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 $998,000.
As of April 15, 1999, there were 11,898,952 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>


ITEM 1.           DESCRIPTION OF BUSINESS



GENERAL

         Prior to January 15,  1999,  Augment  Systems,  Inc.,  (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, in anticipation
of a private placement of the Company's Common Stock. The Company used a portion
of the proceeds of the bridge  financing to repay in full its  indebtedness to a
major lending  institution.  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 implementation
of its  business  plan  and  ongoing  operations.  The  Company  began  to  seek
alternative  financing,  but, was unable to secure the funds or a commitment for
the additional  funding necessary to maintain ongoing  operations and transition
its products  from a  proprietary  platform to standard  hardware and  software.
While the Company  experienced  initial  success  with the  introduction  of its
products to customers,  long-term  viability was dependent in part, on migrating
its technology to standard hardware and software.  However,  without  additional
capital, the Company was unable to complete research and development, maintain a
sales force and requisite administrative support.

         On January 15, 1999, the Board of Directors  elected to discontinue all
ongoing  operations,  layoff all but one of its  employees,  seek buyers for its
technology and inventory and look for a merger  partner.  The Company has ceased
sales, marketing and distribution of its products. On March 31, 1999, two of the
remaining  three  members of the Board of  Directors  resigned  to pursue  other
interests. As of April 15, 1999, the Company's Chief Financial Officer, and only
active board member,  was engaged in the  disposition  of assets,  settlement of
outstanding  debts,  sale  of  the  Company's  technology,  and  exploration  of
potential mergers. There are substantial risks that the Company will not be able
to settle its debts or find a suitable  merger  transaction.  The Company may be
compelled to voluntarily  file for bankruptcy or be forced by its creditors into
an  involuntarily  bankruptcy.  See Item 1 - Potential for Bankruptcy - Need for
Financing  and  Item  6 -  Management's  Discussion  and  Analysis  or  Plan  of
Operation.

         Prior to January 15, 1999, Augment Systems,  Inc.  designed,  developed
and sold fibre  channel-based  network file server systems  designed to increase
data  transfer and file storage on computer  networks.  The  Company's  products
addressed the increasing  demand for the rapid transfer and efficient storage of
very large image and text files within computer networks.  The Company's initial
target  market was the  electronic  printing and  publishing  industry  which is
rapidly  converting to digital  technology,  but suffered from critical workflow
bottlenecks  due to the very large file sizes of color  images  which  cannot be
efficiently  transported  over  conventional  networks.  The Company  sold fibre
channel-based  network  file  server  systems  which  included  (i)  one or more
end-to-end high speed fibre channel arbitrated loop ("FC-AL") interfaces; (ii) a
file server, the AFX 410, that performs a central file management function, high
speed  large  capacity  storage,  and  high  speed  interconnects  to the  FC-AL
interfaces;  and (iii) PCI cards and software for each client  workstation to be
connected to the file server.



                                       1

<PAGE>

BACKGROUND


         Information,   and  the  ability  to  access  and   distribute  it,  is
increasingly  becoming  a  key  strategic  asset  in  the  competitive  business
environment. Advances in computer hardware and software technology have resulted
in  dramatic  increases  in the  amount  of  electronically  stored  information
available  to  computer  users.  The  need to  effectively  use and  communicate
information has driven the extensive  deployment of network based  communication
systems,  which are now typically based on the client/server  architecture.  The
resulting explosion in connectivity has in turn focused attention on the need to
transfer information between computer users quickly and effectively. In a number
of  industries,  for example,  electronic  publishing,  geophysical  information
systems (GIS) and medical imaging, the quantity of digital information routinely
manipulated  has now outgrown the capacity of the networks to transfer  files to
the  client  in  a  reasonably   short  period  of  time.  Often  involving  the
manipulation  of very large text and image  files,  these  applications  require
massive amounts of disk storage and very high network bandwidths.  As more types
of  information  became  digitized  over the past two  decades,  file sizes have
increased dramatically.


THE AUGMENT PRODUCTS

         The Company's products,  which combined  high-performance  interconnect
technology and scalable server,  were optimized for the production flow of large
data files. The Augment super servers permitted  increases in the speed at which
data files were moved from each end of the printing process, leading to improved
workflow,  radically  decreasing  the time lost through  waiting for files to be
transferred between workstations.  The Augment technology was multi-platform and
augmented the existing  network  architecture  to provide  improvements  in file
management and file transfer speed. The Company's initial product,  the AFX 410,
provided data transfer for Macintosh  clients and WindowsNT  clients via a fiber
channel  arbitrated  loop.  The fiber  channel  interconnect  delivered up to 10
MBytes/sec per client workstation. The server incorporated an extensive scalable
internal storage system.

         The  Company's  file  management  network  and  super  server  products
performed the file management functions and high speed interconnects  outside of
the  processor  running  the  core  operating  system.  This  approach  produced
improvements  in file transfer  speeds and enabled the server system to maintain
compatibility with Apple and Microsoft operating systems while running different
application  software..  The Company's products supported Macintosh workstations
and  Windows  NT-based  workstations  and  servers to the  Augment  system.  The
Company's  technology  incorporated  (i)  end-to-end  high-speed  fibre  channel
connectivity,  (ii) a server  containing  an embedded I/O control  processor,  a
hardware-assisted  parallel disk array  subsystem,  and two NUBus-90  backplanes
(each  supporting up to six I/O control  processors)  and (iii) file  management
software in the client and super  server.  The overall  system was  optimized to
move large files over a network.  The Company's server's file system appeared to
the desktop applications as a local hard drive, providing shared access of up to
96 GBs of data, and transfer speeds faster than a conventional 10 baseT network.


COMPETITION

         The Company faced  substantial  competition  from the  manufacturers of
several  different  types  of  products  used as  file  servers.  Many of  these
companies  had   substantially   greater  financial   resources,   research  and
development staffs,  manufacturing,  marketing and distribution  facilities than
the Company.  The Company's  ability to compete  depended,  among other factors,
upon its ability to anticipate  industry trends,  invest in product research and
development,  and  effectively  manage the  introduction  of new  products  into
targeted markets.



                                       2

<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 approximately $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  in the  manufacturing  process and  provided  the Company with the
ability to increase production, as, and if necessary 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,  secured and unsecured
creditors. In the event of bankruptcy,  current equity and warrant-holders could
be substantially diluted.


                                       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.

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 Disscussion and Analysis Plan of Operation.


                                       5

<PAGE>

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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of fiscal 1998.

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's  Common Stock is currently  traded on the Bulletin  Board
Over-the-Counter under the symbol "AUGS" and the Company's Common Stock Purchase
Warrants are traded on the Bulletin Board  Over-the-Counter  under the symbol of
"AUGSW".  In  February  1998,  the NASD  changed the  listing  requirements  for
companies  whose  securities are listed on NASDAQ SmallCap  Market.  In light of
those changes,  on February 26, 1998, NASDAQ informed the Company it was to have
net tangible  assets of $5,000,000  by June 30, 1998,  and granted the Company a
temporary  listing  exception  until that time.  Since,  at June 30,  1998,  the
Company did not meet the net tangible assets requirement, on July 7, 1998 NASDAQ
informed the Company that it's securities were no longer eligible for listing on
the NASDAQ SmallCap Market.

         The following  table sets forth the range of high and low prices quoted
for the  Common  Stock  for  the  periods  indicated.  Such  quotations  reflect
inter-dealer prices, without retail mark-up,  mark-down or commission and do not
necessarily represent actual transactions.


<TABLE>
<CAPTION>
                                                                            Common Stock  

                                                                       High Bid      Low Bid
                                                                        Price         Price
                                                                       --------      -------
        <S>                                                            <C>           <C>
     
         1997

              First Quarter......Privately held until May 1997....      $             $

              Second Quarter......................................      $6.00         $4.00

              Third  Quarter......................................      $4.125        $2.625

              Fourth Quarter......................................      $4.313        $ .734

         1998

              First Quarter.......................................      $1.50         $1.00

              Second Quarter......................................      $1.4375       $  .50

              Third  Quarter......................................      $ .5625       $  .21875

              Fourth Quarter......................................      $ .375        $  .01

</TABLE>







                                       6

<PAGE>

                                 DIVIDEND POLICY

         The Company has never paid any cash  dividends and does not  anticipate
payment of cash  dividends  on the  Company's  Common  Stock in the  foreseeable
future.  Under  Delaware  Corporation  Law,  dividends  may be paid  only out of
legally  available funds as proscribed by statute,  subject to the discretion of
the Company's Board of Directors.

                     RECENT SALES OF UNREGISTERED SECURITIES

         The following information relates to all securities sold by the Company
during the period  covered by this  reporting  period  that were not  registered
under the  Securities  Act of 1933 or otherwise  reported on the Company's  Form
10-QSBs filed during this reporting period.

         1.       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.

         2.       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.

         3.       In  May  1998,  in  connection  with  the 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 on May 30, 2003.

         4.       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.

         5.       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 to 41 accredited investors.

         6.       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.

         7.       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.

         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


                                       7

<PAGE>

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,  retain  key  employees  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  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  for its
technology, and explore merger opportunities.

         Prior to January 15, 1999, Augment Systems,  Inc.  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,  but 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  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  for its
technology, and explore merger opportunities.


                                       8

<PAGE>

         Revenues for the fiscal year ended December 31, 1998 were $1,072,203 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 41% for the period ended  December 31, 1998 versus a 40% gross product
margin on product sales for the period ended December 31, 1997.  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 $1,852,811  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  $2,022,743  as  compared  to  $1,565,274  for the  fiscal  year ended
December 31, 1997. The $457,469  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 $1,867,460 as compared to $3,141,843 for the fiscal year ended December 31,
1997.  The  $1,274,383  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  $6,878,205  as compared  to  $9,380,055  for the fiscal year ended
December 31, 1997. The decrease in net loss of $2,501,850 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 of approximately  $382,000  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 for its technology, and 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


                                       9

<PAGE>

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.

         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 for the Company's technology and
look for merger partners.



                                       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 of the Company's  technology and
attract potential merger partners,  which will undoubtedly result in substantial
dilution to existing  shareholders.  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.

          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  11,898,952  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.

INCOME TAXES

         The Company adopted Statement No. 109 "Accounting for Income Taxes," in
1993  and  its  implementation  has had no  effect  on the  Company's  financial
position and results of operation.

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>

ITEM 9.           DIRECTOR'S  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         The current  directors,  executive  officers  and key  employees of the
Company, their ages and their positions held in the Company are as follows:



NAME                    AGE        POSITION

Duane A. Mayo           46         Vice President of Finance and Administration,
                                   Chief Financial Officer, Treasurer, Secretary
                                   and Director


         All directors hold office until the next annual meeting of stockholders
of the Company and until their  successors have been duly elected and qualified.
The executive  officers are appointed  annually by, and serve at the  discretion
of, the Board of Directors.  In January 1999,  Mr Laurence  Liebson,  the former
President  and CEO,  resigned as an officer and member of the Board of Directors
and as of March 31, 1999, Mr. Fred Chanowski and Mr. Jeffrey Leventhal  resigned
from the Board of Directors.

         DUANE  A.  MAYO  has  served  as  Vice   President   of   Finance   and
Administration  since March 1995 and as a  director,  Chief  Financial  Officer,
Secretary and Treasurer since May 1995.  From April 1993 through  February 1995,
he served as Chief Financial Officer for Xerographic Laser Images Corporation, a
publicly-held   company  involved  in  development  of  resolution   enhancement
technology. From April 1988 to April 1993, Mr. Mayo was Corporate Controller for
Howtek,  Inc., a publicly-held  company and supplier of desktop scanners for the
color prepress marketplace.

COMMITTEES

         The Board of Directors currently does not have any committees.

DIRECTOR COMPENSATION

         The Company's directors do not receive  compensation for serving on the
Board of  Directors,  however,  the  Company  reimburses  directors  for  travel
expenses incurred to attend Board meetings.


ITEM 10.          EXECUTIVE COMPENSATION

         The  following  table sets forth  actual  compensation,  for the fiscal
years ended June 30, 1995,  and 1996,  and the fiscal  years ended  December 31,
1997 and 1998, including salary, bonuses and certain other compensation, paid by
the Company to its Chief  Executive  Officer.  None of the  Company's  executive
officers received cash compensation in excess of $100,000.




                                       12

<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 $.40 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 at $.40 per share.
Mr. Liebson left the Company as President and Chief Executive Officer in January
1999.





                      (This page left intentionally blank.)




                                       14

<PAGE>



ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


     The following table sets, as of April 15, 1999,  certain  information  with
respect to the beneficial  ownership of the capital stock of the Company for (i)
each  person who is known by the Company to own  beneficially  5% or more of the
outstanding shares of its Common Stock; (ii) each of the directors and executive
officers of the Company; and (iii) all directors and officers as a group. Except
as otherwise  indicated,  the stockholders  listed in the table have sole voting
and  investment  powers with  respect to the shares  indicated.  As of April 12,
1999, the Company had 172 Stockholders of record.  Unless  otherwise  indicated,
the  address  for  directors,  executive  officers  and 5%  stockholders  is 790
Turnpike Street, Suite 202, North Andover, Massachusetts 01845.


<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------
Name and Address of Beneficial Owner                       Number of Shares of               Percentage Class

                                                           Common Stock

                                                           Beneficially Owned(1)
------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                                <C>
Duane A. Mayo                                                 105,176                             .9%

Hamburg Bank                                                  657,354                            5.5%
      Hamburg, Germany
Nathan Low                                                    972,942(2)                         7.9%
   C/O Sunrise Securities
         135 East 57th Street
         New York, NY 10022
Trussel & Co.                                               1,000,000                            8.4%
  C/O Westfield Capital Management
         One Financial Center
         Boston, MA 02110


------------------------------------------------------------------------------------------------------------------------
All directors and executive officers as a group               105,176                             .9%
   (1 person)
------------------------------------------------------------------------------------------------------------------------

</TABLE>


     1.  Pursuant to the rules of the Securities and Exchange Commission, shares
         of Common  Stock  which an  individual  or group has a right to acquire
         within 60 days  pursuant to the  exercise  of options or  warrants  are
         deemed to be  outstanding  for the purpose of computing the  percentage
         ownership  of such  individual  or  group,  but are  not  deemed  to be
         beneficially  owned and  outstanding  for the purpose of computing  the
         percentage ownership of any other person shown in the table.

     2.  Includes  210,440 shares of Common Stock held in Nathan A. Low and Ruth
         I. Low JTWROS, and 95,000 shares held in Sunrise Foundation Trust. Also
         includes  325,775  shares of Common  Stock  issuable  upon  exercise of
         warrants held in Nathan A. Low and Ruth I. Low JTWROS, 50,000 shares of
         Common  Stock  issuable  upon  exercise  of  warrants  held in  Sunrise
         Foundation  Trust,  and 34,007  shares of Common  Stock  issuable  upon
         exercise of warrants held by Nathan Low.



                                       15

<PAGE>

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


         In June 1995, as part of a recapitalization,  the Company issued 89,747
shares of  Common  Stock  valued  at $.02 per  share to  Lorrin  Gale in lieu of
payment of $454,843 of accrued compensation and $55,000 of loans payable, and in
exchange for 15,787  shares of preferred  stock and 7,547 shares of common stock
held by Mr.  Gale.  Also as part of this  recapitalization,  the Company  issued
39,100  shares of Common  Stock  valued at $.021 per share to Chappell  Cory,  a
former  director  of the  Company,  in lieu of  payment of  $214,231  of accrued
compensation and $7,255 of loans payable.

         In July 1995,  the Company issued 151,735 shares of Common Stock valued
at $.021 per share to Mr.  Gale and  105,176  shares of Common  Stock  valued at
$.021 per share to Duane Mayo for services rendered.

         In July 1995,  the Company  entered  into a consulting  agreement  with
Young Management Group, Inc. ("Young Management"),  a company founded by Stanley
A. Young, who  subsequently  became a director of the Company in September 1995.
In consideration for consulting  services,  the Company agreed to pay consulting
fees of $7,000 per month, plus out-of-pocket expenses, of which $3,000 per month
was deferred until completion of the Company's initial public offering, and sold
179,279  shares  of  Common  Stock  at a price  of  $.021  per  share  to  Young
Management.  Consulting fees expensed in connection  with this agreement  during
the fiscal year ended June 30, 1996 were approximately $85,000, of which $56,000
was accrued and unpaid at June 30, 1996.  Consulting fees expensed in connection
with this  agreement  during the six months ended December 31, 1996 were $42,000
and an  aggregate  of $67,250 was accrued and unpaid at December  31,  1996.  In
August 1996, Young  Management  transferred all of its shares of Common Stock to
certain  affiliates  of  Young  Management,   including  the  Stanley  A.  Young
Irrevocable Trust and the Stanley A. Young Family Limited Partnership.

         In May 1996,  the  Stanley  A.  Young  Irrevocable  Trust was  issued a
promissory  note in the  principal  amount of $100,000  (which was  subsequently
repaid) and warrants to purchase 23, 904 shares of Common Stock with an exercise
price of  $1.507  per  share in  connection  with a  private  placement,  and in
February 1997, the Stanley A. Young Family Limited  Partnership  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  November  1995,  Stanley  A.  Young
Irrevocable  Trust and Mr.  Young's wife each  purchased  3,787 shares of Common
Stock  at a price  of  $1.507  per  share  and were  each  issued a  convertible
promissory note in the amount of $19,297.50 in a private placement.  In November
1996,  Stanley A. Young  Irrevocable  Trust converted the principal  balance and
accrued  interest on its note into 5,320 shares of Common Stock and Mr.  Young's
wife converted the principal balance and accrued interest on her note into 5,320
shares of Common Stock.

         In May 1996, the Company issued to Fred L. Chanowski,  in consideration
for consulting services rendered,  a warrant to purchase up to 23, 904 shares of
Common  Stock at an exercise  price of $1.507 per share.  Also in May 1996,  the
Company  issued  to Mr.  Chanowski,  in  consideration  for a  $25,000  loan,  a
promissory note in the principal amount of $25,000 plus a warrant to purchase up
to 5,976 shares of Common Stock at $1.507 per share.

         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


                                       16

<PAGE>

         77,540  shares of the  Company's  Common Stock and warrants to purchase
11,952  shares of Common  Stock.  In April 199,  the  Company  issued to Venture
Management Consultants, LLC ("Venture Management"), of which Mr. Chanowski ids 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  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, 1998, 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.  In March 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>

       *10.7   - Form  of  Promissory Note from the Company's  private placement
                 in May 1996.
       *10.8   - Form of  Registration  Rights  Agreement  for  shares of common
                 stock and  shares  underlying  promissory  notes  issued in the
                 Company's private placement completed in May 1996.
       *10.9   - Form of  Registration  Rights  Agreement  for  shares of common
                 stock issued in the Company's  private  placement  completed in
                 October 1996.
       *10.10  - Form  of  Class A Warrant from the Company's  private placement
                 completed in February 1997.
       *10.11  - Form  of  Class B Warrant from the Company's  private placement
                 completed in February 1997.
       *10.12  - Form of  Class A  Promissory  Note from the  Company's  private
                 placement completed in February 1997.
       *10.13  - Form of  Class  B Promissory  Note from the  Company's  private
                 placement completed in February 1997.
       *10.14  - Consulting  Agreement  between Young Management and the Company
                 dated July 1995.
       *10.15  - The Company's 1995 Stock Option Plan.
       *10.16  - Employment  Agreement,  dated  as January 1, 1997, between  the
                 Company and Lorrin G. Gale.
       *10.17  - Noncompetition and Nondisclosure Agreement, dated as of January
                 1, 1997, between the Company and Duane A. Mayo.
       *10.18  - Promissory  Note  issued  to Venture  Management by the Company
                 dated April 8, 1997.
       *10.19  - Promissory  Noted  issued to Venture  Management by the Company
                 dated May 6, 1997.
       *10.20  - Loan Letter Agreement with Fleet National Bank.
       *10.21  - $3,000,000 Promissory Note issued to Fleet National Bank.
       *10.22  - Placement Agent Agreement with Oscar Gruss & Son.
       *10.23  - Consulting   Agreement   between  the  Company  and  Venture
                 Management, executed as of October 1, 1997.
       *10.24  - Form of Promissory Note evidencing the Company's indebtedness
                 to Fleet National Bank, executed October 9, 1997.
       *10.25  - Warrant  Purchase  Agreement  between  the  Company and Fleet
                 National Bank, executed October 9, 1997.
       *10.26  - Loan  Modification  Agreement  between  the Company and Fleet
                 National Bank, executed October 9, 1997.
       *10.27  - Sales  Agency  Agreement  between  the  Company  and  Sunrise
                 Securities, dated December 8, 1997.
       *10.28  - Allonge to  Promissory  Note  between  the  Company and Fleet
                 National Bank.
        10.29  - Form of  Warrant  Purchase  Agreement  between the  Company and
                 certain investors, executed in December 1997 and January 1998.
        10.30  - Form  of Registration Rights Agreement between the Company and 
                 accredited investors participating in private placements of the
                 Company's Common Stock during January 1998 and May 1998.
        10.31  - Software Licence Agreement between Augment and Avid Technology,
                 Inc. dated June 29, 1998.
        10.32  - Form  of  Secured  Convertible  Promissory  Note evidencing the
                 Company's  indebtedness  to certain  accredited  investors  who
                 participated in Bridge financing in September 1999.


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<PAGE>


        10.33  - Form of  Loan  Agreement evidencing the Company's  indebtedness
                 to certain  accredited  investors  who  participated  in Bridge
                 financing in September 1999.
        10.34  - Form   of   Security   Agreement   evidencing   the  Company's
                 indebtedness to certain  accredited  investors who participated
                 in Bridge financing in September 1999.
        10.35  - Form  of   Subscription  Agreement  evidencing  the   Company's
                 indebtedness to certain  accredited  investors who participated
                 in Bridge financing in September 1998
        10.36  - Form of Warrant issued to certain accredited investors who
                 participated in Bridge Financing in September 1998, and the
                 underwriter for consulting fees.
        10.37  - Form  of  Lending Agreement  between  underwriter for Company's
                 September 1999 Bridge Financing and the Company.
        10.38  - Software Licence Agreement between Augment and Polybus  Systems
                 Corporation dated January 22, 1999.
       *24     - Power of Attorney.
        27     - Financial Data Schedule.
       -------------------------------------------------------------------------
       *Previously filed with the Commission.

                  (b)      Reports of Form 8-K.
                           The  Company  did not file any Form 8-Ks  during  the
quarter ended December 31, 1998.






                                   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                                                  April 15, 1999
----------------                                                  --------------
                Chief Financial Officer, Treasurer and Secretary
                (Principal Financial & Accounting Officer)
                Member of the Board of Directors







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