SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                               -------------------
                                  FORM 10-KSB/A
                               -------------------

                       AMENDMENT TO APPLICATION OR REPORT
                  Filed pursuant to Section 12, 13 or 15(d) of
                       THE SECURITIES EXCHANGE ACT OF 1934


                              AUGMENT SYSTEMS, INC.
               --------------------------------------------------
               (Exact name of registrant as specified in charter)


                                 AMENDMENT NO. 1
                                 ---------------

          The  undersigned   Registrant   hereby  amends  the  following  items,
financial  statements,  exhibits or other  portions of its Annual Report on Form
10-KSB for the Fiscal Year ended  December 31,  1998,  as set forth in the pages
attached hereto:

AMENDED: 10-K COVER & PAGES 3,4,5,8,9,10,11,13,14 & 17

NEW:  ITEM 7:  PART II-ITEM 7,  THE FINANCIAL  STATEMENTS


                Pursuant to the  requirements of the Securities  Exchange Act of
1934,  the  Registrant has duly caused this amendment to be signed on its behalf
by the undersigned, thereunto duly authorized.


                                             AUGMENT SYSTEMS, INC.
                                             (Registrant)


Dated:  May 28, 1999                      By: /s/ Duane Mayo
                                              -----------------------
                                              Duane Mayo
                                              Chief Financial Officer



<PAGE>

              AMENDED 10-K COVER & PAGES 3,4,5,8,9,10,11,13,14 & 17
                                     OF THE
                         ANNUAL REPORT ON FORM 10-KSB OF
                      AUGMENT SYSTEMS, INC. (the "Company")
                   FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1999



<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)

(X)      Annual  report  pursuant  to  Section  13 or  15(d)  of the  Securities
         Exchange Act of 1934 (Fee Required)

                   For the fiscal year ended December 31, 1998

( )      Transition  report under section 13 or 15(d) of the Securities Exchange
         Act of 1934

              For the transition period from __________________ to

                         Commission file number 0-22341

                              AUGMENT SYSTEMS, INC.

             (Exact name of registrant as specified in its charter)

                  Delaware                                        04-3089539
                  --------                                        ----------
         (State or other jurisdiction of                     (I. R. S. Employer
         incorporation or organization)                      Identification No.)

 790 Turnpike Street Suite 202 North Andover, MA                       01845
(Address of principal executive offices)                             (Zip Code)

                                  978-725-8156
              (Registrant's telephone number, including area code)

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

                                 Not Applicable

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

                          Common Stock, $.01 par value

                         Common Stock Purchase Warrants


Check  whether  the Issuer:  (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 requirement for the past
90 days.

         (1) Yes  X      No                       (2) Yes  X      No
                -----      -----                         -----      -----

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
the  registrant's  knowledge,  in  definitive  proxy or  information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this form.   Yes  X      NO
                -----      -----

The  issuer's  revenues  for  the  fiscal  year  ended  December  31,  1998  was
$1,062,000.  As of April 15, 1999, there were 11,898,951  shares of the Issuer's
Common Stock, $.01 par value, issued and outstanding. The aggregate market value
of the Issuer's voting stock held by non-affiliates  was approximately  $118,990
based upon the average of the bid and ask prices of such stock on that date.

<PAGE>

SALES AND MARKETING

         The  Company's   sales  and  marketing   strategy   employed   multiple
distribution channels,  including direct sales and value added resellers (VARs).
The Company  believed  that broad  distribution  would enable its products to be
exposed to the  maximum  number of  end-users,  whether as an add-on  upgrade to
sophisticated  early  adopters or as part of a large solution when packaged with
electronic publishing applications and hardware.

RESEARCH AND DEVELOPMENT


         The market for the  Company's  products is  characterized  by extensive
research and development and rapid  technological  advances in both hardware and
software development,  resulting in frequent  introductions of new products. The
introduction  of products  embodying  new  technology  and the  emergence of new
industry  standards can render existing products  obsolete and unmarketable.  In
the fiscal years ended  December  31, 1997 and December 31, 1998,  respectively,
the Company expended $3,812,326,  and 2,338,222  respectively,  for research and
development.



CUSTOMER SERVICE AND SUPPORT

         The Company provided  customer  training,  installation and integration
support,  and  maintained  systems sold  directly to end users in North  America
through an internal systems  integration  organization.  The Company covered its
server products against defects in material and workmanship for 90 days.  During
the warranty period,  the Company would repair or replace,  within two days, any
server component(s) which the Company identified as containing defects which did
not prevent the  continued  use of the server.  For defects that did prevent the
continued use of the server,  the Company would attempt to repair or replace the
identified  defective component within 24 hours. The Company offered service and
maintenance contracts to its customers.


MANUFACTURING AND SUPPLIERS

         The Company's manufacturing  operations consisted of product assurance,
quality control of materials,  components and subassemblies,  final assembly and
system test. The Company relied on numerous  high-quality ISO 9002 class vendors
located in New England for the manufacture of mechanical  subsystems and printed
circuit  boards.   This  strategy  minimized  capital  investment  and  overhead
expenditures and provided the Company with the ability to increase production to
meet market demand.


LICENSES

         The Company's server systems included proprietary software and hardware
developed by the Company, hardware and software components manufactured by third
party vendors, proprietary software and hardware technology licensed from Radius
and proprietary software technology licensed from Polybus.



                                       3


<PAGE>

         On September 27, 1995,  the Company  obtained a worldwide  license from
Radius to use certain of Radius'  technology  in its  products.  The license was
exclusive  except as to Radius,  which retained rights to its technology.  Under
the agreement with Radius,  the royalties  payable by the Company initially were
the greater of $1,500 per unit or two percent of the purchase price per unit for
the first 200 units,  declining in increments  based on the number of units sold
to the  greater of $750 per unit or one percent of the  purchase  price per unit
after 1001 units are sold.  Royalties will be paid until the cumulative total of
royalties paid equals $10,000,000 at which time the Company will have a royalty-
free license. If the Company failed to sell the minimum number of units required
to be sold pursuant to the agreement for two consecutive  calendar quarters,  as
was the case in 1998,  the  technology  can be  licensed  to other  parties.  In
addition,  the  Company  had  granted  to  Radius  an  irrevocable,   perpetual,
non-exclusive,  worldwide,  royalty-free  license  to any  modifications  to the
Radius technology made by the Company.

         The Company  entered into a  Development  and License  Agreement  dated
August  1,  1996  with  Polybus  pursuant  to  which  the  Company  obtained  an
irrevocable,  perpetual,  worldwide,  nonexclusive  (except as to publishing for
which the license is  exclusive)  license to a high speed file manager  software
package in  consideration  for royalty  payments.  The royalties  payable by the
Company  pursuant to the Development  and License  Agreement were initially $800
per server and $400 per  workstation,  declining  in  increments  based upon the
number of systems sold to $50 per server and $25 per workstation until the first
100,000  systems are sold by the Company.  No royalties  were payable  after the
Company sold 100,000  systems.  The initial term of the  Development and License
Agreement was 25 years and the agreement  could be terminated  sooner by Polybus
only in the event of a payment default by the Company.  Upon  termination of the
Development  and License  Agreement,  Polybus may license the  software to third
parties in the publishing market.

         On January 22, 1999, Polybus and the Company terminated the Development
and License Agreement and entered into a Software License  Agreement.  Under the
terms of the new agreement  Polybus  granted to Augment a perpetual,  worldwide,
irrevocable,   nonexclusive  license  to  distribute  Polybus  Macintosh  Client
software; and, Augment granted to Polybus a perpetual, irrovocable, royalty free
license for Augment's NT Client software.


EMPLOYEES

         As of April 15,  1999,  the Company  employed 1  full-time  employee to
dispose  of all  assets,  settle any  outstanding  debts and  explore  potential
mergers.

POTENTIAL FOR BANKRUPTCY - NEED FOR ADDITIONAL FINANCING

         The Company's  continued  viability  depends in part, on its ability to
negotiate or litigate substantial  reductions in the amounts owed by the Company
to its  creditors and  successfully  settle or defend any  creditor's  claims or
actions. In the event the Company is unable to achieve this objective,  it would
not have  adequate cash  resources to meet its  obligations  and would,  in most
likelihood,  be forced into the filing of a petition in bankruptcy. In addition,
the  creditors  of  the  Company  could   involuntarily  place  the  Company  in
bankruptcy.  Either of the foregoing events would have a material adverse effect
on the value of the  Company to its  current  shareholders  and its  secured and
unsecured   creditors.   In  the  event  of   bankruptcy,   current  equity  and
warrant-holders   could  be  substantially   diluted  or  have  their  interests
extinguished.



                                       4
<PAGE>

         In  addition,  the  Company may also need to raise  capital  from other
financings.  There can be no assurances  that the Company will be able to obtain
such additional  financings on terms acceptable to the Company or in a timeframe
required by the Company,  if at all. In such event,  the Company may be required
to  materially  alter its plans.  Any such  additional  financing  may result in
significant dilution to existing stockholders or the issuance of securities with
rights  superior to those of the  existing  shareholders.  In the event that the
Company is unable to raise or borrow additional funds, the Company may be forced
into bankruptcy.

         In  addition,  the Company is seeking to be acquired by another  entity
with growth potential. If any such entity is located, there can be no assurances
that the Company will be able to obtain such a merger on terms acceptable to the
Company and within an acceptable  timeframe required by the Company,  if at all.
Any such transaction may result in significant dilution to existing stockholders
or the  issuance of  securities  with rights  superior to those of the  existing
stockholders.  In the event  that the  Company  is unable to  consummate  such a
transaction, the Company may be forced to file for bankruptcy.

ITEM 2.           DESCRIPTION OF PROPERTY


Facilities

         The  Company  has a month to month  lease for 700 square feet of shared
office space in North Andover,  Massachusetts,  which currently accommodates the
Company's  headquarters,  administrative,  and financial functions.  The Company
vacated  its  principal  office at 2 Robbins  Road in  Westford,  Massachusetts,
consisting of approximately  30,000 square feet. The monthly rent is $1,000. The
Company  believes that its facilities are adequate to meet its current  business
requirements.  See Footnote 5 of Notes to the Financial Statements.

ITEM 3.           LEGAL PROCEEDINGS

         In March 1998,  the Company's  former  President and CEO,  Lorrin Gale,
left the Company at the request of the Board of Directors.  On May 29, 1998, Mr.
Gale  filed a  complaint  against  the  Company  in the  Superior  Court  of the
Commonwealth  of  Massachusetts  seeking  relief  for  breach  of an  employment
contract.  In September  1998, the Company  reached a settlement  with Mr. Gale,
which  required that the Company pay $150,000 in severance pay and an additional
$45,000 in  increments  of $15,000 over the next three years  commencing in July
1999.  In the event the Company  does not make  payments  under the terms of the
settlement  agreement or is unable to work out an arrangement  for payment,  Mr.
Gale could obtain a judgement  against the Company,  which would have a material
adverse affect on the prospects of the Company.

         The Company had received a letter from a printing  vendor claiming that
the  Company  owes  the  vendor  approximately  $50,000  for  printing  services
rendered.  The Company's position was that it had provided  consideration to the
vendor for the  printing  services in the form of  equipment  and  software,  in
accordance  with an  understanding  between the parties  established in November
1996. The Company is negotiating a settlement with the vendor.  In the event the
Company  cannot work out a viable  agreement,  it would have a material  adverse
affect on the prospects of the Company.


         The Company is not involved in any other  material  legal  proceedings.
Although  the Company has  effectively  ceased  operations,  there are  numerous
secured  and  unsecured  creditors  who could  commence  litigation  against the
Company. In the event that the Company has insufficent funds to settle or defend
these  matters,  the  Company  or its  creditors  could  cause  the  filing of a
bankruptcy  proceeding.  See Item 1 - Business - Potential for Bankruptcy - Need
for  Financing  and  Item 6  Management  Discussion  and  Analysis  or  Plan  of
Operation.


                                       5
<PAGE>
         8.       In  December  1998,  the  Board of  Directors  authorized  the
issuance  of  warrants  to  purchase  359,282  shares  of  Common  Stock  to the
underwriter  involved in private placements of the Company's Common Stock during
January 1998 and May 1998. The issuance of the warrants was pursuant to specific
terms of the private placement  relating to missing certain revenue  milestones.
As of April 1999, the Company had not issued those warrants.

         The offerings described in Numbers 1 through 8, inclusive,  were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933 and the
Securities and Exchange Commission Rule 506.


ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The Private  Securities  Litigation  Reform Act of 1995  contains  safe
harbor provisions regarding  forward-looking  statements.  Except for historical
information contained herein, the matters discussed in the Liquidity and Capital
Resources  section below contain potential risks and  uncertainties,  including,
without  limitation,  risks  related to the  Company's  ability to  successfully
identify potential merger partners and settle any outstanding debts. The Company
will need to attract partners in order to execute its revised business strategy,
and there can be no assurance  that the Company will be successful in attracting
such partners.

GENERAL

         In January  1999,  the Board of  Directors  of the  Company  elected to
suspend ongoing operations,  layoff all but one of its employees, dispose of all
physical  assets,  attempt to settle any outstanding  short and long term debts,
seek buyers or strategic  partners for the further  development  of its existing
technology as well as explore merger opportunities.

         Prior to January 15, 1999,  the Company  designed,  developed  and sold
fibre  channel  based  network  file server  systems  designed to increase  data
transfer and file storage on computer  networks.  In September 1998, the Company
obtained $1,500,000 in bridge financing of secured convertible  promissory notes
and common stock purchase  warrants.  The Company used a portion of the proceeds
of the bridge  financing to repay in full its  indebtedness  to a major bank. In
November 1998, the Company was informed by an investment bank, that provided the
bridge  financing,  that they would be unable to secure the  additional  funding
required to repay the  outstanding  bridge  loan,  provide the Company  with the
necessary  working  capital to support the  execution of its  business  plan and
ongoing operations.  The Company began to seek alternative  financing,  however,
was unable to secure the funds necessary to maintain ongoing operations.

         From  October  1995  through  March  1997,  the  Company  operated as a
development  stage company and engaged  principally in research and development,
recruitment of personnel and financing activities. The Company conducted limited
marketing activities and did not commence beta shipments of its initial products
until February 1997.  During the second quarter ended June 30, 1997, the Company
commenced  commercial  shipment  of its server  product and  recognized  initial
revenue in April 1997.  The Company's  initial  target market was the electronic
publishing  industry,  which required the rapid and efficient  movement of large
image and data files over networks.

PLAN OF OPERATION

         In January  1999,  the Board of  Directors  of the  Company  elected to
suspend ongoing operations,  layoff all but one of its employees, dispose of all
physical  assets,  attempt to settle any outstanding  short and long term debts,
seek buyers for its technology, and explore merger opportunities.

                                       8
<PAGE>

         Revenues for the fiscal year ended December 31, 1998 were $1,062,203 as
compared to $989,609 in revenues  for the fiscal year ended  December  31, 1997.
Prior to the second  quarter ended June 30, 1997,  the Company was a development
stage company and had not recognized  revenues.  Gross product margin on product
sales was a negative  23% for the period  ended  December  31, 1998 versus a 40%
gross product  margin on product  sales for the period ended  December 31, 1997.
The  decrease in the gross  product  margin was due  primarily  to the  $542,000
writedown  of  inventory  in 1998.  During 1997 and 1998,  product  revenue were
primarily generated through domestic end-user sales.

         Research and  development  costs for the fiscal year ended December 31,
1998 were  $2,338,222 as compared to $3,812,326  for fiscal year ended  December
31, 1997. The $1,474,014  decrease was primarily  attributable to a reduction in
engineering  personnel and  consultants  associated  with the development of the
Company's  server  product  and lack of  capital.  The  Company  also  decreased
spending for associated engineering supplies and prototype materials used in the
development of its server product.  The Company does not anticipate spending any
additional funds on research and development for the foreseeable future.


         General and administrative costs for the fiscal year ended December 31,
1998 were  $2,102,945  as  compared  to  $1,565,274  for the  fiscal  year ended
December 31, 1997. The $537,671  increase is attributable to increased  spending
for legal fees, fund raising  activities and severance to former employees.  The
Company  anticipates that spending for general and administrative  costs for the
next six months at less than $150,000.

         Selling and marketing costs for the fiscal year ended December 31, 1998
were $1,886,850 as compared to $3,141,843 for the fiscal year ended December 31,
1997.  The  $1,254,993  decrease is  attributable  to an  decrease in  marketing
support and sales personnel,  participation in various trade shows and decreased
spending on sales promotional material and lack of capital. The Company does not
plan on spending any funds on selling and marketing  expenses in the foreseeable
future.

         The Company  recognized  a net loss for the fiscal year ended  December
31,  1998 of  $7,239,529  as compared  to  $9,380,055  for the fiscal year ended
December 31, 1997. The decrease in net loss of $2,140,526 was  attributable to a
decrease in personnel to support research and  development,  sales and marketing
and administration activities. As a result of the Board of Directors decision to
shut  down  its  operations,  the  Company  recognized  a write  down of  unique
inventory  associated with the Company's  products and recognized an increase in
the reserve for bad debts of approximately $542,000 and $258,000,  respectively,
for the fiscal year ended December 31, 1998. In addition, the Company recognized
a write down of fixed assets and capitalized software of approximately  $450,000
associated with the net value realized in a liquidation of fixed assets.


         The  Company  currently  has 1  full-time  employee  to  dispose of all
physical  assets,  attempt to settle any outstanding  short and long term debts,
seek buyers or strategic  partners for the further  development  of its existing
technology as well as explore merger opportunities.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has funded its  operations  since October 1995  principally
from  a  combination  of  debt  and  equity  financings  totaling  approximately
$22,975,000.  Prior to May 1997, the Company issued convertible promissory notes
in the  aggregate  principal  amount of  approximately  $864,000.  Approximately
$802,000 of the  principal  balance of these  notes plus  accrued  interest  was
converted into shares of Common Stock in November 1996 at a conversion  price of
$4.00 per share.  In December 1996 and February  1997,  the Company raised gross
proceeds of  $3,585,000 in a private  placement of  promissory  notes and common
stock purchase  warrants.  The  promissory  notes,  bearing  interest at 12% per
annum,  were  repaid  from the  proceeds  of its  initial  public  offering.  In
addition,  from September 1995 through August 1996, the Company issued 1,653,623
shares of its Common Stock for approximately $3,372,000 in gross proceeds.


                                       9

<PAGE>


         On May 16, 1997, the Company  completed its initial public  offering of
1,800,000 shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase  Warrants at $.15 per warrant.  Each Redeemable
Common  Stock  Purchase  Warrant  entitles  the holder to purchase  one share of
Common Stock for $6.60 during the four-year period  commencing May 12, 1998. The
net  proceeds  from the  Company's  initial  public  offering,  after  deducting
underwriting  discounts and  commissions and estimated  expenses  payable by the
Company, were approximately $8,220,000.

          In October  1997,  the  Company  obtained  a $750,000  loan from Fleet
National  Bank.  The loan  was  secured  by all of the  Company's  assets,  bore
interest at Fleet National Bank's prime rate plus 2% and was originally  payable
by December 31, 1997 or upon completion of a financing resulting in net proceeds
to the Company of at least  $5,000,000.  Pursuant to the terms of the loan,  the
Company issued detachable warrants to purchase 100,000 shares of Common Stock at
an exercise price of $1.00 per share  exercisable over five years. This loan was
extended  through and until July 31, 1998. On July 31, 1998,  the Company made a
payment in the amount of $300,000 to Fleet  National Bank and the final $450,000
balance was retired on August 31, 1998.


         During December 1997 and January 1998, the Company  secured  $1,000,000
in bridge financing from  institutional and private investors in anticipation of
the private  placement  of the  Company's  Common  Stock.  The bridge  financing
promissory  notes  accrued  interest at 8% per annum with interest and principal
payable  at  maturity  on the  initial  closing  of the  private  placement.  In
addition,  the Company issued to bridge investors five year warrants to purchase
up to 750,000 shares in the aggregate of the Company's Common Stock at $1.00 per
share. In February 1998, the Company repaid $200,000 of these  promissory  notes
plus interest and the holders of $800,000 of these  promissory  notes  converted
their notes into shares of the  Company's  Common  Stock at $1.00 per share.  In
January 1998, the Company closed on an initial amount of $6,180,000 of a private
placement  initiated in December  1997. In early May 1998, the Company closed on
an additional $575,000 and terminated the offering started in December 1997. The
aforementioned  funds  were used to repay  outstanding  accounts  payable  debts
incurred  during 1997 of  approximately  $1,400,000,  repay bridge  financing of
approximately $200,000 and bank debt of approximately $300,000, support research
and  development  expenses  of  approximately  $2,000,000,  sales and  marketing
expenses of approximately  $1,700,000,  and $675,000 in administrative and other
expenses.

         In September 1998, the Company obtained  $1,500,000 in bridge financing
of secured convertible  promissory notes and common stock purchase warrants. The
Company used a portion of the proceeds of the bridge  financing to repay in full
its  indebtedness to Fleet National Bank. The convertible  promissory notes were
due and payable  upon the earlier of the closing of a financing  of a minimum of
$4,000,000 or in September  1999. In November  1998, the Company was informed by
the  investment  bank,  that provided the bridge  financing,  that they would be
unable to secure the additional funding required to repay the outstanding bridge
loan and provide the Company with the necessary  working  capital to support its
business  plan and ongoing  operations.  The Company  began to seek  alternative
financing,  but, was unable to secure the funds necessary.  On January 15, 1999,
the Board of Directors decided to shut down operations,  lay-off all all but one
of its employees,  liquidate assets,  seek buyers or strategic  partners for the
further  development  of its  existing  technology  as  well as  explore  merger
opportunities.



                                       10


<PAGE>

         These factors raise  substantial  doubt about the Company's  ability to
continue as a going  concern.  The Company is dependent on its ability to settle
all debts with  creditors,  attract  purchasers  or  strategic  partners for the
Company's   technology  and  attract  potential  merger  partners,   which  will
undoubtedly  result in  substantial  dilution  to existing  shareholders  or may
result  in  the  termination  of  their  interests.  Although  the  Company  has
effectively  ceased  operations,   there  are  numerous  secured  and  unsecured
creditors who could commence  litigation  against the Company.  see Item 3-legal
proceedings  In the event that the  Company has  insufficent  funds to settle or
defend these matters,  the Company or its creditors  could cause the filing of a
bankruptcy  proceeding.  See Item 1 - Business - Potential for Bankruptcy - Need
for Financing Item 3-Legal  Proceedings.  As a result of the  uncertainty of the
Company to continue as a going  concern the  Company's  Auditors  were unable to
express an opinion on the Company's accompanying financial statements.

          The  Company is  authorized  to issue up to  50,000,000  shares of its
Common Stock and up to  2,000,000  shares of  Preferred  Stock.  As of April 15,
1999,  there were  11,898,951  shares of the  Company's  Common Stock issued and
outstanding  and no  Preferred  Stock  issued and  outstanding.  The  Company is
obligated  to issue  additional  3,592,816  shares  of Common  Stock to  certain
investors who  participated in private  placements of the Company's Common Stock
during January 1998 and May 1998. The shares had been authorized for issuance by
the Board of Directors  during  1998.  In  addition,  the Company has  7,413,111
Common Stock Purchase  Warrants issued and  outstanding,  of which all 7,413,111
are substantially above the existing market price.


CAPITAL EXPENDITURES

         The  Company  does  not  have  any  material  commitments  for  capital
expenditures at this time.

EFFECTS OF INFLATION

         The Company  believes  that the  relatively  moderate rate of inflation
over the past few years has not had a significant  impact on the Company's sales
or operating results.

YEAR 2000 DISCLOSURE

         The Company believes that its products are year 2000 compliant and does
not anticipate any claims relating  thereto.  As the Company  effectively has no
operations, the year 2000 problem is not an issue at this point.



ITEM 7.          FINANCIAL STATEMENTS

         See Pages F-2 through F-19.


ITEM 8.          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                 FINANCIAL DISCLOSURE

         The Company does not have any disagreements with its auditors.


                                       11


<PAGE>
<TABLE>
<CAPTION>
                                                   SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                         Long-Term Compensation

                                                                Awards                                   Payouts

                                                                Other      Restricted

                                     Annual Compensation        Annual        Stock                      LTIP        All Other

     Name and Position     Year    Salary($)  Bonus($)  Compensation  Awards($) Options(#)   Payouts($)    Compensation    Principal
            (a)             (b)      (C)        (d)         (e)        (f)        (g)         (h)            (i)
------------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>     <C>           <C>         <C>    <C>        <C>               <C>      <C>                <C>
Lorrin G. Gale             1998     73,253       -           -          -          -             -        195,000 (1)        -
Chairman, President and    1997    120,000       -           -          -      75,000 (2)        -             -             -
Chief Executive Officer *  1996     55,862       -           -      3,186 (3)      -             -             -             -
                           1995        -         -           -      1,885 (4)      -             -             -             -



Laurence Liebson           1998     97,956       -           -          -      1,763,955         -             -             -
Chairman, President and                                                           (5)
Chief Executive Officer **

</TABLE>

     (1) In March 1998, Mr. Gale left the Company at the request of the Board of
Directors.  Pursuant to an employment  agreement  with the Company,  he received
$150,000 in severance  and is obligated to receive an  additional  $45,000 to be
paid in equal installments of $15,000 per year beginning July 1999.

     (2) In January 1997, pursuant to an employment contract, the Company issued
incentive stock options to purchase up to 75,000 shares of Common Stock. Options
to purchase  15,000  shares of Common  Stock  vested upon the  execution  of the
agreement and options to purchase  30,000 shares of Common Stock vest on each of
the first  and  second  anniversaries  of the  agreement.  All  options  have an
exercise price of $4.00 per share.

     (3) In July 1995, the Company  issued  151,735 shares of restricted  Common
Stock  valued at $.021  per  share to Mr.  Gale in  consideration  for  services
rendered.

     (4) In June 1995, as part of a  recapitalization, the Company issued to Mr.
Gale 89,747 shares of restricted  Common Stock valued at $.021 per share in lieu
of payment of accrued  compensation  of $454,843 for the period  commencing June
1992 through  March 1995 and in lieu of repayment of $55,000 of loans payable to
Mr. Gale,  as well as in exchange  for all shares of preferred  stock and common
stock then held by Mr. Gale.

     (5) In May 1998, Laurence Liebson joined the Company as Chairman, President
and Chief Executive Officer. Pursuant to an employment contract, Mr. Liebson was
issued  incentive  stock  options to purchase up to  1,763,955  shares of Common
Stock.  Options to purchase 563,881 shares of Common Stock vested upon execution
of the  agreement  and  options to purchase  300,019  shares vest on each of the
first, second, third and fourth anniversaries of the agreement.  All options had
an exercise price of $1.00 per share


*      In March 1998, Mr. Gale left the Company as President and Chief Executive
       Officer

**     In  January 1999,  Mr. Liebson left  the  Company as  President and Chief
       Executive Officer.

                                       13


<PAGE>

EMPLOYMENT CONTRACTS

         As of April 15, 1999, the Company had no employment  contracts with its
employee.

         Prior to 1999,  the  Company  had  entered  into a two-year  employment
agreement  with Mr. Lorrin Gale.  Pursuant to such  contract,  Mr. Gale would be
paid a base salary of $125,000 and had been granted  incentive  stock options to
purchase up to 75,000 shares of Common Stock.  Options to purchase 15,000 shares
of Common  Stock  vested  upon the  execution  of the  agreement  and options to
purchase  30,000  shares of Common  Stock  vest on each of the first and  second
anniversaries  of the agreement.  All options had an exercise price of $4.00 per
share. Pursuant to his employment agreement, Mr. Gale agreed not to compete with
the Company during the term of his employment and for one year  thereafter.  Mr.
Gale left the Company as President and Chief Executive Officer in March 1998.


         Effective  as  of  May  1998,  the  Company  entered  into  a  two-year
employment agreement with Mr. Laurence Liebson.  Pursuant to such agreement, Mr.
Liebson  would  be  paid a base  salary  of  $150,000  and  receive  $75,000  in
relocation  expenses,  which the  Company was unable to pay.  In  addition,  Mr.
Liebson was granted  incentive stock options to purchase up to 1,763,955  shares
of common  stock at $1.00 per share.  Mr.  Liebson left the Company as President
and Chief Executive Officer in January 1999.






                      (This page left intentionally blank.)




                                       14

<PAGE>

         In October 1996, the Company issued to Mr.  Chanowski  19,123 shares of
Common Stock in consideration for consulting  services  rendered.  Mr. Chanowski
also  purchased  23,904  shares of Common  Stock for $50,000 in October  1996 in
private  placement.  Mr. Chanowski paid the $50,000 purchase price by converting
the  $25,000  promissory  note  issued  to him in May 1996 and by  investing  an
additional  $25,000 in cash. Mr.  Chanowski is a 6.675% member in Alpha Ventures
LLC which holds  77,540  shares of the  Company's  Common  Stock and warrants to
purchase  11,952 shares of Common Stock.  In April 1997,  the Company  issued to
Venture  Management  Consultants,  LLC  ("Venture  Management"),  of  which  Mr.
Chanowski is a 20% member, a promissory note in the principal amount of $200,000
in consideration  for a $200,000 loan. The promissory note bears interest at 18%
per annum with  interest and  principal  payable at maturity on May 31, 1998. In
May 1997,  the Company  issued to Venture  Management a  promissory  note in the
principal  amount  of  $200,000  in  consideration  for  a  $200,000  loan.  The
promissory  note bears  interest at 18% per annum with  interest  and  principal
payable at maturity on June 30, 1998.  In October  1997,  the Company  issued to
Venture Management in consideration of a $400,000 loan, a promissory note in the
principal  amount of $400,000 plus a warrant to purchase up to 100,000 shares of
Common Stock at $3.00 per share.  The  promissory  note bears interest at 9% per
annum with  interest  and  principal  payable at  maturity on the earlier of (i)
December 11, 1997 or (ii) the  completion  of a financing  by the  Company.  The
Company  subsequently repaid all three of the promissory notes issued to Venture
Management.  In October 1997,  the Company  entered into a Consulting  Agreement
with Venture Management.  In consideration for consulting services,  the Company
issued  Venture  Management a warrant to purchase up to 400,000 shares of Common
Stock at $3.00 per share and agreed to pay consulting  fees of $4,000 per month,
plus out-of-pocket expenses up to $1,000 per month. In October 1998, the Company
cancelled the  Consulting  Agreement with Venture  Management  signed in October
1997 and entered into a new  Consulting  Agreement with Venture  Management.  In
consideration for consulting  services,  the Company issued Venture Management a
warrant to purchase up 500,000 shares of common stock at $1.00 per share.

         On March 31,  1999,  Mr.  Fred  Chanowiski  resigned  from the Board of
Directors to pursue other interests.

         In January  1998,  Jeffrey  Leventhal  invested  $200,000  in a private
placement of the Company's  Common Stock. Mr. Leventhal was elected to the Board
of Directors in January 1998. On March 31, 1999 Mr. Leventhal  resigned from the
Board of Directors to pursue other interests.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         Exhibits.

        *1.1   - Form of Underwriting Agreement
        *3.1   - Certificate of Incorporation of the Company, as amended.
        *3.1.1 - Restated Certificate of Incorporation of the Company.
        *3.2   - By-laws of the Company.
        *4.1   - Specimen Common Stock Certificate of the Company.
        *4.2   - Form of Underwriters' Purchase Option.
        *4.3   - Specimen Redeemable Common Stock Purchase Warrant.
        *4.4   - Form of Warrant Agreement.
        *5     - Opinion of Warner & Stackpole LLP on legality of securities
                 being registered.
        *10.1  - Lease agreement of Corporate  Headquarters in Westford,
                 Massachusetts between New England Mutual Life Insurance Company
                 and the Company dated October 23, 1995.
       *10.1.1 - First Amendment to Lease Agreement of Corporate  Headquarters
                 dated as of January 31,  1996.
       *10.2   - Lease  Agreement to Sales Office in San Diego,
                 California  between  The  Parkwest  Partners  and the Company
                 dated  July 1, 1996.
       *10.3   - Restated   Technology  License   Agreement between Radius and
                 the  Company  dated as of  September  27,  1995.
       *10.3.1 - First Amendment to Restated Technology Agreement between Radius
                 and the Company Dated as of October 28, 1996.
       *10.4   - Software  Development  and  License  Agreement  between Polybus
                 and the Company dated as of August 1, 1996.
       *10.5   - Form  of   Warrant   as  issued  to  the   Company's   other
                 Warrantholders.

       *10.6   - Form  of  Warrant as issued to placement agent in the Company's
                 private placement completed in May 1996.

                                       17
<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.

                                      AUGMENT SYSTEMS, INC.

                                     By:   /s/   Duane A. Mayo
                                       -------------------------
                                        Duane A. Mayo
                                        Chief Financial Officer


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



/s/Duane A. Mayo                                                   MAY 28, 1999
----------------                                                   ------------

                Chief Financial Officer, Treasurer and Secretary
                   (Principal Financial & Accounting Officer)
                        Member of the Board of Directors






                                       19
<PAGE>


                              Augment Systems, Inc.

                          Index to financial Statements
<TABLE>
<CAPTION>

<S>                                                                                                            <C>
                                                                                                                Pages
                                                                                                                -----

Report of Independent Certified Public Accountants                                                               F-2


Financial statements:

    Balance sheet as of December 31, 1998                                                                        F-3

    Statements of operations for the years ended December 31, 1998 and 1997                                      F-4

    Statements of stockholders' deficit for the years ended December 31, 1998, and 1997                          F-5

    Statements of cash flows for the years ended December 31, 1998 and 1997                                      F-6

    Notes to financial statements                                                                            F-7 to F-19

</TABLE>

                                      F-1
<PAGE>





               Report of Independent Certified Public Accountants



       To the Board of Directors
       Augment Systems, Inc.
       North Andover, Massachusetts

       We have audited the accompanying  balance sheet of Augment Systems,  Inc.
       as of  December  31,  1998  and the  related  statements  of  operations,
       stockholders'  deficit,  and cash flows for the years ended  December 31,
       1998 and 1997. These financial  statements are the  responsibility of the
       Company's management.  Our responsibility is to report 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  misstatement.  An audit includes  examining,  on a test
       basis,  evidence  supporting the amounts and disclosures in the financial
       statements.  An audit also includes  assessing the accounting  principles
       used and significant estimates made by management,  as well as evaluating
       the overall financial statement presentation.  We believe that our audits
       provide a reasonable basis for our report.

       The accompanying  financial  statements have been prepared  assuming that
       Augment Systems,  Inc. will continue as a going concern.  As discussed in
       Note 1 to the financial  statements,  the Company has suffered  recurring
       losses from  operations  and has a net working  capital  deficiency and a
       stockholders'  deficit. In addition, the Company has suspended operations
       and liquidated its assets.  These  circumstances  raise substantial doubt
       about the entity's  ability to continue as a going concern.  Management's
       plans in  regard  to these  matters  are  also  described  in Note 1. The
       financial  statements  do not include any  adjustments  that might result
       from the outcome of this uncertainty.

       Because of the significance of the uncertainty discussed in the preceding
       paragraph, we are unable to express, and we do not express, an opinion on
       the accompanying financial statements.



                                                                BDO Seidman, LLP



       Boston, Massachusetts
       April 9, 1999

                                      F-2
<PAGE>


                              Augment Systems, Inc.

                                  Balance Sheet
                                    (Note 1)
<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                                             1998
                                                                                                         -------------
<S>                                                                                                     <C>
       Assets

Current assets:
   Cash (Note 2)                                                                                         $     187,815
   Accounts receivable, net of allowance for doubtful accounts of $331,628                                           -
   Inventory, net of allowance of $326,455                                                                           -
   Prepaid expenses and other (Note 2)                                                                          27,936
   Assets held for sale (Note 1)                                                                                75,000
                                                                                                        --------------

     Total current assets                                                                                $     290,751
                                                                                                         =============

       Liabilities and Stockholders' Deficit

Current liabilities:
   Bridge financing (Note 4)                                                                             $   1,395,701
   Accounts payable                                                                                            377,935
   Accrued expenses (Note 3)                                                                                   182,012
   Convertible promissory notes (Note 4)                                                                        20,743
   Current portion of obligations under
     capital leases (Note 5)                                                                                   123,301
                                                                                                        --------------

     Total current liabilities                                                                               2,099,692

Commitments (Note 5)

Stockholders' deficit (Notes 4, 6, 8, 9 and 11):
   Preferred stock,  $.01 par value;  2,000,000 shares  authorized;  none issued
   Common stock, $.01 par value; 50,000,000 shares authorized;
     11,898,951 shares issued and outstanding                                                                  118,990
   Additional paid-in capital                                                                               21,750,866
   Deficit                                                                                                 (23,678,797)
                                                                                                        --------------

     Total stockholders' deficit                                                                            (1,808,941)

     Total liabilities and stockholders' deficit                                                         $     290,751
                                                                                                         =============

</TABLE>

                 See accompanying notes to financial statements.

                                      F-3
<PAGE>

                              AUGMENT SYSTEMS, INC.

                            STATEMENTS OF OPERATIONS
                                    (NOTE 1)
<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                     ---------------------------------
                                                                                          1998                1997
<S>                                                                                 <C>                  <C>

Net sales                                                                            $  1,062,203         $    989,609

Cost of sales                                                                           1,311,031              597,924
                                                                                    -------------        -------------

Gross margin (loss)                                                                      (248,828)             391,685
                                                                                    -------------        -------------

Operating expenses:
   Research and development expenses                                                    2,338,222            3,812,326
   General and administrative expenses                                                  2,102,945            1,565,274
   Selling and marketing expenses                                                       1,886,850            3,141,843
   Loss on impairment of long-lived assets                                                449,975                    -
                                                                                    -------------        -------------

     Total operating expenses                                                           6,777,992            8,519,443
                                                                                    -------------        -------------

     Operating loss                                                                    (7,026,820)          (8,127,758)
                                                                                    -------------        -------------

Other income (expense):
   Interest income, net                                                                    56,847               13,323
   Interest expense (Notes 4 and 6)                                                      (269,556)            (835,815)
   Other expense                                                                                -             (429,805)
                                                                                    -------------        -------------

     Total other expense, net                                                            (212,709)          (1,252,297)
                                                                                    -------------        -------------

Net loss (Notes 2 and 10)                                                            $ (7,239,529)        $ (9,380,055)
                                                                                     ============         ============

Net loss per share of common stock (Note 10):
   Basic and diluted                                                                 $      (0.65)        $      (2.31)
                                                                                     ============         ============

</TABLE>

                 See accompanying notes to financial statements.


                                      F-4
<PAGE>

                              Augment Systems, Inc.

                       Statements of Stockholders' Deficit
                          (Notes 2, 4, 6, 8, 9 and 11)
<TABLE>
<CAPTION>
                                                                                            Additional                     Total
                                                                          Common Stock       Paid-in                   Stockholders'
                                                                      Shares     Amount      Capital       Deficit        Deficit
                                                                    -------------------   -----------   -------------  -------------
<S>                                                                <C>        <C>        <C>           <C>            <C>
Balance, December 31, 1996                                          2,865,512  $ 28,655   $ 6,177,194   $ (7,059,213)  $   (853,364)

  Issuance of common stock for exercise of warrants                    47,807       478        71,567              -         72,045
  Issuance of warrants associated with short term
    promissory notes                                                        -         -       389,500              -        389,500
  Initial public offering of 1,800,000 shares of common
    stock at $5.50 per share and 2,070,000 common stock
    warrants at $.15, net of $1,990,369 in offering costs           1,800,000    18,000     8,202,131              -      8,220,131
  Issuance of warrants in consideration for consulting                      -         -       271,950              -        271,950
  Issuance of warrants in connection with bridge financing                  -         -       174,068              -        174,068
  Net loss                                                                  -         -             -     (9,380,055)    (9,380,055)
                                                                   ----------  --------   -----------  -------------  -------------

Balance, December 31, 1997                                          4,713,319    47,133    15,286,410    (16,439,268)    (1,105,725)

  Issuance of warrants associated with bridge financing                     -         -       211,588              -        211,588
  Issuance of common stock in connection with
    private placement of common stock at $1.00 per share,
    including 378,910 shares issued in lieu of fees to
    placement agent, net of placement fees of $453,881              5,758,910    57,589     4,868,530              -      4,926,119
  Issuance of common stock upon conversion of
    bridge financing                                                  300,000     3,000       297,000              -        300,000
  Issuance of common stock upon conversion of
    notes payable                                                     500,000     5,000       495,000              -        500,000
  Issuance of common stock in connection with a private
    placement of common stock at $1.00 per share, including
    51,722 shares issued in lieu of fees to placement agent, net
    of placement fees of $28,200                                      626,722     6,268       540,532              -        546,800
  Issuance of warrants in consideration for consulting                      -         -        17,138              -         17,138
  Issuance of warrants as financing fees for bridge financing               -         -        34,668              -         34,668
  Net loss                                                                  -         -             -     (7,239,529)    (7,239,529)
                                                                   ----------  --------   -----------  -------------  -------------

Balance, December 31, 1998                                         11,898,951  $118,990   $21,750,866   $(23,678,797)  $ (1,808,941)
                                                                   ==========  ========   ===========   ============   ============

</TABLE>

                 See accompanying notes to financial statements.


                                      F-5
<PAGE>


                              AUGMENT SYSTEMS, INC.

                    STATEMENTS OF CASH FLOWS (Notes 2 and 12)
<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                     ---------------------------------
                                                                                           1998                1997
<S>                                                                                 <C>                  <C>
Cash flows from operating activities:
   Net loss                                                                          $ (7,239,529)        $ (9,380,055)
   Adjustments to reconcile net loss to net cash used for operating activities:
     Depreciation and amortization                                                        193,652              212,364
     Finance fees paid in warrants                                                         34,668                    -
     Consulting expense paid in warrants                                                   17,138              271,950
     Loss on impairment of long-lived assets                                              449,975                    -
     Provision for doubtful accounts                                                      204,955              126,673
     Provision for inventories                                                            226,455              100,000
     Loss on disposal of fixed assets                                                           -               12,375
     Interest on warrants associated with debt                                            165,647              505,211
     Changes in operating assets and liabilities:
       Accounts receivable                                                                 20,014             (351,642)
       Inventories                                                                        936,465             (673,569)
       Prepaid expenses                                                                    91,763              (17,600)
       Other assets                                                                         9,145              176,815
       Accounts payable                                                                  (993,697)             770,358
       Accrued expenses                                                                  (429,621)             415,529
                                                                                    -------------        -------------

         Net cash used for operating activities                                        (6,312,970)          (7,831,591)
                                                                                    -------------        -------------

Cash flows from investing activities:
   Purchase of property and equipment                                                     (43,779)            (179,985)
   Capitalized software                                                                         -             (265,000)
                                                                                    -------------        -------------

         Net cash used for investing activities                                           (43,779)            (444,985)
                                                                                    -------------        -------------

Cash flows from financing activities:
   Proceeds from issuance of common stock                                               5,472,919               72,045
   Proceeds from bridge financing                                                       1,800,000              500,000
   Proceeds from issuance (payments) of note payable                                     (750,000)             750,000
   Payments of short-term promissory notes                                                      -           (1,051,248)
   Payments of short-term advance                                                               -             (575,000)
   Payments on capital lease obligations                                                   (4,827)             (24,128)
   Payments on convertible promissory notes                                               (20,752)             (20,753)
   Net proceeds from initial public offering                                                    -            8,220,131
                                                                                    -------------        -------------

         Net cash provided by financing activities                                      6,497,340            7,871,047
                                                                                    -------------        -------------

Net increase (decrease) in cash                                                           140,591             (405,529)

Cash, beginning of year                                                                    47,224              452,753
                                                                                    -------------        -------------

Cash, end of year                                                                    $    187,815         $     47,224
                                                                                     ============         ============
</TABLE>


                 See accompanying notes to financial statements.

                                      F-6
<PAGE>

                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS


1.    ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION:

      The Company was incorporated in 1990 to develop and distribute fiber optic
printed circuit boards in the publishing and printing  markets.  The fiber optic
products had limited  success and in fiscal 1994 the Company  began  phasing out
the fiber optic  operations and began the transition into a systems  integration
and engineering consulting business. In 1995, the Company made a strategic shift
in its business operation into the server market.

      Since October 1995 and through March 1997,  the Company had been operating
as a development stage company and had been engaged  principally in research and
development,  recruitment  of personnel  and financing  activities.  During this
time,  the  Company  had  engaged in limited  marketing  activities  and had not
commenced  the  selling  of  its  initial  products,  which  are  high-end  file
management  network systems.  During the second quarter ended June 30, 1997, the
Company  commenced  commercial  shipment of its server  product  and  recognized
initial revenue in April 1997.

      The  Company's  initial  target  market  was  the  electronic   publishing
industry,  which  requires the rapid and  efficient  movement of large image and
data files over networks.  In September  1997, the Company  introduced a windows
NT-based client server for its file management network systems.

      The  accompanying  financial  statements  have  been  prepared  on a going
concern basis which  contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business.

      The Company has incurred  substantial  losses since inception and has been
engaged  primarily  in product  development.  The  Company has funded its losses
primarily  from a combination  of debt and equity  financings.  In addition,  at
December  31,  1998  the  Company  has  a  working  capital   deficiency  and  a
stockholders' deficit.

      Although  the Company  commenced  shipment of its products in fiscal 1997,
the  revenues  recognized  were  less than  originally  anticipated  by  Company
management. The shortfall in 1997 revenues was attributed to product development
delays and problems with the Company's initial products sold. Such shortfalls in
revenues continued throughout the course of fiscal 1998.

      In November  1998,  the Company was informed by the  investment  bank that
provided  the  September  1998  bridge  financing,  that they would be unable to
secure the additional  funding required to repay the outstanding bridge loan and
provide the Company with the necessary  working  capital to support its business
plan and ongoing  operations.  The Company began to seek alternative  financing,
but was unable to secure the necessary funds.

         In January  1999,  the Board of  Directors  of the  Company  elected to
suspend ongoing operations,  layoff all but one of its employees, dispose of all
assets, attempt to settle any outstanding short and long term debts, seek buyers
or strategic partners for the further  development of its existing technology as
well  as  explore  merger   opportunities.   The  secured   creditors  formed  a
representative  committee of two people who  initiated a plan to auction off all
remaining inventory and substantially all remaining fixed assets (retaining only
those  assets  necessary  to  effectively   shut  down  operations,   valued  at
approximately  $10,000). On January 28, with the aid of the  committee-appointed
auctioneer,   the  client  held  the  auction,   with   proceeds   amounting  to
approximately  $65,000,  indicating  that  the  carrying  value  of such  assets
exceeded  their fair  values.  Accordingly,  a loss of $184,975  was recorded in
operations in 1998 which  represents  the excess of the carrying  value over the
fair  value  of  $75,000.  Also  included  in  operations  is the  write-off  of
capitalized software costs of $265,000 to reduce their carrying value to $0. The
Company also recorded charges to cost of sales of approximately $542,000 related
to the write-down of unique inventory associated with the Company's products.

      Company  plans include  disposing of assets,  settling of debt and seeking
buyers or strategic  partners for the Company's  technology as well as exploring
merger opportunities, if any.

      These  factors  raise  substantial  doubt about the  Company's  ability to
continue  as a  going-concern.  The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.


                                      F-7
<PAGE>
                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      ESTIMATES AND ASSUMPTIONS

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

      CASH EQUIVALENTS

      The Company  considers  all highly liquid  investments  with a maturity of
three months or less when purchased to be cash  equivalents.  There were no cash
equivalents at December 31, 1998.

      INVENTORIES

      Inventories  were  stated at the lower of cost  (first-in,  first-out)  or
market.  Inventories were recorded at $0 at December 31, 1998 which reflected in
charges to cost of sales of $542,000 for the write-down to market.

      PROPERTY AND EQUIPMENT

      Property and  equipment  were recorded at cost.  Depreciation  is computed
using the  straight-line  method over the estimated  useful lives of the related
assets ranging from three to five years.  Property held under capital leases are
being  amortized  over the  lesser of the lease term or their  estimated  useful
lives.  The Company  reduced the cost of property and  equipment to its carrying
value of $75,000 resulting in a charge to operations of $184,975.

      LONG-LIVED ASSETS

      The Company  follows the  provisions of Statement of Financial  Accounting
Standards  ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived  Assets
and for Long-Lived  Assets to be Disposed of". SFAS 121  establishes  accounting
standards  for the  impairment  of  long-lived  assets and certain  identifiable
intangibles  to  be  held  and  used  and  for  long-lived  assets  and  certain
identifiable intangibles to be disposed of.

      The Company reviews the carrying values of its long-lived and identifiable
intangible  assets  for  possible  impairment  whenever  events  or  changes  in
circumstances  indicate  that  the  carrying  amount  of the  assets  may not be
recoverable. Due to the change in circumstances related to the operations of the
Company in fiscal 1998,  impairment charges were recorded to reduce the carrying
value of long-lived assets (see Note 1).

      REVENUE RECOGNITION

      Revenue  was  recognized  on  system  sales to end users  when the  system
performance  has been  accepted by the  customer  based on  measurement  against
pre-defined published specifications.

      RESEARCH AND DEVELOPMENT

      Research and development costs are expensed as incurred.

      In accordance  with  Statement of Financial  Accounting  Standards No. 86,
Accounting  for the Costs of Computer  Software To Be Sold,  Leased or Otherwise
Marketed,  the Company  capitalizes  software  development  costs incurred after
technological  feasibility of the software  development  projects is established
and the  reliability  of such  capitalized  costs through  future  operations is
expected.  The Company  wrote-off  all  capitalized  software  costs during 1998
resulting in a charge of $265,000 to operations.

                                      F-8
<PAGE>
                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS



2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      INCOME TAXES

      Income  taxes are  calculated  using the  liability  method  specified  by
Statement of  Financial  Accounting  Standards  No. 109,  Accounting  for Income
Taxes.

      FINANCIAL INSTRUMENTS

      The estimated  fair value of the Company's  financial  instruments,  which
include  accounts  payable,   related  party  accounts,   debt  instruments  and
convertible promissory notes, approximate their carrying value.

      CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

      A  significant  portion of the  Company's  sales were to  customers in the
electronic  publishing  industry.   The  Company  extended  credit  terms  on  a
customer-by-customer  basis  based  on  its  evaluation  of  its  collectibility
exposure. In management's opinion, the Company's allowance for doubtful accounts
is  sufficient  to cover any  potential  risk of loss from  extending  credit to
customers.  In fiscal 1998,  the Company  derived  sales from 5 customers  which
represented 69% of net sales approximately as follows:

                                                                       % Total
           Customer                      Sales                          Sales

               A                        182,000                          17%
               B                        180,000                          17%
               C                        116,000                          11%
               D                        142,000                          13%
               E                        113,000                          11%

      STOCK OPTIONS

      The  Company  follows  the  provisions  of SFAS No.  123,  Accounting  for
Stock-Based  Compensation.  The  Company  has elected to continue to account for
stock options at their  intrinsic  value with  disclosure of the effects of fair
value  accounting on net earnings  (loss) and earnings (loss) per share on a pro
forma basis.

      NET LOSS PER SHARE OF COMMON STOCK

      The Company  follows the Statement of Financial  Accounting  Standards No.
128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 requires the presentation
of both basic and diluted earnings per share.

      NEW ACCOUNTING STANDARD NOT YET ADOPTED

      In June 1998,  the Financial  Accounting  Standards  Board issued SFAS No.
133,  "Accounting for Derivative  Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 requires companies to recognize all derivative  contracts as
either  assets or  liabilities  in the balance sheet and to measure them at fair
value.  If  certain  conditions  are  met,  a  derivative  may  be  specifically
designated as a hedge,  the objective of which is to match the timing of gain or
loss  recognition  on the hedging  derivative  with the  recognition  of (i) the
changes in the fair value of the hedged assets or liability or (ii) the earnings
effect of the hedged forecasted transaction.  For a derivative not designated as
a hedging instrument,  the gain or loss is recognized in income in the period of
change.  SFAS No. 133 is  effective  for all  fiscal  quarters  of fiscal  years
beginning after June 15, 1999.

      Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative  purposes.  Accordingly,  the Company
does not expect adoption of the new standard to affect its financial statements.


                                      F-9
<PAGE>
                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS



3.    ACCRUED EXPENSES

      ACCRUED EXPENSES CONSIST OF THE FOLLOWING:

                                                                 December 31,
                                                                     1998

      Consulting                                                   $  31,246
      Professional fees                                               40,051
      Severance                                                       45,000
      Interest                                                        31,057
      Other                                                           34,658
                                                                   ---------

      Total accrued expenses                                       $ 182,012
                                                                   =========

      Included  in  accrued  expenses  is an  accrual  of  $45,000  related to a
severance  agreement with a former President and Chief Executive  Officer of the
Company.


4.    FINANCING ARRANGEMENTS

      PRIVATE PLACEMENT

      In January 1998,  the Company  completed a private  placement of 6,180,000
shares of the Company's common stock at a price of $1.00 per share. The proceeds
from the private  placement less  placement fees of $453,881 were  approximately
$4,926,000.  An additional  378,910  shares were issued as part of the placement
fees.

      In May 1998, the Company  completed a private  placement of 575,000 shares
of the Company's  common stock at a price of $1.00 per share.  The proceeds from
the  private  placement  less  placement  fees  of  $28,200  were  approximately
$546,800. An additional 51,722 shares were issued as part of the placement fees.

      BRIDGE FINANCING

      In January 1998, the Company  entered into bridge  financing made up of 10
units each  consisting  of (i) a  convertible  promissory  note in the principal
amount of $50,000 bearing  interest  payable at maturity,  at the rate of 8% per
annum, which shall be converted into shares of the Company's common stock at the
rate of one share of common stock per dollar loaned plus accrued  interest as of
the date and upon the  earlier of (a) the  consummation  of a  financing  by the
Company which  results in net proceeds to the Company of at least  $3,000,000 or
(b) June 30, 1998; and (ii) a warrant to purchase  25,000 shares of common stock
at an exercise  price of $1.00 per share.  Gross  proceeds  were  $500,000.  The
Company allocated proceeds of $47,689 to the detachable warrants and $452,131 to
the promissory notes. Upon the completion of a separate private equity placement
in January 1998,  the above 10 units were  converted  into 500,000 shares of the
Company's common stock. The discount on the debt for the detachable  warrants of
$47,689 was charged to interest expense upon conversion.

      In September  1998, the Company  obtained  $1,500,000 in bridge  financing
consisting  of secured  convertible  promissory  notes and 750,000  common stock
purchase warrants.  The promissory notes bear interest at the rate of 8% and are
to be repaid at the earlier of July 31, 1999 or (i) any sale, pledge, assignment
or disposition of any assets of the borrower (ii) any merger or consolidation of
the  borrower  or "change of control"  of the  borrower or (iii)  proceeds of at
least  $4,000,000 from the sale or issuance of any debt or equity  securities or
proceeds  of any loans.  Each  warrant  shall be  exercisable  for the number of
shares  equal to 50% of the  principal  amount of the loans.  The  warrants  are
exercisable  at $.40 per share and expire five years from the date of  issuance.
Of the  $1,500,000  in gross  proceeds,  the Company  allocated  $163,899 to the
warrants  and  $1,336,101  to the  notes.  The  discount  on the  debt is  being
amortized over 11 months,  the  anticipated  term of the loan.  The  unamortized
discount on the notes at December 31, 1998 was $104,299.


                                      F-10
<PAGE>
                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS


4.    FINANCING ARRANGEMENTS (concluded)

      BRIDGE FINANCING (concluded)

      In October 1997, the Company  entered into a note agreement with a bank in
the principal amount of $750,000,  with interest at the banks prime rate plus 2%
(9.75% at December 31, 1998).  This loan was originally  payable upon completion
of  financing,  resulting  in net proceeds of at least  $5,000,000.  In December
1997,  the loan  agreement  was  amended  to extend  the due date on the loan to
February 28, 1998. In accordance with the original terms of the bridge loan, the
Company issued  detachable  warrants to purchase 100,000 shares of the Company's
common stock at an exercise price of $3.00 per share  exercisable  over 5 years.
In consideration  of the extension  granted in December 1997, the exercise price
of the detachable  warrants was reduced from $3.00 per share to $1.00 per share.
Of the  $750,000  in  gross  proceeds,  the  Company  allocated  $81,077  to the
detachable  warrants  and  $668,923  to the note.  The  discount on the debt was
amortized over 5 months,  the term of the extended loan. In September  1998, the
Company  repaid the  principal  balance with a portion of the proceeds  from the
September  1998 bridge  financing.  During the year ended December 31, 1998, the
remaining discount of $32,431 was charged to interest expense.  Accrued interest
related to this  bridge  note of  approximately  $17,000 is  included in current
liabilities at December 31, 1998.

      In  December  1997,  the  Company  entered  into  bridge  financing  which
consisted of the sale of 10 units.  Each unit consisted of (i) a promissory note
in the principal  amount of $50,000 bearing  interest payable at maturity at the
rate of 8% and  payable  on the  earlier  of (a) the  date  of  consummation  of
financing by the Company resulting in net proceeds of at least $3,000,000 or (b)
January 30, 1998;  and (ii) a warrant to purchase  50,000 shares of common stock
at an  exercise  price of $1.00  per share and  having an  exercise  period of 5
years.  Proceeds were $500,000.  The Company allocated gross proceeds of $51,852
to the detachable warrants and $448,148 to the promissory notes. The discount on
the debt was  amortized  over 2 months,  the term of the loan.  During  the year
ended  December  31,  1998,  the  remaining  discount  of $25,926 was charged to
interest expense.  The Company extinguished this debt by paying $200,000 in cash
and  converting the remaining  balance into 300,000 shares the Company's  common
stock in conjunction with the January 1998 private placement of 6,180,000 shares
of the Company's common stock at $1.00 per share.

      CONVERTIBLE PROMISSORY NOTES

      At June 30,  1996,  the Company had  outstanding  $752,602 of  convertible
promissory notes issued to various  stockholders of the Company during September
1995 and May 1996 in connection with a private placement, as well as $111,674 of
convertible promissory notes issued (collectively referred to as the "Notes") to
MTDC and First Stage in  connection  with the  conversion  of demand  promissory
notes  issued in 1991.  The Notes mature three years from date of issue and bear
interest  of 10 percent  per annum  payable at  maturity  or upon the earlier of
redemption or conversion. The notes provided that following the public offering,
any portion of the  principal  and interest of the Notes not so converted may be
converted  at the  option of the  holder at the  offering  price  plus $1.33 per
share.  However,  if the price of the common  stock is at least  $4.00 above the
initial public  offering price for a period of 10 consecutive  trading days, the
Company may convert any of the  remaining  principal  and accrued  interest at a
price equal to $1.33 per share  above the  initial  public  offering  price.  On
November 30, 1996, $802,018 of the outstanding  convertible promissory notes and
$71,488 of accrued interest, net of financing costs of $133,969,  were converted
into 218,374 shares of the Company's  common stock at a conversion rate of $4.00
per share.  Outstanding  balances on these notes amounted to $20,743 at December
31, 1998.


                                      F-11
<PAGE>
                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS


5.    COMMITMENTS

      Leases

      The Company is obligated for rental  payments  under two operating  leases
for  facilities  that expire  through  August  2001.  Rent  expense  under these
agreements  for the years ended  December  31,  1998 and 1997 was  approximately
$522,000 and $431,000, respectively. In addition, the Company is obligated under
capital  leases for equipment  that continue  through July 2000.  Future minimum
payments,  by year and in the  aggregate,  under  capital  leases and  operating
leases with initial or remaining terms of one year or more was  approximately as
follows at December 31, 1998:

  Year ended December 31,                  Capital Leases       Operating Leases

  1999                                        $  99,361           $   504,000
  2000                                           33,940               504,000
  2001                                                -               358,000
                                             ----------          ------------

 Total minimum lease payments                   133,301           $ 1,366,000
                                                                  ===========

 Less amount representing interest               10,000

 Present value of minimum lease payments      $ 123,301
                                              =========

      Subsequent to year end, the Company  returned all equipment  under capital
leases and cancelled the operating  leases.  No amounts have been accrued by the
Company as a result of canceling the operating leases. The Company is attempting
to negotiate a settlement  under  non-cancellable  capital  leases and operating
leases  and has been  released  from any  future  obligations  under  one of the
operating leases.

      LICENSE AGREEMENTS

      On  September  27,  1995,  the Company  obtained a worldwide  license from
Radius, Inc. ("Radius") to use certain of Radius' technology in its products. In
addition,   the   Company   granted   to  Radius  an   irrevocable,   perpetual,
non-exclusive,  worldwide,  royalty-free  license  to any  modifications  to the
Radius technology made by the Company.  During 1998 and 1997, the Company failed
to meet the unit sales  requirement.  As a result, the Company no longer has the
exclusive  right  to the  Radius  technology  and it may be  licensed  to  other
parties. Royalty expense under this license amounted to approximately $3,000 and
$16,500 in 1998 and 1997, respectively.

      The Company entered into a Development and License  Agreement dated August
1, 1996 with  Polybus  Systems  Corporation  ("Polybus")  pursuant  to which the
Company obtained an irrevocable,  perpetual, worldwide,  nonexclusive (except as
to publishing  for which the license is exclusive)  license to a high speed file
manager software package in consideration  for royalty  payments.  The royalties
payable by the Company  pursuant to the  Development  and License  Agreement are
initially  $800 per server and $400 per  workstation,  declining  in  increments
based upon the number of systems sold to $50 per server and $25 per  workstation
until the first  100,000  systems  are sold by the  Company.  No  royalties  are
payable  after the  Company  sells  100,000  systems.  The  initial  term of the
Development  and  License  Agreement  is 25  years  and  the  agreement  may  be
terminated  sooner by  Polybus  only in the event of a  payment  default  by the
Company. Upon termination of the Development and License Agreement,  Polybus may
license the software to third parties in the publishing market. The Company made
advances of $0 and $109,100  pursuant to the agreement,  as of December 31, 1998
and 1997, respectively.  On January 22, 1999, Polybus and the Company terminated
the  development  and  license  agreement  and entered  into a software  license
agreement. Under the terms of the new agreement,  Polybus granted to the Company
a perpetual worldwide,  irrevocable,  nonexclusive license to distribute Polybus
Macintosh  client  software  and the  Company  granted to  Polybus a  perpetual,
irrevocable royalty free license for the Company's NT client server. Included in
royalty expense is $106,000 of prepaid  royalties which were  written-off in the
current year due to the uncertainty of future sales using the software package.

                                      F-12
<PAGE>
                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS


5.    COMMITMENTS (concluded)

      EMPLOYMENT CONTRACTS

      Effective January 1, 1997, the Company entered into a two-year  employment
agreement  with Mr.  Lorrin  Gale,  the  Company's  former  President  and Chief
Executive Officer. Pursuant to such contract, Mr. Gale was paid a base salary of
$125,000 and was granted incentive stock options to purchase up to 75,000 shares
of common stock.  Options to purchase  15,000 shares of common stock vested upon
the execution of the  agreement and options to purchase  30,000 shares of common
stock vest on each of the first and second  anniversaries of the agreement.  All
options have an exercise  price of $4.00 per share.  Pursuant to his  employment
agreement,  Mr.  Gale may not compete  with the  Company  during the term of his
employment and for one year  thereafter.  Mr. Gale left the Company as President
and Chief  Executive  Officer in March  1998.  In  September  1998,  the Company
reached a settlement with Mr. Gale which required the Company to pay $150,000 in
severance  pay and an  additional  $45,000 in  increments  of $15,000 over three
years beginning July 1999.

      Effective  January  1,  1997,  the  Company  entered  into  an  employment
agreement with Mr. Duane Mayo, the Company's Chief Financial Officer, for a term
equal to the duration of his employment.  In consideration of the agreement, Mr.
Mayo's  annual  salary  increased  from  $85,000 to  $100,000.  Mr. Mayo may not
compete with the Company  throughout the term of his employment and for one year
thereafter.

      Effective  May  1998,  the  Company  entered  into a  two-year  employment
agreement with Lawrence  Liebson,  the Company's  President and Chief  Executive
Officer.  Pursuant to the contract,  Mr. Liebson was to be paid a base salary of
$150,000  and was granted  incentive  stock  options to purchase up to 1,763,955
shares of common  stock.  Options to  purchase  563,881  shares of common  stock
vested upon  execution of the agreement and options to purchase  300,019  shares
vest on  each of the  first,  second,  third  and  fourth  anniversaries  of the
agreement. All options had an exercise price of $1.00 per share.

      Mr. Liebson left the Company as President and Chief  Executive  Officer in
January 1999.

      In December  1998,  the Company  authorized  the issuance of an additional
3,592,816  shares of common stock to  investors  and the issuance of warrants to
purchase  359,282 shares of common stock to the underwriter who  participated in
the  January and May 1998  private  placements.  The  issuance of the shares and
warrants  was  pursuant to specific  terms of the private  placement  related to
missing certain revenue milestones.


6.    RELATED PARTY TRANSACTIONS

      In February  1997,  the Stanley A. Young Family  Limited  Partnership,  an
entity affiliated with Stanley A. Young, a company director until June 1997, was
issued,  in a private  placement,  promissory  notes in the aggregate  principal
amount of $50,000 and  warrants to purchase  6,375  shares of common stock at an
exercise  price of $2.75 per share and  warrants  to  purchase  6,375  shares of
common stock at an exercise price of $4.125 per share.

      In April 1997, the Company issued to Venture Management  Consultants,  LLC
("Venture  Management"),  of which Fred L. Chanowski,  a director of the Company
until March 1999, is a 20% member,  a promissory note in the principal amount of
$200,000  in  consideration  for a  $200,000  loan.  The  promissory  note bears
interest at 18% per annum with interest and principal payable at maturity on May
31, 1998.  In May 1997,  the Company  issued to Venture  Management a promissory
note in the principal amount of $200,000 in  consideration  for a $200,000 loan.
The promissory  note bears interest at 17% per annum with interest and principal
payable at maturity on June 30, 1998.  In October  1997,  the Company  issued to
Venture  Management,  in  consideration of a $400,000 loan, a promissory note in
the principal amount of $400,000 plus a warrant to purchase up to 100,000 shares
of Common Stock at $3.00 per share. The promissory note bears interest at 9% per
annum with  interest  and  principal  payable at  maturity on the earlier of (i)
December 11, 1997;  or (ii) the  completion  of a financing by the Company.  The
Company subsequently repaid all three of the promissory notes


                                      F-13
<PAGE>
                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS


6.    RELATED PARTY TRANSACTIONS (concluded)

issued to Venture  Management.  In October  1997,  the  Company  entered  into a
Consulting  Agreement with Venture  Management.  In consideration for consulting
services,  the Company  issued  Venture  Management  a warrant to purchase up to
400,000  shares of common stock at $3.00 per share and agreed to pay  consulting
fees of $4,000 per month,  plus  out-of-pocket  expenses up to $1,000 per month.
Included in  consulting  expense in 1997 is  approximately  $196,000  related to
these services.  In October 1998, the Company cancelled the consulting agreement
with Venture Management signed in October 1997 and the warrant to purchase up to
400,000 shares of common stock and entered into a new consulting  agreement with
Venture Management.  In consideration of consulting services, the Company issued
a warrant to purchase up to 500,000  shares of common  stock at $1.00 per share.
Included in  consulting  expense for 1998 is  approximately  $17,000  related to
these warrants.

      In January  1998,  Leventhal  Paget LLC,  of which  Jeffrey  Leventhal,  a
director of the Company until March 1999, is a member,  purchased 200,000 shares
of Common Stock for  $200,000 in a private  placement  of the  Company's  Common
Stock.


7.    INCOME TAXES

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes.

      At  December  31,  1998 the  Company  had a gross  deferred  tax  asset of
$8,457,000 related to a net operating loss  carryforward,  for which a valuation
allowance of $8,457,000 was recorded.  The Company had no deferred tax liability
at December  31, 1998.  The current year  increase in the deferred tax asset and
the related valuation allowance of $2,957,000 was primarily  attributable to the
increase in the deferred asset related to the net operating loss carryforward.

      Due to operating losses  generated,  there is no provision for federal and
state income taxes for the years ended December 31, 1998 and December 31, 1997.

      The  difference  between  the  effective  tax rate and the  United  States
federal  rate of 34 percent for the years ended  December  31, 1998 and December
31,  1997  relates  to the  limitations  applicable  to the  recognition  of tax
benefits from the net operating losses.

      At December 31, 1998,  the Company had a net operating  loss  carryforward
for federal income tax purposes of  approximately  $20,300,000  which expires in
2012.  Net  operating  loss  carryforwards  are  subject to review and  possible
adjustment  by the Internal  Revenue  Service and may be limited in the event of
certain   cumulative   changes  in  the  ownership   interests  of   significant
stockholders  over a three year period in excess of 50  percent.  As a result of
the change in ownership of the Company in June 1995, the ultimate utilization of
the Company's net operating losses were substantially  eliminated as of June 30,
1995.  As a result of the changes in ownership of the Company in June 1996,  May
1997,  January 1998 and May 1998, the ultimate  utilization of the Company's net
operating losses are expected to be limited.



                                      F-14
<PAGE>
                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS



8.    CAPITAL STOCK

      PREFERRED STOCK

      In July 1995,  the Board of Directors'  approved an increase in the number
of authorized shares of preferred stock from 593,602 shares to 2,000,000 shares.
The preferred stock may be issued in one or more series,  the terms of which may
be determined at the time of issuance by the Board of Directors, without further
action by stockholders,  and may include voting rights, preferences to dividends
and liquidation, conversion and redemption rights and sinking fund provisions.

      COMMON STOCK

      In June 1998,  the Board of Directors'  approved an increase in the number
of  authorized  shares of common  stock  from  30,000,000  shares to  50,000,000
shares.

      In March  1997,  the  Company  issued  47,807  shares of  common  stock in
connection  with the  exercise of a warrant to purchase  common stock for $1.507
per share.

      In May 1997,  the  Company  issued  1,800,000  shares  of common  stock in
connection with an initial public offering.

      In April 1997, the Board of Directors  declared a  three-for-four  reverse
stock split of the  Company's  common  stock.  All common  stock,  common  stock
options and per share  information  disclosed in the  financial  statements  and
notes thereto have been adjusted to give effect for this stock split.

      In January 1998, in connection with a $6,180,000  private placement of the
Company's  common stock,  the Company issued  warrants for the purchase of up to
655,891 shares of common stock to the underwriter and 12 of its designees. These
warrants have an exercise  price of $1.00 per share;  rights to purchase  shares
granted by these warrants will expire on January 8, 2003.

      In May 1998,  in  connection  with a  $575,000  private  placement  of the
Company's common stock, the Company issued 51,722 shares of common stock, to the
underwriter. The shares of common stock were issued in lieu of cash compensation
payments to the underwriter.

      At December 31, 1998,  4,800,000  shares of common stock were reserved for
issuance under  outstanding stock options and 7,501,681 shares were reserved for
issuance under warrants.

      WARRANTS

      In January 1998,  in  connection  with a $500,000  bridge  financing,  the
Company issued promissory notes with a stated principal of $500,000 and warrants
to purchase up to 250,000 shares at $1.00 per share.

      In January 1998, in connection with a $6,180,000  private placement of the
Company's  common stock,  the Company issued 378,910 shares of common stock,  to
the underwriter  and 4 of its designees.  The shares of common stock were issued
in lieu of cash compensation payments to the underwriter.

      In May 1998,  in  connection  with a  $575,000  private  placement  of the
Company's  common stock,  the Company issued  warrants for the purchase of up to
62,673 shares of common stock to the underwriter  and 4 of its designees.  These
warrants have an exercise  price of $1.00 per share;  rights to purchase  shares
granted by these warrants will expire May 30, 2003.


                                      F-15
<PAGE>


8.    CAPITAL STOCK (concluded)

      WARRANTS (concluded)

      In September 1998, in connection with a $1,500,000 bridge  financing,  the
Company issued secured  promissory  notes with a stated  principal of $1,500,000
and warrants to purchase up to 750,000  shares of the Company's  common stock at
$.40 per share.

      In  September  1998,  in  connection  with the  execution  of a consulting
agreement and securing of  $1,500,000  the Company  issued  warrants to purchase
1,000,000  shares of the Company's  common stock to an underwriter  and 4 of its
designees.  These warrants have an exercise  price of $.40 per share;  rights to
purchase shares granted by these warrants will expire on September 30, 2003.

      In October 1998, the Company cancelled  warrants to purchase up to 400,000
in common stock  associated  with a consulting  agreement and entered into a new
consulting  agreement  by issuing  warrants  to purchase  500,000  shares of the
Company's common stock at $1.00 per share expiring in October 2003.

      In December  1998,  the Board of Directors  authorized  the issuance of an
additional  3,592,816  shares of common  stock to 66  accredited  investors  who
participated in private  placements of the Company's common stock during January
and May 1998.  The issuance of the shares was pursuant to specific  terms of the
private placement  relating to missing certain revenue  milestones.  As of April
1999, the Company had not issued those shares.

      In  December  1998,  the Board of  Directors  authorized  the  issuance of
warrants to purchase 359,282 shares of common stock to the underwriter  involved
in private  placements of the Company's common stock during January 1998 and May
1998. The issuance of the warrants was pursuant to specific terms of the private
placement relating to missing certain revenue milestones.  As of April 1999, the
Company has not issued those warrants.

      From  November  1995 to May 1996,  the  Company  issued  (i)  warrants  to
purchase in the aggregate 244,059 shares of common stock at an exercise price of
$1.507,  of which  21,514  have an  expiration  date four years from the date of
issuance  and  222,545  have an  expiration  date  five  years  from the date of
issuance;  and (ii) warrants (to a placement  agent) to purchase an aggregate of
21,966  shares of  common  stock at a price of  $1.507  per  share and  expiring
between  November 22, 2000 and May 31, 2001. In July 1996,  the Company issued a
warrant to purchase  23,904 shares of common stock at an exercise price equal to
one half of the price of the  shares of common  stock in the  Company's  initial
public  offering  and  with an  expiration  date  five  years  from  the date of
issuance.  In October  1996,  the Company  issued a warrant to  purchase  11,952
shares  of common  stock at an  exercise  price of $2.093  per share and with an
expiration  date five years from the date of  issuance.  In December  1996,  the
Company issued a warrant to purchase 37,500 shares of the Company's common stock
at an exercise  price of $4.00 per share and with an expiration  date five years
from the date of issuance. From December 1996 through February 1997, the Company
issued  warrants to purchase in the  aggregate  914,188  shares of common stock,
457,094 of which have an exercise  price of $2.75 per share and 457,094 of which
have an exercise price equal of $4.125 per share. These warrants are exercisable
for a period of three years commencing on December 30, 1997.

      In connection  with an initial public offering  declared  effective on May
12, 1997, 2,070,000 redeemable common stock purchase warrants were issued by the
Company.  Each warrant entitles the holder to purchase one share of common stock
for $6.60 during the four-year  period  commencing one year from the date of the
offering.


                                      F-16
<PAGE>
                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS


9.    STOCK OPTION PLAN

      In July 1995, the Company  adopted its 1995 Stock Option Plan.  Under this
plan, the Board of Directors,  at their  discretion,  can issue either incentive
stock options or nonqualified  options to employees and nonqualified  options to
consultants, directors or other nonemployees.

      Incentive  stock  options may not be granted at a price less than the fair
market  value of the shares at the grant date (or less than 110% of fair  market
value in the case of  employees  or  officers  holding 10% or more of the voting
stock) while the  nonqualified  options may be granted at a price  determined by
the Board of Directors  except that the Company has agreed with the Underwriters
not to grant any  nonqualified  options  at a price  lower  than 85% of the fair
market  value of the shares at the date of the grant.  All grants as of December
31, 1998 were at fair market value or greater.  The options  generally  vest 10%
after 30 days from the date of grant and the  balance  ratably  over a period of
four years.  Incentive stock options granted under the plan expire not more than
10 years  from the date of grant  and not more  than  five  years in the case of
incentive stock options granted to an employee or officer holding 10% or more of
the voting  stock of the  Company.  All options not  exercised at the end of the
vesting period automatically expire. The aggregate number of shares which may be
granted under this plan may not exceed 4,800,000 shares.

      Changes  in  options  outstanding  under the 1995  Stock  Option  Plan are
summarized as follows:

                                                                Weighted-Average
                                              Shares             Exercise Price

Balance, December 31, 1996                     304,589                 $2.14
Granted                                        223,813                  3.82
Exercised                                            -                     -
Cancelled or expired                          (153,918)                 3.09
                                             ---------                ------

Balance, December 31, 1997                     374,484                  2.58
Granted                                      2,492,260                  1.00
Exercised                                            -                     -
Cancelled or expired                          (601,124)                 1.87
                                             ---------                ------

Balance, December 31, 1998                   2,265,620                 $1.04
                                             =========                 =====

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

                                   Options Outstanding
                         -------------------------------------
                                                    Weighted-
                                 Number               Average         Weighted-
Range of                    Outstanding at         Remaining           Average
Exercise                      December 31,         Contractual         Exercise
Prices                           1998              Life (years)         Price
--------------------------------------------------------------------------------
 $1.00                         2,187,439               4.4               $ 1.00
  1.51                            64,541               2.0                 1.51
  2.09                             2,390               2.8                 2.09
  3.00                            11,250               3.5                 3.00
---------------               ----------               ---              -------

 $1.00-   $3.00                2,265,620               4.3               $ 1.04
 ====== =======               ==========               ===               ======


                                      F-17
<PAGE>
                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS



9.    STOCK OPTION PLAN (concluded)

                               Options Exercisable
                    ---------------------------------------
                                     Number                        Weighted-
Range of                         Exercisable at                    Average
Exercise                          December 31,                     Exercise
Prices                               1998                              Price
--------------------------------------------------------------------------

$1.00                               782,830                           $1.00
 1.51                                49,214                            1.51
 2.09                                 1,404                            2.09
 3.00                                 4,782                            3.00
---------------                     --------                          ------

$1.00-   $3.00                      838,230                           $1.03
====== =======                     ========                           =====

      The  Company  follows the  provisions  of SFAS No.  123,  "Accounting  for
Stock-Based  Compensation".  The  Company has elected to continue to account for
stock  options at intrinsic  value with  disclosure of the effects of fair value
accounting  on net income  (loss) and  earnings  (loss) per share on a pro forma
basis. Had  compensation  costs for the stock option plans been determined using
the fair value method, the Company's pro forma net loss and loss per share would
have been as follows:

                                                       December 31,
                                             ----------------------------------
                                                 1998                 1997
                                             ----------------------------------
  Net loss                   As reported     $ (7,239,529)        $ (9,380,055)
                             Pro forma       $ (7,814,319)        $ (9,480,378)

  Basic and diluted loss
    per share                As reported     $      (0.65)        $     (2.31)
                             Pro forma       $      (0.70)        $     (2.33)


      Pro  forma  compensation  cost  may  not be  representative  of that to be
expected in future years.

      The Company has computed the pro forma disclosures required under SFAS No.
123 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The
weighted  average  assumptions  used for the year ended December 31, 1998 are as
follows:  risk free interest rates range of 5.67%, expected dividend yield of 0%
and  expected  option life of 60 months;  and  expected  volatility  of 50%. The
weighted  average  assumptions  used for the year ended December 31, 1997 are as
follows:  risk free interest rate ranging from 5.97% to 6.33%, expected dividend
yield of 0% and expected  option life of 60 months;  and expected  volatility of
46.5%.  The weighted  average fair value of all options granted during the years
ended   December   31,  1998  and  December  31,  1997  were  $0.51  and  $1.07,
respectively.


                                      F-18
<PAGE>



10.   NET LOSS PER SHARE OF COMMON STOCK

      The Company follows Statement of Financial Accounting Standards (SFAS) No.
128,  Earnings per Share,  issued by the Financial  Accounting  Standards Board.
Under SFAS No. 128, the basic and diluted net loss per share of common stock for
the years ended  December 31, 1998 and December 31, 1997 is computed by dividing
the net loss by the weighted average number of common shares  outstanding during
the period.

      The weighted average number of common shares  outstanding is summarized as
follows:

                                                             December 31,
                                                         -------------------
                                                         1998           1997
                                                         ----           ----
 Denominator for basic and diluted loss per share:
   Weighted average common stock
     shares outstanding                               11,102,306      4,062,360

      The  Company's   convertible   preferred   stock  and  other   convertible
instruments  are not considered  outstanding for the diluted  calculation  since
their effect is antidilutive.


11.   INITIAL PUBLIC OFFERING

      During fiscal 1997, the Company  consummated an initial public offering of
its common stock and common stock purchase  warrants under the Securities Act of
1933 with the  Securities  and Exchange  Commission.  Pursuant to the  offering,
1,800,000 shares of common stock and 2,070,000  redeemable common stock purchase
warrants were issued and sold by the Company.  Each warrant  entitles the holder
to purchase  one share of common  stock for $6.60  during the  four-year  period
commencing one year from the date of the offering.  The  Registration  Statement
was declared  effective on May 12, 1997. The Company received net proceeds after
expenses of approximately $8,220,000.


12.   SUPPLEMENTAL CASH FLOW INFORMATION

                                                                December 31,
                                                             1998         1997

Supplemental schedule of cash payments:
Cash paid for interest                                   $        -    $ 180,549

Supplemental schedule of noncash financing
and investing activities:
    Conversion of bridge financing into common stock        300,000            -
    Conversion of notes payable into common stock           500,000            -
    Debt discount paid in warrants                          211,588            -
    Financing fees paid in warrants                          34,668            -
    Consulting expense paid with warrants                    17,138      271,950
    Property and equipment acquired by
      capital lease obligations                                   -      105,713


                                      F-19