SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
    of 1934 for the fiscal year ended December 31, 1997 or

___ Transition report pursuant to section 13 or 15(d) of the Securities Exchange
    Act of 1934 for the transition period from___to___

Commission file number                      0-15864
                      ----------------------------------------------------------

                               SCAN-GRAPHICS, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          Pennsylvania                                    95-4091769
-----------------------------------------  -------------------------------------
 (State or other jurisdiction of                       (I.R.S. Employer
 incorporation or organization)                       Identification No.)

    649 North Lewis Road, Limerick, PA                        19468
---------------------------------------------  ---------------------------------
 (Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code) 610-495-3003
                                                   -----------------------------

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

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

                     Common Stock, par value $.001 per share
--------------------------------------------------------------------------------
                                (Title of class)

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.

The aggregate market value of the Voting Stock held by non-affiliates of the
registrant computed by reference to the closing price as reported on the NASDAQ
system as of February 27, 1998 was $51,848,115.

The number of shares of the registrant's Common Stock issued and outstanding as
of February 27, 1998 was 18,642,019 shares.


                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III.


<PAGE>




                       NOTE ON FORWARD-LOOKING STATEMENTS

This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are statements
other than historical information or statements of current condition. Some
forward-looking statements may be identified by use of terms such as "believes",
"anticipates", "intends", or "expects". These forward-looking statements relate
to the plans, objectives, and expectations of Scan-Graphics, Inc. (the "Company"
or "Scangraphics") for future operations. In light of the risks and
uncertainties inherent in all forward-looking statements, the inclusion of such
statements in this Form 10-K should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved or that any of the Company's operating expectations will be realized.
The Company's revenues and results of operations are difficult to forecast and
could differ materially from those projected in the forward-looking statements
contained herein as a result of certain factors including, but not limited to,
dependence on operating agreements with foreign partners, significant foreign
and U.S.-based customers and suppliers, availability of transmission facilities,
U.S. and foreign regulations, international economic and political instability,
dependence on effective billing and information systems, customer attrition and
rapid technological change. These factors should not be considered exhaustive;
the Company undertakes no obligation to release publicly the results of any
future revisions it may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

                                     PART I

ITEM 1. BUSINESS

General

Founded in 1972, Scangraphics(R) is a provider of Geographic Information Systems
(GIS) database management software products and is a leader in scanning and
image processing technology, large document scanners, backfile conversion
services, image software and systems, systems integration, and consulting. The
Company has key product development and marketing alliances with Oracle Corp. as
well as other database and application vendors. Its products are marketed
internationally by a variety of systems integrators and distributors, especially
its Tangent Imaging Systems products. With principal locations in suburban
Philadelphia, Pennsylvania and Englewood, Colorado, the Company's strategies are
encompassed in three business units: Tangent Imaging Systems, (TIS), the Sedona
GeoServices(TM), Inc., and the Technology Resource Centers(TM), Inc. (TRC).

Tangent Imaging Systems(TIS) provides large format color and monochrome scanning
and reprographics systems, servicing among others, the Geographic Information
System (GIS), engineering, reprographics, and fine arts markets. A complete line
of monochrome and grayscale large document scanners and imaging software for
multiple applications are manufactured in Doylestown, Pennsylvania. The color
scanners and related software are produced in and distributed from a facility in
Englewood, Colorado.

                                       2


<PAGE>



ITEM 1. BUSINESS (Continued)

Sedona GeoServices, Inc. (Sedona) acquired by the Company in July of 1995, is a
developer, integrator, and distributor of sophisticated spatial data management
software. The open-architecture, object-oriented data management tools organize
and manipulate geospatial objects such as maps, images, and database information
within a single, user-intuitive GIS. A GIS might combine such geographical data
as elevation, waterways, roadways, or soils with demographic, socioeconomic,
environmental or other types of data in ways to facilitate analysis and display.
Some of the uses for these systems are map development, urban planning and
management, emergency response, utilities management, mining and natural
resource exploration, transportation planning and risk management, environmental
services, global positioning systems, market research and planning, aerial
photography management, real estate and retail cataloging. In addition, Sedona
provides mapping and data conversion services in support of its software
products.

Technology Resource Centers, Inc. (TRC) was incorporated in February of 1996
with the purpose of providing an integrated approach to clients' needs for
document scanning, conversion services, imaging systems consulting, systems
integration and technical training. The TRC is concentrating on services that
support imaging and document management technologies and the integration of
these applications with other processes in engineering and Geographic
Information Services.

Financial Information (In Thousands)

Total revenues for the years ended December 31, 1997, 1996, and 1995 were
$4,827, $5,060, and $4,987, respectively. The percentages of total revenue for
scanners and related services for years ended 1997, 1996 and 1995 were 94%, 92%,
and 93%, respectively. The percentages of total revenue for software and related
services for years ended 1997, 1996, and 1995 were 5%, 5%, and 5%, respectively.
The percentages of total revenue for license and royalty fees for years ended
1997, 1996, and 1995 were 1%, 3%, and 2%, respectively.

Financial Information Relating to Domestic and International Sales(In Thousands)

                                            1997            1996           1995
                                            ----            ----           ----
Sales to unaffiliated customers:
       United States                      $ 2,700         $ 3,760        $ 3,825
       Export                               2,127           1,300          1,162

Gross Profit
       United States                      $  (429)        $   553        $ 1,048
       Export                             $   711             494            692

Exports were sold into the following regions: Western and Eastern Europe, Asia,
the Middle East, and South America.

Description of Business and Principal Products

Tangent Imaging Systems Division

Tangent Imaging Systems is a leading provider of high performance monochrome,
grayscale, and color scanners for large documents. Its complete line of
monochrome/grayscale large document scanners is manufactured at a facility in
Doylestown, Pennsylvania.

The monochrome and grayscale scanners are used to scan architectural,
engineering, and construction drawings, manufacturing process charts, technical
publications, graphic art, and site/facility maps up to 44" wide of virtually
unlimited length. These CF (Continuous Feed) Series scanners feature multiple
and selectable resolutions from 100 to 1270 dots per inch.

                                       3

<PAGE>

ITEM 1. BUSINESS (Continued)

The Company acquired Tangent Engineering, Inc. of Englewood, Colorado in
December 1995. As a result, the Company gained the ability to produce a full
line of color scanners, including a range of high accuracy drum scanners,
flatbed scanners, and sheetfeed scanners ranging from 24" wide to 70" wide. This
complement of color scanners is enhanced with its closed-loop system software
for calibrating the scanner, plotter, and the user's choice of inks and paper to
give color copies of great fidelity. Marketed under the brand names TScan(TM)
and Reproworks(TM), these products are targeted toward reprographics, fine arts,
archiving, and automated mapping.

The key challenges facing Tangent Imaging Systems as it positions its products
going forward include a fuller exploitation of the high price and high quality
niche markets for color and monochrome scanners, development of a lower cost
line of scanners, higher profit line of products, and a broadening of its
international distribution systems. In addition, the Company will continue to
re-orient the marketing focus of its scanner products from the defense to the
commercial and industrial sectors. Finally, the Windows NT operating systems
Reproworks will continue to be established as the primary operating system and
user interface.

Sedona GeoServices, Inc.

Sedona GeoServices, Inc. is the developer of leading-edge software products that
enable both GIS specialists and business analysts to visualize, query, and
analyze spatial data. Sedona is also the only Master Value Added Reseller
authorized to commercially package and distribute Lockheed Martin geospatial
software products to the commercial marketplace. Sedona's leading edge products
are based upon open architecture, object-oriented database management systems
for processing geospatially oriented information. These products allow data
types such as maps, images, text and relational database information to be
organized and manipulated within a single, user intuitive GIS. Sedona is also
the developer of software and processes to convert analog spatial data to
digital forms.

Sedona has recently introduced a number of new products:

Sedona DMTool SDO(TM) Version 6 is a comprehensive set of integrated computer
software which provides extensive imaging, map processing and database
capabilities to the workstation user. Specifically developed to interface with
Oracle Corp.'s Spatial Data Option (SDO) and Spatial Cartridge, DMTool SDO's
capabilities are organized as independent but integrated Tools within a Tool Box
approach. The toolbox contains a broad spectrum of GIS functions including map
and image source data management, map display, map editing, image display, and
image editing. Specific support for many Defense oriented map and image formats,
including Vector Product Format (VPF), are provided in DMTool SDO(TM). DMTool
SDO(TM) was the subject of a rigorous evaluation in 1997 by National Imagery and
Mapping Agency (NIMA) which reviewed over 120 spatial imagery and analysis
products. DMTool SDO(TM) was one of only nine products selected for insertion
into NIMA/Department of Defense (DOD) programs.

Sedona is in the final stages of development of a new visualization and query
tool code named JBuffet. This product provides the means to visualize spatial
information contained in text databases, superimposed on a wide variety of
mapping and image products ranging from satellite imagery to street maps.
JBuffet allows users to query the database to perform spatial analysis and
ultimately produce maps detailing regions or specifics of particular interest.
JBuffet is a 100% Java-based, open architecture product, based on concepts
developed in DMTool. JBuffet is user friendly and valuable to both the
traditional GIS expert and the emerging GIS user focused on business management
and marketing analysis. The initial release of JBuffet, in the early summer of
1998, will focus on enabling Oracle's Spatial Cartridge and will be welcomed by
a large number of Spatial Cartridge users.


                                       4

<PAGE>


ITEM 1. BUSINESS (Continued)

Sedona supports its software with map conversion and GIS database creation and
update capabilities. Sedona provides high resolution scanning from the paper
source map to digital information; and Digital Line Graph (DLG), and Digital
Elevation Model (DEM) file generation including the ability to generate these
files to U.S. Geological Survey (USGS) National Mapping Standards. The DLG and
DEM production capability has been facilitated by Sedona's development of
software and processes that automate the data digitization process to the
greatest degree possible. Sedona's data conversion software and processes have
cut the time and cost for digital data production dramatically, while
significantly increasing product quality.

Sedona's strategies in the near term involve exploiting existing channels of
distribution for its geospatial software products (e.g., customers of major
database providers such as Oracle; creating software product demand through a
direct sales force soliciting federal agencies, database vendors and Fortune 500
companies; establishing world class mapping and data conversion services for
private industry as well as federal, state, and local governments; and
developing new technology for the generation and distribution of market-driven
data requirements.

Technology Resource Centers, Inc.

TRC provides a wide range of imaging and document management services via
computer technologies with a special emphasis on large format documents such as
engineering drawings, construction drawings, and maps. Integration of these
documents with related data is one of the fastest growing market segments in
imaging and document management. The services provided by TRC include document
conversion, consulting, and systems implementation and training.

TRC has started the process of developing sales, project management, and
technical teams. The TRC has partnership alliances with key vendors to maximize
its penetration into the large format document markets related to manufacturing,
engineering, and geographic information systems within the local and federal
governments and the commercial sector. In addition, contracts for training
services have been secured from the Department of Defense and TRC is working
with agencies in two states to develop a jobs oriented training program in
technical areas.

Research & Development (In Thousands)

The Company's engineering groups are engaged in continuing research and
development programs for its software and scanner products. Tangent Imaging
Systems' efforts will be centered on development of lower cost, higher
performance hardware, and porting existing software to the Windows NT
environment. Sedona's product development is focused on application of existing
programming tools to spatial applications.

Research and development expenses were $1,327, $744, and $582 for the years
ended December 31, 1997, 1996 and 1995, respectively.

Patents and Copyrights

The Company is the sole owner of two patents entitled "High Speed, High
Resolution Image Processing System," Patent Number 4,631,598 issued December 23,
1986 and Patent Number 4,972,273, issued November 20, 1990. Patents are
effective for seventeen years from date of issuance.

The Company applied for a patent for its color matching solution technology
during 1997. The patent is pending. The Company has no reason to believe that
this patent will not be awarded.


                                       5

<PAGE>


ITEM 1. BUSINESS (Continued)

The Company believes that the technology contained in these patents is very
important to electronic document scanner and/or digital copier products and to
the Company's competitive position. The Company's internally developed software
programs are covered by copyrights.

Marketing

Each of the Company's business units sells its products and services through
independent, yet complementary distribution systems, looking to leverage
synergistic opportunities across business unit channels.

Tangent Imaging Systems sells its products through an expanding network of
distributors, value added resellers, system integrators, manufacturers'
representatives, and direct sales personnel. In addition, Tangent Imaging
Systems is actively working to expand its distribution capabilities through
strategic alliances. The Company strongly believes in trademarking its products
and servicemarking its services. The Company has been awarded or is in the
process of applying for a total of 26 trademarks and servicemarks.

Sedona expects to derive significant benefit from various third party
relationships:

*    Sedona holds the rights to distribute in the commercial marketplace
     Lockheed Martin GIS software and cooperates with the company on both
     domestic and international defense and commercial systems-integration
     projects that involve the licensed products.

*    ESRI accepted Sedona into its Business Partner Program, which is designed
     to formalize relationships between ESRI and application developers,
     technology resellers, data publishers, systems integrators and consultants.
     Sedona's first joint product launch was the SRV+ automatic vectorizing
     engine that can be fully integrated within ESRI's ARC/INFO geographic
     information product.

*    Sedona is in Oracle's Business Alliance Program. The companies are working
     together to develop open systems software that spatially enable the
     database products of Oracle as well as other vendors. Oracle is supporting
     the development and release of Sedona's JBuffet product for Oracle's
     existing customer base.

*    Sedona is a Principal Member of the Open GIS Consortium, a government,
     educational and industry-backed, not-for-profit membership organization
     promoting GIS standardization and interoperability. Other key members of
     the Consortium include IBM, Intergraph, Lockheed Martin, Microsoft,
     Mitsubishi, Oracle and Sun Microsystems, as well as US Geological Survey,
     National Imagery and Mapping Agency and US Department of Agriculture.

These strategic relationships are complementary to the distribution system
Sedona is constructing to sell commercial off-the-shelf products and/or licensed
technology.

TRC markets its conversion, software, and consulting to numerous federal, state,
and local government agencies and commercial organizations. Targets of
opportunity are based on TRC's expertise with large format documents such as
engineering drawings and maps. TRC coordinates marketing programs with the
Tangent Imaging Systems and Sedona GeoServices to capitalize on the large niche
markets related to manufacturing, engineering, and geographic information
systems. TRC has also developed marketing and reseller alliances with a number
of document management and conversion software providers as well as conversion
hardware manufacturers.



                                       6

<PAGE>



ITEM 1. BUSINESS (Continued)

Major Customers

The Company had a different single customer during the years ended December 31,
1997 and 1996 which accounted for 10% or more of the Company's total sales
revenue. Total revenues for these customers, Sihl GmbH (a subsidiary of the Shil
Group located in Germany) and 3M Company amounted to 22%, and 14% in 1997 and
1996, respectively.

Competition

Tangent Imaging Systems' monochrome and grayscale hardware products compete in a
worldwide market estimated at $100 million. Two competitors, Contex and Vidar,
dominate a significant share of that market. The balance of market share is
divided among the Company and a number of other significant hardware
manufacturers.

Tangent Imaging Systems color products comprise a portion of a rapidly expanding
worldwide market which is primarily shared with four other color scanner
manufacturers. In the areas of large document color imaging and color image
processing software, the Company competes with two providers. In all cases, the
Company's market niche remains large document scanning and digital file
manipulation.

Sedona GeoServices, Inc.'s primary software competitors are businesses with a
focus on specially trained GIS users in one or more industry vertical
applications. These GIS specialists are generally focused on engineering and
planning tasks. Sedona's focus is development of user-friendly, broadly
applicable visualization and analysis tools coupled to both spatial and
non-spatial information technology products. Sedona's tools will be at the
leading edge of integrating spatial analysis in day-to-day business decisions.

There are a number of organizations which offer services similar to those
offered by TRC. However, the focus of TRC on large format documents and the
emphasis on job training programs with conversion services has created a very
strong competitive leverage in a very large market segment that has little
competitive penetration. The trend toward outsourcing of computer services
because of the shortage of technically skilled workers has created a very strong
market for the types of services provided by TRC.

Suppliers

The Company is not dependent on any single supplier for components and
subassemblies in the manufacture of its products.

Manufacturing and GIS Software Development

The Company manufactures its large format scanners, scanner interfaces, and
related software products at its Doylestown, Pennsylvania and Englewood,
Colorado facilities. Sedona GeoServices, Inc. maintains its facilities in
Limerick, Pennsylvania.

Employees

As of December 31, 1997, the Company had 79 full time employees. None of these
employees are represented by a labor union. The Company believes that its
relationships with its employees are satisfactory.



                                       7


<PAGE>



ITEM 1. BUSINESS (Continued)

Dependence Upon Key Personnel

The Company is dependent upon certain key members of its management for the
successful operation and development of its business. The loss of the services
of one or more of its management personnel could materially and adversely affect
the operation of the Company. In addition, in order to continue its operations,
the Company must attract and retain additional technically qualified personnel
with backgrounds in engineering, production, and marketing.

There is keen competition for such highly qualified personnel and consequently
there can be no assurance that the Company will be successful in recruiting or
retaining personnel of the requisite caliber or in the numbers necessary to
enable the Company to continue to conduct its business.

ITEM 2. DESCRIPTION OF PROPERTY

The Company leases its corporate offices as well as facilities for Sedona
GeoServices, and Technology Resource Centers at 649 North Lewis Road, 2nd Floor,
Limerick, Pennsylvania 19468. The lease for this facility of 11,618 square feet
commenced July 1, 1996 and expires September 30, 1999 with a two year renewal
option. Two addendums to this lease have been made to reflect the consolidation
of certain operations in Limerick, PA and the consequent closing of the former
headquarters in Broomall, PA.

The Tangent Imaging Systems Division administrative offices and certain
manufacturing facilities are located at 825 North Easton Road, Doylestown,
Pennsylvania, 18901 in a 5,500 square foot mixed use facility. The current
sublease for this facility commenced on May 31, 1997, as this Division relocated
from the former Broomall, PA location and expires on May 31, 1998. The remaining
manufacturing facilities are located at 14 Inverness Drive East, Suite A-100,
Englewood, Colorado 80012 in a 7,300 square foot facility. The current lease has
a term of five years beginning in June 1994 and ending May 31, 1999.

The Company maintains five remote sales and operations offices in Virginia,
Connecticut, Florida (2) and Ohio.

Management believes that its facilities are adequate to fulfill its current and
near term needs given the current and projected sales levels.

ITEM 3. LEGAL PROCEEDINGS (In Thousands)

On August 15, 1996, the Company filed suit in the United States Federal Court
for the Eastern District of Pennsylvania for patent infringement against two
competitors who produce electronic image scanning equipment. The Company
believes the defendants are infringing one or more of its patents, and has
requested monetary damages in favor of the Company, as well as injunctive
relief. All defendants are denying any claim of infringement, and are vigorously
defending the claim on the merits. The defendants have also filed a counterclaim
against the Company, requesting that the patents be found invalid and other
relief. The case is presently in the discovery stage, with the trial not
scheduled.



                                       8

<PAGE>



ITEM 3. LEGAL PROCEEDINGS (Continued)

During 1995, an action was filed against the Company through the International
Arbitration Tribunal in Paris, France, claiming amounts due and damages for the
Company's alleged failure to perform its obligations under a March 30, 1990
agreement. The Company filed an answer to the complaint on February 26, 1996,
asserting loss of profits from failure by the Plaintiff to forward sales orders
for parts, maintenance and software. During 1997, the arbitrator ruled that the
Company owed the opposing party $229. The Company has paid this amount to the
opposing party and has no more potential liabilities directly associated with
this arbitration. The Company had made a $90 provision for this matter in 1996
and the remaining charge of $139 was made during 1997.

On March 11, 1998, an action was commenced in the Court of Common Pleas of
Montgomery County, PA, against the Company by a former employee, seeking damages
of $361, for termination of contract, by change of control and for convenience.
This plaintiff asserts this sum represents the excess of market value over the
exercise price of unvested warrants held by the plaintiff which the plaintiff
asserts should have been vested and thereby available for exercise and sale. The
Company has categorically denied the plaintiff claims and will defend its
actions if required. No action has been taken as of this date.

No other actions other than matters involved in the ordinary course of business
are currently known by management and none of these are believed by management
to have potential significance.

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

None.







                                       9
<PAGE>



                                     PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
        HOLDER MATTERS.

Common stock is traded in the NASDAQ SmallCap Market under the symbol "SCNG."

The following Table sets forth the high and low sales prices of the Company's
common stock as reflected on the NASDAQ SmallCap Market for the periods
indicated.

Common Stock                    High Sales Price                 Low Sales Price
------------                    ----------------                 ---------------

1996
1st Quarter                     $ 3  7/8                         $ 2  5/8
2nd Quarter                       3  7/16                          1 15/16
3rd Quarter                       3 11/16                          1  7/16
4th Quarter                       4  1/16                          2  3/4


Common Stock                    High Sales Price                 Low Sales Price
------------                    ----------------                 ---------------

1997
1st Quarter                     $ 4  3/4                         $ 2  1/2
2nd Quarter                       4  1/16                          2  1/2
3rd Quarter                       5  1/8                           2  9/16
4th Quarter                       4 31/32                          2  1/2


Common Stock                    High Sales Price                 Low Sales Price
------------                    ----------------                 ---------------

1998
1st Quarter through
February 27, 1997               $ 2 15/16                         $ 2 1/8


As of February 27, 1998 there were approximately 2,300 Shareholders of record.
On February 27, 1998, the last reported sale price of the Company's common stock
as reported on the NASDAQ SmallCap Market was $2 50/64.

The Company has never declared or paid cash dividends on its common stock and
does not anticipate payment of cash dividends on its common stock in the
foreseeable future. It is the current intent of the Company to continue to
retain any earnings to finance the development and expansion of its business.

By letter dated November 14, 1997, NASDAQ contacted the Company regarding its
continued listing eligibility on The NASDAQ SmallCap Market. After a number of
discussions, correspondence and a meeting with NASDAQ, the Company was notified
by letter dated March 10, 1998 that a NASDAQ panel had concluded that the
Company is currently in compliance with the requirements for continued listing.



                                       10

<PAGE>


ITEM 6. SELECTED FINANCIAL DATA (In Thousands Except Per Share Data)

The following table sets forth selected financial information regarding the
Company for the year ended December 31, 1997 and for the four previous years.

This information should be read in conjunction with the financial statements and
notes thereto included in Item 8 of this Form 10-K.


                                       YEAR ENDED DECEMBER 31,
                                       -----------------------
Income Statement          1997      1996        1995       1994(1)     1993(1)
                          ----      ----        ----       -------     -------
Data:
Revenue                $ 4,827    $ 5,060     $ 4,987      $ 5,067     $ 3,839

(Loss)before
Extraordinary item      (7,517)    (4,271)     (1,237)        (889)     (1,856)

Extraordinary item        (300)      --          --           --          --

Net (Loss)              (7,817)    (4,271)     (1,237)        (889)     (1,856)

Preferred Dividends       (182)      (220)       (158)        (120)       (120)

Balance, applicable
to Common Stock         (7,999)    (4,491)     (1,395)      (1,009)     (1,976)

Basic(Loss) Per
Share applicable to
Common Stock
Before Extraordinary
Item                   $  (.47)    $ (.39)    $  (.14)     $  (.10)    $  (.21)

Extraordinary Item     $  (.02)      --          --           --          --

Basic Net(Loss) Per
Common Share(2)       $  (.49)    $ (.39)     $ (.14)     $  (.10)    $  (.21)


                               AT DECEMBER 31,
                               ---------------

Balance Sheet Data:       1997      1996        1995      1994(1)       1993(1)
                          ----      ----        ----      -------       -------
Total Assets           $5,217     $4,092      $4,084      $4,358        $3,884

Working Capital         2,435      1,804         952         465           880
Long-Term
Obligations               156        150         231         417            12

Stockholders' Equity    3,514      2,556       2,105       1,876         2,885

(1) Restated due to acquisition of Tangent Engineering, Inc.
(2) Company adopted SFAS 128 in 1997 and applied it to all prior periods.

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

Liquidity and Capital Resources (In Thousands Except Per Share and Share Data)

At December 31, 1997, cash and cash equivalents increased to $1,310, a $229
increase compared to the December 31, 1996 amount of $1,081. The above changes
in cash and cash equivalents are explained as follows in the discussion of cash
flows from operating, investing and financing activities.




                                       11

<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS  (Continued)

Liquidity and Capital Resources(Continued)

For the year ended December 31, 1997, the cash flows from operating activities
resulted in a net use of cash of $7,333 compared to the year ended December 31,
1996 amount of $2,621. The increase of $4,712 was primarily due to funding of
development costs in all Divisions of the Company as well as operating losses
sustained by the Tangent Imaging Systems Division. An increase in inventories
($644) was due principally to a build up of stock in anticipation of 1998
orders.

For the year ended December 31, 1997 the cash flows from investing activities
resulted in a net use of cash of $591 compared to the year ended December 31,
1996 amount of $329. The increase in the use of cash of $262 as of December 31,
1997, compared to December 31, 1996 is due to the purchase of property and
equipment for ongoing operations and development activities and the lack of $228
in proceeds from the sale of Tangent demo scanners realized in 1996.

For the year ended December 31, 1997, cash flows from financing activities
provided $8,153 compared to the fiscal December 31, 1996 amount of $3,842. The
increase in cash in 1997 is due principally to the proceeds of an April 1997
private placement of $5,200, in addition to increased funds from exercise of
options and warrants of $3,162. The increase in cash in 1996 was due to the
proceeds of a March 1996 private placement of $3,100 less expenses of $300, in
addition to increased funds from warrant/option exercise activity ($1,641).

In connection with a $5,200 private placement of its securities in April 1997,
the Company offered for sale 52 units, each of which consisted of a $100, 7%
convertible note due May or June 1999, and one warrant to purchase 17,308 shares
of common stock of the Company at an exercise price of $4.00 per share for a
period of four (4) years. The notes and any accrued interest are convertible
within two (2) years at a price per share equal to the lesser of $7.00 or the
applicable percentage of the average closing sales price (90%, minus 1% for each
full $.20 by which the conversion price for such conversion is greater than
$4.00) of the Company's common stock during the last five trading days prior to
conversion. If the conversion price is less than $4.00, a 10% discount to the
closing price for the 5 days prior to conversion is required.

In conjunction with this financing, the Company has entered into a consulting
agreement with a New York investment capital firm, and has issued 2,100,000
warrants on the same terms as the individual investors participating in the
$5,200 private placement.

During the remainder of 1997, substantially all the April 1997 convertible notes
outstanding were converted to a new Series "D" of Preferred Stock with similar
terms and conditions.

Promissory notes ofthe certain officers and directors of the Company in the
amountof $1,327 reflects the balance of amounts provided in exchange for
exercise of warrants and options and have maturity dates through January 2003.

During March 1998, the Company entered into a $5.2 million private placement
purchase agreement. The Company expects to sell 52 units of convertible
debentures. Each unit consists of $100, 7% convertible note due in two years and
a warrant to purchase 28,850 shares of common stock. The notes and any accrued
interest are convertible within 90 days at a price per share equal to the lesser
of $3 per share or at a 15% discount to the average closing bid price for the
five days preceding conversion.



                                       12
<PAGE>




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS  (Continued)

Liquidity and Capital Resources(Continued)

If the conversion price is $2 a share or less, the Company may elect to redeem
all or part of the debenture and accrued interest at the par value of principal,
plus the conversion discount. Conversions are restricted to 10% per month on a
cumulative monthly basis. As of March 27, 1998, the Company has received $2.1
million of these proceeds.

The Company believes that the proceeds from this private placement and funds
generated from operations will be sufficient to meet the Company's working
capital requirements for 1998.

Results of Operations (In Thousands)

Net Revenue for the year ended December 31, 1997 decreased to $4,827, a 4.6%
decline when compared to the year ended December 31, 1996 amount of $5,060.

The percentage of total revenue for scanners and related services for years
ended December 31, 1997, 1996 and 1995 were 94%, 92%, and 93%, respectively. The
percentages of total revenue for software and related services for years ended
December 31, 1997, 1996 and 1995 were 5%, 5%, and 5%, respectively. The
percentage of total revenue for license fees for years ended December 31, 1997,
1996 and 1995 was 1%, 3%, and 2%, respectively.

The gross profit margin decreased to $282 for the year ended December 31, 1997
from $1,047 for the year ended December 31, 1996, a drop of 73%. This resulted
from a combination of lower sales volume in the Tangent Division and higher
costs principally in the Company's Sedona Division.

The gross profit margin decrease of $693 between the years ended December 31,
1996 and 1995 was a result of inventory write-offs for two discontinued product
lines ($400) and the full amortization of software rights received in a
litigation settlement ($417). The Company's gross profit margin percentages were
6%, 21%, and 35% for the years ended December 31, 1997, 1996, and 1995,
respectively.

Research and Development Expenses: In the years ended December 31, 1997, 1996
and 1995, the Company had research and development expenses of $1,327, $744, and
$582, respectively. Research and development expenses as a percentage of revenue
for 1997, 1996 and 1995 were 27.5%, 14.7%, and 11.7%, respectively. The 1997
increase from the 1996 amounts of research and development was principally the
result of increased expenses in the Sedona software products area and Tangent
Imaging Systems Division. The 1996 increase from 1995 levels in research and
development was the result of increased personnel engaged in the design of
Sedona GeoServices geospatial software products.

Sales and Marketing Expenses: Sales and Marketing expenses for years ended
December 31, 1997, 1996 and 1995 totaled $2,773, $1,665, and $1,388,
respectively. Sales and marketing expenses as a percentage of Revenue in 1997,
1996 and 1995 were 57.4%, 32.9%, and 27.8%, respectively. Increases are
principally the result of the hiring of sales management and personnel and
related costs for Sedona.

Operating, General and Administrative Expenses: General and Administrative
expenses for the years ended December 31, 1997, 1996 and 1995 totaled $3,375,
$2,263, and $985, respectively. The increase in year ended December 31, 1997
expenses compared to the year ended December 31, 1996 resulted principally from
the addition of executive level personnel in Corporate and Tangent Imaging
Systems Divisions.



                                       13

<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS  (Continued)

Results of Operations (Continued)

The general and administrative cost increases in the years ended December 31,
1996 from 1995 levels resulted from the addition of key executive management
personnel in each subsidiary and in Corporate capacities. In addition, Sedona
($575) and TRC ($150) staffed or initiated their operations during 1996 and the
Company incurred $283 of non-cash consulting expense for warrants issued for
non-employee services. General and Administrative expenses as percentages of
revenue for the years ended December 31, 1997, 1996 and 1995 were 69.9%, 44.7%,
and 19.8%,respectively.

Interest expense for years ended December 31, 1997, 1996 and 1995 was $326, $432
and $44, respectively. The Company incurred $100 of non-cash interest expense
for the issuance of warrants to note holders of the $5,200 private placement in
April of 1997. Interest expense of $193 was incurred on the $5,200 in private
placement debentures prior to their conversion at the year ended December 31,
1997 into a new series of preferred stock.

The company has conducted an exhaustive review of the Year 2000 issue with all
key executives participating. This review included all software produced by the
Company for use by its customers as well as the principal internally used
management information system. As a result of this review, conclusion was
reached that there is no Year 2000 issue of significance regarding either
software produced by the Company or used internally. Nevertheless, management
plans to periodically review the Year 2000 issue and will develop a
comprehensive plan to address any issues which may arise.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"), effective for periods ending after
December 15, 1997, establishes standards for disclosing information about an
entity's capital structure. SFAS 129 requires disclosure of the pertinent rights
and privileges of various securities outstanding (stock, options, warrants,
preferred stock and debt) including dividend and liquidation preferences, call
prices and dates, conversion or exercise prices and redemption requirements. The
Company has adopted the standard for all periods presented.

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.

Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of a Business Enterprise" ("SFAS 131"), establishes standards for public
enterprises reporting of information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available and that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.



                                       14

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS  (Continued)

Recent Accounting Pronouncements (Continued)

Statement of Financial Accounting Standards No.132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"), revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminate certain existing disclosure requirements.

SFAS 130, SFAS 131 and SFAS 132 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Adoption of all three statements is not
expected to impact financial statements or disclosures.

Inflation

Although inflation has resulted in an increase in certain operating costs during
the past three years, management believes it has not had a material effect on
the Company's results of operations or financial condition.

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           See Index on F-1.

ITEM 9.         CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
                ON ACCOUNTING AND FINANCIAL DISCLOSURES

                None.


                                       15

<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding the directors and
executive officers of the Company.

Name                              Age              Position
----                              ---              --------

Andrew E. Trolio                  68               Chairman of the Board

Laurence L. Osterwise             50               CEO, President and Director

William C. Hubbard                42               Executive Vice President

Michael A. Mulshine               58               Secretary and Director

R. Barry Borden                   58               Director

David S. Hirsch                   62               Director

Jack Pellicci                     59               Director

James C. Sargent                  82               Director

Bruce D. Downing                  57               Vice President

Robert J. Griffin                 51               Vice President

Colin B. Matthews                 43               Vice President

All Directors hold office until the next annual meeting of the Shareholders of
the Company and until their successors are elected and qualified.

All officers serve at the discretion of the Board of Directors subject to the
terms of their employment agreements.

The business experience, principal occupation and employment of the directors
and executive officers have been as follows:

Andrew E. Trolio is Chairman of the Board and a Director of the Company. He
founded the Company in 1972. From 1961 to 1971 he was President, Director and
Founder of KDI Adtrol, Inc., a company which manufactured photo-optical
recording and reading devices for motion picture cameras. He is also credited
with several patents as inventor or co-inventor. Mr. Trolio is a Trustee
Emeritus of Cabrini College. Mr. Trolio has served as Chairman of the Finance
and Audit Committee and is currently a Fellow of the International Society of
Optical Engineers. Mr. Trolio received an Honorary Doctor of Science degree from
Cabrini College in 1997.

Laurence L. Osterwise was appointed Chief Executive Officer, President and a
Director of the Company by action of the Board of Directors on April 23, 1997.
Mr. Osterwise began his employment with the Company on November 1, 1996, as its
Chief Operating Officer and President of Sedona GeoServices, Inc., a subsidiary.
He was most recently President of the $1.5+ billion Communications Division of
General Instruments Corporation. Prior to joining General Instruments
Corporation, Mr. Osterwise spent 25 years with IBM Corporation, where he held
positions as President of Production Industries, U.S. Vice President and
Corporate Director of Market Driven Quality, and IBM Rochester General Manager
and Director of Application Business Systems. Under his leadership, IBM
Rochester was awarded the Malcomb Baldridge National Quality Award. Mr.
Osterwise received a BS in Mathematics from Duke University in 1969 and a MS in
Computer Sciences from Syracuse University in 1973.



                                       16


<PAGE>


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)

William C. Hubbard has been an Executive Vice President of the Company since
March 1996. He initially joined the Company as a consultant in 1995, and later
that year he assumed the position of Vice President of Sales and Marketing. From
1991 to 1994, he was Vice President of Marketing for R & B, Inc., a manufacturer
and distributor of replacement parts for automobiles, watercraft and trucks.
Prior to joining R & B, Inc., Mr. Hubbard spent 6 years with Giles & Ransome,
Inc., the last 3 years in the capacity of Corporate Marketing Manager. From 1979
to 1984, he completed a variety of field sales/dealer development and internal
staff assignments for Caterpiller, Inc. He received a BA in Economics and
Business from Rockford College in 1978. Mr. Hubbard has announced his
resignation from the Company effective March 31, 1998.

Michael A. Mulshine has been a Director and Secretary of the Company since May
1985 and has been associated with the Company on a management consulting basis
since 1979. He has been the President of Osprey Partners, a management
consulting firm, since 1977. In addition, he is a Director of Vasco Data
Security International, Inc., an OTC traded company and provider of internet and
computer network hardware and software security products for financial
institutions, industry and government. Mr. Mulshine received a BSEE degree from
the Newark College of Engineering in 1961.

R. Barry Borden, a Director of the Company since June 1996, has founded and
managed businesses in the computer hardware and software industry for the past
30 years. Since August 1997, he has served as President of Nettech Systems,
Inc., a supplier of software for wireless data communications. Prior to that he
has served as Chairman and CEO of Mergent International, a supplier of software
for data security on PC Desktops and enterprise wide networks. Since 1984, Mr.
Borden has been President of LMA Group Inc., a general management consulting
firm. From 1968 to 1980, Mr. Borden was the founder, President and CEO of Delta
Data Systems, a CRT Terminal manufacturer, and from 1981 to 1984 he was founder,
Chairman and CEO of Franklin Computer Corp., a manufacturer of microcomputers.
In 1989 he served as President and CEO of Cricket Software, Inc., a supplier of
graphics software. Mr. Borden received a BSEE degree from the University of
Pennsylvania in 1961.

David S. Hirsch, a Director of the Company since January 1992, retired in 1991
from Schroder & Co., Incorporated and its predecessor firms where he was a
principal during the five years preceding his retirement. Mr. Hirsch received a
BA degree from Cornell University in 1957 and a MBA degree from Harvard
University in 1959.

Jack Pellicci, a Director of the Company since October 1996, is Oracle
Corporation's Vice President of Global Public Sector "Government and Education".
Prior to joining Oracle in 1992, Mr. Pellicci retired as a Brigadier General
with 30 years in the U.S. Army, where he was the Commanding General of the
Personnel Information Systems Command. Mr. Pellicci is a member of the Board of
Directors of the Open GIS Consortium (OGC), an organization of over 70
commercial, governmental, and educational entities dedicated to open systems
approaches to geoprocessing. He is the Vice Chairman of the High Performance
Computing and Communications Consortium (HPCCC). In addition, Mr. Pellicci
serves on the Armed Forces Communications and Electronics Association (AFCEA)
International Technical Committee, and is a Corporate Fellow for the National
Governors Association. He also serves on the Board of Advisors for the Club of
Rome. He is a graduate of the U.S. Military Academy at West Point with a
Bachelor of Engineering degree, and received a Master of Mechanical Engineering
degree from Georgia Institute of Technology.


                                       17

<PAGE>


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)

James C. Sargent, a Director of the Company since January 1992, is Counsel to
the law firm of Opton, Handler, Gottleib, Fieler & Katz, and is counsel to Abel
Noser Corporation, a member of the New York Stock Exchange. He was previously a
partner and counsel to Whitman & Ransom. He was Regional Administrator from 1955
to 1956, and Commissioner from 1956 to 1960, of the Securities and Exchange
Commission.

Bruce Downing has been the President of the Technology Resource Centers, Inc.
since July 1996 and was appointed Company Vice President in March 1998. Mr.
Downing has more than 30 years experience in computer systems management and
business development. His computer industry experience includes positions as a
marketing manager and systems consultant for Systems and Computer Technology
Corporation, Director of Industry Marketing for Commodore Computers covering
education and government markets and as a founding officer and Senior Vice
President of Intelligent Electronics. Prior to joining the Company, Mr. Downing
was involved in the startup of software and systems consulting companies. Mr.
Downing received a BA degree from Grinnel College in 1962 and a MA and PhD
degree from the University of Colorado in 1966.

Robert J. Griffin was appointed a Company Vice President in March 1998. He
joined the Company as Senior Vice President of Sales and Distribution in the
Company's Tangent Imaging Systems Division in September 1997 and in January 1998
Mr. Griffin was appointed President of that unit. Prior to joining the Company,
Mr. Griffin directed a broad array of marketing and sales initiatives with
International Business Machines Corporation including: market and brand
management, customer satisfaction, business partner recruitment and support,
sales training and field sales management. Most recently, Mr. Griffin served as
Director, Worldwide Competitive Marketing and Sales for IBM, a position directly
responsible to the CEO and senior executive team.

Colin B. Matthews has been President of Sedona GeoServices, Inc., since April
1997 and was appointed Company Vice President in March 1998. Prior to his
joining the Company, Mr. Matthews was President, COO and a Director of Denbridge
Capital Corporation, a Toronto Stock Exchange listed venture capital/ merchant
bank to high technology and junior resource companies. Mr. Matthews became a
part of the Denbridge organization in 1994 when a company he co-founded in 1992,
RMSL Traffic Systems, Ltd., was acquired by the Denbridge organization in a $50
million transaction. Mr. Matthews received a BSC degree in Electronic
Engineering in 1975 from Robert Gordons University in Aberdeen, Scotland.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference to the
information under the caption "Compensation of Executive Officers and Directors"
in the Company's definitive proxy statement for the 1998 annual meeting of
Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated by reference to the
information under the caption "Security Ownership of Management and Certain
Beneficial Owners" in the Company's proxy statement for the 1998 annual meeting
of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
in the Company's proxy statement for the 1998 annual meeting of Shareholders.


                                       18

<PAGE>


                                     PART IV

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

Item 14(a) 1 and 2 Financial Statements and Schedules.
See "Index to Financial Statements and Schedules" on F-1.

     (b) Reports on Form 8-K

          None filed in the last quarter of the period covered by this report.

     (c) Exhibits

The following is a list of exhibits filed as part of this annual report on Form
10-K. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parenthesis.

        3.1     Articles of incorporation (2) (Exhibit 3.1).

        3.2     Bylaws (2) (Exhibit 3.2).

        3.3     Amendment to Articles of Incorporation. (7)

        4.1     Specimen copy of stock certificate for shares
                of Common Stock of the Registrant. (5)

        4.2     Specimen copy of stock certificate for shares
                of Class A Convertible Preferred Stock Series
                A (1) (Exhibit 4.2).

        4.3     Specimen copy of stock certificate for shares of Class B
                Preferred Stock (1) (Exhibit 4.3).

        4.4     Restricted Common Stock Registration Rights
                (1) (Exhibit 4.1).

        4.5     Form of Common Stock Warrant (1) (Exhibit 4.4).

        4.6     Form of Redeemable Common Stock Purchase Warrant
                and Subscription Agreement (1) (Exhibit 4.5).

        4.8     Specimen copy of stock certificate for shares
                of Class A Convertible Preferred Stock Series C. (7)

       *4.9     Specimen copy of stock certificate for shares of Class A
                Convertible Preferred Stock Series D.

      *4.10     Designation of rights and preferences with respect to shares of
                Class A Convertible Preferred Stock Series D.

     **10.1     Employment Contract - Andrew E. Trolio (1) (Exhibit 10.1).

   *,**10.1.1   Addendum to Employment Agreement - Andrew E. Trolio
                Exhibit (10.1.1).

     **10.2     Employment Contract - Anthony M. Trolio (1)(Exhibit 10.4).

     **10.4     Form of Common Stock Option (1) (Exhibit 10.6).

     **10.5     SCAN-GRAPHICS, Inc. 1992 Long Term Incentive Plan
                (3) (Exhibit 2.1 - Annex E).

       10.6     Facility Lease, 700 Abbott Drive, Broomall, PA (6)
                (Exhibit 10.6).


                                       19

<PAGE>


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

       10.7     Form of Selling Shareholder Agreement (4)(Exhibit 10.2).

       10.8     Agreement between SCAN-GRAPHICS, Inc. and
                Howard L. Morgan and the ARCA Group, Inc. (5)(Exhibit 10.9)

       10.9     Agreement between SCAN-GRAPHICS, Inc. and
                Michael A. Mulshine and Osprey Partners. )(6) (Exhibit 10.9

       10.9.1   Agreement between SCAN-GRAPHICS, Inc. and
                Michael A. Mulshine and Osprey Partners. (8)(Exhibit 10.9.1)

       10.9.2   Agreement between SCAN-GRAPHICS, Inc. and
                Michael A. Mulshine and Osprey Partners. (8)(Exhibit 10.9.2)

       10.9.3   Finders Fee Agreement between SCAN-GRAPHICS, Inc. and
                Osprey Partners and C&F Global Enterprises. (8)(Exhibit 10.9.3)

       10.10    Facility Lease, 649 N. Lewis Rd., Limerick, PA.(8)
                (Exhibit 10.10)

       10.10.1  Addendum to Facility Lease, 649 N. Lewis Road, Limerick, PA. (8)
                (Exhibit 10.10.1)

      *10.10.2  Addendum to Facility Lease, 649 N. Lewis Road, Limerick, PA.
                (Exhibit 10.10.2)

     **10.11    Employment Contract - Laurence L. Osterwise (8) (Exhibit 10.11)

     **10.12    Employment Contract - Richard L. Rex (8) (Exhibit 10.12)

     **10.13    Employment Contract - Bruce Downing (8) (Exhibit 10.13)

   *,**10.13.1  Employment Contract - Bruce Downing (Exhibit 10.13.1)

     **10.14    Employment Contract - William Hubbard (8) (Exhibit 10.14)

       10.15    License Agreement between The Ohio State University Research
                Foundation and Sedona GeoServices, Inc.(8)(Exhibit 10.15)

   *,**10.16    Employment Contract - Colin M. Matthews (Exhibit 10.16)

   *,**10.17    Employment Contract - Robert J. Griffin (Exhibit 10.17)

      *10.18    Facility Lease - 825 N. Easton Road, Doylestown, Pennsylvania
                (Exhibit 10.18)

       25.1     Power of attorney (included on the signature page to this
                Form 10-K).

*    Filed herewith.

**   Executive Compensation Plans and Arrangements.



                                       20

<PAGE>


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

(1)    Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
       year ended December 31, 1991, as amended by Amendment No. 1 on Form 8
       dated June 12, 1992 and Amendment No. 2 on Form 8 dated July 27, 1992.

(2)    Filed as an Exhibit to the Company's Current report on Form 8-K dated
       June 15, 1992.

(3)    Filed as an Exhibit to the Registration Statement on Form 8-K, filed
       under the Securities Exchange Act of 1934, dated June 19, 1992.

(4)    Filed as an Exhibit to Pre-Effective Amendment No. 1 to the
       Registration Statement on Form S-3 (Registration No. 33-47127)
       filed on July 2, 1992.

(5)    Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
       year ended December 31, 1993

(6)    Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
       ended December 31, 1994.

(7)    Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
       ended December 31, 1995.

(8)    Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year
       ended December 31, 1996.


                                       21

<PAGE>


                                   Scan-Graphics, Inc. and Subsidiaries


                                                               Contents

<TABLE>

<S>                                                                                         <C>
         Report of Independent Certified Public Accountants                                         F-2

         Consolidated financial statements
             Balance sheets as of December 31, 1997 and 1996                                  F-3 - F-4
             Statements of operations for each of the three years
               in the period ended December 31, 1997                                          F-5 - F-6
             Statements of stockholders' equity for each of the three
               years in the period ended December 31, 1997                                    F-7 - F-8
             Statements of cash flows for each of the three years in the
               period ended December 31, 1997                                                F-9 - F-10

         Summary of significant accounting policies                                         F-11 - F-15

         Notes to consolidated financial statements                                         F-16 - F-38

         Financial statements schedule
             Schedule II - Valuation and qualifying accounts and
               reserves for each of the three years in the period
               ended December 31, 1997                                                             F-39

</TABLE>




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

         All other schedules have been omitted because they are inapplicable,
         not required, or the required information is included elsewhere in
         the financial statements and notes thereto.


                                                                             F-1

<PAGE>




Report of Independent Certified Public Accountants

Scan-Graphics, Inc.
  and Subsidiaries
Limerick, Pennsylvania

We have audited the accompanying consolidated balance sheets of Scan-Graphics,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. We have also
audited the schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the 1995 financial statements of
Tangent Engineering, Inc., a wholly owned subsidiary, which statements reflect
total assets of $1,657,000 as of December 31, 1995, and total revenues of
$3,023,000 for the year then ended. Those 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 Tangent Engineering, Inc., is based solely
on the reports of the 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 and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. 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, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Scan-Graphics, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.

Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.



                                                                BDO SEIDMAN, LLP

Philadelphia, Pennsylvania
March 13, 1998, except for
Note #14, which is dated March 27, 1998

                                                                             F-2
<PAGE>


                                            Scan-Graphics, Inc. and Subsidiaries

                                                     Consolidated Balance Sheets
                                 (In Thousands, Except Share and Per Share Data)


<TABLE>
<CAPTION>



December 31,                                                                                 1997            1996
--------------------------------------------------------------------------------------------------------------------

Assets
<S>                                                                                      <C>             <C>

Current assets
     Cash                                                                                $  1,310        $  1,081
     Accounts and notes receivable,
         less allowance for doubtful accounts of $91 and $189                                 696             844
     Inventories                                                                            1,690           1,174
     Prepaid expenses and other current assets                                                267              91
--------------------------------------------------------------------------------------------------------------------

Total current assets                                                                        3,963           3,190
--------------------------------------------------------------------------------------------------------------------

Property and equipment,
     less accumulated depreciation and amortization                                         1,226             864
--------------------------------------------------------------------------------------------------------------------

Other assets                                                                                   28              38
--------------------------------------------------------------------------------------------------------------------

                                                                                         $  5,217        $  4,092
====================================================================================================================
</TABLE>

                                                                             F-3

<PAGE>


                                            Scan-Graphics, Inc. and Subsidiaries

                                                     Consolidated Balance Sheets
                                 (In Thousands, Except Share and Per Share Data)


<TABLE>
<CAPTION>


December 31,                                                                              1997               1996
--------------------------------------------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
<S>                                                                                <C>                <C>

Current liabilities
     Accounts payable and accrued expenses                                         $     1,013        $       617
     Dividend payable                                                                       30                368
     Deferred revenue                                                                       33                237
     Current maturities, capital lease obligations                                          41                102
     Current maturities of long-term debt                                                  411                 62
--------------------------------------------------------------------------------------------------------------------

Total current liabilities                                                                1,528              1,386
--------------------------------------------------------------------------------------------------------------------

Long-term debt, less current maturities                                                     98                107
Capital lease obligations, less current maturities                                          58                 43
Deferred revenue                                                                            19                 --

Stockholders' equity
     Class B preferred stock, par value $0.01
         Authorized 2,000,000 shares
         No issued shares                                                                   --                 --
     Class A convertible preferred stock
         Authorized 1,000,000 shares
         Series A - Issued and outstanding 500,000 shares,
              par value $2.00                                                            1,000              1,000
         Series C - No issued and outstanding shares for 1997 and
              125,000 for 1996, par value $10.00                                            --              1,250
         Series D - Issued and outstanding 2,990 shares for 1997,
              par value $1,000                                                           2,990                 --
     Common stock, par value $0.001
         Authorized 50,000,000 shares
         Issued and outstanding 18,070,319 and 14,780,766 shares                            18                 15
     Additional paid-in capital                                                         22,155             15,295
     Deficit                                                                           (21,322)           (13,323)
     Notes receivable, related parties                                                  (1,327)            (1,681)
--------------------------------------------------------------------------------------------------------------------

Total stockholders' equity                                                               3,514              2,556
--------------------------------------------------------------------------------------------------------------------

                                                                                   $     5,217        $     4,092
====================================================================================================================
</TABLE>

     See accompanying summary of significant accounting policies and notes to
     consolidated financial statements.
                                                                             F-4
<PAGE>

                                            Scan-Graphics, Inc. and Subsidiaries

                                           Consolidated Statements of Operations
                                 (In Thousands, Except Share and Per Share Data)

<TABLE>
<CAPTION>





Year ended December 31,                                                1997               1996              1995
--------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                  <C>               <C>

Revenues
     Sales                                                 $          4,791     $        4,935    $        4,866
     License and royalty fees                                            36                125               121
--------------------------------------------------------------------------------------------------------------------

Total revenues                                                        4,827              5,060             4,987

Cost of goods sold (including rent expense
     to a related party of $30 in 1997 and
     $48 in 1996 and 1995)                                            4,545              4,013             3,247
--------------------------------------------------------------------------------------------------------------------

Gross profit                                               `            282              1,047             1,740
--------------------------------------------------------------------------------------------------------------------

Expenses
     Research and development                                         1,327                744               582
     Sales and marketing (including rent expense
         to a related party of $4 in 1997 and $29 in
         1996 and 1995)                                               2,773              1,665             1,388
     General and administrative (including
         related party amounts of $30, $19 and $26,
         respectively)                                                3,375              2,263               985
--------------------------------------------------------------------------------------------------------------------

Total expenses                                                        7,475              4,672             2,955
--------------------------------------------------------------------------------------------------------------------

(Loss) before other (expense) income                                 (7,193)            (3,625)           (1,215)
--------------------------------------------------------------------------------------------------------------------

Other (expense) income
     Litigation legal fees                                             (187)              (179)               --
     Interest expense (including related party
         amounts of $-0-, $23 and $10, respectively)
                                                                       (326)              (432)              (44)
     Other expenses                                                     (29)               (86)              (27)
     Interest income                                                    218                 51                 2
     Other income                                                        --                 --                47
--------------------------------------------------------------------------------------------------------------------

Total other (expense)                                                  (324)              (646)              (22)
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                             F-5
<PAGE>

                                            Scan-Graphics, Inc. and Subsidiaries

                                           Consolidated Statements of Operations
                                 (In Thousands, Except Share and Per Share Data)


<TABLE>
<CAPTION>


Year ended December 31,                                            1997             1996            1995
------------------------------------------------------------------------------------------------------------

<S>                                                        <C>              <C>             <C>
(Loss) before income taxes                                 $     (7,517)    $     (4,271)   $     (1,237)

Income taxes                                                         --               --              --
------------------------------------------------------------------------------------------------------------

(Loss) before extraordinary item                                 (7,517)          (4,271)         (1,237)

Extraordinary item
     (Loss) on early extinguishment of debt
         (net of tax of $-0-)                                      (300)              --              --
------------------------------------------------------------------------------------------------------------

Net (loss)                                                       (7,817)          (4,271)         (1,237)

Preferred dividends                                                (182)            (220)           (158)
------------------------------------------------------------------------------------------------------------

Balance, applicable to common stock                        $     (7,999)    $     (4,491)   $     (1,395)
============================================================================================================

Per share data
     Basic
       (Loss) applicable to common shares
         before extraordinary item                         $       (.47)            (.39)           (.14)
       Extraordinary item                                          (.02)              --              --
------------------------------------------------------------------------------------------------------------

Basic net (loss) per common share                          $       (.49)    $       (.39)   $       (.14)
============================================================================================================

Basic weighted average number
     of common shares outstanding                            16,288,296       11,490,332       9,872,327
============================================================================================================
</TABLE>

     See accompanying summary of significant accounting policies and notes to
     consolidated financial statements.
                                                                             F-6
<PAGE>

                                            Scan-Graphics, Inc. and Subsidiaries

                                 Consolidated Statements of Stockholders' Equity
                                               (In Thousands, Except Share Data)

<TABLE>
<CAPTION>





                                                            Class B Preferred        Class A Preferred      Class A Preferred
                                                                  Stock               Stock Series A         Stock Series C
                                                            -------------------      ------------------    --------------------
                                                            Shares      Amount       Shares     Amount      Shares      Amount
-------------------------------------------------------------------------------------------------------------------------------

<S>                                                         <C>       <C>            <C>      <C>          <C>        <C>
Balance, December 31, 1994                                      --    $     --       500,000  $  1,000          --    $     --

Issuance of preferred stock
     Class A, Series C                                          --          --           --         --     125,000       1,250
Exercise of common stock options                                --          --           --         --          --          --
Exercise of common stock warrants                               --          --           --         --          --          --
Expenses incurred related to issuance of
     preferred stock and common stock                           --          --           --         --          --          --
Preferred stock dividends                                       --          --           --         --          --          --
Net loss, year ended December 31, 1995                          --          --           --         --          --          --
---------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1995                                      --          --      500,000      1,000     125,000       1,250

Issuance of stock warrants - convertible debt                   --          --           --         --          --          --
Stock warrants/options issued for
     consulting services                                        --          --           --         --          --          --
Exercise of common stock
     options/warrants - stock subscription                      --          --           --         --          --          --
Conversion of debt into common stock                            --          --           --         --          --          --
Exercise of common stock options                                --          --           --         --          --          --
Exercise of common stock warrants                               --          --           --         --          --          --
Expenses incurred related to issuance
     of convertible debt                                        --          --           --         --          --          --
Expenses incurred related to
     issuance of common stock                                   --          --           --         --          --          --
Preferred stock dividends                                       --          --           --         --          --          --
Net loss, year ended December 31, 1996                          --          --           --         --          --          --
---------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1996                                      --          --      500,000      1,000     125,000       1,250

Stock warrants/options issued for consulting services           --          --           --         --          --          --
Conversion of debt into common stock                            --          --           --         --          --          --
Conversion of debt into preferred stock                         --          --           --         --          --          --
Conversion of preferred stock into common stock                 --          --           --         --    (125,000)     (1,250)
Exercise of common stock options                                --          --           --         --          --          --
Exercise of common stock warrants                               --          --           --         --          --          --
Expenses incurred related to conversion
     of convertible debt                                        --          --           --         --          --          --
Expenses incurred related to issuance of
     common stock                                               --          --           --         --          --          --
Preferred stock dividends                                       --          --           --         --          --          --
Repayment of notes receivable                                   --          --           --         --          --          --
Issuance of stock warrants - convertible debt                   --          --           --         --          --          --
Net loss, year ended December 31, 1997                          --          --           --         --          --          --
---------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1997                                      --    $     --       500,000  $  1,000          --    $     --
=================================================================================================================================
</TABLE>

     See accompanying summary of significant accounting policies and notes to
     consolidated financial statements.

                                                                             F-7
<PAGE>


                                            Scan-Graphics, Inc. and Subsidiaries

                                 Consolidated Statements of Stockholders' Equity
                                               (In Thousands, Except Share Data)



<TABLE>
<CAPTION>



                                                         Class A Preferred                                                  Notes
                                                           Stock Series D       Common Stock      Additional             Receivable,
                                                       -------------------  --------------------   Paid-In                Related
                                                         Shares   Amount      Shares     Amount    Capital      Deficit     Party
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>        <C>         <C>      <C>         <C>          <C>

Balance, December 31, 1994                                 --    $   --     9,718,812   $   10    $  8,303    $  (7,437)   $    --

Issuance of preferred stock
     Class A, Series C                                     --        --            --       --          --           --         --
Exercise of common stock options                           --        --       185,000       --         296           --         --
Exercise of common stock warrants                          --        --       285,000       --         157           --         --
Expenses incurred related to issuance of
     preferred stock and common stock                      --        --            --       --         (79)          --         --
Preferred stock dividends                                  --        --            --       --          --         (158)        --
Net loss, year ended December 31, 1995                     --        --            --       --          --       (1,237)        --
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1995                                 --        --    10,188,812       10       8,677       (8,832)        --

Issuance of stock warrants - convertible debt              --        --            --       --         270           --         --
Stock warrants/options issued for
     consulting services                                   --        --            --       --         283           --         --
Exercise of common stock
     options/warrants - stock subscription                 --        --     1,099,300        1       1,680           --     (1,681)
Conversion of debt into common stock                       --        --     2,259,056        2       3,105           --         --
Exercise of common stock options                           --        --       264,222        1         330           --         --
Exercise of common stock warrants                          --        --       969,376        1       1,309           --         --
Expenses incurred related to issuance
     of convertible debt                                   --        --            --       --        (300)          --         --
Expenses incurred related to
     issuance of common stock                              --        --            --       --         (59)          --         --
Preferred stock dividends                                  --        --            --       --          --         (220)        --
Net loss, year ended December 31, 1996                     --        --            --       --          --       (4,271)        --
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1996                                 --        --    14,780,766       15      15,295      (13,323)    (1,681)

Stock warrants/options issued for consulting services      --        --            --       --         124           --         --
Conversion of debt into common stock                       --        --       683,020        1       1,954           --         --
Conversion of debt into preferred stock                 2,990     2,990            --       --          --           --         --
Conversion of preferred stock into common stock            --        --       949,352        1       1,451           --         --
Exercise of common stock options                           --        --       182,917       --         295           --         --
Exercise of common stock warrants                          --        --     1,474,264        1       2,864           --         --
Expenses incurred related to conversion
     of convertible debt                                   --        --            --       --         (45)          --         --
Expenses incurred related to issuance of
     common stock                                          --        --            --       --        (183)          --         --
Preferred stock dividends                                  --        --            --       --          --         (182)        --
Repayment of notes receivable                              --        --            --       --          --           --        354
Issuance of stock warrants - convertible debt              --        --            --       --         400           --         --
Net loss, year ended December 31, 1997                     --        --            --       --          --       (7,817)        --
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1997                              2,990    $2,990    18,070,319   $   18    $ 22,155    $ (21,322)   $(1,327)
====================================================================================================================================
</TABLE>

     See accompanying summary of significant accounting policies and notes to
     consolidated financial statements.

                                                                             F-8
<PAGE>


                                            Scan-Graphics, Inc. and Subsidiaries

                                           Consolidated Statements of Cash Flows
                                                                  (In Thousands)


<TABLE>
<CAPTION>


Year ended December 31,                                                            1997         1996         1995
--------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>          <C>

Cash flows from operating activities
     Net loss                                                                 $  (7,817)   $  (4,271)   $  (1,237)
     Adjustments to reconcile net loss to net cash
         (used in) operating activities
              Depreciation and amortization                                         384          344          679
              Write-off of purchased software                                        --          556           --
              Consulting expense                                                    124          283           --
              Interest expense and write-off of deferred debt costs                 454          270           --
              Provision for losses on accounts receivable                           (98)         143           12
              (Gain) loss on sale and disposition of assets                          --           23            1
              Decrease in deferred income taxes                                      --           34           --
              Decrease (increase) in
                  Accounts receivable                                               246            3           74
                  Inventories                                                      (644)         280         (391)
                  Prepaid expenses and other current assets                        (176)         (55)          10
                  Other noncurrent assets                                           (17)          30           27
              Increase (decrease) in
                  Accounts payable and accrued expenses                             396         (335)         111
                  Accrued bonuses                                                    --           --         (400)
                  Deferred revenue                                                 (185)          74         (120)
--------------------------------------------------------------------------------------------------------------------

Net cash (used in) operating activities                                          (7,333)      (2,621)      (1,234)
--------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities
     Purchase of property and equipment                                            (591)        (553)        (129)
     Capitalized trademark and patent costs                                          --           (4)         (10)
     Proceeds from sale of property and equipment                                    --          228           --
--------------------------------------------------------------------------------------------------------------------

Net cash (used in) investing activities                                            (591)        (329)        (139)
--------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                            F-9

<PAGE>

                                            Scan-Graphics, Inc. and Subsidiaries

                                           Consolidated Statements of Cash Flows
                                                                  (In Thousands)


<TABLE>
<CAPTION>


Year ended December 31,                                                            1997         1996         1995
--------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>          <C>

Cash flow from financing activities
     Proceeds from issuance of convertible debt and warrants                  $   5,200    $   3,100    $      --
     Payment of preferred stock dividends                                          (289)         (10)          --
     Repayments of notes receivable, related parties                                324           --           --
     Payment against loans payable, officer                                          --          (59)        (108)
     Proceeds from notes payable, officers                                           --           25          387
     Payment of notes payable, officers                                              --         (284)        (207)
     Payment of long-term debt                                                      (66)         (82)         (70)
     Payment of capital lease obligation                                            (46)        (130)         (81)
     Payment of expenses, stock issuance                                           (183)         (59)         (79)
     Payment of expenses, convertible debt                                          (45)        (300)          --
     Proceeds from issuance of preferred stock                                       --           --        1,050
     Proceeds from exercise of common stock warrants/options                      3,162        1,641          444
     Proceeds from issuance of long-term debt                                        96           --           --
--------------------------------------------------------------------------------------------------------------------

Net cash provided by financing activities                                         8,153        3,842        1,336
--------------------------------------------------------------------------------------------------------------------

Increase (decrease) in cash and cash equivalents                                    229          892          (37)

Cash and cash equivalents, beginning of year                                      1,081          189          226
--------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, end of year                                        $   1,310    $   1,081    $     189
====================================================================================================================
</TABLE>

     See accompanying summary of significant accounting policies and notes to
     consolidated financial statements.

                                                                            F-10
<PAGE>


                                            Scan-Graphics, Inc. and Subsidiaries

                                      Summary of Significant Accounting Policies
                              (In Thousands, Except Share and Per Share Amounts)


<TABLE>
<CAPTION>

<S>                          <C>
Description of               Scan-Graphics,  Inc. designs,  manufactures and markets a comprehensive  line of
Business                     automated imaging products and related software.

Principles of                The Company's consolidated financial statements include the accounts of its
Consolidation                wholly owned  subsidiaries, Tangent Engineering, Inc., Sedona, Inc. and
                             Technology  Resource  Center, Inc. All significant intercompany accounts and
                             transactions have been eliminated.

Inventories                  Inventories are valued at the lower of cost (first-in, first-out method) or market.

Property and                 Property and equipment are stated at cost. Depreciation and amortization are
Equipment,                   computed on the  straight-line method over the estimated useful lives of the
Depreciation and             respective assets.
Amortization

Revenue                      Revenue from product sales is  recognized at the time of shipment. Revenue from
Recognition                  noncontract  maintenance  services is recorded as  performed.  Deferred revenue
                             from maintenance contracts is recognized over the service period of the contract.
                             Revenue from royalty and licensing agreements is recorded when earned.

Research and                 Costs incurred in the research and development of the Company's products are
Development Costs            expensed as incurred. Software production costs (once product is considered
and Software                 feasible and a working model or detail design is completed) are capitalized and
Production Costs             amortized by using the greater of the ratio of actual current revenue
                             recognized over the total estimated revenue, or the straight-line method over
                             the estimated useful lives of the products, not to exceed five years.

Software                     Software  purchased  is stated at cost. Amortization is computed by using the
Purchased                    greater  of the  ratio of actual current revenue recognized over the total
                             estimated revenue, or the straight-line method over the estimated useful lives
                             of the products, not to exceed five years.
</TABLE>

                                                                            F-11

<PAGE>

                                            Scan-Graphics, Inc. and Subsidiaries

                                      Summary of Significant Accounting Policies
                              (In Thousands, Except Share and Per Share Amounts)


Net Loss Per        The Company adopted the provisions of Statement of Financial
Common Share        Accounting Standards No. 128 ("SFAS 128") "Earnings Per
                    Share" in 1997. SFAS 128 provides for the calculation of
                    "basic" and "diluted" net loss per share for all periods
                    presented. Basic net loss per share includes no dilution and
                    is calculated by dividing net loss by the weighted average
                    number of common shares outstanding for the period. Diluted
                    net loss per share has not been presented as it would have
                    an antidilutive effect on loss per share. The adoption of
                    SFAS #128 had no impact on the prior years.

Long-Lived          The Company evaluates the recoverability of all intangibles
Assets              and other long-lived assets annually, or more frequently
                    whenever events and circumstances warrant revised estimates,
                    and considers whether the assets should be completely or
                    partially written off or if the amortization period should
                    be accelerated. In accordance with Statement of Financial
                    Accounting Standards No. 121, "Accounting for the Impairment
                    of Long-Lived Assets and for Long-Lived Assets to be
                    Disposed Of", the Company assesses the recoverability of the
                    assets based on undiscounted estimated future operating cash
                    flows.

Use of Estimates    The preparation of financial statements in conformity with
                    generally accepted accounting principles requires management
                    to make estimates and assumptions that affect the reported
                    amounts of assets and liabilities and disclosure of
                    contingent assets and liabilities at the date of the
                    financial statements and the reported amounts of revenue and
                    expenses during the reporting period. Actual results could
                    differ from those estimates.

Concentration       Financial instruments which potentially subject the Company
of Credit Risk      to credit risk consist of cash equivalents and accounts
                    receivable.


                                                                            F-12
<PAGE>

                                            Scan-Graphics, Inc. and Subsidiaries

                                      Summary of Significant Accounting Policies
                              (In Thousands, Except Share and Per Share Amounts)



                    The Company's policy is to limit the amount of credit
                    exposure to any one financial institution and place
                    investments with financial institutions evaluated as being
                    creditworthy. Concentration of credit risk, with respect to
                    accounts receivable, is reduced due to the Company's credit
                    evaluation process. The Company does not require collateral
                    from its customers with the exception of certain foreign
                    customers which prepayments or letters of credit are
                    required. Although the Company has a diversified client
                    base, its customers consist primarily of distributors,
                    governmental agencies and large corporate entities.

Fair Value of       The carrying amounts reported in the balance sheets for
Financial           cash, accounts and notes receivable, accounts payable and
Instruments         short-term debt approximate fair value because of the
                    immediate or short-term maturity of these financial
                    instruments. The carrying amount reported for long-term debt
                    approximates fair value because the underlying instruments
                    are at variable rates which are repriced frequently. The
                    remaining long-term debt is based on quoted market prices or
                    where quoted market prices are not available on the present
                    value of cash flows discounted at estimated borrowing rates
                    for similar debt instruments.

Income Taxes        The Company accounts for income taxes under the liability
                    method. Deferred tax liabilities are recognized for taxable
                    temporary differences and deferred tax assets are recognized
                    for deductible temporary differences, tax losses and credit
                    carryforwards. A valuation allowance is established to
                    reduce deferred tax assets if some, or all, of such deferred
                    tax assets are not likely to be realized.

Cash Equivalents    For purposes of the statements of cash flows, the Company
                    considers all highly liquid debt instruments purchased with
                    a maturity of three months or less to be cash equivalents.


                                                                            F-13
<PAGE>

                                            Scan-Graphics, Inc. and Subsidiaries

                                      Summary of Significant Accounting Policies
                              (In Thousands, Except Share and Per Share Amounts)



Recent Accounting   Statement of Financial Accounting Standards No. 129,
Pronouncements      "Disclosure of Information about Capital Structure" ("SFAS
                    129"), effective for periods ending after December 15, 1997,
                    establishes standards for disclosing information about an
                    entity's capital structure. SFAS 129 requires disclosure of
                    the pertinent rights and privileges of various securities
                    outstanding (stock, options, warrants, preferred stock and
                    debt) including dividend and liquidation preferences, call
                    prices and dates, conversion or exercise prices and
                    redemption requirements. The Company has adopted the
                    standard for all periods presented.

                    Statement of Financial Accounting Standards No. 130,
                    "Reporting Comprehensive Income" ("SFAS 130"), establishes
                    standards for reporting and display of comprehensive income,
                    its components and accumulated balances. Comprehensive
                    income is defined to include all changes in equity except
                    those resulting from investments by owners and distributions
                    to owners. Among other disclosures, SFAS 130 requires that
                    all items required to be recognized under current accounting
                    standards as components of comprehensive income be reported
                    in a financial statement that is displayed with the same
                    prominence as other financial statements.

                    Statement of Financial Accounting Standards No. 131,
                    "Disclosure about Segments of a Business Enterprise" ("SFAS
                    131"), establishes standards for public enterprises
                    reporting of information about operating segments in annual
                    financial statements and requires reporting of selected
                    information about operating segments in interim financial
                    statements issued to the public. It also establishes
                    standards for disclosures regarding products and services,
                    geographic areas and major customers. SFAS 131 defines
                    operating segments as components of an enterprise about
                    which separate financial information is available and that
                    is evaluated regularly by the chief operating decision maker
                    in deciding how to allocate resources and in assessing
                    performance.


                                                                            F-14
<PAGE>

                                            Scan-Graphics, Inc. and Subsidiaries

                                      Summary of Significant Accounting Policies
                              (In Thousands, Except Share and Per Share Amounts)



                    Statement of Financial Accounting Standards No.132,
                    "Employers' Disclosures about Pensions and Other
                    Postretirement Benefits" ("SFAS 132"), revises employers'
                    disclosures about pension and other postretirement benefit
                    plans. It does not change the measurement or recognition of
                    those plans. It standardizes the disclosure requirements for
                    pensions and other postretirement benefits to the extent
                    practicable, requires additional information on changes in
                    the benefit obligations and fair values of plan assets that
                    will facilitate financial analysis and eliminate certain
                    existing disclosure requirements.

                    SFAS 130, SFAS 131 and SFAS 132 are effective for financial
                    statements for periods beginning after December 15, 1997 and
                    require comparative information for earlier years to be
                    restated. Adoption of all three statements is not expected
                    to impact financial statements or disclosures.


                                                                            F-15
<PAGE>


                                            Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



1. Business         On December 29, 1995, 1,000,000 common shares of
   Combinations     Scan-Graphics, Inc. were issued in exchange for all the
                    outstanding common shares of Tangent Engineering, Inc.
                    ("Tangent"), primarily a manufacturer of document imaging
                    color scanners. The acquisition was accounted for as a
                    pooling of interests. Accordingly, Tangent's operating
                    results are included in the financial statements for all
                    periods presented.

                    On July 28, 1995, the Company acquired all of the
                    outstanding common stock of Sedona GeoServices, Inc. of
                    Pennsylvania ("Sedona") and the rights to their software in
                    exchange for warrants to purchase up to 1,210,000 shares of
                    the Company's common stock at an exercise price of $1.00 per
                    share. Sedona has the exclusive rights to certain
                    "Geographic Information System" software, which, although
                    requiring additional development, is expected to reach
                    technological feasibility in 1998. Warrants to purchase
                    160,000 shares vested immediately, and the balance will vest
                    as cumulative revenues from future sales of the software
                    reach levels specified in the acquisition agreement. As of
                    December 31, 1997, those levels had not been attained.
                    Warrants which do not vest within five years from the date
                    of acquisition will be canceled.

2. Inventories      Inventories are summarized as follows:

                    December 31,                           1997        1996
                    ----------------------------------------------------------

                    Raw materials                       $   904    $    523
                    Work-in-process                         414         263
                    Finished goods                          372         388
                    ----------------------------------------------------------

                                                        $ 1,690    $  1,174
                    ==========================================================


                                                                            F-16
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



3. Property and     Major classes of property and equipment consist of the
   Equipment        following:

                        December 31,                         1997        1996
                        --------------------------------------------------------

                        Equipment under capital lease     $   387    $    415
                        Machinery and equipment             3,139       2,492
                        Furniture and fixtures                158         110
                        Automobiles and trucks                 12          12
                        Leasehold improvements                116          94
                        Software                              282         253
                        --------------------------------------------------------

                                                            4,094       3,376
                        Less accumulated depreciation
                            and amortization                2,868       2,512
                        --------------------------------------------------------

                                                          $ 1,226    $    864
                        ========================================================

                    Depreciation and amortization expense was $357 in 1997, $344
                    in 1996 and $457 in 1995.

4. Other Assets     Software purchased is summarized as follows:

                        December 31,                         1997        1996
                        --------------------------------------------------------

                        Capitalized software purchased   $    695    $    695
                        Less accumulated amortization         695         695
                        --------------------------------------------------------

                                                         $     --    $     --
                        ========================================================


                    In 1996, the carrying amount of the Company's software
                    purchased was determined to be impaired based on an analysis
                    of the products undiscounted estimated future operating cash
                    flows. Therefore, the remaining amount of $556 was written
                    off and recorded in cost of goods sold.


                                                                            F-17
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



5. Long-Term Debt

        Long-term debt consists of the following:

        December 31,                                          1997         1996
        ------------------------------------------------------------------------

        7% convertible debentures payable, originally
        maturing between May and June 1999. Balance
        was converted into common stock subsequent to
        December 31, 1997 (see Note 6).
                                                        $     311    $      --

        Note payable, payable in monthly installments
        of $6, including interest at 8.75% through
        July 1999. The note payable is collateralized
        by equipment.                                         107          169

        Other                                                  91           --
        ------------------------------------------------------------------------

                                                              509          169
        Less current maturities                               411           62
        ------------------------------------------------------------------------

        Long-term debt                                  $      98    $     107
        ========================================================================

   As of December 31, 1997, long-term debt matures as follows:

            1998                                                      $    411
            1999                                                            62
            2000                                                            36
        ------------------------------------------------------------------------

                                                                      $    509
        ========================================================================


                                                                            F-18
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



6. Stockholders'    Class B Preferred Stock
   Equity
                    Each share of the Company's Class B preferred stock is
                    convertible at the holder's option into ten shares of common
                    stock. The holders of Class B preferred stock are entitled
                    to share in any dividends declared by the Board of Directors
                    on a pro rata basis, without preference, with the holders of
                    common stock. Dividends are not cumulative. In liquidation,
                    the only preference is for the par value of the preferred
                    shares.

                    Class A Preferred Stock

                    Series A, C and D

                    Class A preferred stock is issuable in various series and is
                    convertible in accordance to the issued series. The Board of
                    Directors has the authority to fix by resolution all other
                    rights.

                    The Class A Series A preferred shares pay quarterly
                    dividends at the rate of twelve percent (12%) per annum,
                    have cumulative rights and have a liquidation preference at
                    the par value of the preferred shares. Each share is
                    convertible at the election of the holder into one share of
                    common stock at any time. Each holder has the same right to
                    vote each share on all corporate matters as the holder of
                    one share of common stock.

                    The Class A Series C preferred shares pay quarterly
                    dividends at the rate of eight percent (8%) per annum, have
                    cumulative rights and have a liquidation preference for the
                    par value of the preferred shares. Each share is convertible
                    at the election of the holder after twenty-four months from
                    date of issue into shares of common stock at a 50% discount
                    from the "Market Price" (closing bid price for the day)
                    average for the twenty trading days preceding notice of
                    conversion, but not less than $.50 per share or more than
                    $2.50 per share of common stock. The Company has the right
                    to force conversion to common stock upon thirty days written
                    notice after thirty-six months from the date of issue. Each
                    share of Class A Series C represents twenty (20) shares of

                                                                            F-19
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)


                    common stock in voting power in matters brought before the
                    shareholders. During the second and third quarters of 1997,
                    all outstanding shares of Class A Series C preferred stock
                    and their related dividends payable were converted to common
                    stock.

                    The Class A Series D preferred shares pay quarterly
                    dividends at the rate of seven percent (7%) per annum, of
                    the par value of the preferred shares. Each share and any
                    accrued interest is convertible at the election of the
                    holder of the issue into shares of common stock at a price
                    per share equal to the lesser of $7.00 per share or the
                    average closing bid for the five days preceding conversion,
                    or if the conversion price is less than $4.00 per share, at
                    a 10% discount to the average closing bid price for the five
                    days prior to conversion. If the conversion price is greater
                    than $4.00, but less than $7.00, the discount is increased
                    by 1% for each $.20 increase in the conversion price.
                    Conversions are limited to 10% per month on a cumulative
                    basis. The Company has the right to force conversion if the
                    conversion price is equal to or less than $3.00 per share.
                    The holders shall not have any rights to vote on elections
                    of directors or on other corporate matters.

                    Common Stock

                    On December 29, 1995, the Company issued 1,000,000 shares
                    for all the shares outstanding of Tangent Engineering, Inc.
                    in a pooling of interests business combination (see Note 1).

                    In connection with a $3,100 private placement purchase
                    agreement in March 1996, the Company sold 62 units of
                    convertible debentures. Each unit consisted of a $50, 8%
                    convertible note due March 28, 1997, 19,355 "A" warrants and
                    19,355 "B" warrants. The notes and any accrued interest were
                    convertible within one year at a price per share equal to
                    the lesser of $3.00 or 65% of the average closing bid price
                    for the five days preceding conversion which was determined,
                    based on an appraisal, to reflect estimated fair value of
                    the common stock at the date of the transaction.

                                                                            F-20
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)


                    The warrants are exercisable immediately and expire in March
                    1999. The "A" warrants are exercisable at $3.00 per share
                    or, if less, the lowest price per share at which any
                    conversion shall have occurred under any of the convertible
                    notes. The "B" warrants are exercisable at $4.00 per share.
                    The warrants had an estimated, based on an appraisal, fair
                    value of $270. This amount was reflected as a debt discount.
                    Upon the conversion of the notes to stock (see below), this
                    amount was charged to interest expense within the 1996
                    statement of operations.During 1997 and 1996, 618,454 and
                    542,841, respectively, of the total 1,200,010 "A" warrants
                    were exercised. During 1997 and 1996, 437,558 and -0-,
                    respectively, of the total 1,200,010 "B" warrants were
                    exercised.

                    During the second and third quarters of 1996, all of the
                    debentures, plus $7 in accrued interest, were converted into
                    2,259,056 shares of common stock.

                    During December 1996, 260,000 stock options and 839,300
                    stock warrants were exercised for $366 and $1,315,
                    respectively, by certain officers and directors of the
                    Company in exchange for promissory notes and promissory
                    demand notes. The notes bear an interest rate of 8.25%. The
                    promissory notes, together with accrued interest, have
                    maturity dates ranging from July 1998 through January 2003.
                    The loans are secured by 737,180 shares of the Company's
                    common stock. The Company intends to collect all amounts
                    under these notes. Promissory demand notes totaling $354
                    were paid during the first quarter 1997.


                                                                            F-21
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



                    Convertible Debentures

                    In connection with a $5,200 private placement purchase
                    agreement completed during June 1997, the Company sold 52
                    units of convertible debentures. Each unit consisted of
                    $100, 7% convertible note due between May and June 1999 and
                    a warrant to purchase 17,308 shares of common stock. The
                    notes and any accrued interest were convertible within 90
                    days at a price per share equal to the lesser of $7.00 per
                    share or the average closing bid price for the five days
                    preceding conversion, or if the conversion price was less
                    than $4.00 per share, at a 10% discount to the average
                    closing bid price for the five days prior to conversion. If
                    the conversion was greater than $4.00, but less than $7.00,
                    the discount was increased by 1% for every $.20 increase in
                    the conversion price. Debenture conversions are limited to
                    $520 in any month.

                    The warrants were exercisable immediately at $4.00 per share
                    and expire June 1, 2001. The warrants had an estimated fair
                    value, based on an appraisal of $400. This amount is
                    reflected as a debt discount. Upon the conversion of the
                    notes to stock (see below), $100 of this amount was charged
                    to interest expense within the 1997 statement of operations
                    while the remaining $300 was reflected as extraordinary loss
                    on early extinguishment of debt (see Note 13). From August
                    through December 1997, note holders converted $1,900 or 19
                    units of convertible debentures, plus accrued interest
                    thereon, into 683,150 shares of common stock. During
                    December 1997, note holders converted $2,990 or 29.9 units
                    of convertible debentures, plus accrued interest thereon,
                    into $2,990 shares of Class A Series D preferred stock.
                    Additionally, during January 1998, note holders converted
                    the remaining $310.5 or 3.1 units of convertible debentures,
                    plus accrued interest thereon, into 139,114 shares of common
                    stock.


                                                                            F-22
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



                    Options and Warrants

                    Long-Term Incentive Plan

                    On June 12, 1992, at the Company's Annual Meeting, the
                    stockholders of the Company approved a Long-Term Incentive
                    Plan for the issuance of options for the purchase of up to
                    1,000,000 restricted common stock shares in the aggregate,
                    or such other number of shares as are subsequently approved
                    by the Company's stockholders. The shares related to the
                    unexercised or undistributed portion of any terminated,
                    expired or forfeited award will also be made available for
                    distribution in connection with future grants under the
                    Plan. During 1997, the Plan was amended to increase the
                    number of options available for future grants to 3,000,000.

                    The Long-Term Incentive Plan provides for the granting of
                    both incentive stock options intended to qualify under
                    Section 422 of the Internal Revenue Code of 1986, and
                    nonqualified stock options which do not so qualify. Unless
                    the Plan is terminated earlier by the Board of Directors,
                    the Plan will terminate in March 2002.


                                                                            F-23
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



Options outstanding under the Long-Term Incentive Plan have been granted to
officers, directors and employees to purchase common stock at prices ranging
from $.47 to $4.00 per share and expiring between March 8, 1998 and August 25,
2007. All options were granted at market prices. Transactions under this Plan
were as follows:

                                                     Exercise         Weighted
                                                  Price Range          Average
                                       Shares       Per Share            Price
  ------------------------------------------------------------------------------

  Outstanding at
      December 31, 1994               473,888   $         .50    $        1.24
                                                           to
                                                         2.25

  Canceled or expired                 (130,000)           .50             1.30
                                                           to
                                                         2.00

  Granted                             490,000             .47             1.18
                                                           to
                                                         2.50

  Exercised                           (125,000)           .47             1.11
                                                           to
                                                         1.81
  ------------------------------------------------------------------------------

  Outstanding at
      December 31, 1995               708,888             .47             1.21
                                                           to
                                                         2.50

  Granted                             782,643            2.00             2.89
                                                           to
                                                         3.50

  Exercised                           (127,222)           .47             1.04
                                                           to
                                                         2.50
  ------------------------------------------------------------------------------


                                                                            F-24
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



                                                      Exercise         Weighted
                                                   Price Range          Average
                                        Shares       Per Share            Price
   -----------------------------------------------------------------------------

   Outstanding at
       December 31, 1996             1,364,309   $         .47    $        2.20
                                                            to
                                                          3.50

   Canceled or expired                (112,750)            .50             2.30
                                                            to
                                                          3.03

   Granted                             573,717            2.00             3.09
                                                            to
                                                          4.00

   Exercised                          (182,917)            .78             1.62
                                                            to
                                                          2.50
   -----------------------------------------------------------------------------

   Outstanding at
       December 31, 1997             1,642,359             .47             2.57
                                                            to
                                                          4.00
   =============================================================================

Nonqualified Stock Option Plan

As indicated in the previous pages, a Long-Term Incentive Plan was approved on
June 12, 1992. Prior to the inception of the Plan, there were options to
purchase 450,000 common shares outstanding. Options under the Nonqualified Stock
Option Plan have been granted to officers of the Company to purchase common
stock at prices ranging from $1.34 to $1.81. Transactions under the Plan were as
follows:

                                                        Exercise       Weighted
                                                         Price          Average
                                                         Range
                                          Shares       Per Share          Price
   -----------------------------------------------------------------------------

   Outstanding at
       December 31, 1995                 390,000    $       1.34   $       1.46
                                                              to
                                                            1.81

   Exercised                            (390,000)           1.34           1.46
                                                              to
                                                            1.81
   -----------------------------------------------------------------------------

   Outstanding at
       December 31, 1996 and 1997             --              --             --
   =============================================================================


                                                                            F-25
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



                                                      Exercise       Weighted
                                Option             Price Range        Average
                                Shares               Per Share          Price
 -------------------------------------------------------------------------------

 Exercisable at year-end - qualified stock options

 1995                          708,888           $.47 to $2.50      $    1.21
 1996                          984,309           $.47 to $3.00      $    2.03
 1997                          912,360           $.47 to $4.00      $    2.30

 Available for future grant

 1995                          166,112
 1996                         (616,531)
 1997                          915,502
 ===============================================================================

As of December 31, 1996, the Company over issued stock options under their 1992
plan. During 1997, the Company amended its Long-Term Incentive Plan and
increased the number of options available for future grants by 2,000,000 to a
total of 3,000,000.

The following table summarizes information about stock options outstanding at
December 31, 1997:

                                              Ranges                 Total
                                    ----------------------------   ----------

                                 $    .47   $   2.00  $     3.00   $      .47
                                       to         to          to           to
 Range of exercise prices            1.00       2.50        4.00         4.00

 Outstanding Options

 Number outstanding at            314,999    160,000   1,167,360    1,642,359
     December 31, 1997

 Weighted average remaining           1.8        3.1         6.3          5.8
     contractual life (years)

 Weighted average                $    .87   $   2.22  $     3.08   $     2.57
     exercise price


                                                                            F-26
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



                                              Ranges                 Total
                                    ----------------------------   ----------

 Exercisable Options

 Number outstanding at              295,000   85,000    532,360      912,360
     December 31, 1997

 Weighted average                  $    .86  $  2.00    $  3.14     $   2.30
     exercise price

Warrants

Warrants outstanding have been granted to officers, directors, stockholders and
others to purchase common stock at prices ranging from $.38 to $5.29 per share
and expiring between January 18, 1998 and August 25, 2007. All warrants were
granted with exercise prices equal to the fair market value of the underlying
stock. Transactions under the plan were as follows:

                                                    Exercise         Weighted
                                                 Price Range          Average
                                      Shares       Per Share            Price
 -------------------------------------------------------------------------------

 Warrants outstanding at
     December 31, 1994             1,650,892   $         .38    $        1.40
                                                          to
                                                        2.10

 Warrants granted                  2,546,500             .44             1.68
                                                          to
                                                        3.00

 Warrants exercised                 (285,000)            .44             1.01
                                                          to
                                                        2.10
 -------------------------------------------------------------------------------


                                                                            F-27
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



                                                   Exercise         Weighted
                                                Price Range          Average
                                     Shares       Per Share            Price
-------------------------------------------------------------------------------

Warrants outstanding at
    December 31, 1995             3,912,392   $         .38    $        1.61
                                                         to
                                                       3.00

Canceled or expired                (510,000)           1.00             2.57
                                                         to
                                                       3.00

Granted                           3,396,010            1.31             2.68
                                                         to
                                                       4.00


Exercised                        (1,808,676)            .50             1.45
                                                         to
                                                       2.10
-------------------------------------------------------------------------------

Outstanding at
    December 31, 1996             4,989,726             .38             2.30
                                                         to
                                                       4.00

Canceled or expired                (793,598)            .50             3.13
                                                         to
                                                       4.00

Granted                           3,626,473            1.00             3.94
                                                         to
                                                       5.29

Exercised                        (1,474,264)            .50             1.94
                                                         to
                                                       4.00
-------------------------------------------------------------------------------

Outstanding at
    December 31, 1997             6,348,337             .38             3.22
                                                         to
                                                       5.29
===============================================================================


                                                                            F-28
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



                                                      Exercise        Weighted
                               Warrant             Price Range        Average
                                Shares               Per Share          Price
 -------------------------------------------------------------------------------

 Exercisable at year-end

 1995                        1,961,088           $.38 to $3.00      $    1.73
 1996                        3,236,294           $.38 to $4.00      $    2.58
 1997                        4,698,731           $.38 to $4.00      $    3.56

During 1995, the Company issued 2,546,500 stock warrants. 1,210,000 stock
warrants were issued in connection with the Sedona acquisition (see Note 1). The
remaining warrants of 1,336,500 were issued in lieu of compensation for various
employment contracts. The warrants were issued at fair market value and vest
over time.

During 1996, the Company issued 3,396,010 stock warrants. 2,400,020 warrants
were issued in connection with the convertible debt (see Note 6 - common stock).
Of the remaining warrants of 995,990, 374,999 were issued to nonemployees for
certain consulting contracts and 620,991 were issued to employees in lieu of
compensation. The 1996 statement of operations reflects a charge of $283 for
nonemployee stock warrants and options.

During 1997, the Company issued 3,626,473 stock warrants. 3,000,016 warrants
were issued in connection with the 1997 convertible debt financing (see Note 6 -
common stock and convertible debentures). Of the 626,457 warrants, 311,457 were
issued to nonemployees in lieu of compensation, while the remaining 315,000 were
issued to employees.Included among the 311,457 warrants issued to nonemployees
are 300,000 warrantswhich were not valued as their vesting is contingent upon
completion of certain services. The 1997 statement of operations reflects a
charge of $124 for nonemployee stock warrants and options.

                                                                            F-29

<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



The following table summarizes information about stock warrants outstanding at
December 31, 1997:

                                            Ranges                   Total
                                 -----------------------------    ------------

                               $     .38       1.31  $     2.63   $         .38
                                      to         to          to              to
 Range of exercise prices           1.00       2.38        5.29            5.29

 Outstanding Warrants


 Number outstanding at           1,140,086   254,021   4,954,230       6,348,337
     December 31, 1997

 Weighted average remaining          2.3        2.3         3.4             3.3
     contractual life (years)

 Weighted average              $     .93     $ 1.66  $     3.80   $        3.22
     exercise price

 Exercisable Warrants

 Number outstanding at           243,500    173,021   4,282,210       4,698,731
     December 31, 1997

 Weighted average              $     .67     $ 1.50  $     3.81   $        3.56
     exercise price

The Company is obligated to purchase 294,000 options and 516,362 warrants from
two (2) officers and seven (7) employees of the Company in the event of change
of control of the Company or termination of employment for breach of contract or
convenience at a cash purchase price equal to the amount of the aggregate fair
market value of the shares, less the aggregate option/warrant price of such
shares. As of December 31, 1997, the market value exceeded the aggregate
option/warrant price by approximately $1.3 million.

During 1995, the FASB issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation", which has recognition
provisions that establish a fair value based method of accounting for
stock-based employee compensation plans and established fair value as the
measurement basis for transactions in which an entity acquires goods or services

                                                                            F-30
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



from nonemployees in exchange for equity instruments. SFAS 123 also has certain
disclosure provisions. Adoption of the recognition provisions of SFAS 123 with
regard to these transactions with nonemployees was required for all such
transactions entered into after December 15, 1995. The Company adopted these
provisions as required. The recognition provision with regard to the fair value
based method of accounting for stock-based employee compensation plans is
optional. Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25") uses what is referred to as an intrinsic value
based method of accounting. The Company has decided to continue to apply APB 25,
for its stock-based employee compensation arrangements. Accordingly, no
compensation cost has been recognized. The Company estimates the fair value of
each stock option at the grant date by using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 1997,
1996 and 1995, respectively: no dividends paid for all years; expected
volatility of 35%; risk-free interest rates range from 5.25% to 7.81%; and
expected lives range from .77 to 10.00 years.

Utilizing the above assumptions, the weighted average fair market value of
employee issued stock options and warrants for each of the three years ended
December 31, 1997 are as follows:

                                                1997         1996        1995
 -------------------------------------------------------------------------------

 Stock options                              $   1.48    $    1.67    $    .49
 Warrants                                       1.31          .86         .48
 ===============================================================================


                                                                            F-31
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



Had compensation cost for the Company's employee stock options and warrants been
determined based on the fair value at the grant date for such awards consistent
with the method of SFAS 123, the Company's net loss and basic loss applicable to
a common share would have been increased to the pro forma amounts indicated
below:

Year ended December 31,                       1997         1996          1995
-------------------------------------------------------------------------------

Net (loss)
    As reported                          $  (7,817)  $  (4,271)   $   (1,237)
    Pro forma                            $  (8,959)  $  (5,121)   $   (1,711)

Basic (loss) applicable to
    common share
         As reported                     $    (.49)  $    (.39)   $     (.14)
         Pro forma                       $    (.55)  $    (.46)   $     (.19)
===============================================================================

7. Revenues from    The Company had a customer during the year ended December
   Major Customers  31, 1997 which accounted for more than 10% of the Company's
                    total sales revenue. Additionally, the Company had a
                    customer for each of the years ended December 31, 1996 and
                    1995, which accounted for more than 10% of the Company's
                    total sales revenue. Total revenues for these customers
                    amounted to 22%, 14% and 15% in 1997, 1996 and 1995,
                    respectively.

                    A summary of domestic and export sales and gross profits for
                    the years ended December 31, 1997, 1996 and 1995 are as
                    follows:

                                                                        1997
-------------------------------------------------------------------------------

                                         Total     Domestic           Export
-------------------------------------------------------------------------------

Revenues                            $    4,827  $     2,700     $      2,127

Cost of sales                            4,545        3,129            1,416
-------------------------------------------------------------------------------

Gross profit                        $      282  $     (4,29)   $         711

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


                                                                            F-32
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



                                                                         1996
 -------------------------------------------------------------------------------

                                          Total     Domestic           Export
 -------------------------------------------------------------------------------

 Revenues                            $    5,060  $     3,760     $      1,300

 Cost of sales                            4,013        3,207              806
 -------------------------------------------------------------------------------

 Gross profit                        $    1,047  $       553     $        494
 ===============================================================================

                                                                         1995
 -------------------------------------------------------------------------------

                                          Total     Domestic           Export
 -------------------------------------------------------------------------------

 Revenues                            $    4,987  $     3,825     $      1,162

 Cost of sales                            3,247        2,777              470
 -------------------------------------------------------------------------------

 Gross profit                        $    1,740  $     1,048     $        692
 ===============================================================================

                    Exports were sold into Western and Eastern Europe, Asia, the
                    Middle East and South America regions.

8. Litigation       On August 15, 1996, the Company filed suit for patent
   Matters          infringement against two competitors. The defendants filed a
                    counterclaim against the Company, requesting that the
                    patents be found invalid. The Company plans to vigorously
                    litigate the matter. The case is presently in the discovery
                    stage, with the trial not scheduled. No provision has been
                    made in the accompanying financial statements related to
                    this uncertainty.

                    During 1995, an action was filed against the Company through
                    the International Arbitration Tribunal in Paris, France,
                    claiming amounts due and damages for the Company's alleged
                    failure to perform its obligations under a March 30, 1990
                    agreement. The Company filed an answer to the complaint on
                    February 26, 1996, asserting loss of profits from failure by
                    the plaintiff to forward sales orders for parts, maintenance

                                                                            F-33
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)


                    and software. On September 24, 1997, the arbitrator ruled
                    against the Company and ordered them to pay $229. The amount
                    was paid in October 1997 and $139 is reflected in the
                    statement of operations for the period ended December 31,
                    1997, as the Company has accrued $90 during the year ended
                    December 31, 1996.

                    During 1998, an Action was filed against the Company by a
                    former employee for $360. The basis of the claim is his
                    expired employment agreement and stock warrants issued to
                    him as an employee. The Company plans to vigorously defend
                    itself and may seek a counterclaim. No provision has been
                    made in the accompanying financial statements related to
                    this uncertainty.

9. Related Party    The Company had leased its principal office and one of its
   Transactions     manufacturing facilities from a corporation which is owned
                    by the former chief executive officer of the Company. This
                    operating lease, terminated on August 31, 1997. Rent expense
                    charged to operations was $64 for the year ended December
                    31, 1997 and $96 for each of the years ended December 31,
                    1996 and 1995.

                    The Company incurred consulting and commission fees, and
                    out-of-pocket expenses of $60, $259 and $73 for the years
                    ended December 31, 1997, 1996 and 1995, respectively, to a
                    company whose president is a director of the Company.
                    Commissions, plus out-of-pocket expenses, were incurred for
                    investment banking type services and other agreed-upon
                    duties provided to the Company.


                                                                            F-34
<PAGE>
                                           Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



                    The Company issued stock options and warrants to purchase
                    54,300 shares of the Company's common stock to directors of
                    the Company for services rendered during 1997. The options
                    and warrants were issued with exercise prices ranging
                    between $3.69 and $3.98 per share, expiring through December
                    31, 2006. None of these options or warrants were issued at
                    exercise prices below the Company's market value. As of
                    December 31, 1997, none of these options or warrants were
                    exercised.

                    The Company issued stock warrants to purchase 170,000 shares
                    of the Company's common stock to directors of the Company
                    for services rendered during 1996. The warrants were issued
                    with an exercise price of $3.00 per share, expiring through
                    April 30, 2001 with immediately vesting upon issuance. Of
                    the 170,000 warrants, 20,000 were issued at an exercise
                    price below the Company's market value. As of December 31,
                    1997, none of these warrants were exercised.

10. Profit Sharing  A subsidiary of the Company has a qualified profit
    Plan            sharing/401(k) plan (the Plan ) available to all eligible
                    employees. Contributions to the 401(k) portion of the Plan
                    are matched by the Company equal to 100% of voluntary
                    contributions by individual participants, limited to 3% of
                    the individual participant's annual pay. Annual profit
                    sharing contributions to the Plan are at the discretion of
                    the Board of Directors.

                    The total amount charged to operations under the plan was
                    $72, $35 and $83 for the years ended December 31, 1997, 1996
                    and 1995, respectively.


                                                                            F-35
<PAGE>
                                            Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



11. Commitments     The Company has employment agreements with certain key
    and             employees which expire at various dates through December
    Contingencies   1998. The agreements provide for minimum salary levels, plus
                    any additional compensation as directed by the Board of
                    Directors. The commitments for future salaries at December
                    31, 1997 is $778, for 1998 and $625 for 1999.

                    In addition, the Company will be obligated to pay one to two
                    years of annual salary to certain officers and employees of
                    the Company if the Company is acquired or merged and the
                    acquirer chooses to terminate their services. The aggregate
                    potential severance pay at December 31, 1997 was $1,013.

                    The Company is obligated under a royalty agreement to make
                    future minimum payments as of December 31, 1997 as follows:

Year ended December 31,
-------------------------------------------------------------------------------

    1998                                                           $     220
    1999                                                                 220
    2000                                                                 220
    2001                                                                 220
    2002                                                                 110
-------------------------------------------------------------------------------

                                                                   $     990
===============================================================================

                                                                            F-36

<PAGE>
                                            Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)



12. Income Taxes    At December 31, 1997, the Company has accumulated, for
                    federal and state income tax purposes, net operating loss
                    carryforwards and federal tax credit carryforwards. These
                    carryforwards are generally available for use by the Company
                    through the indicated expiration dates.


<TABLE>
<CAPTION>
                                                                 Approximate          Expiration
                    Description                                       Amount               Dates
                    ----------------------------------------------------------------------------
<S>                 <C>                                    <C>                        <C>
                    Net operating loss carryforwards        $         19,500           1999-2017
                    Investment tax credit carryforwards                   25           1998-2000
                    Research credit carryforwards                        230           2000-2010
</TABLE>


                    Approximately $8.1 million of deferred tax assets arising
                    primarily from net operating loss and tax credit carryovers
                    have been offset by a $8.1 million valuation allowance.


13. Extraordinary   In 1997, the Company recognized a $300 extraordinary loss as
    Item-Loss       a result of the early redemption of the 7% convertible
    Related to      debentures. The extraordinary loss consisted of a partial
    Early           write-off of the debt discount which was recorded upon
    Retirement of   issuance of the debentures. There was no tax benefit
    Debt            recognized for the extraordinary item because it increased
                    the Company losses.

14. Subsequent      During March 1998, the Company entered into a $5.2 million
    Events          private placement purchase agreement. The Company expects to
                    sell 52 units of convertible debentures. Each unit consists
                    of $100, 7% convertible note due in two years and a warrant
                    to purchase 28,850 shares of common stock. The notes and any
                    accrued interest are convertible within 90 days at a price
                    per share equal to the lesser of $3 per share or at a 15%
                    discount to the average closing bid price for the five days
                    preceding conversion. If the conversion price is $2 a share
                    or less, the Company may elect to redeem all or part of the
                    debenture and accrued interest at the par value of
                    principal, plus the conversion discount. Conversions are
                    restricted to 10% per month on a cumulative monthly basis.
                    As of March 27, 1998, the Company has received $2.1 million
                    of these proceeds.

                                                                            F-37
<PAGE>

                                            Scan-Graphics, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                              (In Thousands, Except Share and Per Share Amounts)


15. Supplemental
    Disclosures
    of Cash Flow
    Information

     Year ended December 31,                       1997       1996        1995
 -------------------------------------------------------------------------------

  Cash paid during the year for interest       $    223    $   166    $     45
  Cash paid during the year for
      income taxes                                   --         --          10
  Noncash investing and financing
      activities are as follows:
           Conversion of debentures into
               common stock                       1,954      3,107          --
           Issuance of common stock in
               exchange for notes
               receivable, related party             --      1,681          --
           Declaration of preferred stock
               cash dividend                        182        210         158
           Capitalized lease obligations
               incurred to lease new
               equipment                             --        146          --
           Common Stock issued
               in lieu of payment of
               preferred dividends                  201         --         200
           Transfer of inventory to
               equipment in fixed assets            128         --         137
           Transfer of equipment in fixed
               assets to inventory upon
               termination of lease                  --         --          50
           Purchase of a vehicle through
               a note payable                        --         --          33
           Conversion of debentures
               into preferred stock               2,990         --          --
           Dividends payable offset against
               notes receivable - related
               party                                 30         --          --
           Conversion of preferred stock
               Series C into common stock         1,250         --          --


                                                                            F-38
<PAGE>

                                            Scan-Graphics, Inc. and Subsidiaries

       Consolidated Schedule II - Valuation and Qualifying Accounts and Reserves


                                                                  (In Thousands)
<TABLE>
<CAPTION>


Column A                                              Column B                     Column C             Column D      Column E
----------------------------------------------------------------------------------------------------------------------------------

                                                    Balance at          Charged to         Charged                     Balance
                                                     Beginning          Costs and          to Other     Reductions      at End
                                                     of Period           Expenses          Accounts     - Describe     of Period
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                 <C>                <C>          <C>            <C>
Year ended December 31, 1997
     Allowance for doubtful accounts                  $   189           $      1          $     --      $     99(A)      $   91

Year ended December 31, 1996
     Allowance for doubtful accounts                  $    46           $    155          $     --      $     12(A)      $  189

Year ended December 31, 1995
     Allowance for doubtful accounts                  $   275           $     12          $     --      $    241(A)      $   46

</TABLE>

(A) Accounts receivable written-off.

                                                                            F-39

<PAGE>



                                   SIGNATURES

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

                                           SCAN-GRAPHICS, INC.

March  30, 1998                            /S/ Laurence L. Osterwise
---------------                            -------------------------------------
DATE                                       LAURENCE L. OSTERWISE
                                           CHIEF EXECUTIVE OFFICER AND PRESIDENT

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

Each person whose signature appears below constitutes and appoints Laurence L.
Osterwise and Michael A. Mulshine and each of them, as his lawful
attorney-in-fact and agent, each with full power of substitution and
resubstitution for him and in his name, place and stead in any and all
capacities to execute in the name of each such person who is then an officer or
director of the registrant any and all amendments (including post-effective
amendments) to this report and to file the same with all exhibits thereto and
other documents in connection therewith with the Securities Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing required or necessary to be done in and
about the premises as fully as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

                                   Signatures
                                   ----------

BY /S/ Andrew E. Trolio                                      Date March 30, 1998
  --------------------------                                      --------------
  Andrew E. Trolio                Chairman of the Board
                                  of Directors

BY /S/ Laurence L. Osterwise                                 Date March 30, 1998
  --------------------------                                      --------------
                                  Chief Executive Officer,
                                  President, and Acting
                                  Principal Financial &
                                  Accounting Officer

BY /S/ Michael A. Mulshine                                   Date March 30, 1998
  --------------------------                                      --------------
  Michael A. Mulshine             Director and Secretary

BY /S/ R. Barry Borden                                       Date March 30, 1998
  --------------------------                                      --------------
  R. Barry Borden                 Director

BY /S/ David S. Hirsch                                       Date March 30, 1998
  --------------------------                                      --------------
  David S. Hirsch                 Director

BY /S/ Jack Pellicci                                         Date March 30, 1998
  --------------------------                                      --------------
  Jack Pellicci                   Director

BY /S/ James C. Sargent                                      Date March 30, 1998
  --------------------------                                      --------------
  James C. Sargent                Director