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________________________________________________________________________________

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K

(MARK ONE)

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 FOR THE TRANSITION PERIOD FROM           TO           .

                         COMMISSION FILE NUMBER: 333-12091

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

                          INTER*ACT SYSTEMS, INCORPORATED
              (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

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<S>                                                       <C>
                     NORTH CAROLINA                                              56-1817510
    (STATE OR OTHER JURISDICTION OF INCORPORATION OR                (I.R.S. EMPLOYER IDENTIFICATION NO.)
                       ORGANIZATION)
                   14 WESTPORT AVENUE                                              06851
                  NORWALK, CONNECTICUT                                           (ZIP CODE)
        (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 750-0300

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<S>                                                       <C>
                  TITLE OF EACH CLASS                            NAME OF EACH EXCHANGE ON WHICH REGISTERED
                          None                                                      None
</TABLE>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      None

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

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [x]

     As of March 25, 1998, the number of shares outstanding of the registrant's
Common Stock, no par value, was 7,728,555 shares. There is no trading market for
the Common Stock. Accordingly, the aggregate market value of the common Stock
held by non-affiliates of the registrant is not determinable. See Part II, Item
5. of this Report.

________________________________________________________________________________







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                             CROSS REFERENCE SHEET
                                      AND
                               TABLE OF CONTENTS

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                                                                                                      PAGE NUMBER
                                                                                                     OR REFERENCE
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<S>        <C>                                                                                       <C>
                                                   PART 1
ITEM 1.    Business...............................................................................           3
ITEM 2.    Properties.............................................................................          16
ITEM 3.    Legal Proceedings......................................................................          16
ITEM 4.    Submission of Matters to a Vote of Security Holders....................................          17

                                                   PART II
ITEM 5.    Market for Registrant's Common Equity and Related Stockholder Matters..................          17
ITEM 6.    Selected Consolidated Financial Data...................................................          18
ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of
             Operations...........................................................................          19
ITEM 8.    Financial Statements and Supplementary Data............................................          29
ITEM 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...          29

                                                  PART III
ITEM 10.   Directors and Executive Officers of the Company........................................          30
ITEM 11.   Executive Compensation.................................................................          33
ITEM 12.   Security Ownership of Certain Beneficial Owners and Management.........................          36
ITEM 13.   Certain Relationships and Related Transactions.........................................          39

                                                   PART IV
ITEM 14.   Exhibits, Financial Statement Schedules and Reports on Form 10-K.......................          42
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CAUTIONARY STATEMENT FOR PURPOSE OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

     The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995), which can be identified by
the use of forward-looking terminology such as believes, expects, may, will,
should, or anticipates or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. In addition, from time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forwarding-looking statements may be included in, but are not
limited to, various filings made by the Company with the Securities and Exchange
Commission, or press releases or oral statements made by or with the approval of
an authorized executive officer of the Company. Forward-looking statements are
based on management's current views and assumptions and involve risks and
uncertainties that could significantly affect expected results. The Company
wishes to caution the reader that factors, such as those listed below, in some
cases have affected and could affect the Company's actual results, causing
actual results to differ materially from those in any forward-looking statement.
These factors include: (i) the Company's limited operating history, significant
losses, accumulated deficit, negative cash flow from operations and expected
future losses, (ii) the dependence of the Company on its ability to establish,
maintain and expand relationships with Manufacturers to promote brands on the
ILN (as defined herein) and the uncertainty of market acceptance for the ILN,
(iii) the uncertainty as to whether the Company will be able to manage its
growth effectively, (iv) the early stage of the Company's products and services
and technical and other problems that the Company has experienced and may
experience, (v) risks related to the Company's substantial leverage and debt
service obligations, (vi) the Company's dependence on third parties such as
those who manufacture ILN terminals, (vii) the intensely competitive nature of
the consumer product and promotional industry, (viii) risks that the Company's
rights related to patents, proprietary information and trademarks may not
adequately protect its business, (ix) the possible inability of new management
to perform their respective roles and the possible conflicts of interest of the
Company's directors, officers and principal shareholders in certain transactions
with the Company. See Part II, Item 7. 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors.'

                                     PART I

ITEM 1. BUSINESS

     Inter*Act Systems, Incorporated ('Inter*Act' or the 'Company') is one of
the nation's largest in-store operators of customer-interactive electronic
marketing systems. The Company's patented technologies enable consumer products
manufacturers ('Manufacturers') and supermarket retailers ('Retailers') to offer
shopper-specific purchase incentives and messages to customers moments before
shopping begins. The Company's proprietary system, called the Inter*Act Loyalty
Network'tm' ('ILN'), utilizes patented, multimedia touch-screen terminals, or
Smart Kiosks'tm', located in the entrance area of retail grocery stores. These
terminals are connected to each store's point-of-sale scanning system which
allows the electronic promotions to be immediately redeemed at the check-out.
This fully automated process virtually eliminates the misredemption and fraud
associated with paper coupons, estimated by industry sources to cost
Manufacturers hundreds of millions of dollars per year.

     Through the ILN, Retailers and Manufacturers can track and analyze
individual consumer purchasing behavior over time and issue individually
targeted purchase discounts, free product sampling, and other promotional
incentives in order to increase sales while building store and brand loyalty.
The Company owns a series of patents and exclusive patent licenses that it
believes are a significant barrier to other potential kiosk-based in-store
competitors.

     The Company's primary objective is to become the nation's largest in-store
marketing services company by uniquely integrating the economic interests of
Manufacturers, Retailers, and consumers at a lower cost than any other in-store
marketing vehicle. The Company believes that the ILN capitalizes on the
convergence of major trends in the Manufacturer and Retailer industries to
better target and serve consumers. Manufacturers are striving to increase the
efficiency of their brand promotion through

                                       3







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individually targeted incentives and are seeking to offer promotions nearer to
the shopper purchase decision. Retailers are developing customer databases that
identify individual households and their product purchasing histories over time,
thereby allowing Retailers first to segment their customers by sales and
profitability and then reward them accordingly. Retailers are also seeking to
offer rewards to and communicate with their customers in-store as opposed to at
home. In addition to these industry trends, consumers are seeking greater
convenience in shopping without sacrificing savings.

     In the U.S., the Company has installed systems in 1,317 stores, and has
contracted to install in approximately an additional 2,100 stores as of March
25, 1998. Additionally, the Company, through a subsidiary, has entered into a
contract with Sainsbury's, one of the largest Retailers in the United Kingdom,
to commercially deploy the ILN in pilot stores in 1998.

     The Company is compensated by Manufacturers who commit to a specific set of
targeted promotions and pay the Company fees when a consumer selects and redeems
promotional incentives. This predominantly 'pay on redemption' method of payment
is unique in an industry that traditionally charges for promotions distributed
rather than promotions redeemed. In addition, Manufacturers are given category
exclusivity for the duration of their contract.

INDUSTRY OVERVIEW

     Manufacturers have traditionally used promotional vehicles such as mass
media advertising (newspapers, printed circulars, television, radio, and
billboards), Free Standing Inserts ('FSIs') and direct marketing techniques to
reach consumers. In 1996, Manufacturers of consumer products and household items
spent over $51 billion on promotional strategies designed to support their
brands, up from $49 billion in 1995. A growing diversity of lifestyles and a
profound expansion in the amount of information delivered to increasingly
fragmented consumer segments have contributed to brand proliferation and a
perceived decline in brand loyalty. At the same time, the changes in the
workforce and demographic shifts have made it increasingly difficult for
Manufacturers to use traditionally mass distributed and untargeted promotional
methods to reach purchasing decision makers. Consequently, conventional
advertising and promotional strategies that are untargeted have become less
efficient because they are reaching fewer people who are potential purchasers.

     Manufacturers have recognized the limitations of traditional promotional
vehicles. Despite the ineffectiveness of coupons and other mass distributed
promotional vehicles at reaching consumers efficiently, they continue to be
prevalent promotional tools. According to Veronis, Shuler & Associates, over 306
billion coupons were distributed in the United States in 1996 as compared with
237 billion in 1986. A decrease in the redemption rates of coupons by consumers
illustrates the limitations of this promotional tool. While consumers continued
to recognize the value of coupons by redeeming them for an estimated $3.7
billion of savings in 1996, overall redemption rates of all distributed coupons
dropped to average of 1.8% in 1996 versus 2.8% in 1986. In response to the
declining redemption rates of coupons, spending by Manufacturers on FSIs
declined year over year for the first time from $7 billion in 1995 to $6 billion
in 1996. In spite of the decreasing effectiveness of the more traditional
promotional methods such as coupons and mass media, and the corresponding
decline in Manufacturers' spending on promotional incentives such as FSIs,
Manufacturers are maintaining a similar level of overall investment in brand
promotions by shifting their promotional dollars to more targeted vehicles.
Promotional spending through direct marketing (targeted free sample give aways
and other direct to consumer programs) increased by 6% from 1990 to 1996.

     Not only have Manufacturers recognized the value of targeted promotions,
they have also recognized the effectiveness of promotions delivered in close
proximity to the purchase decision. It is estimated that 70% of all brand
purchase decisions are made by consumers while they are in the store, according
to Progressive Grocer Magazine and the Point-of-Purchase Advertising Institute
(POPAI). In-store promotion has enjoyed rapid growth as Manufacturers have begun
to shift promotion spending to emerging in-store platforms. As reported in the
Annual Survey of Promotional Practices, 72% of Manufacturers utilized in-store
electronic promotion techniques in 1996 as compared with only 48% in 1994, while
spending $850 million on these promotions, an increase of 33% over 1994,
according to Promo Magazine.

                                       4







<PAGE>
     Retailers have also begun to institute changes in their approach to
reaching their customers. Retailers have invested in technology to improve
efficiency and inventory management. Advances in point of sale technology, in
addition to providing efficiency at check-out and a means of price and inventory
control, also provide a platform for Retailers to identify and target their
customer base. This new technology has enabled Retailers to develop programs
that permit them to capture information about and communicate with targeted
segments of their customer base.

     Today Retailers have begun to concentrate on retaining and growing the 20%
to 25% of their customer base that accounts for an estimated 70% to 80% of total
store sales. Retailers are using loyalty-building frequent shopper card programs
('loyalty cards') in order to establish a direct means of communication with
these most important customers. The card programs are also designed to
counteract competition from other supermarkets, mass merchandisers, warehouse
clubs and specialty Retailers. These loyalty cards enable participating
customers to take advantage of product discounts offered by that store or by
regional chains without presenting a paper coupon. In a survey conducted by
Supermarket News (April 1, 1996), it was reported that 35% of households
contacted had a least one loyalty card, and 67% of these households always used
the card when shopping. It was estimated that by year 2000, 75% of all U.S.
households will have one or more loyalty cards.

RATIONALE FOR THE ILN NETWORK

     The ILN is positioned to provide a competitive advantage to Manufacturers
and Retailers by offering sophisticated targeting in close proximity to the
point of purchase decision at the beginning of the shopping process, by
populating the ILN with promotional offers that are based on past purchase
history, by charging for service based on products sold rather than offers
distributed, and by delivering the product in a paperless electronic system to
improve efficiency.

BENEFITS FOR MANUFACTURERS

     The Company believes that it provides Manufacturers with a more efficient
promotion channel than those channels to which they have traditionally allocated
promotional and advertising spending.

     Ability to Target Incentives Based on Prior Purchase History. The Company
believes that Manufacturers want to tailor promotional incentives by individual
households according to their degree of loyalty to the promoted brand. In order
for Manufacturers to offer targeted promotions they must have access to
household purchase history data and a targeting algorithm that can match the
desired promotions with the desired households. The ILN provides access to such
household data through its connection to the retailer point-of-sale system,
which permits the Company's Target Engine Software ('TES') to deliver different
promotional strategies for the same product depending on the buying habits of
each customer. See ' -- Technology and Software -- ILN Software.' The ILN can
also remind a consumer to buy particular products when sufficient time has
lapsed since the last purchase and can stimulate increased purchase volume
through promotions such as 'buy two and get a third item free.'

     Ability to Deliver Promotions in Close Proximity to Brand Purchase
Decisions. It is estimated that 70% of all brand purchase decisions are made by
consumers while they are in the store according to Progressive Grocer Magazine
and POPAI. The Company believes that the ILN's store entrance location, which
provides a shopping list of promotions prior to purchase, affords Manufacturers
the most opportune time to reach shoppers with a targeted incentive.

     The Company believes that the offering of personally customized discounts
to consumers in the store immediately prior to shopping results in the current
average of an approximately 35% redemption rate of ILN's electronically offered
coupons (which the Company believes is two to five times higher than that of
other in-store vehicles and approximately 18 times higher than that of FSIs).

     Delivers Accountable Consumer Promotion Alternative. The Company believes
that the ILN offers Manufacturers the lowest cost alternative among coupon
promotional strategies because:

          The Company's core product is based upon a 'pay on redemption' format;
     Manufacturers pay the Company a fee predominantly upon actual redemption
     and not merely upon a distribution of a specific coupon or promotion.

                                       5







<PAGE>
          The ILN's electronic scanning of the frequent shopping card at
     checkout verifies that items for which promotions were selected were
     actually purchased, virtually eliminating the problem of mistaken and
     fraudulent redemption of paper coupons. Industry sources estimate that this
     costs Manufacturers hundreds of millions of dollars per year through other
     coupon promotion vehicles.

     Stimulates Incremental Product Sales. As a result of its front-end location
and targeted touch-screen promotional display, management believes that the ILN
can directly cause an increase in the sales volume of promoted products. Sales
increases are generally attributable to a promotion motivating consumers to
trade up in volume (e.g., buy two and get a third item free), to try a new brand
due to the value of the offered incentive or to remind consumers to buy a
specified brand due to the on-screen prompt. Substantial sales increases at the
product and category level were attributed to the Company's ILN in Information
Resources Inc. matched store studies ('IRI Studies') performed for several
Manufacturers. These studies showed that Manufacturers who promoted products on
the ILN enjoyed significant product sales increases versus the same Manufacturer
products not promoted on the ILN in comparable stores.

     Develops Manufacturers/Retailer Partnership. The Company believes that its
ILN provides a new and unique platform for Manufacturers to maximize the impact
of account-specific (i.e., retail chain-specific) promotion dollars. For
example, a Manufacturer-sponsored sweepstakes promotion may be conducted
electronically via the ILN and advertised jointly by the Manufacturer and
Retailer in a specific market area. In this way, the ILN serves as a bridge
between the Manufacturer and the Retailer's frequent shopper card program.

     Provides Unique Promotion Flexibility. The ILN allows Manufacturers to
adjust any attribute of a promotion virtually on a daily basis. Modifications to
Manufacturer promotions can be introduced to the ILN remotely from the Company's
headquarters.

BENEFITS FOR RETAILERS

     The Company believes that the ILN provides competitive advantages for
Retailers.

     Provides Inexpensive, In-Store Platform To Reward The Most Valued Shoppers.
As in many industries, a small number of loyal customers account for a major
portion of revenue and profits per store. Many major supermarket chains have
developed loyalty card marketing programs to help them identify and reward these
valuable customers. The Company believes that the ILN, working in conjunction
with a store's loyalty marketing card, offers Retailers a unique and
cost-efficient way to deliver in-store targeted messages, promotional incentives
and rewards to this important shopper segment. In a study conducted by the
Company, utilizing data procured from three ILN stores, the average transaction
size for a loyalty card holder who visited an ILN terminal was approximately
twice as large as the average transaction size of a loyalty card holder and
approximately three times as large as the average for all customers.

     Promotes Consumer/Retailer Communication. In addition to rewarding its best
customers, a store can use the ILN more generally to capture information from,
and to communicate with, cardholders through questionnaires, interactive games,
electronic sweepstakes, tie-in promotions with local media, charities, special
events and other merchandising theme promotions. Access to the ILN also enhances
the efforts by Retailers to promote acceptance and usage of their loyalty cards.

     Stimulates Incremental Product Sales. The Company believes that the ILN
stimulates incremental product sales for Retailers as a result of several
factors. The ILN's location at the store entrance enables it to remind a shopper
of an item they may otherwise would have forgotten or stimulate them to purchase
items in addition to those they intended to purchase. The ILN also provides the
Retailer a channel to promote perishable foods and private label products.
Finally, the ILN program is able to track the time lapse since the last purchase
of a particular product and remind a consumer to buy the needed item in the
store that day rather than in another class of trade.

     Distributes, Redeems and Clears Promotions Electronically. Traditional
promotion of food and related products relies upon paper-based systems such as
FSIs and other paper coupon vehicles. Paper-based promotions require Retailers
to handle paper at checkout and bundle paper records that must be sent to third
party clearing businesses. With the ILN, there is no paper for cashiers to
handle and no

                                       6







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need for expensive third party clearing. See ' -- Products and
Services -- Inter*Act Loyalty Network ('ILN').'

     Generates Incremental Fee Revenue. Retailers receive revenue based upon
promotion redemptions, currently $0.08 per transaction. The Company believes
that this fee produces high-margin revenue for Retailers relative to the amount
of floor space that the ILN occupies.

BENEFITS FOR CONSUMERS

     The Company believes that consumers who are introduced to the ILN continue
their usage as they discover the following benefits:

          Provides Increased Purchasing Power and Convenience. Consumers want to
     maximize the value of their shopping dollars through discounts and
     promotions, but at the same time wish to limit the amount of time they
     invest preparing for shopping. The ILN eliminates the time-consuming
     exercise of locating, clipping and organizing individual coupons, and the
     consumer does not have to remember to bring any paper coupons to the store
     or track expiration dates. The ILN is conveniently located inside the store
     entrance where it can easily be accessed at the beginning of shopping. In
     less than 60 seconds, the ILN terminal will display approximately 35 to 40
     customer-specific product promotions and will dispense a shopping list for
     the product discounts selected by the customer, which if redeemed could
     result in substantial savings to the consumer.

          Provides Personalized Discounts and Incentives. The ILN is designed to
     deliver customer-selected incentives that are customized to an individual
     consumer's purchasing preferences. The Company believes that consumers
     prefer to select and redeem promotions on the ILN that are targeted to
     their past purchasing history as evidenced by redemption rates of targeted
     promotions that are approximately twice the redemption rates of promotions
     that are randomly presented.

     In June 1997, the Company contracted Yankelovich Partners to conduct a
telephone 'Habits and Usage' study among 302 loyalty card holders selected at
random. The results of the study indicate that the ILN system is an attractive
source of value to the customer with few barriers to trial and high satisfaction
rates promoting repeat usage. The study was conducted in the Philadelphia
market, where participating ILN chains include the market leader ACME (a
division of American Stores), SuperFresh (a division of A&P) and Laneco. As
shown on the graph below, the conversion from trial to repeat usage (trial to
acceptor) was 86%.

                        CONSUMER AWARENESS & ACCEPTANCE

                                  [CHART]

     Source: Yankelovich Partners Habits and Usage Study June/July 1997

     Accordingly, the Company believes that consumer marketing support that
raises awareness of the ILN will increase kiosk usage among existing and new
loyalty card holders.

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BUSINESS STRATEGY

     The Company's primary objective is to become the preeminent in-store
distributor of promotional incentives by integrating the interests of
Manufacturers, Retailers and consumers. The Company is pursuing the following
principal business strategies to achieve its objectives:

INCREASE MANUFACTURER ENROLLMENT ON THE ILN

     During the twelve months ended December 31, 1997, 52 Manufacturers promoted
116 products through the ILN. The Company is continually working to increase
both the number of brands per Manufacturer and dollars committed per brand since
certain of the Manufacturers currently under contract promote only one product
offering. Manufacturers who have tested or contracted with the ILN in 1997
include Beatrice Cheese, Ben & Jerry's, Benckiser, Borden Foods, Bri-Al, Brown &
Williamson, Carvel Corporation, Church & Dwight, Citrus World, ConAgra Frozen
Foods, CPC International, Dean Foods, Dial, Disney Magazines, Dow Brands,
Drypers, Friendship Dairy, General Mills, Georgia Pacific, Gillette, Gruner+
Jahr, Heinz Pet Products, Hunt Wesson, Hygrade, Irving Tissue, James River,
Jones Dairy Farm, JR Simplot, Keebler, Kikkoman, Kimberly-Clark, Krino Foods,
Lea & Perrin's, Lever Brothers, Marathon Enterprises, Nestle Beverage, Northland
Cranberries, Ore-Ida Foods, Pepsi Cola, Pine Mountain, Procter & Gamble,
Reynolds Metals, SmithKline Beecham, SP Healthcare, Stroehmann Bread, Tenneco,
Tetley, Tropicana, Turkey Hill, Universal Foods, Van Den Bergh, and Warner
Wellcome.

     Manufacturers typically trial the ILN for contract amounts that are
typically less than $100,000. Upon successful completion of trial, Manufacturers
have been willing to commit substantially greater amounts of promotional dollars
to the ILN. Successful trials have recently led to multi-cycle/multi-brand
category contracts or letters of intent with Manufacturers including Keebler,
General Mills, Procter & Gamble and Pillsbury. The Company is pursuing increased
contractual commitments from certain other multi-brand Manufacturers. The
Company believes that securing these multi-brand Manufacturers will induce other
Manufacturers to seek space on the ILN during the ILN's ongoing roll-out.

NATIONWIDE INSTALLATION OF THE ILN

     The Company is actively pursuing multi-year contracts with additional major
Retailers in key geographic regions across the country. The Company believes
that Manufacturers seek access to a promotion platform that incorporates a
nationwide network of top Retailers. The Company also believes that these top
Retailers comprise approximately 10,000 to 12,000 stores and are among the
approximately 18,500 stores in the United States that are part of chain
supermarkets and have annual sales of greater than $2 million. As of December
31, 1997, the Company had over 3,000 stores in the United States under contract
and had installed terminals in 1,148 stores, only the second electronic in-store
company offering promotional incentives to achieve a 1,000+ installed store
base, the first such company being Catalina Marketing Corporation ('Catalina').
See ' -- Customers and Competition.' The Company's contracts with Retailers
typically provide for a 90 day trial period followed by an initial term of up to
36 months. The Company has installed its ILN in A&P (consisting of A&P, Farmer
Jack, Food Emporium, Kohl's, Super Fresh and Waldbaum's stores), American Stores
(ACME and Lucky North divisions), Food Lion, Gerland's, Grand Union, and Laneco.
The Company expects to be deployed in the Jewel and Lucky South divisions of
American Stores in the first half of 1998 and the Charlotte division of Food
Lion in the second half of 1998. Upon completion of these installations, the
Company will have installed ILN terminals in stores in 22 states and will be
represented in nine of the top 15 food markets in the United States. The Company
also has contracts for future installation in Giant (Washington/Baltimore),
Marsh, Randalls and Weis supermarket chains.

ENLISTMENT OF ILN RETAILERS TO ASSIST IN THE MANUFACTURER SALES EFFORT

     Substantially all of the Retailers who have installed the ILN are aiding
the Company in its efforts to expand Manufacturer participation on the ILN.
Retailer efforts include the inclusion of ILN promotional materials in Retailer
sales meetings with Manufacturers; the distribution of letters to Manufacturers
indicating Retailer support of the ILN; the placement of ILN terminals in the
lobbies or

                                       8







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waiting rooms of retailer headquarters; and the ability to locate an Inter*Act
salesperson at Retailer headquarters to immediately follow-up with Manufacturers
who indicate interest to the Retailers' own sales forces.

CONTINUED EXPANSION OF ILN FUNCTIONALITY THROUGH INNOVATIVE PROPRIETARY SOFTWARE
DEVELOPMENT

     The Company's video touch-screen platform offers virtually unlimited
opportunity for the creation of innovative in-store promotions that appeal to
consumers and make the ILN more personalized to each of them. The Company
intends to maximize this opportunity through aggressive proprietary software
development that anticipates and addresses the loyalty marketing goals of
Manufacturers and Retailers while simultaneously enhancing consumers' enjoyment
of an ILN visit. In addition to the ILN's numerous screens of brand icons that
lead to electronic discounts, the ILN also offers Manufacturers the ability to
pursue other promotion strategies, including targeted free samples of products
and the ability to purchase access to customized 'full screen' presentations
(that, for example, may visually and audibly portray the promoted products'
tie-in with a just-released Hollywood movie), among others. Retailers are able
to conduct sweepstakes promotions electronically, promote private label
products, and offer ILN incentives to tie-in with their weekly circular
promotions. The Company is planning a mid-1998 software release that will add
significantly to the ILN's Retailer functionality. Added features will include,
among others, the ability to offer rewards through the ILN to specific customers
based upon their spending in the store or other loyalty criteria, and the
ability to offer prizes tied to games of chance.

LEVERAGE THE COMPANY'S GROWING DATABASE ON CONSUMER SHOPPING PATTERNS

     Manufacturers will benefit from access to the extensive consumer behavior
research that is expected to be accessible through the Inter*Act Cardholder
Panel ('ICP'). Each day the Company collects data on all card-identified
shoppers, whether or not they stopped at the kiosks. For certain stores, these
data are aggregated centrally at Inter*Act's headquarters. As Inter*Act expands
this database, the Company intends to develop a system that will provide
information to Manufacturers on the efficiency of promotion and incentives which
are brand-specific, location-specific, value-specific and date-specific. It may
also be possible for the Company to assist the Manufacturers in creating the
optimal promotional strategy given the historical impact of the ILN and other
promotions initiated by Manufacturers.

ACQUISITION OF INTELLECTUAL PROPERTY RIGHTS

     The Company has successfully acquired exclusive and non-exclusive licenses
to a number of patents covering various aspects of in-store promotion in general
and its business in particular. The Company believes that several of its
licensed patents are seminal in the incentive distribution industry and afford
the Company the ability to aggressively protect its growing business franchise.

PURSUE EUROPEAN EXPANSION

     The Company, through a subsidiary, recently entered into a four-year
exclusive contract to commercially deploy the ILN with Sainsbury's, one of the
largest retailers in the United Kingdom, following a pilot program in the Spring
of 1998. The Company believes that the U.K. consumer promotion and retail
markets represent a substantial opportunity for the Company's products and
services.

PRODUCTS AND SERVICES

INTER*ACT LOYALTY NETWORK ('ILN')

     A customer can access the ILN by inserting his or her frequent shopper
card, as issued under the store's existing loyalty card program, into the
Company's ATM-like terminal(s) located near the entrance to the store. The
system identifies the customer and, based upon data gathered by the ILN on that
customer's cumulative purchasing history, displays full color images of
promotions and discounts

                                       9







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specifically selected for that customer. The ILN may also present several
'universal' promotions (offered by either the Retailer or Manufacturers) to all
ILN visitors. The customer selects desired promotions, usually price discounts,
multiple purchase bonuses or free product samples, by simply touching the
desired product icon displayed on the screen. When the selection process is
complete (in less than 60 seconds for most shoppers), the ILN terminal can
deliver a 'shopping list' of all selected promotions, which serves to remind the
customer of the selected promotions while shopping. After shopping, the
customer's purchases and frequent shopper card are electronically scanned at
checkout, and the ILN (i) verifies that the promoted items were purchased, (ii)
immediately notifies the store register system to give the customer the selected
discounts and promotions and (iii) records all the customer's purchases for use
in more accurately targeting promotions during future visits. Due to
technological constraints unique to certain Retailers in approximately 238
stores, the ILN delivers individual coupons rather than a shopping list.

     The Company's contracts with Manufacturers provide them with the
opportunity to offer promotions on an exclusive basis within 13 four-week cycles
during a year. These product categories are generally based on standard industry
classifications of household and consumer products available in supermarkets.
The purchaser of a particular category is given the exclusive right to promote
products in that category for each cycle purchased. Categories are generally
purchased nationally, although programs can be developed with regional
differences in mind.

     The Company's primary source of revenue is the sale of product category
cycles to Manufacturers. The Company's revenue is generated from a fee charged
for each redeemed electronic incentive and in certain cases an ILN access fee.

MANUFACTURER PRODUCTS

     ILN Targeting Products. The Company's core product offered to Manufacturers
is the ability to tailor promotions and incentives to individual shoppers based
upon their degree of loyalty to the promoted product as demonstrated by prior
purchase history. On a daily basis, the ILN chooses a unique set of promotions
for each shopper according to Manufacturer specifications.

     ILN Universal Products. The Company also offers Manufacturers the ability
to show a product offer or other incentive to all ILN visitors, regardless of
purchase history. For example, the Company's Check-In-Ad'tm' product is
typically offered to account-specific Manufacturer sales representatives who
wish to show a universal offer to ILN visitors and increase the visibility of
their promotion by potentially receiving an ad placement in a Retailer's weekly
flyer. The universal aspect of Check-In-Ad'tm' promotions allows such offers to
be advertised by Retailers because all ILN visitors are assured of seeing these
promotions. Retailers join Inter*Act in selling this product and receive a
portion of the Company's Check-In-Ad'tm' fees for doing so.

     The Company also markets a product that combines Check-In-Ad'tm' with its
ILN targeting products in its new '3+1=More'tm' offering to Manufacturers.
3+1=More'tm' takes a typical four-week cycle and offers three weeks of targeted
promotions plus one week of universal promotion to maximize volume and
efficiencies. The ILN can also deliver free recipes prominently featuring the
sponsoring brands as the key ingredients. Brand focused recipes offer two
distinct benefits for Manufacturers. First, participating Manufacturers may use
the recipe feature as an opportunity to continue reaching shoppers with a
seasonal alternative to discounting. Second, Manufacturers that do not generally
offer discounts may consider using recipes as an integral part of their
marketing strategy by implementing an ongoing program of different recipes. The
Company intends to target this program to Manufacturers that do not generally
offer discounts but may elect to test discounting in conjunction with the
recipes to measure the incremental sales gained by adding discounts as a
purchase incentive.

PRICING

     Pay on Redemption. Manufacturers pay a transaction fee to the Company
predominantly based upon an electronically cleared redemption of ILN's
electronic incentives. The transaction fee is composed of (i) a redemption fee,
(ii) a processing fee and (iii) an incentive fee (the face value of the discount
for the consumer). Inter*Act retains the redemption fee, passes through the
incentive fee to the Retailer and pays the Retailer the processing fee. In the
case of the Company's targeting products, the amount of the redemption fee
earned by the Company depends on whether the consumer who

                                       10







<PAGE>
redeems the promotion is a 'targeted' consumer (one for whom the Manufacturer is
specifically directing the promotion in order to reward loyalty or to encourage
switching brands) or an 'entry-level' consumer (a shopper for whom the ILN has
insufficient data on prior purchasing activity to determine appropriate targeted
promotions). The Company earns a higher fee when it provides a Manufacturer with
a targeted redemption. The Company can also receive revenue on a fixed charge
per day basis from Manufacturers who contract for recipes and event promotion
screens. Event promotion screens are full screens shown on the ILN that are
dedicated to a specific market campaign.

     Brand Contract Terms. The principal elements of the Company's brand
contracts with Manufacturers are brand identity, product category exclusivity,
dollar commitment and the start and end dates of the promotion period. The
typical contract duration is for four-to-twelve week periods or until the total
dollar commitment is exhausted. In some cases, contract duration may be for one
year. The Company offers category exclusivity to Manufacturers on the ILN (i.e.,
two brands of soups will not simultaneously have promotions on the ILN). If the
dollar commitment is exhausted prior to the contract term, the Manufacturer can
choose to terminate the promotions for the duration of the period or to increase
the dollar commitment. If the contract term expires before the dollar commitment
is exhausted, the contract will terminate unless the Manufacturer elects to
continue the promotion until the original dollar commitment is exhausted,
providing the category has not been contracted by a competing brand. National
contracts of three cycles or more receive renewal rights for the following year.

RETAILER PRODUCTS

     The Company offers its Retailer partners the ability to promote to, and
communicate with, their shoppers on a cardholder-specific basis. Retailers can
promote private label products and perimeter departments through the ILN,
conduct sweepstakes and games electronically, and communicate with customers
through customized screens. In the first half of 1998, the Company is launching
a series of Retailer products designed to allow Retailers to communicate with
and reward their best customers, just as they enter a store. These products give
the Retailer the ability to target promotions to specific cardholders that the
Retailer has selected. The Retailer can use these products to support 'Top
Shopper' programs, continuity programs, and buyers clubs (e.g., a 'Baby'
products club). The Company currently charges Retailers nominal fees for use of
the ILN. Retailer use of the ILN substantially increases consumer usage of the
ILN. The Company expects that substantially all of its revenue will be earned
from Manufacturers.

                                       11







<PAGE>
RETAILER PARTNERS

     Set forth below are the Retailers who have entered into contracts as of
March 25, 1998 to use the ILN and the resulting installations the Company has
achieved to date.

<TABLE>
<CAPTION>
  REGIONAL                                                                   STORES
STATISTICAL                                                               CONTRACTED TO       STORES
    AREA                              RETAILER                             RECEIVE ILN       INSTALLED
------------  ---------------------------------------------------------   -------------      ---------
<S>           <C>                                                         <C>                <C>
New England   A&P New England..........................................          50               50
              Grand Union..............................................          57               57
                                                                             ------          ---------
              Total New England........................................         107              107
                                                                             ------          ---------
Mid Atlantic  A&P Metro................................................         122              122
              A&P (Baltimore/Washington)...............................          86               86
              Acme.....................................................         178              178
              Food Emporium............................................          16               16
              Food Lion................................................       1,077               49
              Giant Maryland...........................................         160            --
              Grand Union..............................................         116              116
              Laneco...................................................          16               16
              Price Chopper............................................          91            --
              SuperFresh...............................................          68               68
              Waldbaum's...............................................          81               81
              Weis Markets.............................................         125            --
                                                                             ------          ---------
              Total Mid Atlantic.......................................       2,136              732
                                                                             ------          ---------
South East    A&P New Orleans..........................................          36            --
              A&P Atlanta..............................................          48               48
                                                                             ------          ---------
              Total South East.........................................          84               48
                                                                             ------          ---------
East Central  Farmer Jack..............................................          95                6
              Food Town................................................          10            --
              Marsh....................................................          74            --
              Riser....................................................          57            --
                                                                             ------          ---------
              Total East Central.......................................         236                6
                                                                             ------          ---------
West Central  Jewel Food Stores........................................         186               17
              Kohl's...................................................          46               46
                                                                             ------          ---------
              Total West Central.......................................         232               63
                                                                             ------          ---------
South West    Gerlands.................................................          16               16
              Randalls/Tom Thumb.......................................         150            --
                                                                             ------          ---------
              Total South West.........................................         166               16
                                                                             ------          ---------
Pacific       Lucky North..............................................         177              177
              Lucky South..............................................         245              168
                                                                             ------          ---------
              Total Pacific............................................         422              345
                                                                             ------          ---------
              Total....................................................       3,383            1,317
                                                                             ------          ---------
                                                                             ------          ---------
</TABLE>

TECHNOLOGY AND SOFTWARE

ILN SOFTWARE

     The Company maintains a staff of software developers and engineers. This
team continually refines and enhances ILN functionality for both Manufacturers
and Retailers. It also has primary responsibility for developing the unique
interfaces required to connect the ILN to each Retailer's point-of-sale system
controller. The Company's core targeting products are driven by its proprietary
Target Engine Software ('TES') which collects and analyzes each shopper's
cumulative market basket of purchases stored over a rolling time period of
between three and 12 months depending on the size of the store. On a daily
basis, TES selects for each shopper up to 40 product promotions from the larger
universe of promotions available on the ILN (between 100 and 200 on a fully
loaded system) based on each consumer's purchasing history. Presently the
Company is developing software and hardware enhancements to enable Inter*Act to
collect and analyze consumer data over longer periods in all stores.

                                       12







<PAGE>
     For each product category available on the ILN, the TES classifies each
consumer as follows:

<TABLE>
<CAPTION>
                        CLASSIFICATION                           CONSUMER DESCRIPTION
                 ----------------------------  --------------------------------------------------------
<S>              <C>                           <C>
'Targeted'       Brand loyal.................  Tends to purchase consistently the Manufacturer's brand
                                                 within the product category
'Targeted'       Brand switcher..............  Tends to demonstrate little brand loyalty, buying
                                                 several different brands over time within a category
'Targeted'       Brand competitive...........  Tends to purchase consistently a competitor's brand
'Untargeted'     Entry level.................  A consumer who has no record of purchasing products
                                                 within the product category
</TABLE>

     Customers are offered promotions with specific incentives on specific
products depending on their individual purchasing profiles. For example, a
customer classified as 'brand competitive' can be offered a higher discount than
would a consumer classified as a 'brand switcher,' who in turn would receive a
higher discount than would a consumer classified as 'brand loyal.' In this way,
the TES offers Manufacturers the ability to execute different promotional
strategies for the same product simultaneously. Manufacturers pay a higher fee
to the Company for targeted promotion redemptions than for entry level promotion
redemptions and have the flexibility to change the relative face values of
redemptions for each targeted category. Until a customer has a purchase history
in every product category on the ILN, he or she may also see a number of entry
level promotions, which are randomly selected by the TES.

     ILN software also enables event promotions (full screen(s) dedicated to the
promotion of a specific marketing campaign), sweepstakes and games, full-motion
videos and printed vouchers that shoppers can mail in for rebates or other
special promotions. The Company's current system release gives Retailers the
ability to target offers directly to a predetermined set of customers, such as
preferred shoppers.

ILN HARDWARE

                            INTERACT LOYALTY NETWORK
                      IN-STORE CONFIGURATION & INTERACTION

                                  [FLOW CHART]

                                       13







<PAGE>
     A customer can access the ILN by inserting his or her frequent shopper
card, as issued under the store's existing loyalty card program, into the
Company's ATM-like terminal(s) located near the entrance to the store. The
system identifies the customer and, based upon data gathered by the ILN on that
customer's cumulative purchasing history, displays full color images of
promotions and discounts specifically selected for that customer. The ILN may
also present several 'universal' promotions (offered by either the Retailer or
Manufacturers) to all ILN visitors. The customer selects desired promotions,
usually price discounts, multiple purchase bonuses or free product samples, by
simply touching the desired product icon displayed on the screen. When the
selection process is complete (in less than 60 seconds for most shoppers), the
ILN terminal can deliver a 'shopping list' of all selected promotions, which
serves to remind the customer of the selected promotions while shopping. After
shopping, the customer's purchases and frequent shopper card are electronically
scanned at checkout, and the ILN (i) verifies that the promoted items were
purchased, (ii) immediately notifies the store register system to give the
customer the selected discounts and promotions and (iii) records all the
customer's purchases for use in more accurately targeting promotions during
future visits. Due to technological constraints unique to certain Retailers in
approximately 238 stores, the ILN delivers individual coupons rather than a
shopping list.

     A shopping list offers several advantages over paper coupons. The customer
does not need to present this list at checkout to receive the discounts for
promoted products. Rather, the shopping list serves as a reminder to the shopper
to purchase the promoted products.

SALES AND MARKETING

     The primary focus of the Company's sales effort is to attract national
Manufacturers to contract for ILN category cycles. The sales effort is conducted
primarily through the Company's direct sales force, all of whom are experienced
in packaged goods and marketing services sales. These people are organized into
geographical teams, with operations in San Francisco, Los Angeles, Chicago,
Cincinnati, Atlanta, New Jersey, Philadelphia, and Norwalk. The teams are headed
by group sales directors who report to the Vice President, National Sales. The
Company augments its direct sales efforts through the development of strategic
relationships with prominent promotion agencies and food brokers. Through
development of custom events and packages, the Company can provide a unique
offering to both of these constituents, giving a competitive point of difference
in the marketplace. This, in turn, generates trial and bona fide success stories
among their principals which can be cultivated into larger headquarter
commitments.

     The Company plans to continue to aggressively hire experienced, well
trained industry sales professionals into key positions across the nation and to
invest in continuous training of the team. The Company's sales team is directed
towards (a) securing tactical programs from Manufacturers, and pursuing account
growth through analysis, repeat sales and further brand penetration through
successful trials and (b) strategic sales, in which the Company pursues
long-term multi-brand commitments from prominent Manufacturers in return for
longer-term contractual commitments to the ILN.

     Retailer sales efforts are conducted through direct mail campaigns, trade
shows and two Company-employed sales representatives, supported by senior
management. Ongoing Retailer service, support, and product sales are provided by
the Company's Client Services group. Client Service account executives typically
have substantial industry experience selling packaged goods to Retailers and are
responsible for maximizing each Retailer's use of ILN functionality.

SUPPLY OF ILN TERMINALS

     As of March 25, 1998, the Company is negotiating with a number of major
equipment integrators to supply ILN terminals and servers to the Company, and
expects to conclude a non-exclusive terminal supply agreement during the second
quarter of 1998. The Company recently terminated a three-year exclusive supply
agreement with Thermo Information Solutions, Inc. ('Thermo'). See Part II, Item
7. 'Management Discussion and Analysis of Financial Condition and Results of
Operations -- Year Ended December 31, 1997 Compared with Year Ended December 31,
1996.'

                                       14







<PAGE>
INTELLECTUAL PROPERTY MATTERS

     The Company currently uses U.S. Patent No. 4,554,446 (the '446 Patent') in
its in-store consumer product promotion and couponing business. The Company is
licensee of the '446 Patent, which expires in November 2003, through separate
agreements with the holders of rights in this patent. With respect to one
license agreement under which the Company is assignee, the Company is required
to pay a royalty of 2% of the gross collected revenues of the Company, to the
extent derived from the Company's exploitation of the patent, with such royalty
decreasing to 1% of such revenues after $10 million in aggregate royalties have
been paid to the licensors. This license agreement requires that certain minimum
monthly payments be made to the licensors, and be exceeded within approximately
two years, in order to avoid triggering a termination right on the part of the
licensors. With respect to another license agreement, the Company is required to
pay the licensor a royalty of .8% of the gross collected revenues of the Company
to the extent derived from the Company's exploitation of the patent, until such
time as the licensor has received the aggregate sum of $600,000 after which no
additional royalty payments are required. This license agreement requires
certain minimum monthly payments to the licensor. Additionally, the Company is
required to pay royalties to a former director of the Company who was an earlier
licensee of this patent and assigned his rights therein to the Company, in
exchange for certain ongoing payments and other consideration, to the Company's
subsidiary, which in turn has assigned such rights to the Company. See Part III,
Item 13. 'Certain Relationships and Related Transactions.' See ' -- Products and
Services -- Inter*Act Loyalty Network.' In addition, the foregoing license
agreements include two patents that are not presently used in the Company's
business.

     During the third quarter of 1997, the Company acquired pursuant to a patent
license agreement, certain exclusive and nonexclusive rights for U.S. Patent No.
Re.34,915 for a 'Paperless System for Distributing, Redeeming and Clearing
Merchandise Coupons.' Consideration for such license included cash, shares of
Common Stock and royalties based on the Company's future revenue stream from
such patent. The term of such agreement is for as long as the patent remains
valid and enforceable, subject to certain termination rights as set forth in
such agreement. Management believes that by obtaining the rights to this patent,
the Company will experience a significant competitive edge in the electronic
coupon redemption industry in the future.

     The Company has acquired the registered trademark Coupon Xpress'r'.
Inter*Act Loyalty Network is a service mark of the Company and an application
for federal registration of the mark is pending. Applications for Inter*Act
Promotion Network'tm' and Coupon Central'tm' are also pending.

CUSTOMERS AND COMPETITION

     The Company competes against a wide range of promotional media for
Manufacturers' advertising and promotional dollars, including television, radio,
print and direct mail. The Company also competes against providers of in-store
and point-of-sale marketing platforms, such as ActMedia, Inc. ('ActMedia'),
which provides automatic coupon dispensers in the aisles of supermarkets, and
Catalina, which provides an electronic marketing network that delivers coupons
to consumers at checkout lanes based on that day's purchases. The Company
competes for promotional dollars based on several factors, including the ability
to more accurately and effectively target consumers, the ability to demonstrate
Retailer support of the system, the ability to influence buying behavior,
promotion flexibility, and price. Most of the Company's competitors are larger
and have substantially greater resources than the Company. In many of the
grocery stores in which the Company has installed its ILN, ActMedia and Catalina
also provide their in-store promotion services.

EMPLOYEES

     As of December 31, 1997, the Company had approximately 200 employees
primarily full-time. None of the Company's employees is represented by a labor
union. The Company considers its relations with its employees to be good. The
Company's future success will depend in significant part on the continued
service of its key technical, sales and senior management personnel. Competition
for such personnel is intense and there can be no assurance that the Company can
retain its key managerial, sales and technical employees. The Company
anticipates that the nationwide commercialization of the

                                       15







<PAGE>
ILN will require the hiring of a substantial number of new employees in
connection with the planned expansion of its business.

RELATIONSHIP WITH VANGUARD

     The Company receives business development and other support from Vanguard
Cellular Systems, Inc. (together with its subsidiaries, 'Vanguard') the
Company's largest shareholder. Stephen R. Leeolou, Chief Executive Officer and
Chairman of the Company, is also Co-Chief Executive Officer of Vanguard. Six of
the Company's eleven directors are also directors of Vanguard. See Part II, Item
7. 'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors' and Part III, Item 12. 'Security Ownership of
Certain Beneficial Owners and Management,' and Part III, Item 13. 'Certain
Relationships and Related Transactions'.

ITEM 2. PROPERTIES

     The Company is headquartered in Norwalk, Connecticut, where it leases
33,452 square feet of office space. The lease runs through January 31, 2000. The
Company also leases 2,080 square feet of warehouse storage space in Central
Islip, New York. The lease runs through June 1999. The Company intends to lease
other warehouse storage space as necessary and believes that suitable space will
be readily available to meet its anticipated needs for the foreseeable future.
Warehouse space is leased in South Carolina to meet the Company's needs of
storing finished kiosks and kiosk supplies. The Company believes this space is
adequate to accommodate the Company's variable storage requirements. Additional
warehouse space is leased in Columbus, Ohio which is used to store finished
kiosks, servers, and kiosk supplies.

ITEM 3. LEGAL PROCEEDINGS

     In February 1996, the Company filed suit against Catalina alleging that
Catalina has infringed United States Letters Patent No. 4,554,446 (the '446
Patent') under which the Company is licensee. The Company alleges that Catalina
is infringing the patent by making, using and offering for sale devices and
systems that incorporate and employ inventions covered by the '446 Patent. The
Company is seeking an injunction against Catalina to stop further infringement
of the patent, treble damages and the costs and expenses incurred in connection
with the suit. The complaint has been amended to add additional detail, and
Catalina has answered denying the allegations, raising certain affirmative
defenses, and seeking declaratory judgment of non-infringement, invalidity or
unenforceability of the '446 Patent. In May 1997, Catalina asserted a second
counterclaim alleging that the Company is infringing a newly issued Catalina
patent, U.S. Patent No. 5,612,868. The Company has answered denying the
allegations, raising affirmative defenses and seeking declaratory judgment of
non-infringement, invalidity and unenforceability of U.S. Patent No. 5,612,868.
Discovery on the claims and counterclaims is proceeding and various motions are
pending before the United States District Court in the District of Connecticut.
As with any litigation, the ultimate outcome of these actions cannot be
predicted. However, the Company intends to assert its claims vigorously.

     In January 1998, Catalina Marketing International, Inc. ('Catalina
International,' a subsidiary of Catalina) filed suit against the Company
alleging that the Company has infringed United States Patent No. 4,674,041 (the
'041 Patent') which Catalina International acquired by assignment in December
1997. Catalina International alleges that the Company is infringing the '041
Patent by making, using and offering for sale devices and systems that
incorporate and employ inventions covered by the '041 Patent. Also in February
1998, Catalina International amended its complaint to join as additional parties
defendant Thermo and Coleman Research Corporation ('Coleman'), who have
manufactured kiosks pursuant to an agreement with the Company. Catalina
International seeks injunctive and declaratory relief as well as unspecified
money damages against all defendants, and has filed a motion for preliminary
injunction against the Company seeking to stop further alleged infringement of
the '041 Patent pending trial. Various other motions are pending in the United
States District Court in the District of Connecticut, including the Company's
motion for a more definite statement. The Company

                                       16







<PAGE>
intends to defend against Catalina International's claims vigorously, and to
pursue available remedies against Catalina International, which may include the
filing of appropriate counterclaims.

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 1997.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     There is currently no established trading market for the Common Stock.
Inter*Act has no current intention to list the Common Stock for trading on any
securities exchange or on any automated dealer quotation system. As of March 25,
1998, the company had 7,728,555 shares of Common Stock issued and outstanding,
which shares were held by 224 shareholders of record.

     The Company has not paid any cash dividends since its inception and does
not intend to pay cash dividends on its Common Stock in the foreseeable future.
The Company intends to retain future earnings to finance its operations and fund
the growth of its business. Any payment of dividends in the future will be at
the discretion of the Board of Directors of the Company and will depend upon,
among other things, the Company's earnings, financial condition, capital
requirements, level of indebtedness, contractual and other restrictions in
respect of the payment of dividends, and other factors the Company's Board of
Directors deems relevant. The Company's ability to pay dividends or make
distributions to shareholders is also restricted by the terms of the Indenture.

                                       17







<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data of the Company are
qualified by reference to, and should be read in conjunction with, Part II, Item
8. 'Financial Statements and Supplementary Data -- Consolidated Financial
Statements', including notes thereto, and, Part II, Item 7. 'Management's
Discussion and Analysis of and Results of Operations'. In February 1997, the
Company elected to change its fiscal year end from the last Saturday in
September to December 31, effective December 31, 1996. For comparability
purposes, the following summary consolidated financial data of the Company for
the year ended 1996 has been restated into a comparable twelve month period
ended December 31, 1996. The consolidated financial data for the years 1994
through 1997 have been derived from audited consolidated financial statements.

<TABLE>
<CAPTION>
                                                                     THREE MONTH PERIOD
                                                  YEAR ENDED               ENDED                   FISCAL YEARS ENDED
                                             --------------------    ------------------    -----------------------------------
                                                 DECEMBER 31,           DECEMBER 31,       SEPTEMBER 28,      SEPTEMBER 30,
                                             --------------------    ------------------    -------------    ------------------
                                               1997        1996       1996       1995          1996          1995       1994
                                             --------    --------    -------    -------    -------------    -------    -------
                                                       (UNAUDITED)              (UNAUDITED)
                                                               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                          <C>         <C>         <C>        <C>        <C>              <C>        <C>
CONSOLIDATED INCOME STATEMENT DATA:
Gross sales...............................   $  1,672    $    823    $   408    $    78      $     492      $   255    $     6
    Less: Retailer reimbursements.........       (964)       (482)      (240)       (45)          (287)        (144)        (4)
                                             --------    --------    -------    -------    -------------    -------    -------
     Net sales............................        708         341        168         33            205          111          2
                                             --------    --------    -------    -------    -------------    -------    -------
Operating Expenses:
    Direct costs..........................      5,784       3,030        939        275          2,298          903        262
    Selling, general and administrative
      expenses............................     26,352       8,468      3,077      1,453          6,911        3,391      1,973
    Depreciation and amortization of
      intangibles.........................      3,934       1,201        468         88            821          191         32
                                             --------    --------    -------    -------    -------------    -------    -------
    Total operating expenses..............     36,070      12,699      4,484      1,816         10,030        4,485      2,267
                                             --------    --------    -------    -------    -------------    -------    -------
Operating loss............................    (35,362)    (12,358)    (4,316)    (1,783)        (9,825)      (4,374)    (2,265)
                                             --------    --------    -------    -------    -------------    -------    -------
Other income (expense)
    Interest income.......................      3,892       2,251      1,249          7          1,009           35          9
    Interest expense......................    (18,033)     (6,948)    (4,263)       (58)        (2,743)        (187)       (88)
    Other expense.........................       (301)      --         --         --           --             --         --
                                             --------    --------    -------    -------    -------------    -------    -------
    Total other expense...................    (14,442)     (4,697)    (3,014)       (51)        (1,734)        (152)       (79)
                                             --------    --------    -------    -------    -------------    -------    -------
Loss from operations before income
  taxes...................................    (49,804)    (17,055)    (7,330)    (1,834)       (11,559)      (4,526)    (2,344)
Income taxes..............................        (10)      --         --         --           --             --         --
                                             --------    --------    -------    -------    -------------    -------    -------
Net loss..................................   $(49,814)   $(17,055)   $(7,330)   $(1,834)     $ (11,559)     $(4,526)   $(2,344)
                                             --------    --------    -------    -------    -------------    -------    -------
                                             --------    --------    -------    -------    -------------    -------    -------
Loss Per Common Share:
    Basic.................................   $  (6.48)   $  (2.46)   $ (0.96)   $ (0.44)     $   (1.91)     $ (1.27)   $ (0.83)
                                             --------    --------    -------    -------    -------------    -------    -------
                                             --------    --------    -------    -------    -------------    -------    -------
    Diluted...............................   $  (6.48)   $  (2.46)   $ (0.96)   $ (0.44)     $   (1.91)     $ (1.27)   $ (0.83)
                                             --------    --------    -------    -------    -------------    -------    -------
                                             --------    --------    -------    -------    -------------    -------    -------
Weighted average number of common shares:
    Basic.................................      7,692       6,939      7,669      4,126          6,038        3,556      2,830
    Diluted...............................      7,692       6,939      7,669      4,126          6,038        3,556      2,830
OTHER DATA: (in whole numbers)
    Installed terminals at end of
      period..............................      1,840         623        623         96            614           62          7
    Installed stores at end of period.....      1,148         335        335         51            328           25          3
</TABLE>

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,        SEPTEMBER 28,      SEPTEMBER 30,
                                                                 --------------------    -------------    -----------------
                                                                   1997        1996          1996          1995      1994
                                                                 --------    --------    -------------    ------    -------
                                                                                   (DOLLARS IN THOUSANDS)
<S>                                                              <C>         <C>         <C>              <C>       <C>
CONSOLIDATED BALANCE SHEET DATA:
    Working capital (deficit).................................   $ 38,478    $ 86,230      $  91,835      $ (753)   $    63
    Total assets..............................................     81,023     105,765        107,757       2,178        644
    Total debt................................................     91,406      76,866         72,923       2,042      1,893
    Common stock purchase warrants(1).........................     27,436      24,464         24,464        --        --
    Stockholder's equity (deficit)............................    (48,432)        643          7,934        (910)    (1,417)
</TABLE>

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

(1) Reflects the effect of the valuation of the warrants issued in the Private
    Placement, which are exercisable for 9.429 shares of Common Stock per
    warrant. The exercise price of $.01 per share was

                                              (footnotes continued on next page)

                                       18







<PAGE>
(footnotes continued from previous page)

    deemed to have been paid at the time of issuance. See Notes 6 and 8 to the
    Notes to Consolidated Financial Statements.

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

     The following should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto, and other financial information
included elsewhere in this report. This report contains certain statements
regarding future operating results and anticipated growth, the accuracy of which
is subject to many risks and uncertainties. Such trends, and their anticipated
impact on the Company, could differ materially from those discussed in this
report. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in ' -- Risk Factors' and elsewhere in this
report.

     The Company is one of the nation's largest in-store operators of
customer-interactive electronic marketing systems. The Company's patented
technologies enable consumer products Manufacturers and Retailers to offer
shopper-specific purchase incentives and messages to customers moments before
shopping begins. The Company's proprietary system, called the Inter*Act Loyalty
Network'tm' ('ILN'), utilizes patented, multimedia touch-screen terminals, or
Smart Kiosks'tm', located in the entrance area of retail grocery stores. These
terminals are connected to each store's point-of-sale scanning system which
allows the electronic promotions to be immediately redeemed at the check-out.
This fully automated process virtually eliminates the misredemption and fraud
associated with paper coupons, estimated by industry sources to cost
Manufacturers hundreds of millions of dollars per year.

     In the second quarter of 1997, the Company changed the reference to its
proprietary interactive multimedia system from Inter*Act Promotion Network
('IPN') to Inter*Act Loyalty Network ('ILN') in order to more closely align the
marketing of Inter*Act's products and services to the supermarket industry,
whose participants are increasingly pursuing frequent shopper or loyalty card
programs, as well as to Manufacturers, who typically seek to win new customer
loyalty.

     The Company recognizes revenue as electronic discounts are redeemed at
store cash registers. Manufacturers pay a fee to the Company for each
redemption. The fee is composed of (1) a retailer processing fee, (2) a
redemption fee and (3) the face value of the coupon. The Company, in turn,
passes through both the retailer processing fee, which is included in direct
operating expenses, and the face value of the coupon to the Retailer, while
retaining the redemption fee. The Company records as net sales the redemption
fee and the retailer processing fee paid by the Manufacturers. Certain
Manufacturers pay the Company in advance for a portion of anticipated
redemptions, and these amounts are recorded as deferred revenue until earned
through redemptions. The Company's net sales and results of operations during
the periods presented have not been significantly affected by inflation.

     Direct costs of the Company consist of such expenditures for direct store
support, paper used in the kiosks to print shopping lists and recipes, direct
marketing costs, telecommunications between the stores and the Company and
retailer processing fees. Selling, general and administration expenses include
items relating to sales and marketing, administration, non-paid promotional
expenses and royalties payable under certain patent agreements.

     Non-paid promotional expenses represent consumer discounts and retailer
processing fees paid to the Retailer by the Company on promotions offered on the
ILN that are not funded by a Manufacturer contract. Manufacturer participation
in the ILN to date has been characterized by a substantial number of trial
commitments leading to increasing dollar commitments to the ILN from those
Manufacturers as the network approaches a more national footprint. In the fourth
quarter of 1997, the Company completed the installation of the Lucky North
division of American Stores in Northern California. As of March 25, 1998, the
Company has begun installation of Retailers in Los Angeles and Chicago. As the
network grows and is more widely accepted by Manufacturers, the Company believes
that the need for non-paid promotions will diminish and that revenues from
Manufacturers will increase.

     To date, the Company has generated minimal operating revenue, has incurred
significant losses and has experienced substantial negative cash flow from
operations. The Company's prospects must be

                                       19







<PAGE>
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development. The Company had an
accumulated stockholders deficit of $48.4 million as of December 31, 1997 and
has incurred losses of $49.8 million, $7.3 million and $11.6 million for the
year ended December 31, 1997, the three month period ended December 31, 1996 and
the fiscal year ended September 28, 1996, respectively. The Company expects to
incur substantial additional costs to install additional ILN terminals in retail
supermarket stores and to sponsor selected promotions to demonstrate the utility
of the ILN to consumers, Retailers and Manufacturers. The Company expects to
incur net losses in 1998 and may operate at a loss for the foreseeable future,
and there can be no assurance that the Company will ever be able to achieve
profitability or, if achieved, sustain such profitability.

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

     The Company had installed 1,840 terminals in 1,148 stores as of December
31, 1997 as compared to 623 terminals in 335 stores as of December 31, 1996.

     Total redemptions for the year ended December 31, 1997 increased by
approximately 11.3 million redemptions to 16.2 million redemptions from 4.9
million redemptions in the comparable period in 1996. Average
redemptions/day/store decreased to 56 from 65 for the year ended December 31,
1997 versus the comparable period in 1996. The decrease in average
redemptions/day/stores was primarily attributed to a 1996 fourth quarter
sweepstakes promotion sponsored by a Retailer, which at that time represented
over 50% of the Company's limited store base. This promotion was primarily
responsible for the strong average redemptions/day/store reported in the fourth
quarter 1996 of 93. Average redemptions/day/store were 75 during the fourth
quarter 1997. Fourth quarter 1997 redemptions were 7.7 million as compared to
2.8 million redemptions in the same period of 1996.

     Manufacturers promoting on the ILN system for at least one week during the
1997 and 1996 periods increased to 52 from 26, respectively, while total
products promoted increased to 86 from 84. Net sales during the year ended
December 31, 1997, increased to $708,000 from $341,000 in the 1996 period,
primarily as a result of the larger installed base of ILN terminals. During the
three month period ended December 31, 1997, net sales increased to $188,000 from
$168,000 in the same period in 1996.

     Operating loss for the year ended December 31, 1997 was $35.4 million
versus an operating loss of $12.4 million in calendar 1996. The increased loss
was primarily due to higher employee costs, non-paid promotions, settlement
costs incurred to terminate an exclusive supplier contract, fixed asset
write-offs, legal fees and depreciation expense. Higher employee costs of
approximately $5.5 million represent an increase of 96 employees, from 99
employees at December 31, 1996 to 195 employees at December 31, 1997. Most of
the increase in headcount represents additional technology and field service
personnel to support the increase in number of terminals and stores installed.
Non-paid promotion expense increased by $4.3 million in the 1997 twelve-month
period, to $6.3 million from $2.0 million in the comparable 1996 period.
Non-paid promotions represent consumer incentives and retailer processing fees
paid for by the Company instead of by contracted Manufacturers and are placed on
the ILN in order to stimulate consumer usage. As the network grows and is more
widely accepted by Manufacturers the Company believes that the need for non-paid
promotions will diminish substantially. During the third quarter of 1997, the
Company entered into preliminary negotiations with Coleman, a parent of Thermo,
to terminate an exclusive supply agreement whereby Coleman was to fulfill the
Company's anticipated terminal requirements for a three-year period. Such
negotiations led to execution of a mutual termination agreement during the first
quarter of 1998. As part of this mutual termination agreement, the Company
agreed to pay $4.5 million, in installments, to pay balances on previously
purchased ILN equipment, to acquire certain inventory and to obtain early
release from the exclusivity provision of the original contract to allow the
Company to pursue relationships with new vendors. Of this amount, $4.1 million
was charged to operating income during 1997 and approximately $400,000 related
to supplies and terminal parts acquired by the Company in the Agreement and is
reflected in other current assets as of December 31, 1997. The Company recorded
approximately $1.1 million of fixed asset write-offs during the year ended
December 31, 1997, primarily representing the disposal of obsolete assets. Legal
expense, primarily costs associated with patent litigation, increased by $1.1
million over the

                                       20







<PAGE>
comparable 1996 period (see Note 11 to Notes to Consolidated Financial
Statements). Depreciation expense increased by $2.7 million reflecting the
addition of approximately 1,200 terminals installed in 800 stores from December
31, 1996 to December 31, 1997. Fourth quarter 1997 operating loss of $13.2
million was $8.9 million higher than in the fourth quarter of 1996, primarily
reflecting additional headcount and expenses associated with increased
installations of terminals, the Coleman settlement of approximately $2.8 million
(approximately $1.3 million was recorded in the third quarter of 1997),
increased non-paid promotion expense of $2.0 million and higher depreciation
expense of $831,000.

     Net loss for the year ended December 31, 1997 increased by approximately
$32.7 million from $17.1 million in the comparable 1996 period to $49.8 million
primarily due to higher operating losses of $23.0 million, increased non-cash
interest expense of $11.1 million and higher other expenses of $300,000, offset
by an increase in interest income of $1.6 million. Non-cash interest expense of
$18.0 million during the year ended December 31, 1997 reflects the interest
expense on the issuance of $142 million of 14% Senior Discount Notes on August
2, 1996 for which the Company received net proceeds of $90.8 million
(See' -- Liquidity and Capital Resources'). Interest income of $3.9 million for
1997 reflects an increased average cash balance during 1997 versus the
comparable period in 1996. Net loss for the three month period ended December
31, 1997, was $17.3 million, an increase of $10.0 million compared to the same
three month period in 1996 due to increased operating losses and interest
expense of $8.9 million and $400,000, respectively, and lower interest income of
$500,000.

THREE MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED WITH THREE MONTH PERIOD
ENDED DECEMBER 31, 1995

     Net sales were $168,000 and $33,000 in the 1996 and 1995 three month
periods, respectively. The increase was primarily attributable to the addition
of ILN terminals installed in stores in the 1996 period. As of December 31, 1996
and December 31, 1995, 335 and 51 stores contained ILN terminals, respectively.
Net sales did not increase proportionately with the increase in installed
stores. The number of Manufacturers promoting on the ILN for at least one week
during the 1996 and 1995 periods increased to 25 from 22, respectively, while
total product offerings promoted decreased to 75 from 82. Average paid
redemptions/day/store decreased to 17 from 30. This was principally a result of
ILN terminals in the 1996 period being supported through a higher number of
non-paid incentives than were promoted in the 1995 period.

     Operating loss increased to approximately $4.3 million from $1.7 million in
the three month period ended December 31, 1996, versus the comparable 1995
period. The increase was primarily due to increased employee headcount,
increased supplies and other expenses related to increased ILN usage, increased
non-paid promotion expense of approximately $1.0 million and higher depreciation
expense of approximately $380,000. The increase in employee costs resulted from
increased headcount required to support additional store roll-outs and increased
emphasis on sales and marketing.

     Net loss increased by approximately $5.5 million to $7.3 million for the
three month period ended December 31, 1996, reflecting the increased operating
loss of $2.5 million, and higher interest expense of $4.2 million attributable
to the issuance of the $142 million of 14% Senior Discount Notes on August 2,
1996 (See' -- Liquidity and Capital Resources'), offset by higher interest
income of $1.2 million resulting from increased cash balances from the proceeds
of such issuance.

FISCAL YEAR ENDED SEPTEMBER 28, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1995

     Net sales were $205,000 and $111,000 during the fiscal years ended
September 28, 1996 and September 30, 1995, respectively. As of September 28,
1996 and September 30, 1995, the Company had installed terminals in 328 and 25
stores, respectively. The Company generated minimal operating revenue from its
inception in 1993 through December 31, 1996 having devoted most of its resources
to the development, testing and initial deployment, capital formation and
recruitment of management and other key employees.

     Operating loss was $9.8 million in the fiscal year ended September 28,
1996, reflecting an increase of $5.5 million or 125% in operating loss over the
comparable period in 1995. The increase was primarily due to higher employee
costs, increased non-paid promotions of $696,000, increased supply

                                       21







<PAGE>
expenses of $1.4 million and higher depreciation expense of $630,000. The
increase in employee expense represents an increase of employees to support the
roll-out of terminals in stores. Higher supply costs and depreciation relate to
the additional 500 terminals installed in 300 stores during the fiscal year
ended September 28, 1996.

     Net loss for the fiscal years ended September 28, 1996 and September 30,
1995 was $11.6 million and $4.5 million, respectively. The increase in net loss
for the year ended September 28, 1996 over the comparable prior year was
primarily attributable to higher operating losses of $5.5 million and increased
interest expense of $2.6 million, offset by increased interest income of $1.0
million. Interest expense of $2.7 million in 1996 reflects interest expense on
the issuance of $142 million of 14% Senior Discount Notes on August 2, 1996 (See
' -- Liquidity and Capital Resources'). The increase in interest income during
the fiscal year ended September 30, 1996 reflects an increased average cash
balance in 1996 versus the comparable 1995 period.

LIQUIDITY AND CAPITAL RESOURCES

     For the year ended December 31, 1997, the three month period ended December
31, 1996, and the fiscal years ended September 28, 1996 and September 30, 1995,
cash used in operating activities was $22.2 million, $2.6 million, $6.7 million
and $3.8 million, respectively. From inception to December 31, 1997, the Company
generated minimal revenue yet incurred expenses related to the development of
its ILN technology, test marketing the product and recruiting additional
personnel. The Company has funded its operations through private sales of debt
and equity securities. From its inception through December 31, 1997, the
Company's stockholders had contributed $27.7 million of equity to the Company of
which $2.0 million was originally issued as debt and subsequently converted to
equity. The Company consummated a private offering of debt securities (the
'Private Placement') on August 2, 1996 for which it received net proceeds of
approximately $90.8 million. The Private Placement consisted of 142,000 units
representing $142 million in aggregate principal amount of 14% Senior Discount
Notes Due 2003 (the 'Notes') and warrants (the 'Warrants') to purchase initially
an aggregate of 1,041,428 shares of common stock of the Company at $.01 per
share. As of September 30, 1997, a Qualifying Initial Public Offering (as
defined in the Notes) had not been completed and as a result thereof, the
Warrants were then adjusted to entitle respective holders to purchase an
aggregate of 1,338,918 shares of common stock at $.01 per share. Therefore, the
Company recorded additional Common Stock Purchase Warrants of $3.0 million
reflecting the valuation of the additional 297,492 shares, or 2.095 shares
issuable per warrant. For a further description of the Notes and Warrants, See
Notes 6 and 8 to the Notes to Consolidated Financial Statements included
elsewhere herein.

     In January 1997, the Company consummated an exchange offer (the 'Exchange
Offer'), whereby the holders of the Notes issued in the Private Placement
exchanged such Notes for new Notes (the 'Exchange Notes') that were registered
under the Securities Act of 1933, as amended. The Exchange Notes do not bear
legends restricting the transfer thereof.

     At December 31, 1997, the Company had working capital of $38.5 million,
compared to working capital of $86.2 million at December 31, 1996. Total cash
and cash equivalents at December 31, 1997 and December 31, 1996 was $45.2
million and $88.3 million, respectively. The Company's current level of
indebtedness, amounting to approximately $91.4 million, represents long-term
debt resulting from the Private Placement.

     In the year ended December 31, 1997, cash used in investing activities was
$20.9 million, primarily reflecting disbursements for net capital expenditures
of $20.1 million. During the year ended December 31, 1997, the Company installed
approximately 1,200 terminals in over 800 stores. Of the $20.1 million net
capital expenditures, approximately $6.9 million relates to ILN equipment for
planned 1998 installations, the majority of which the Company expects to be
installed during the first half of 1998. The Company estimates its 1998 capital
expenditures will be approximately $15 million, to be used primarily for ILN
equipment.

     In the three month period ended December 31, 1996 and the fiscal years
ended September 28, 1996 and September 30, 1995, cash used in investing
activities was $2.6 million, $8.7 million and $1.7 million, respectively.
Expenditures for ILN equipment was the primary use of funds in each of these
years.

                                       22







<PAGE>
     In the fiscal year ended September 28, 1996, cash provided by financing
activities was $108.8 million, reflecting net proceeds received of $90.8 million
from the Private Placement and $18.3 million received from the issuance of
common stock. In the fiscal year ended September 30, 1995, cash provided by
financing activities was $5.4 million of which $5.0 million represent net
proceeds from the issuance of common stock. Financing activities during the year
ended December 31, 1997 and the three month period ended December 31, 1996 did
not provide any cash to the Company.

     As of March 24, 1998, the Company terminated its three-year exclusive
terminal supply relationship with Coleman and its subsidiary, Thermo
(collectively, the 'Vendors'). As part of this mutual termination agreement, the
Company agreed to pay $4.5 million, in installments, to pay balances on
previously purchased ILN equipment, to acquire certain inventory and to obtain
early release from the exclusivity provision of the original contract to allow
the Company to pursue relationships with new vendors. See ' -- Year Ended
December 31, 1997 Compared with Year Ended December 31, 1996.' Further, the
Vendors will supply the Company with 350 additional kiosks.

     The Company continues to use the net proceeds from the Private Placement to
fund capital expenditures, working capital requirements and operating losses
incurred in connection with the increased commercialization of its ILN. The
Company intends to raise additional equity or debt capital to fund its ongoing
1998 and 1999 expansion plans. In addition, the Company has received several
multi-year equipment leasing proposals from equipment manufacturers for future
purchases of ILN equipment. There is no assurance that such additional capital
or equipment financing can be obtained. In the event that such additional
capital or equipment financing is not obtained, the Company believes that
existing cash and cash equivalents, together with reduced or delayed operating
and capital expenditures, will be sufficient to meet the Company's operating
requirements into the first quarter of 1999. Because of the Company's early
stage of development and the risks inherent in its business, there are a number
of material uncertainties that could result in shortfalls in revenue. For
example, shortfalls could occur if the Company experiences delays in
installations of the ILN such that any growth in paid redemption volume is
delayed.

     If additional funds are raised through the issuance of equity securities,
the percentage ownership of the stockholders may experience additional dilution,
or such equity securities may have rights, preferences or privileges senior to
the Common Stock. If additional funds are raised through debt financing, such
financing will increase the financial leverage of the Company and earnings would
be reduced by the associated interest expense. The Indenture related to the
Exchange Notes permits the Company to incur additional indebtedness, subject to
certain limitations. There can be no assurance that additional financing will be
available when needed on terms favorable to the Company or at all. If adequate
funds are not available on acceptable terms, the Company may be unable to
continue its planned ILN installations, expand both the number and dollar amount
of Manufacturer commitments, or respond to competitive pressures, any of which
could have a material adverse effect on the Company's results of operations and
financial condition.

     The Company is currently in the process of updating its systems to ensure
all programs are year 2000 compliant. The Company will utilize internal and
external resources to reprogram, replace and test systems for year 2000
compliance. The estimated cost of such project is estimated to be approximately
$300,000. Year 2000 compliance testing is expected to be completed no later than
December 31, 1998. The Company is also reliant on Year 2000 compliance by
Retailers with respect to the Company's TES ability to process and collect data
from the TES interface to each of the Retailer's point-of-sale systems. The
Company is currently working with Retailers to test such interfaces for year
2000 compliance. There can be no assurance that a failure by a Retailer to
become Year 2000 compliant will not negatively affect the Company with respect
to that Retailer.

                                       23







<PAGE>
RISK FACTORS

     The information contained in this report should be read in conjunction with
the following factors.

LIMITED OPERATING HISTORY; SIGNIFICANT LOSSES; ACCUMULATED DEFICIT; FUTURE
LOSSES

     The Company was incorporated in February 1993 and has concentrated its
efforts on the development, testing and initial deployment of the ILN, on
capital formation and on the recruitment of management and other key employees.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company and its prospects can be based. To date, the Company
has generated minimal operating revenue, has incurred significant losses and has
experienced substantial negative cash flow from operations. The Company had an
accumulated stockholders deficit of $48.4 million as of December 31, 1997 and
has incurred losses of $49.8 million, $7.3 million and $11.6 million for the
year ended December 31, 1997, the three month period ended December 31, 1996 and
the fiscal year ended September 28, 1996, respectively. The Company expects to
incur substantial additional costs to install additional ILN terminals and to
sponsor selected promotions to demonstrate the utility of the ILN to consumers,
Retailers and Manufacturers. The Company expended $6.3 million and $2.0 million
for the year ended December 31, 1997 and December 31, 1996, respectively, to
sponsor promotions. The Company will incur net losses in fiscal 1998 and may
operate at a loss for the foreseeable future. There can be no assurance that the
Company will ever be able to achieve profitability or, if achieved, sustain such
profitability.

     The Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in the early stages of
their development. To address these risks, the Company must, among other things,
effectively manage any growth that may occur, successfully commercialize its
product by securing new and renewal commitments from Manufacturers, respond to
competitive developments and attract and retain management and other key
personnel.

ABILITY TO OBTAIN BRAND CONTRACTS; LENGTHY SALES CYCLE

     All or substantially all the Company's revenue is expected to be derived
for the foreseeable future from fees paid by Manufacturers that promote products
on the ILN. However, many Manufacturers currently participating in the ILN are
doing so at relatively low promotional dollar commitments to test the ILN's
effectiveness. Accordingly, the Company's future success will depend
substantially on its ability to establish, maintain and expand relationships
with Manufacturers to promote their products using the ILN. Moreover, it is
critical that the Company obtain additional commitments from Manufacturers of
major brands in the most popular consumer product categories, as it has recently
done with Keebler, Procter & Gamble, General Mills and Pillsbury, and to develop
long-term relationships with these Manufacturers in order to ensure that an
appropriate mix of products is displayed on the ILN.

     In addition, the Company has experienced a lengthy sales cycle in marketing
the ILN to Manufacturers. In most cases, the time between initial contact with
the Manufacturer and the execution of the final contract, if any, exceeds five
months. The Company could fail to obtain such commitments or could experience
substantial delays in obtaining such commitments, and, once such commitments are
received, the Company could fail to maintain relationships through renewal
contracts. There can be no assurance that the Company will obtain additional
commitments on a timely basis from any Manufacturers and maintain long-term
relationships with these Manufacturers to participate in the ILN. Even if the
Company obtains initial commitments from additional major and other
Manufacturers, these contracts typically have had short-term durations, and
there can be no assurance that such Manufacturers will make the ILN a component
of their long-term promotional strategies. In addition, if a contract expires
and the dollar value of the total redemptions during the contract term is less
than the contract value, the Company may not be able to realize the remaining
contract value. Any of the foregoing events could result in the Company
incurring substantially greater losses for a longer period than expected and
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, as a new market participant,
the Company may only receive one opportunity to convince any single Manufacturer
to become and remain a customer of the Company. As

                                       24







<PAGE>
a result, even short-term difficulties in implementing its strategies could have
a material adverse effect on its results of operations and financial condition.

     In order to enhance its prospects of enrolling Manufacturers in the ILN,
the Company has elected in the past, and expects to elect in the future, to
sponsor from time to time, at its own cost, selected product promotions in
certain stores to continue to demonstrate the effectiveness of the ILN in
prompting product sales and targeting promotions to individual consumers.
Currently the Company sponsors a majority of its promotions. Since these
promotional expenditures are classified as selling, general and administrative
expenses and are incurred to attract Manufacturers and enhance future revenue,
the Company's current losses will be increased in the period of the expenditures
and, if the expected future revenue does not materialize, liquidity difficulties
currently experienced by the Company could become more significant. See
' -- Limited Operating History; Significant Losses; Accumulated Deficit; Future
Losses'.

UNCERTAINTY OF MARKET ACCEPTANCE

     Because the utility and the ultimate attractiveness of the ILN to
Manufacturers is substantially dependent on the number of shoppers using the
system, the number of stores in which the Company has installed its ILN
significantly affects its revenue generation potential. The Company's
profitability and the success of its growth plans will be significantly affected
by its ability to contract with additional Retailers for the installation of the
ILN and to install the system in such stores in a rapid and orderly manner.
While the Company has contractual commitments from 13 supermarket chains as of
March 25, 1998, there can be no assurance that Retailers who currently, or in
the future, have ILN terminals installed will retain the ILN in their stores or
that the Company will be able to continue to increase the number of stores in
which the ILN is installed.

     The Company also is dependent on the level of general acceptance and usage
by consumers. Consumer acceptance and usage are dependent on many factors, such
as actual and perceived ease of use, access to terminals during peak shopping
periods, reliability of the Company's ILN and perceived attractiveness of the
product offerings of the ILN. There can be no assurance that an adequate number
of consumers will use the ILN at a level sufficient to support the ILN on an
ongoing basis or at a level that will attract additional Manufacturers.

     Inasmuch as demand by Manufacturers, Retailers and consumers is
substantially interrelated, any significant continuous lack or lessening of
demand by any one of these constituencies could have an adverse effect on
overall market acceptance. See Part I, Item 1. 'Business -- Business Strategy'.

MANAGEMENT OF GROWTH

     The Company's rapid growth has placed, and is expected to continue to
place, significant pressure on the Company's managerial, operational and
financial resources. To manage its growth, the Company must continue to
strengthen its management, implement and improve its operational and financial
systems and expand, train and manage its employee base. The Company also will be
required to develop and manage multiple relationships with various customers,
business partners and other third parties. The Company's systems, procedures or
controls may not be adequate to support the Company's operations and Company
management may not be able to achieve the rapid expansion necessary to exploit
potential market opportunities for the Company's products and services. Any
significant problems in the Company's commercialization of the ILN could create
a negative image in the consumer product promotion and discounting business that
may be impossible to overcome. The Company's future operating results will also
depend on its ability to expand its sales and marketing and research and
development organizations, to implement and manage new distribution channels to
penetrate markets and to expand its support organization. The Company's failure
to manage growth effectively will have a material adverse effect on the
Company's business, operating results and financial condition.

                                       25







<PAGE>
RISKS RELATING TO SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS

     The Company is highly leveraged with indebtedness that is substantial in
relation to its stockholders' equity. As of December 1997, the Company had an
aggregate of $91.4 million of indebtedness and stockholders' deficit of $48.4
million. See Part II, Item 6. 'Selected Consolidated Financial Data.'

     The Company's high degree of leverage could have important consequences
including but not limited to the following: (i) the Company's ability to obtain
additional financing for capital expenditures, working capital, general
corporate purposes or other purposes (including potential acquisitions) may be
impaired in the future; and (ii) the Company's flexibility to adjust to changing
market conditions and ability to withstand competitive pressures could be
limited, and the Company may be more vulnerable to a downturn in general
economic conditions of its business, or be unable to carry out capital spending
that is important to its growth strategy.

     Pursuant to an Indenture dated as of August 1, 1996 (the 'Indenture'), the
Company issued $142,000,000 principal amount at maturity of 14% Senior Discount
Notes Due 2003 (the 'Notes'). The Company's ability to make scheduled payments
or to refinance its obligations with respect to the Notes and its other
indebtedness will ultimately depend on its financial and operating performance,
which in turn is subject to prevailing economic and competitive conditions and
to certain financial, business and other factors that may be beyond its control,
including operating difficulties, increased operating costs, product prices, the
response of competitors, regulatory developments and delays in implementing its
strategy. The Company's ability to meet its debt service and other obligations
will depend on the extent to which the Company can implement successfully its
business strategy of achieving large-scale commercialization of the ILN. There
can be no assurance that the Company will be able to implement fully its
strategy or that the anticipated results of its strategy will be realized. See
Part I, Item 1. 'Business -- Business Strategy.'

     If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, seek to obtain additional equity capital, or
restructure its debt. There can be no assurance that the Company's cash flow and
capital resources will be sufficient for payment of interest on and principal of
its indebtedness in the future, or that any such alternative measures would be
available at reasonable costs or would permit the Company to meet its scheduled
debt service obligations. In the absence of adequate operating results and/or
capital resources, the Company could face substantial liquidity problems and
might be required to dispose of material assets or operations to meet its debt
service and other obligations, and there can be no assurance as to the timing of
such sales or the proceeds which the Company could realize therefrom.

NEED FOR ADDITIONAL FINANCING

     The Company will need to procure additional financing, the amount and
timing of which will depend on a number of factors including the pace of
expansion of the Company's markets and customer base, services offered, and
development efforts and the cash flow generated by its operations. In the event
that such additional financing is not obtained, the Company believes that
existing cash and cash equivalents, along with reduced or delayed operating and
capital expenditures, will be sufficient to meet the Company's operating
requirements into the first quarter of 1999. See ' -- Liquidity and Capital
Resources.' The Indenture limits the ability of the Company to incur additional
indebtedness in certain circumstances. If additional funds are raised through
debt financing, such financing will increase the financial leverage of the
Company and earnings would be reduced by the associated interest expense. There
can be no assurance that additional financing will be available when needed on
terms favorable to the Company. Any future debt financing or issuance of
preferred stock by the Company would be senior to the rights of the holders of
Common Stock, and any future issuance of Common Stock would result in the
dilution of the then existing stockholders' proportionate equity interests in
the Company. If adequate funds are not available on acceptable terms, the
Company may be unable to continue its planned ILN installations, expand both the
number and dollar amount of Manufacturer commitments, or respond to competitive
pressures, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition.

                                       26







<PAGE>
DEPENDENCE ON THIRD PARTIES

     The Company's success is dependent upon its ability to obtain and maintain
favorable contracts with Retailers and Manufacturers. The Company has derived
and will continue to derive substantially all its revenue from the participation
of Manufacturers on the ILN and from the operation of the ILN in supermarkets.
Any decrease in Manufacturers' promotional expenditures in general or the
decision of Manufacturers to promote their products through marketing strategies
that do not include the ILN could result in a smaller overall market for the
Company's services. In addition, the Company is dependent upon the condition and
performance of its Retailer partners. Consequently, factors affecting the
advertising and promotional strategy of Manufacturers or the condition of its
Retail partners, such as labor disputes or supply problems, could have a
material adverse effect on the Company's business, results of operations or
financial condition.

     In addition, the Company's terminals have been manufactured by a single
supplier, Thermo, under an exclusive contract. As of March 24, 1998, the Company
terminated its contract with Thermo. See 'Management Discussion and Analysis of
Financial Condition and Results of Operations -- Year Ended December 31, 1997
Compared with Year Ended December 31, 1996.' As of March 25, 1998, the Company
is negotiating with a number of major equipment integrators to supply ILN
terminals and servers to the Company, and expects to conclude a non-exclusive
terminal supply agreement during the second quarter 1998. With any new supplier
with which the Company may contract in the future, the Company may experience
problems related to the transition of suppliers and their transition from
prototype to commercial deployment.

COMPETITION

     The consumer product advertising and promotional business is intensely
competitive. Many media outlets compete for the advertising and promotional
dollars Manufacturers spend to promote their products. The Company's services
compete against these media outlets, such as television, radio, newspapers and,
most directly, coupons. A number of new, electronic marketing products and
services also have been introduced, including electronic shelf markers,
computer-screen equipped shopping carts, battery-powered coupon dispensers,
electronic marketing networks and frequent shopper programs. A number of
potential competitors have failed because of a lack of acceptance, lack of
capital, technical problems or a combination of these factors. While the Company
believes it provides a cost-effective targeted marketing service, there are many
factors a Manufacturer will take into account in allocating advertising or
promotional expenditures, and there can be no assurance that the Company's
services will compete effectively against alternative marketing outlets. Most of
the Company's competitors in the consumer product promotional and advertising
business are larger, possess significantly greater financial resources and have
longer operating histories than the Company. See Part I, Item 1.
'Business -- Customers and Competition.'

PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS

     The Company's success and ability to compete are dependent upon its
proprietary systems and technology. The Company holds licenses to United States
patents which cover various aspects of its systems and methods of distributing
promotions, and the Company also has an additional patent application pending.
Inter*Act Loyalty Network is a service mark of the Company and an application
for federal registration of the mark is pending. Applications for Inter*Act
Promotion Network'tm' and Coupon Central'tm' are also pending. However, it is
possible that patent rights held by the Company may be held invalid or that
disputes with third parties over the scope of licensed patents and other
proprietary rights may occur, including the Company's trademarks. Certain
aspects of the Company's services may not be adequately protected from
infringement or copying and there can be no assurance that the Company's
licensed patents or its trademarks would be upheld if challenged or that
competitors might not develop similar or superior processes or services outside
the protection of any patents licensed to the Company. In addition, litigation
may be necessary to enforce or protect the Company's intellectual property
rights or to defend against claims of infringement or invalidity. In February
1996, the Company filed suit against Catalina alleging that Catalina has
infringed United States Letters Patent No. 4,554,446 under which the Company is
a licensee. In May 1997, Catalina asserted a counter claim

                                       27







<PAGE>
alleging that the Company is infringing a newly issued Catalina patent, U.S.
Patent No. 5,612,868. The Company has answered denying the allegations, raising
affirmative defenses and seeking declaratory judgment of non-infringement,
invalidity and unenforceability. In January 1998, Catalina Marketing
International, Inc. filed suit against the Company alleging that the Company had
infringed U.S. Patent No. 4,674,041, acquired by Catalina International in
December 1997. In February 1998, Catalina International amended its complaint to
join as additional parties defendant Thermo and Coleman. The Company intends to
defend against Catalina International claims vigorously, and to pursue available
remedies, which may include filing appropriate counter claims. See Part I, Item
3. 'Legal Proceedings'. Misappropriation of the Company's intellectual property
or any potential litigation on the Company's rights to its intellectual property
could have a material adverse effect on the Company's business, results of
operations and financial condition. See Part I, Item 1.
'Business -- Intellectual Property Matters'.

NEW MANAGEMENT; DEPENDENCE ON KEY EMPLOYEES

     The Company's business operating results and financial condition depend in
significant part upon the continued contributions of its management and other
key technical personnel and sales people. Most of the Company's management and
sales force has been hired by the Company in the last eighteen months. The
Company's Senior Vice President, Chief Operating Officer and Chief Financial
Officer has served in such capacity since April 1997. From September 1996
through April 1997, he served as Chief Financial Officer. The Company's Senior
Vice President and Chief Marketing Officer has served since September 1997 and
its Vice President of National Sales since April 1997. The Company's Chief
Executive Officer, Mr. Stephen Leeolou, was elected to such position on June 12,
1996. Mr. Leeolou is also a co-founder, Co-Chief Executive Officer and a
director of Vanguard.

     An inability of new management and other recently hired employees of the
Company to adjust quickly to, and to perform as expected in, their respective
roles within the Company or an inability of the Company to attract and retain
employees with such skills could have a material adverse effect on the Company's
business, results of operations and financial condition. See Part III, Item 10.
'Directors and Executive Officers of the Company'.

     The Company is also highly dependent on certain key technical employees and
on its ability to recruit, retain and motivate high quality technical personnel.
All employment agreements entered into by the Company are terminable at will by
either party. See Part III, Item 10. 'Directors and Executive Officers of the
Company'. The Company's future success will depend on its ability to retain key
managers and employ additional qualified senior managers. Competition for such
personnel is intense and the inability to attract and retain additional
qualified employees or the loss of current key employees and managers could
materially and adversely affect the Company's business, results of operations
and financial condition.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

     The Company has experienced fluctuations in its quarterly operating results
and may continue to do so in the future. Some of the factors that may affect the
quarterly operating results of the Company include (i) the timing and nature of
expansion efforts in both new and existing markets, (ii) the introduction of new
products or services and the market response to those introductions, (iii)
relationships with Retailers, (iv) relationships with Manufacturers, (v)
seasonal trends, particularly in the retail grocery industry, (vi) changes in
pricing policies or service offerings, (vii) changes in the level of marketing
and other operating expenses to support future growth, (viii) the mix of product
and promotional offerings on the ILN, (ix) competitive factors and (x) general
economic conditions. Consequently, quarterly revenues and operating results may
fluctuate significantly, and the Company believes that period-to-period
comparisons of results will not necessarily be meaningful and should not be
relied upon as an indication of future performance.

                                       28







<PAGE>
RELATIONSHIP WITH DIRECTORS, OFFICERS AND PRINCIPAL SHAREHOLDERS; POTENTIAL
CONFLICTS OF INTEREST; CONTROL BY SIGNIFICANT SHAREHOLDER

     The directors, officers and principal shareholders of the Company have
potential conflicts of interest in certain transactions with the Company and
between the Company and certain parties controlled by or otherwise related to
directors, officers or principal shareholders. These transactions include asset
purchases, private purchases of stock, loans to the Company, licensing of
proprietary rights, option grants, consulting agreements and other transactions.
See Part III, Item 13. 'Certain Relationships and Related Transactions'. In
addition, directors and officers of Vanguard who are also directors or officers
of the Company, including Stephen R. Leeolou, the Company's Chairman and Chief
Executive Officer, have certain fiduciary obligations to each organization.
Vanguard and directors and officers of Vanguard who are also directors and
officers of the Company are in positions involving the possibility of conflicts
of interest with respect to certain transactions concerning the Company.
Although the terms of certain of these arrangements were established in
consultation with the Company, they were not the result of arm's-length
negotiations. Accordingly, although the Company believes that the terms of these
arrangements were reasonable under the circumstances, there can be no assurance
that these agreements are as favorable to the Company as those that could be
obtained from unaffiliated third parties. With respect to future transactions,
the Company currently has not adopted or formulated any procedures to resolve
conflicts of interest other than customary board practices such as relying on
the judgment of disinterested directors, when appropriate.

     As of December 31, 1997, Vanguard and certain of its officers and directors
who are also officers and directors of the Company owned beneficially
approximately 41% of the outstanding Common Stock. As a result of the
relationship between Vanguard and the Company and this share ownership, Vanguard
has significant control over the Company and the conduct of its business. These
factors may have the effect of delaying, deferring or preventing a change in
control of the Company. See Part III, Item 10. 'Directors and Executive Officers
of the Company' and Part III, Item 12. 'Security Ownership of Certain Beneficial
Owners and Management'.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and supplementary financial information that are
required to be included pursuant to this Item 8. are listed in and follow the
Index to Financial Statements following Item 14 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None

                                       29







<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     The following table sets forth certain information about each of the
Company's executive officers and directors.

<TABLE>
<CAPTION>
                    NAME                       AGE                              POSITION
--------------------------------------------   ---   --------------------------------------------------------------
<S>                                            <C>   <C>

Stephen R. Leeolou..........................   42    Chairman of the Board of Directors, Chief Executive Officer;
                                                       Treasurer and Director

Richard A. Vinchesi, Jr. ...................   31    Senior Vice President; Chief Operating Officer and Chief
                                                       Financial Officer

William F. Penwell..........................   65    Vice Chairman of the Board of Directors; Secretary; Director

Paul A. Nash................................   41    Senior Vice President; Director

James F. Brandhorst, Jr. ...................   56    Senior Vice President and Chief Marketing Officer

Thomas A. Manna.............................   40    Vice President, National Sales

Michael T. Leeolou..........................   40    Vice President, Retail Services

Robert M. DeMichele.........................   53    Director

William P. Emerson, Jr. ....................   45    Director

Haynes G. Griffin...........................   51    Director

Richard P. Ludington........................   51    Director

L. Richardson Preyer, Jr. ..................   50    Director

Brian A. Rich...............................   37    Director

Stuart S. Richardson........................   51    Director

Robert A. Silverberg........................   62    Director
</TABLE>

     Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified. The
Board of Directors is classified. Mr. Penwell, Mr. Preyer and Mr. Silverberg
will hold office until the next annual meeting of shareholders in 1998. Mr.
Nash, Mr. DeMichele, Mr. Griffin and Mr. Rich will hold office until the annual
meeting of shareholders in 1999. Mr. Leeolou, Mr. Emerson, Mr. Ludington and Mr.
Richardson will hold office until the annual meeting of shareholders in 2000.
Directors elected at the 1998 annual meeting of shareholders will hold office
for three years.

     Stephen R. Leeolou has been a director of the Company since its inception
in 1993 and Chairman of the Board of Directors and Treasurer of the Company
since 1995. In June 1996, Mr. Leeolou became Chief Executive Officer of the
Company. Mr. Leeolou is a co-founder and Co-Chief Executive Officer of Vanguard,
and has served as an executive officer and director of Vanguard since its
inception in 1984. See Part III, Item 13. 'Certain Relationships and Related
Transactions'. Since 1994, Mr. Leeolou has been a charter director of the North
Carolina Electronics and Information Technology Association. Mr. Leeolou also
serves as a director of International Wireless Communications Inc., a
California-based company involved in wireless telecommunications, licensing,
construction and operations primarily in Asia and Lation America. Stephen R.
Leeolou is the brother of Michael T. Leeolou.

     Richard A. Vinchesi, Jr. has been Senior Vice President, Chief Operating
Officer and Chief Financial Officer of the Company since April 1997. He served
as Vice President and Chief Financial Officer from September 1996 to April 1997.
Prior thereto, he served in various capacities in the Corporate Finance
department of Salomon Brothers Inc., most recently as a Vice President in the
Media Group.

     William F. Penwell has been Vice Chairman of the Board of Directors of the
Company since 1995 and Secretary since June 1996. Mr. Penwell served as
President and Chief Executive Officer of the Company from 1993 to 1996 and has
served as a director of the Company since 1994. Prior to joining the Company in
1993, Mr. Penwell was Chairman of TSS Ltd., a publicly traded company engaged in
the manufacture and deployment of terminals used to dispense coupons. Prior
thereto, Mr. Penwell was Chairman and Chief Executive Officer of the Sperry &
Hutchinson Co., Inc. (issuers of S&H green stamps) and President and Chief
Executive Officer of its Counter Intelligence Division which operated a frequent
shopper and database marketing business.

                                       30







<PAGE>
     Paul A. Nash has been a director of the Company since its inception and has
been a Senior Vice President of the Company since 1993. From 1994 to January
1996, Mr. Nash also served as the Company's Chief Operating Officer. Prior
thereto, he was Chairman and Chief Executive Officer for Advanced Technical
Services, Inc., a nationwide ATM manufacturing, maintenance and support company.

     James F. Brandhorst, Jr. has been Senior Vice President and Chief Marketing
Officer since September 1997. From April 1992 through March 1997, Mr. Brandhorst
served in a number of positions with R.J. Reynolds including as Managing
Director and Regional Vice President of R.J. Reynolds International in Malaysia
and Senior Vice President, Marketing and Business Planning of RJR Tobacco
International. Prior thereto, he served in various executive positions in
advertising including positions with The Coca-Cola Company.

     Thomas A. Manna has been Vice President, National Sales since April 1997.
Prior to joining the Company, he held various positions with Catalina Marketing
Corporation including Senior Vice President/General Manager, SaveNOW! from
January 1996 through March 1997, Senior Vice President, National Sales and
Client Services from March 1994 through December 1995 and Vice President Sales
and Retail East from June 1991 through February 1994.

     Michael T. Leeolou has been Vice President, Retail Services since September
1996. From September 1995 through August 1996, Mr. Leeolou was a Regional Sales
Manager for Geotek Communications. From January 1990 through August 1995 he was
a Senior Account Executive with AT&T. Michael T. Leeolou is the brother of
Stephen R. Leeolou.

     Robert M. DeMichele has been a director of the Company since 1995 and has
served as President, Chief Executive Officer and a director of Lexington Global
Asset Managers, Inc., a diversified financial services holding company, since
1995. Prior thereto, Mr. DeMichele was President, Chief Executive Officer and a
director of Piedmont Management Company, Inc., formerly the parent corporation
of Lexington Global Asset Managers, Inc. Mr. DeMichele also serves as a director
of Vanguard, Chartwell Reinsurance Co. and the Navigators Group, Inc.

     William P. Emerson, Jr. has been a director of the Company since its
inception and has served as the President and Chief Executive Officer of all
divisions of Wilmington Shipping Company since 1991. During 1995, Mr. Emerson
served as Chairman of the Company's Board of Directors. Wilmington Shipping
Company services the international trade community through divisions that
include steamship line agents, customs brokers and freight forwarders, a
warehouse and a container maintenance and repair station.

     Haynes G. Griffin has been a director of the Company since its inception
and from 1993 to 1995 Mr. Griffin served as Chairman of the Board of Directors
of the Company. Mr. Griffin is a co-founder of Vanguard and has served as an
executive officer and a member of its Board of Directors since its inception in
1983. Mr. Griffin is presently Chairman and Co-Chief Executive Officer of
Vanguard. Mr. Griffin also serves as Chairman of the Board of Directors of
International Wireless Communications, Inc. Mr. Griffin also is a member of the
Boards of Directors of Lexington Global Asset Managers, Inc. and Geotek
Communication, Inc. and recently served on the United States Advisory Council on
the National Information Infrastructure. He is a past Chairman of the Cellular
Telecommunications Industry Association.

     Richard P. Ludington has been a director of the Company since 1993. Mr.
Ludington is presently in the private practice of law. From 1996 to 1997, Mr.
Ludington was Vice President-Real Estate of Forest Land Group, L.L.C., a
timberland investment corporation. Prior thereto, Mr. Ludington has served as
Southeast Regional Director for The Conservation Fund, a nonprofit organization
that creates partnerships with private and public sector corporations and
organizations to help protect America's outdoor environment.

     L. Richardson Preyer, Jr. has been a director of the Company since its
inception. Mr. Preyer is a co-founder of Vanguard and has served as its Vice
Chairman of the Board, Executive Vice President and Treasurer since its
inception in 1983. Prior to the formation of Vanguard, Mr. Preyer was Vice
President of Caro-Cell which was engaged in the formation of partnerships to
fund and apply for cellular telephone authorizations. Mr. Preyer is a cousin of
Stuart S. Richardson.

                                       31







<PAGE>
     Brian A. Rich has been a director of the Company since June 1996. Mr. Rich
has served as Managing Director and Group Head of Toronto Dominion Capital, the
U.S. merchant bank affiliate of Toronto Dominion Bank, since July 1995. Prior
thereto, Mr. Rich was a managing director of the Communications Finance Group of
Toronto Dominion Bank in New York where he focused on transactions in the
wireless communications, cable and broadcast industries. Mr. Rich also serves as
a director of Teletrac, Inc. and International Wireless Communications, Inc.

     Stuart S. Richardson has been a director of the Company since 1995 and has
served as Chairman of Lexington Global Asset Managers, Inc., a diversified
financial services holding company, since 1995. Prior thereto, was an executive
of Piedmont Management Company, Inc., formerly the parent corporation of
Lexington Global Asset Managers, Inc., and served as its Vice Chairman from 1986
to 1995. Mr. Richardson also is the former Chairman of the Board of
Richardson-Vicks, Inc. and serves as Chairman of the Board of Vanguard and a
director of Chartwell Reinsurance Co. Mr. Richardson is a cousin of Mr. Preyer.

     Robert A. Silverberg has been a director of the Company since June 1996.
Mr. Silverberg has been Executive Vice President and Director of Vectra Bank
since 1995. Prior thereto, Mr. Silverberg was Chairman of the Board and
President of First Denver Corporation and Chairman of the Board of its
subsidiary, First National Bank of Denver. Mr. Silverberg has also been
President and Chairman of the Board of 181 Realty Company, a commercial real
estate holding company, and has been a director of Vanguard since 1984.

     In addition to the officers of the Company mentioned above, Blair Jenkins
has been President and Chief Executive Officer of Inter*Act International
Holdings, Inc., the Company's subsidiary presently developing the Company's
United Kingdom business, since April 1997. From 1993 until joining the Company
in April 1997, he was a Chief Executive with Catalina Marketing U.K. Prior
thereto he served as Senior Vice President Restaurant Operations with
Pepsico-Pizza Hut U.K. and Chief Executive of Allied Bakeries operating division
of Associated British Foods.

     The Company's bylaws provide that the number of directors shall be not less
than 7 nor more than 12, such number within the foregoing range to be fixed from
time to time by the Board of Directors or shareholders. The number is presently
fixed at 12, although there are presently only 11 directors of the Company. The
holders of a majority of the Company's Common Stock have entered into an
agreement whereby Vanguard is entitled to designate six of the 12 directors
until such time as the Company has completed an initial public offering of its
Common Stock. See Part III, Item 13. 'Certain Relationships and Related
Transactions'.

COMMITTEES

     The Compensation and Stock Option Committee of the Board of Directors
consists of Messrs. Griffin (Chairman), Richardson, Preyer and Emerson. This
Committee recommends employee salaries and incentive compensation to the Board
of Directors and administers the Company's stock option plans.

     The Audit Committee of the Board of Directors consists of Messrs.
Silverberg (Chairman), Emerson, Ludington and Penwell. The Audit Committee makes
recommendations to the Board of Directors concerning its review of the Company's
internal controls and accounting system and its review of the annual audit, and
regarding the selection of independent auditors.

DIRECTOR COMPENSATION

     Directors of the Company have received options to purchase Common Stock in
lieu of cash compensation for serving on the Board of Directors or its
committees. The number of options granted in lieu of cash are determined each
year by the Compensation and Stock Option Committee. In granting options, such
Committee considers the individual directors' service on committees and other
time devoted to Company business as a director and whether the director has also
been compensated as an employee. During 1997, the members of the Board of
Directors received options for their service as directors as follows: Mr.
Emerson (3,000 shares); Mr. DeMichele (7,500 shares); Mr. Griffin (3,000
shares); Mr. Ludington (3,000 shares); Mr. Preyer (10,000 shares); Mr. Rich
(3,000 shares); Mr.

                                       32







<PAGE>
Richardson (7,500 shares); and Mr. Silverberg (3,000 shares). Such options are
exercisable at a price of $10.00 per share, fully vested and expire 10 years
from the date of grant.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

     The following table sets forth all compensation paid by the Company to (i)
its Chairman of the Board and Chief Executive Officer and (ii) each of the four
most highly compensated individuals serving as executive officers of the Company
at the end of 1997 (collectively, the 'Named Officers'), for services rendered
in all capacities to the Company during the periods indicated.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                         LONG-TERM
                                                                                                       COMPENSATION
                                                                                                      ---------------
                                                                          ANNUAL COMPENSATION           SECURITIES
                                                                     -----------------------------      UNDERLYING
                   NAME AND PRINCIPAL POSITION                       YEAR    SALARY($)    BONUS($)    OPTIONS/SARS(#)
------------------------------------------------------------------   ----    ---------    --------    ---------------
<S>                                                                  <C>     <C>          <C>         <C>
Stephen R. Leeolou ...............................................   1997       50,000       --           --
  Chairman of the Board, Chief Executive Officer and and Treasurer   1996       11,538       --           192,600
                                                                     1995       --           --             8,400
Richard A. Vinchesi, Jr.  ........................................   1997      142,538       --            52,000
  Senior Vice President, Chief Operating Officer and Chief           1996       33,157      15,000         48,000
  Financial Officer                                                  1995       --           --           --
William F. Penwell ...............................................   1997      120,923      12,500        --
  Vice Chairman of the Board and Secretary                           1996       71,821       6,500         24,000
                                                                     1995      109,256      12,000        --
Paul A. Nash .....................................................   1997      138,600       --           --
  Senior Vice President                                              1996      132,996       4,000         14,000
                                                                     1995      136,855       4,000        --
Thomas A. Manna ..................................................   1997      105,962     155,000(1)      70,000
  Vice President National Sales                                      1996       --           --           --
                                                                     1995       --           --           --
</TABLE>

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

(1) Of such amount, $100,000 represents a signing bonus payable to Mr. Manna
    upon execution of an employment agreement. See ' -- Employment and other
    Agreements'.

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

     Option Grants, Exercises and Holdings and Fiscal Year-end Option Values.
The following table summarizes all option grants during the year ended December
31, 1997 to the Named Officers.

<TABLE>
<CAPTION>
                                                       OPTION GRANTS DURING 1997                   POTENTIAL REALIZABLE
                                        -------------------------------------------------------      VALUE AT ASSUMED
                                                         PERCENT                                     ANNUAL RATES OF
                                         NUMBER OF      OF TOTAL                                       STOCK PRICE
                                          SHARES         OPTIONS                                     APPRECIATION FOR
                                        UNDERLYING     GRANTED TO     EXERCISE OR                     OPTION TERM(2)
                                          OPTIONS       EMPLOYEES     BASE PRICE     EXPIRATION    --------------------
                NAME                    GRANTED(#)     IN 1997(%)      PER SHARE        DATE        5%($)      10%($)
-------------------------------------   -----------    -----------    -----------    ----------    -------    ---------
<S>                                     <C>            <C>            <C>            <C>           <C>        <C>
Stephen R. Leeolou...................      --            --              --             --           --          --
Richard A. Vinchesi, Jr.(1)..........      52,000          $10          $ 10.00        4/29/07     327,025      828,746
William F. Penwell...................      --            --              --             --           --          --
Paul A. Nash.........................      --            --              --             --           --          --
Thomas A. Manna(1)...................      70,000           13            10.00        3/30/07     440,226    1,115,620
</TABLE>

                                                        (footnotes on next page)

                                       33







<PAGE>
(footnotes from previous page)

(1) Mr. Vinchesi's options were granted under the 1997 Long-term Incentive Plan.
    Of Mr. Manna's options, 35,000 were granted under the 1996 Nonqualified
    Stock Option Plan and 35,000 were granted under the 1994 Stock Compensation
    Plan. For a summary of the terms of such options, see 'Stock Compensation
    Plans' below.

(2) Amounts represent hypothetical gains that could be achieved for the
    respective options if exercised at the end of the option term. These gains
    are based on assumed rates of stock price appreciation, mandated by rules
    promulgated by the Securities and Exchange Commission, of 5% and 10%
    compounded annually from the date the respective options were granted to
    their expiration date, and are not intended to forecast possible future
    appreciation, if any, in the price of the Company's Common Stock. The gains
    shown are net of the option exercise price, but do not include deductions
    for federal or state income taxes or other expenses associated with the
    exercise of the options or the sale of the underlying shares. The actual
    gains, if any, on the exercise of the stock options will depend on the
    future performance of the Common Stock, the option holder's continued
    employment through the option period and the date on which the options are
    exercised.

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

     No Named Officers exercised any stock options during 1997. The following
table sets forth information concerning all option holdings for the year ended
December 31, 1997, with respect to the Named Officers.

<TABLE>
<CAPTION>
                                                             AGGREGATED OPTIONS/SAR EXERCISES IN 1997
                                                                  AND YEAR-END 1997 OPTION VALUES
                                                -------------------------------------------------------------------
                                                                                    NUMBER OF
                                                                                   SECURITIES
                                                                                   UNDERLYING          VALUE OF
                                                                                   UNEXERCISED       IN-THE-MONEY
                                                                                 OPTIONS/SARS AT     OPTIONS/SARS
                                                                                     FISCAL            AT FISCAL
                                                    SHARES                         YEAR-END(#)      YEAR-END($)(1)
                                                 ACQUIRED ON         VALUE        EXERCISABLE/       EXERCISABLE/
                    NAME                         EXERCISE(#)      REALIZED($)     UNERERCISABLE      UNEXERCISABLE
---------------------------------------------   --------------    -----------    ---------------    ---------------
<S>                                             <C>               <C>            <C>                <C>
Stephen R. Leeolou...........................       202,000         913,700      102,000/100,000    463,700/450,000
Richard A. Vinchesi, Jr. ....................       100,000         120,000         9,600/90,400      24,000/96,000
Thomas A. Manna..............................        70,000               0             0/70,000                0/0
William F. Penwell...........................        66,000         396,500        37,350/28,650    241,625/154,875
Paul A. Nash.................................        29,000         138,000        15,400/13,600      74,000/64,000
</TABLE>

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

(1) There is no trading market for the Common Stock. Management estimated the
    fair market value of the Common Stock to be $10.00 per share at December 31,
    1997.

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

     Stock Compensation Plans. The Company has a 1994 Stock Compensation Plan
that provides for the issuance of shares of Common Stock to key employees,
consultants and directors pursuant to stock options that meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (incentive stock
options), options that do not meet such requirements (nonqualified stock
options) and stock bonuses. All options under the plan must be granted at an
exercise price not less than fair market value. Stock bonuses may be in the form
of grants of restricted stock. The aggregate number of shares of Common Stock
that may be issued pursuant to the plan may not exceed 330,000 shares, subject
to adjustment upon occurrence of certain events affecting the Company's
capitalization. As of December 31, 1997, 17,900 shares remain available for
future grants under the 1994 Stock Compensation Plan.

     The Company also has a 1996 Nonqualified Stock Option Plan that provides
for the issuance of shares of Common Stock to key employees, consultants and
directors pursuant to nonqualified stock options. All options must be granted at
an exercise price not less than $5.50 per share. The aggregate number of shares
of Common Stock that may be issued pursuant to the plan may not exceed 600,000
shares of Common Stock, subject to adjustment upon occurrence of certain events
affecting the

                                       34







<PAGE>
Company's capitalization. This plan is subject to shareholder approval. As of
December 31, 1997, 17,000 shares remain available for future grants under the
1996 Nonqualified Stock Option Plan.

     The Company also has established the 1997 Long-Term Incentive Plan that
provides for the issuance of shares of Common Stock to officers, supervisory
employees, directors or consultants pursuant to incentive and nonqualified stock
options and restricted and unrestricted stock awards. All options under the plan
must be granted at an exercise price not less than the fair market value of the
Common Stock at the time of the grant. No stock awards or stock appreciation
rights have been granted under the plan. The aggregate number of shares that may
be issued pursuant to this plan may not exceed 500,000 shares, subject to
certain adjustments affecting the Company's capitalization. As of December 31,
1997, 135,200 shares remain available for future grants under this plan.

     The foregoing plans are administered by the Compensation and Stock Option
Committee of the Board of Directors, which is authorized, subject to the
provisions of the Plan, to determine to whom and at what time options and
bonuses may be granted and the other terms and conditions of the grant.

EMPLOYMENT AND OTHER AGREEMENTS

     All of the Company's employees, including the Named Officers, are employees
at will. Each of the Named Officers and each employee of the Company is required
to sign non-compete and non-disclosure agreements covering such items as
ownership and authorship of all work and materials, trade secrets, confidential
information, unfair business practices and covenants not to compete.

     In connection with Mr. Manna's offer of employment in March 1997, the
Company and Mr. Manna entered into a letter agreement in which the Company
agreed to pay Mr. Manna a base salary of $145,000, a guaranteed $55,000
incentive pay amount in the first year of employment and a $100,000 incentive
pay amount in the second year of employment, contingent on reaching mutually
agreeable quarterly sales objectives. In addition, Mr. Manna was paid a one-time
signing bonus in the amount of $100,000 and was granted options to purchase an
aggregate of 70,000 shares of Common Stock at an exercise price of $10.00 per
share vesting over five years. Should Mr. Manna be terminated for any reason
other than cause, the Company also agreed to immediately vest 50% of all
unvested outstanding options that were granted to him or 40,000 shares,
whichever is greater, and to pay one year of severance pay. In addition, during
the first five years of employment, should a change in control occur for the
Company, Mr. Manna's unvested options will automatically vest.

     In connection with Mr. Brandhorst's offer of employment in September 1997
the Company and Mr. Brandhorst entered into a letter agreement pursuant to which
the Company agreed to pay Mr. Brandhorst a base salary of $130,000 per annum, a
guaranteed first year bonus of $25,000 with bonus opportunities available in
subsequent years based on pre-determined objectives and reimbursement of
temporary living allowance for the first year of employment. In addition, Mr.
Brandhorst was granted options to purchase 50,000 shares of Common Stock at an
exercise price of $10.00 per share vesting over five years. If the Company is
sold at any time during Mr. Brandhorst's employment, his options will
immediately vest in full.

     The Company has entered into other various employment agreements with
certain other of its employees, all of which are terminable at will by either
party and none of which is considered material.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

     Decisions on compensation on the Company's Chief Executive Officer and of
its other executive officers are made by the Company's Board of Directors upon
recommendations of the Compensation Committee (the 'Committee'). Four
nonemployee directors currently serve as members of the Committee: Haynes G.
Griffin, Chairman, Stuart S. Richardson, L. Richardson Preyer, Jr., and William
P. Emerson, Jr.

     The Committee's philosophy is to provide the Company's executive officers
with reasonable cash compensation, augmented by incentive compensation
represented by stock options. The Company has found that, in many instances, it
can attract highly qualified persons at salaries that are below what they could
obtain elsewhere in exchange for stock options which, if the Company is
successful, provide

                                       35







<PAGE>
considerable upside potential. The Committee believes that stock options that
vest over a substantial length of time (generally over three to five years) are
a particularly effective incentive for executives of an entrepreneurial company
such as the Company in its start-up phase because they enable the Company to
attract persons who have a willingness to work very hard to make the Company
successful. Since it believes stock options are particularly effective, it has
sought to emphasize stock options and to de-emphasize cash compensation for the
Company's executive officers.

     The Committee believes that it is important for the Company's Chief
Executive Officer to receive cash compensation from the Company to reflect the
substantial time commitment and the effort involved in leading an
entrepreneurial company. However, since Stephen R. Leeolou, the Company's
Chairman and Chief Executive Officer, is a full-time employee of Vanguard, the
Company's largest shareholder, and since Mr. Leeolou's time commitment to the
Company is less than full-time, the Committee has not sought to pay Mr. Leeolou
a competitive salary. Mr. Leeolou presently receives a salary of $50,000 per
year. However, because the Committee feels that Mr. Leeolou's efforts are
important to the long-term success of the Company, in June 1996 it recommended
awarding Mr. Leeolou an option to purchase 192,600 shares of the Company's
common stock at a price of $5.50 per share. That option was approved by the
Board.

          Haynes G. Griffin    L. Richardson Preyer, Jr.    Stuart S.
                     Richardson    William P. Emerson, Jr.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Haynes G. Griffin, L. Richardson Preyer, Jr. and Stuart S. Richardson,
members of the Company's Compensation and Stock Option Committee, are each
directors and executive officers of Vanguard. Stephen R. Leeolou, Chief
Executive Officer of the Company, also is a director and executive officer of
Vanguard. Each of the foregoing persons and Vanguard, as well as William P.
Emerson, Jr., who is also a member of the Compensation and Stock Option
Committee, have provided capital to the Company and engaged in related
transactions. In addition, Vanguard has provided and continues to provide
certain services to the Company pursuant to consulting and management services
agreements entered into in 1995 and 1996. See Part III, Item 13. 'Certain
Relationships and Related Transactions'.

INDEMNIFICATION MATTERS

     The North Carolina Business Corporation Act (the 'Business Corporation
Act') provides for mandatory indemnification against reasonable expenses for a
director or officer who is wholly successful in the defense of any proceeding to
which he is a party because he is or was a director or officer of a corporation.
Additionally, as permitted by the Business Corporation Act, the Company's Bylaws
provide for indemnification of the Company's directors and Indemnified Officers
(executive officers who are also directors and any other officer who is
designated by the Board as an Indemnified Officer) against any and all liability
and expenses in any proceeding, including reasonable attorneys' fees, arising
out of their status or activities as directors and officers, except for
liability or litigation expense incurred on account of activities that at the
time taken were not in good faith or were known or reasonably should have been
known by such director or officer or employee to be clearly in conflict with the
best interests to the Company or that such director or officer had reason to
believe were unlawful.

     At present, there is no pending litigation or proceeding involving any
director or officer, employee or agent of the Company where indemnification will
be required. The Company is not aware of any threatened litigation or proceeding
which may result in a claim for such indemnification.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL SHAREHOLDERS

     The following table sets forth the ownership of the Company's Common Stock
by each person known by the Company to be the owner of 5% or more of the Common
Stock, by each person who is a

                                       36







<PAGE>
director or named officer of the Company and by all directors and executive
officers of the Company as a group.

<TABLE>
<CAPTION>
                                                                                    SHARES BENEFICIALLY
                                                                                         OWNED(1)
                                                                                  -----------------------
                                  SHAREHOLDER                                      NUMBER      PERCENT(1)
-------------------------------------------------------------------------------   ---------    ----------
<S>                                                                               <C>          <C>
Vanguard Cellular Operating Corp.(2)...........................................   2,944,381       27.79%
Piedmont Acorn Investors Limited Partnership(3)(4).............................     786,286        7.42
Clearing Systems, Inc(5).......................................................     816,902        7.71
Stephen R. Leeolou(6)..........................................................     444,162        4.19
William F. Penwell(7)..........................................................      52,852       *
Paul A. Nash(8)................................................................     832,302        7.85
Richard P. Ludington(9)........................................................     113,567        1.07
William P. Emerson, Jr.(10)....................................................     317,837        3.00
Haynes G. Griffin(11)..........................................................     460,464        4.35
L. Richardson Preyer, Jr.(4)(12)...............................................     381,762        3.60
Richard A. Vinchesi, Jr.(13)...................................................      30,000       *
Stuart S. Richardson(4)(14)....................................................     113,500        1.07
Robert A. Silverberg(15).......................................................      26,000       *
Robert M. DeMichele(4)(16).....................................................      73,500       *
Thomas A. Manna(17)............................................................      14,000       *
Brian A. Rich(18)..............................................................       6,000       *
All Directors and Officers as a group (15 persons)(19).........................   2,823,946       26.65
</TABLE>

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

   * Owns less than 1% of the total outstanding Common Stock.

 (1) Applicable percentage of ownership is based on 10,596,186 shares of Common
     Stock outstanding as of March 1, 1998. Beneficial ownership is determined
     in accordance with the rules of the Commission and includes voting and
     investment power with respect to securities. Shares issuable under options
     or warrants currently excisable or exercisable within 60 days of March 1,
     1998 are deemed outstanding for purposes of computing the percentage
     ownership of the person holding such options or warrants, but are not
     deemed outstanding for purposes of computing the percentage of any other
     person. Except for shares held jointly with a person's spouse or subject to
     applicable community property laws, or as indicated in the footnotes to
     this table, each stockholder identified in the table possesses sole voting
     and investment power with respect to all shares of Common Stock shown as
     beneficially owned by such stockholder.

 (2) Includes 900,113 shares that Vanguard has the right to acquire under a
     warrant at $23.50 per share under an amended and restated warrant. Also
     includes 169,722 shares that Vanguard has the right to acquire at $.01 per
     share under a warrant issued in the Private Placement. See Part III, Item
     13. 'Certain Relationships and Related Transactions'. These shares may also
     be deemed beneficially owned by Messrs. Stephen Leeolou, Griffin, Preyer
     and Richardson, each of whom is a director and executive officer of
     Vanguard.

 (3) These shares are owned of record by Piedmont Acorn Investors Limited
     Partnership. Lunsford Richardson, Jr. is the general partner of Piedmont
     Acorn Investors Limited Partnership and may also be deemed to beneficially
     own such shares.

 (4) The descendants of Lunsford Richardson, Sr., their spouses, trusts, and
     corporations in which they have interests and charitable organizations
     established by such descendants (collectively referred to as the
     'Richardson Family') beneficially own approximately 1,268,048 shares or
     11.97% of the Company's Common Stock as of March 1, 1998. Such number of
     shares includes 786,286 shares owned by Piedmont Acorn Investors Limited
     Partnership, 50,000 shares held by the Smith Richardson Foundation, Inc.,
     50,000 shares held by Piedmont Harbor-Piedmont Associates Limited
     Partnership, 342,162 shares held directly by L. Richardson Preyer, Jr., and
     39,600 shares which Mr. Preyer has the right to acquire under presently
     exercisable options granted to him under the

                                              (footnotes continued on next page)

                                       37







<PAGE>
(footnotes continued from previous page)
     Company's stock option plans. The individuals and institutions constituting
     the Richardson Family have differing interests and may not necessarily vote
     their shares in the same manner. Furthermore, trustees and directors have
     fiduciary obligations (either individually or jointly with other
     fiduciaries) under which they must act on the basis of fiduciary
     requirements which may dictate positions that differ from their personal
     interests.

 (5) These shares are owned of record by Clearing Systems, Inc. ('CSI'). Paul A.
     Nash, a director and executive officer of the Company, and Michael R.
     Jones, a former director of the Company, are principal shareholders of CSI
     and may also be deemed to beneficially own such shares.

 (6) Includes 102,000 shares that Mr. Leeolou has the right to acquire under
     presently exercisable stock options granted to him under the Company's
     stock option plans. Does not include shares owned by Vanguard, for which
     Mr. Stephen Leeolou serves as a director and executive officer. Mr. Stephen
     Leeolou disclaims beneficial ownership of such shares.

 (7) Includes 41,350 shares that Mr. Penwell has the right to acquire under
     presently exercisable stock options granted to him under the Company's
     stock option plans.

 (8) Includes 15,400 shares that Mr. Nash has the right to acquire under
     presently exercisable stock options granted to him under the Company's
     stock option plans. Also includes 816,902 shares owned of record by CSI
     that may be deemed beneficially owned by Mr. Nash.

 (9) Includes 18,000 shares that Mr. Ludington has the right to acquire under
     presently exercisable stock options granted to him under the Company's
     stock option plans, and 17,113 shares held by a trust for the benefit of
     his children.

(10) Includes 42,200 shares shares that Mr. Emerson has the right to acquire
     under presently exercisable options granted to him under the Company's
     stock option plans. Includes 30,000 shares held by a trust for the benefit
     of his sons, 5,000 shares held by an entity controlled by Mr. Emerson, and
     4,600 shares held by members of his immediate family.

(11) Includes 32,600 shares that Mr. Griffin has the right to acquire under
     presently exercisable options granted to him under the Company's stock
     option plans, and 85,702 shares owned by a partnership of which his brother
     is general partner. Does not include shares owned by Vanguard, for which
     Mr. Griffin serves as a director and executive officer. Mr. Griffin
     disclaims beneficial ownership of such shares.

(12) Includes 39,600 shares that Mr. Preyer has the right to acquire under
     presently exercisable options granted to him under the Company's stock
     option plans. Does not include shares owned by Vanguard, for which Mr.
     Preyer serves as a director and executive officer. Mr. Preyer disclaims
     beneficial ownership of such shares.

(13) Includes 20,000 shares that Mr. Vinchesi has the right to acquire under
     presently exercisable options granted to him under the Company's stock
     option plans.

(14) Represents 50,000 shares held by the Smith Richardson Foundation, of which
     Mr. Richardson serves as one of eight trustees and 50,000 shares held by
     Piedmont Harbor-Piedmont Associates Limited Partnership, of which Mr.
     Richardson is a general partner. The shares held by the Smith Richardson
     Foundation are also reported as beneficially owned by Robert M. DeMichele.
     Mr. Richardson disclaims beneficial ownership of the shares held by such
     foundation and partnership. Does not include shares owned by Vanguard, for
     which Mr. Richardson serves as a director and executive officer. Mr.
     Richardson disclaims beneficial ownership of such shares. Includes 13,500
     shares that Mr. Richardson has the right to acquire under the presently
     exercisable options granted to him under Company's stock option plans.

(15) Includes 6,000 shares shares that Mr. Silverberg has the right to acquire
     under presently exercisable options granted to him under the Company's
     stock option plans.

(16) Includes 50,000 shares held by the Smith Richardson Foundation, of which
     Mr. DeMichele serves as one of eight trustees. The shares held by the Smith
     Richardson Foundation are also reported as

                                              (footnotes continued on next page)

                                       38







<PAGE>
(footnotes continued from previous page)
     beneficially owned by Stuart S. Richardson. Mr. DeMichele disclaims
     beneficial ownership of the shares held by such foundation. Includes 13,500
     shares that Mr. DeMichele has the right to acquire under presently
     exercisable options granted to him under the Company's stock option plans.

(17) Includes 14,000 shares that Mr. Manna has the right to acquire under
     presently exercisable options granted to him under the Company's stock
     option plans.

(18) Does not include the 363,636 shares owned by Toronto Dominion Investments,
     Inc., an affiliate of Mr. Rich's employer, Toronto Dominion Bank. Includes
     6,000 shares that Mr. Rich has the right to acquire under presently
     exercisable options granted to him under the Company's stock option plans.

(19) Includes 372,150 shares, shares that may be purchased under presently
     exercisable options granted to directors and officers under the Company's
     stock option plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company was incorporated in 1993 and in April of that year purchased
certain technology and other assets, including software and trademarks and
service marks under which the ILN was developed, and assumed certain
liabilities, of Clearing Systems, Inc. ('CSI') in exchange for 816,902 shares of
the Company's authorized Common Stock. CSI is a Delaware corporation founded in
1992 whose principal shareholders are Paul A. Nash, a director of the Company,
and Michael R. Jones, a former director of the Company. CSI was the shell
corporation under which certain of the Company's technology was first developed
and has had no business operation. On June 15, 1993, Mr. Jones assigned to the
Company his rights as licensee of certain patent rights, including the patent
presently used in the Company's business. See Part I, Item 1.
'Business -- Intellectual Property Matters'.

     From time to time after such purchase, the Company has obtained capital for
its business by issuing shares of its Common Stock in private transaction and
directors, officers, and principal shareholders of the Company and members of
their immediate families and certain related entities have purchased shares. The
first of these transactions was consummated April 1993, whereby the Company
issued 1,999,998 shares of its Common Stock at a purchase price of approximately
$1.02 per share to certain individual investors including Messrs. Preyer,
Griffin, Leeolou, Emerson, and Ludington.

     In connection with their April 1993 purchases of Common Stock, the initial
investors agreed to lend the Company and aggregate of $1.6 million. These loans
were made to the Company in 1994 and included loans made by the following
investors in the amounts indicated: Mr. Preyer, $196,722; Mr. Griffin, $196,722;
Mr. Leeolou, $196,722; Mr. Emerson, $177, 050; and Mr. Ludington, $65,574. Also
included were loans made by Alonzo Family Partners, Ltd., a limited partnership
owned by the brother of Haynes G. Griffin and certain members of the brother's
immediate family, and Mr. Penwell, who each purchased part of an initial
investor's interest and agreed to fulfill a portion his loan commitment. The
promissory notes issued for such loans, bearing interest with rates from prime
plus 2% to 15%, were exchanged for 8.5% convertible notes in 1995 in the same
principal amount and with a conversion price of $5.00 per share.

     In May 1995, Vanguard, purchased 400,000 shares of Common Stock of the
Company at a purchase price of $5.00 per share. In connection with such
purchase, Vanguard received a warrant to purchase up to an additional 10.27% of
the Common Stock of the Company (the 'Vanguard Warrant'). The Vanguard Warrant
was restructured immediately prior to consummation of the Private Placement to
provide Vanguard with the right to buy 900,113 shares at any time before May 5,
2005 at $23.50 per share.

     On October 13, 1995, the Board of Directors approved a private offering of
Common Stock at a purchase price of $5.50 per share, pursuant to which $18.1
million of Common Stock was sold. The Purchasers included Mr. Preyer (45,454
shares), Mr. Griffin (45,454 shares), Mr. Leeolou (45,454 shares) Mr. DeMichele
(10,000 shares), Alonzo Family Partners, Ltd. (36,363 shares), Shipyard
Associates, a general partnership of which certain of Mr. Emerson's family
members and an entity affiliated with Mr. Emerson were general partners,
Vanguard (1,454,546 shares), Toronto Dominion Investments, Inc.

                                       39







<PAGE>
('TDI') (363,636 shares), and Piedmont Acorn Investors Limited Partnership
(786,286 shares). In connection with this offering, purchasers of $250,000 or
more of Common Stock received warrants to purchase a number of shares of Common
Stock equal to 5% of the shares purchased in the offering and purchasers of
$1,000,000 or more of Common Stock received warrants to purchase a number of
shares of Common Stock equal to 10% of the shares purchased in the offering.
Purchasers of Common Stock in this offering who were also purchasers of Common
Stock in 1994 and earlier 1995 offerings (excluding Vanguard) were also offered
warrants (at a purchase price of $.01 per warrant share) to purchase Common
Stock. The exercise price of the warrants in this offering will equal the
average sales price of the next $2 million of Common Stock issued and sold by
the Company. Purchasers and recipients of warrants in this offering included Mr.
Preyer (2,773 shares), Mr. Griffin (2,773 shares), Mr. Leeolou (2,773 shares),
Mr. DeMichele (1,000 shares), Vanguard (145,455 shares), Piedmont Acorn
Investors Limited Partnership (78,629 shares), TDI (36,364 shares), Shipyard
Associates (13,750 shares), Smith Richardson Foundation, Inc. (2,500 shares) and
Piedmont Harbor-Piedmont Associates Limited Partnership (2,500 shares). These
warrants expire on December 31, 2000.

     On December 28, 1995, the Company issued to CSI a $375,000 note,
convertible into shares of Common Stock at the rate of $5.50 per share and
bearing interest at the rate of 8.5% per annum, in satisfaction of certain
obligations of the Company to CSI for consulting services rendered. In January
1996, at CSI's request the convertible note was partitioned and distributed to
certain creditors of CSI, including Mr. Nash ($90,000) and Mr. Jones ($216,000).
In connection with Mr. Nash's agreement to assign his interest in a terminal
design to the Company, Mr. Nash's note was prepaid by the Company in January
1996.

     Effective February 1, 1996, the holders of the 8.5% convertible notes
issued in 1995 converted the principal thereof into shares of common stock at
the conversion price of $5.00 per share and accepted Common Stock in lieu of
one-half of the accrued interest thereon at the rate of $5.50 per share. Shares
issued to converting noteholders pursuant to this conversion and interest
payment included the following: Mr. Preyer, 40,864 shares; Mr. Griffin, 40,864
shares; Mr. Leeolou, 40,864 shares; Mr. Emerson, 36,778 shares; Mr. Ludington,
13,620 shares; Mr. Penwell, 3,500 shares; and Alonzo Family Partners, Ltd.,
7,350 shares.

     Effective May 31, 1996, other promissory notes issued in 1994 to Mr.
Emerson, Mr. Griffin, Mr. Leeolou, Mr. Preyer and Mr. Ludington, including
accrued interest, were exchanged for shares of the Common Stock at the rate of
$5.50 per share. Shares issued to exchanging noteholders pursuant to such
exchange included the following: Mr. Emerson, 11,169 shares; Mr. Griffin, 12,410
shares; Mr. Leeolou, 12,410 shares; Mr. Preyer, 12,410 shares; and Mr.
Ludington, 4,136 shares.

     In June 1996, the Company entered into a management services agreement with
Vanguard for a two year term (the 'Management Services Agreement'). Pursuant to
the terms of the Management Services Agreement, Vanguard provides services to
the Company from time to time to assist the Company in developing accounting,
human resources, information management, legal compliance, sales training,
research and development, business development and operation procedures, and
systems and programs. In June 1996 and again in June 1997 the Company issued
10,000 shares of Common Stock to Vanguard as compensation for its services under
the Management Services Agreement. For the fiscal years December 31, 1997 and
September 28, 1996, the Company also reimbursed Vanguard $218,000 and $71,000,
respectively, for its out-of-pocket expenses incurred in rendering such
services.

     In connection with their respective investments, Vanguard and TDI each
entered into agreements providing certain rights to have their shares of the
Company's Common Stock registered under the Securities Act. If the Company
proposes to make a registered public offering of any of its securities under the
Securities Act, other than certain specified types of offerings, the Company
will be obligated to give written notice of the proposed registration to
Vanguard and TDI. Upon receipt of such written notice of the proposed
registration, Vanguard and TDI will be entitled to request that all or a portion
of their Common Stock be included in such registration offering (a 'Piggyback
Registration') except in certain specified circumstances. The agreements also
provide that, at any time after six months from the date the first registration
statement filed under the Securities Act by the Company becomes effective, the
shareholder is entitled to request registration for sale under the Securities
Act of all or a portion of its Common Stock (a 'Demand Registration'), provided
that the shareholder shall not be entitled to

                                       40







<PAGE>
request any Demand Registration within the 12-month period immediately following
the date of any previous request for a Demand Registration. These rights to
Piggyback and Demand Registrations expire at such time as the recipient's shares
subject to such registration rights may be sold pursuant to Rule 144(k) of the
Securities Act.

     In August 1996, Vanguard purchased 18,000 of the Units sold in the Private
Placement.

     Inter*Act has received, and expects to continue receiving, substantial
business development support from its three largest shareholders: Vanguard, one
of the largest independent operators of cellular telephone systems in the United
States; the Richardson Family, founders and former operators of the consumer
products company Richardson-Vicks, Inc.; and Toronto Dominion Investments, Inc.,
a wholly owned indirect subsidiary of Toronto Dominion Bank, which is one of the
largest media finance institutions in the world.

     Stephen R. Leeolou, Chief Executive Officer and Chairman of the Company, is
a co-founder of Vanguard and currently serves as its President and a member of
its Board of Directors. The Board of Directors of Vanguard recently announced
its intention to elect him to the position of Chief Executive Officer of
Vanguard in May 1998. Other directors of Vanguard are also directors of
Inter*Act and, through a voting agreement with a majority of the Company's
stockholders, Vanguard is entitled to have six of its designees on the Company's
Board of Directors. See Part III, Item 10. 'Directors and Executive Officers of
the Company'.

     Stock options have been granted under the Company's stock option plans from
time to time the Company directors and officers. See Part III, Item 10,
'Directors and Executive Officers of the Registrant' and Part III, Item 11,
'Executive Compensation'.

                                       41




<PAGE>
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K

     (a) List of documents filed as part of this report:

          1. The financial statements listed on page F-1.

          2. All schedules are omitted because they are not applicable, not
     required or the requested information is included in the Consolidated
     Financial Statements or notes thereto.

          3. Exhibits to this report are listed below and in the accompanying
     Index to Exhibits.

<TABLE>
<CAPTION>
EXHIBIT NO.                                                  DESCRIPTION
------------    -----------------------------------------------------------------------------------------------------
<C>    <S>      <C>
     *3 (a)(1)  Articles of Incorporation of the Company, with amendments, through June 12, 1996.
  ****3 (a)(2)  Articles of Amendment of the Company, dated May 21, 1997 and effective June 3, 1997.
  ****3 (b)     Amended and Restated Bylaws of the Company.
     *4 (a)     Specimen Certificate of the Company's Common Stock.
     *4 (b)     Indenture dated August 1, 1996, between the Company and Fleet National Bank, as trustee, relating to
                $142,000,000 in principal amount of 14% Senior Discount Notes due 2003.
    *10 (a)     Management Services Agreement dated June 17, 1996, between the Company and Vanguard Cellular Systems,
                Inc.
    *10 (b)     Consulting Agreement dated January, 1996, between the Company and Vanguard Cellular Systems, Inc.
    *10 (c)     Registration Rights Agreement dated May 5, 1995, between the Company and Vanguard Cellular Systems,
                Inc.
    *10 (d)     Amendment No. 1 to Registration Rights Agreement dated October, 1995, between the Company and
                Vanguard Cellular Systems, Inc.
    *10 (e)     Registration Rights Agreement dated March, 1996 between the Company and Toronto Dominion Investments,
                Inc.
    *10 (f)     Subscription Agreement dated October, 1995, between the Company and Vanguard Cellular Systems, Inc.
    *10 (g)     Company's 1996 Nonqualified Stock Option Plan.
    *10 (h)     Form of Nonqualified Stock Option Agreement.
    *10 (i)     Company's 1994 Stock Compensation Plan.
    *10 (j)     Form of Incentive Stock Option Agreement.
    *10 (k)     Amended and Restated Common Stock Purchase Warrant granted to Vanguard Cellular Operating Corp.
    *10 (l)     Warrant Agreement dated August 1, 1996, between the Company and Fleet National Bank, as Warrant
                Agent.
    *10 (m)     Shareholders' Agreement dated April 16, 1993, between the Company and its shareholders.
    *10 (n)     Amendment No. 1 to Shareholders' Agreement dated June 17, 1994, between the Company and its
                shareholders.
    *10 (o)     Exchange and Registration Rights Agreement dated July 30, 1996, between the Company and the Initial
                Purchasers.
    *10 (p)     Kiosk Agreement dated September 3, 1996, between the Company and Coleman Research Corporation.
    *10 (q)     Assignment of License Agreement dated June 15, 1993 among Gerald Singer and Arthur Murphy as
                Licensors, Michael R. Jones as Licensee and Network Licensing, Inc. as Assignee.
    *10 (r)     Security Agreement dated June 16, 1993 between Michael R. Jones and Network Licensing, Inc.
    *10 (s)     Sublicense dated June 16, 1993 between Network Licensing, Inc. and the Company.
    *10 (t)     Settlement Agreement and Mutual General Release dated as of September 6, 1994 among Gerald R. Singer,
                Arthur J. Murphy, Lenora Singer, Joan Murphy, Network Licensing, Inc. and the Company.
    *10 (u)     Amended and Restated Patent Rights Assignment/Consulting Agreement dated as of March 29, 1995 between
                Joseph F. Stratton and the Company.
    *10 (v)     Agreement Regarding Licensing matters dated as of January 22, 1996 among Michael R. Jones, Network
                Licensing, Inc. and the Company.
</TABLE>

                                       42




<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.                                                  DESCRIPTION
------------    -----------------------------------------------------------------------------------------------------
<C>    <S>      <C>
    *10 (w)     Letter Agreement dated July 22, 1996 between Gerald Singer, Arthur J. Murphy and the Company.
    *10 (x)     Assignment dated as of July 23, 1996 from Network Licensing, Inc. to the Company.
   **10 (y)     Purchase Agreement dated July 30, 1996, between the Company and the Initial Purchasers.
  ***10 (z)     Company's 1997 Long-Term Incentive Plan.
     10 (aa)    Form of Incentive Stock Option Agreement.
     10 (bb)    Form of Nonqualified Stock Option Agreement.
     10 (cc)    Patent License Agreement dated August 20, 1997, between the Company and Coupco, Inc. (Portions
                of this exhibit have been omitted pursuant to a request for confidential treatment.)
     10 (dd)    Termination Agreement dated March 24, 1998 between the Company, Coleman Research Corporation and
                Thermo Information Solutions, Inc.
     10 (ee)    Letter Agreement dated March 17, 1997 between the Company and Thomas A. Manna.
     10 (ff)    Letter Agreement dated September 3, 1997 between the Company and James. F. Brandhort, Jr.
     10 (gg)    Form of Employment, Noncompetition and Nondisclosure Agreement.
     21         List of Subsidiaries of the Company.
     27         Financial Data Schedule.
</TABLE>

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

   * Incorporated by reference to the corresponding exhibit number filed with
     the Company's Registration Statement on Form S-4 (Registration No.
     333-12091)

  ** Incorporated by reference to exhibit 1 filed with the Company's
     Registration Statement on Form S-4 (Registration No. 333-12091)

 *** Incorporated by reference to the corresponding exhibit number filed with
     the Company's Quarterly Report on Fom 10-Q for the period ended March 31,
     1997.

**** Incorporated by reference to the corresponding exhibit number filed with
     the Company's Quarterly Report on Form 10-Q for the period ended June 30,
     1997.

     (b) Reports on Form 8-K:

     The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the fourth quarter of 1997.

     (c) Exhibits:

     See (a) 3. above for a listing of Exhibits filed as a part of this Report.

     (d) Additional Financial Statement Schedules:

     None. Additional financial statement schedules are not filed herewith, as
the information required therein is either not applicable, or can be found in
the Consolidated Financial Statements or the Notes thereto.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT

     Neither an annual report covering the Company's last fiscal year nor proxy
materials with respect to any annual or other meeting of security holders have
been sent to security holders.

     The Company currently anticipates that it will send to security holders an
annual report covering the year ended December 31, 1997 at a future date.

                                       43





<PAGE>
                                   SIGNATURES

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

                                          INTER*ACT SYSTEMS, INCORPORATED

                                          By: /s/ RICHARD A. VINCHESI, JR.
                                             ...................................
                                              RICHARD A. VINCHESI, JR., SENIOR
                                                     VICE PRESIDENT,
                                             CHIEF OPERATING OFFICER AND CHIEF
                                                    FINANCIAL OFFICER

March 30, 1998

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

<TABLE>
<CAPTION>
                SIGNATURE                                      TITLE                              DATE
------------------------------------------  --------------------------------------------   -------------------
<C>                                         <S>                                            <C>
          /S/ STEPHEN R. LEEOLOU            Chairman of the Board of Directors and Chief     March 30, 1998
 .........................................    Executive Officer and Treasurer
           (STEPHEN R. LEEOLOU)

       /S/ RICHARD A. VINCHESI, JR.         Senior Vice President, Chief Operating           March 30, 1998
 .........................................    Officer and Chief Financial Officer
        (RICHARD A. VINCHESI, JR.)            (principal accounting and principal
                                              financial officer)

         /S/ WILLIAM F. PENWELL             Vice Chairman of the Board of Directors          March 31, 1998
 .........................................
           (WILLIAM F. PENWELL)

             /S/ PAUL A. NASH               Senior Vice President, Director                  March 30, 1998
 .........................................
              (PAUL A. NASH)

         /S/ ROBERT M. DEMICHELE            Director                                         March 30, 1998
 .........................................
          (ROBERT M. DEMICHELE)

       /S/ WILLIAM P. EMERSON, JR.          Director                                         March 30, 1998
 .........................................
        (WILLIAM P. EMERSON, JR.)

          /S/ HAYNES G. GRIFFIN             Director                                         March 30, 1998
 .........................................
           (HAYNES G. GRIFFIN)

         /S/ RICHARD P. LUDINGTON           Director                                         March 30, 1998
 .........................................
          (RICHARD P. LUDINGTON)

      /S/ L. RICHARDSON PREYER, JR.         Director                                         March 30, 1998
 .........................................
       (L. RICHARDSON PREYER, JR.)

            /S/ BRIAN A. RICH               Director                                         March 30, 1998
 .........................................
             (BRIAN A. RICH)

                                            Director                                         March   , 1998
 .........................................
          (STUART S. RICHARDSON)

                                            Director                                         March   , 1998
 .........................................
          (ROBERT A. SILVERBERG)
</TABLE>

                                       44



<PAGE>
                        INTER*ACT SYSTEMS, INCORPORATED
                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                              -----
<S>                                                                                                           <C>
Report of Independent Public Accountants...................................................................     F-2
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996..................................     F-3
Consolidated Statements of Operations for the year ended December 31, 1997, the three month period ended
  December 31, 1996 and the fiscal years ended September 28, 1996 and September 30, 1995...................     F-4
Consolidated Statements of Cash Flows for the year ended December 31, 1997, the three month period ended
  December 31, 1996 and the fiscal years ended September 28, 1996 and September 30, 1995...................     F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the year ended December 31, 1997, the three
  month period ended December 31, 1996 and the fiscal years ended September 28, 1996 and September 30,
  1995.....................................................................................................     F-6
Notes to Consolidated Financial Statements.................................................................     F-7
</TABLE>

                                      F-1





<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To INTER*ACT SYSTEMS, INCORPORATED:

     We have audited the accompanying consolidated balance sheets of Inter*Act
Systems, Incorporated (a North Carolina corporation) and Subsidiaries as of
December 31, 1997 and December 31, 1996, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
years ended September 28, 1996 and September 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Inter*Act Systems,
Incorporated and Subsidiaries as of December 31, 1997 and December 31, 1996, and
the results of their operations and their cash flows for the year ended December
31, 1997, the three month period ended December 31, 1996 and the fiscal years
ended September 28, 1996 and September 30, 1995, in conformity with generally
accepted accounting principles.

                                          ARTHUR ANDERSEN LLP

New York, New York
March 17, 1998

                                      F-2





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,      DECEMBER 31,
                                                                                        1997              1996
                                                                                    ------------      ------------
                                                                                     (IN THOUSANDS, EXCEPT SHARE
                                                                                                DATA)
<S>                                                                                 <C>               <C>
                                     ASSETS
Current assets:
     Cash and cash equivalents...................................................     $ 45,211          $ 88,306
     Receivables, net............................................................          813               617
     Other current assets........................................................        3,067               807
                                                                                    ------------      ------------
          Total current assets...................................................       49,091            89,730
Property, plant and equipment, net...............................................       26,900            11,690
Bond issuance costs, net.........................................................        3,302             3,720
Patents, licenses and trademarks, net............................................        1,687               227
Other noncurrent assets..........................................................           43               398
                                                                                    ------------      ------------
          Total assets...........................................................     $ 81,023          $105,765
                                                                                    ------------      ------------
                                                                                    ------------      ------------

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
     Accounts payable............................................................     $  3,204          $  1,243
     Accrued expenses............................................................        6,870             1,778
     Deferred revenue............................................................          539               479
                                                                                    ------------      ------------
          Total current liabilities..............................................       10,613             3,500
Long-term debt, net of discount..................................................       91,406            76,866
Other noncurrent liabilities.....................................................       --                   292
                                                                                    ------------      ------------
          Total liabilities......................................................      102,019            80,658
                                                                                    ------------      ------------
Common stock purchase warrants...................................................       27,436            24,464
                                                                                    ------------      ------------
Stockholders' equity (deficit):
     Preferred stock, no par value, authorized 5,000,000 shares; none
       outstanding...............................................................       --                --
     Common stock, no par value, authorized 20,000,000 shares; 7,728,555, and
       7,668,555 shares issued and outstanding at December 31, 1997 and December
       31, 1996, respectively....................................................       28,251            27,651
       Additional paid-in capital................................................          768               768
     Deferred compensation.......................................................         (570)             (723)
     Cumulative translation adjustments..........................................          (14)           --
     Accumulated deficit.........................................................      (76,867)          (27,053)
                                                                                    ------------      ------------
          Total stockholders' equity (deficit)...................................      (48,432)              643
                                                                                    ------------      ------------
          Total liabilities and stockholders' equity (deficit)...................     $ 81,023          $105,765
                                                                                    ------------      ------------
                                                                                    ------------      ------------
</TABLE>

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

                                      F-3





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       THREE MONTH
                                                                          PERIOD             FISCAL YEAR ENDED
                                                        YEAR ENDED        ENDED        ------------------------------
                                                       DECEMBER 31,    DECEMBER 31,    SEPTEMBER 28,    SEPTEMBER 30,
                                                           1997            1996            1996             1995
                                                       ------------    ------------    -------------    -------------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                    <C>             <C>             <C>              <C>
Gross sales.........................................     $  1,672        $    408        $     492         $   255
     Less: Retailer reimbursements..................         (964)           (240)            (287)           (144)
                                                       ------------    ------------    -------------    -------------
          Net sales.................................          708             168              205             111
                                                       ------------    ------------    -------------    -------------
Operating expenses:
     Direct costs...................................        5,784             939            2,298             903
     Selling, general and administrative expenses...       26,352           3,077            6,911           3,391
     Depreciation and amortization of intangibles...        3,934             468              821             191
                                                       ------------    ------------    -------------    -------------
          Total operating expenses..................       36,070           4,484           10,030           4,485
                                                       ------------    ------------    -------------    -------------
Operating loss......................................      (35,362)         (4,316)          (9,825)         (4,374)
                                                       ------------    ------------    -------------    -------------
Other income (expense)
     Interest income................................        3,892           1,249            1,009              35
     Interest expense...............................      (18,033)         (4,263)          (2,743)           (187)
     Other expense..................................         (301)         --              --               --
                                                       ------------    ------------    -------------    -------------
          Total other expense.......................      (14,442)         (3,014)          (1,734)           (152)
                                                       ------------    ------------    -------------    -------------
Income (loss) before income taxes...................      (49,804)         (7,330)         (11,559)         (4,526)
Income taxes........................................          (10)         --              --               --
                                                       ------------    ------------    -------------    -------------
     Net loss.......................................     $(49,814)       $ (7,330)       $ (11,559)        $(4,526)
                                                       ------------    ------------    -------------    -------------
                                                       ------------    ------------    -------------    -------------
Per share information:
Net loss per common share:
     Basic..........................................     $  (6.48)       $  (0.96)       $   (1.91)        $ (1.27)
                                                       ------------    ------------    -------------    -------------
                                                       ------------    ------------    -------------    -------------
     Diluted........................................     $  (6.48)       $  (0.96)       $   (1.91)        $ (1.27)
                                                       ------------    ------------    -------------    -------------
                                                       ------------    ------------    -------------    -------------
Common shares used in computing per share amounts:
     Basic..........................................        7,692           7,669            6,038           3,556
                                                       ------------    ------------    -------------    -------------
                                                       ------------    ------------    -------------    -------------
     Diluted........................................        7,692           7,669            6,038           3,556
                                                       ------------    ------------    -------------    -------------
                                                       ------------    ------------    -------------    -------------
</TABLE>

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

                                      F-4





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                       THREE MONTH
                                                                          PERIOD             FISCAL YEAR ENDED
                                                        YEAR ENDED        ENDED        ------------------------------
                                                       DECEMBER 31,    DECEMBER 31,    SEPTEMBER 28,    SEPTEMBER 30,
                                                           1997            1996            1996             1995
                                                       ------------    ------------    -------------    -------------
                                                                               (IN THOUSANDS)

<S>                                                    <C>             <C>             <C>              <C>
Cash flows from operating activities:
    Net loss........................................     $(49,814)       $ (7,330)       $ (11,559)        $(4,526)
    Items not affecting cash and cash equivalents:
        Depreciation and amortization of intangible
          assets....................................        3,934             468              821             191
        Loss on disposal of assets..................        1,097          --                   74              10
        Non-cash interest on discounted bonds.......       17,972           4,217            2,626          --
        Equity in earnings of affiliate, net........          301          --              --               --
        Other items, net............................          319              38              381          --
    Changes in working capital:
        Receivables, net............................         (196)           (373)            (169)            (59)
        Accounts payable and accrued expenses.......        6,416           1,038            1,208             588
        Other current assets........................       (2,260)           (866)            (255)            (45)
        Deferred revenues...........................           60             250              207              22
                                                       ------------    ------------    -------------    -------------
            Net cash used in operating activities...      (22,171)         (2,558)          (6,666)         (3,819)
                                                       ------------    ------------    -------------    -------------
Cash flows from investing activities:
        Expenditures for property, plant and
          equipment.................................      (20,110)         (2,584)          (8,739)         (1,702)
        Proceeds from disposal of assets............       --              --                   57          --
        Patent acquisition costs....................         (800)         --              --               --
                                                       ------------    ------------    -------------    -------------
            Net cash used in investing activities...      (20,910)         (2,584)          (8,682)         (1,702)
                                                       ------------    ------------    -------------    -------------
Cash flows from financing activities:
        Net proceeds from issuance of 14% Senior
          Notes.....................................       --              --               90,865          --
        Long-term debt repayments...................       --                 (32)             (20)         --
        Proceeds from common stock issuance, net....       --              --               18,256           5,033
        Net amount due to stockholders..............       --              --              --                  148
        Net amount due (from) to related parties....       --              --                 (339)            200
                                                       ------------    ------------    -------------    -------------
            Net cash (used in) provided by financing
              activities............................       --                 (32)         108,762           5,381
                                                       ------------    ------------    -------------    -------------
Foreign exchange effects on cash and cash
  equivalents.......................................          (14)         --              --               --
                                                       ------------    ------------    -------------    -------------
Net (decrease) increase in cash and cash
  equivalents.......................................      (43,095)         (5,174)          93,414            (140)
Cash and cash equivalents at beginning of period....       88,306          93,480               66             206
                                                       ------------    ------------    -------------    -------------
Cash and cash equivalents at end of period..........     $ 45,211        $ 88,306        $  93,480         $    66
                                                       ------------    ------------    -------------    -------------
                                                       ------------    ------------    -------------    -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
    Interest........................................     $     39        $     10        $      94         $    79
                                                       ------------    ------------    -------------    -------------
                                                       ------------    ------------    -------------    -------------
Supplemental disclosures of non-cash investing and
  financing activities:
    Deferred compensation related to stock options
      granted.......................................     $ --            $ --            $     768         $--
                                                       ------------    ------------    -------------    -------------
                                                       ------------    ------------    -------------    -------------
    Issuance of common stock in consideration of
      certain obligations...........................     $    600        $ --            $   2,141         $--
                                                       ------------    ------------    -------------    -------------
                                                       ------------    ------------    -------------    -------------
    Issuance of common stock purchase warrants in
      connection with the issuance of 14% Senior
      Notes.........................................     $  2,972        $     --        $  24,464         $    --
                                                       ------------    ------------    -------------    -------------
                                                       ------------    ------------    -------------    -------------
</TABLE>

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

                                      F-5





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                                                  TOTAL
                               COMMON STOCK       ADDITIONAL                                   CUMULATIVE     STOCKHOLDERS'
                             -----------------     PAID-IN        DEFERRED      ACCUMULATED    TRANSLATION       EQUITY
                             SHARES    AMOUNT      CAPITAL      COMPENSATION      DEFICIT      ADJUSTMENTS      (DEFICIT)
                             ------    -------    ----------    ------------    -----------    -----------    -------------
                                                                     (IN THOUSANDS)

<S>                          <C>       <C>        <C>           <C>             <C>            <C>            <C>
Balance at September 30,
  1994....................   2,917     $2,222       -$-            $--           $  (3,638)       $--           $  (1,416)
    Issuance of common
      stock...............   1,032      5,172       --             --               --                              5,172
    Forfeiture of common
      stock...............     (18)      (140)      --             --               --                               (140)
    Net loss..............    --         --         --             --               (4,526)                        (4,526)
                             ------    -------      -----           -----       -----------         ---       -------------
Balance at September 30,
  1995....................   3,931      7,254       --             --               (8,164)       --                 (910)
    Issuance of common
      stock...............   3,329     18,311       --             --               --            --               18,311
    Conversion of certain
      obligations to
      common stock........     409      2,086       --             --               --            --                2,086
    Deferred Compensation
      related to stock
      options granted.....    --         --           768            (768)          --            --              --
    Amortization of
      deferred
      compensation........    --         --         --                  6           --            --                    6
    Net loss..............    --         --         --             --              (11,559)       --              (11,559)
                             ------    -------      -----           -----       -----------         ---       -------------
Balance at September 28,
  1996....................   7,669     27,651         768            (762)         (19,723)       --                7,934
    Amortization of
      deferred
      compensation........    --         --         --                 39           --            --                   39
    Net loss..............    --         --         --             --               (7,330)       --               (7,330)
                             ------    -------      -----           -----       -----------         ---       -------------
Balance at December 31,
  1996....................   7,669     27,651         768            (723)         (27,053)       --                  643
    Issuance of common
      stock...............      60        600       --             --               --            --                  600
    Amortization of
      deferred
      compensation........    --         --         --                153           --            --                  153
    Translation
      Adjustment..........    --         --         --             --                               (14)              (14)
    Net loss..............    --         --         --             --              (49,814)          --           (49,814)
                             ------    -------      -----           -----       -----------         ---       -------------
Balance at December 31,
  1997....................   7,729     $28,251       $768          $ (570)       $ (76,867)       $ (14)        $ (48,432)
                             ------    -------      -----          ------       -----------       -----       -------------
                             ------    -------      -----          ------       -----------       -----       -------------
</TABLE>

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

                                      F-6





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

1. BUSINESS DESCRIPTION

     Inter*Act Systems, Incorporated (the 'Company') is one of the nation's
largest in-store operators of customer-interactive electronic marketing systems.
The Company's patented technologies enable consumer products manufacturers
('Manufacturers') and supermarket retailers ('Retailers') to offer
shopper-specific purchase incentives and messages to customers moments before
shopping begins. The Company's proprietary system, called the Inter*Act Loyalty
Network'tm' ('ILN'), utilizes patented, multimedia touch-screen terminals, or
Smart Kiosks'tm', located in the entrance area of retail grocery stores. These
terminals are connected to each store's point-of-sale scanning system which
allows the electronic promotions to be immediately redeemed at the check-out.
This fully automated process virtually eliminates misredemption and fraud
associated with paper coupons, estimated by industry sources to cost
manufacturers hundreds of millions of dollars per year.

     Certain factors could affect Inter*Act's actual future financial results.
These factors include: (i) the Company's limited operating history, significant
losses, accumulated deficit and expected future losses, (ii) the dependence of
the Company on its ability to establish, maintain and expand relationships with
manufacturers to promote brands on the ILN and the uncertainty of market
acceptance for the ILN, (iii) the uncertainty as to whether the Company will be
able to manage its growth effectively, (iv) the early stage of the Company's
products and services and technical and other problems that the Company has
experienced and may experience, (v) risks related to the Company's substantial
leverage and debt service obligations, (vi) the Company's dependence on third
parties such as those who manufacture ILN terminals, (vii) the intensely
competitive nature of the consumer product and promotional industry and (viii)
risks that the Company's rights related to patents, proprietary information and
trademarks may not adequately protect its business, and (ix) the possible
inability of new management to perform their respective roles and the possible
conflicts of interest of the Company's directors, officers and principal
shareholders in certain transactions with the Company.

     From inception to December 31, 1997, the Company has had minimal revenues,
incurred recurring losses and experienced negative operating cash flow and there
is no assurance that the product the Company has developed will achieve success
in the marketplace. The Company intends to raise additional equity or debt
capital to fund its ongoing 1998 and 1999 expansion plans. In addition, the
Company has received several multi-year equipment leasing proposals from
equipment manufacturers for future purchases of ILN equipment. There is no
assurance that such additional capital or equipment financing can be obtained.
In the event that such additional financing is not obtained, the Company
believes that existing cash and cash equivalents, along with reduced or delayed
operating and capital expenditures, will be sufficient to meet the Company's
operating requirements into the first quarter of 1999.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The financial statements include the consolidated accounts of the Company
and its wholly and majority-owned subsidiaries: Network Licensing, Inc. ('NLI'),
Inter*Act International Holdings, Inc. ('Inter*Act International'), Inter*Act
Holdings, Ltd., ('Inter*Act Holdings') and Inter*Act U.K. Ltd. ('Inter*Act
U.K.'). Inter*Act International, Inter*Act Holdings and Inter*Act U.K. were
incorporated during 1997. All intercompany accounts and transactions have been
eliminated in consolidation.

FISCAL YEAR

     On February 13, 1997, the Company elected to change its fiscal year end
from the last Saturday in September to December 31, effective December 31, 1996.
The Company's 1996 and 1995 fiscal years

                                      F-7





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

ended on the Saturday closest to September 30. The financial statements for
fiscal 1996 and 1995 each contain activity for fifty-two weeks.

REVENUE RECOGNITION

     The Company recognizes revenue as electronic discounts are redeemed at
store cash registers. Manufacturers pay a fee to the Company for each
redemption. The fee is composed of 1) a retailer processing fee, 2) a redemption
fee and 3) the face value of the coupon. The Company, in turn, passes through
both the retailer processing fee, which is included in direct operating
expenses, and the face value of the coupon to the Retailer, while retaining the
redemption fee. The Company records as net sales the redemption fee and the
retailer processing fee paid by the Manufacturers. Certain Manufacturers pay the
Company in advance for a portion of anticipated redemptions, and these amounts
are recorded as deferred revenue until earned through redemptions.

CASH AND CASH EQUIVALENTS

     Cash and cash equivalents, which at December 31, 1997 and December 31, 1996
were primarily comprised of money market funds and overnight repurchase
agreements, are stated at cost, which approximates market value. Highly liquid
investments with original maturities of three months or less are considered cash
equivalents.

RECEIVABLES, NET

     Accounts receivable included in current assets are stated net of allowances
for doubtful accounts of approximately $30,000 and $10,000 at December 31, 1997
and at December 31, 1996, respectively. The Company recorded approximately
$30,000 and $10,000 for bad debt expense for the year ended December 31, 1997
and the three month period ended December 31, 1996, respectively. The Company
did not record an allowance for doubtful accounts or bad debt expense for the
fiscal years ended September 28, 1996 or September 30, 1995.

PROPERTY, PLANT AND EQUIPMENT

     Depreciation is generally provided on the straight-line method for
financial reporting purposes over the estimated useful lives of the underlying
assets. Machinery and equipment are depreciated over a period ranging from 3 to
5 years and leasehold improvements are amortized using the straight-line method
over the term of the lease or the estimated useful life of the improvements,
whichever is shorter. In-store machinery and equipment are depreciated over five
years. Repairs and maintenance are charged to expense as incurred.

RESEARCH AND DEVELOPMENT COSTS

     Research and development costs incurred by the Company are included in
selling, general and administrative expenses. Such costs for the year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
years ended September 28, 1996 and September 30, 1995 were $646,000, $121,000,
$800,000 and $623,000, respectively.

BOND ISSUANCE COSTS

     Bond issuance costs incurred by the Company are costs associated with a
private placement offering of 14% Senior Discount Notes during fiscal 1996 (the
'Private Placement') (See Note 6) and are being amortized over seven years using
the effective interest rate method. Accumulated

                                      F-8





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

amortization was $633,000 and $169,000 at December 31, 1997 and at December 31,
1996, respectively. The Company recorded amortization expense on the bond
issuance costs of $464,000, $102,000 and $67,000 for the year ended December 31,
1997, the three month period ended December 31, 1996 and the fiscal year ended
September 28, 1996, respectively.

PATENTS, LICENSES AND TRADEMARKS

     Acquisition costs for patents, licenses and trademarks and legal fees
incurred for the improvement and protection of the Company's patents, licenses
and trademarks have been deferred and are being amortized over fifteen years or
the remaining life of the patent, license or trademark, whichever is less, using
the straight-line method. Accumulated amortization was $95,000 and $34,000 at
December 31, 1997 and December 31, 1996, respectively. The Company recorded
amortization expense of $131,000, $10,000, $22,000 and $2,000 for the year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
years ended September 28, 1996 and September 30, 1995, respectively.

FOREIGN CURRENCY TRANSLATION

     Assets and liabilities of foreign entities have been translated using the
exchange rates in effect at the balance sheet dates. Results of operations of
foreign entities are translated using the average exchange rates prevailing
throughout the period. Local currencies are considered functional currencies of
the Company's foreign operating entities. Translation effects are accumulated as
part of the cumulative foreign translation adjustment in equity. Gains and
losses from foreign currency transactions are included in net loss for the
period. The Company did not incur material foreign exchange gains or losses
during any period presented. The Company has not entered into any derivative
transactions to hedge foreign currency exposure.

LONG-LIVED ASSETS

     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,' requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. The adoption of SFAS No. 121 in the three-month
period ended December 31, 1996 did not have a material effect on the Company's
results of operations, cash flows or financial position.

INCOME TAXES

     The Company accounts for income taxes in accordance with SFAS No. 109,
'Accounting for Income Taxes.' SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes. It also requires the company
to adjust its deferred tax balances in the period of enactment for the effect of
enacted changes in tax rates and to provide a valuation allowance against such
deferred tax assets that are not, more likely than not, to be realized.

STOCK-BASED COMPENSATION

     During the three month period ended December 31, 1996, the Company adopted
the provisions of SFAS No. 123, 'Accounting for Stock-Based Compensation,' by
continuing to apply the provisions of Accounting Principles Board ('APB')
Opinion No. 25, 'Accounting for Stock Issued to Employees,' while providing the
required pro forma disclosures as if the fair value method had been applied.
(See Note 13)

                                      F-9





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

NET LOSS PER SHARE

     Effective December 31, 1997, the Company adopted SFAS No. 128, 'Earnings
Per Share.' (See Note 9.) In accordance with SFAS No. 128, net loss per common
share amounts ('basic EPS') were computed by dividing net loss by the weighted
average number of common shares outstanding and contingently issuable shares
(which satisfy certain conditions) and excluded any potential dilution. Net loss
per common share amounts -- assuming dilution ('diluted EPS') were computed by
reflecting potential dilution from the exercise of stock options and warrants.
SFAS No. 128 requires the presentation of both basic EPS and diluted EPS on the
face of the income statement. Net loss per share amounts for the same prior-year
periods have been restated to conform with the provisions of SFAS No. 128;
however, the result of that restatement was not material. In all periods
presented, the impact of stock options and warrants was anti-dilutive.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets (specifically with
respect to the lives of in-store machinery and equipment) 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.

RECLASSIFICATIONS

     Certain prior year financial statement amounts have been reclassified to
conform with the current year presentation.

3. PROPERTY, PLANT AND EQUIPMENT, NET

     Property, plant and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                DECEMBER 31,      DECEMBER 31,
                                                                    1997              1996
                                                                ------------      ------------
<S>                                                             <C>               <C>
Land and buildings...........................................     $     77          $     16
                                                                ------------      ------------
Machinery and equipment
     In-Store................................................       28,383            11,286
     Other...................................................        3,067             1,784
                                                                ------------      ------------
     Total machinery and equipment...........................       31,450            13,070
                                                                ------------      ------------
                                                                    31,527            13,086
Less: accumulated depreciation...............................       (4,627)           (1,396)
                                                                ------------      ------------
Property, plant and equipment, net...........................     $ 26,900          $ 11,690
                                                                ------------      ------------
                                                                ------------      ------------
</TABLE>

Depreciation expense was approximately $3.8 million, $456,000, $786,000 and
$180,000 for the year ended December 31, 1997, the three month period ended
December 31, 1996 and the fiscal years ended September 28, 1996 and September
30, 1995, respectively.

4. LEASES

     The Company leases office facilities and equipment under various operating
lease agreements expiring through year 2002. Future minimum lease payments under
noncancelable operating leases at December 31, 1997 were as follows:

                                      F-10





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

<TABLE>
<CAPTION>
                                      OPERATING
                                        LEASES
                                    --------------
                                    (IN THOUSANDS)
<S>                                 <C>
1998.............................       $  911
1999.............................          932
2000.............................          330
2001.............................           99
2002.............................           11
                                       -------
                                        $2,283
                                       -------
                                       -------
</TABLE>

Rent expense of $383,000, $57,000, $222,000 and $219,000 was recognized for the
year ended December 31, 1997, the three month period ended December 31, 1996 and
the fiscal years ended September 28, 1996 and September 30, 1995, respectively,
and is included in selling, general and administrative expenses.

5. RELATED PARTY TRANSACTIONS

     On April 14, 1993, the Company entered into an agreement with Clearing
Systems, Inc. ('CSI'), a Delaware corporation, whereby approximately 817,000
shares of the Company's common stock were exchanged for certain assets,
consisting primarily of acquired technology and research and development, at the
then estimated fair market value of $612,000, and assumption of certain
liabilities of CSI. The agreement provided that CSI would consult on matters
pertaining to the Company's technology, vendor relations, customer contacts and
strategic planning and be paid a fee when, and if, the Company installed 50 ILN
terminals or achieved $1,000,000 in revenues. During December 1995, in
anticipation of the Company's limited cash resources, the parties amended the
consulting agreement to provide that CSI would receive a $375,000 note,
convertible into shares of the Company's common stock at a rate of $5.50 per
share and bearing interest at the rate of 8.5% per annum, in satisfaction of the
amounts due under the consulting agreement. The Company has paid $138,500 of the
note and the remaining portion of $236,500 is due December 28, 1998. The entire
consulting fee of $375,000 was recorded as an expense during the fiscal year
ended September 28, 1996.

     The Company is party to various agreements with Vanguard Cellular Financial
Corp. (together with its subsidiaries, 'Vanguard'). As of December 31, 1997,
Vanguard has beneficial ownership of approximately 3.1 million shares of
common stock of the Company and holds 18,000 units issued in the Private
Placement (See Note 6). Stephen R. Leeolou, Chairman and Chief Executive Officer
of the Company, is also co-founder and Co-Chief Executive Officer of Vanguard.

     On June 17, 1996, the Company entered into a management consulting
agreement with Vanguard for a period of two years. Under the agreement, Vanguard
will assist the Company in developing accounting, human resources, information
management, legal compliance, sales training, research and development, business
development and operations procedures, systems and programs. For services
rendered under the agreement, the Company issued 10,000 shares of its common
stock upon execution of the agreement and issued 10,000 shares in June 1997. In
addition, the Company will reimburse Vanguard for any expenses incurred in the
course of providing consulting services. This agreement terminated the previous
consulting agreements dated January 30, 1996, the Company had with Vanguard.
Under the January 30, 1996 agreement, Vanguard was to provide one of its
executive employees to serve in the role of Chief Operating Officer (the 'COO')
of the Company and to provide other consulting services as necessary. All
expenses, including related compensation expenses of such individuals based on
time rendered on the Company's activities, would be paid by the Company. This
agreement was terminated upon execution of the management consulting agreement
with Vanguard on June 17, 1996. The Company has paid Vanguard under such
consulting agreements, approximately

                                      F-11





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

$218,000, $42,000 and $29,000 during the year ended December 31, 1997, the three
month period ended December 31, 1996 and the fiscal year ended September 28,
1996, respectively.

     In May 1995, the Company issued 400,000 shares of common stock to Vanguard
at a Purchase price of $5.00 per share. In connection with this issuance,
Vanguard also received a warrant (the 'Vanguard Warrant') to purchase up to an
additional 400,000 shares of the Company's common stock at the agreed-upon fair
market value of such stock at the time of exercise. This warrant agreement
contains an anti-dilution clause which provides for adjustments to the number of
shares eligible to be purchased to maintain the number of shares at
approximately 10.3% of the Company's outstanding common stock. The warrant
expires on the earlier of (i) May 5, 2005 or (ii) the consummation of an initial
public offering by the Company. The terms of the Vanguard Warrant were
restructured immediately prior to the consummation of the private placement
transaction (see Note 7) to provide that Vanguard has the right to buy 900,113
shares at any time before May 5, 2005 at $23.50 per share, which was, in the
opinion of management, the fair market value of the related common stock at the
date of restructuring. The restructured Vanguard Warrant also provides that
Vanguard may pay the exercise price either in cash or, if the fair market value
of the common stock at the time of exercise is greater than the exercise price,
by surrendering any unexercised portion of the Vanguard Warrant and receiving
the number of shares equal to (i) the excess of fair market value per share at
the time of exercise over the exercise price per share multiplied by (ii) the
number of shares surrendered.

     On May 5, 1995, the Company entered into a Registration Rights Agreement
with Vanguard relating to certain warrants and shares of common stock of the
Company owned by Vanguard. The agreement provides that Vanguard may at any time
after six months from the date the first registration statement filed by the
Company under the Securities Act of 1933 becomes effective, request the Company
to effect the registration of certain securities held by Vanguard as
expeditiously as may be practicable. However, the Company is entitled to decline
such request, if, in the Company's judgment, such demand registration would not
be in the Company's best interest. The Company may only decline such request
once and will only be effective for a three-month period. In addition, the
agreement allows Vanguard certain piggyback registration rights on any security
offerings the Company may undertake, provided, however, the Company's
underwriter determines, in their sole discretion, such shares will not
jeopardize the success of the proposed offering by the Company. The agreement
terminates the earlier of five years from date of the Company's first
registration statement becomes effective or such time as Vanguard may sell its
securities pursuant to Rule 144 under the Securities Act.

6. LONG-TERM DEBT

     Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,    DECEMBER 31,
                                                                       1997            1996
                                                                   ------------    ------------

<S>                                                                <C>             <C>
14% Senior Discount Notes(1)....................................     $ 91,406        $ 76,866
Less: Current portion of long-term debt.........................       --              --
                                                                   ------------    ------------
          Total long-term debt..................................     $ 91,406        $ 76,866
                                                                   ------------    ------------
                                                                   ------------    ------------
</TABLE>

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

(1) In August 1996, the Company, through the Private Placement, issued 142,000
    units, each consisting of a 14% senior discount note due 2003 (collectively,
    the 'Notes') with a principal amount at maturity of $1,000 and a warrant to
    purchase 7.334 shares (adjusting to 9.429 shares at September 30, 1997 if
    the Company did not complete a qualified initial public offering of common
    stock by that date) of common stock of the Company at $.01 per share. The
    gross proceeds of $94.8

                                              (footnotes continued on next page)

                                      F-12





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

(footnotes continued from previous page)

    million were allocated by the Company to the value of the warrants of
    approximately $24.5 million and to the discounted notes of approximately
    $70.2 million. Expenses of the offering of approximately $3.8 million were
    capitalized as bond issuance costs and are being amortized over the
    remaining term of the Notes. The Company did not complete a qualified
    initial public offering of common stock by September 30, 1997; therefore,
    the Company recorded additional common stock purchase warrants of $3.0
    million reflecting the valuation of an additional 297,490 shares, or 2.095
    shares issuable per warrant.

     No cash interest will be payable on the Notes prior to February 1, 2000.
The Notes will accrue cash interest at a rate of 14% per annum, commencing on
August 1, 1999, payable semi-annually on February 1 and August 1 of each year
commencing on February 1, 2000. The debt discount related to the difference
between the face value of the notes ($142 million) and the proceeds of the
Private Placement ($94.8 million) is being accreted over the period to August 1,
1999. The debt discount related to the portion of the Private Placement
allocated to the value of the warrants ($27.4 million, $24.5 million and $24.5
million at December 31, 1997, December 31, 1996 and September 30, 1996,
respectively) is being accreted over the full term of the Notes to August 1,
2003. Interest expense on the notes, including the accretion of debt discount
and amortization of issuance costs, is being recognized at a constant rate of
interest over the life of the Notes. Discount accretion of $17.5 million, $4.1
million and $2.6 million and amortization of bond issuance costs of
approximately $464,000, $102,000 and $67,000 have been recognized as interest
expense during the year ended December 31, 1997, the three month period ended
December 31, 1996 and the fiscal year ended September 28, 1996, respectively. If
additional funds are raised through debt financing, such financing will increase
the financial leverage of the Company and earnings would be reduced by the
associated interest expense. There is no assurance that the Company will be able
to meet its financial obligations under the Notes or other commitments.

7. COMMON STOCK

     During the year ended December 31, 1997, the Company issued 60,000 shares
of Common Stock, 50,000 shares for partial consideration in the acquisition of a
patent and 10,000 shares issued pursuant to the management service agreement the
Company has with Vanguard. (See Note 5) The issuance of such shares was recorded
at $10.00 per share, which management believes approximates the fair market
value of the shares on date of issuance.

     During the fiscal year ended September 28, 1996, the Company issued
approximately 3,738,000 shares of Common Stock of which approximately 3,418,000
shares were issued at a purchase price of $5.50 per share and approximately
320,000 were issued at a purchase price of $5.00 per share. Approximately
3,319,000 shares were issued as part of a private offering of common stock at a
purchase price of $5.50 per share. In connection with this offering, purchasers
of $250,000 or more of common stock received warrants to purchase a number of
shares of common stock equal to 5% of the shares purchased in the offering and
purchasers of $1,000,000 or more of common stock received warrants to purchase a
number of shares of common stock equal to 10% of the shares purchased in the
offering. The exercise price of all warrants issued or sold in connection with
this offering will equal the sales price of the next $2 million of common stock
issued and sold by the Company. Purchasers of common stock in this offering who
were also purchasers of common stock in certain earlier offerings were also
offered warrants (at a purchase price of $.01 per warrant share) to purchase
common stock. Approximately 323,216 warrants were issued under this offering and
expire on December 31, 2000. Also during the year ended September 30, 1996,
10,000 shares of common stock were issued pursuant to the management service
agreement the Company has with Vanguard at the then estimated fair market value
of $5.50 per share. In addition, the Company converted approximately $2.1
million in debt, notes payable and related accrued interest due to stockholders
into 409,000 shares of common stock. Notes

                                      F-13





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

payable to stockholders of $1.6 million bearing interest at 8.5%, maturing on
February 1, 1998 were converted into approximately 320,000 shares of common
stock at a conversion price of $5.00 per share. Fifty percent of accrued
interest on such notes payable were converted into approximately 13,000 shares
at a conversion price of $5.50 per share, the remaining fifty percent of accrued
interest was paid in cash. Other notes payable to stockholders with a principal
amount of approximately $371,000 and related accrued interest of approximately
$47,000 were converted into approximately 76,000 shares of common stock at $5.50
per share.

     During the fiscal year ended September 30, 1995, the Company issued
1,032,000 shares of common stock. Vanguard, through a subsidiary, purchased
400,000 shares of common stock of the Company at a purchase price of $5.00 per
share. In connection with such investment, Vanguard received a warrant to
purchase up to an additional 10.27% of the common stock of the Company at an
exercise price equal to the fair market value of the common stock at the time of
the exercise (the 'Vanguard Warrant'). The Vanguard Warrant was exercisable at
any time prior to the earlier of an underwritten initial public offering or May
5, 2005. The Vanguard Warrant was restructured immediately prior to consummation
of the Private Placement to provide that Vanguard has the right to buy 900,113
shares at any time before May 5, 2005 at $23.50 per share. The restructured
Vanguard Warrant also provides that Vanguard may pay the exercise price either
in cash or, if the fair market value of the common stock at the time of exercise
is greater than the exercise price, by surrendering any unexercised portion of
the Vanguard Warrant and receiving the number of shares equal to (i) the excess
of fair market value per share at the time of exercise over the exercise price
per share multiplied by (ii) the number of shares surrendered.

     Of the remaining 632,000 shares issued during the fiscal year ended
September 30, 1995, approximately 607,000 shares were issued at $5.00 per share
and approximately 25,000 shares were issued at $5.50 per share.

     On September 30, 1994, a stockholder agreed to forfeit 10,000 shares of the
Company's common stock for failure to fulfill an obligation to invest additional
capital in the Company. The forfeiture did not reduce the amount of the
stockholder's financial investment in the Company at that time, but did reduce
the number of shares issued to this individual. These shares were subsequently
reissued to two other individuals at $5.00 per share. In December 1994, the same
stockholder agreed to forfeit an additional 18,000 shares of the Company's
common stock for failure to fulfill an obligation to invest additional capital
in the Company. Upon this forfeiture, the investor's equity in the Company was
reduced in the total amount of $140,000, representing the value of 28,000 shares
of common stock at $5.00 per share. The original forfeiture of 10,000 shares and
subsequent reissuance of the same 10,000 shares at $5.00 per share was recorded
during the fiscal year ended September 30, 1994. The additional forfeiture of
18,000 shares and the entire value of the September 1994 and December 1994
forfeitures of $140,000 was recorded during the fiscal year ended September 30,
1995.

8. COMMON STOCK PURCHASE WARRANTS

     In addition to the Vanguard Warrant to purchase 900,113 shares and the
warrants to purchase an aggregate of 323,216 shares issued in the private
offering described in Note 7, the Company has issued and outstanding other
warrants described below. In August 1996, the Company, through the Private
Placement, issued 142,000 units, each consisting of a 14% senior discount note
due 2003 (collectively, the 'Notes') with a principal amount at maturity of
$1,000 and a warrant to purchase 7.334 shares (adjusting to 9.429 shares at
September 30, 1997 if the Company did not complete a qualified initial public
offering of common stock by that date) of common stock of the Company at $.01
per share. The Company did not complete a qualified public offering of common
stock by September 30, 1997, therefore, the Company recorded additional common
stock purchase warrants of $3.0 million reflecting the valuation of an
additional 297,490 shares, or 2.095 shares issuable per warrant. These warrants
shall be exercisable on or after the earliest to occur of (i) August 1, 2000,
(ii) a change of control, (iii) (a) 90

                                      F-14





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

days after the closing of an initial public offering or (b) upon the closing of
the initial public offering but only in respect of warrants required to be
exercised to permit the holders thereof to sell shares in the initial public
offering, (iv) a consolidation, merger or purchase of assets involving the
Company or any of its subsidiaries that results in the common stock of the
Company becoming subject to registration, (v) an extraordinary cash dividend or
(vi) the voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Company. The number of shares of the common stock for which a
warrant is exercisable is subject to adjustment upon the occurrence of certain
events.

     Holders of warrants (or common stock issued in respect thereof) will be
entitled to include the common stock issued or issuable upon the exercise of the
warrants (the 'Underlying Common Stock') in a registration statement whenever
the Company or any shareholder proposes to effect a public equity offering with
respect to common stock of the Company (other than redeemable stock), except to
the extent the managing underwriter for such offering determines that such
registration and sale would materially adversely affect the price, timing or
distribution of the shares to be sold in such public equity offering. Following
the occurrence of an initial public offering, holders of warrants and Underlying
Common Stock representing not less than 25% of all the outstanding warrants and
Underlying Common Stock, taken together, will have the right, on one occasion,
to require the Company to register these securities pursuant to an effective
registration statement.

     After August 1, 2001, the Company may be required, under certain
circumstances, to purchase, at fair market value, the outstanding warrants and
underlying common stock issued. Depending on the fair market value at that time,
there may be a charge to earnings in connection with the repurchase of warrants
and underlying common stock.

     Management of the Company believes, based on independent third party
valuations, that the value of the Company's common stock at the date of the
initial issuance of these warrants was $23.50 per share and, accordingly,
allocated $24.5 million of the proceeds of the Private Placement to the value of
these warrants based on 142,000 units consisting of warrants to purchase 7.334
shares of common stock per unit with an exercise price of $.01 per share.
Effective September 30, 1997, the Company recorded additional Common Stock
Purchase Warrants of approximately $3.0 million reflecting the valuation of an
additional 297,490 shares, or 2.095 shares issuable per warrant. This aggregate
amount is classified between liabilities and stockholders' equity (deficit) in
the accompanying consolidated balance sheet as of December 31, 1997. The value
of the original warrants and the incremental value of the 2.095 (9.429 less
7.334) warrants issued per unit of the Notes effective September 30, 1997 have,
since their issuance, been accounted for as an additional debt discount subject
to accretion as described in Note 6.

                                      F-15





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

9. NET LOSS PER SHARE

     A reconciliation between the net loss and common shares of the basic and
diluted EPS computations is as follows:
<TABLE>
<CAPTION>



                                            YEAR ENDED               THREE MONTH PERIOD           FISCAL YEAR ENDED
                                        DECEMBER 31, 1997         ENDED DECEMBER 31, 1996         SEPTEMBER 28, 1996
                                    --------------------------   --------------------------   --------------------------
                                                         PER                          PER                          PER
                                                        SHARE                        SHARE                        SHARE
                                    NET LOSS   SHARES   AMOUNT   NET LOSS   SHARES   AMOUNT   NET LOSS   SHARES   AMOUNT
                                    --------   ------   ------   --------   ------   ------   --------   ------   ------
<S>                                 <C>        <C>      <C>      <C>        <C>      <C>      <C>        <C>      <C>
Basic EPS
Net loss attributable to common
  stock...........................  $(49,814)  7,692    $(6.48)  $(7,330)   7,669    $(0.96)  $(11,559)  6,038    $(1.91)
Effect on Dilutive Securities:
  Warrants........................              --                           --                           --
  Stock Options...................              --                           --                           --
                                    --------   ------   ------   --------   ------   ------   --------   ------   ------
Diluted EPS
Net loss attributable to common
  stock and assumed option
  exercise........................  $(49,814)  7,692    $(6.48)  $(7,330)   7,669    $(0.96)  $(11,559)  6,038    $(1.91)
                                    --------   ------   ------   --------   ------   ------   --------   ------   ------
                                    --------   ------   ------   --------   ------   ------   --------   ------   ------

<CAPTION>
                                       FISCAL YEAR ENDED
                                       SEPTEMBER 30, 1995
                                    --------------------------
                                                         PER
                                                        SHARE
                                    NET LOSS   SHARES   AMOUNT
                                    --------   ------   ------
<S>                                 <C>        <C>      <C>
Basic EPS
Net loss attributable to common
  stock...........................  $(4,526)   3,556    $(1.27)
Effect on Dilutive Securities:
  Warrants........................              --
  Stock Options...................              --
                                    --------   ------   ------
Diluted EPS
Net loss attributable to common
  stock and assumed option
  exercise........................  $(4,526)   3,556    $(1.27)
                                    --------   ------   ------
                                    --------   ------   ------

</TABLE>

     There were no reconciling items to be reported by the Company in the
calculation for basic EPS and diluted EPS for the year ended December 31, 1997,
three month period ended December 31, 1996 and the fiscal years ended September
28, 1996 and September 30, 1995. Inclusion of the Company's outstanding common
stock purchase warrants and stock options (See Note 13) would have an
antidilutive effect on earnings per share and, therefore, they are not included
in the calculation of diluted EPS per SFAS No. 128.

10. DEFERRED COMPENSATION

     In September 1996, the Company issued options to purchase 48,000 shares of
common stock at an exercise price of $7.50 per share under the 1996 Nonqualified
Stock Option Plan (See Note 13), which was an exercise price below the
then-estimated fair market value of the Company's common stock on the date of
grant. Accordingly, the Company has recorded a deferred compensation charge of
$768,000, which will be amortized ratably over the five year vesting period of
the related options. Accumulated amortization was $198,000, $45,000 and $6,000
at December 31, 1997, December 31, 1996 and September 28, 1996, respectively.
Amortization expense of deferred compensation was $153,000, $39,000 and $6,000
for the year ended December 31, 1997, the three month period ended December 31,
1996 and for the fiscal year ended September 28, 1996, respectively.

11. LITIGATION

     During the year ended September 28, 1996, a lawsuit was filed and settled
against the Company alleging certain patent infringement. The Company expressly
denied any wrongdoing and entered into such agreement to avoid lengthy
litigation costs. Under the settlement agreement, the Company was required to
pay $400,000, and in return, received, among other things, the worldwide,
perpetual right to use such patent, dismissal with prejudice and release of all
related claims. The cost of the settlement of $400,000 was expensed during the
fiscal year ended September 28, 1996.

     In February 1996, the Company filed suit against Catalina Marketing
Corporation alleging that Catalina has infringed United States Letters Patent
No. 4,554,446 (the '446 Patent') under which the Company is licensee. The
Company alleges that Catalina is infringing the patent by making, using and
offering for sale devices and systems that incorporate and employ inventions
covered by the '446 Patent. The Company is seeking an injunction against
Catalina to stop further infringement of the patent, treble damages and the
costs and expenses incurred in connection with the suit. The complaint has been
amended to add additional detail, and Catalina has answered denying the
allegations, raising certain

                                      F-16





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

affirmative defenses, and seeking declaratory judgment of non-infringement,
invalidity or unenforceability of the '446 Patent. In May 1997, Catalina
asserted a second counterclaim alleging that the Company is infringing a newly
issued Catalina Patent U.S. Patent No. 5,612,868. The Company has answered
denying the allegations, raising affirmative defenses and seeking declaratory
judgment of non-infringement, invalidity and unenforceability of U.S. Patent No.
5,612,868. Discovery on the claims and counterclaims is proceeding and various
motions are pending before the United States District Court in the District of
Connecticut. As with any litigation, the ultimate outcome of these actions
cannot be predicted. However, the Company intends to assert its claims
vigorously.

     In January 1998, Catalina Marketing International, Inc. ('Catalina
International,' a subsidiary of Catalina) filed suit against the Company
alleging that the Company has infringed United States Patent No. 4,674,041 (the
'041 Patent') which Catalina International Inc. acquired by assignment in
December 1997. Catalina International alleges that the Company is infringing the
'041 Patent by making, using and offering for sale devices and systems that
incorporate and employ inventions covered by the '041 Patent. Also in February
1998, Catalina International amended its complaint to join as additional parties
defendant Thermo Information Solutions, Inc. and Coleman Research Corporation
who have manufactured kiosk pursuant to an agreement with the Company. Catalina
International seeks injunctive and declaratory relief as well as unspecified
money damages against all defendants, and has filed a motion for preliminary
injunction against the Company seeking to stop further alleged infringement of
the '041 Patent pending trial. Various other motions are pending in the United
States District Court in the District of Connecticut, including the Company's
motion for a more definite statement. The Company intends to defend against
Catalina International's claims vigorously, and to pursue available remedies
against Catalina International, which may include the filing of appropriate
counterclaims.

12. INCOME TAXES

     The components of cumulative deferred tax assets and liabilities were as
follows (in thousands):

<TABLE>
<CAPTION>
                                                           DECEMBER 31,         DECEMBER 31,
                                                               1997                 1996
                                                         -----------------    -----------------

<S>                                                      <C>                  <C>
Cumulative Amounts:
Deferred Tax Assets:
     Accrued Bonus/Deferred
       Compensation/other.............................       $     174             $    26
     Amortization of Warrant Expense..................           1,545                 384
     Interest Accretion...............................           4,464               1,242
     Other............................................              13                   5
     Bond Issuance Cost Amortization..................             222                  59
     Net Operating Loss Carryforward..................          24,294               8,720
                                                         -----------------    -----------------
          Total Deferred Tax Assets...................          30,712              10,436
                                                         -----------------    -----------------
Deferred Tax Liabilities:
     Depreciation.....................................           (1157)               (527)
                                                         -----------------    -----------------
          Total Deferred Tax Liabilities..............           (1157)               (527)
                                                         -----------------    -----------------
     Net Deferred Tax Asset before Valuation
       Allowance......................................          29,555               9,909
                                                         -----------------    -----------------
     Valuation Allowance..............................         (29,555)             (9,909)
                                                         -----------------    -----------------
          Net Deferred Tax Asset......................       $--                   $--
                                                         -----------------    -----------------
                                                         -----------------    -----------------
</TABLE>

     In accordance with the provisions of Internal Revenue Code Section 382,
utilization of the Company's net operating loss carryforwards could be limited
in years following a change in the Company's ownership. In general, a change in
ownership occurs if a shareholder's (or the combined

                                      F-17





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

group of the shareholders each owning less than 5%) ownership increases 50
percentage points over a three year period. This change could occur at the time
of an Initial Public Offering. The net operating loss limitation is computed by
applying a percentage (approximately 5%, as determined by the Internal Revenue
Code) to the value of the Company on the date of the change. The Section 382
limitation limits the use of the net operating loss carryforward as computed on
the date of the change in ownership. Net operating losses incurred after the
date of the change of ownership are not limited unless another change in
ownership occurs. At December 31, 1997 the amount of net operating loss
carryforward is approximately $54.4 million. These losses begin to expire in the
2008 tax year.

     Creditable foreign taxes paid by the Company or its subsidiaries will be
subject to Internal Revenue Code Section 904, Limitation on Foreign Tax Credit,
because the Company does not have a Federal Income Tax liability. The Foreign
Tax Credit limitation may be carried back two years and forward five years. The
Company has the option of deducting these foreign taxes in lieu of the credit.
In general, since the Company does not have a federal tax liability, the
deduction method will increase the amount of net operating losses which are
available to be carried forward fifteen years. As of December 31, 1997 the
Company has not paid or accrued foreign taxes.

     SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets may not be realized.
At each of the balance sheet dates, a valuation allowance for the full amount of
the net deferred tax asset was recorded. This valuation allowance is recorded
due to both the uncertainty of future income and the possible application of
Internal Revenue Code Section 382 limitations on the use of the net operating
loss carryforwards.

13. STOCK OPTION PLANS

     The Company has in place the 1994 Stock Compensation Plan which provides
for the issuance of shares of Common Stock to key employees, consultants and
directors pursuant to stock options that meet the requirements of Section 422 of
the Internal Revenue Code of 1986, as amended (incentive stock options), options
that do not meet such requirements (nonqualified stock options) and stock
bonuses. All options under the plan must be granted at an exercise price not
less than fair market value. Stock bonuses may be in the form of grants of
restricted stock. The aggregate number of shares of Common Stock that may be
issued pursuant to the plan may not exceed 330,000 shares, subject to adjustment
upon occurrence of certain events affecting the Company's capitalization. As of
December 31, 1997 an aggregate of 17,900 shares remain available for future
grants under the 1994 Stock Compensation Plan.

     The Company also has in place the 1996 Nonqualified Stock Option Plan which
provides for the issuance of shares of Common Stock to key employees,
consultants and directors pursuant to nonqualified stock options. All options
must be granted at an exercise price not less than $5.50 per share. The
aggregate number of shares of Common Stock that may be issued pursuant to the
plan may not exceed 600,000 shares of Common Stock, subject to adjustment upon
occurrence of certain events affecting the Company's capitalization. This plan
is subject to shareholder approval. As of December 31, 1997 an aggregate of
17,000 shares remain available for future grants under the 1996 Nonqualified
Stock Option Plan.

     On May 20, 1997, the Company established the 1997 Long-term Incentive Plan
('Long-term Incentive Plan') for the purpose of promoting the long-term
financial performance of the Company by providing incentive compensation
opportunities to officers, supervisory employees, directors or consultants of
the Company or any subsidiary. The plan allows for the Company to grant Stock
Options for the purchase of shares of Stock to Grantees under the Plan in such
amounts as the Compensation Committee of the Board of Directors, in its sole
discretion, determines. The Stock Options granted under the Plan will be
designated as either: (i) Incentive Stock Options or (ii) Nonqualified Stock
Options. The purchase price for shares acquired pursuant to the exercise, will
be determined at the time

                                      F-18





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

of grant; however, it will not be less than the fair market value of the shares
at the time of the grant. The Long-term Incentive Plan also allows the Company
to grant Stock Appreciation Rights in any amount, at its sole discretion, either
alone or in combination with other Awards granted under the Plan. As of December
31, 1997, 367,900 of 500,000 total available options have been issued under the
Long-term Incentive Plan at an exercise price of $10.00 per share. Management
believes that these options were granted at fair market value of common stock at
the date of grant. No Stock Appreciation Rights were awarded as of December 31,
1997. The awards vest annually over five years from the date of grant with the
exception of 63,500 options, which became immediately exercisable.

     The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123 (See Note 2), the Company's net
loss and net loss per share would have been changed to the following pro forma
amounts:

<TABLE>
<CAPTION>
                                                                             THREE MONTH
                                                        YEAR ENDED          PERIOD ENDED       FISCAL YEAR ENDED
                                                     DECEMBER 31, 1997    DECEMBER 31, 1996    SEPTEMBER 28, 1996
                                                     -----------------    -----------------    ------------------

<S>                                   <C>            <C>                  <C>                  <C>
Net Loss:                             As Reported        $ (49,814)            $(7,330)             $(11,559)
                                      Pro Forma            (50,353)             (7,355)              (11,832)
Net Loss Per Share:   Basic           As Reported            (6.48)               (.96)                (1.91)
                      Diluted         As Reported            (6.48)               (.96)                (1.91)
                      Basic           Pro Forma              (6.55)               (.96)                (1.96)
                      Diluted         Pro Forma              (6.55)               (.96)                (1.96)
</TABLE>

     Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. A summary
of the status of the Company's stock option plans for the year ended December
31, 1997, the three month period ended December 31, 1996 and the fiscal year
ended September 28, 1996 is presented in the table and narrative below:

<TABLE>
<CAPTION>
                                                                            THREE MONTH
                                                      YEAR ENDED            PERIOD ENDED       FISCAL YEAR ENDED
                                                  DECEMBER 31, 1997      DECEMBER 31, 1996     SEPTEMBER 28, 1996
                                                 --------------------    ------------------    ------------------
                                                              WTD AVG               WTD AVG               WTD AVG
                                                                EX                    EX                    EX
                                                  SHARES       PRICE     SHARES      PRICE     SHARES      PRICE
                                                 ---------    -------    -------    -------    -------    -------

<S>                                              <C>          <C>        <C>        <C>        <C>        <C>
Outstanding at beginning of year..............     821,100    $ 5.40     844,100     $5.40     266,600     $4.77
Granted.......................................     543,400     10.00       --         --       617,500      5.65
Exercised.....................................      --          --         --         --         --         --
Forfeited.....................................       2,200      5.23      (3,000)     5.50      (7,000)     5.00
Expired.......................................     102,400      5.91     (20,000)     5.50     (33,000)     5.08
Outstanding at end of year....................   1,259,900      7.34     821,100      5.40     844,100      5.40
Exercisable at end of year....................     571,250      6.16     332,400      5.15     320,200      5.16
Weighted average fair value of options
  granted.....................................         N/A      7.34         N/A      5.40         N/A      5.40
</TABLE>

     821,100 of the options outstanding at December 31, 1996 have exercise
prices between $1.86 and $7.50, with a weighted average exercise price of $5.40
and a weighted average remaining contractual life of 8.2 years. 332,400 of these
options are exercisable. The remaining options have exercise prices between
$1.86 and $7.50, with a weighted average exercise price of $5.56 and a weighted
average remaining contractual life of 6 years. 332,400 of these options are
exercisable; their weighted average exercise price is $5.15.

     1,259,900 of the options outstanding at December 31, 1997, have exercise
prices between $1.86 and 10.00, with a weighted average exercise price of $7.34
and a weighted average remaining contractual life

                                      F-19





<PAGE>
                         INTER*ACT SYSTEMS, INCORPORATED
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
 1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

of 8.7 years. 571,250 of these options are exercisable. The remaining options
have exercise prices between $1.86 and 10.00 with a weighted average price of
$8.48 and a weighted average remaining contractual life of 9.1 years. 571,250 of
these options are exercisable; their weighted average exercise price is $6.16.

     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes Option Pricing Model with the following weighted-average
assumptions used for grants in the year ended December 31, 1997, the three month
period ended December 31, 1996, and the fiscal year ended September 28, 1996
respectively: risk free interest rates of 6.49%, 6.45%, and 6.60%; and expected
dividend yields of 0%, expected lives of 5 years, and expected stock volatility
of 0 for each respective period.

     The foregoing plans are administered by the Compensation and Stock Option
Committee of the Board of Directors, which is authorized, subject to the
provisions of the plans, to determine to whom and at what time options and
bonuses may be granted and the other terms and conditions of the grant.

14. COMMITMENTS AND CONTINGENCIES

COMMITMENTS FOR TECHNOLOGY

     The Company is party to several patent licensing agreements relating to its
in-store consumer product promotion and couponing business. With respect to one
license agreement under which the Company is assignee, the Company is required
to pay a royalty of 2% of the gross collected revenues of the Company, to the
extent derived from the Company's exploitation of the patent, with such royalty
decreasing to 1% of such revenues after $10 million in aggregate royalties have
been paid to the licensors. This license agreement requires that certain minimum
monthly payments be made to the licensors, and be exceeded within approximately
two years, in order to avoid triggering a termination right on the part of the
licensors. With respect to another license agreement, the Company is required to
pay the licensor a royalty of .8% of the gross collected revenues of the Company
to the extent derived from the Company's exploitation of the patent, until such
time as the licensor has received the aggregate sum of $600,000 after which no
additional royalty payments are required. Under a third agreement, the Company
is required to pay the licensor a royalty of 1% of the gross revenues related to
the Company's exploitation of the patent subject to certain minimum annual
payments, should the Company wish to maintain exclusive rights under such
patent. Under these agreements, the Company recorded royalty payments of
$398,000, $99,000, $333,000 and $274,000 for the year ended December 31, 1997,
the three month period ended December 31, 1996, and for the fiscal years ended
September 28, 1996 and September 30, 1995, respectively.

COMMITMENTS FOR FIXED ASSET PURCHASES

     On September 9, 1996, the Company sold its manufacturing operations to
Coleman Research Corporation ('Coleman') for approximately $2.6 million and
entered into an exclusive supply agreement whereby Coleman is to fulfill the
Company's anticipated requirements for terminals for the next three years with
fixed pricing for the first 5,000 terminals. No material gain or loss was
realized in this transaction. As of March 24, 1998, the Company terminated its
three-year exclusive terminal supply relationship with Coleman and its
subsidiary, Thermo Information Solutions, Inc. ('Thermo') (collectively, the
'Vendors'). As part of this mutual termination agreement, the Company agreed to
pay $4.5 million in installments to pay balances on previously purchased ILN
equipment, to acquire certain inventory and to obtain early release from the
exclusivity provision of the original contract to allow the Company to pursue
relationships with new vendors. Of this amount, $4.1 million was charged to
operating expense during 1997. The Vendors have agreed to return supplies and
terminal parts to the Company, for which approximately $400,000 was reflected in
other current assets of the Company as of December 31, 1997. Further, the
Vendors will supply the Company with 350 additional kiosks.

                                      F-20




<PAGE>
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                                            SEQUENTIAL
EXHIBIT NO.                                            DESCRIPTION                                           PAGE NO.
------------    -----------------------------------------------------------------------------------------   ----------
<C>    <S>      <C>                                                                                         <C>
     *3 (a)(1)  Articles of Incorporation of the Company, with amendments, through June 12, 1996.........
  ****3 (a)(2)  Articles of Amendment of the Company, dated May 21, 1997 and effective June 3, 1997......
  ****3 (b)     Amended and Restated Bylaws of the Company...............................................
     *4 (a)     Specimen Certificate of the Company's Common Stock.......................................
     *4 (b)     Indenture dated August 1, 1996, between the Company and Fleet National Bank, as trustee,
                relating to $142,000,000 in principal amount of 14% Senior Discount Notes due 2003.......
    *10 (a)     Management Services Agreement dated June 17, 1996, between the Company and Vanguard
                Cellular Systems, Inc....................................................................
    *10 (b)     Consulting Agreement dated January, 1996, between the Company and Vanguard Cellular
                Systems, Inc.............................................................................
    *10 (c)     Registration Rights Agreement dated May 5, 1995, between the Company and Vanguard
                Cellular Systems, Inc....................................................................
    *10 (d)     Amendment No. 1 to Registration Rights Agreement dated October, 1995, between the Company
                and Vanguard Cellular Systems, Inc.......................................................
    *10 (e)     Registration Rights Agreement dated March, 1996 between the Company and Toronto Dominion
                Investments, Inc.........................................................................
    *10 (f)     Subscription Agreement dated October, 1995, between the Company and Vanguard Cellular
                Systems, Inc.............................................................................
    *10 (g)     Company's 1996 Nonqualified Stock Option Plan............................................
    *10 (h)     Form of Nonqualified Stock Option Agreement..............................................
    *10 (i)     Company's 1994 Stock Compensation Plan...................................................
    *10 (j)     Form of Incentive Stock Option Agreement.................................................
    *10 (k)     Amended and Restated Common Stock Purchase Warrant granted to Vanguard Cellular Operating
                Corp.....................................................................................
    *10 (l)     Warrant Agreement dated August 1, 1996, between the Company and Fleet National Bank, as
                Warrant Agent............................................................................
    *10 (m)     Shareholders' Agreement dated April 16, 1993, between the Company and its
                shareholders.............................................................................
    *10 (n)     Amendment No. 1 to Shareholders' Agreement dated June 17, 1994, between the Company and
                its shareholders.........................................................................
    *10 (o)     Exchange and Registration Rights Agreement dated July 30, 1996, between the Company and
                the Initial Purchasers...................................................................
    *10 (p)     Kiosk Agreement dated September 3, 1996, between the Company and Coleman Research
                Corporation..............................................................................
    *10 (q)     Assignment of License Agreement dated June 15, 1993 among Gerald Singer and Arthur Murphy
                as Licensors, Michael R. Jones as Licensee and Network Licensing, Inc. as Assignee.......
    *10 (r)     Security Agreement dated June 16, 1993 between Michael R. Jones and Network Licensing,
                Inc......................................................................................
    *10 (s)     Sublicense dated June 16, 1993 between Network Licensing, Inc. and the Company...........
    *10 (t)     Settlement Agreement and Mutual General Release dated as of September 6, 1994 among
                Gerald R. Singer, Arthur J. Murphy, Lenora Singer, Joan Murphy, Network Licensing, Inc.
                and the Company..........................................................................
    *10 (u)     Amended and Restated Patent Rights Assignment/Consulting Agreement dated as of March 29,
                1995 between Joseph F. Stratton and the Company..........................................
    *10 (v)     Agreement Regarding Licensing matters dated as of January 22, 1996 among Michael R.
                Jones, Network Licensing, Inc. and the Company...........................................
    *10 (w)     Letter Agreement dated July 22, 1996 between Gerald Singer, Arthur J. Murphy and the
                Company..................................................................................
    *10 (x)     Assignment dated as of July 23, 1996 from Network Licensing, Inc. to the Company.........
</TABLE>




<PAGE>
<TABLE>
<CAPTION>
                                                                                                          SEQUENTIAL
EXHIBIT NO.                                          DESCRIPTION                                           PAGE NO.
------------  -----------------------------------------------------------------------------------------   ----------
<C>    <S>    <C>                                                                                         <C>
   **10 (y)   Purchase Agreement dated July 30, 1996, between the Company and the Initial
              Purchasers...............................................................................
  ***10 (z)   Company's 1997 Long-Term Incentive Plan..................................................
     10 (aa)  Form of Incentive Stock Option Agreement.................................................
     10 (bb)  Form of Nonqualified Stock Option Agreement..............................................
     10 (cc)  Patent License Agreement dated August 20, 1997, between the Company and Coupco, Inc.
              (Portions of this exhibit have been omitted pursuant to a request for confidentiality.)..
     10 (dd)  Termination Agreement dated March 24, 1998 between the Company, Coleman Research
              Corporation and Thermo Information Solutions, Inc........................................
     10 (ee)  Letter Agreement dated March 17, 1997 between the Company and Thomas A. Manna............
     10 (ff)  Letter Agreement dated September 3, 1997 between the Company and James. F. Brandhort,
              Jr.......................................................................................
     10 (gg)  Form of Employment, Noncompetition and Nondisclosure Agreement...........................
     21       List of Subsidiaries of the Company......................................................
     27       Financial Data Schedule..................................................................
</TABLE>

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

   * Incorporated by reference to the corresponding exhibit number filed with
     the Company's Registration Statement on Form S-4 (Registration No.
     333-12091)

  ** Incorporated by reference to exhibit 1 filed with the Company's
     Registration Statement on Form S-4 (Registration No. 333-12091)

 *** Incorporated by reference to the corresponding exhibit number filed with
     the Company's Quarterly Report on Fom 10-Q for the period ended March 31,
     1997.

**** Incorporated by reference to the corresponding exhibit number filed with
     the Company's Quarterly Report on Form 10-Q for the period ended June 30,
     1997.

                           STATEMENT OF DIFFERENCES

The trademark symbol shall be expressed as......................'tm'