting from his incapacity due
to physical or mental illness, after a demand for substantial performance
is delivered to Executive by the Chief Executive Officer of the Company
(or in the case that the Chief Executive Officer is unavailable or he is
the Executive in question, the Chairman of the Board of Directors, or in
the case the Chief Executive Officer is also the Chairman of the Board of
Directors, then a member of the Board of Directors Compensation
Committee) which specifically identifies the manner in which Executive
has not substantially performed his duties, or (B) the willful engaging
by Executive in misconduct which is materially injurious to the Company,
monetarily or otherwise, and that constitutes on the part of Executive
common law fraud or a felony. For purposes of this paragraph, no act, or
failure to act, on Executive's part shall be considered "willful" unless
done, or omitted to be done, by him not in good faith and without
reasonable belief that his action or omission was in the best interest of
the Company. Notwithstanding the foregoing, Executive shall not be deemed
to have been terminated for Cause unless and until there shall have been
delivered to him a copy of a Notice of Termination from the Chief
Executive Officer of the Company (or in the case that the Chief Executive
Officer is unavailable or he is the Executive in question, the Chairman
of the Board of Directors, or in the case the Chief Executive Officer is
also the Chairman of the Board of Directors, then a member of the Board
of Directors Compensation Committee) after reasonable notice to Executive
and an opportunity for Executive, to be heard before such person, finding
that in the good faith opinion of such person the Executive was guilty of
conduct set forth above in clauses (A) or (B) of the first sentence of
this subparagraph and specifying the particulars thereof in detail.<PAGE>

(e) Any purported termination by the Company pursuant to
Section 3(c)(i) or Section 3(d) above, or by Executive pursuant to
Section 3(c)(ii) shall be communicated by written Notice of Termination
to the other party hereto. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so
indicated.

(f) "Date of Termination" shall mean (i) if Executive's
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that Executive shall not have returned to
the performance of his duties on a full-time basis during such thirty
(30) day period), and (ii) if Executive's employment is terminated for
any other reason, the date on which a Notice of Termination is given.

4. Certain Benefits upon Termination.

(a) If there is a Termination of Employment of Executive as
provided in Section 3(a) hereof( i.e., a Change in Control Termination),
Executive shall be entitled to the following benefits:

(i) The Company shall pay Executive his full base salary
through the Date of Termination at the rate in effect at the time Notice
of Termination is given plus credit for any vacation earned but not taken
and the amount, if any, of any bonus for a past fiscal year which has
been awarded but not yet paid to Executive under the Bonus Plans;

(ii) The Company shall pay Executive a lump sum payment
equal to one time his full annual base salary at the rate in effect at
the time Notice of Termination is given;

(iii) The Company shall continue to provide Executive
with medical insurance, life insurance, disability insurance and such
other similar insurance benefits as are provided to other executives of
the Company (but not a company car or profit-sharing plan contribution)
for a period of time until Executive obtains other employment on a full-
time basis, but not to exceed one (1)year from the Date of Termination;
and

(iv) Executives period to exercise stock options granted
to Executive under any of the Company's stock option plans shall be
extended to one (1) year from the Date of Termination.

(b) If there is a Termination of Employment of Executive as
provided in Section 3(b) hereof (i.e., a Non-Change in Control
Termination), Executive shall be entitled to the following benefits:

(ii) The Company shall pay Executive his full base salary
on a biweekly basis at the rate in effect at the time Notice of
Termination is given for a period of six (6) months following the Date of
Termination; and

(c) Notwithstanding anything to the contrary contained
herein, in the event that it shall be determined that any payment or
benefit received under this Agreement and/or any other plan, arrangement
or agreement (a "Payment" or, collectively, the "Payments") would be an
"excess parachute payment" (within the meaning of Section 280G(b)(1) of
the Internal Revenue Code of 1986 (the "Code")) subject to the excise tax
imposed by Section 4999 of the Code (the "Excise Tax"), the present value
of such Payments shall be reduced to the "Reduced Amount." The "Reduced
Amount" shall be an amount expressed in present value that maximizes the
aggregate present value of the Payments without causing any Payment to be
an excess parachute payment subject to the Excise Tax. For these
purposes, the present value of any non-cash benefit or deferred payment
or benefit shall be determined in accordance with Sections 280G(d)(3) and
(4) of the Code. The determination whether any Payment would be an excess
parachute payment and the calculation of the Reduced Amount shall be made
by a law firm or accounting firm selected by the Company from among those
regularly consulted by it regarding Federal income tax matters within the
12-month period preceding the change in control, and reasonably
acceptable to Executive ("Tax Counsel"). Tax Counsel's opinion shall be
delivered to Executive within five days after his Date of Termination,
and shall contain detailed calculations supporting the determination of
the Reduced Amount or of Tax Counsel's determination that no portion of
the Payments would be subject to the Excise Tax. Upon receipt by
Executive of Tax Counsel's opinion setting forth a Reduced Amount,
Executive shall determine which and how much of the Payments shall be
eliminated or reduced, provided that, if Executive does not make such
determination within ten (10) days of his receipt of such opinion, the
Company shall determine which and how much of the Payments shall be
eliminated or reduced and shall promptly give Executive written notice
thereof. Within five (5) days after Executive gives notice or upon the
expiration of ten (10) days without notice, the Company shall pay to or
distribute to or for Executive's benefit such amounts as are then due to
Executive under this Agreement and shall promptly pay to or distribute
for Executive's benefit in the future such amounts as become due to
Executive under this Agreement.

As a result of the uncertainty of the application of Section
280G of the Code at the time of the initial determination hereunder, it
is possible that Payments will have been made by the Company which should
not have been made ("Overpayment") or that additional payments which will
not have been made by the Company should have been made ("Underpayment"),<PAGE>

in each case, consistent with the calculations required to be made
hereunder. In the event it is determined that an Overpayment has been
made, Executive shall promptly repay any such Overpayment to the Company
together with interest at the applicable Federal rate provided for in
Section 7872(f)(2) of the Code, provided that, no amount shall be payable
by Executive to the Company (or if paid by Executive shall be returned to
Executive) if and to the extent such payment would not reduce the amount
that is subject to Excise Tax. In the event it is determined that an
Underpayment has been made, any such Underpayment shall be promptly paid
by the Company to or for Executive's benefit together with interest at
the applicable Federal rate provided for in Section 7872(f)(2) of the
Code.

(d) The Company shall also pay all fees and expenses
(including legal fees and expenses) incurred by Executive in contesting
or disputing any termination of Executive's employment or in seeking to
obtain or enforce any right or benefit provided by this Agreement or in
connection with any tax audit or proceeding to the extent attributable to
the application of the Excise Tax to any payment or benefit hereunder,
provided that, the Company shall not have any obligation to pay any legal
expenses incurred by Executive in contesting or disputing any Termination
of the Employment of Executive or seeking to obtain or enforce any right
or benefit provided by this Agreement, and Executive shall be obligated
to repay the Company for any legal fees advanced to Executive by the
Company (and interest thereon), to the extent that it is determined by a
court of competent jurisdiction that Executive's employment was
terminated for Cause within the meaning of Section 3(d)(iii). Any
payments to be made by the Company pursuant to this subsection (d) shall
be made to Executive on a regular and current basis upon Executive's
presentation to the Company of documentation in support thereof.

5. Mitigation of Damages.

Executive shall not be required to mitigate the amount of any
payment provided for in Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in Section 4
be reduced by any compensation earned by Executive as the result of
employment by another employer after the Date of Termination, or
otherwise.

6. General

(a) Executive, after Termination of Employment of Executive,
shall retain in confidence any confidential or proprietary information
known to him concerning the Company and its business (including any
Subsidiary and its business) so long as such information is not publicly
disclosed and shall not use such information in any way injurious to the
Company (or any Subsidiary), except for any disclosure or use to which an
authorized officer of the Company or the Board of Directors of the
Company has consented or any disclosure or use required by an order of
any governmental body or court (including legal process). If requested,
Executive shall return to the Company any memoranda, documents or other
materials possessed by Executive and containing confidential or
proprietary information of the Company.<PAGE>

(b) During the period ending one (1) year following the Date
of Termination, Executive shall not, directly or indirectly, solicit or
induce any of the Company's or its Subsidiaries' employees to terminate
their employment with the Company or any of its Subsidiaries or hire or
cause any of the then current employees of the Company or any of its
Subsidiaries to be hired by any other company in which Executive is an
officer, director or controlling shareholder or interfere with the
Company's or any of its Subsidiaries' contractual relationships with its
customers.

(c) The Company may in good faith condition the payment of
the benefits referred to in clause (ii) of Section 4(a) or clause (ii) of
Section 4(b), as the case may be, upon the receipt of a general release
by Executive of the Company and its Subsidiaries from all employment
related claims and obligations, whether known or unknown, other than
rights under this Agreement or any employment or other agreement between
Executive and the Company or any of its Subsidiaries (or to which the
assets of the Company or its Subsidiaries are bound), and any other
accrued and unpaid employee benefits.

7. Successors: Binding Agreement.

(a) The Company shall require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle Executive to compensation from
the Company in the same amount and on the same terms as Executive would
be entitled to under Section 4(a), except that for purposes of
implementing the foregoing the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and
any successor to its business and/or assets as aforesaid which executes
and delivers the agreement provided for in this Section 6 or which
otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.

(b) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
If Executive should die while any amount would still be payable to him
hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this
Agreement to his devisee, legatee or other designee or, if there be no
such designee, to his estate.

<PAGE>
8. Notice.

For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by
certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth below, or to such other
address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be
effective only upon receipt.

To the Company:
Precision Systems, Inc.
11800 30th Court, North
St. Petersburg, FL 33716
Attn: Chief Financial Officer

To the Executive:
At such address as set forth on the Company's book sand
records (or at such other address as specified by Executive)

9. Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by Executive and such officer as
may be specifically designated by the Board of Directors of the Company.
No waiver by either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement; provided, however, that this Agreement shall not supersede or
in any way limit the employment agreement in effect between the Company
and Executive.

This Agreement shall be governed by the laws of the State of Delaware
(without reference to the choice of law provisions thereof). This
Agreement may be executed in one or more counterparts, each of which
shall constitute an original hereof.

PRECISION SYSTEMS, INC. EXECUTIVE

By: /s/Kwang-I Yu By: /s/Kenneth M. Clinebell
-------------- ------------------------
Kwang-I Yu Kenneth M. Clinebell
Title: Director Title: Chief Financial Officer

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRECISION SYSTEMS, INC., FOR THE YEAR ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,543,763
<SECURITIES> 0
<RECEIVABLES> 7,520,543
<ALLOWANCES> 696,903
<INVENTORY> 0
<CURRENT-ASSETS> 13,173,859
<PP&E> 33,934,081
<DEPRECIATION> 27,112,340
<TOTAL-ASSETS> 20,033,422
<CURRENT-LIABILITIES> 24,342,068
<BONDS> 0
0
145
<COMMON> 179,861
<OTHER-SE> (4,642,789)
<TOTAL-LIABILITY-AND-EQUITY> 20,033,422
<SALES> 6,647,200
<TOTAL-REVENUES> 33,451,391
<CGS> 16,978,499
<TOTAL-COSTS> 16,978,499
<OTHER-EXPENSES> 26,484,724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,346,557
<INCOME-PRETAX> (11,358,3898)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,358,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,358,389)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> (.64)

</TABLE>