SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 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 September 30, 1998

                           Commission File No. 0-12329



                              LCS INDUSTRIES, INC.
             (Exact name of registrant as specified in its charter)

        Delaware                                      13-2648333
(State of incorporation)                 (I.R.S. employer identification number)

      120 Brighton Road
      Clifton, New Jersey                               07012
(Address of principal executive offices)             (zip code)

                  Registrant's telephone number: (973) 778-5588

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

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

                          Common Stock ($.01 par value)
                                (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. [X]

               Aggregate market value of the voting and non-voting  Common Stock
held by non-affiliates  of the registrant,  based on the average of high and low
sales prices for December 1, 1998:  $54,473,637.  The number of shares of Common
Stock ($.01 par value) outstanding as of December 1, 1998: 4,898,447.
<PAGE>
                       DOCUMENTS INCORPORATED BY REFERENCE

               The Proxy  Statement  in  respect of the 1999  Annual  Meeting of
Stockholders  is  incorporated  by reference  into Part III hereof to the extent
indicated in that Part.  This Form 10-K consists of 48 pages.  Index to exhibits
is located at page 41.
<PAGE>
                                  Introduction

                                     Part I

Item 1.        Business.

               LCS  Industries,  Inc.  ("LCS"  or  the  "Company"),  a  Delaware
corporation,   provides  outsourcing  services   specializing  in  international
telecommunications  database  development and management as well as fulfillment,
list marketing and computer services. LCS was incorporated in November, 1969.

               Contribution  to total  sales for the three  most  recent  fiscal
years by the type of service described above is as follows:
<TABLE>
<CAPTION>
                                                   Fiscal Year Ended September 30,
                                                   -------------------------------

                                                    1998        1997         1996
                                                    ----        ----         ----
<S>                                                  <C>         <C>         <C>
Fulfillment services                                 42%         38%         37%
Computer services                                    14%         18%         19%
List marketing services                              44%         44%         44%
</TABLE>

               On  December  17,  1998,  the  Company  and  CustomerONE  Holding
Corporation,  a subsidiary of Onex Corporation, announced that they have entered
into a definitive  merger agreement  pursuant to which  CustomerONE will acquire
all of the outstanding shares of LCS common stock at a price of $17.50 per share
in cash,  representing an aggregate  transaction  value of  approximately  $97.3
million. Onex Corporation, the ninth largest company in Canada, is a diversified
company with 1997 consolidated  revenues of $11 billion  Canadian,  consolidated
assets of $6.4 billion Canadian and 43,000 employees.

               Pursuant to the merger  agreement,  CustomerONE  commenced a cash
tender  offer for all of the  outstanding  common  shares of LCS common stock on
December 23, 1998. Consummation of the tender offer is subject to U.S. antitrust
regulatory clearance and other customary closing conditions.

               The tender offer is not subject to financing.  Onex has agreed to
provide CustomerONE with all necessary funds to affect the merger.

               The Board of Directors of LCS has unanimously approved the merger
and has recommended  that LCS  stockholders  accept the tender offer and approve
and adopt the merger agreement.

               Headquartered in Buffalo, New York,  CustomerONE is an outsourced
customer  service  and  fulfillment  provider.  CustomerONE  owns  North  Direct
Response,  Inc., a premier teleservices provider, and Softbank Services Group, a
leading provider of outsourced customer service solutions.

               In June,  1997,  the  Company  recorded a loss on  investment  of
$954,000  ($863,000 net of taxes)  representing a  non-recurring  charge for the
write-off of the Company's  investment in McIntyre & King,  Ltd.  ("M&K").  This
charge  represented $.17 per share in the prior fiscal year. The Company's Board
of  Directors  decided  to sever  the  relationship  with M&K due to  unexpected
operating losses that would have required  unacceptable  demands on management's
time and financial  support required to attempt to return M&K to  profitability.
As a  result,  effective  April 5,  1997,  the  Company  agreed to  rescind  its
acquisition of M&K. The rescission agreement,  dated June 30, 1997, provided for
the return of a portion of the down payment in one year.  However,  recovery was
uncertain and,  therefore,  the Company expensed all payments,  advances and all
related costs. On November 28, 1997, the Company  received a payment from M&K of
approximately  $210,000 in final  settlement  of a portion of the down  payment,
which was recorded in other income in the quarter ended December 31, 1997.

               On December  30,  1997,  the Company and former  shareholders  of
Catalog  Resources,  Inc.  agreed to Amendment  No. 2 of the purchase  agreement
dated April 1, 1993 and amended August 1, 1994. This Amendment  provides for the
payment made January 2, 1998 of $1,012,500 to be 100% in

                                        1
<PAGE>
cash  compared to the  previously  agreed 50% in cash and 50% in Common Stock of
the  Company,  subject  to a maximum  number of shares to be issued of  660,000.
Accordingly,  the current  portion of  long-time  debt at December  31, 1997 was
increased  by $506,250  (50% of the  $1,012,500  payment).  This was offset by a
reduction in common stock issuable of $418,899,  representing  the present value
at September 30, 1995 of the originally anticipated stock issuance, and a charge
to additional paid-in capital of $87,351.

               As a result of Amendment No. 2, the parties have agreed to reduce
the maximum number of shares issuable under the amended  agreement by the shares
which would have been issued on January 2, 1998 based on the  provisions  of the
original agreement.  The revised maximum number of shares issuable is 628,020 of
which 538,287 shares have been previously issued.


Fulfillment Services

               Continuity/Order Entry

               LCS'  continuity/order   entry  services  provide  computer-based
support to the membership  activities of book clubs,  similar  continuity  (mail
order) clubs and catalog companies.  Continuity clubs and catalog  companies,  a
large  part  of the  direct-response  industry,  make  repetitive  mailings  and
periodic  product  offerings  to their  members  or  customers.  The LCS  system
supports  these efforts by processing and providing  information  with regard to
orders, shipments,  billings, returns and credit criteria, cashiering (receiving
and depositing  customer  payments and related  updating of customer  files) and
providing personnel to respond to inquiries from club members.

               The  Company  also  provides   computer-generated  reports  which
clients  use in  measuring  profitability  and  in  evaluating  and  controlling
marketing efforts.

               During the 1996 fiscal year, the outbound telemarketing operation
was integrated into the customer service function within continuity fulfillment.

               Lead/Inquiry Fulfillment

               Leads and/or  inquiries are generated by clients'  advertisements
which  require a mailed or  telephoned  (to toll-free  "800"  numbers)  customer
response.  These leads are received by LCS and are computer-processed  using its
proprietary system which accommodates clients of varying sizes from any industry
and with differing volumes of activity.

               Processing  begins by converting  the lead into  machine-readable
form.  Then,  depending  on the  criteria  supplied by the  client,  the Company
processes  the  lead  in  a  variety  of  ways,  including  the  elimination  of
non-productive  leads and the mailing,  usually within 24 hours,  of fulfillment
packages containing the client's literature or product. At the same time, a lead
form  generated  by  computer  is  sent  to the  client's  local  sales  office,
warehouse,  branch or retail outlet so that a salesperson  can directly  contact
the prospective customer.

               Using codes identifying the sources of the lead, the LCS computer
system produces reports allowing the client to evaluate the effectiveness of the
advertising.  In addition,  upon return of the lead form containing the client's
disposition  of  the  lead,  LCS is  able  to  produce  reports  evaluating  the
performance  of the client's  sales force in handling  the lead.  The system may
also be customized in response to unique customer requirements.

               Catalog Fulfillment

               CRI provides fulfillment  services to the catalog industry.  This
service  encompasses  the maintaining of its clients'  inventory,  receiving its
clients'  customer  orders  and  payments  by  mail  as  well  as  by  dedicated
telemarketing  personnel via toll-free "800" numbers which are open  twenty-four
hours a day, year-round, and the subsequent shipping of the merchandise.  Orders
received are entered into CRI's  computer  system with  appropriate  validations
being performed prior to processing. This includes receiving payment, whether in
the form of check,  money order or credit card. The CRI system includes  various
features which are intended to minimize credit losses to its clients.  The order
is then picked,

                                       2
<PAGE>
packed and shipped.  CRI also handles  inventory returns for its clients as well
as providing  dedicated  customer  service  representatives  to handle  customer
inquiries,  complaints, etc. Various reports are developed and provided to CRI's
clients to enable them to properly analyze their marketing efforts.


Computer Services

               Direct-response  marketing  consists of selective and  analytical
methods of  reaching  a specific  audience  for the sale of  clients'  goods and
services.  These  methods,  applied  singly or in  combination,  can  accurately
determine the most responsive audience for a particular direct marketing effort.
The Company's computer systems tabulate,  store and process this information for
future use by clients, resulting in the more efficient and cost-effective use of
their sales and advertising budgets.

               International Telecommunications

               The  Company is also  involved  in the  design,  development  and
implementation of marketing  databases for communications  companies both within
and outside the United States.  This entails  conversion of raw data on customer
billings and control data into marketing tools, the objective being retention of
customer  base,  increasing  market share or win back of previously  lost market
share.

               List Maintenance

               List maintenance involves the processing, updating and storing of
mailing lists and other demographic  information on the Company's  computers for
clients'  promotional and list rental activities.  Mailing lists may be combined
and enhanced with demographic  information to form databases,  which can be used
as the basis of  additional  client  promotions  or marketed to other list users
(see "Enhancement" below).

               The Company maintains lists and databases for its clients who use
them for  marketing  their own  products  and  services as well as for rental to
other  marketers.  The lists and databases  maintained by LCS presently range in
size from several thousand to approximately four million names.  Certain clients
have on-line access to lists and databases maintained for them by LCS. Each list
or database may be used to produce a variety of end-use formats, such as labels,
listings, index cards, computer letters and magnetic tapes, cartridges or disks.
Demographic  information  can be  customized  for  the  client  and  used as the
selection  criteria for a list or database  rental.  In  addition,  lists can be
presorted for maximum postal cost efficiencies.

               "Fastfax,"  the  Company's  proprietary  list  fulfillment  order
processing system,  provides clients with on-line database list segment counting
and order selection  capabilities  using their own personal computer  terminals.
List orders entered using this system can be fulfilled  within 24-48 hours after
authorization.

               Merge/Purge

               Merge/purge  is  a  computerized   system  which  recognizes  and
eliminates  duplicate  names when combining  large numbers of lists or databases
for mailing  programs.  It can also be used to identify names with high response
potential by identifying  duplications between lists with similar  demographics.
Identification of these multiple prospects enables the direct-response client to
plan marketing strategy, including follow-up promotions.

               Because  clients  may  wish to  target  a  promotion  to a highly
segmented  audience,  merge/purge can be applied to attributes (such as location
or gender) in addition to names in a number of lists and  databases  and,  based
upon the clients'  criteria,  can generate refined lists  identifying the target
audience.

               LCS' software can also remove (suppress) the names of persons who
the client deems  inappropriate  or who have a low probability of ordering based
on past experience.

                                        3
<PAGE>
               Enhancement

               Enhancement is the overlay of demographic information to computer
lists and  databases  to  facilitate  targeted  mailing  programs,  sometimes in
combination with the list maintenance and merge/purge services. This information
added by LCS can include  profiles of time in present  residence,  dwelling unit
size, occupation, income estimate, age, gender, presence and number of children,
telephone number and other information.

               The Company has been selected by the U.S.  Postal  Service as one
of 23  licensees  for its  National  Change of Address  System.  As part of this
program  to reduce the  return  rate of  domestic  mail,  the Postal  Service is
furnishing  licensees every two weeks with changes of address on all recent U.S.
business and  household  moves.  Utilizing  this data,  LCS is able to offer its
clients the ability to enhance  existing  lists to reflect the Postal  Service's
most   current   change  of  address   information,   thereby   increasing   the
cost-effectiveness of mailings using such updated lists.

               Computer Personalization

               Computer  personalization  is the use of  computerized  lists  to
personalize mass mailings of various forms including  labels,  computer letters,
complex  insurance  applications and many other forms. The Company  subcontracts
this process.


List Marketing Services

               The Company,  through its consolidated subsidiary The SpeciaLISTS
Ltd., provides consumer list marketing services. These services include:

               --     List brokerage -- the  recommendation of lists or segments
                      of lists for specific  mailing  campaigns and the securing
                      of names  from  various  list  owners  for  mailings.  The
                      Company  consults  with  clients  to  determine  the  best
                      direct-mail strategy and optimal targeted markets.

               --     List management -- rental and promotion of proprietary and
                      client-owned lists for direct-mail promotions.

               --     List  compilation -- creation of  proprietary  lists drawn
                      from numerous sources,  such as directories and attendance
                      rosters.


Marketing

               The  Company   currently   markets  its   products  and  services
throughout the United States using in-house sales expertise. Leads are generated
by  personal  calls,  print  advertising  in trade  media,  referrals,  industry
meetings  and trade shows and  seminars.  LCS uses its own  direct-response  and
fulfillment services to generate leads, support sales and facilitate  follow-up.
The generally  close  working  relationship  between LCS and its clients  offers
opportunities for the sale of additional  related services.  The Company makes a
practice of identifying and designing services to meet special needs of clients.
The sales staff is compensated by salary plus commissions or bonuses.

               Although,  during fiscal 1998,  revenues recognized in connection
with the contract to provide computer services to a non-U.S.  telecommunications
company amounted to 12% of consolidated sales,  management does not believe that
the loss of any  single  customer  would  have a severe  impact  (as  defined in
Statement  of  Position  94-6  "Disclosure  of  Certain  Significant  Risks  and
Uncertainties"  issued by the American Institute of Certified Public Accountants
in December,  1994) on the Company and its subsidiaries  taken as a whole.  This
contract  contributed  significantly  to the  profits  of the  Company  and  was
completed  June 30,  1998.  On July 1,  1998,  the  Company  began work under an
additional  $6.0  million  one-year  contract  with the same  telecommunications
company.  There is no assurance  that  additional  replacement  projects will be
obtained in the future providing the same level of sales or profits.


                                        4
<PAGE>
Customer Trade Terms

               As the Company is in a service  business,  a large  proportion of
its  consolidated  current assets and a significant  portion of its consolidated
total assets are represented by trade accounts receivable.  Invoices for service
to clients of the Company and its subsidiaries are customarily  rendered monthly
for recurring matters and at the completion of special  projects.  For financial
statement purposes,  revenues and related costs are recognized when services are
performed.  Revenues under long-term  consulting contracts are recognized on the
percentage-of-completion  method of  accounting  measured by the  percentage  of
labor hours  incurred to date to the  estimated  total labor hours  required for
each contract.

               In the  case  of  approximately  36% of  the  consolidated  trade
accounts  receivable  of the Company and its  subsidiaries  as of September  30,
1998,  various  payment terms exist ranging from payable upon receipt of invoice
to 60 days from date of  invoice,  and in the case of  substantially  all of the
balance  (primarily those of  SpeciaLISTS),  payment terms are 60 days after the
client's mailing date.

               Management   believes  that  the   consolidated   trade  accounts
receivable of the Company and its  subsidiaries as of September 30, 1998, net of
the allowance for doubtful accounts reflected on the consolidated  balance sheet
as  at  such  date  included  in  the  Consolidated  Financial  Statements,  are
collectable in the ordinary course of business.


Product Protection and Proprietary Rights

               LCS uses several methods to ensure the protection of confidential
client  data  and  its  proprietary   systems.  The  Company's  computer  tapes,
cartridges and disks are accessible only to authorized  personnel.  LCS protects
on-line  access  to data by  restricting  access  to  on-line  terminals  and by
utilizing a periodically changing,  segmented password system. To enhance safety
in case of fire or other natural  disasters,  duplicate tapes containing  client
data are stored at an off-site location.

               The Company  considers certain of its software to be proprietary.
It  currently  relies  upon  trade  secret  laws  and  internal   non-disclosure
agreements  to  protect  the  software.  LCS has no patents  or  copyrights.  In
management's  opinion,  no such patent or copyright  protection  is customary or
necessary.


Competition

               The segment of the  computer  services  industry  that serves the
direct-response marketing industry is highly competitive. Competition is related
primarily to technical  capability and expertise,  pricing,  quality of work and
ability to meet deadlines and is not confined to specific  geographic areas. The
industry in which LCS  operates  is subject to rapid  client  marketing  changes
requiring constant adaptation to provide competitive services.  Reliable data on
LCS's relative position in its market is not available.

               The Company competes not only with other independent  specialized
computer service companies but also with in-house  computer service  departments
of companies in the direct-response marketing industry.

               Some of the  companies  with which LCS  competes  have  access to
substantially  greater  financial and other resources and offer a wider range of
non-computer services than the Company.


Employees

               As of December 1, 1998, the Company  employed  1,494 persons,  of
whom 881 were employed on a full-time  basis.  LCS does not have any  collective
bargaining  agreements  with its employees  and believes its relations  with its
employees to be good.

                                        5
<PAGE>
Item 2.        Properties.

               The Company and its subsidiaries lease or sublease  facilities at
the locations and under leases or subleases summarized as follows and in Note 13
of Notes to Consolidated Financial Statements, as to future rental expenses:
<TABLE>
<CAPTION>
                                                      Square           Expiration
                      Location                         Feet               Date
                      --------                         ----               ----
<S>                                                  <C>               <C>
120 Brighton Road, Clifton, NJ (1)                     78,645          September 2000
1200 Harbor Blvd., Weehawken, NJ (2)                   18,100          June  2003
Jonathan's Landing, Magnolia, DE (4)                   17,000          Month to Month
100 Enterprise Place, Dover, DE (1)(5)                 55,000          Month to Month
97 Commerce Way, Dover, DE (1)                        124,000          October 2005
155 Commerce Way, Dover, DE (1) (3)                    35,530          December 1999
2 McKee Road, Dover, DE (4)                            29,000          Month to Month
155 Commerce Way, Dover, DE (4)                        56,762          April 1999
5725 S. University Dr., Davie, FL (2)                  11,550          April 2002
                                                    ---------

                                           TOTAL      425,587
</TABLE>

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

(1)  Office, warehouse, production
(2)  Office
(3)  Five year renewal option available
(4)  Warehouse
(5)  Sublease


Item 3.  Legal Proceedings

                             None.


Item 4.  Submission of Matters to a Vote of Security Holders.

                             None.


                                       6
<PAGE>
                                     Part II

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

Quarterly Stock Price Information

The  Company's  common  stock is traded on The Nasdaq Stock  MarketSM  under the
symbol LCSI.  The following  table sets forth the  quarterly  high and low sales
prices of the common  stock,  as quoted on  Nasdaq.  Such  quotations  represent
prices  between  dealers  and do not  include  retail  mark-ups,  mark-downs  or
commissions.

Commencing in the second quarter of fiscal 1996, subsequent to the 2 for 1 stock
split paid as a 100% stock  dividend  on October  24,  1995,  regular  quarterly
dividends  of $.025 per share were paid.  Effective  with the second  quarter of
fiscal 1997, regular quarterly dividends of $.0375 per share were paid.

As of December 1, 1998, there were 170 registered holders and an estimated 1,600
beneficial holders of record of the Company's common stock.

--------------------------------------------------------------------------------
                                                   Price                        
--------------------------------------------------------------------------------
                                           High              Low
--------------------------------------------------------------------------------
Fiscal Year Ended                                                               
    September 30, 1998                                                          
         1st Quarter..................   $21-3/4           $14                  
         2nd Quarter..................    18                12-3/8              
         3rd Quarter..................    17-1/8            13-1/4              
         4th Quarter..................    18                11-3/4              

Fiscal Year Ended
    September 30, 1997
         1st Quarter..................   $15-1/2           $12-1/2
         2nd Quarter..................    16-1/8            13-1/2
         3rd Quarter..................    17-1/4            13-3/4  
         4th Quarter..................    20                14       

                                        7
<PAGE>
Item 6.                       Selected Financial Data.
<TABLE>
<CAPTION>
Five Year Review
Income Statement Data
(In thousands, except per share amounts)
---------------------------------------------------------------------------------------------------------------
Years Ended September 30,                            1998         1997         1996         1995         1994
---------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>          <C>          <C>          <C>      
Sales .........................................   $  94,209    $ 100,627    $  95,570    $  78,863    $  62,690
Cost of sales .................................      65,973       69,384       66,120       54,717       46,986
Gross profit ..................................      28,236       31,243       29,450       24,146       15,704
Selling and administrative expenses ...........      16,533       17,906       16,679       13,653       13,270
Dividend and interest (income) expense, net ...      (1,299)      (1,000)        (553)        (167)          65
Other expense (Note 1) ........................        (210)       1,914         --           --           --
Income before income taxes ....................      13,212       12,423       13,324       10,660        2,369
Net income ....................................       7,835        6,987        7,838        6,329        1,375
Per common and common equivalent share (Note 2)
Basic earnings (Note 1) .......................        1.63         1.51         1.81         1.57          .36
Weighted average number of shares outstanding .       4,808        4,625        4,330        4,020        3,871
Diluted earnings (Note 1) .....................        1.52         1.37         1.53         1.33          .32
Weighted average number of shares outstanding .       5,158        5,104        5,118        4,755        4,306
Dividends per share ...........................        .150         .138         .094         .066         .045
---------------------------------------------------------------------------------------------------------------
</TABLE>
Note 1  -      1997 includes  write-off of the Company's  investment in McIntyre
               and King, Ltd. ("M&K") of $954,000 ($863,000 net of taxes or $.17
               per share) and a non-recurring  charge of $960,000  ($570,000 net
               of taxes or $.11 per share)  related to the death  benefits under
               employment   agreements  and  other  severance  amounts  due  the
               Company's  former  Chairman.  1998  includes a $210,000  recovery
               related to the M&K transaction.

Note 2 -       1995 and 1994 have been retroactively restated to reflect the 10%
               stock dividend paid in January,  1995 and the 2 for 1 stock split
               paid as a 100% stock dividend on October 24, 1995.
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data
(In thousands)
------------------------------------------------------------------------------------
September 30,                        1998      1997      1996      1995      1994
------------------------------------------------------------------------------------
<S>                                <C>       <C>       <C>       <C>       <C>    
Working capital ................   $34,947   $26,799   $19,359   $10,569   $ 4,673
Total assets ...................    69,379    69,509    64,970    49,737    31,815
Long-term debt and capital
      lease obligations - net of
       current portion .........     2,575     3,445     4,583     3,436     1,805
Stockholders' equity ...........    46,210    38,276    30,861    22,048    12,865
------------------------------------------------------------------------------------
</TABLE>

                                        8
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

Results of Operations

The following  table sets forth,  for the periods  indicated,  the percentage of
sales represented by data derived from the Company's Consolidated  Statements of
Income:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Year Ended September 30,                                1998      1997      1996
------------------------------------------------------------------------------------
<S>                                                    <C>       <C>       <C>   
Sales ............................................     100.0%    100.0%    100.0%
Cost of sales ....................................      70.0      69.0      69.2
                                                       -----     -----     -----
Gross profit .....................................      30.0      31.0      30.8
Selling and administrative .......................      17.6      17.8      17.4
Dividend and interest (income) expense, net ......      (1.4)     (1.0)     (0.6)
Other (income) expense ...........................       (.2)      1.9    --
                                                       -----     -----     -----
Income before income taxes .......................      14.0      12.3      14.0
Provision for income taxes .......................       5.7       5.4       5.8
                                                       -----     -----     -----
Net income .......................................       8.3%      6.9%      8.2%
                                                       =====     =====     =====

------------------------------------------------------------------------------------
</TABLE>

Fiscal Year 1998 Compared to Fiscal Year 1997

Sales in 1998  declined  $6.4 million  (6%)  compared to 1997  principally  as a
result of a $4.3 million  (24%)  decrease in computer  services,  a $2.7 million
(6%) decrease in list marketing partially offset by a $0.6 million (1%) increase
in fulfillment  services.  The lower computer  services revenues reflect reduced
billings, compared to the prior year, for the last phase of the three-year $40.0
million  contract to build and manage a marketing  database for a major non-U.S.
telecommunications  company which  contract was completed June 30, 1998. On July
1, 1998,  the  Company  began work under an  additional  $6.0  million  one-year
contract with the same  telecommunications  company.  The list marketing decline
reflects  customer  attrition  and  industry  softness  not fully  offset by new
customers. The fulfillment increase is comprised of a 10% increase in continuity
services  offset by a 9%  decrease  in the catalog  fulfillment  operation.  The
continuity increase resulted primarily from higher activity levels from existing
clients. The decline in the catalog fulfillment  operation resulted from several
customers being acquired by third parties,  as previously  reported.  During the
second half of fiscal  1998,  contracts  with  several  new catalog  fulfillment
customers were finalized.

Gross profit in 1998 decreased $3.0 million (10%) compared to 1997. Gross profit
margin was 30% in 1998  compared to 31% in 1997.  The lower gross profit  amount
resulted  primarily  from the  decrease  in sales  volume.  The  reduced  margin
resulted  from the impact of the lower  computer  services  sales,  as described
above,  which carry a higher gross profit  percentage than the other  operations
partially offset by an improved margin in the list marketing area.

Selling and administrative  expenses in 1998 declined $1.4 million (8%) compared
to 1997. Selling and administrative expenses, as a percentage of sales, were 18%
in both 1998 and 1997. The decrease in the amount of selling and  administrative
expenses  is  primarily  due  to  lower  executive   compensation,   travel  and
communication costs.


                                        9
<PAGE>
Dividend and interest income in 1998 increased $0.2 million (13%) as a result of
a higher level of funds available for investment and marginally  higher interest
rates.  Interest  expense  declined  $0.1 million in 1998 compared to 1997 which
resulted from reduced debt levels and capital lease  obligations.  The unsecured
line of credit held  available for the Company was not used during either fiscal
year.

Other income in 1998 of $0.2 million reflects a payment received from McIntyre &
King,  Ltd.  ("M&K")  and  represents  final  settlement  of a  portion  of  the
down-payment made in connection with the 1997 rescinded purchase  agreement,  as
described below.  Other expense in 1997 included the June, 1997 recorded loss on
investment  of  $1.0  million  ($0.9  million  net  of  taxes)   representing  a
non-recurring  charge for the write-off of the  Company's  investment in M&K and
represented  $.17 per share.  The Company's Board of Directors  decided to sever
the  relationship  with M&K due to unexpected  operating  losses that would have
required  unacceptable  demands  on  management's  time  and  financial  support
required to attempt to return M&K to profitability. As a result, effective April
5, 1997,  the Company  agreed to rescind its  acquisition of M&K. The rescission
agreement, dated June 30, 1997, provided for the return of a portion of the down
payment in one year. However, recovery was uncertain and, therefore, the Company
expensed all  payments,  advances and all related costs at that time. On October
6, 1997, the Company  announced the recording of a non-recurring  charge of $1.0
million  ($0.6  million  net of taxes or $.11 per  share)  in the  period  ended
September  30,  1997  relating  to  death  benefits   payable  under  employment
agreements and other severance  amounts due the Company's former  Chairman,  the
late Arnold J. Scheine who passed away on September 22, 1997.

The effective tax rate in 1998 was 41% compared to 44% in 1997.  The  provisions
for taxes for the two  fiscal  years  reflect  relatively  normal  relationships
between book income and taxes therein with the  exception,  in 1997, of the loss
on  investment  in M&K,  as  described  above.  The Company  currently  does not
anticipate realizing sufficient capital gains during the tax carryforward period
to offset this capital loss and,  accordingly,  a full  valuation  allowance has
been recorded for the tax benefit.

Primarily because of the non recurrence of the other expense charges in 1997, as
described  above,  net income  increased $0.8 million (12%) for 1998 compared to
1997. Lower executive  compensation,  travel and communication  expenses and the
M&K payment of $0.2 million  contributed  to the increase as well. The impact of
the  decline in sales in 1998  versus 1997  substantially  reduced the  positive
impact of these items.


Fiscal Year 1997 Compared to Fiscal Year 1996

Sales in 1997  increased  $5.1 million (5%)  compared to 1996  principally  as a
result of a $2.9  million  (8%)  increase  in  fulfillment  services  and a $2.1
million (5%) increase in list  marketing.  The increase in fulfillment  services
sales reflects 16% increases in both continuity and catalog fulfillment services
partially offset by a decrease of 82% in inbound telemarketing  revenues,  which
is in line with the  Company's  program  to de-  emphasize  this  activity.  The
continuity  increase was primarily the result of increased  billings to existing
customers  while the catalog  increase  resulted from billings to new customers,
increased  billings  to  existing  customers  partially  offset  by the  loss of
billings to several customers upon their acquisition by third parties.  Computer
services revenues were comparable to the prior year and continue to benefit from
the revenues related to the previously announced $40 million contract to build a
marketing database for a major non-U.S. telecommunications company. The contract
extends    through    June,    1998.    Revenue    is    recognized    on    the
percentage-of-completion  method of  accounting  measured by the  percentage  of
labor hours incurred to date to the estimated total labor hours required for the
contract.  Initial revenues from this contract were recorded in the last quarter
of fiscal 1995. The list marketing  increase resulted generally from an expanded
customer base and increased volume with continuing customers.

Gross profit in 1997 increased $1.8 million (6%) compared to 1996. Gross profit,
as percentage of sales,  was 31% in both fiscal 1997 and 1996. Both fiscal years
include  the  favorable  impact  from the margin  associated  with the  computer
services revenues, as described above.

Selling and administrative expenses in 1997 increased $1.2 million (7%) compared
to 1996. Selling and administrative expenses, as a percentage of sales, were 18%
in the current year compared to 17% in the comparable prior period. The increase
in the amount of these expenses reflects increased expenses

                                       10
<PAGE>
associated with incremental  revenues and higher outlays for  professional  fees
primarily  related  to  investment  banking,   financial  public  relations  and
expansion activities.

Dividend and interest income in 1997 increased $0.5 million (46%) from 1996 as a
result of a higher level of funds  available  for  reinvestment  and  marginally
higher interest rates. Interest expense was comparable in both fiscal years. The
unsecured  line of credit  held  available  for the  Company was not used during
either fiscal year.

Other expense  during the current  fiscal year includes the June,  1997 recorded
loss on investment of $1.0 million  ($0.9 million net of taxes)  representing  a
non-recurring charge for the write-off of the Company's investment in McIntyre &
King, Ltd. ("M&K"). This charge represented $.17 per share in the current fiscal
year. The Company's Board of Directors  decided to sever the  relationship  with
M&K due to unexpected  operating  losses that would have  required  unacceptable
demands on management's time and financial support required to attempt to return
M&K to profitability.  As a result,  effective April 5, 1997, the Company agreed
to rescind its  acquisition  of M&K. The  rescission  agreement,  dated June 30,
1997,  provided  for the  return of a portion  of the down  payment in one year.
However,  recovery  was  uncertain  and,  therefore,  the Company  expensed  all
payments,  advances and all related  costs.  On November  28, 1997,  the Company
received a payment from M&K of approximately $0.2 million in final settlement of
a portion of the down  payment,  which was recorded in other income in the first
quarter of fiscal 1998. On October 6, 1997, the Company  announced the recording
of a non-recurring charge of $1.0 million ($0.6 million net of taxes or $.11 per
share) in the period ended September 30, 1997 relating to death benefits payable
under employment agreements and other severance amounts due the Company's former
Chairman, the late Arnold J. Scheine who passed away on September 22, 1997.

The effective tax rate in 1997 was 44% compared to 41% in 1996.  The  provisions
for taxes for the two  fiscal  years  reflect  relatively  normal  relationships
between  book  income  and  taxes  thereon  with  the  exception  of the loss on
investment in M&K, as described above. The Company did not anticipate  realizing
sufficient  capital  gains  during the tax  carryforward  period to offset  this
capital loss and, accordingly,  a full valuation allowance has been recorded for
the tax benefit.

Net income for 1997 decreased $0.9 million (11%) compared to 1996 primarily as a
result of the other expense charges, described above, partially offset by higher
contribution  levels for the  continuity and catalog  operations.  Excluding the
impact of the other  expense  charges,  net  income  would have  increased  $0.6
million or 7%.


Liquidity and Capital Resources

Working  capital at September  30, 1998  increased  to $34.9  million from $26.8
million at the prior year end. Current assets increased $0.8 million principally
from an  increase  in cash  partially  offset by a  decrease  in  investments  -
held-to-maturity and in accounts receivable.  Current liabilities decreased $7.4
million primarily as a result of decreases in accounts payable, deferred revenue
and accrued  salaries and commissions and other accrued  expenses.  At September
30, 1998, the ratio of long-term debt to equity was .06 to 1.

For the fiscal year ended  September  30, 1998,  cash  generated  by  operations
decreased  $3.8 million over such  amounts  generated in 1997.  The decrease was
primarily attributable to a decrease in adjustments to net income and changes to
operating  assets and  liabilities  of $4.7 million offset by an increase in net
income of $0.9 million. The decrease in adjustments to net income and changes in
operating  assets was primarily the result of a decrease in accounts payable and
accrued  expenses  of $5.1  million,  increases  in prepaid  expenses  and other
current assets of $0.5 million,  accounts  receivable  and security  deposits of
$0.2 million each partially  offset by increases in income taxes payable of $0.6
million and adjustments to net income of $0.9 million. The $0.9 million included
increases in deferred  income taxes of $0.5 million,  deferred  compensation  of
$0.3 million and depreciation of $0.1 million.

During the current  fiscal year,  funds used by financing  activities  increased
$0.9 million,  primarily as a result of reduced funds from the exercise of stock
options of $0.5  million  combined  with  increased  repayments  of debt of $0.3
million and dividend payments of $0.1 million.

                                       11
<PAGE>
Cash  provided by  investing  activities  increased  $7.1 million over the prior
year.  This increase was primarily  attributed to a maturing of  investments  of
$7.0 million and a reduction  in  additions  to property  and  equipment of $0.1
million.

Pursuant  to the  purchase  agreement,  as  amended,  with CRI,  the  Company is
obligated  to pay to  CRI's  selling  shareholders  in  cash or  stock  up to an
aggregate of $10 million. Under such purchase agreement, the Company will pay $1
million on  January 1, 1999  bringing  the total  payments  to that date to $6.7
million.  As  outlined  in  Note 2 to the  accompanying  consolidated  financial
statements,  the present value of the remaining  obligation of $6.1 million,  at
September  30,  1995 was  recorded  at that time  resulting  in an  increase  in
goodwill at that date of $4.5 million.

Management  believes cash  generated  from current  operations  and other liquid
assets  combined with the available  bank credit line will be sufficient to meet
cash flow needs during the 1999 fiscal year, including the payment to former CRI
shareholders due January 1, 1999.


Recently Issued Accounting Standards

In June, 1997, the FASB issued SFAS No. 130, "Reporting  Comprehensive  Income."
SFAS No. 130 requires a reconciliation of net income to comprehensive  income in
the financial statements.  Comprehensive income includes items that are excluded
from net income and reported as  components  of  stockholders'  equity,  such as
unrealized  gains  and  losses  on  certain   investments  in  debt  and  equity
securities,  foreign currency items and minimum pension  liability  adjustments.
SFAS No. 130 is effective for fiscal years  beginning  after  December 15, 1997.
Management  of the Company does not believe  there will be any  material  effect
from adopting SFAS No. 130.

In June,  1997, the FASB issued SFAS No. 131,  "Disclosure  about Segments of an
Enterprise  and Related  Information."  SFAS No. 131 requires  the  reporting of
profit and loss,  specific  revenue and expense items and assets for  reportable
segments.  It also requires the reconciliation of total segment revenues,  total
segment  profit or loss,  total segment  assets and other amounts  disclosed for
segments  to  the  corresponding   amounts  in  the  general  purpose  financial
statements.  SFAS No. 131 is effective for fiscal years beginning after December
15, 1997.  The Company is planning to adopt the  provisions  of SFAS No. 131 for
its fiscal year beginning  October 1, 1998 but has not yet fully determined what
additional disclosures may be required to complete its implementation.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
instruments and Hedging Activities",  which establishes accounting and reporting
standards for  derivative  instruments  and hedging  activities.  Generally,  it
requires  that an  entity  recognize  all  derivatives  as  either  an  asset or
liability and measure those  instruments at fair value,  as well as identify the
conditions for which a derivative may be specifically  designed as a hedge.  The
Company does not have any derivative instruments.


Year 2000 Issues

Certain  of the  Company's  operational  computer  programs  use two  digits  to
identify a year in the date field which does not consider the impact, if any, of
the upcoming change in the century. Since internal personnel are being utilized,
the Company  anticipates,  at a cost not  material to its  business,  results of
operations or financial  condition,  the timely  completion  of any  programming
needed to address this issue and result in successful computer processing in the
year 2000 and beyond.  Expenditures for equipment is currently  estimated as not
exceeding $250,000, primarily for upgrading and replacing personal computers and
related software.  The current program anticipates completion of this process by
June, 1999.

The  Company  has not,  however,  fully  completed  its  review of the Year 2000
issues, particularly,  but not limited to, non-operational computer programs and
third  party  vendor and  customer  issues.  The  Company  is in the  process of
completing that review.


                                       12
<PAGE>
Management  cannot provide assurance that the result of its Year 2000 compliance
efforts or the cost of such efforts will not differ  materially  from estimates.
Accordingly,  business  continuity  and  contingency  plans are currently  being
developed to address high risk areas as they are identified.

The above discussion contains statements that are  "forward-looking"  within the
meaning of the Private  Securities  Litigation Reform Act of 1995.  Although the
Company believes that its estimates are based on reasonable  assumptions,  there
can be no assurance  that actual results will not differ  materially  from these
estimates.


                                       13
<PAGE>
Item 8. Financial Statements and Supplementary Data.


INDEPENDENT AUDITORS' REPORT







Board of Directors and Stockholders of
LCS Industries, Inc.
Clifton, New Jersey


We have audited the accompanying  consolidated balance sheets of LCS Industries,
Inc. and Subsidiaries (the "Company") as of September 30, 1998 and 1997, and the
related consolidated  statements of income,  stockholders' equity and cash flows
for each of the three  years in the  period  ended  September  30,  1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position of LCS  Industries,  Inc.  and its
Subsidiaries  as of  September  30,  1998 and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.




Deloitte & Touche LLP
Parsippany, NJ
November 3, 1998
(December 17, 1998, as to Note 18)




                                       14
<PAGE>
<TABLE>
                      LCS INDUSTRIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Years Ended September 30,              1998            1997             1996
                                          -------------    -------------    -------------
<S>                                       <C>              <C>              <C>          
Net sales .............................   $  94,209,365    $ 100,627,292    $  95,570,436
Cost of sales .........................      65,973,405       69,383,846       66,120,153
                                          -------------    -------------    -------------
Gross profit ..........................      28,235,960       31,243,446       29,450,283
Selling and administrative expenses ...      16,533,318       17,905,852       16,678,548
Other (income) expense:
   Dividend and interest income .......      (1,631,706)      (1,442,707)        (990,108)
   Interest expense ...................         332,874          443,642          437,198
   Other (income) expense .............        (210,000)       1,914,000             --
                                          -------------    -------------    -------------
Income before income taxes ............      13,211,474       12,422,659       13,324,645
Provision for income taxes ............       5,376,000        5,436,000        5,487,000
                                          -------------    -------------    -------------
Net income ............................   $   7,835,474    $   6,986,659    $   7,837,645
                                          =============    =============    =============

Per common and common equivalent share:
Basic earnings ........................   $        1.63    $        1.51    $        1.81
                                          =============    =============    =============

Diluted earnings ......................   $        1.52    $        1.37    $        1.53
                                          =============    =============    =============

Dividends .............................   $         .15    $        .138    $        .094
                                          =============    =============    =============
</TABLE>



                 See Notes to Consolidated Financial Statements.

                                       15
<PAGE>
<TABLE>
                                            LCS INDUSTRIES, INC. AND SUBSIDIARIES
                                                 CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30,                                                                                1998            1997
                                                                                         ------------    ------------
<S>                                                                                      <C>             <C>         
ASSETS
Current assets:
   Cash and cash equivalents .........................................................   $ 19,702,803    $ 14,619,271
   Investments - held-to-maturity ....................................................     11,479,120      14,410,101
   Accounts receivable (less allowance for doubtful
       accounts:  1998 - $502,000 and 1997 - $496,000) ...............................     22,020,995      23,163,774
   Prepaid expenses and other current assets .........................................      1,623,264       1,460,990
   Deferred taxes ....................................................................        295,000         684,000
                                                                                         ------------    ------------
     Total current assets ............................................................     55,121,182      54,338,136
                                                                                         ------------    ------------

Investments - available-for-sale, net ................................................           --           123,708
Property and equipment, net ..........................................................      6,452,529       7,093,790
Goodwill (net of accumulated amortization:
    1998 - $1,092,553 and 1997 - $806,204) ...........................................      6,994,628       7,280,977
Other assets .........................................................................        811,022         672,656
                                                                                         ------------    ------------
                                                                                         $ 69,379,361    $ 69,509,267
                                                                                         ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable ..................................................................   $ 13,691,193    $ 14,798,326
   Accrued salaries and commissions ..................................................      2,311,796       3,127,141
   Other accrued expenses ............................................................      2,993,400       3,899,876
   Income taxes payable ..............................................................        151,210         290,407
   Current portion of long-term debt .................................................      1,026,147       1,087,511
   Current portion of capital lease obligations ......................................           --           211,580
   Deferred revenue ..................................................................           --         4,124,699
                                                                                         ------------    ------------
     Total current liabilities .......................................................     20,173,746      27,539,540
                                                                                         ------------    ------------

Long-term debt, net of current portion ...............................................      2,574,598       3,444,533
Deferred taxes .......................................................................        107,000         249,000
Deferred compensation ................................................................        313,922            --

Commitments and contingencies ........................................................
<PAGE>
<CAPTION>
                                            LCS INDUSTRIES, INC. AND SUBSIDIARIES
                                                 CONSOLIDATED BALANCE SHEETS
September 30,                                                                                1998            1997
                                                                                         ------------    ------------
<S>                                                                                      <C>             <C>         
Stockholders' equity:
   Preferred stock $.01 par value; authorized
       1,000,000 shares; issued - none
   Common stock $.01 par value; authorized
       15,000,000 shares; issued 1998 - 5,111,899
       shares and 1997 - 4,854,847 shares ............................................         51,119          48,548
   Common stock issuable .............................................................      1,071,532       1,490,431
   Additional paid-in capital ........................................................     10,424,048       8,702,971
   Retained earnings .................................................................     35,368,901      28,245,206
                                                                                         ------------    ------------
                                                                                           46,915,600      38,487,156
   Less:  Treasury stock, at cost, 1998 - 214,663 shares
               and 1997 - 187,766 shares .............................................       (705,505)       (207,953)
          Available-for-sale securities valuation adjustment,
               net of deferred income taxes ..........................................           --            (3,009)
                                                                                         ------------    ------------
     Total stockholders' equity ......................................................     46,210,095      38,276,194
                                                                                         ------------    ------------
                                                                                         $ 69,379,361    $ 69,509,267
                                                                                         ============    ============
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       16
<PAGE>
<TABLE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
                                             Common Stock                                                       
                                            $.01 Par Value            Common        Additional                  
                                    ---------------------------       Stock          Paid-in         Retained   
Balance                                 Shares         Amount        Issuable        Capital         Earnings   
                                    ----------------------------------------------------------------------------
<S>                                 <C>            <C>            <C>             <C>             <C>           
October 1, 1995 .................      4,347,886   $     43,479   $  2,407,521    $  5,431,455    $ 14,451,854  
Acquisition of Catalog
  Resources, Inc. ...............
  Common stock issued ...........         34,621            346       (461,538)        461,192            --    
Exercise of stock options .......        216,903          2,169           --           617,504            --    
Stock dividend - converted shares            360              4           --               251            --    
Stock purchased through
  Employee Stock Purchase Plan
  and employment agreements .....         11,717            117           --           153,861            --    
Dividends paid ..................           --             --             --              --          (401,762) 
Valuation adjustment, net .......           --             --             --              --              --    
Tax benefit of exercise of
  stock options .................           --             --             --           559,000            --    
Net income ......................           --             --             --              --         7,837,645  
                                    ------------   ------------   ------------    ------------    ------------  
September 30, 1996 ..............      4,611,487         46,115      1,945,983       7,223,263      21,887,737  
                                    ------------   ------------   ------------    ------------    ------------  
Acquisition of Catalog
  Resources, Inc. ...............
  Common stock issued ...........         38,762            388       (455,552)        455,164            --    
Exercise of stock options .......        195,675          1,956           --           517,543            --    
Stock dividend - converted shares            318              3           --               218            --    
Stock purchased through
  Employee Stock Purchase Plan
  and employment agreements .....          8,605             86           --           106,783            --    
Dividends paid ..................           --             --             --              --          (629,190) 
Valuation adjustment, net .......           --             --             --              --              --    
Tax benefit of exercise of
  stock options .................           --             --             --           400,000            --    
Net income ......................           --             --             --              --         6,986,659  
                                    ------------   ------------   ------------    ------------    ------------  
September 30, 1997 ..............      4,854,847         48,548      1,490,431       8,702,971      28,245,206  
                                    ------------   ------------   ------------    ------------    ------------  
Acquisition of Catalog
  Resources, Inc. ...............
  Common stock issuable
  exchanged for long-term debt ..           --             --         (418,899)        (87,351)           --    
Exercise of stock options .......        249,600          2,496           --           938,080            --    
Stock dividend - converted shares            716              8           --               494            --    
Stock purchased through
  Employee Stock Purchase Plan
  and employment agreements .....          6,736             67           --            89,854            --    
Treasury stock acquired .........           --             --             --              --              --    
Dividends paid ..................           --             --             --              --          (711,779) 
Valuation adjustment, net .......           --             --             --              --              --    
Tax benefit of exercise of
  stock options .................           --             --             --           780,000            --    
Net income ......................           --             --             --              --         7,835,474  
                                    ------------   ------------   ------------    ------------    ------------  
September 30, 1998 ..............      5,111,899   $     51,119   $  1,071,532    $ 10,424,048    $ 35,368,901  
                                    ============   ============   ============    ============    ============  
<PAGE>
<CAPTION>
                                           Treasury Stock -        Available-for-      
                                               at Cost             Sale Securities  
                                     --------------------------      Valuation
Balance                                  Shares        Amount        Adjustment       Total
                                    -----------------------------------------------------------
<S>                                  <C>           <C>             <C>             <C>         
October 1, 1995 .................        187,766   ($   207,953)   ($    78,837)   $ 22,047,519
Acquisition of Catalog
  Resources, Inc. ...............
  Common stock issued ...........           --             --              --              --
Exercise of stock options .......           --             --              --           619,673
Stock dividend - converted shares           --             --              --               255
Stock purchased through
  Employee Stock Purchase Plan
  and employment agreements .....           --             --              --           153,978
Dividends paid ..................           --             --              --          (401,762)
Valuation adjustment, net .......           --             --            44,245          44,245
Tax benefit of exercise of
  stock options .................           --             --              --           559,000
Net income ......................           --             --              --         7,837,645
                                    ------------   ------------    ------------    ------------
September 30, 1996 ..............        187,766       (207,953)        (34,592)     30,860,553
                                    ------------   ------------    ------------    ------------
Acquisition of Catalog
  Resources, Inc. ...............
  Common stock issued ...........           --             --              --              --
Exercise of stock options .......           --             --              --           519,499
Stock dividend - converted shares           --             --              --               221
Stock purchased through
  Employee Stock Purchase Plan
  and employment agreements .....           --             --              --           106,869
Dividends paid ..................           --             --              --          (629,190)
Valuation adjustment, net .......           --             --            31,583          31,583
Tax benefit of exercise of
  stock options .................           --             --              --           400,000
Net income ......................           --             --              --         6,986,659
                                    ------------   ------------    ------------    ------------
September 30, 1997 ..............        187,766       (207,953)         (3,009)     38,276,194
                                    ------------   ------------    ------------    ------------
Acquisition of Catalog
  Resources, Inc. ...............
  Common stock issuable
  exchanged for long-term debt ..           --             --              --          (506,250)
Exercise of stock options .......           --             --              --           940,576
Stock dividend - converted shares           --             --              --               502
Stock purchased through
  Employee Stock Purchase Plan
  and employment agreements .....           --             --              --            89,921
Treasury stock acquired .........         26,897       (497,552)           --          (497,552)
Dividends paid ..................           --             --              --          (711,779)
Valuation adjustment, net .......           --             --             3,009           3,009
Tax benefit of exercise of
  stock options .................           --             --              --           780,000
Net income ......................           --             --              --         7,835,474
                                    ------------   ------------    ------------    ------------
September 30, 1998 ..............        214,663   ($   705,505)   $          0    $ 46,210,095
                                    ============   ============    ============    ============
</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
                      LCS INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>

For the Years Ended September 30,                               1998            1997            1996
                                                            ------------    ------------    ------------
<S>                                                         <C>             <C>             <C>         
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
   Net income ...........................................   $  7,835,474    $  6,986,659    $  7,837,645
                                                            ------------    ------------    ------------
   Adjustments to reconcile net income to net cash
       provided by operating activities:
       Depreciation and amortization ....................      2,610,430       2,504,699       2,321,718
       Deferred income taxes ............................        245,000        (220,600)        (21,000)
       Provision for doubtful accounts receivable .......        134,168         119,000          65,000
       Deferred compensation ............................        313,922            --              --
       Gain on sale of available-for-sale securities, net           --              (474)         (1,046)
                                                            ------------    ------------    ------------
       Total adjustments ................................      3,303,520       2,402,625       2,364,672
   Changes in operating assets and liabilities:
       Accounts receivable ..............................      1,008,611       1,236,276        (768,131)
       Prepaid expenses and other current assets ........       (968,626)       (426,921)        295,018
       Accounts payable and accrued expenses ............     (2,733,740)      2,366,400         347,847
       Income taxes payable .............................        640,725          74,450         215,635
       Deferred revenue .................................     (4,124,699)     (4,015,068)      4,525,436
       Security deposits ................................       (188,701)         12,893         331,262
       Other, net .......................................         51,851          15,244          29,111
                                                            ------------    ------------    ------------
       Total adjustments and changes ....................     (3,011,059)      1,665,899       7,340,850
                                                            ------------    ------------    ------------
   Net cash provided by operating activities ............      4,824,415       8,652,558      15,178,495
                                                            ------------    ------------    ------------

Cash flows from financing activities:
   Changes in note payable, long-term debt and capital
       leases (including current portion):
       Borrowings .......................................           --              --         2,500,000
       Repayments .......................................     (1,744,343)     (1,448,425)     (1,251,888)
   Dividends paid .......................................       (711,277)       (628,969)       (401,507)
   Exercise of stock options ............................        443,024         919,499       1,178,673
   Employee Stock Purchase Plan and employment
       agreement proceeds ...............................         89,921         106,869         153,978
                                                            ------------    ------------    ------------
   Net cash (used in) provided by financing activities ..     (1,922,675)     (1,051,026)      2,179,256
                                                            ------------    ------------    ------------

Cash flows from investing activities:
   Additions to property and equipment ..................     (1,682,820)     (1,762,911)     (4,362,085)
   Net sales (purchases) of investments .................      3,864,612      (3,113,332)     (9,732,515)
                                                            ------------    ------------    ------------
   Net cash provided by (used in) investing activities ..      2,181,792      (4,876,243)    (14,094,600)
                                                            ------------    ------------    ------------

Cash and cash equivalents:
   Net increase in cash and cash equivalents ............      5,083,532       2,725,289       3,263,151
   Cash and cash equivalents at beginning of period .....     14,619,271      11,893,982       8,630,831
                                                            ------------    ------------    ------------
   Cash and cash equivalents at end of period ...........   $ 19,702,803    $ 14,619,271    $ 11,893,982
                                                            ============    ============    ============
</TABLE>

Continued on next page.
<PAGE>
<TABLE>
                      LCS INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                          Continued from previous page.

<CAPTION>
For the Years Ended September 30,                       1998         1997          1996
                                                      ----------   ----------   ----------
<S>                                                   <C>          <C>          <C>       
Supplementary disclosures of cash flow information:
  Cash paid during the period for:
    Interest ......................................   $  263,000   $  273,000   $  219,000
    Income taxes ..................................   $4,210,000   $5,337,000   $4,261,000
</TABLE>

Supplemental disclosures of non-cash investing
   and financing activities:

   Valuation adjustment:
       For the year ended September 30, 1998, the valuation  adjustment  account
       is no longer  required  as a result  of  selling  the  available-for-sale
       securities  portfolio to which the valuation  adjustment related. For the
       years  ended  September  30, 1997 and 1996,  the account was  adjusted to
       reflect an increase in market values of the available-for-sale securities
       portfolio of $31,583 and $44,245,  respectively,  net of deferred  income
       taxes.

   Stock dividends:
       For the years ended  September 30, 1998,  1997 and 1996, 716, 318 and 360
       shares of the Company's common stock were paid as dividends upon exchange
       of 299, 133 and 150 shares,  respectively,  of the Company's "old" common
       stock.

   Treasury stock:
       For the year ended  September  30, 1998,  26,897  shares of the Company's
       outstanding  Common Stock were received in exchange for options exercised
       covering 176,000 shares of Common Stock.

   Long-term debt and acquisition of business:
       As a result of Amendment No. 2 of the Catalog  Resources,  Inc.  purchase
       agreement,  (as  explained  in  Note  2  to  the  Consolidated  Financial
       Statements),  additional long-term debt of $506,250 was recorded,  offset
       by charges to common stock  issuable of $418,899 and  additional  paid-in
       capital of $87,351 during fiscal 1998. For the years ended  September 30,
       1997 and 1996,  $455,552  and  $461,538  of  common  stock  issuable  was
       converted  into 38,762 and 34,621  issued  shares,  respectively,  of the
       Company's  common  stock,  in  accordance  with the terms of the  Catalog
       Resources, Inc. purchase agreement, as amended.

                 See Notes to Consolidated Financial Statements.
<PAGE>
Notes to Consolidated Financial Statements

Note 1 - Summary of Significant Accounting Policies

A - Business and Consolidation - The consolidated  financial  statements include
the accounts of LCS Industries,  Inc. and its Subsidiaries (the "Company").  The
Company  provides  outsourcing  services  specializing in fulfillment,  list and
computer services and international  telecommunications database development and
management.  The Company's  services are performed  within the United States and
Canada   except   for   a   computer   services   contract   with   a   non-U.S.
telecommunications  company. All material intercompany transactions and balances
have been eliminated in consolidation.

B - 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 revenue and expenses  during the period  reported.
Actual  results  could  differ  from those  estimates.  Estimates  are made when
accounting for allowance for doubtful accounts, sales adjustments,  depreciation
and  amortization,  carrying  value of  goodwill,  costs to  complete  long-term
contracts which are accounted for using the percentage-of-  completion method of
accounting, taxes and contingencies.

C - Cash and cash  equivalents - Cash and cash  equivalents  include  short-term
cash investments with maturities of three months or less at date of acquisition.
Such investments are carried at cost, which approximates market, and amounted to
$18,409,000 and $12,931,000 at September 30, 1998 and 1997, respectively.

D - Investments - The Company records its investments based on the provisions of
Statement of Financial Standards No. 115, "Accounting for Certain Investments in
Debt  and  Equity  Securities".  In  accordance  with  the  provisions  of  this
Statement,  the Company has classified its  investments in debt  securities into
held-to-maturity,  trading or available-for-sale  based upon management's intent
with respect to such  investments  and the  Company's  ability to so hold.  Debt
securities  are stated at amortized  cost.  Equity  securities are classified as
available-for-sale  or trading depending on management's  intent.  Market values
are based on publicly quoted market prices.

E - Long-Lived Assets - Effective October 1, 1996, the Company adopted Statement
of Financial  Accounting Standards ("SFAS 121") , "Accounting for the Impairment
of Long-lived  Assets and for Long-lived  Assets to Be Disposed Of".  Long-lived
assets  and  identifiable  intangibles  to be held  and used  are  reviewed  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount may not be recoverable.  Impairment is measured by comparing the
carrying value of the  long-lived  assets to the estimated  undiscounted  future
cash  flows  expected  to  result  from use of the  assets  and  their  eventual
disposition.  If the sum of the expected  undiscounted future cash flows is less
than  the  carrying  amount  of the  assets,  the  Company  would  recognize  an
impairment  loss. The impairment  loss, if determined to be necessary,  would be
measured  as the amount by which the  carrying  amount of the asset  exceeds the
fair value of the asset.  The Company  determined  that as of September 30, 1998
and 1997,  there had been no  impairment  in the  carrying  value of  long-lived
assets.

F -  Property  and  equipment  -  Property  and  equipment  are  stated at cost.
Depreciation  and  amortization,  which  includes  the  amortization  of  assets
recorded under capital leases, are computed using the straight-line  method over
the  estimated  serviceable  lives of the  respective  assets or the  initial or
remaining  terms of leases.  Leasehold  improvements  are  amortized,  using the
straight-line method, over the shorter of the estimated useful life of the asset
or the life of the lease.

G - Goodwill -  Represents  the  unamortized  excess cost of  acquiring  Catalog
Resources,  Inc.  over  the  fair  value  of  the  net  assets  received  at the
acquisition date. This asset is being amortized on the straight-line  basis over
30 years. The  consolidated  statements of operations for the fiscal years ended
September 30, 1998,  1997 and 1996 include  goodwill  amortization  of $286,300,
$286,300  and  $286,400,   respectively.  The  Company  regularly  assesses  the
recoverability of goodwill in accordance with the provisions of SFAS No. 121.

H - Revenue  recognition - Sales and related cost of sales are  recognized  when
services are  performed.  Revenues  under  long-term  consulting  contracts  are
recognized based on the  percentage-of-completion  method of accounting measured
by the percentage of labor hours  incurred to date to the estimated  total labor
hours required for each contract. Deferred revenue represents billings in excess
of revenues recognized as sales.

I - Income taxes - The Company  records  income taxes based on the provisions of
Statement  of  Financial  Standards  No.  109,  "Accounting  for Income  Taxes".
Deferred tax assets and liabilities are recognized for the estimated  future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying amounts

                                       20
<PAGE>
of existing assets and liabilities and their respective tax bases.  Deferred tax
assets and  liabilities  are measured  using enacted tax rates in effect for the
year in which  those  temporary  differences  are  expected to be  recovered  or
settled.

J - Earnings Per Common Share - Effective  October 1, 1997, the Company  adopted
the provisions of Statement of Financial  Accounting Standards ("SFAS") No. 128,
"Earnings per Share",  issued in March,  1997. Basic earnings per share includes
no dilution and is computed by dividing income available to common  shareholders
by the  weighted-average  number of common  shares  outstanding  for the period.
Diluted  earnings per share reflects the potential  dilution of securities  that
could share in the earnings of the Company.  The prior years' earnings per share
amounts have been restated to reflect the provisions of SFAS No. 128.

The following is the  reconciliation  of the weighted average shares used in the
computations of basic and dilutive earnings per share:
<TABLE>
<CAPTION>
September 30,                                          1998        1997         1996
                                                     ---------   ---------   ---------
<S>                                                  <C>         <C>         <C>      
Weighted average common shares outstanding
      used for basic earnings per share ..........   4,808,274   4,624,702   4,329,663

Weighted average dilutive stock options ..........     259,633     371,985     627,947

Shares issuable in connection with the acquisition
      of Catalog Resources, Inc. .................      89,733     107,151     160,475
                                                     ---------   ---------   ---------
Weighted average common shares outstanding
      for dilutive earnings per share ............   5,157,640   5,103,838   5,118,085
                                                     =========   =========   =========
</TABLE>

The weighted  average shares used in the computations of fiscal years 1998, 1997
and 1996 diluted  earnings per share  include the shares  issuable in accordance
with the agreement, as amended, related to the acquisition of Catalog Resources,
Inc.

K - Disclosure of Accounting  Pronouncements  - In June,  1997,  the FASB issued
SFAS No.  130,  "Reporting  Comprehensive  Income."  SFAS  No.  130  requires  a
reconciliation   of  net  income  to  comprehensive   income  in  the  financial
statements.  Comprehensive  income  includes  items that are  excluded  from net
income and reported as components of  stockholders'  equity,  such as unrealized
gains and losses on certain  investments in debt and equity securities,  foreign
currency  items and  minimum  pension  liability  adjustments.  SFAS No.  130 is
effective for fiscal years beginning after December 15, 1997.  Management of the
Company does not believe  there will be any material  effect from  adopting SFAS
No. 130.

In June,  1997, the FASB issued SFAS No. 131,  "Disclosure  about Segments of an
Enterprise  and Related  Information."  SFAS No. 131 requires  the  reporting of
profit and loss,  specific  revenue and expense items and assets for  reportable
segments.  It also requires the reconciliation of total segment revenues,  total
segment  profit or loss,  total segment  assets and other amounts  disclosed for
segments  to  the  corresponding   amounts  in  the  general  purpose  financial
statements.  SFAS No. 131 is effective for fiscal years beginning after December
15, 1997.  The Company is planning to adopt the  provisions  of SFAS No. 131 for
its fiscal year beginning  October 1, 1998 but has not yet fully determined what
additional disclosures may be required to complete its implementation.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
instruments and Hedging Activities",  which establishes accounting and reporting
standards for  derivative  instruments  and hedging  activities.  Generally,  it
requires  that an  entity  recognized  all  derivatives  as  either  an asset or
liability and measure those  instruments at fair value,  as well as identify the
conditions for which a derivative may be specifically  designed as a hedge.  The
Company does not have any derivative instruments.


Note 2 - Acquisition

On April 1, 1993,  the Company  completed  the  purchase of all the  outstanding
stock of Catalog  Resources,  Inc.  ("CRI").  CRI's  results of  operations  are
included in the Company's Consolidated  Statements of Income from that date. The
initial  purchase price was $3,500,000 with additional  payments earned if CRI's
pretax income, as defined

                                       21
<PAGE>
by the agreement,  reached  certain  amounts during the next five years.  Of the
initial purchase price, a total of $1,900,000 was paid consisting of $950,000 in
cash and 324,956 shares of the Company's common stock.

Effective  August 1,  1994,  the  purchase  agreement  was  amended  to limit to
$8,100,000 the aggregate amount of additional purchase  consideration to be paid
in addition to the $1,900,000  paid at such date.  The  additional  amount to be
paid is based upon the operating  performance  of CRI over the eight year period
beginning October 1, 1993. Based upon CRI's earnings for each fiscal year ending
on September 30, a maximum annual payment of $1,012,500 is payable in January of
the following  year,  which amount is subject to a  dollar-for-dollar  reduction
based on CRI's operating  results.  Such payments are calculated  separately for
each year.  Each  payment  will  consist of 50 percent in cash and 50 percent in
common  stock of the Company  with the maximum  number of shares to be delivered
under the purchase  agreement,  as amended,  not to exceed 660,000  shares.  The
portion of these  payments  not made in stock is payable in cash.  The number of
shares to be issued will be based on the market value, as defined, of the common
stock at the future payment dates.  Based on the terms of the amended  agreement
and the achievement of the required  operating  results for the preceding fiscal
year,  payments of $1,012,500,  50 percent in cash and 50 percent in stock, were
made on January 1, 1995, 1996 and 1997. As of September 30, 1997, 538,287 shares
had been delivered under the provisions of the purchase agreement, as amended.

On December 30, 1997, the Company and former  shareholders of Catalog Resources,
Inc. agreed to Amendment No. 2 of the purchase agreement dated April 1, 1993 and
amended August 1, 1994. This Amendment  provided for the payment made January 2,
1998 of $1,012,500 to be 100 percent in cash compared to the  previously  agreed
50 percent in cash and 50 percent in Common Stock of the  Company,  subject to a
maximum  number of shares to be issued  of  660,000.  Accordingly,  the  current
portion of long-time debt at December 31, 1997 was increased by $506,250 (50% of
the $1,012,500 payment). This was offset by a reduction in common stock issuable
of  $418,899,  representing  the  present  value at  September  30,  1995 of the
originally  anticipated  stock  issuance,  and a charge  to  additional  paid-in
capital of $87,351.

As a result of Amendment No. 2, the parties  agreed to reduce the maximum number
of shares  issuable  under the amended  agreement by the shares which would have
been  issued  on  January  2,  1998  based  on the  provisions  of the  original
agreement.  The revised  maximum  number of shares  issuable is 628,020 of which
538,287 shares have been previously issued.

The common stock issuable amount reflects the maximum number of shares (628,020,
as adjusted for  Amendment  No. 2 to the purchase  agreement,  less those shares
issued and delivered  prior to September 30, 1995)  issuable  under the terms of
the purchase agreement,  as amended,  based on the market price of the Company's
common stock at September 30, 1995. This amount is subject to adjustment,  based
on the future  movements in the market price of the Company's  common stock.  No
adjustment was recorded  during the current fiscal year.  Based on the operating
results  for the fiscal  year ended  September  30,  1998,  the  January 1, 1999
scheduled payment of $1,012,000 will be paid.


Note 3 - Investments

During the year ended  September 30, 1997, the valuation  account related to the
available-for-sale  marketable  securities  portfolio was adjusted to reflect an
increase in market  values of  $31,583,  net of deferred  taxes.  The  valuation
account  was no longer  required  in fiscal year 1998 as a result of selling the
available-for-sale securities portfolio to which the valuation account related.

                                       22
<PAGE>
The following  table sets forth the components of investments  held at September
30, 1998:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
                                                          Market   Unrealized Holding
Held-to-maturity:                            Cost         Value           Gain
-------------------------------------------------------------------------------------
<S>                                      <C>           <C>            <C>        
U.S. Government due January 31, 1999 .   $    24,996   $    25,016    $        20
Commercial paper-various issues ......    11,454,124    11,454,124              0
-------------------------------------------------------------------------------------
Total ................................   $11,479,120   $11,479,140    $        20
-------------------------------------------------------------------------------------
</TABLE>

During  the  year  ended  September  30,  1998,  proceeds  from  redemptions  of
investments  were  $36,731,307.  The Company uses  specific  identification  for
securities sold.

The following  table sets forth the components of investments  held at September
30, 1997:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
                                                         Market    Unrealized Holding
Available-for-sale:                          Cost         Value          Loss
-------------------------------------------------------------------------------------
<S>                                      <C>           <C>           <C>         
U.S. Government due January 31, 1999 .   $    24,996   $    24,695   $      (301)
Equity securities ....................       103,799        99,013        (4,786)
-------------------------------------------------------------------------------------
Total ................................   $   128,795   $   123,708   $    (5,087)
-------------------------------------------------------------------------------------

Held-to-maturity:
-------------------------------------------------------------------------------------
Commercial paper-various issues ......   $14,410,101   $14,410,101   $         0
-------------------------------------------------------------------------------------
</TABLE>

During  the  year  ended  September  30,  1997,  proceeds  from  redemptions  of
investments were  $24,445,993  resulting in a realized gain of $474. The Company
uses specific identification for securities sold.

                                       23
<PAGE>
Note 4 - Allowance for Doubtful Accounts

Activity  in the  Allowance  for  Doubtful  Accounts  for the three  years ended
September 30, 1998 includes:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Year Ended September 30,                    1998           1997          1996
--------------------------------------------------------------------------------
<S>                                       <C>           <C>           <C>      
Balance at beginning of year .........    $ 496,000     $ 627,000     $ 624,000
Additions - charged to expense .......      134,000       119,000        65,000
Deductions ...........................     (128,000)     (250,000)      (62,000)
--------------------------------------------------------------------------------
Balance at end of year ...............    $ 502,000     $ 496,000     $ 627,000
--------------------------------------------------------------------------------
</TABLE>

Note 5 - Property and Equipment

The components of property and equipment include:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
September 30,                                              1998          1997
--------------------------------------------------------------------------------
<S>                                                    <C>           <C>        
Furniture and fixtures .............................   $ 3,267,647   $ 3,094,284
Leasehold improvements .............................     2,231,127     2,207,228
Computer equipment .................................     8,216,147     7,508,056
Computer equipment under capital leases ............     1,915,567     1,915,567
Other equipment ....................................     4,984,534     4,228,200
--------------------------------------------------------------------------------
                                                        20,615,022    18,953,335
Less:  Accumulated depreciation and amortization ...    14,162,493    11,859,545
--------------------------------------------------------------------------------
                                                       $ 6,452,529   $ 7,093,790
--------------------------------------------------------------------------------
</TABLE>

Depreciation   and   amortization   charged  to  operations  was   approximately
$2,324,000, $2,218,000, and $2,035,000 for 1998, 1997 and 1996, respectively.

Note 6 - Unsecured Line of Credit

A bank holds available,  until March 31, 1999, a $5,000,000  unsecured bank line
of credit.  The line of credit has been renewed  annually.  During  fiscal years
1998 and 1997, the available line of credit was not used.
<PAGE>

Note 7 - Long-Term Debt

Long-term debt consists of:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
September 30,                                               1998         1997
--------------------------------------------------------------------------------
<S>                                                      <C>          <C>       
Payable to former shareholders of CRI ...................$2,176,260   $2,499,945
Notes payable to banks .................................. 1,424,485    2,032,099
--------------------------------------------------------------------------------
                                                          3,600,745    4,532,044
Less: Current portion ................................... 1,026,147    1,087,511
--------------------------------------------------------------------------------
                                                         $2,574,598   $3,444,533
--------------------------------------------------------------------------------
</TABLE>

See Note 2 for a description  of the amounts due to the former  shareholders  of
CRI.

                                       24
<PAGE>
Notes  payable to banks  consist  of one note for a five year term loan  payable
through  December 15, 1998 with interest at 6.9%. The loan is secured by certain
equipment  located at CRI with a net book value of $180,314 as of September  30,
1998. A second note is for a five year term loan  payable  through June 27, 2001
with interest at 7.99%. This loan is secured by certain equipment located at CRI
with a net book value at September 30, 1998 of $1,631,812.  CRI must continue to
meet a financial ratio test and maintain net worth of at least  $5,000,000 after
September 30, 1996. The Company has guaranteed the repayment of this loan.

Maturities of long-term debt include:

--------------------------------------------------------------------------------
        Fiscal Year Ended
          September 30,                                    Amount
--------------------------------------------------------------------------------
            1999                                       $  1,026,147
            2000                                          1,018,464
            2001                                            767,215
            2002                                            788,919
--------------------------------------------------------------------------------
Total long-term debt                                   $  3,600,745
--------------------------------------------------------------------------------

Note 8 - Provision for Income Taxes

The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Year Ended September 30,                                1998           1997          1996
--------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>            <C>        
Current
      Federal ...................................   $ 3,994,000   $ 4,413,000    $ 4,292,000
      State .....................................     1,137,000     1,244,000      1,216,000
--------------------------------------------------------------------------------------------
        Total provision for current income taxes      5,131,000     5,657,000      5,508,000
--------------------------------------------------------------------------------------------
Deferred
      Federal ...................................       175,000      (179,000)       (22,000)
      State .....................................        70,000       (42,000)         1,000
--------------------------------------------------------------------------------------------
        Total provision for deferred income taxes       245,000      (221,000)       (21,000)
--------------------------------------------------------------------------------------------
        Total provision for income taxes ........   $ 5,376,000   $ 5,436,000    $ 5,487,000
--------------------------------------------------------------------------------------------
</TABLE>

The total  provision  for income  taxes varies from the U.S.  federal  statutory
rate. The following  reconciliation shows the significant differences in the tax
at statutory and effective rates:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Year Ended September 30,                                    1998           1997          1996
-------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>            <C>        
Federal income tax at statutory rate ................   $ 4,524,000    $ 4,248,000    $ 4,564,000
State income taxes - net of federal tax benefit .....       794,000        740,000        791,000
Non-deductible expenses .............................       145,000        149,000        148,000
Non-taxable income ..................................        (1,000)        (5,000)       (16,000)
Valuation allowance against capital loss carryforward       (86,000)       298,000           --
Other ...............................................           --           6,000           --
-------------------------------------------------------------------------------------------------
        Total provision for income taxes ............   $ 5,376,000    $ 5,436,000    $ 5,487,000
-------------------------------------------------------------------------------------------------
</TABLE>

                                       25
<PAGE>
The components of deferred income tax assets and liabilities include:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
September 30,                                                             1998                                   1997
------------------------------------------------------------------------------------------------------------------------------------
                                                              Net Current      Net Non-current        Net Current    Net Non-current
                                                                 Asset            Liability              Asset         Liability
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                 <C>                 <C>                 <C>      
Property and equipment .............................          $    --             $ 235,000           $    --             $ 251,000
Allowance for doubtful accounts ....................            205,000                --               201,000                --
Non-deductible expenses ............................               --                  --               392,000                --
Unrealized holding loss on
      marketable securities ........................               --                  --                  --                (2,000)
Vacation accrual ...................................             90,000                --                91,000                --
Deferred compensation ..............................               --              (128,000)               --                  --
Capital loss carryforward ..........................            212,000                --               298,000                --
Valuation allowance against capital
      loss carryforward ............................           (212,000)               --              (298,000)               --
------------------------------------------------------------------------------------------------------------------------------------
        Total ......................................          $ 295,000           $ 107,000           $ 684,000           $ 249,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Note 9 - Stock Options

The Company has an Incentive  Stock  Option Plan (the "Plan")  which was adopted
and became  effective in May, 1993. The Plan calls for granting  incentive stock
options to certain officers and other employees,  as defined,  under current tax
laws to purchase  shares of the Company's  common  stock.  The stock options are
exercisable at prices not less than the fair market value of the common stock on
the date the options are granted.  The  aggregate  number of shares which may be
issued under the Plan is 2,200,000.

The 1996 non-qualified  Non-Employee  Directors Stock Option Plan ("1996 Plan"),
provides for the granting of options covering 250,000 shares.  Each non-employee
director,  who is a non-employee director at the date of grant of the option and
who was a non-employee at all times during the fiscal year preceding the date of
grant,  shall be granted an option to purchase 11,000 shares of the common stock
on the  date  the  1996  Plan  was  approved  by the  stockholders  and on  each
succeeding  fifth  business day  following  the public  release of the Company's
annual  earnings  for any fiscal year in which sales and net income per share of
common  stock  increase  by more than 5% over the  prior  fiscal  year.  Options
granted  under the 1996 Plan are based on the market value on the date of grant.
During  fiscal  1997,  22,000  shares  were  granted,  based on fiscal year 1996
results,  at a price of $15.00,  all of which are outstanding.  At September 30,
1998, 8,800 of these shares were exercisable. No options were granted for fiscal
years 1998 and 1997. The 1993 non-qualified  Non-Employee Directors Stock Option
Plan ("1993 Plan") was terminated when the 1996 Plan was approved. The 1993 Plan
has 11,600  options  which  remain  outstanding  at prices of  $3.53-$16.00.  At
September 30, 1998,  7,400 shares were  exercisable  at prices of  $3.53-$16.00.
There was no other activity in this plan during fiscal years 1998 and 1997.

Non-employee  directors  have been granted  non-qualified  options,  at the fair
market value on the date of grant,  to purchase  54,000  shares of the Company's
common  stock at prices of $2.05 to $5.38 per  share.  At  September  30,  1998,
46,000  options  were  exercisable.  During the current  year,  no options  were
exercised and no options were cancelled.

During the year ended September 30, 1995,  certain  officers of the Company were
issued  non-qualified  options to purchase 75,000 shares of the Company's common
stock at a price of $5.75 per share (100 percent of fair market  value).  During
fiscal year 1998, options to purchase 50,000 shares were exercised.

                                       26
<PAGE>
The following  schedule sets forth the activity under the 1983  Incentive  Stock
Option Plan for the years ended September 30, 1998,  1997 and 1996.  Granting of
options under this plan ceased in May, 1994.

--------------------------------------------------------------------------------
Incentive options                          Number                 Option Price
--------------------------------------------------------------------------------
Outstanding September 30, 1995             565,900              $1.25  - $  3.75
Exercised                                 (165,200)             $2.05  - $  3.41
--------------------------------------------------------------------------------
Outstanding September 30, 1996             400,700              $1.25  - $  3.41
Exercised                                 (176,300)             $2.25  - $  3.41
--------------------------------------------------------------------------------
Outstanding September 30, 1997             224,400              $1.25  - $  2.69
Exercised                                 (136,400)             $1.25  - $  2.69
--------------------------------------------------------------------------------
Outstanding September 30, 1998              88,000              $ 2.61
--------------------------------------------------------------------------------
Exercisable September 30, 1998              88,000              $ 2.61
--------------------------------------------------------------------------------

The  following  schedule  sets forth the  activity of the 1993  Incentive  Stock
Option Plan for the years ended September 30, 1998, 1997 and 1996.

--------------------------------------------------------------------------------
Incentive options                          Number                 Option Price
--------------------------------------------------------------------------------
Outstanding September 30, 1995             554,374              $ 2.88  - $16.85
Granted                                    110,000              $15.50
Exercised                                  (32,403)             $ 2.88  - $ 5.75
Expired or Cancelled                       (23,998)             $ 2.96  - $ 5.75
--------------------------------------------------------------------------------
Outstanding September 30, 1996             607,973              $ 2.96  - $16.85
Granted                                    110,800              $12.75  - $15.00
Exercised                                  (17,375)             $ 2.96  - $15.50
Expired or Cancelled                      (117,448)             $ 2.96  - $15.50
--------------------------------------------------------------------------------
Outstanding September 30, 1997             583,950              $ 2.96  - $16.85
Granted                                    159,200              $14.00  - $14.63
Exercised                                  (63,200)             $ 2.96  - $15.50
Expired or Cancelled                      (215,500)             $ 2.96  - $16.85
--------------------------------------------------------------------------------
Outstanding September 30, 1998             464,450              $ 2.96  - $16.85
--------------------------------------------------------------------------------
Exercisable September 30, 1998             195,725              $ 2.96  - $16.85
--------------------------------------------------------------------------------
Available for grant September 30, 1998   1,602,146
--------------------------------------------------------------------------------

                                       27
<PAGE>
The  following  schedule  sets forth the status of the  incentive  stock options
outstanding and exercisable at September 30, 1998:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                 Options Outstanding                      Options Exercisable
------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Weighted-Average
------------------------------------------------------------------------------------------------------------------------------------
Range of                                                                                                  Average
Exercise                           Number of                Remaining               Exercise             Number of      Exercise
Prices                               Shares                 Life-Years                Price                Shares         Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>                          <C>                  <C>                   <C>             <C>  
1983 Incentive Plan
$2.61                               88,000                      4.5                  $ 2.61                 88,000        $ 2.61

1993 Incentive Plan
$2.96 to $5.50                      62,650                      6.1                    3.84                 50,150          3.79
$12.75 to $16.85                   401,800                      8.2                   14.49                145,575         15.19
------------------------------------------------------------------------------------------------------------------------------------
Total 1993 Plan                    464,450                                                                 195,725
------------------------------------------------------------------------------------------------------------------------------------
Total Plans                        552,450                                                                 283,725
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting   Standards   ("SFAS")   No.   123,   "Accounting   for   Stock-Based
Compensation,"  issued in October,  1995. In accordance  with the  provisions of
SFAS No. 123, the Company applies APB Opinion 25 and related  interpretations in
accounting  for its stock  option  plans and,  accordingly,  does not  recognize
compensation  cost.  If the Company had elected to recognize  compensation  cost
based on the fair value of the options  granted at the various  grant dates,  as
prescribed  by SFAS No. 123,  net income and  earnings per share would have been
adjusted to the pro forma amounts indicated in the following table:

<TABLE>
<CAPTION>
Year Ended September 30,                        1998              1997           1996
------------------------                        ----              ----           ----
<S>                                        <C>             <C>             <C>          
Net income - as reported                   $   7,835,474   $   6,986,659   $   7,837,645
Net income - pro forma                         7,548,105       6,751,871       7,726,185
Diluted earnings per share - as reported            1.52            1.37            1.53
Diluted earnings per share - pro forma              1.46            1.32            1.51
</TABLE>

The fair value of each option grant was estimated on the date of grant using the
Binery Option Pricing Model with the following assumptions:

<TABLE>
<CAPTION>
                                          1998             1997           1996
                                          ----             ----           ----
<S>                                     <C>            <C>            <C> 
Expected dividend yield -                   1.10%           .80%           .80%
Expected stock volatility -                48.83%         59.65%         59.65%
Risk free interest rates -              4.61-4.66%     5.86-6.13%     5.84-5.93%
Expected life of options -              7 Years        5-10 years     5-7 years
</TABLE>

The  effects  of  applying  SFAS No.  123 in this pro forma  disclosure  are not
necessarily indicative of the effect on future amounts.

The Company's stock options are not  transferrable,  and the actual value of the
stock options that an employee may realize, if any, will depend on the excess of
the market price on the date of exercise  over the exercise  price.  The Company
has based its  assumption  for stock price  volatility on the variance of weekly
closing  prices of the Company's  stock for the last three years.  The risk-free
rate of return used equals the yield on zero-coupon U.S.  Treasury issues on the
grant date based on the grants estimated life.

                                       28
<PAGE>
Note 10 - 1994 Employee Stock Purchase Plan and Employment Agreements

At the annual meeting of  stockholders  in March,  1994, the 1994 Employee Stock
Purchase  Plan (the  "Purchase  Plan") was adopted.  The Purchase  Plan provides
eligible  employees  of the  Company and its  subsidiaries  the  opportunity  to
acquire up to 300,000  shares of common  stock.  Purchases are made on a monthly
basis  through  payroll  deductions  of 1  percent  to 10  percent  of  eligible
compensation. Shares are offered at a 15 percent discount from the closing price
on  the  last  trading  date  of  each  month  with  no  brokerage  commissions.
Participation  in the Purchase Plan began September 1, 1994. For the years ended
September 30, 1998, 1997 and 1996,  shares  purchased  totaled 6,341,  6,892 and
9,968, respectively.

Employment  agreements with current and former officers of a subsidiary  include
the provision for the  quarterly  purchase of the Company's  common stock to the
extent of 5 percent of any bonus  earned,  as  defined.  Shares are offered at a
discount from the quarter end closing  market price of the common stock.  During
fiscal  years  1998,  1997 and 1996,  a total of 395,  1,713  and 1,749  shares,
respectively,  were purchased  under these  agreements.  Effective  December 31,
1997,  the  election  for  future  purchases  was  terminated  by the  remaining
participant.


Note 11 - Employee Retirement Savings Plan (401K)

The Company sponsors a tax deferred  retirement savings plan ("401K Plan") which
permits  eligible   employees  to  contribute   varying   percentages  of  their
compensation up to the limit allowed by the Internal Revenue  Service.  The 401K
Plan also provides for  discretionary  Company  contributions.  No discretionary
contributions were made for the years ended September 30, 1998, 1997 and 1996.

The Company matches  employees'  contributions to a maximum of 25 percent of the
employee's first 6 percent  contributed.  The Company's  matching  contributions
were temporarily  increased to 35 percent of eligible employee  contributions in
fiscal  years  1998,  1997 and 1996,  during the period of January 1 to June 30.
Matching  contributions charged to expense were $233,000,  $189,000 and $196,000
for the fiscal years ended September 30, 1998, 1997 and 1996, respectively.


Note 12 - Non-Qualified Deferred Compensation Plans

During the current fiscal year, the Company  established  Plans providing senior
and other  executives of the Company and its  subsidiaries  the  opportunity  to
participate in unfunded deferred compensation programs.

The Executive  Non-Qualified Deferred Compensation Plan provides senior officers
retirement  benefits  through the deferring of  compensation,  as defined,  on a
pre-tax  basis to a maximum  of  $30,000  per year.  The  Company  provides a 30
percent matching  contribution of the amounts deferred.  Participants fully vest
in the Company's matching contributions and related  earnings/losses after three
years of service with the Company.

The  Management   Non-Qualified  Deferred  Compensation  Plan  provides  certain
management  employees retirement benefits through the deferring of compensation,
as defined,  on a pre-tax  basis to a maximum of $10,000  per year.  The Company
provides  a  20  percent   matching   contribution  of  the  amounts   deferred.
Participants  fully vest in the  Company's  matching  contribution  and  related
earnings/losses  after five years of  participation in the plan or attaining age
62.

The Plans are not qualified under Section 401 of the Internal  Revenue Code and,
therefore, the participants are general creditors of the Company with respect to
these benefits.  The Company has established  irrevocable rabbi trusts to assist
in funding the Plan's benefits.  Trust investments are recorded as assets of the
Company with the related earnings/losses passed on to the Plan participants.

Deferred compensation expense for the year,  represented by the Company matching
contributions and net earnings/losses, was $77,000.

                                       29
<PAGE>
Note 13 - Operating Lease Commitments

The  Company  and its  subsidiaries  lease  certain  properties,  equipment  and
software  under  noncancellable  long-term  operating  leases,  which  expire at
various dates.  Certain of the leases on real estate require the payment of real
estate taxes. Minimum rentals under the leases are as follows:

--------------------------------------------------------------------------------
         Fiscal Year                                   Operating Leases
--------------------------------------------------------------------------------
              1999                                         $ 2,309,000
              2000                                           1,594,000
              2001                                           1,224,000
              2002                                           1,204,000
              2003                                           1,141,000
        Thereafter                                           1,409,000
--------------------------------------------------------------------------------
      Total                                                 $8,881,000
--------------------------------------------------------------------------------

Real estate, equipment and software operating lease costs include:
--------------------------------------------------------------------------------
Year Ended September 30,           1998               1997             1996
--------------------------------------------------------------------------------
Real estate                    $2,634,000         $2,535,000        $2,324,000
Equipment and software            719,000            740,000           788,000
--------------------------------------------------------------------------------
    Total                      $3,353,000         $3,275,000        $3,112,000
--------------------------------------------------------------------------------

Note 14 - Other (Income) Expense

In June, 1997, the Company  recorded a loss on investment of $954,000  ($863,000
net of taxes)  representing  a  non-recurring  charge for the  write-off  of the
Company's  investment in McIntyre & King, Ltd. ("M&K").  This charge represented
$.17 per diluted share.  The Company's  Board of Directors  decided to sever the
relationship  with  M&K due to  unexpected  operating  losses  that  would  have
required  unacceptable  demands  on  management's  time  and  financial  support
required to attempt to return M&K to profitability. As a result, effective April
5, 1997,  the Company  agreed to rescind its  acquisition of M&K. The rescission
agreement, dated June 30, 1997, provided for the return of a portion of the down
payment in one year. However, recovery was uncertain and, therefore, the Company
expensed all payments, advances and all related costs. On November 28, 1997, the
Company  received  a  payment  from  M&K  of  approximately  $210,000  in  final
settlement of a portion of the down payment,  which was recorded in other income
in the quarter ended December 31, 1997.

On October 6, 1997,  the Company  announced  the  recording  of a  non-recurring
charge of  $960,000  ($570,000  net of taxes or $.11 per  diluted  share) in the
period  ended  September  30,  1997  related  to death  benefits  payable  under
employment  agreements  and other  severance  amounts due the  Company's  former
Chairman, the late Arnold J. Scheine who passed away on September 22, 1997.


Note 15 - Fair Value of Financial Instruments

The   carrying   amounts   of  cash  and   cash   equivalents,   investments   -
held-to-maturity,  trade receivables, other current assets, accounts payable and
amounts  included  in  investments  and  accruals  meeting the  definition  of a
financial  instrument  approximate  fair value.  The carrying values and related
estimated  fair  values for the  Company's  long-term  debt  payable to banks is
estimated based on the current rates offered to the Company for debt of the same
maturities as follows:

                                       30
<PAGE>
--------------------------------------------------------------------------------
September 30,                    1998                     1997
--------------------------------------------------------------------------------
Carrying value                $1,424,000               $2,032,000
Fair value                     1,439,000                2,037,000
--------------------------------------------------------------------------------

Note 16 - Commitments and Contingencies

The Company is involved in various legal claims and disputes that are normal and
incidental  to the  Company's  business.  In the  opinion of  management,  after
consultation  with legal counsel,  the amount of losses that might be sustained,
if any,  from such claims and disputes  would not have a material  effect on the
Company's financial statements.

The Company has  entered  into  agreements  with  certain of its key  management
employees  providing  for  payments  totalling  $385,000 if there is a change in
control transaction signed by the Company.

At  September  30,  1998,  the  Company  and its  subsidiaries  have  employment
agreements  with certain of their  officers with terms expiring at various times
through   September  30,  2002,  which  provide  for  aggregate  future  minimum
compensation of $1,175,000.  One of the agreements provides for a bonus based on
the results of the respective subsidiary's operations. Certain of the agreements
provide for severance payments equal to six months salary.

During the current fiscal year, one of the Company's  subsidiaries had in effect
a $500,000 standby letter of credit agreement  securing the timely payments,  by
the subsidiary, of amounts owing to a customer. No claims were made against this
agreement during the year. The fair value of the standby agreement  approximates
the cost of the agreement.


Note 17 - Major Customers

For the years ended September 30, 1998, 1997 and 1996, revenues recognized under
the  contract  to provide  computer  services  to a non-U.S.  telecommunications
company  amounted to 12 percent,  15 percent  and 14 percent,  respectively,  of
consolidated sales.


Note 18 - Subsequent Event

On December  17,  1998,  the  Company and  CustomerONE  Holding  Corporation,  a
subsidiary  of  Onex  Corporation  announced  that  they  have  entered  into  a
definitive  merger agreement  pursuant to which  CustomerONE will acquire all of
the  outstanding  shares of LCS  common  stock at a price of $17.50 per share in
cash,  representing  an  aggregate  transaction  value  of  approximately  $97.3
million.  Onex  Corporation  is a  diversified  company  with 1997  consolidated
revenues  of $11  billion  Canadian  and  consolidated  assets  of $6.4  billion
Canadian.

Pursuant to the merger agreement,  CustomerONE will make a cash tender offer for
all of the  outstanding  common shares of LCS common stock.  The tender offer is
expected to commence the week of December 21.  Consummation  of the tender offer
is subject to U.S.  antitrust  regulatory  clearance and other customary closing
conditions.

The  tender  offer is not  subject  to  financing.  Onex has  agreed to  provide
CustomerONE with all necessary funds to effect the tender offer and merger.

The Board of  Directors  of LCS has  unanimously  approved  the  merger  and has
recommended that LCS stockholders  accept the tender offer and approve and adopt
the merger agreement.

                                       31
<PAGE>
                                  * * * * * *

Item 9.   Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure.

    None.



                                       32
<PAGE>
                                    Part III

Item 10. Directors, Executive Officers and Significant Employees of the
         Registrant.

    The  information  appearing in the Company's Proxy Statement with respect to
its 1999  Annual  Meeting of  Stockholders  (The  "Proxy  Statement")  under the
caption "Election of Directors" is incorporated herein by reference.

    The  following is a list as of December 1, 1998,  showing the names and ages
of all principal executive officers and significant employees of the Company and
its  subsidiaries,  all  positions  and offices with the Company held by each of
them and the year from which each said office has been  continuously  held.  All
executive  officers are elected  annually and hold office at the pleasure of the
Company's Board of Directors.
<TABLE>
<CAPTION>
                                                   Position with the Company
Name                                  Age          and Date from which Held
----                                  ---          ------------------------
<S>                                    <C>         <C>
William Rella.................         56          Chief Executive Officer - 1998
                                                   President, Chief Operating Officer and Director - 1997
                                                   President-Fulfillment Services - 1994

Marvin Cohen................           64          Senior Vice President and Secretary-1981
                                                   Director-1969

Pat R. Frustaci..............          44          Vice President - Finance, Chief Financial Officer,
                                                   Treasurer and Assistant Secretary - 1995

James E. Quinlan.........              60          Controller-1988

Lon Mandel...................          43          President and Chief Operating Officer - The SpeciaLISTS,
                                                   Ltd. - 1987
</TABLE>

         All executive officers of the Company and other significant  employees,
other than Mr. Frustaci, have, as their principal occupations,  been employed in
positions  as officers  with the Company or its  subsidiaries  for more than the
last five years. Mr. Frustaci was Vice President and Chief Financial Officer for
Image Business Systems, Inc. during 1994.

         Based  solely  upon a review of Forms 3 and 4 and  amendments  thereto,
furnished to the Company  pursuant to Rule 16a-3(e) during its fiscal year ended
September 30, 1998, and Forms 5 and amendments  thereto furnished to the Company
with  respect  to such  fiscal  year,  there  was no  officer,  director  or 10%
stockholder  of the Company who failed to file, on a timely basis,  as disclosed
in the above Forms,  reports  required by Section  16(a) of the  Securities  and
Exchange Act of 1934, as amended, during such fiscal year or prior fiscal years.

                                       33
<PAGE>
Item 11. Executive Compensation

         The  information  appearing  in the Proxy  Statement  under the caption
"Executive Compensation" is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

         The  information  appearing  in the Proxy  Statement  under the caption
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
herein by reference.

Item 13. Certain Relationships and Related Transactions

         The  information  appearing  in the Proxy  Statement  under the caption
"Election of Directors" is incorporated herein by reference.


                                       34
<PAGE>
                                    Part IV.

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

(a)1.         Financial Statements                                     Page No.
              --------------------                                     -------- 
              Independent Auditors' Opinion.......                       14

              Consolidated Statements of Income
              for the Years Ended September 30,
              1998, 1997 and 1996.................                       15

              Consolidated Balance Sheets as
              of September 30, 1998 and 1997......                       16

              Consolidated Statements of Changes
              in Stockholders' Equity for the
              Years Ended September 30, 1998,
              1997 and 1996......................                        17

              Consolidated Statements of Cash Flows
              for the Years Ended September 30,
              1998, 1997 and 1996.................                       18

              Notes to Consolidated Financial Statements                 20

(a)2.         Financial Statement Schedules
              -----------------------------

         Schedules  have been  omitted  because they are not  applicable  or the
         required  information  is shown in the  financial  statements  or notes
         thereto.

                                       35
<PAGE>
                                    Exhibits
                                    --------


(a)      2.1            Agreement and Plan of Merger by and among
                        LCS Industries, Inc., CustomerONE Holding
                        Corporation and Catalog Acquisition Co. dated
                        as of December 17, 1998 (15)

         3.1            Restated Certificate of Incorporation of the Company (1)

         3.2            By-laws, as amended, of the Company (2)

         10.1           Lease Agreement dated April 11, 1980, as
                        amended, between the Company and Saul
                        Rachmiel, with respect to premises located
                        at 120 Brighton Road, Clifton, New Jersey (3)

         10.2           1983 Stock Option Plan as Amended and
                        Restated (4)

         10.3           1993 Incentive Stock Option Plan as Amended
                        and Restated (11)

         10.4           1993 Non-Employee Directors Stock Option Plan (8)

         10.5           The Bank of New York letter  dated July 10, 1998 related
                        to the holding available of a line of credit

         10.6           Master Equipment Lease Agreement dated
                        December 8, 1989 between the Company and
                        Forsythe/McArthur Associates, Inc. (5)

         10.7           Agreement of Purchase and Sale of Stock dated
                        April 1, 1993 among the Company,
                        Catalog Resources, Inc. and the sellers of
                        all of the outstanding shares of Catalog
                        Resources, Inc. (6)

         10.8           1994 Employee Stock Purchase Plan (7)

         10.9           Form of Software Development Agreement
                        between LCS Industries, Inc. and a major
                        non-U.S. communications company (9)

         10.10          Amendment No.1 dated as of August 1, 1994, to
                        Agreement of Purchase and Sale of Stock dated
                        April 1, 1993, among LCS Industries, Inc.,
                        Catalog Resources, Inc., and the stockholders
                        of Catalog Resources, Inc. (10)

         10.11          Form of Marketing Database Agreement
                        between LCS Industries, Inc. and a major
                        non-U.S. communications company (12)

         10.12          Employment agreement between Arnold J. Scheine
                        and LCS Industries, Inc. (13)

         10.13          Employment agreement between Arnold J. Scheine
                        and LCS Industries, XXX (a group company). (13)

                                       36
<PAGE>
         10.14          1996 Non-Employee Directors Stock Option Plan (14)

         22             List of Subsidiaries

         23             Consent of Deloitte & Touche LLP

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

                    (1)             Incorporated  by reference to Exhibit  filed
                                    with the Company's Registration Statement on
                                    Form 8-A, File No.  0-12329,  filed with the
                                    Commission on June 27, 1983.

                    (2)             Incorporated  by reference to Exhibit to the
                                    Company's  Registration  Statement  on  Form
                                    S-18, Registration No. 3-87557-N.Y.

                    (3)             Incorporated  by reference to Exhibit to the
                                    Company's  Registration  Statement  on  Form
                                    S-18, Registration No. 2-79941-N.Y.

                    (4)             Incorporated  by reference to Exhibit to the
                                    Company's  Registration  Statement  on  Form
                                    S-8, Registration No. 33-12508.

                    (5)             Incorporated  by reference to Exhibit to the
                                    Company's Annual Report on Form 10-K for the
                                    fiscal year ended  September 30, 1990,  File
                                    No. 0-12329.

                    (6)             Incorporated  by reference to Exhibit to the
                                    Company's  Current  Report on Form 8-K dated
                                    April 1, 1993, File No. 0-12329.

                    (7)             Incorporated  by reference to Exhibit to the
                                    Company's  Registration  Statement  on  Form
                                    S-8, Registration No. 33-83058.

                    (8)             Incorporated  by reference to Exhibit to the
                                    Company's  Annual Report on Form 10K for the
                                    fiscal year ended  September 30, 1993,  File
                                    No. 0-12329.

                    (9)             Incorporated  by reference to Exhibit to the
                                    Company's  Current  Report on Form 8-K dated
                                    January 18, 1994, File No. 0-12329.

                    (10)            Incorporated  by reference to Exhibit to the
                                    Company's  Current  Report on Form 8-K dated
                                    September 13, 1994, File No. 0-12329.

                    (11)            Incorporated  by Reference to Exhibit to the
                                    Company's Annual Report on Form 10-K for the
                                    fiscal year ended  September 30, 1994,  File
                                    No. 0-12329.

                    (12)            Incorporated  by Reference to Exhibit to the
                                    Company's  Current  Report on Form 8-K dated
                                    September 1, 1995, File No. 0-12329.

                                       37
<PAGE>
                    (13)            Incorporated  by Reference to Exhibit to the
                                    Company's  Quarterly  Report on Form 10Q/A-1
                                    dated August 8, 1996, File No. 0-12329.

                    (14)            Incorporated by Reference to the Company's
                                    Proxy Statement dated December 30, 1996,
                                    File No. 0-12329.

                    (15)            Incorporated  by Reference to Exhibit to the
                                    Company's  Current  Report on Form 8-K dated
                                    December 17, 1998, File No. 0-12329.


(b)      Reports on Form 8-K

         LCS Industries, Inc. did not file any Forms 8-K during the last quarter
         of its fiscal year ended September 30, 1998.

                                       38
<PAGE>
                                   SIGNATURES

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


                                                   By:  /s/William Rella
                                                       -------------------------
                                                           William Rella
                                                           President
Date: December 23, 1998

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities indicated on December 23, 1998.
<TABLE>
<CAPTION>
               Signature                                              Title
               ---------                                              -----
<S>                                      <C>

 /s/William Rella                        President (Principal Executive Officer) and Director
-----------------------------
William Rella



 /s/Pat R. Frustaci                      Vice President - Finance, Chief Financial Officer,
-----------------------------            Treasurer and Assistant Secretary (Principal
Pat R. Frustaci                          Accounting Officer)
                                         



 /s/Marvin Cohen                         Senior Vice President, Secretary and Director
-----------------------------
Marvin Cohen



 /s/Joseph R. Barbaro                    Director
-----------------------------
Joseph R. Barbaro



 /s/Bernard Ouziel                       Director
-----------------------------
Bernard Ouziel
</TABLE>

                                       39
<PAGE>







                              LCS INDUSTRIES, INC.

                           Commission File No. 0-12329


                                     -------


                           Annual Report on Form 10-K

                                     for the

                      Fiscal Year Ended September 30, 1998




                                 E X H I B I T S







                                       40
<PAGE>
INDEX TO EXHIBITS


Exhibit
   No.                            Description                  
-------                           -----------

10.5                    The Bank of New York letter dated              
                        July 10, 1998 related to the
                        holding available of a line of credit

22                      List of Subsidiaries                           

23                      Consent of Deloitte & Touche LLP               










                                       41