<PAGE>

==========================================================================
                              UNITED STATES
                    SECURITIES AND EXCHANGE COMMISSION
                         WASHINGTON, D. C. 20549
                                FORM 10-K

         [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                     SECURITIES EXCHANGE ACT OF 1934
               For the Fiscal Year Ended December 31, 1998
                                    OR
        [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                     SECURITIES EXCHANGE ACT OF 1934

                         Commission file number 0-21980


                           CFI PROSERVICES, INC.
          (Exact name of registrant as specified in its charter)

                       Oregon                               93-0704365
     (State or other jurisdiction of                    (I.R.S. Employer
              incorporation                           Identification No.)
            or organization)

     400 SW Sixth Avenue, Portland, Oregon                     97204
    (Address of principal executive offices)                 (Zip Code)

        Registrant's telephone number, including area code: 503-274-7280

     Securities registered pursuant to Section 12(b) of the Act: None Securities
       registered pursuant to Section 12(g) of the Act:
                        Common Stock, no par value
                             (Title of Class)
                             ---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days: Yes [X] No [ ]

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant  is  $44,109,296  as of February 26, 1999 based upon the last closing
price as reported by the Nasdaq National Market System  ($11.00).  The number of
shares outstanding of the Registrant's  Common Stock as of February 26, 1999 was
5,083,527 shares.


                             ---------------
                   Documents Incorporated by Reference
The  Registrant has  incorporated  into Part III of Form 10-K by reference
portions of its Proxy  Statement  for its 1999 Annual  Meeting to be filed on or
about April 7, 1999.
==========================================================================

<PAGE>

                            CFI PROSERVICES, INC.
                        1998 FORM 10-K ANNUAL REPORT
                              TABLE OF CONTENTS

          PART I                                                      Page

Item 1.   Business                                                      2

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 Financial Data                                      18

Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                    20

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk   35

Item 8.   Financial Statements and Supplementary Data                  35

Item 9.   Changes in and Disagreements With Accountants on Accounting
          and Financial Disclosure                                     35

          PART III

Item 10.  Directors and Executive Officers of the Registrant           35

Item 11.  Executive Compensation                                       35

Item 12.  Security Ownership of Certain Beneficial Owners and          35
          Management

Item 13.  Certain Relationships and Related Transactions               35

          PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form  36
          8-K

Signatures                                                             41

                                       1

<PAGE>

                                PART I

ITEM 1.  BUSINESS

OVERVIEW

CFI is a  leading  provider  of  integrated,  PC-based  software  for  financial
institutions,  including solutions for branch automation, loan origination,  new
account opening, call centers, cross selling of products and electronic banking.
Beginning in 1999 with the Company's  acquisition  of Modern  Computer  Systems,
Inc. (MCS), the Company will also offer hardware and software  solutions for the
back office  accounting needs of community banks and credit unions.  The Company
combines its technology,  banking and legal expertise to deliver knowledge-based
solutions that enable  institutions  to simplify key business  processes such as
sales and service, improve productivity,  strengthen customer relationships, and
maintain compliance with both internal business policies and external government
regulations. More than 6,000 financial institutions have licensed one or more of
the Company's products.

During 1993  substantially  all of the  Company's  revenue was derived  from its
Laser Pro and Deposit Pro  products.  Today,  the Company  licenses more than 20
products  organized  into  four  product  groups:   lending,   retail  delivery,
connectivity  software and host processing.  Due to its product  diversification
efforts,  the  Company  is now less  reliant  on the Laser Pro and  Deposit  Pro
products.  In 1998 approximately 48% of the Company's revenue came from products
other than Laser Pro and Deposit Pro.

CFI generates recurring revenue from software  maintenance  agreements.  In 1998
service and support fees, primarily for Laser Pro and Deposit Pro, accounted for
approximately 35% of total revenue. Substantially all CFI customers subscribe to
the  Company's  service and support  programs,  which  provide  ongoing  product
enhancements  and,  where  applicable,  updates to  facilitate  compliance  with
changing regulations.

The  Company's  cost  structure is  relatively  fixed and the cost of generating
revenue, in aggregate, does not vary significantly with changes in revenue. As a
result,  the Company typically  generates  significantly  greater profit margins
from incremental sales once fixed costs are covered. In addition, any failure to
achieve  revenue targets in a particular  period would  adversely  affect profit
margins for that period.

The Company believes that sales to larger financial institutions will constitute
a higher percentage of total revenue in future periods.  Transactions with these
larger  institutions  are typically of greater scope,  usually involve a greater
sales effort over a longer period of time,  and require more  customization  and
prolonged  acceptance  testing.  This project  oriented  business tends to cause
growth in unbilled accounts  receivable  resulting from the use of percentage of
completion  accounting and deferred payment terms, and also results in increased
collection times for billed accounts receivable.  These factors, in turn, result
in higher days sales outstanding (DSOs) in accounts receivable.

                                       2

<PAGE>

THE FINANCIAL SERVICES INDUSTRY

The  financial  services  industry  is  undergoing  a  period  of  rapid  change
characterized by increased competition. In response to this rapidly changing and
increasingly competitive market,  commercial banks are consolidating in order to
achieve operational efficiencies and increased revenues.  Financial institutions
are embracing  technological  solutions that enable them to automate operations,
redirect  routine   transactions  to  more  cost-effective   solutions  such  as
electronic banking, and develop new service and sales delivery channels.

CONSOLIDATION.  Consolidation  continues  at a rapid pace  within the  financial
services  industry,  particularly  among larger banks. The Company believes that
this trend is leading to an increasingly two-tiered market consisting of larger,
multibank   holding  companies  and  smaller  community  banks.  Both  types  of
organizations face unique challenges.

Large banks that have grown through  acquisition often must integrate  disparate
host  processing  systems,  which  often lack the  flexibility  needed to easily
utilize and deliver information across different systems.  Bank customer service
representatives  often are  limited  in their  ability  to access  comprehensive
customer  information  on one screen,  which limits their  ability to cross-sell
products and services.  Banks must also be able to support customer transactions
in a number of channels,  such as electronic banking and telephone call centers.
Accordingly,  large banks increasingly find it necessary to centralize data from
several  disparate host processing  systems.  Interstate  banking presents these
institutions with additional and costly  administrative  and legal  complexities
relating to compliance with complex and changing regulatory  requirements across
states.

Smaller community  institutions face similar operational  difficulties.  Lacking
the  economies  of  scale  of  larger  banks,   smaller   institutions  find  it
increasingly  necessary to exploit  technological  solutions that enable them to
reduce operating costs, generate additional revenues from existing customers and
focus on  specific  market  niches.  In  addition,  compliance  with  regulatory
requirements  can be more burdensome to these smaller  institutions  given their
resource limitations.

NEW DELIVERY CHANNELS.  Banks of all sizes are increasingly recognizing that the
value-added role of branch offices lies not in their  traditional  capacity as a
transaction  processor,  but as a new sales channel for  financial  products and
services.  A study by a financial  services  consulting  firm estimates that the
average cost of a call center transaction is 35% of a branch transaction, an ATM
transaction is 10% of a branch transaction, and a home banking transaction is 5%
of a branch transaction. In order to make these new delivery channels attractive
and  user-friendly,  the  Company  believes  that  consumers  require  access to
consolidated  information  and services that are consistent  across all delivery
channels.

CHANGING REGULATIONS.  Financial institutions in the United States remain highly
regulated with respect to compliance and other matters. To understand and remain
in  compliance  with  the  numerous  complex  and  changing  interstate  banking
regulations, a regulated financial institution must invest significant resources
in developing a compliance infrastructure.

Because  regulatory  requirements  are often triggered simply by the interaction
between a financial institution and its customer,  institutions are increasingly
subject to compliance issues as they migrate their sales efforts to new forms of
delivery channels, such as telephone and online

                                       3

<PAGE>

banking. Increasingly, these regulations extend beyond simple disclosure or form
content  requirements,  and financial  institutions  must also focus on customer
data  collection  and  analysis as well as internal  business  procedures.  This
collection  and analysis  must be obtained  from,  and  available  to,  multiple
delivery channels.  Data collection and analysis is complicated by the emergence
of new channels for interacting with customers and potential customers.

EVOLVING NETWORK  TECHNOLOGY.  Personal computer network  technology is becoming
increasingly  integrated  into all facets of the  financial  services  business.
Financial  institutions  are  transitioning  from  mainframe-based   systems  to
client/server  computing  for  customer  service  applications,  with  continued
reliance on mainframe  technology for back-office  functions.  The growth of the
Internet is expected to have a substantial  impact on the banking industry.  Not
only are institutions themselves connected through local and wide area networks,
but their customers are increasingly  using the Internet to gain access to these
institutions  and  financial  data.  The Company  believes  the rapidly  growing
network banking environment is demanding  compatible  software  applications and
connectivity.

BACK OFFICE ("HOST") PROCESSING. Financial institutions use back office ("host")
processing  software and hardware  solutions to perform  accounting  and general
ledger  tasks.  Community  banks  and  credit  unions  require  host  processing
capabilities that are simple to operate and maintain because these  institutions
generally cannot afford highly trained in-house  information  systems  personnel
such   as  data   base   administrators.   These   institutions   also   require
interconnectivity  between their host processing solutions and the software used
in branches and other points of customer contact.

THE CFI SOLUTION

The  Company  relies  on  a  variety  of  knowledge-based   and  technical  core
competencies.  The Company's  vertical  market focus on the  financial  services
industry  has  enabled  it  to  develop  specialized   knowledge  and  expertise
pertaining to business  processes and  regulations  affecting the industry.  The
Company  incorporates  this  knowledge  into its software  solutions to automate
lending,  retail  delivery  and  connectivity.  Beginning in 1999 CFI also began
offering host processing software and hardware solutions for community banks and
credit  unions.  CFI's  products  and services are designed to meet the evolving
needs  of  financial  institutions  by  addressing  a broad  range  of  banking,
technology and regulatory requirements.

CFI's  products  provide a number  of  benefits  to  financial  institutions  by
addressing  regulatory  requirements,  system  connectivity  issues and internal
business  processes  faced  by  institutions  in  the  increasingly  competitive
financial services industry. Using CFI's solutions,  these institutions are able
to simplify sales and service processes and improve productivity through reduced
operating  costs and expanded  capacity.  The ability to view an entire customer
account  relationship  on-screen  enables  financial  institutions to strengthen
relationships  with their customers at each point of contact and across multiple
delivery channels.  CFI's products also enable  institutions to comply with both
internal business processes and external government regulations.  CFI intends to
begin offering  hardware and software  solutions that integrate host  processing
and application software functions for community banks and credit unions.

The Company's  products provide support and service  solutions to both large and
small   financial   institutions.   CFI's  products   enable  larger   financial
institutions  to  utilize  data  among  disparate  and often  incompatible  host
processor platforms. The Company's suite of products also addresses

                                       4
<PAGE>

the  preference of larger  institutions  to work with fewer vendors that provide
comprehensive   software  solutions.   Smaller   institutions   benefit  through
streamlined  operations  and enhanced  cross-selling  abilities,  while ensuring
cost-effective regulatory compliance.

The Company has also developed substantial technological  capabilities necessary
to meet the evolving  requirements  of financial  institutions.  The Company has
established  substantial  knowledge of host processing  systems commonly used in
the financial services industry.  Through its StarGate connectivity software and
other applications,  the Company has developed the capability to retrieve,  view
and  update  data  stored  on  these  systems.   The  Company  has   established
relationships  with  numerous  service  bureaus and turnkey host vendors such as
International Business Machines Corporation ("IBM").  Fiserv, Inc. and The BISYS
Group,  Inc.  Beginning  in 1999 the Company  also began  offering  hardware and
software host  processing  solutions to community  banks and credit unions.  The
Company intends to establish additional relationships with other leading service
bureaus and turnkey host vendors.

THE CFI STRATEGY

The  Company's  strategic  objective is to be a leading  provider of  technology
solutions for the delivery of financial  services,  including  customer  service
software  solutions to financial  institutions at key points of customer contact
and host processing solutions.  The Company intends to achieve this objective by
combining its expertise in regulatory  issues,  banking and technology.  Primary
elements of the Company's strategy include:

OFFERING A BROAD SUITE OF DELIVERY CHANNEL SOLUTIONS. The Company believes it is
unique in its ability to offer  solutions  enabling  financial  institutions  to
perform transactions across multiple delivery channels, including branches, call
centers,  electronic  banking  and,  beginning  in  1999,  host  processing.  By
providing a broad suite of  solutions,  the Company  believes it can address the
need for consistent  processes  across  delivery  channels for an  institution's
products  (such  as loans  and new  accounts)  and  services  (such  as  account
inquiries  or  transfers).  The  Company's  strategy is to  establish  long-term
relationships with its customers and cross-sell multiple products throughout its
customer base. The Company  believes this ability  provides an important  market
advantage  over  competitors  who are able to address  only a limited  number of
delivery channels or provide a limited number of products and services.

ADDRESSING  EXPANDING  HOME BANKING  MARKET.  The Company is currently a leading
provider of personal computer banking solutions in the United States,  with more
than 230 institutions  offering  private-dial or Internet banking services using
the Company's  solutions.  The Company has licensed the Internet  version of its
home banking  product to more than 50 financial  institutions  and believes that
more than 500,000 bank  customers use the Company's home banking  products.  The
Company offers its home banking solutions on a private label basis, running on a
server  controlled  by the  financial  institution.  This  approach  permits the
financial  institution to retain its proprietary customer relationship and brand
name identity.  The Company's home banking  solution also supports the financial
institution's  customers  who use personal  finance  software  such as Microsoft
Money.  The  Company  believes  it was the first to support a  consumer  banking
transaction  through  the  Internet  and to connect a home  banking  solution to
Microsoft Money through Microsoft's Open Financial  Connectivity  specification.
The  Company  has also  created  a  service  bureau  alternative  that  provides
financial  institutions  with an inexpensive  method of initiating  home banking
services with their customers.

                                       5
<PAGE>

EXPANDING  CUSTOMER  BASE.  Over 50% of U.S.  commercial  banks have licensed at
least one of the Company's  solutions.  The Company  believes its brand name and
reputation as a provider of high-quality  solutions are widely recognized in the
financial institution community. The Company intends to expand its customer base
through its direct sales force of more than 75 professionals. CFI seeks to enter
into formal and informal  arrangements whereby it makes its solutions compatible
with the software and hardware  solutions offered by leading  technology vendors
to the financial institutions,  enabling those vendors to act as joint marketers
of the Company's solutions.  The Company has entered into such arrangements with
more than 60 technology vendors,  including IBM. In particular, the Company will
continue  its focus on expanding  its market share with large banks  through its
own major account sales force and through formal and informal partnerships.  The
Company has entered  into a strategic  alliance  with the CUNA Mutual  Insurance
Group, a key marketer and supplier of technology in the credit union market. The
Company intends to increase its marketing and sales efforts to further penetrate
the mortgage banking and thrift markets.

LEVERAGING  CUSTOMER  RELATIONSHIPS.   The  Company  builds  long-term  customer
relationships by employing relationship selling techniques and through long-term
service and support  agreements.  These  techniques and such service and support
relationships  keep the Company in frequent contact with the customer,  enabling
the  Company  to  sell  additional  products  to its  customers  as  they  grow,
cross-sell  additional products and sell product upgrades.  Substantially all of
the Company's customers enter into service and support agreements.

MAINTAINING LEADING  KNOWLEDGE-BASED  SOFTWARE TECHNOLOGY.  The Company believes
its  proprietary  software  and service  solutions  are  competitive  strengths.
Therefore,  the Company intends to continue to invest in product  development in
order to maintain  and  strengthen  its  technology  position and to improve its
compatibility  with other  major  applications.  For  example,  the  Company has
migrated many of its software solutions to the Windows and Windows NT platforms.

PROVIDING CONNECTIVITY  SOLUTIONS.  Financial institutions  increasingly seek to
integrate technology systems through networks and other connectivity  solutions,
so that  operations  at multiple  locations  and through  multiple  distribution
channels can access common customer  account and transaction data and processes.
CFI entered the connectivity solutions market through its April 1995 acquisition
of  Texas/Southwest   Technology  Group,  Inc.  and  is  increasingly   offering
integrated connectivity solutions to its customer base.

GROWING THROUGH STRATEGIC  ACQUISITIONS.  The Company has acquired 12 businesses
or companies  since June 1994.  These  transactions  have enabled the Company to
expand its product  suite and  customer  base,  leverage  product  cross-selling
opportunities and add engineering expertise.  The Company intends to continue to
selectively  pursue  acquisitions of businesses,  products or technologies  that
enhance its competitive position.

                                       6

<PAGE>

PRODUCTS

LENDING PRODUCTS. CFI's lending products automate processes at nearly every step
in the  lending  process  for  consumer,  commercial,  indirect  and real estate
lending lines of business.  General business functions  automated by CFI lending
solutions  include  loan  application  and  analysis,  loan  closing,  portfolio
analysis and workflow management,  and risk management,  as well as connectivity
for  interfaces to credit scoring and reporting  systems and remote  printing of
loan  documents.  The Company  engineers  its lending  products to operate  with
common user interfaces and databases.

RETAIL DELIVERY  PRODUCTS.  CFI's retail delivery products automate the customer
service,  sales,  and account opening  functions for the branch office platform,
teller station and telephone call center.  These products  provide a common view
of the entire  customer  relationship,  enabling  service  personnel to leverage
selling  opportunities.  In 1998 CFI  introduced  a  re-engineered  call  center
product that is integrated  more  effectively  with its branch sales and service
products.

CFI's electronic  delivery products provide personal  computer  private-dial and
Internet access to account inquiry and transaction capabilities,  as well as ACH
transaction  management  and remittance  processing.  The Company's home banking
products provide over a dozen  functions,  including  account  balance,  account
history,  bill payment and online loan  applications.  CFI's  latest  version of
Personal Branch home banking software is a Windows NT client/server-based system
that allows  financial  institutions  to provide  personal  computer-based  home
banking services via  private-dial or the Internet.  This version is designed to
improve  performance  and  provide  additional  functionality  and  connectivity
capabilities.  CFI has also created a service bureau  alternative  that provides
financial  institutions  with an inexpensive  method of initiating  home banking
services with their customers.

CONNECTIVITY PRODUCTS. Connectivity products and services enable institutions to
transfer  or exchange  data  between CFI  software  and host  systems and across
incompatible host systems.  The Company's software connects  back-office systems
to front-end delivery systems, such as the home personal computer, branch office
platform or telephone call center.

HOST PROCESSING  PRODUCTS.  Beginning in 1999 with the Company's  acquisition of
MCS, the Company  began  offering  hardware and software  solutions for the back
office accounting needs of community banks and credit unions.

                                       7

<PAGE>

<TABLE>

REVENUE BY PRODUCT GROUP
<CAPTION>

Years Ended December 31,       1998                  1997                1996
------------------------ ----------------     -----------------    ----------------
(Dollars in thousands)   Amount   Percent     Amount   Percent     Amount   Percent
                         -------  -------     -------  --------    -------  -------
<S>                    <C>        <C>       <C>        <C>        <C>       <C>  
Lending Products       $  47,296     55.2%  $  36,820      50.7%  $ 29,096     48.5%
Retail Delivery           27,500     32.2      26,970      37.1     22,640     37.8
Products
Connectivity Products      4,485      5.2       3,418       4.7      2,639      4.4
Other (1)                  6,349      7.4       5,441       7.5      5,572      9.3
                         -------  -------     -------  --------    -------  -------
Total Revenue          $  85,630    100.0%  $  72,649     100.0%  $ 59,947    100.0%
                         =======  =======     =======  ========    =======  =======
<FN>

(1)Other  products  include  bill  payment  systems  processing  fees,  sales of
   preprinted forms and supplies and certain consulting revenues.
</FN>
</TABLE>

Products by Product Group

<TABLE>

Lending Products

<CAPTION>
                 Date
              Introduced/
  Product      Acquired            Description              Benefits to Customer
  -------     ---------- ------------------------------   ------------------------
  <S>         <C>        <C>                              <C>    
  Laser       Released   Integrated, modular loan         Standardizes lending
  Pro         1986       processing system for consumer,  policies and products,
  Lending                commercial, SBA, real estate     streamlines processing,
                         home equity and agricultural     incorporates a national
                         loans                            database of regulations

  Application Acquired   Processes applications for       Speeds the loan application
  Manager     1996       indirect consumer lending        and approval process for
                                                          indirect lenders

  LP          Acquired   Provides mortgage origination,   Improves consistency of loan
  Mortgage    1996       processing and servicing         processes, speeds
                         capabilities                     origination, increases
                                                          capacity

  SMarT       Acquired   Comprehensive risk and pipeline  Automates complex analyses
              1998       management system that           necessary for ensuring
                         automates secondary mortgage     optimal mortgage loan pool
                         marketing functions from         sales
                         registration through delivery
                         of loans

  DocSMarT    Acquired   Automates the labor intensive    Speeds process of preparing
              1998       functions performed after a      mortgage loans for sale
                         mortgage loan is closed          faster than manual methods,
                                                          allowing lenders to take
                                                          advantage of higher near
                                                          term delivery prices

  LoansPlus   Acquired   Portfolio and credit risk        Balances acceptable credit
              1996       analysis system that uses        risk and lending
                         neural network technology and    opportunities to recommend
                         case-based reasoning             credit decisions and manage
                                                          portfolios

</TABLE>

                                       8

<PAGE>

<TABLE>

Retail Delivery Products

<CAPTION>

                Date
             Introduced/                                          
Product       Acquired             Description                 Benefits to Customer
-------      ----------  ------------------------------      ------------------------
<S>          <C>        <C>                                  <C> 
Encore!      Acquired    Automates the teller station by     Improves
Teller       1995        providing comprehensive             productivity and
                         transaction automation, electronic  facilitates sales
                         journaling, store-and-forward       referrals
                         capabilities, simplified
                         balancing, and access to the
                         customer database

Encore!      Acquired    Provides sales and service          Opens accounts,
Platform     1995        capabilities, including account     enables
                         opening screens, customer/product   cross-selling and
                         matching, customer contact          fulfillment of
                         histories, letter and fulfillment   customer
                         generation, and institution and     information
                         product information                 requests

Encore!      Acquired    Integrates in a common and          Enables
Call Center  1994        consistent format customer,         cross-selling and
                         product and internal procedure      improves service
                         information

Deposit Pro  Acquired    Automates and ensures regulatory    Speeds account
             1990        compliance in the account opening   opening, ensures
                         and cross-selling processes for     compliance with
                         checking, savings, certificates of  regulations,
                         deposit, and IRA accounts.          improves the
                                                             consistency of new
                                                             account policies
                                                             and practices

Encore!      Released    Windows-based system that           Allows customized
Desktop      1996        graphically links each user to CFI  arrangements of
                         software and other business         modules and access
                         applications                        to customer 
                                                             information

ProForms     Released    Generates laser printed forms used  Eliminates the
Laser        1994        daily by financial institutions     need for costly
                                                             inventories of
                                                             preprinted forms,
                                                             speeds form
                                                             processing

Personal     Released    Server-based system that allows     Provides low-cost
Branch       1993        institutions to provide personal    service delivery
                         computer-based home banking         channel,
                         services via private-dial or        strengthens
                         Internet channels                   customer
                                                             relationships,
                                                             extends
                                                             institution
                                                             branding,
                                                             increases customer
                                                             convenience

Pro Active   Released    Collects, analyzes, reports and     Simplifies the
             1994        maps HDMA loan application          process of meeting
                         information, non-real estate loan   fair lending and
                         data, and community demographic     community
                         data                                reinvestment
                                                             requirements

ACH Manager  Acquired    Originates and receives ACH         Cost-effective
             1995        electronic payments and collections processes ACH
                                                             business, monitors
                                                             business for risk

ACH Remote   Acquired    System licensed by financial        Generates new fee
             1995        institutions to its corporate       income and
                         customers for transmitting data     simplifies
                         files from the customer personal    automated
                         computer to the financial           procedures
                         institution's ACH system

</TABLE>

                                       9

<PAGE>

<TABLE>

Connectivity Products

<CAPTION>

                Date
             Introduced/                                          
 Product      Acquired           Description                Benefits to Customer
 -------     ---------- ------------------------------    ------------------------
 <S>         <C>        <C>                               <C> 
 StarGate    Acquired   Connectivity software system      Allows institutions
             1995       which transfers or exchanges      to integrate data
                        data between CFI products and     from multiple host
                        other host or client/server       systems and present
                        systems                           that data through
                                                          networks to multiple
                                                          front-end systems

 StarGate    Acquired   Connectivity software which       Reduces costs,
 F/X         1995       enables institutions to print     increases
                        Laser Pro documents remotely      transaction speed
                        through their  mainframe networks and productivity;
                                                          enables institutions
                                                          to centralize loan
                                                          document preparation

</TABLE>

<TABLE>

Host Processing Products

<CAPTION>

                Date
             Introduced/                                          
 Product      Acquired           Description                Benefits to Customer
 -------     ---------- ------------------------------    ------------------------
 <S>         <C>        <C>                               <C> 
 BankServ    Acquired   Back office "host" processing     Automates back room
             1999       software for community banks      accounting and
                                                          servicing functions

 CuServ      Acquired   Back office "host" processing     Automates back room
             1999       software for credit unions        accounting and
                                                          servicing functions

 TeleServ    Acquired   24-hour telephone banking module  Improves customer
             1999       for BankServ and CuServ that      service
                        supports account inquiries, fund
                        transfers and loan payments

 OptiServ    Acquired   Laser optical disk storage and    Improves document
             1999       retrieval system                  storage and retrieval

</TABLE>

PRODUCT DEVELOPMENT AND NEW PRODUCTS

The Company's  products  enable  institutions  to increase  sales  capabilities,
improve  productivity,  and remain in  compliance  with  internal  policies  and
government regulations. CFI ensures that its products meet customer requirements
by  conducting  primary  research  and  holding  product  user and  focus  group
meetings.  The Company also incorporates  knowledge learned during the sales and
installation  process  into  development  of  new  and  enhanced  products.  CFI
continues  to invest  significantly  in its  product  development  efforts.  The
Company  intends to increase the ability of its products to operate in networked
environments throughout the entire banking enterprise.  Its integration strategy
addresses  the  movement  in the  industry  toward  common user  interfaces  and
databases driving consistent  information to all points of customer contact.  In
addition  to  offering  products  that  operate in the  growing  network-centric
banking environment,  CFI will continue developing the Internet  capabilities of
its product suite where appropriate.

The  Company  believes  that  market  acceptance  of its  products  is  based in
significant  part on the  ability of the  products to share  information  with a
financial  institution's  host  processor  system or with the  vendor  providing
processing services to such institution. The Company has developed

                                       10
<PAGE>

significant expertise with most available host processor systems and the methods
necessary  to  transfer  data to and from such  systems.  Although  the  Company
generally  is able to  develop  interfaces  that allow its  products  to operate
effectively with its customers' host systems, integration is optimized where the
Company  and  the  host  processor  provider   cooperatively  share  information
regarding  the  respective  products'  technologies,  development  schedules and
enhancements. The Company's future success depends upon its ability to establish
and maintain adequate relationships with important host processor providers.  In
1999 the Company  purchased a host system for community banks and credit unions.
The Company  believes that it will be able to integrate many of its  application
software products into this host processor.

The Company has migrated  its Laser Pro lending  products to Windows and Windows
NT operating  environments.  Many of its other lending  products and most of its
retail delivery and connectivity products also run on the Windows platform.  The
Company is currently  supporting both DOS and Windows-based  versions of several
products, enabling its customers to upgrade easily and at a reasonable pace.

SERVICE AND SUPPORT

Substantially all of the Company's customers subscribe to maintenance agreements
under  which  CFI  provides   periodic  product  updates   reflecting   evolving
regulations,  product enhancements and toll-free telephone support.  Maintenance
fees  consist of  per-item  or  per-user  charges or are  calculated  based on a
percentage  of the current  product  list price or of the size of the  customer.
Furthermore,  CFI provides  training to its customers.  The Company accounts for
this revenue as service and support fees. Software service and support fees have
grown  significantly  over the last three years. For the year ended December 31,
1998, such fees were $30.3 million, or 35.4% of the Company's total revenue.

The Company  installs,  implements  and  customizes  its  software  solutions at
certain customer sites,  particularly at larger  institutions.  As the Company's
sales to larger institutions  increase, the Company anticipates demand for these
services to increase.  Revenue from these  services is accounted for as software
license fees.

CUSTOMERS

CFI has licensed its software to over 6,000 financial institutions in the United
States.   In  addition,   the  Company's   acquisitions   have  opened   limited
opportunities in non-financial  service industries and have added a small number
of international institutions to CFI's customer base. CFI's target customer base
includes commercial banks,  thrifts and credit unions. No customer accounted for
10% or more of the Company's total revenues in 1998, 1997 or 1996.

The Company's largest accounts include Bank of America  (formerly  NationsBank),
The BISYS Group, Inc., Union Planters Bank, NCR Corporation, Banc One, PNC Bank,
Citicorp and Central Carolina Bank & Trust.

                                       11

<PAGE>

SALES AND MARKETING

CFI sells its  products  through two  experienced,  national  direct field sales
teams. One team is devoted exclusively to large financial institutions,  and the
other  team  focuses  on all  other  accounts.  Both  teams are  supported  by a
marketing group,  product  specialists and a telemarketing  team.  Telemarketing
personnel contact institutions for lead generation and qualification,  and sales
support  personnel  are  responsible  for direct  sales  campaigns,  trade media
support and advertisements.

The Company has a number of  third-party  reseller and  co-marketing  alliances,
including  agreements  with some of the largest  host  processors  and  hardware
vendors.  For example,  the Company has a relationship with IBM whose sales team
resells a large portion of the Company's product line.  Third-party reseller and
co-marketing  alliances  provide access to  institutions  with which the Company
would otherwise have no relationship.

LEGAL NETWORK

The Company  maintains a network of  independent  legal counsel in all 50 states
and the District of Columbia.  This network,  as well as the Company's  internal
legal staff,  keeps the Company  informed of changes in state and federal  laws,
changes in state and local documentation  requirements,  pending legislation and
court  actions  affecting  financial  institution  practices,  as well as  other
information required to maintain regulatory compliance. The Company's management
believes  that  the  quality  of this  information,  the  Company's  ability  to
effectively  manage the  continuous  information  flow  provided  by the network
participants,  and the capability of the Company to integrate  this  information
into its software  products  provide the Company with a significant  competitive
advantage.

The Company utilizes legal counsel in all  jurisdictions,  other than Louisiana,
under  agreements  that are  terminable at will by either party and that provide
for  compensation  based on an hourly  rate.  The  Company  has  entered  into a
long-term  legal services  agreement with a Louisiana law firm pursuant to which
it pays legal fees based upon sales of the Company's products in Louisiana.

ACQUISITIONS

To remain  competitive  and to meet the  changing  needs of its  customers,  CFI
pursues acquisitions of products, technologies and businesses as one part of its
growth strategy.  The Company continuously evaluates acquisition candidates that
provide  opportunities  to expand its customer base,  cross-sell  products,  and
broaden  its  product   offerings   with  proven   solutions  in  a  timely  and
cost-effective  manner.  Since 1994 the  Company  has made 12  acquisitions  and
believes that to date it has achieved its  objectives  of growth and  broadening
its product offerings  through this acquisition  program and intends to continue
such activity in the future. Acquisitions of businesses or companies require the
dedication of management  resources in order to achieve the strategic objectives
of the acquisitions.

                                       12
<PAGE>

RISK FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS

POTENTIAL  FLUCTUATIONS  IN QUARTERLY  RESULTS.  The Company  typically ships or
installs many of its products  within three months of receipt of an order.  As a
result,  software  license  fees in any quarter are  substantially  dependent on
orders booked in that quarter or the previous quarter. In addition,  the Company
has generally  recognized a substantial portion of its revenue in the last month
of each  quarter,  with  this  revenue  concentrated  in the  last  weeks of the
quarter.  The Company's  results of operations  may also be affected by seasonal
trends,  including  the  tendency of some  customers  to complete  purchases  of
products in the quarter ended  December 31 or not to implement new orders in the
quarter ended March 31.  Because the Company's  operating  expenses are based on
anticipated  revenue  levels  and  a  high  percentage  of  these  expenses  are
relatively  fixed,  a small  variation in the timing of  recognition of specific
revenue items can cause significant variations in operating results from quarter
to  quarter.  Due to  all of the  foregoing  factors,  the  Company's  quarterly
operating results may differ from the expectations of public market analysts and
investors.  In such event,  the price of the Company's Common Stock would likely
be  affected.   Accordingly,   the  Company  believes  that   quarter-to-quarter
comparisons  of its  results  of  operations  should  not be  relied  upon as an
indication of future  performance.  See Management's  Discussion and Analysis of
Financial Condition and Results of Operations - Quarterly Results.

YEAR 2000. The Company's customers are regulated financial  institutions located
in the  United  States,  including  banks,  credit  unions  and  thrifts.  These
financial  institutions  are  experiencing  enhanced  regulatory  oversight with
respect to their  preparedness  for the Year 2000.  In response to pressure from
regulators, or concerns about integration of new products into the institution's
existing  systems,  the Company's  customers may delay or defer purchases of the
Company's products until after 1999. See Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000.

TECHNOLOGICAL AND MARKET CHANGES. The market for the Company's software products
and services is characterized by technological  advances and evolving standards.
In addition,  changes in banking requirements and new product  introductions and
enhancements  could  render  the  Company's   existing  products   unmarketable.
Accordingly,  the Company's  future success  depends upon its ability to enhance
its current  products  in a timely  fashion  and to develop  and  introduce  new
products that keep pace with technological  developments and changes in delivery
channels  such as  electronic  home banking and other  changes in the  financial
services  industry.  Further,  the  Company's  future  success  depends  on  the
willingness of banks and other financial  institutions to adopt new technologies
required for acceptance in this evolving market.

DEPENDENCE ON HOST PROCESSOR  RELATIONSHIPS.  Market acceptance of the Company's
products  depends on the Company's  ability to ensure that its products  operate
together with other  products  offered by the Company,  and with the products of
other major  service  providers and vendors of hardware and software used in the
financial  services  industry;   in  particular,   those  of  vendors  providing
processing  services  to  financial  institutions.  The  Company  has  developed
significant expertise with most available host processor systems and the methods
necessary to transfer data to and from such  systems;  however,  integration  is
optimized  where  the  Company  and  the  provider  of a host  processor  system
cooperatively share information regarding the respective products' technologies,
development  schedules and enhancements.  CFI has had varying degrees of success
in establishing such relationships with host providers. Furthermore,

                                       13
<PAGE>

providers of host  processor  systems or processing  services have or may become
competitors  of  the  Company  with  respect  to one or  more  of the  Company's
products.  In such events the  Company may not be able to obtain  access to host
system  technology   necessary  for  developing   optimal   third-party   system
integration. The Company's acquisition in January 1999 of host processor systems
for community  banks and credit  unions may cause other host  processors to view
the Company as a direct competitor.  The Company's future success depends on its
ability  to  establish  and  maintain  adequate   relationships  with  important
providers of host processor systems or processing services.

POSSIBLE  NEED FOR  ADDITIONAL  FINANCING.  The Company  believes that the funds
expected  to be  generated  by the  Company's  operations  and its  bank  credit
facilities  will  provide  the  Company  with  sufficient  funds to finance  its
operations.  However, if additional funds were needed to support working capital
requirements, or to complete acquisitions,  the Company would seek to raise such
additional  funds through one or more public or private  financings of equity or
debt, or from other  sources.  Additional  financing may not be available or, if
available,  may not be  obtainable  on terms  favorable  to the  Company  or its
shareholders.

MANAGEMENT  OF GROWTH.  The growth in the size and  complexity  of the Company's
business  and the  expansion  of its product  lines and its  customer  base have
placed and are expected to continue to place a significant strain on all aspects
of the Company's business.  In particular,  the Company's emphasis on selling to
large institutions has placed significant additional demands on its installation
and implementation operations, and the growing installed base and release of new
products has placed  additional  demands on the customer support  operation.  To
accommodate  growth,  the Company  will be  required  to upgrade or  implement a
variety of  operational  and financial  systems,  procedures  and controls.  The
Company's  future  success  will  depend on its  ability to expand  its  support
organization  and  infrastructure   commensurate  with  its  expanding  base  of
installed  products  and on its  ability to  attract,  hire and  retain  skilled
personnel.

DEPENDENCE ON KEY EMPLOYEES AND SOFTWARE  ENGINEERS.  The Company  believes that
its future success will depend to a significant extent upon the contributions of
its  executive  officers and key sales,  engineering,  marketing  and  technical
personnel.  The Company does not have "key person" life  insurance on any of its
employees.  Competition  for highly skilled  personnel,  particularly  qualified
software development  engineers and systems  implementation  experts, is intense
and the Company has, at times, experienced difficulty in locating personnel with
the requisite levels of expertise and experience.

LENGTHY SALES AND  IMPLEMENTATION  CYCLES. The license of the Company's software
products  generally  requires  the  Company  to  educate  prospective  customers
regarding  the use and benefits of the  Company's  products.  In  addition,  the
implementation of the Company's  products  involves a significant  commitment of
resources  by  prospective  customers  and can be  associated  with  substantial
changes in  workflow,  processing  or the  configuration  of hardware  and other
software.  The license of the  Company's  software  products can often require a
board-level or executive decision by prospective customers.  For these and other
reasons, the period between initial indications of interest by a customer in the
Company's  product and the ultimate  sale and  implementation  of the  Company's
product to the  customer can be lengthy  (often  ranging from three months to in
excess of one year) and is subject to a number of significant  delays over which
the Company has little or no control.  The  Company's  sales and  implementation
cycle could be lengthened by increases in the size and complexity of its license

                                       14
<PAGE>

transactions  and by delays in its customers'  implementation  or upgrade of the
necessary computing environments.

COMPETITION.  The market for the Company's products is intensely competitive and
rapidly changing.  A number of companies offer competitive  products  addressing
certain of the Company's target markets, which include lending products,  retail
delivery  products,  connectivity  products  and host  processing  products.  In
addition, a number of prospective and existing customers of the Company have the
internal capability to provide  alternative  solutions to the Company's products
and may,  therefore,  be  viewed  as  competing  with the  Company.  Some of the
Company's competitors have significantly greater financial, technical, sales and
marketing  resources  than the Company.  The Company  believes  that the primary
competitive  factors  in  this  market  include  product  quality,  reliability,
performance, price, vendor and product reputation, financial stability, features
and functions,  ease of use, interoperability with other applications or systems
and quality of support.  The Company  believes it competes  favorably in each of
these  categories.  Further,  because  of the  rapidly  evolving  nature  of the
industry,  many of the Company's collaborative partners are current or potential
competitors.  The Company's entrance in 1999 into the host processing market may
cause some of the  Company's  partners to view the Company  more as a competitor
than as a partner.

PRODUCT CONCENTRATION. A significant portion of the Company's revenue is derived
from a limited number of products. Revenue from the Company's Laser Pro products
and Deposit Pro products  represented  approximately  52% of the Company's total
revenue for the year ended December 31, 1998. The Company believes that although
these  products  will  continue to  represent a  significant  percentage  of the
Company's revenue for the near term, an important part of the Company's business
strategy  depends  upon the  ability of the  Company to  continue to develop and
market its other products.

DEPENDENCE ON FINANCIAL  SERVICES  INDUSTRY.  Substantially all of the Company's
revenue is derived  from  licenses  and  services  to banks and other  financial
institutions,  and its future  success is dependent  on  increased  sales to the
financial  services  industry.  Demand for the  Company's  products and services
could  be  disproportionately  affected  by  instability  or  downturns  in  the
financial services industry,  which may cause existing or potential customers to
exit the industry or delay, cancel or reduce planned expenditures for technology
solutions,  including  those  offered by the  Company.  Further,  the  financial
services industry is currently experiencing consolidation that may affect demand
for the Company's products.  The financial services industry is highly regulated
and changes in  regulations  affecting  the financial  services  industry or the
Company's products could have a significant effect on the Company.

PRODUCT LIABILITY RISKS;  SOFTWARE DEFECTS.  The Company's software products are
highly complex and sophisticated  and could,  from time to time,  contain design
defects or software  errors that could be difficult  to detect and  correct.  In
addition,  implementation  of the  Company's  products may involve a significant
amount of  customer-specific  customization  and may  involve  integration  with
systems  developed by third parties.  Such errors could give rise to warranty or
other  liability  of the  Company,  cause  delays in  product  introduction  and
shipments,  require design  modifications,  result in loss of or delay in market
acceptance of the Company's products or loss of existing customers.

DEPENDENCE  UPON  PROPRIETARY  TECHNOLOGY;  INTELLECTUAL  PROPERTY  RIGHTS.  The
Company's  success  and  ability  to  compete  are  dependent  in part  upon its
proprietary technology,  including its

                                       15
<PAGE>

software.  The Company  relies  primarily on a combination  of copyright,  trade
secret and trademark laws, confidentiality procedures and contractual provisions
to protect its proprietary rights.  Despite the Company's efforts to protect its
proprietary  rights,  other  parties  may attempt to reverse  engineer,  copy or
otherwise engage in unauthorized use of the Company's proprietary information.

Certain  technology or  proprietary  information  incorporated  in the Company's
products is licensed from third parties, generally on a non-exclusive basis. The
termination of any such licenses, or the failure of the third-party licensors to
adequately  maintain or update  their  products,  could  result in delays in the
Company's  ability to ship certain of its  products  while it seeks to implement
technology offered by alternative sources, and any required replacement licenses
could prove costly. In addition,  the integration of the Company's products with
financial  institutions'  host systems is optimized if the Company has access to
the  host  system  technology.   The  parties  controlling  the  host  processor
technologies  may also be current or future  competitors  of the  Company and as
such may restrict access to such  technologies.  In some instances,  the Company
has not  been  able to  obtain  sufficient  access  to  host  system  technology
necessary for developing optimal system interfaces. While it may be necessary or
desirable in the future to obtain rights to third party technology, there can be
no assurance that the Company will be able to do so on  commercially  reasonable
terms, or at all.

EMPLOYEES

As of  December  31,  1998,  the Company had 613  full-time  employees.  Of this
number, 174 were engaged in product groups (primarily product development),  130
in  customer   service  and  support,   87  in  sales  and  marketing,   125  in
implementation and training,  28 in technology,  research and development and 69
in general and administrative functions.

ITEM 2.  PROPERTIES 

The Company's corporate headquarters are located in Portland, Oregon in a leased
facility consisting of approximately 79,800 square feet of office space occupied
under  leases that  expire in 2003.  Annual  lease  payments  for the  Company's
corporate  headquarters  are  approximately  $1.3 million,  with  provisions for
inflationary increases. The Company also leases office space in Atlanta, Georgia
(52,678 square feet); Dayton, Ohio (15,151 square feet);  Burnsville,  Minnesota
(18,392 square feet); Englewood Cliffs, New Jersey (6,148 square feet); Houston,
Texas (7,565 square feet);  Denver,  Colorado  (4,470 square feet);  Charleston,
South Carolina (2,500 square feet);  McLean,  Virginia (2,680 square feet);  and
Jericho,  New York (1,140 square feet). These leases expire in 2000, 2006, 2000,
2002, 2002, 2004, 2003, 2001 and 2002,  respectively.  Annual lease payments for
these additional facilities,  in aggregate,  are approximately $1.6 million. The
Company  believes the office space currently under lease is adequate to meet its
needs for the next year.

ITEM 3.  LEGAL PROCEEDINGS

The Company is involved in routine legal matters incidental to its business. The
Company  believes  that the  resolution  of any such matters that are  currently
outstanding  will not have a  material  effect  on its  financial  condition  or
results of  operations.  However,  no assurance can be given that the concurrent
resolution of several of such matters in manners adverse to the

                                       16
<PAGE>

Company  would not have a material  adverse  effect on the  Company's  financial
condition or results of operations.

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

The Company did not submit any matters to a vote of security  holders during the
quarter ended December 31, 1998.

                                 PART II


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

The Company's Common Stock trades on the Nasdaq National Market System under the
symbol  PROI.  The high and low  selling  prices for the two years in the period
ended December 31, 1998 were as follows:

<TABLE>
<CAPTION>

       1998                               High         Low
       -------------------------------   -------      ------
       <S>                             <C>         <C>  
       First Quarter                   $  16.69    $  12.25
       Second Quarter                     17.88       14.50
       Third Quarter                      16.88        9.38
       Fourth Quarter                     13.13       10.00

       1997                               High         Low
       -------------------------------   -------      ------
       First Quarter                   $  20.88    $  14.00
       Second Quarter                     20.25       14.25
       Third Quarter                      18.75       13.50
       Fourth Quarter                     16.50       10.00

</TABLE>

The number of shareholders  of record and the  approximate  number of beneficial
holders of the  Company's  Common Stock on February 26, 1999 were 282 and 3,000,
respectively.

There were no cash dividends  declared or paid on the Company's  Common Stock in
1998 or 1997.  The Company does not  anticipate  declaring cash dividends on its
Common Stock in the foreseeable future.

                                       17

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

IN THOUSANDS:
EXCEPT PER SHARE AMOUNTS     1998(1)     1997     1996(2)     1995(3)     1994
------------------------   ---------  ---------  ---------  ----------  ---------
<S>                        <C>        <C>        <C>        <C>        <C>  
CONSOLIDATED STATEMENT
OF INCOME DATA
Revenue:
  Software license fees    $  49,202  $  40,475  $  33,935  $   18,918  $  16,781
  Service and support fees    30,352     27,466     22,336      15,060     12,775
  Other revenue                6,076      4,708      3,676       2,798      3,060
                           ---------  ---------  ---------  ----------  ---------
     Total revenue            85,630     72,649     59,947      36,776     32,616
Cost of revenue               29,423     27,041     20,844      11,672      9,646
                           ---------  ---------  ---------  ----------  ---------
Gross profit                  56,207     45,608     39,103      25,104     22,970
Operating expenses            45,357     36,780     29,810      20,552     17,859
Acquired in-process
  research and development
  and other charges            2,661         --      8,030       4,549         --
                           =========  =========  =========  ==========  =========
Income from operations     $   8,189  $   8,828  $   1,263  $        3  $   5,111
                           =========  =========  =========  ==========  =========

Net income                 $   3,960  $   4,680  $     114  $      323  $   3,514
Preferred Stock dividend          95         95         97          97         97
                           ---------  ---------  ---------  ----------  ---------
Net income applicable to
  common shareholders      $   3,865  $   4,585  $      17  $      226  $   3,417
                           =========  =========  =========  ==========  =========
Diluted net income per
  share                    $    0.75  $    0.90  $      --  $     0.05  $    0.71
                           =========  =========  =========  ==========  =========
Shares used in diluted
  per share calculations       5,167      5,124      5,112       4,877      4,806
Basic net income per share $    0.77  $    0.93  $      --  $     0.05  $    0.87
                           =========  =========  =========  ==========  =========
Shares used in basic per
  share calculations           5,012      4,919      4,763       4,369      3,922

CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents and
  short-term investments   $   3,795  $      20  $      --  $    7,670  $   7,958
Working capital               16,972      7,187      2,792       8,759     10,336
Property and equipment, net    4,534      5,211      4,805       2,968      2,579
Total assets                  56,781     57,542     46,845      36,587     27,487
Short-term debt                  261      5,605      2,896       3,951         --
Long-term debt, less
  current portion              5,693      2,232      2,880         423         --
Mandatory Redeemable
  Class A Preferred Stock        738        746        754         761        764
Shareholders' equity       $  30,632  $  25,943  $  20,238  $   18,169  $  16,591

<FN>
(1)Results for the year ended December 31, 1998 include pretax charges  totaling
   $3.0 million for the value of in-process  research and development efforts at
   the date of  acquisition  pertaining  to the  acquisition  of the  assets  of
   Mortgage  Dynamics,  Inc.  in October  1998  ($1.0  million),  the  remaining
   goodwill and  associated  severance  charges  related to the fisCAL  products
   ($0.9  million),  the present  value of net future  lease  payments  due with
   respect to certain  office  space in Atlanta  that the Company  ceased  using
   ($0.8 million),  and the initial investment of the Company in a joint venture
   ($0.3  million).  Excluding the impact of these  charges,  net income and net
   income  per  share   (diluted)  would  have  been  $5.7  million  and  $1.11,
   respectively.  See  Notes  1,  2 and 7 of  Notes  to  Consolidated  Financial
   Statements.

(2)Results for the year ended  December 31, 1996 include a pretax charge of $8.0
   million for the value of in-process  research and development  efforts at the
   date of  acquisition  pertaining  to five  companies  acquired in April 1996.
   Excluding  the impact of the acquired  in-process  research  and  development
   charges, net income and net income per share (diluted) would have been $5.2

                                       18

<PAGE>

   million and $1.02, respectively. The results of operations for the year ended
   December 31, 1996 include the results of these  companies'  operations  since
   the date of acquisition  in April 1996.  See Note 2 of Notes to  Consolidated
   Financial Statements.

(3)Results for the year ended  December 31, 1995 include a pretax charge of $4.5
   million.  The  charge  consists  of $3.7  million  for the value of  Culverin
   Corporation's  (Culverin)  in-process research and development efforts at the
   date of acquisition and $0.8 million for restructuring.  Excluding the impact
   of  the  acquired  in-process  research  and  development  and  restructuring
   charges,  net income and net income per share  (diluted) would have been $3.1
   million and $0.64,  respectively.  The year ended December 31, 1995 statement
   of income  includes the results of  Culverin's  operations  since the date of
   acquisition in November 1995. See Note 2 of Notes to  Consolidated  Financial
   Statements.
</FN>
</TABLE>

                                       19

<PAGE>

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

THE  CONSOLIDATED  FINANCIAL  STATEMENTS  AND  NOTES  THERETO  SHOULD BE READ IN
CONJUNCTION  WITH THE FOLLOWING  DISCUSSION.  THIS DISCUSSION  CONTAINS  CERTAIN
FORWARD-LOOKING  STATEMENTS  THAT  INVOLVE  RISKS  AND  UNCERTAINTIES,  SUCH  AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,  EXPECTATIONS AND INTENTIONS. THE
CAUTIONARY STATEMENTS MADE IN THIS DISCUSSION SHOULD BE READ AS BEING APPLICABLE
TO ALL RELATED  FORWARD-LOOKING  STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER  MATERIALLY FROM THOSE DISCUSSED HERE.
FACTORS  THAT  COULD  CAUSE OR  CONTRIBUTE  TO SUCH  DIFFERENCES  INCLUDE  THOSE
DISCUSSED  ELSEWHERE IN THIS REPORT,  AS WELL AS IN THE COMPANY'S  OTHER FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.

OVERVIEW

CFI is a  leading  provider  of  integrated,  PC-based  software  for  financial
institutions,  including solutions for branch automation, loan origination,  new
account opening, call centers, cross selling of products and electronic banking.
Beginning in 1999 with the Company's  acquisition  of Modern  Computer  Systems,
Inc. (MCS), the Company will also offer hardware and software  solutions for the
back office  accounting needs of community banks and credit unions.  The Company
combines its technology,  banking and legal expertise to deliver knowledge-based
solutions that enable  institutions  to simplify key business  processes such as
sales and service, improve productivity,  strengthen customer relationships, and
maintain compliance with both internal business policies and external government
regulations. More than 6,000 financial institutions have licensed one or more of
the Company's products.

During 1993  substantially  all of the  Company's  revenue was derived  from its
Laser Pro and Deposit Pro  products.  Today,  the Company  licenses more than 20
products  organized  into  four  product  groups:   lending,   retail  delivery,
connectivity  software  and,  beginning  in 1999,  host  processing.  Due to its
product  diversification  efforts,  the Company is now less reliant on the Laser
Pro and Deposit Pro products. In 1998 approximately 48% of the Company's revenue
came from products other than Laser Pro and Deposit Pro.

CFI generates recurring revenue from software  maintenance  agreements.  In 1998
service and support fees, primarily for Laser Pro and Deposit Pro, accounted for
approximately 35% of total revenue. Substantially all CFI customers subscribe to
the  Company's  service and support  programs,  which  provide  ongoing  product
enhancements  and,  where  applicable,  updates to  facilitate  compliance  with
changing regulations.

The  Company's  cost  structure is  relatively  fixed and the cost of generating
revenue, in aggregate, does not vary significantly with changes in revenue. As a
result,  the Company typically  generates  significantly  greater profit margins
from incremental sales once fixed costs are covered. In addition, any failure to
achieve  revenue targets in a particular  period would  adversely  affect profit
margins for that period.

The Company believes that sales to larger financial institutions will constitute
a higher percentage of total revenue in future periods.  Transactions with these
larger  institutions  are typically of greater scope,  usually involve a greater
sales effort over a longer period of time,  and require more  customization  and
prolonged  acceptance  testing.  This project  oriented  business tends to cause
growth in unbilled accounts  receivable  resulting from the use of percentage of
completion

                                       20

<PAGE>

accounting and deferred payment terms, and also results in increased  collection
times for billed accounts  receivable.  These factors, in turn, result in higher
days sales outstanding (DSOs) in accounts receivable.

The  Company's  backlog as of December 31, 1998 was $18.3  million,  compared to
$15.2  million and $10.0  million at December  31, 1997 and 1996,  respectively.
CFI's  backlog  consists of firm signed  orders  taken and not yet  converted to
revenue,  but  expected to be  converted  to revenue  within the next 12 months.
Orders  constituting  the  Company's  backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without  significant
penalty.  The stated  backlog is not  necessarily  indicative  of the  Company's
revenue for any future period.

ACQUISITIONS AND NEW BUSINESS VENTURES

The Company has expanded its market presence by acquiring products, technologies
and companies that complement the Company's product suite or increase its market
share. The Company has completed the following 12 acquisitions  since June 1994.
See Note 2 of Notes to Consolidated Financial Statements.

<TABLE>
<CAPTION>

 COMPANY                       DATE ACQUIRED  PRINCIPAL PRODUCTS/MARKETS ACQUIRED
 --------------------------    -------------  -----------------------------------
 <S>                           <C>            <C>                                          
 Assets of the Products        June 1994      Access  to   customers   in  certain
   Division of Professional                   Midwestern  states for the Company's
   Bank Systems, Inc.                         compliance products

 The Genesys Solutions         September 1994 Call center software Group, Inc.

 Texas/Southwest Technology    April 1995     StarGate  connectivity  products and
   Group, Inc.                                ACH products

 Culverin Corporation          November 1995  Encore!  Platform and Encore! Teller
                                              branch automation products

 OnLine Financial              April 1996     Over   1,000    branch    automation
   Communications                             customers     employing    DOS-based
   Systems, Inc.                              technology

 COIN Banking Systems, Inc.    April 1996     Application     Manager     indirect
                                              lending product

 Assets of Input               April 1996     LP Mortgage lending product
   Creations, Inc.

 Assets of Halcyon             April 1996     fisCAL loan decision support product
   Group, Inc.

 Assets of Pathways            April 1996     LoansPlus  neural net loan  decision
   Software, Inc.                             support  and  portfolio   management
                                              product

 Vendor Payment Systems, Inc.  April 1996     Bill payment services company

 Assets of Mortgage            October 1998   Secondary  mortgage loan  processing
   Dynamics, Inc.                             products

</TABLE>

                                       21

<PAGE>

<TABLE>
<CAPTION>

 COMPANY                       DATE ACQUIRED  PRINCIPAL PRODUCTS/MARKETS ACQUIRED
 --------------------------    -------------  -----------------------------------
 <S>                           <C>            <C>                                          
 Assets of Modern Computer     January 1999   Host    processing    software   and
   Systems, Inc.                              hardware   systems   for   community
                                              banks and credit unions
</TABLE>

There can be no assurance that any of these or future  acquisitions  will have a
favorable impact on the performance of the Company. The Company believes that it
has achieved its objectives of growth and  broadening its product  offerings and
customer base through this acquisition program and intends to continue to pursue
acquisitions. However, the Company currently has no understandings,  commitments
or  agreements  with respect to any material  acquisition  of other  businesses,
products or technologies.

The aggregate  purchase price for the foregoing  acquisitions  was $28.9 million
and 430,967 shares of Common Stock,  plus  contingent  royalties.  In connection
with such acquisitions, the Company incurred non-cash charges primarily relating
to the  write-off  of  acquired  in-process  research  and  development  efforts
totaling  approximately  $1.0  million  in 1998,  $8.0  million in 1996 and $4.5
million in 1995. The terms of certain of the acquisitions provide that, based on
various factors,  including the passage of time or certain product revenue,  the
Company will be required to pay contingent  royalties.  Because  amortization of
certain intangible assets arising from the Company's acquisition activity is not
deductible  for  federal  income  tax  purposes,  certain  amortization  expense
incurred by the Company has the effect of increasing the Company's effective tax
rate for financial reporting purposes.

From time to time,  the  Company may also  evaluate  establishing  new  business
operations  or making  investments  in new business  ventures,  including  joint
ventures.

In March 1997 CFI  announced  the  creation of Lori Mae,  L.L.C.  (Lori Mae),  a
company that was designed to  securitize  small  business  loans  originated  by
community  banks. CFI owns 50% of Lori Mae and uses the equity method to account
for this  investment.  In 1998 the Company  wrote off its initial  investment in
Lori Mae due to lack of acceptable market demand for Lori Mae's initial product.
See Note 1 of Notes to Consolidated  Financial Statements.  The Company believes
that Lori Mae will in the future completely redesign its product offerings.

                                       22

<PAGE>

RESULTS OF OPERATIONS

The  following  table  sets  forth  statements  of  income  data of the  Company
expressed as a percentage of total revenue for the periods indicated:

<TABLE>
<CAPTION>

                                                    Year Ended December 31,
                                             ------------------------------------
                                               1998           1997         1996
                                             ----------     ----------    -------
       <S>                                   <C>            <C>           <C>
       Revenue
         Software license fees                   57.5  %        55.7  %     56.6  %
         Service and support                     35.4           37.8        37.3
         Other                                    7.1            6.5         6.1
                                             ----------     ----------     ------
            Total revenue                       100.0          100.0       100.0
       Gross profit                              65.6           62.8        65.2
       Operating expenses
         Sales and marketing                     22.4           21.6        21.2
         Product development                     17.5           15.9        17.7
         General and administrative              11.7           11.4         9.1
         Amortization of intangibles              1.4            1.7         1.7
         Acquired in-process research         
           and development and other charges      3.1             --        13.4
                                             ----------     ----------     ------
            Total operating expenses             56.1           50.6        63.1
                                             ----------     ----------     ------
       Income from operations                     9.5  (1)      12.2         2.1  (1)

       Non-operating expense                     (0.9)         (0.4)          --
                                             ----------     ----------     ------
       Income before income taxes                 8.6           11.8         2.1
       Provision for income taxes                 4.0            5.4         1.9
       Preferred stock dividend                   0.1            0.1         0.2
                                             ==========     ==========     ======
       Net income applicable to common            4.5  %(1)      6.3  %       --  %(1)
       shareholders
                                             ==========     ==========     ======

<FN>
(1)Excluding  the impact of acquired  in-process  research and  development  and
   other charges,  income from operations as a percentage of revenue in 1998 and
   1996 would have been 12.7% and 15.5%, respectively, and net income applicable
   to  common  shareholders  in 1998 and 1996  would  have  been  6.8% and 8.5%,
   respectively.
</FN>
</TABLE>

                                       23

<PAGE>

The  following  table sets forth  percentage  changes  period over period in the
statements of income data of the Company:

<TABLE>
<CAPTION>

                                             1998 Over            1997 Over
                                               1997                 1996
                                            -----------         -----------
      <S>                                   <C>                 <C>      
      Revenue
        Software license fees                      21.6 %              19.3 %
        Service and support                        10.5                23.0
        Other                                      29.0                28.1
                                                -------             -------
          Total revenue                            17.9                21.2
      Gross profit                                 23.2                16.6
      Operating expenses
        Sales and marketing                        22.2                23.4
        Product development                        29.1                 8.8
        General and administrative                 21.2                52.3
         In-process R&D and other charges         100.0              (100.0)
                                                -------             -------
          Total operating expenses                 30.6 (1)            (2.8)(1)
                                                -------             -------
      Income from operations                       (7.2)(1)           599.0 (1)
      Non-operating expense                       211.6            (1,439.0)
                                                -------             -------
      Income before income taxes                  (13.3)              570.0
      Provision for income taxes                  (10.9)              235.0
                                                -------             -------
      Net income applicable to common                                     
         shareholders                             (15.7)%(1)             NM %(1)(2)
                                                =======             =======

<FN>
(1)Excluding  the impact of acquired  in-process  research and  development  and
   other charges, income from operations would have increased 22.9% in 1998 from
   1997  and  would  have  decreased  5.0% in 1997  from  1996,  and net  income
   applicable to common  shareholders  would have  increased  27.5% in 1998 from
   1997 and would have decreased 10.1% in 1997 from 1996.

(2) Not meaningful.
</FN>
</TABLE>

REVENUE

Total revenue  increased $13.0 million,  or 17.9%, to $85.6 million in 1998 from
$72.6 million in 1997. Total revenue increased $12.7 million,  or 21.2%, in 1997
from $59.9 million in 1996.

SOFTWARE  LICENSE  FEES.  Software  license  fees  include  sales of software to
customers,  fees for software  customization  and fees  related to  implementing
software and systems at customer  sites.  Software  license fees  increased $8.7
million,  or 21.6%,  to $49.2 million in 1998 compared to $40.5 million in 1997.
The increase was led by Laser Pro lending  suite  products,  mortgage  products,
connectivity  products  and Deposit  Pro,  and was offset in part by declines in
Encore!  branch  automation and home banking  revenues.  Revenues from 1997 also
included results from the Company's RPxpress!  remittance  processing  division,
which was sold in September 1997.  Software license fees increased $6.6 million,
or 19.3%,  in 1997 from $33.9  million in 1996.  The increase was led by lending
products  and  Encore!  branch  automation  products,  and was offset in part by
declines in home banking and call center product revenues.  No significant price
changes for software products occurred during the periods presented.

                                       24

<PAGE>

PERCENTAGE OF SOFTWARE LICENSE FEES

<TABLE>
<CAPTION>

                                      Years Ended December 31,
                              ---------------------------------------
                                   1998           1997         1996
                              -----------    -----------   ----------
<S>                           <C>            <C>          <C>
Lending Products                     63  %          55  %        45  %
Retail Delivery Products             32             42           50
Connectivity Products                 5              3            5
                              ===========    ===========   ==========
Total                               100  %         100  %       100  %
                              ===========    ===========   ==========
</TABLE>

      LENDING PRODUCTS. Lending products license revenue increased $8.8 million,
or 39.9%,  to $31.0  million in 1998  compared  to $22.2  million  in 1997.  The
increase resulted primarily from sales of Laser Pro Closing (particularly of the
Company's Windows-based product), Laser Pro Mortgage and customization. Sales of
fisCAL Analyzer and fisCAL Online declined substantially in 1998. The Company is
not actively  marketing the current fisCAL  products and wrote off the remaining
goodwill  associated  with the  products  in 1998.  The  Company  simultaneously
accrued for related  severance costs calculated in accordance with  pre-existing
employment agreements. See Note 1 of Notes to Consolidated Financial Statements.
The Company intends to completely redesign the fisCAL products in the future.

Lending  products  license  revenue  increased $6.8 million,  or 44.3%,  in 1997
compared to $15.4 million in 1996. The increase resulted primarily from sales of
Laser Pro Closing (particularly of the Company's  Windows-based product to large
banks), Laser Pro Mortgage and Laser Pro Application Manager.

Lending  products include Laser Pro Closing,  Laser Pro  Application,  Laser Pro
SBA,  Laser Pro Credit Line,  Laser Pro  Application  Manager,  Laser Pro fisCAL
Analyzer, Laser Pro fisCAL Online, Laser Pro Mortgage, Laser Pro SMarT and Laser
Pro DocSMarT.

RETAIL DELIVERY PRODUCTS. Retail delivery product license revenue decreased $1.3
million,  or 7.7%,  to $15.6  million in 1998 compared to $16.9 million in 1997.
1997 revenues included $0.7 million of RPxpress! sales that were not repeated in
1998. Increased revenues from Deposit Pro, Encore!  Desktop and Flextran in 1998
were offset by decreased revenues from Encore! Teller, Encore! Platform,  OnLine
branch automation, Encore! Personal Branch and RPxpress!

      Retail delivery product license revenue  decreased $0.2 million,  or 1.2%,
in 1997  compared to $17.1  million in 1996.  Increased  revenues  from  Encore!
Teller and Encore!  Platform  products  were offset by declines in revenues from
OnLine branch automation products, Encore! Personal Branch, Deposit Pro, Encore!
Call  Center  and Pro Active  CRA.  The  declines  in OnLine  branch  automation
revenues in 1998 and 1997  reflect a decreased  emphasis on the older  DOS-based
product  and  a  transition  to  the  Company's   Windows-based  Encore!  branch
automation products. Encore! Personal Branch revenues were adversely affected in
1997  as the  Company  transitioned  the  product  from a UNIX to a  Windows  NT
environment.  The decrease in Deposit Pro revenues in 1997 reflects the one-time
spike in  demand  when the  Windows  version  of the  product  was  released  in
mid-1996.  Encore! Call Center revenues were adversely affected in 1997 when the
product was substantially rewritten, and from the lack of an installed reference
site. The decrease in retail delivery product license

                                       25

<PAGE>

revenues  in  1997  was  also  caused  by the  sale of the  Company's  RPxpress!
remittance processing division in September 1997.

Retail  delivery  products  include  Encore!  Teller,  Encore!   Platform,
Flextran,   OnLine  branch  automation,   Deposit  Pro,  Encore!  Desktop,
Encore! Call Center, Encore! Personal Branch, Pro Active CRA and ACH.

      CONNECTIVITY  PRODUCTS.  Connectivity  products license revenues increased
$1.1  million,  or 75.8%,  to $2.5  million in 1998 from $1.4 million in each of
1997 and 1996.  Revenues for these  products  are tied closely to the  Company's
sales of its various  products to larger  institutions  and through  third party
host software  providers.  Connectivity  products include  StarGate  middleware,
Laser Pro interfaces and Deposit Pro interfaces.

      HOST PROCESSOR PRODUCTS. In January 1999 CFI acquired substantially all of
the assets of Modern Computer  Systems,  Inc. and certain  related  corporations
(collectively,  MCS).  MCS provides  back office  ("host") data  processing  and
related  services to community  banks and credit  unions.  No revenues from host
processor products are attributable to 1998, 1997 or 1996.

SERVICE  AND  SUPPORT  FEES.  Service  and support  fees  consist  primarily  of
recurring  software  support charges and revenue from training  customers in the
use of the Company's  products.  Substantially  all of the  Company's  customers
subscribe  to its  support  services,  which  require  the  payment of annual or
quarterly  maintenance fees. Service and support fees increased $2.9 million, or
10.5%,  to $30.4 million in 1998 compared to $27.5 million in 1997.  Service and
support fees increased $5.1 million, or 22.8%, in 1997 compared to $22.4 million
in 1996. These increases resulted primarily from increases in the installed base
of the Company's products,  by the Company's  acquisition of new products and by
an  increase,  effective in the fourth  quarter of 1998,  in service and support
pricing for certain lending products.

OTHER REVENUE.  Other revenue  includes Vendor Payment Systems (VPS)  processing
fees,  sales of preprinted  forms and supplies and certain  consulting  revenue.
Other revenue increased $1.4 million, or 29.0%, to $6.1 million in 1998 compared
to $4.7 million in 1997. Other revenue increased $1.0 million, or 27.8%, in 1997
compared to 1996. The acquisition of VPS in April 1996 was the primary cause for
the increase in dollars in 1997.

COST OF REVENUE

Cost of revenue primarily  consists of amortization of internally  developed and
purchased  software,  royalty payments,  compliance warranty insurance premiums,
software   production   costs,   costs  of   product   support,   training   and
implementation,  costs of software customization,  materials costs for forms and
supplies, and bill payment processing costs.

Cost of  revenue  increased  $2.4  million,  or 8.9%,  to $29.4  million in 1998
compared to 1997.  Cost of revenue  increased $6.2 million,  or 29.8%,  to $27.0
million for 1997 compared to $20.8 million in 1996. Of the 1997  increase,  $2.6
million resulted from additional amortization of software development costs. The
remainder  of the  increase  in 1997  and the  increase  in 1998  are  primarily
attributable to higher  implementation  costs associated with the growing number
of large  financial  institution  projects,  additional  personnel  required  to
support the increased  installed  base of customers and increased  royalties and
materials costs associated with

                                       26

<PAGE>

increased  revenues.  As the breadth of the Company's product line has expanded,
the complexity and cost of providing high quality  customer  service and support
has increased both in absolute dollars and as a percentage of revenue.

Software  amortization  was $2.6 million in 1998,  $4.5 million in 1997 and $1.9
million  in  1996.  During  1998,  1997 and 1996  several  software  development
projects  reached  commercial  feasibility.  As a result,  the Company  began to
amortize  certain product  development  costs that had been capitalized in prior
periods. In addition,  the Company recorded amortization as a result of software
acquired in  connection  with the MDI  acquisition  in October 1998 and the 1996
acquisitions.  The increase in  amortization  costs in 1997 also  resulted  from
accelerated  amortization for certain products being replaced by new products or
which management concluded were no longer technologically viable.

As a result  of  acquisitions,  costs  associated  with  royalty  payments  will
increase in future  periods.  The Company is obligated to pay royalties  ranging
from 3% to 18% of  revenue  related  to  certain  products  acquired  in various
acquisitions  since June 1994.  In  addition,  the Company is  obligated  to pay
MicroBilt  Corporation  a fixed  amount per  OnLine  customer  converted  to the
Company's products. The royalty obligations generally extend three to five years
from the acquisition date.

The Company's  gross margin was 65.6%,  62.8% and 65.2% in 1998,  1997 and 1996,
respectively.  The increase in 1998 is primarily  attributable to lower software
amortization  than in 1997 and from improved  implementation  efficiencies.  The
decline in gross  margin from 1996 to 1997 is  primarily  attributable  to three
factors:  increased  software  amortization,  a  shift  in  product  mix to more
projects  and  increased   royalty   expenses  for  products   acquired  through
acquisitions.  The  Company  expects  all three  factors to  continue  in future
periods,  which may continue to adversely  affect gross margin.  In  particular,
software amortization is expected to increase in 1999 compared to 1998.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses increased to $19.2 million, or
22.4% of  revenue,  in 1998  compared  to 1997.  Sales  and  marketing  expenses
increased  to $15.7  million,  or 21.6% of  revenue,  in 1997  compared to $12.7
million,  or 21.2% of revenue,  in 1996.  The increases in dollar amount in 1998
and 1997 resulted from increased commissions associated with increased revenues,
salary increases, additional personnel and higher advertising costs.

PRODUCT  DEVELOPMENT.  Product  development  expenses include costs of enhancing
existing products and developing new products. Product development expenses were
$14.9 million, or 17.4% of revenue, in 1998, $11.5 million, or 15.9% of revenue,
in 1997 and $10.6  million,  or 17.7% of revenue,  in 1996.  Increases in dollar
amount of product  development  expenses  were  largely the result of  increased
staffing  in  the  development  areas  of  the  Company,  additional  costs  for
integrating acquired products and accelerating development of the Company's home
banking products.

Product development  expenses in each of 1998, 1997 and 1996 were offset in part
by capitalization of software  development efforts. The company capitalized $1.0
million of software  development  costs in 1998,  $5.0  million in 1997 and $5.2
million in 1996.  Capitalized  software  development  costs,  net of accumulated
amortization, were $8.3 million as of

                                       27

<PAGE>

December 31, 1998 compared to $9.9 million as of December 31, 1997.  The Company
believes that the current development cycle for its compliance-related products,
which typically have relatively long lives,  was completed in the second quarter
of 1998  and,  accordingly,  there  should  be a  significant  reduction  in the
capitalization  of software  development  costs in future  periods.  No software
development  costs were capitalized in the third or fourth quarters of 1998. The
Company anticipates that its capitalized  software development costs existing as
of December 31, 1998 will be fully amortized over the next four years.

The Company will continue to commit significant resources to product development
efforts.  The  Company  anticipates  that  with the  completion  of the  current
development  cycle  of  its  compliance-related  products,  and  the  consequent
reduction  in  capitalization  of costs,  product  development  cost will have a
material adverse effect in future periods on operating margin and net income.

GENERAL AND  ADMINISTRATIVE.  General  and  administrative  expenses  were $10.0
million, or 11.7% of revenue in 1998, $8.3 million, or 11.4% of revenue in 1997,
and $5.4 million,  or 9.0% of revenue,  in 1996. The increases in dollar amounts
in 1998 and 1997 are due  principally to additional  systems and  infrastructure
costs necessary to accommodate  revenue growth. The increase in dollar amount in
1997 was also due to increased  bad debt expense.  Consolidation  of the general
and  administrative  functions of the  companies  acquired in April 1996 was the
principal  reason for the relatively low level of these expenses as a percentage
of revenue in 1996.

AMORTIZATION OF INTANGIBLES

Intangibles  include acquisition  payments assigned to goodwill,  noncompetition
agreements and customer  lists.  These costs are amortized over periods  ranging
from five to seven years.  Amortization  of intangibles  was $1.2 million,  $1.3
million and $1.0 million in 1998, 1997 and 1996, respectively.

ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES

In connection with its acquisition of the assets of Mortgage  Dynamics,  Inc. in
October 1998, the Company  recorded a pretax charge of $1.0 million for research
and development efforts in process at the date of the acquisition. In the fourth
quarter of 1998 the Company also recorded aggregate other pretax charges of $2.0
million  consisting of the present value of the remaining  liability for certain
leased office space the Company ceased using, the remaining goodwill  associated
with the fisCAL credit analysis  products and related  severance  costs, and the
Company's  initial  investment  in Lori  Mae.  See  Notes 1, 2 and 7 of Notes to
Consolidated Financial Statements.

In connection with its  acquisitions of six companies in April 1996, the Company
recorded  pretax  charges  of $8.0  million  in the  second  quarter of 1996 for
research and development efforts in process at the date of acquisition.

The values  assigned to the  in-process  research and  development  efforts were
determined by independent  appraisals and represent  those efforts in process at
the dates of  acquisition  that had not reached  the point  where  technological
feasibility  had  been  established  and that had no  alternative  future  uses.
Accounting  rules require that these costs be expensed as incurred.  At

                                       28

<PAGE>

December 31, 1998 the Company  believes  that acquired  in-process  research and
development  efforts  related to the  acquisitions  will result in  commercially
viable products during 1999 at an additional cost of approximately $350,000.

INCOME FROM OPERATIONS

Income from operations in 1998 was $8.2 million, or 9.6% of revenue, compared to
$8.8 million, or 12.2% of revenue, in 1997 and $1.3 million, or 2.1% of revenue,
in 1996.  Excluding the impact of the $2.6 million  charge in the fourth quarter
of 1998 and of the $8.0 million charge in the second quarter of 1996,  operating
income  would have been $10.8  million,  or 12.7% of  revenue,  in 1998 and $9.3
million, or 15.5% of revenue, in 1996.

NON-OPERATING INCOME (EXPENSE)

Non-operating income (expense),  which consists primarily of interest income and
expense,  was a net expense of $0.7 million in 1998 compared to a net expense of
$0.3  million  in  1997  and  net  non-operating  income  of  $18,000  in  1996.
Non-operating  expense in 1998 included a $0.4 million charge representing CFI's
initial  investment in Lori Mae. See Note 1 of Notes to  Consolidated  Financial
Statements.  Interest paid on outstanding balances under the Company's bank line
of credit was the principal cause of the net expense in 1997.

In September  1997 the Company  completed the sale of its  RPxpress!  remittance
processing division.  On an annual basis, the remittance processing revenues and
expenses were both approximately  $1.0 million.  The Company received 10% of the
sales price in cash with the  remainder to be paid in yearly  installments  with
interest at 8.5% per annum over four years.  In  connection  with the sale,  the
Company recorded a non-operating gain of $0.6 million.

In February 1997 the Company's Board of Directors  elected not to proceed with a
planned follow-on stock offering of the Company's common stock. The Company took
a $0.5  million  non-operating  charge in the first  quarter  as a result of the
cancellation.  The Company's Board of Directors  determined that the stock price
at which the Company would be required to offer the shares was too low and would
unfairly dilute the investment of existing shareholders.

PROVISION FOR INCOME TAXES

The effective tax rate for 1998 was 44.3% compared to 45.5% in 1997 and 43.0% in
1996,  excluding  the effect of $3.0 million in pretax  charges in 1998 and $8.0
million  in pretax  charges  resulting  from the April  1996  acquisitions.  The
difference  between  federal  and state  statutory  tax rates and the  Company's
effective  tax rates in 1998,  1997 and 1996 results  primarily  from  increased
amortization of nondeductible intangibles related to acquisitions.

QUARTERLY RESULTS

The  Company  has  experienced,   and  expects  in  the  future  to  experience,
significant  quarterly   fluctuations  in  its  results  of  operations.   These
fluctuations may be caused by various factors, including, among others: the size
and timing of product orders and shipments;  the timing and market acceptance of
new  products  and  product  enhancements  introduced  by the  Company  and  its
competitors; the Company's product mix, including expenses of implementation and
royalties related to certain products; the timing of the Company's completion of
work under contracts

                                       29

<PAGE>

accounted  for  under  the  percentage  of  completion  method;  customer  order
deferrals in anticipation of new products;  aspects of the customers' purchasing
process,  including the evaluation,  decision-making  and acceptance of products
within  the  customers'  organizations;  the  sales  process  for the  Company's
products,  including the complexity of customer  implementation of the Company's
products; the number of working days in a quarter;  federal and state regulatory
events,  including  regulatory  requirements  for  financial  institutions  with
respect to the Year 2000;  competitive pricing pressures;  technological changes
in hardware platform, networking or communication technology; changes in Company
personnel; the timing of the Company's operating expenditures; specific economic
conditions in the financial services industry and general economic conditions.

The  Company's  business  has  experienced,  and  is  expected  to  continue  to
experience,  some degree of  seasonality  due to its  customers'  budgeting  and
buying cycles. The Company's  strongest revenue quarter in any year is typically
its fourth  quarter  and its  weakest  revenue  quarter is  typically  its first
quarter.  Customers'  purchases  are  tied  closely  to  their  internal  budget
processes.  For some of the  Company's  customers,  budgets are  approved at the
beginning of the year and budgeted  amounts often must be utilized by the end of
the year. In addition,  the Company's incentive sales compensation plan provides
for increases in commission percentages as sales people approach or exceed their
annual  sales  quotas.  As a result of these two  factors,  the Company  usually
experiences increased sales orders in the last quarter.

YEAR 2000

The Year 2000 issue identifies problems that may arise in computer equipment and
software,  as well as  embedded  electronic  systems,  because  of the way these
systems are  programmed  to interpret  certain  dates that will occur around the
change in century.  In the computer  industry  this is  primarily  the result of
computer  programs  being  designed and  developed  using or reserving  only two
digits in date fields (rather than four digits) to identify the century, without
considering  the  ability of the program to properly  distinguish  the  upcoming
century  change in the Year 2000. In addition,  the Year 2000 is a  special-case
leap  year,  and some  programs  may drop  February  29th  from  their  internal
calendars.  Likewise,  other dates may present  problems  because of the way the
digits are interpreted. Because the Company's business is based on the licensing
of  applications  software,  the  Company's  business  would be  impacted if its
products or its internal systems experience problems associated with the century
change.  This issue also potentially  affects the internal software systems used
by the Company in its operations.

The Company has completed its survey of internal  computer  systems,  as well as
critical  third party  software and systems used by the Company,  regarding Year
2000  compliance  status.  The scope of the Year 2000 readiness  effort included
addressing  (i)  information  technology  such as software  and  hardware,  (ii)
non-information  systems or embedded technology  contained in various equipment,
safety systems, facilities and utilities and (iii) readiness of mission critical
third-party  suppliers.  The  Company  has  communicated  with  its  significant
suppliers and vendors to understand their ability to continue providing services
and products  through the millenium  change and to determine the extent to which
the  Company  may be  vulnerable  in the  event  of a  failure  by them or their
services and products.  With respect to mission  critical  systems,  the Company
sought  statements of compliance from each vendor either through direct response
or by reference to  information  posted on an electronic  bulletin board or in a
government database.

                                       30

<PAGE>

INTERNAL SYSTEMS.  Some of the computer programs and systems used by the Company
require   date-sensitive   information  to  accurately  and  adequately  process
information critical to the Company's business.  Inaccuracies or other errors in
this  information  could  have a  material,  adverse  effect  on  the  Company's
business.  Furthermore,  non-compliance  in these  programs could cause a system
failure or interruption,  either of which could also materially adversely affect
the Company. In addition to computer software, some machines and devices used by
the  Company and others may contain  embedded  technology  that is not Year 2000
compliant, which could result in a malfunction or failure of such devices.

The review and  assessment of the Company's  internal  systems is complete.  The
Company's internal  accounting  system,  including those components used for the
Company's  invoicing and bill payment,  has been evaluated by the vendor and has
been  represented  to be Year 2000  compliant.  Nevertheless,  the Company  will
conduct its own tests in the first half of 1999. Furthermore,  the Company plans
to routinely  backup its financial data through the end of 1999 and will develop
a contingency  plan with respect to the accounting  system in the second half of
1999. The Company anticipates that its customer support and call tracking system
will be Year 2000 compliant after  installation of an update  scheduled to occur
in the  second  quarter  of 1999.  The cost of the  update  is  estimated  to be
immaterial.

The Company  completed the survey of its software  vendors in the fourth quarter
of 1998.  The bulk of the  Company's  vendors  have already  provided  compliant
versions of their software.  The Company continues to monitor all material third
party  software not  indicated to be Year 2000  compliant  and believes that few
vendors, if any, will not provide compliant versions by the middle of 1999.

The Company has received  representations  that its phone and voice mail systems
became Year 2000 compliant  through upgrades  completed during the first quarter
of 1999. As to its phone service  providers,  the Company has offices located at
10 disparate  geographical locations all served by different local phone service
providers  and  the  Company   contracts   with  two  long  distance   carriers.
Consequently,  the  Company  can shift  telecommunications  through any of these
locations should any other location be down. Further, neither the Company's base
software nor updates are provided exclusively via downloading.  Virtually all of
the  Company's  base  software  and updates are  provided to  customers  through
magnetic media.

Based on information gathered to date, the Company is not presently aware of any
Year 2000 issue that could materially  affect the Company's  operations,  either
self-originated   or  caused  by  third-party   service  vendors  or  providers.
Management  believes that all mission  critical systems will be compliant by the
Year 2000.  Nevertheless,  there can be no  assurance  that the Company will not
experience some operating  difficulties as a result of Year 2000 issues. If they
occur, these difficulties could require the Company to incur unanticipated costs
to remedy the problems and, either individually or collectively, have a material
adverse effect on the Company's business  operations and financial results.  The
Company has not yet determined the cost of completing its  investigation  or the
cost of any  modification  or  remediation  that may be required to correct Year
2000  issues.  Costs  incurred  to date to assess Year 2000 issues have not been
significant  and have been funded  through  operating  cash  flows.  The Company
intends to develop  contingency  plans for its  significant  systems that can be
implemented  on or after  January  1,  2000 in the  event  of a  system  failure
resulting from the century change.

                                       31

<PAGE>

COMPANY  DEVELOPED  SOFTWARE.  The Company develops software programs for use by
financial  institutions to automate various  transactions  and processes.  These
programs  often are highly  dependent upon  historical or dynamic  financial and
other data that,  if the programs are not able to  distinguish  between the Year
2000 and other century-end  years,  could be misreported or  misinterpreted  and
cause significant resulting calculation errors. This data is often acquired from
other systems that may or may not be Year 2000 compliant,  further  exacerbating
the  problem.  The  Company's  financial  institution  customers  are subject to
regulatory  scrutiny;  any such errors could subject them to civil or regulatory
action, or both, resulting in large fines, penalties or other costs.

Additional  consequences  of the Year  2000  issue for the  Company's  financial
institution   customers  may  include  systems  failures  and  business  process
interruption,  including,  among other things, a temporary  inability to process
transactions,  satisfy  regulatory  obligations,  or  engage in  similar  normal
business  activities.  In addition,  the impact of Year 2000 issues may severely
impair  the  ability  of the  Company's  customers  to  purchase  the  Company's
products, or to make payments on software or services previously purchased.

Concern over Year 2000 issues is permeating the financial services industry, and
management  expects that the  resolution of these  concerns will likely absorb a
substantial portion of financial institution  information technology budgets and
attention in the near term (with an associated decreased focus on other business
initiatives,   including  purchase  decisions  with  respect  to  the  Company's
software).  Year  2000  issues  faced  by its  customers  could  materially  and
adversely affect the Company's operations and financial results through the Year
2000.

The Federal Financial Institutions  Examination Council (the "FFIEC") has issued
a series  of  Statements  beginning  in June  1996  requiring  that the  various
financial institutions regulated by FFIEC member agencies provide assurance that
they will be capable of  conducting  business as usual in 2000 and into the 21st
century. To this end, and among other obligations,  each institution is required
to survey its systems and  operations  (including  software and vendor  supplied
services), determine any deficiencies,  remediate to correct deficiencies,  test
mission  critical  third party  software and services to confirm their Year 2000
readiness after  remediation,  and develop  contingency  plans against the event
that a  mission  critical  item,  service  or  process  fails  to be  Year  2000
compliant.  Further  information on the FFIEC mandate and related matters can be
found at the FFIEC's  website,  www.ffiec.gov/y2k.  In support of its customers'
obligations resulting from the FFEIC's Statements, the Company has made the Year
2000 issue a significant  priority and assigned a task force with responsibility
for an ongoing  effort to  minimize  Year  2000-related  risks  relative  to the
Company's products.

The Company has  completed  its review of all of its software  products for Year
2000 compliance, and has determined that most of the Company's standard software
products are Year 2000 compliant.  The Company has not undertaken,  and does not
intend  to  undertake,  a review of the many  customized  versions  of  software
products  that it has provided  customers.  The Company has  developed a plan to
discontinue  some of its standard  products  prior to December 31, 1999, and the
Year 2000 issue has been one of the factors  considered in those decisions.  For
those  products  that will not  continue  to be  offered,  generally a Year 2000
compliant replacement product currently exists.

For standard  products that will  continue to be offered,  but are not currently
Year 2000 compliant, the Company has developed and executed a plan for resolving
such compliance-related issues.

                                       32

<PAGE>

Remediation was  substantially  completed  during 1998. A matrix  describing the
Company's product compliance (including a comprehensive  definition to determine
such  compliance)  has  been  communicated  to the  Company's  customers  and is
available for review on the Company's  website.  The financial  impact of making
the required changes to the software  programs is not expected to be material to
the Company's  consolidated  financial  position,  results of operations or cash
flows.  The Company acquired  substantially  all of the assets of MCS in January
1999. Although MCS's BankServ product has been certified as Year 2000 compliant,
none of the  products  of MCS are  included  in the  foregoing  discussion.  The
Company  intends to complete its Year 2000 review of the MCS products during the
first  quarter  of  1999  consistent  with  the  standards  established  for the
Company's other products.

Information  on the  Company's  website is  provided to  customers  for the sole
purpose of assisting  them in planning for the  transition  to the Year 2000 and
includes the Company's  definition of Year 2000 compliance,  product  compliance
status, and, in the case of the Laser Pro Closing/Lending product, includes test
guides.  This  information  is updated at least  quarterly so that the Company's
customers can access current  information on the Year 2000 compliance  status of
the Company's products.  The matrix does not provide  certification of Year 2000
compliance  and customers are cautioned that they should  independently  confirm
Year 2000 compliance of the Company's products.

The  Company has  developed  a standard  Year 2000  compliance  warranty  and is
offering it to customers with respect to those products that will continue to be
offered into the next century.  This  warranty is consistent  with the Company's
standard  product  warranties,   extends  no  indeminities,  and  maintains  the
liability cap applying otherwise in its licenses.

Financial institutions,  financial institution regulators,  and the many vendors
supplying the financial  services  industry have not developed a consistent  and
comprehensive  definition of what constitutes  "compliance"  with the Year 2000.
This,  coupled  with the  different  combinations  of  software,  firmware,  and
hardware  used by customers may lead to disputes  against the Company  regarding
the  operation of its  software.  The outcome of such disputes and the impact on
the Company are not estimable at this time.

MARKET RISK

The Company has not entered into derivative financial  instruments.  The Company
may be exposed to future interest rate changes on its debt. The Company does not
believe that a  hypothetical  10 percent  change in interest  rates would have a
material effect on the Company's cashflow.

LIQUIDITY AND CAPITAL RESOURCES

Working  capital  increased  $9.8 million to $17.0  million at December 31, 1998
from $7.2 million at December 31, 1997. The increase  resulted  principally from
enhanced  efforts by the  Company to improve  cash  collections,  and from a net
reduction in short-term  debt of $5.3 million and an increase in long-term  debt
of $4.0 million in connection with a renegotiation of the Company's bank line of
credit facility.

Net cash  provided  by  operations  was $11.0  million in 1998  compared to $5.4
million in 1997.  The  increase  was  principally  due to a charge for  acquired
research and development efforts

                                       33

<PAGE>

and other charges taken in 1998,  decreased net accounts  receivable and prepaid
expenses, and increased customer deposits.  These changes were offset in part by
decreases in deferred revenues,  depreciation and amortization,  deferred income
taxes and income taxes payable.

Net cash used in investing  activities in 1998 was $6.1 million compared to $7.9
million in 1997,  due primarily to the reduction in  capitalization  of software
development  costs  in  1998  and  offset  in  part  by  cash  paid  for the MDI
acquisition.  Expenditures  for property  and  equipment of $1.7 million in 1998
were  primarily  attributable  to  investments  in  infrastructure  necessary to
accommodate the Company's growth.

Net  cash  used in  financing  activities  of  $1.3  million  in  1998  resulted
principally from a total of $2.0 million of repayment on the Company's bank line
of credit facility and on  acquisition-related  debt. These payments were offset
in part by $0.8 million in proceeds  from  issuance of common  stock,  primarily
upon exercise of stock options.

The  Company's   project-oriented  business  often  requires  unbilled  accounts
receivable and milestone  billings,  both of which often have longer  collection
cycles.  Unbilled accounts receivable at December 31, 1998 were $7.6 million, or
25.8% of total accounts receivable,  compared to $3.8 million, or 11.9% of total
accounts  receivable,  at December 31, 1997.  Days sales  outstanding  (DSOs) in
accounts  receivable,  including both billed and unbilled  accounts  receivable,
decreased to 108 days at December 31, 1998,  from 136 days at December 31, 1997,
primarily  because the Company  issued certain  annual  maintenance  invoices in
January 1999 instead of December 1998. Historically, the Company had issued such
invoices in late  December each year.  DSOs at December 31, 1997,  excluding the
distorting impact of annual  maintenance  invoices,  were 106 days. The shift in
the timing of issuing annual maintenance invoices is also primarily  responsible
for the decreases in accounts  receivable and deferred  revenues at December 31,
1998 compared to December 31, 1997.

Future cash  requirements  could  include,  among  other  things,  purchases  of
companies,   products  or  technologies,   expenditures  for  internal  software
development,  capital  expenditures  necessary to the expansion of the business,
and  installment  payments  on debt  related  to  acquisitions.  Available  cash
resources  include cash  generated by the Company's  operations  and a revolving
bank line of credit of up to the  lesser  of $10.0  million  or 50% of  accounts
receivable,  of which $6.0 million was available at December 31, 1998.  The line
of credit expires May 1, 2000.

From time to time, the Company receives  contract claims from its customers.  In
the  second  quarter of 1997,  one of the  Company's  customers  canceled a $0.8
million  project with the Company and requested a partial  refund of moneys paid
and cancellation of unpaid invoices. The Company believes that it has met all of
its contractual obligations to this customer and intends to enforce the terms of
the agreement.

The  Company  believes  that  funds  expected  to  be  generated  from  existing
operations  and  borrowings  under its revolving line of credit will provide the
Company with sufficient funds to finance its current operations for at least the
next 12 months.  The Company may require additional funds to support its working
capital requirements,  future acquisitions or for other purposes and may seek to
raise such additional funds through one or more public or private  financings of
debt or equity, or from other sources. No assurance can be given that additional

                                       34

<PAGE>

financing  will be available  or, that,  if available,  such  financing  will be
obtainable on terms favorable to the Company or its shareholders.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

SEE MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF
OPERATIONS - MARKET RISK.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements,  notes thereto and supplementary data required by this
item begin on page F-1 as listed in Item 14 of Part IV of this document.

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

None.
                               PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information  required by this item is included  under the  captions  Proposal 1.
Election of Directors,  Members of the Board of Directors  Continuing in Office,
Non-Director   Executive  Officers,   and  Section  16(a)  Beneficial  Ownership
Reporting  Compliance,  respectively,  in the Company's  Proxy Statement for its
1999 Annual Meeting of Shareholders and is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

Information  required  by  this  item  is  included  under  the  captions  Board
Compensation,  Executive  Compensation,  Employment  Contracts,  Termination  of
Employment and  Change-in-Control  Arrangements  and Report of the  Compensation
Committee in the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by this item is included  under the caption  Security
Ownership of Certain  Beneficial  Owners and  Management in the Company's  Proxy
Statement for its 1999 Annual Meeting of Shareholders and is incorporated herein
by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required  by this item is included  under the caption  Certain
Relationships and Related  Transactions in the Company's Proxy Statement for its
1999 Annual Meeting of Shareholders and is incorporated herein by reference.

                                       35

<PAGE>


                                PART IV


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

FINANCIAL STATEMENTS AND SCHEDULES

The  Consolidated  Financial  Statements,  together  with the report  thereon of
Arthur Andersen LLP, are included on the pages indicated below:

                                                              Page

Report of Independent Public Accountants                       F-1

Consolidated Balance Sheets - December 31, 1998 and 1997       F-2

Consolidated Statements of Income for the years ended
  December 31, 1998, 1997 and 1996                             F-3

Consolidated Statements of Shareholders' Equity for the
  years ended December 31, 1998, 1997 and 1996                 F-4

Consolidated Statements of Cash Flows for the years ended
  December 31, 1998, 1997 and 1996                             F-5

Notes to Consolidated Financial Statements                     F-6

The following schedule and report thereon is filed herewith:

Report of Independent Public Accountants on Financial
Statement Schedule                                            F-23

Schedule II       Valuation and Qualifying Accounts           F-24

REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the quarter ended December 31, 1998.

                                       36

<PAGE>

EXHIBITS

The  following  exhibits  are  filed  herewith  and  this  list is  intended  to
constitute the exhibit index:

Number       Description
----------   -------------------------------------------------------------------

2.1          Stock  Purchase and Sale Agreement  dated November 21, 1995,  among
             CFI ProServices,  Inc., Culverin Corporation,  Eric T. Wagner, John
             M. Loveless,  David Steffens and Douglas Teets  previously filed as
             Exhibit 2.1 to the Current  Report on Form 8-K dated  November  21,
             1995 and as filed with the  Securities  and Exchange  Commission on
             December 6, 1995 and incorporated herein by reference.

2.2          Stock Purchase and Sale Agreement  effective  April 1, 1996, by and
             among MicroBilt Corporation, First Financial Management Corporation
             and CFI  ProServices,  Inc. - previously  filed as Exhibit 2.1 with
             the  Company's  Form 8-K dated  April 1, 1996 and as filed with the
             Securities and Exchange Commission on April 16, 1996 and
             incorporated herein by reference.

2.3          Asset Purchase and Sale Agreement,  effective April 1, 1996, by and
             among Input Creations,  Inc., its shareholders and CFI ProServices,
             Inc. - previously  filed as Exhibit 2.1 with the Company's Form 8-K
             dated April 17, 1996 and as filed with the  Securities and Exchange
             Commission on May 2, 1996 and
             incorporated herein by reference.

2.4          Asset Purchase and Sale  Agreement,  effective  January 1, 1999, by
             and  among  Modern  Computer   Systems,   Inc.,   other  affiliated
             corporations,   their   shareholder  and  CFI   ProServices,   Inc.
             previously  filed as Exhibit 2.1 with the Company's  Form 8-K dated
             February  10, 1999 and as filed with the  Securities  and  Exchange
             Commission  on  February  10,  1999  and  incorporated   herein  by
             reference.

3.1          Registrant's   Amended  and  Restated   Articles  of  Incorporation
             previously filed as Exhibit 3(i)(a) to the  Registration  Statement
             on Form S-1, Registration Statement No. 33-64894, as filed with the
             Securities and Exchange Commission on June 23, 1993 and
             incorporated herein by reference.

3.2          Amendments  to  Registrant's   Amended  and  Restated  Articles  of
             Incorporation  (effective  June  28,  1993) -  previously  filed as
             Exhibit  3(i)(b)  to  the  Registration   Statement  on  Form  S-1,
             Registration  Statement No. 33-64894,  as filed with the Securities
             and Exchange Commission on July 26, 1993 and incorporated herein by
             reference.

3.3          Amendments  to  Registrant's   Amended  and  Restated  Articles  of
             Incorporation  (effective  July  26,  1993) -  previously  filed as
             Exhibit  3(i)(c)  to  the  Registration   Statement  on  Form  S-1,
             Registration  Statement No. 33-64894,  as filed with the Securities
             and Exchange  Commission on August 10, 1993 and incorporated herein
             by reference.

3.4          Registrant's  Amended and  Restated  Bylaws -  previously  filed as
             Exhibit   3(ii)  to  the   Registration   Statement  on  Form  S-1,
             Registration  Statement No. 33-64894,  as filed with the Securities
             and Exchange  Commission on August 10, 1993 and incorporated herein
             by reference.

                                       37

<PAGE>

Number       Description
----------   -------------------------------------------------------------------

10.1*        Nonqualified  Stock Option Plan dated  October 15, 1993  previously
             filed as Exhibit  99.10 to the  Registration  Statement on Form S-8
             (Registration  No.  33-70506),  as filed  with the  Securities  and
             Exchange  Commission on October 19, 1993 and incorporated herein by
             reference.

10.2*        Registrant's  Outside  Director  Compensation and Stock Option Plan
             previously filed as Exhibit 10.3 to the Company's Form 10-Q for the
             quarter ended March 31, 1994 and incorporated herein by reference.

10.3*        Registrant's   Standardized   Regional  Prototype  401(k)  Cash  or
             Deferred   Savings  Plan  and  Trust,   adopted  December  1,  1994
             previously  filed as Exhibit 10.12 to the  Company's  Form 10-K for
             the year ended  December 31, 1995 and as filed with the  Securities
             and Exchange Commission on April 1, 1996 and
             incorporated herein by reference.

10.4         Legal Services Agreement for the State of Louisiana effective March
             13,  1986  between the Company  and  McGlinchey,  Stafford,  Mintz,
             Cellini  &  Lang,   a  Louisiana   professional   law   corporation
             (confidential  treatment  requested) - previously  filed as Exhibit
             10.25 to the Registration  Statement on Form S-1  (Registration No.
             33-64894) filed with the Securities and Exchange Commission on July
             26, 1993 and incorporated herein by reference.

10.5         1994 Employee  Stock  Purchase  Plan - previously  filed as Exhibit
             10.2 to the Company's Form 10-Q for the quarter ended June 30, 1994
             and incorporated herein by reference.

10.6*        1995 Consolidated and Restated Stock Option Plan - previously filed
             as Exhibit  99.13 to the  Registration  Statement on Form S-8 filed
             with the  Securities  and Exchange  Commission on March 1, 1995 and
             incorporated herein by reference.

10.7*        First Amendment to 1995 Consolidated and Restated Stock Option Plan
             -  previously  filed as Exhibit 9.2 to the  Company's  Registration
             Statement  on Form S-8  filed  with  the  Securities  and  Exchange
             Commission on or about September 4, 1996 and incorporated herein by
             reference.

10.8         Office  Lease  dated  March 18,  1994  between the Company and John
             Hancock Mutual Life Insurance Company - previously filed as Exhibit
             10.1 to the  Company's  Form 10-Q for the  quarter  ended March 31,
             1994 and incorporated herein by reference.

10.9         First  amendment,  dated July 8, 1996,  to office lease dated March
             18, 1994 between the Company and John Hancock Mutual Life Insurance
             Company - previously filed as Exhibit 10.17 to the Company's Annual
             Report on Form 10-K for the year ended  December  31, 1996 as filed
             with the Securities and Exchange Commission on March 27, 1997 and
             is incorporated herein by reference.

10.10        Second  amendment,  dated  January 11, 1999,  to office lease dated
             March 18, 1994 between the Company and John Hancock Mutual Life
             Insurance Company.

                                       38

<PAGE>

Number       Description
----------   ---------------------------------------------------------------

10.11*       Employment  and  Noncompetition  Agreement  dated November 21, 1995
             between CFI ProServices,  Inc. and Eric T. Wagner  previously filed
             as Exhibit 10.1 to the Company's  Current  Report on Form 8-K filed
             with the Securities and Exchange Commission on December 6, 1995 and
             incorporated herein by reference.

10.12        Business Loan Agreement  (Revolving  Line of Credit) dated November
             8, 1995 between CFI ProServices,  Inc. and Bank of America,  Oregon
             previously filed as Exhibit 10.35 to the Company's Annual Report on
             Form 10-K for the year ended  December  31,  1995 as filed with the
             Securities and Exchange Commission on April 1, 1996 and
             incorporated herein by reference.

10.13        Amendment  No. 1, dated May 17, 1996,  to Business  Loan  Agreement
             dated  November 8, 1995 -  previously  filed as Exhibit 10.7 to the
             Company's  quarterly report of Form 10-Q for the quarter ended June
             30, 1996 as filed with the  Securities  and Exchange  Commission on
             August 13, 1996 and
             incorporated herein by reference.

10.14        Amendment  No. 2, dated July 1, 1996,  to Business  Loan  Agreement
             dated  November 8, 1995 -  previously  filed as Exhibit 10.8 to the
             Company's  quarterly report of Form 10-Q for the quarter ended June
             30, 1996 as filed with the  Securities  and Exchange  Commission on
             August 13, 1996 and
             incorporated herein by reference.

10.15        Amendment  No. 3,  dated  September  24,  1996,  to  Business  Loan
             Agreement  dated November 8, 1995 - previously  filed as Exhibit 10
             to the  Company's  quarterly  report of Form  10-Q for the  quarter
             ended  September 30, 1996 as filed with the Securities and Exchange
             Commission on November 14, 1996 and
             incorporated herein by reference.

10.16        Amendment  No.  4,  dated  November  21,  1996,  to  Business  Loan
             Agreement dated November 8, 1995 - previously filed as Exhibit 10.1
             to the Company's  Registration  Statement No. 333-15505 on Form S-3
             as filed with the Securities and Exchange Commission on January 27,
             1997 and incorporated herein by reference.

10.17        Amendment  No.  5,  dated  December  31,  1996,  to  Business  Loan
             Agreement dated November 8, 1995 - previously filed as Exhibit 10.2
             to the Company's  Registration  Statement No. 333-15505 on Form S-3
             as filed with the Securities and Exchange Commission on January 27,
             1997 and incorporated herein by reference.

10.18        Amendment No. 6, dated March 1, 1997,  to Business  Loan  Agreement
             dated November 8, 1995 - previously filed as exhibit 10.41 with the
             Company's  Form 10-K for the year ended  December  31,  1996 and as
             filed with the Securities and Exchange Commission on March 21, 1997
             and incorporated herein by reference.

10.19        Amendment  No. 7 dated June 1, 1997,  to  business  loan  agreement
             dated  November 8, 1995 - previously  filed with the Company's Form
             10-Q for the  quarter  ended  June  30,  1997,  as  filed  with the
             Securities  and  Exchange  Commission  on August 13,  1997,  and is
             incorporated herein by reference.

                                       39

<PAGE>

Number       Description
----------   ---------------------------------------------------------------

10.20        Amendment No. 8 dated March 31, 1998,  to business  loan  agreement
             dated  November 8, 1995 - previously  filed with the Company's Form
             10-Q for the  quarter  ended  March  31,  1998,  as filed  with the
             Securities  and  Exchange   Commission  on  May  5,  1998,  and  is
             incorporated herein by reference.

10.21        Amendment No. 9 dated April 30, 1998,  to business  loan  agreement
             dated  November 8, 1995 - previously  filed with the Company's Form
             10-Q for the  quarter  ended  March  31,  1998,  as filed  with the
             Securities   and  Exchange   Commission  on  May  5,1998,   and  is
             incorporated herein by reference.

10.22*       Form of Executive Retention Agreement - previously filed as Exhibit
             10.1 to the  Company's  Current  Report on Form 8-K filed  with the
             Securities   and  Exchange   Commission  on  August  22,  1994  and
             incorporated herein by reference.


21           Subsidiaries of the Registrant

23           Consent of Arthur Andersen LLP

27           Financial Data Schedule

------------------
*Mangement contract or compensatory plan or arrangement.

                                       40


<PAGE>

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

Date: March 30, 1999
                              CFI PROSERVICES, INC.

                                    By: /s/ MATTHEW W. CHAPMAN
                                        ----------------------
                                        Matthew W. Chapman
                                        Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities indicated on March 30, 1999.

Signature                          Title
---------                          -----

/s/ MATTHEW W. CHAPMAN             Chairman and Chief Executive Officer
----------------------             (Principal Executive Officer)
Matthew W. Chapman                 


/s/ ROBERT P. CHAMNESS             Director, President and Chief
----------------------               Operating Officer
Robert P. Chamness


/s/ KURT W. RUTTUM                 Vice President and Chief Financial Officer
----------------------             (Principal Financial and Accounting Officer)
Kurt W. Ruttum 


/s/ ROBERT T. JETT                 Director, Executive Vice President and 
----------------------               Secretary
Robert T. Jett


/s/ J. KENNETH BRODY               Director
----------------------
J. Kenneth Brody


/s/ LORRAINE O. LEGG               Director
----------------------
Lorraine O. Legg


/s/ ERAN S. ASHANY                 Director
----------------------
Eran S. Ashany


/s/ FRANK E. BRAWNER               Director
----------------------
Frank E. Brawner


/s/ L. B. DAY                      Director
----------------------
L. B. Day

                                       41

<PAGE>

                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors and Shareholders of CFI ProServices, Inc.

We have audited the accompanying consolidated balance sheets of CFI ProServices,
Inc. (an Oregon  corporation)  and subsidiaries as of December 31, 1998 and 1997
and the related  consolidated  statements of income,  shareholders'  equity, and
cash flows for each of the three years in the period  ended  December  31, 1998.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
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 consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of CFI ProServices,
Inc. and  subsidiaries as of December 31, 1998 and 1997 and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.






                                                          ARTHUR ANDERSEN LLP



Portland, Oregon
January 22, 1999

                                      F-1

<PAGE>

<TABLE>
                             CFI PROSERVICES, INC.
                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)
<CAPTION>

                                                            December 31,
                                                       ----------------------
                                                          1998         1997
                                                       ---------    ---------
<S>                                                    <C>          <C>      
ASSETS
Current Assets:
  Cash and cash equivalents                            $   3,589    $      20
  Investments                                                206            - 
  Receivables, net of allowances of $2,600 and $2,880     29,701       32,059
  Inventory                                                  249          297
  Deferred tax asset                                       1,341        1,307
  Prepaid expenses and other current assets                1,604        1,928
                                                        --------     --------
          Total Current Assets                            36,690       35,611

Property and Equipment, net of accumulated
  depreciation of $9,947 and $7,855                        4,534        5,211
Software Development Costs, net of accumulated
  amortization of $3,368 and $735                          8,277        9,856
Purchased Software Costs, net of accumulated
  amortization of $19                                        211            -
Other Intangibles, net of accumulated amortization
  of $4,763 and $3,227                                     6,190        5,689
Other Assets, including deferred taxes                       879        1,175
                                                        --------     --------
          Total Assets                                 $  56,781    $  57,542
                                                        ========     ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Accounts payable                                     $   1,986    $   2,119
  Accrued expenses                                         8,017        5,362
  Deferred revenues                                        5,300       12,498
  Customer deposits                                        3,681        1,715
  Bank line of credit                                          -        5,310
  Current portion of long-term debt                          261          295
  Income taxes payable                                       473        1,125
                                                        --------     --------
          Total Current Liabilities                       19,718       28,424

Deferred Tax Liability                                         -          197
Commitments and Contingencies
Long-Term Debt, less current portion                       5,693        2,232
                                                        --------     --------
          Total Liabilities                               25,411       30,853

Mandatory Redeemable Class A Preferred Stock                 738          746

Shareholders' Equity:
  Series preferred stock, 5,000,000 shares
authorized, none issued and outstanding                        -            -
  Common stock, no par value, 10,000,000
    shares authorized and 5,032,977 and 4,925,423
    shares issued and outstanding                         19,689       18,865
  Retained earnings                                       10,943        7,078
                                                        --------     --------
          Total Shareholders' Equity                      30,632       25,943
                                                        --------     --------
          Total Liabilities and Shareholders' Equity   $  56,781   $   57,542
                                                        ========     ========

</TABLE>

              The         accompanying  notes  are an  integral  part  of  these
                          consolidated balance sheets.

                                      F-2

<PAGE>

<TABLE>

                             CFI PROSERVICES, INC.
                       CONSOLIDATED STATEMENTS OF INCOME
                 (Dollars in thousands, except per share data)

<CAPTION>
                                               Years Ended December 31,
                                              ---------------------------
                                               1998       1997      1996
                                              ------     ------    ------
<S>                                        <C>        <C>       <C>      
REVENUE
  Software license fees                    $  49,202  $  40,475 $  33,935
  Service and Support                         30,352     27,466    22,336
  Other                                        6,076      4,708     3,676
                                              ------     ------    ------
          Total Revenue                       85,630     72,649    59,947

COST OF REVENUE                               29,423     27,041    20,844
                                              ------     ------    ------
          Gross Profit                        56,207     45,608    39,103

OPERATING EXPENSES
  Sales and marketing                         19,204     15,709    12,725
  Product development                         14,913     11,549    10,615
  General and administrative                  10,012      8,263     5,425
  Amortization of intangibles                  1,228      1,259     1,045
  Acquired in-process research and
     development and other charges             2,661          -     8,030
                                              ------     ------    ------
          Total Operating Expenses            48,018     36,780    37,840
                                              ------     ------    ------
          Income From Operations               8,189      8,828     1,263

NON-OPERATING INCOME (EXPENSE)
  Interest expense                              (454)      (456)     (251)
  Interest income                                295        170       271
  Canceled stock offering costs                    -       (487)        -
  Gain on sale of operating division               -        628         -
  Equity in losses attributable to joint                           
     venture                                    (670)      (148)        -
  Other, net                                      83         52       (2)
                                              ------     ------    ------
          Total Non-operating Income  
               (Expense)                        (746)      (241)       18
                                              ------     ------    ------
INCOME BEFORE PROVISION FOR INCOME TAXES       7,443      8,587     1,281
PROVISION FOR INCOME TAXES                     3,483      3,907     1,167
                                              ------     ------    ------
NET INCOME                                     3,960      4,680       114
PREFERRED STOCK DIVIDEND                          95         95        97
                                              ------     ------    ------
NET INCOME APPLICABLE TO 
  COMMON SHAREHOLDERS                      $   3,865  $   4,585 $      17
                                              ======     ======    ======
BASIC NET INCOME PER SHARE                 $    0.77  $    0.93 $       -  
                                              ======     ======    ======
DILUTED NET INCOME PER SHARE               $    0.75  $    0.90 $       -
                                              ======     ======    ======

</TABLE>

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

                                      F-3

<PAGE>

                             CFI PROSERVICES, INC.
                  CONSOLIDATED STATEMENTS OF SHAREHOLDERS'S EQUITY
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                             Common Stock 
                                         -------------------     Retained
                                          Shares      Amount     Earnings     Total
                                        ---------    --------    --------    -------
<S>                                   <C>           <C>          <C>        <C>     
BALANCES, DECEMBER 31, 1995           $ 4,496,136   $  15,693    $  2,476   $ 18,169
       Issuance of Common Stock           328,837       1,420          -       1,420
       Tax benefits from stock  
         transactions                           -         632          -         632
       Net income applicable to common                                 
         shareholders                           -           -          17         17
                                        ---------    --------    --------    -------

BALANCES, DECEMBER 31, 1996             4,824,973      17,745       2,493     20,238
       Issuance of Common Stock           100,450         724           -        724
       Tax benefits from stock                                           
         transactions                           -         396           -        396
       Net income applicable to common                              
         shareholders                           -           -       4,585      4,585
                                        ---------    --------    --------    -------

BALANCES, DECEMBER 31, 1997             4,925,423      18,865       7,078     25,943
       Issuance of Common Stock           107,554         768           -        768
       Tax benefits from stock                   
         transactions                           -          56           -         56
       Net income applicable to common                              
         shareholders                           -           -       3,865      3,865
                                        ---------    --------    --------    -------

BALANCES, DECEMBER 31, 1998           $ 5,032,977   $  19,689   $  10,943  $ 30,632
                                        =========     =======     =======    ======
</TABLE>

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

                                      F-4

<PAGE>

                             CFI PROSERVICES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                                          Years Ended December 31,
                                                          -------------------------
                                                           1998     1997      1996
                                                          ------   ------    ------
<S>                                                     <C>       <C>       <C>    
Cash  flows from operating activities:
   Net income applicable to common shareholders         $  3,865  $ 4,585   $    17
   Adjustments to reconcile net income applicable to
     common shareholders to cash provided by operating
     activities:
         Depreciation and amortization                     6,805    8,540     4,731
         Write-off of in-process research and
          development and other charges                    2,661        -     8,030
         Gain on sale of property and equipment                -        -       (10)
         Gain on sale of operating division                    -     (628)        -
         Deferred income taxes                              (586)      87    (1,328)
         Interest accreted on mandatory redeemable               
          preferred stock                                     95       95        97
         Interest accreted on note payable                    93       93         -
         Gain on sale of equity/debt investments               -        -      (156)
   Equity in losses attributable to joint venture            670      148         -
   (Increase) decrease in assets, net of effects from
           purchase of businesses:
            Receivables, net                               2,749   (9,135)  ( 6,580)
            Income taxes receivable                            -        -       229
            Inventories, net                                  48     (141)       59
            Prepaid expenses and other assets                612     (269)     (325)
   Increase(decrease)   in   liabilities,   net  of  effects  from  purchase  of
           businesses:
            Drafts payable                                     -     (425)      425
            Accounts payable                                (133)    (765)    1,167
            Accrued expenses                                  52   (1,186)    2,079
            Deferred revenues                             (7,307)   2,053     2,069
            Customer deposits                              1,966      846      (609)
            Other current liabilities                          -        -      (338)
            Income taxes payable                            (596)   1,475       678
                                                          ------   ------    ------
               Net cash provided by operating             
                    activities                            10,994    5,373    10,235

Cash flows from investing activities:
   Expenditures for property and equipment                (1,680)   (2,713)  (2,721)
   Software development costs capitalized                 (1,054)   (4,994   (5,204)
   Investment in joint venture                              (304)     (322)       -
   Purchase of investments                                  (206)       -         -
   Proceeds from sale/maturity of investments                  -        -     2,982
   Issuance of note receivable                              (391)       -         -
   Proceeds from long-term note receivable                   189        -         -
   Proceeds from sale of operating division                    -       87         -
   Proceeds from sale of property and equipment                -        -        19
   Cash paid for acquisition of Mortgage Dynamics, Inc.   (2,668)       -         -
   Cash paid for acquisition of OnLine and COIN
     Division, net of cash received                            -        -    (2,277)
   Cash paid for acquisition of Input Creations, Inc.          -        -    (2,107)
   Cash paid for other acquisitions                            -        -      (812)
   Other assets                                                -        -         8
                                                          ------   ------    ------
               Net cash used in investing activities      (6,114)  (7,942)  (10,112)

Cash flows from financing activities:
   Net proceeds from (payments on) line of credit         (1,310)   3,719     1,591
   Payments on notes payable                                   -        -    (7,280)
   Payments on long-term debt                               (666)  (1,751)     (328)
   Payments on mandatory redeemable preferred stock         (103)    (103)     (104)
   Proceeds from issuance of common stock                    768      724     1,154
                                                          ------   ------    ------
               Net cash provided by (used in)             
                    financing activities                  (1,311)   2,589    (4,967)
                                                          ------   ------    ------
Increase (decrease) in cash and cash equivalents           3,569       20    (4,844)

Cash and cash equivalents:
   Beginning of period                                        20        -     4,844
                                                          ------   ------    ------
   End of period                                        $  3,589  $    20   $     -
                                                          ======   ======    ======
</TABLE>

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

                                      F-5

<PAGE>

                            CFI PROSERVICES, INC.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS
CFI ProServices,  Inc. and its subsidiaries (the Company)  develops,  sells, and
services customer service software used by financial  institutions.  The Company
combines its technology,  banking and legal expertise to deliver knowledge-based
software  solutions that enable  institutions  to simplify key sales and service
business processes, improve productivity, strengthen customer relationships, and
maintain compliance with both internal business policies and external government
regulations.  Although most sales  historically  have been to  commercial  banks
within the United  States,  today the Company  actively  markets its products to
most types of financial  institutions  domestically and, for the  non-compliance
oriented software, internationally. The Company has been in business since 1978.

BASIS OF CONSOLIDATION
Effective December 31, 1997, the Company's wholly owned subsidiaries (other than
The Genesys  Solutions Group,  Inc.  (Genesys) and Vendor Payment Systems,  Inc.
(VPS)) were dissolved and their assets were distributed to the Company.  Genesys
is an  inactive  subsidiary  and its  assets  were  distributed  to the  Company
effective December 31, 1997. Genesys was dissolved in 1998.

The  consolidated  financial  statements  include the accounts of the  Company's
wholly owned  subsidiaries:  Genesys,  Texas/Southwest  Technology Group,  Inc.,
Culverin  Corporation,  OnLine  Financial  Systems,  Inc., COIN Banking Systems,
Inc., and VPS. All intercompany  transactions and balances have been eliminated.
A cash  investment  in VPS was  included in other assets and was  accounted  for
using the  equity  method  until  April  1996  when the  Company  purchased  the
remaining outstanding VPS common stock. The Company made certain acquisitions in
April 1996 and October 1998 (see Note 2). These  acquisitions have been included
in the consolidated financial statements since the date of acquisition.

CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term  investments with maturity
dates of three months or less at the time of acquisition.

INVESTMENTS
Statement of  Financial  Accounting  Standards  (SFAS) No. 115  "Accounting  for
Certain  Investments  in Debt and Equity  Securities"  requires  the  Company to
classify  and  account  for its  security  investments  as  trading  securities,
securities  available for sale or securities  held to maturity  depending on the
Company's intent to hold or trade the securities at time of purchase. Securities
available  for sale are stated on the balance  sheet at their fair market value,
which  approximates  cost.  Securities  held to maturity are stated at amortized
cost. There were no unrealized  holding gains or losses at December 31, 1998 and
1997. The Company uses the specific  identification  method for  determining the
cost to use in computing realized gains and losses.

                                      F-6

<PAGE>



                                                Years Ended December 31,
                                             --------------------------------
                                              1998        1997        1996
                                             --------   ---------   ---------
                                                     (In thousands)

Proceeds from sale of debt securities      $      --  $       --  $    2,982
Realized gains on sales of debt securities        --          --         156

INVENTORY
Inventory consists  primarily of printed bank forms and supplies,  and is stated
at the lower of cost or market, with cost determined on the first-in,  first-out
(FIFO) method.

PROPERTY AND EQUIPMENT
Property  and  equipment  is  stated  at cost.  Depreciation  is  computed  on a
straight-line  basis over the estimated  useful lives of the individual  assets,
which are three years for computer  equipment  and  software,  and five to seven
years for furniture, fixtures and other equipment.  Expenditures for repairs and
maintenance are charged to current operations, and costs related to renewals and
improvements  that  add  significantly  to  the  useful  life  of an  asset  are
capitalized.  When depreciable  properties are retired or otherwise disposed of,
the cost and related accumulated  depreciation are removed from the accounts and
the resulting gain or loss is reflected in income.

SOFTWARE
The costs of internally  developed  software which meet the criteria in SFAS No.
86,  "Accounting  for the  Costs of  Computer  Software  To Be Sold,  Leased  or
Otherwise   Marketed,"  are   capitalized.   These  costs  are  amortized  on  a
straight-line  basis over  estimated  economic  lives ranging from three to five
years.

Purchased software is capitalized at cost and amortized on a straight-line basis
over the  estimated  economic  life of three  years.  Generally,  contracts  for
purchased  software require royalties to be paid based on revenues  generated by
the related software.

                                                Years Ended December 31,
                                            ---------------------------------
                                              1998        1997        1996
                                            ---------   ---------   ---------
                                                     (In thousands)
Amortization of internally developed         
  software                                   $ 2,633     $ 3,465     $ 1,194
Amortization of purchased software                19       1,079         693

During  1998,  1997 and  1996  several  software  development  projects  reached
commercial  feasibility.  As a result,  the Company  began to  amortize  certain
product  development  costs  which had been  capitalized  in prior  periods.  In
addition,  the Company recorded amortization as a result of software acquired in
connection  with the 1998 and 1996  acquisitions.  The increase in  amortization
costs in 1997 also resulted from  accelerated  amortization for certain products
being  replaced by new  products or which  management  concluded  were no longer
technologically viable.

                                      F-7

<PAGE>

INTANGIBLES
The  Company's  intangibles  consist  primarily  of amounts  paid for  goodwill,
noncompetition  agreements  and customer  lists.  These costs are amortized on a
straight-line  basis over estimated  economic lives of five to seven years.  The
Company  believes  these  useful  lives  are  appropriate  based on the  factors
influencing   acquisition   decisions.   These  factors  include  product  life,
profitability and general industry  outlook.  The Company reviews its intangible
assets for asset impairment at the end of each quarter,  or more frequently when
events  or  changes  in  circumstances  indicate  that the  carrying  amount  of
intangibles  may  not be  recoverable.  To  perform  that  review,  the  Company
estimates  the sum of expected  future  undiscounted  cash flows from  operating
activities. If the estimated net cash flows are less than the carrying amount of
intangibles, the Company recognizes an impairment loss in an amount necessary to
write  the  intangibles  down  to  fair  value  as  determined  by the  expected
discounted future cash flows. In 1998 the Company wrote off $877,000, reflecting
the remaining  goodwill  associated with its fisCAL credit analysis products and
related  severance costs calculated in accordance with  pre-existing  employment
contracts.  These charges are included in the acquired  in-process  research and
development and other charges in the Company's Statement of Income for 1998.

INVESTMENT IN JOINT VENTURE
In November  1997 the Company made a 50%  investment in Lori Mae,  L.L.C.  (Lori
Mae), a company  designed to  securitize  small  business  loans  originated  by
community  banks.  The  Company  uses  the  equity  method  to  account  for its
investment  in this joint  venture.  In 1998 the  Company  wrote off its initial
investment  in Lori Mae in the  amount  of  $352,000  due to lack of  acceptable
market demand for Lori Mae's initial product. This charge, in addition to losses
attributable to the joint venture, are included in equity in losses attributable
to joint venture in the Company's  Statement of Income for 1998. At December 31,
1998, the net investment in Lori Mae was $0.

REVENUE RECOGNITION
License revenues are derived from three kinds of transactions:

      o     Licenses  with no follow-on  obligations  on the part of the Company
            are recognized upon shipment.
      o     Licenses  which  require  installation  and  training by the Company
            prior to use are recognized upon completion of the  installation and
            training.
      o     Licenses  which  include   significant  amounts  of  tailoring  and,
            occasionally,  customization  are  recognized  on  a  percentage  of
            completion basis as the tailoring and  customization  are performed.
            Estimates  of  efforts  to  complete  a  project  are  used  in  the
            percentage  of  completion  calculation.  Due to  the  uncertainties
            inherent in these estimates,  actual results could differ from those
            estimates.

If the license agreement obligates the Company to provide  post-contract support
at no additional cost to the customer,  the revenue related to the post-contract
support is recognized ratably over the support period. Returns and exchanges are
infrequent and are recorded as reductions in license revenue when the obligation
to accept the return or conduct the exchange becomes known.

                                      F-8

<PAGE>

Revenues for  consulting,  custom  programming  and training,  where  separately
contracted  for, are  recognized as the related  services are  performed.  Other
revenues  include  sales of  preprinted  forms  and font  cartridges,  which are
recognized  upon shipment.  Amounts  received in advance for service and support
contracts are deferred and recognized  ratably over the support period.  Amounts
in excess of invoiced  minimums for service and support  charges  based on usage
are  estimated and  recognized in the period in which usage occurs.  Included in
receivables at December 31, 1998 and 1997 are unbilled receivables of $7,697,000
and $3,824,000, respectively. These primarily relate to percentage of completion
contracts and contracts with deferred payment terms.

During  1997 and 1998  Statements  of  Position  (SOP) 97-2 and 98-9,  "Software
Revenue Recognition," were released and became effective for the Company for the
year  ended  December  31,  1998.  SOP 97-2 and SOP 98-9 did not have a material
impact on the Company's financial statements.

INCOME TAXES
The  Company  accounts  for  income  taxes in  accordance  with  SFAS  No.  109,
"Accounting For Income Taxes." This  pronouncement  requires deferred tax assets
and  liabilities  to be valued  using the  enacted  tax rates  expected to be in
effect when the temporary differences are recovered or settled.

ADVERTISING COST
Advertising  costs are  expensed  as  incurred.  These  costs  were  $1,406,000,
$1,241,000  and $950,000 for the years ended  December 31, 1998,  1997 and 1996,
respectively.

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

EARNINGS PER SHARE
Basic  earnings per share (EPS) and diluted EPS are  computed  using the methods
prescribed by SFAS No. 128,  "Earnings per Share." Basic EPS is calculated using
the weighted  average  number of common  shares  outstanding  for the period and
diluted EPS is computed  using the weighted  average number of common shares and
dilutive common equivalent shares outstanding.  Following is a reconciliation of
basic EPS and diluted EPS:

                                      F-9

<PAGE>

<TABLE>
<CAPTION>

Year Ended December 31,       1998                   1997                  1996
----------------------- --------------------   --------------------  --------------------
(In thousands, except
per share data)                      Per                    Per                    Per
                                     Share                  Share                  Share
Basic EPS              Income Shares Amount   Income Shares Amount   Income Shares Amount
---------              --------------------   --------------------   --------------------
<S>                    <C>    <C>   <C>       <C>    <C>   <C>       <C>    <C>   <C>   
Income available to
 common shareholders   $3,865 5,012 $ 0.77    $4,585 4,919 $ 0.93    $ 17   4,763 $ 0.00
                                     =====                  =====                  =====
Effect of Dilutive
 Securities
 Stock Options            -     155             -      205              -     349
                       --------------         -------------         -------------

Diluted EPS
-----------
Income available to    
 common shareholders   $3,865 5,167 $ 0.75    $4,585 5,124 $ 0.90    $ 17   5,112 $ 0.00
                                     =====                  =====                  =====
</TABLE>

The number of options to purchase shares of common stock that were excluded from
the table  above (as the effect  would have been  anti-dilutive)  were  787,184,
94,500  and  10,000  for the  years  ended  December  31,  1998,  1997 and 1996,
respectively.

SUPPLEMENTARY  CASH  FLOW  INFORMATION  The  Company  made  the  following  cash
payments:

                                                     Years Ended December 31,
                                                     ------------------------
                                                     1998      1997     1996
                                                     ------   -------  ------
                                                          (In thousands)

Interest and preferred dividends                   $   554  $    517 $    148
Income taxes                                         4,751     2,294    1,597


Noncash investing and financing activities were as follows:

                                                     Years Ended December 31,
                                                     ------------------------
                                                     1998     1997     1996
                                                     ------   ------   ------
                                                         (In thousands)
Tax benefit from exercise of nonqualified stock    
  options                                          $    56  $   396  $   632
MicroBilt Financial Services Division
  acquisition (Note 2):
   Issuance of note payable                             --       --    3,500
Input Creations, Inc. acquisition (Note 2):
   Issuance of long term debt                           --       --    1,533
Other acquisitions (Note 2):
  Issuance of long term debt                            --       --    1,182
  Issuance of notes payable                             --       --    1,170
  Issuance of Common Stock                              --       --      266
Note  receivable  received  in  connection  with the
  sale of of remittance processing division             --      788       --
Increase in goodwill for accrued acquisition
  related  contingent royalties                      1,085    1,140       --
Decrease in goodwill and increase in deferred
     tax asset                                          --      389       --
   related to acquired net operating losses
Reclassification of bank line of credit to long      4,000       --       --
     term debt

                                      F-10

<PAGE>

RECLASSIFICATIONS
Certain  reclassifications  in the financial statements and notes have been made
to prior year financial statements to conform with the current presentation.

COMPREHENSIVE INCOME
SFAS No.  130,  "Reporting  Comprehensive  Income,"  establishes  standards  for
reporting and display of  comprehensive  income.  Comprehensive  income includes
charges  or  credits  to  equity  that did not  result  from  transactions  with
shareholders.  SFAS No.  130 became  effective  during  1998.  As net income and
comprehensive  income were identical in 1998, 1997 and 1996 SFAS No. 130 did not
have an impact on the Company's financial statements.

SEGMENT REPORTING
SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information," requires the Company to report certain information about operating
segments.  SFAS No. 131 became  effective for the Company's  year ended December
31,  1998.  The Company  provides  integrated  PC-based  software  to  financial
institutions  for,  among  other  things,   use  in  branch   automation,   loan
origination,  new account opening and electronic banking. The Company classifies
its products  primarily as lending,  retail  delivery  and  connectivity.  These
products  constitute  the  Company's  suite of products and are sold to the same
types of  customer  through  similar  distribution  channels.  Accordingly,  the
Company  believes it operates in one segment.  License  revenues  from  lending,
retail delivery and connectivity products were $31.0 million,  $15.6 million and
$2.5  million,  respectively,  in 1998,  $22.2  million,  $16.9 million and $1.4
million,  respectively,  in 1997,  and $15.4  million,  $17.1  million  and $1.4
million, respectively, in 1996.

Virtually  all of the  Company's  sales  are  made  in the  United  States.  The
remaining sales are made to customers located in Latin America.

RECENT PRONOUNCEMENT
SFAS No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities,"
becomes  effective for the Company's year ending  December 31, 2000. The Company
does not believe that SFAS No. 133 will have a material  impact on its financial
statements.

2.     ACQUISITIONS

In October 1998 the Company acquired substantially all of the assets of Mortgage
Dynamics,  Inc.  (MDI).  The  acquisition  was accounted for as a purchase.  The
purchase price was $2,668,000 in cash plus certain contingent  royalties tied to
future revenue  production.  In conjunction with this  acquisition,  the Company
recorded approximately  $1,518,000 of goodwill, which is being amortized ratably
over a seven  year  period;  $230,000  of  purchased  software,  which  is being
amortized ratably over a three year period; and $991,000 of acquired  in-process
research and development,  determined by independent appraisal, all of which was
expensed in 1998.  The  technological  feasibility  of the acquired  technology,
which has no  alternative  future  use,  had not been  established  prior to the
purchase. Pro forma results for 1998 and 1997 reflecting the MDI acquisition are
not materially different from the Company's reported results for such years.

In April 1996 the Company  acquired all of the capital stock of OnLine Financial
Communication  Systems,  Inc.  (OnLine) and COIN Banking  Systems,  Inc.  (COIN)
(formerly

                                      F-11

<PAGE>

subsidiaries of MicroBilt  Corporation),  and substantially all of the assets of
Input  Creations,  Inc.  (Input),  Pathways  Software,  Inc.  (Pathways) and The
Halcyon Group, Inc.  (Halcyon).  All of these acquisitions were accounted for as
purchases.  The combined purchase prices totaled approximately  $13,600,000 plus
certain  contingent  royalties tied to future revenue  production or to software
conversions.  The $13,600,000  included $5,196,000 of cash,  $7,385,000 in notes
payable  and  other  long-term   liabilities,   $266,000  of  common  stock  and
approximately  $700,000 of other assumed liabilities.  In conjunction with these
acquisitions, the Company recorded approximately $4,300,000 of goodwill which is
being  amortized  ratably  over a seven year period and  $8,030,000  of acquired
in-process research and development, determined by independent appraisal, all of
which was  expensed  in 1996.  The  technological  feasibility  of the  acquired
technology,  which has no alternative future use, had not been established prior
to the purchase.

In November  1995 the Company  acquired all of the  outstanding  common stock of
Culverin Corporation (Culverin), a software company with headquarters in Dayton,
Ohio.  The  initial  purchase  price  consisted  of  $3,888,000  in cash paid in
installments  through  November  1996;  cash of $50,000 and 33,341 shares of the
Company's  common  stock,  valued at $13.50  per  share and  discounted  40% for
restrictions  on trading,  which were delivered on January 1, 1998; and expenses
of  $531,000.  In  addition,  the Company  will make annual  contingent  royalty
payments  through  2000 of between 2% and 14% of revenues  generated by Culverin
products, depending on the amount of such revenues in each year. The transaction
has been  accounted  for as a purchase  and the excess of the  initial  purchase
price over the value of the identifiable assets,  $1,969,000,  has been recorded
as an intangible  asset,  amortized on a  straight-line  basis over seven years.
Annual  contingent  royalty  payments  earned are  recorded  as an  addition  to
intangible assets and amortized on a straight line basis over the remaining life
of the original seven-year period.

3.     PROPERTY AND EQUIPMENT

The major categories of property and equipment are summarized as follows:

                                               Years Ended December 31,
                                             -----------------------------
                                                1998             1997
                                             ------------     ------------
                                                    (In thousands)

 Computer hardware and software            $      10,630    $       9,546
 Furniture and fixtures                            3,293            3,008
 Leasehold improvements                              558              512
                                             ------------     ------------
                                                  14,481           13,066
 Less- accumulated depreciation                    9,947            7,855
                                             ============     ============
                                           $       4,534    $       5,211
                                             ============     ============

                                      F-12

<PAGE>


 Depreciation expense was as follows:
                                              Years Ended December 31,
                                         -----------------------------------
                                           1998        1997         1996
                                         ----------  ----------   ----------
                                                   (In thousands)

Depreciation expense                   $     2,381 $     2,230  $     1,799
                                         ==========  ==========   ==========

4.     ACCRUED EXPENSES

Accrued expenses consist of the following:
                                                      Years Ended December 31,
                                                      -------------------------
                                                        1998           1997 
                                                      ----------    -----------
                                                           (In thousands)

    Accrued royalties                               $     1,766   $      1,958
    Accrued commissions                                     960          1,080
    Accrued bonuses and profit sharing                    2,095            392
    Other                                                 3,196          1,932
                                                      ==========    ===========
                                                    $     8,017   $      5,362
                                                      ==========    ===========


5.     EMPLOYEE BENEFIT PLANS

The Company  created a profit  sharing plan (the Plan) on February 1, 1989 under
the  provisions  of  Section  401(k)  of the  Internal  Revenue  Code.  Employer
contributions  to the Plan are made at the  discretion of the Board of Directors
and were as follows:

                                             Years Ended December 31,
                                        ------------------------------------
                                          1998        1997          1996
                                        ----------  ----------   -----------
                                                  (In thousands)

Employer contributions                $       856 $       468  $        327
                                        ==========  ==========   ===========

The Board of Directors has approved an officers'  bonus plan and employee profit
sharing plan. The amount and timing of the bonus and profit sharing payments are
at the  Board's  discretion.  The  expense  associated  with these  plans was as
follows:

                                             Years Ended December 31,
                                        ------------------------------------
                                          1998        1997          1996
                                        ----------  ----------   -----------
                                                  (In thousands)

Bonus and profit sharing expense      $     2,735 $       850  $      2,298
                                        ==========  ==========   ===========

Through  December 31, 1998 the Company had a qualified  employee  stock purchase
plan (ESPP) which allowed  qualified  employees to direct up to seven percent of
monthly base pay for purchases of stock. The purchase price for shares purchased
under the plan was 85

                                      F-13

<PAGE>

percent of the lesser of the fair market  value at the  beginning  or end of the
plan year. The ESPP will terminate in accordance with its terms during 1999.

6.     LINE OF CREDIT AND LONG-TERM DEBT

Line of Credit
The Company may borrow up to the lesser of $10,000,000 or 50 percent of accounts
receivable, as defined under the terms of a committed, unsecured, revolving bank
line of credit  agreement.  At the  Company's  option,  interest on  outstanding
borrowings may be at the bank's  published  reference rate or alternative  rates
specified in the agreement. The interest rate in effect at December 31, 1998 was
6.7 percent.  The line of credit expires on May 1, 2000. The agreement  contains
covenants  which require the Company to maintain  certain  financial  ratios and
prohibits the Company from  incurring  other debts or liens outside the ordinary
course of business.  The Company is in compliance with the covenants at December
31,  1998.  The  Company  pays an annual  commitment  fee of 0.2  percent on the
average unused balance. Borrowings under the line totaled $4,000,000 at December
31, 1998 and $5,310,000 at December 31, 1997.

Long-Term Debt
At December 31, 1998 and 1997, long-term debt consisted of the following:

                                                               1998     1997
                                                              -------  -------
                                                              (In thousands)

 Note  payable,   in  relation  to  Culverin   acquisition,
   payment  of  $3,690  in  1996  with  the   balance   due $     -- $     50
   January 1998
 Note  payable,  in relation to Halcyon  acquisition,  with
   imputed   interest  at   8 percent,   due   in quarterly
   installments  of  $50,   including   interest,   payable      449      605
   through 2001
 Note   payable,   assumed  in  the  Halcyon   acquisition,
   in monthly   installments  of  $6,  including   interest
   imputed at  8.5 percent,  with final payment due October      307      346
   2004
 Guaranteed  royalties  to be paid  in  relation  to  Input
   acquisition,   with  imputed   interest  at   6 percent,    1,148    1,426
   payable through March 2001
 TSTG non-compete payments through April 1999                     50      100
 Long-term portion of line of credit                           4,000       --
                                                              -------  -------
                                                               5,954    2,527
 Less current portion of long-term debt                         (261)    (295)
                                                              -------  -------
 Long-term debt                                             $  5,693 $  2,232
                                                              =======  =======

                                      F-14

<PAGE>


Payouts under long-term debt are as follows (in thousands):

Years Ending December 31,
-------------------------
1999                                $       261
2000                                      4,230
2001                                      1,295
2002                                         55
2003                                         59
Thereafter                                   54
                                      ----------
                                    $     5,954
                                      ==========

7.     COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases facilities and equipment under operating  leases,  with terms
from one to 10 years, payable in monthly  installments.  Total lease expense was
as follows:

                                          Years Ended December 31,
                                 -------------------------------------------
                                    1998           1997            1996
                                 ------------   -----------     ------------
                                               (In thousands)


Lease expense                  $       2,980  $      2,786    $       2,131
                                 ============   ===========     ============

Future minimum lease payments are as follows (in thousands):

Years Ending December 31,
-------------------------
1999                                       $     2,833
2000                                             2,863
2001                                             1,838
2002                                             1,749
2003                                             1,293
Thereafter                                         506
                                             ----------
                                           $    11,082
                                             ==========

In 1998 the  Company  recorded a loss of $793,000  for the present  value of net
future lease  payments due with respect to certain  office space in Atlanta that
the  Company  ceased  using.  The loss was  included  in  other  charges  on the
Statement of Income for 1998.

                                      F-15

<PAGE>

CONTINGENCIES

The Company is involved in routine legal matters incidental to its business. The
Company  believes  that the  resolution  of any such matters that are  currently
outstanding  will not have a  material  effect  on its  financial  condition  or
results of  operations.  However,  no assurance can be given that the concurrent
resolution  of several of such matters in manners  adverse to the Company  would
not have a material  adverse  effect on the  Company's  financial  condition  or
results of operations.

8.     INCOME TAXES

The provision (benefit) for income taxes is as follows:

                                          Years Ended December 31,
                                 -------------------------------------------
                                    1998           1997            1996
                                 ------------   -----------     ------------
                                               (In thousands)
Current tax provision:
  Federal                      $       3,667  $      3,443    $       2,223
  State                                  402           377              272
                                 ------------   -----------     ------------
                                       4,069         3,820            2,495
Deferred tax provision (benefit)        (586)           87           (1,328)
                                 ------------   -----------     ------------
Total provision                $       3,483  $      3,907    $       1,167
                                 ============   ===========     ============

The  reconciliation  of the statutory  Federal  income tax rate to the Company's
effective income tax rate is as follows:
                                              Years Ended December 31,
                                           -------------------------------
                                             1998       1997       1996
                                           ---------   --------   --------

Federal statutory rate                         34.0 %     34.0 %     34.0 %
State   income   taxes  net  of  Federal        4.8        4.2        6.8
  benefit
Disallowance of meals and entertainment
  expenses                                      1.4        1.1        6.0
Purchase     accounting     adjustments,
  including amortization of intangibles         5.5        5.7       47.6
Change in valuation allowance                  (0.1)      (0.2)      10.9
Other                                           1.2        0.7      (14.1)
                                           ---------   --------   --------
                                               46.8 %     45.5 %     91.2 %
                                           =========   ========   ========

                                      F-16

<PAGE>


Deferred tax assets and (liabilities) are comprised of the following components:

                                                          December 31,
                                                     ------------------------
                                                       1998           1997 
                                                     ----------     ---------
                                                         (In thousands)
Current deferred tax asset:
  Allowance for doubtful accounts                  $       844    $      950
  Current portion of net operating loss
     carryforwards                                         164           177
  Severance and other accruals                             281            20
  Other                                                     52           160
                                                     ----------     ---------
 Total current deferred tax asset                  $     1,341    $    1,307
                                                     ==========     =========
Long-term deferred tax asset (liability):
  In-process technology acquired                   $     2,660    $    2,477
  Depreciation                                            (160)         (154)
  Intangibles amortization                                 702           651
  Capitalized software                                  (3,145)       (3,746)
  Net operating loss and credit carryforwards              475           714
  Other                                                    (77)           33
                                                     ----------     ---------
 Gross long-term deferred tax asset (liability)            455           (25)
  Valuation allowance                                     (100)         (172)
                                                     ----------     ---------
Total long-term deferred tax asset (liability)     $       355     $    (197)
                                                     ==========     =========

The increase (decrease) in the valuation allowance was as follows:

                                              Years Ended December 31,
                                          ---------------------------------
                                            1998        1997        1996
                                          ---------   ---------   ---------
                                                   (In thousands)
Increase (decrease) in valuation        
  allowance                             $     (72)  $     (17)  $      140
                                          =========   =========   =========

At December 31, 1998, for Federal tax return reporting purposes, the Company had
approximately  $1,272,000 of regular and alternative minimum tax loss carryovers
that expire at various dates  through  2010. In addition,  at December 31, 1998,
the Company had $152,000 of general  business  credit  carryovers that expire at
various dates through 2007. The general  business  credit  carryovers may not be
used to offset taxes payable until the tax loss  carryovers are fully  utilized.
In 1997, based on management's estimate of realization,  the Company recorded an
increase  in  deferred  tax assets and a  corresponding  decrease in goodwill of
$389,000  relating to net operating  losses  acquired in connection with a prior
acquisition.

Current Federal tax law limits the net operating loss and tax credit  carryovers
available  to be used in any given  year in the event of  certain  circumstances
including significant changes in ownership interests.  The Company is limited to
using approximately $430,000 of net operating loss carryovers in any one year.

                                      F-17

<PAGE>

9.     PREFERRED STOCK

The Company is redeeming the 10,300 outstanding  shares of mandatory  redeemable
Class A preferred stock at $262.14 per share over a 28-year period ending in the
year 2018. The present value of the remaining payments, which are due quarterly,
has been  recorded  as the  carrying  value at December  31, 1998 and 1997.  The
carrying value is adjusted as payments are made and dividends are accrued on the
shares yet to be redeemed.  The rate used to calculate  the present value was 13
percent per annum, which  approximated the Company's  borrowing rate at the time
redemption  commenced.  At December 31, 1998 there were 7,410 outstanding shares
remaining to be redeemed.

The repayment  schedule for the mandatory  redeemable Class A preferred stock at
December 31, 1998 is as follows (in thousands):

Years Ending December 31,
-------------------------
1999                                            $      103
2000                                                   103
2001                                                   103
2002                                                   103
2003                                                   103
Thereafter                                           1,428
                                                  ---------
Total future payments                                1,943
Less- Amount representing dividends                  1,205
                                                  ---------
Present value of future payments                       738
Less- Current portion                                   --
                                                  ---------
Long-term mandatory redeemable preferred stock  $      738
                                                  =========


10.    STOCK OPTIONS AND DIRECTOR COMPENSATION

At December 31, 1998,  the Company had five stock option plans:  a  Consolidated
Plan, a nonqualified  stock option plan, two plans for outside directors and the
ESPP.

Under the Consolidated Plan,  options,  which consist of incentive stock options
and  nonqualified  stock  options,  generally  vest  ratably over five years and
generally  expire  ten years  from the date of  grant.  The  exercise  price for
incentive  stock options  granted under the plan is set at the fair market value
at the grant date. The exercise price for nonqualified  options may be set below
the fair market value at the grant date, but, to this date, no options have been
granted with an exercise price less than fair market value at the grant date.

Under  the  nonqualified  stock  option  plan,  available  to  officers  and key
employees,  the vesting  period and exercise  price,  which may be set below the
fair  market  value at the date of grant,  are  determined  by the  Compensation
Committee  of the Board of  Directors.  No  options  have been  granted  with an
exercise price less than fair market value at the date of grant.

The  Company has two stock  option  plans for outside  directors:  the  Restated
Outside  Director  Restricted  Stock Plan (the Restricted Plan) and the Restated
Outside Director Compensation

                                      F-18

<PAGE>

and Stock  Option  Plan  (the  Compensation  Plan).  The  Compensation  Plan was
approved by the shareholders of the Company in May 1994 and provides for outside
directors  to be paid  $5,000  per year and  allows  for the  issuance  of stock
options.  A total of 50,000  shares of Common  Stock were  reserved for issuance
under the Restricted Plan and the Compensation Plan, of which 15,400 shares were
reserved  under  the  Restricted   Plan  and  34,600  were  reserved  under  the
Consolidated  Plan. As of December 31, 1998, 28,600 shares had been issued under
the Restricted Plan and are no longer restricted.

Under the ESPP 67,000  shares of Common  Stock were  reserved,  of which  64,354
shares had been issued as of December 31, 1998.

Below is a table showing the activity for the aforementioned  stock option plans
for the past three years:
                                                  Weighted          Total
                                   Shares          Average        Exercise
                                 Subject to       Exercise          Price
                                   Options        Price Per          (in
                                                    Share        thousands)
                                 ------------   ------------  --------------
Balances, December 31, 1995          824,682  $     7.23     $        5,962
Options granted                      290,500       14.52              4,219
Options exercised                   (273,183)       3.63               (991)
Options lapsed                       (10,179)       9.92               (101)
                                 ------------   ------------  --------------
Balances, December 31, 1996          831,820       10.93              9,089
Options granted                      118,000       18.40              2,172
Options exercised                    (79,804)       5.52               (441)
Options lapsed                       (86,713)      13.45             (1,167)
                                 ------------   ------------  --------------
Balances, December 31, 1997          783,303       12.32              9,653
Options granted                      214,293       12.39              2,655
Options exercised                    (51,680)      10.43               (539)
Options lapsed                       (30,490)      13.74               (419)
                                 ------------   ------------  --------------
Balances, December 31, 1998          915,426  $    12.40     $       11,350
                                 ============   ============  ==============

For all five plans at December 31, 1998,  there were 987,591  shares of unissued
stock reserved for issuance under the plans,  of which 2,655 shares are reserved
under the ESPP and options for the purchase of 69,510 shares remained  available
for future grants.  Options to purchase  437,026,  361,873 and 250,990 shares of
common stock were exercisable at December 31, 1998, 1997 and 1996, respectively.
These exercisable options had weighted average exercise prices of $10.71,  $9.91
and $8.27 at December 31, 1998, 1997 and 1996, respectively.

The Financial Accounting Standards Board issued SFAS No.123 which defines a fair
value based method of accounting for an employee stock option and similar equity
instrument  and  encourages  all entities to adopt that method of accounting for
all of their  employee  stock  compensation  plans.  However,  it also allows an
entity to continue to measure compensation cost for those plans using the method
of  accounting  prescribed  by APB 25.  Entities  electing  to  remain  with the
accounting in APB 25 must make pro forma  disclosures of net income and earnings
per share,  as if the fair value based method of accounting  defined in SFAS 123
had been adopted.

                                      F-19

<PAGE>

The Company has elected to account for its stock-based  compensation plans under
APB 25; however,  the Company has computed,  for pro forma disclosure  purposes,
the  value  of all  options  granted  during  1998,  1997  and  1996  using  the
Black-Scholes  options  pricing  model  as  prescribed  by SFAS  123  using  the
following weighted average assumptions for grants:

                                       For the Years Ended December 31,
                                   -----------------------------------------
                                     1998           1997           1996
                                   ----------    ------------   ------------

Risk-free interest rate              6.0%           6.3%           6.0%
Expected dividend yield              0.0%           0.0%           0.0%
Expected lives (years)                7.5            6.9            4.7
Expected volatility                  59.4%          60.7%          62.8%

Using the Black-Scholes  methodology,  the total value of options granted during
1998,  1997 and 1996 was $1,215,000,  $1,286,000 and  $1,854,000,  respectively,
which would be  amortized  on a pro forma  basis over the vesting  period of the
options  (typically  five  years).  The  weighted  average fair value of options
granted  during  1998,  1997 and 1996 was $8.36 per share,  $11.51 per share and
$7.39 per share,  respectively.  The number of shares  issued under the ESPP was
22,383,  20,646 and 11,338 for the years ended December 31, 1998, 1997 and 1996,
respectively,  and the related  weighted  average  purchase  price and  weighted
average  fair value of shares  issued were $10.20 and $5.83,  respectively,  for
1998,  $13.71  and  $6.55,  respectively,   for  1997,  and  $13.71  and  $6.61,
respectively, for 1996.

If  the  Company  had  accounted  for  its  stock-based  compensation  plans  in
accordance  with SFAS 123,  the  Company's  net  income and net income per share
would approximate the pro forma disclosures below:

<TABLE>
<CAPTION>

                                   For the Years Ended December 31,
                                (in thousands, except per share data)
                  ------------------------------------------------------------------
                         1998                   1997                   1996
                  --------------------  ---------------------  ---------------------
                     As         Pro        As         Pro         As         Pro 
                  Reported     Forma    Reported     Forma     Reported     Forma
                  ----------  --------  ----------  ---------  ----------  ---------
<S>                 <C>       <C>          <C>       <C>         <C>      <C>    
Net income (loss)   $3,865    $3,363       $4,585    $3,563      $   17    $  (979)
Net income (loss)   
  per share -       $ 0.77    $ 0.68       $ 0.93    $ 0.72      $ 0.00    $ (0.21)
  basic
Net income(loss)    
  per share -       $ 0.75    $ 0.66       $ 0.90    $ 0.71      $ 0.00    $ (0.21)
  diluted

</TABLE>

The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. Additional awards are anticipated in future years.

                                      F-20

<PAGE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1998:
<TABLE>
<CAPTION>

                  Options Outstanding                        Options Exercisable
--------------------------------------------------------  --------------------------
                    Number       Weighted
                     Out-        Average      Weighted     Number of     Weighted
   Range of        standing     Remaining     Average       Shares        Average
Exercise Prices       at       Contractual    Exercise    Exercisable    Exercise
   Per Share       12/31/98    Life (years)    Price      at 12/31/98      Price
----------------   ----------  ------------   ----------  ------------  ------------
<S>                <C>             <C>          <C>         <C>           <C>   
   $1.00 - 4.99    118,449         3.0          $  1.63     118,449       $  1.63
  10.00 - 14.99    499,877         7.1          $ 12.44     199,877       $ 12.61
  15.00 - 15.00    200,000         7.1          $ 15.00      80,000       $ 15.00
  16.13 - 20.00     87,100         8.1          $ 19.49      28,700       $ 18.46
  24.25 - 24.25     10,000         2.3          $ 24.25      10,000       $ 24.25

</TABLE>

<TABLE>

11.   SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<CAPTION>

QUARTER ENDED (1)                March 31,     June 30,      September        December
(In thousands, except per          1998          1998         30, 1998        31, 1998
share data)
-------------------------------  ----------   -----------   -------------   -------------
<S>                            <C>          <C>           <C>             <C>           
Revenue                        $    19,051  $     19,002  $       23,186  $       24,391
Gross profit                        12,303        11,835          15,413          16,656
Net income applicable to
  common shareholders                1,000           927           1,593             345
Net income per share - basic   $      0.20  $       0.19  $         0.32  $         0.07
Net income per share - diluted $      0.19  $       0.18  $         0.31  $         0.07

<CAPTION>

QUARTER ENDED                    March 31,     June 30,      September        December
(In thousands, except per          1997          1997         30, 1997        31, 1997
share data)
-------------------------------  ----------   -----------   -------------   -------------
<S>                            <C>          <C>           <C>             <C>           
Revenue                        $    16,002  $     17,880  $       17,894  $       20,873
Gross profit                        10,374        11,870          10,907          12,457
Net income applicable to
  common shareholders                  768         1,424             912           1,481
Net income per share - basic   $      0.16  $       0.29  $         0.19  $         0.30
Net income per share - diluted $      0.15  $       0.28  $         0.18  $         0.29

<FN>

 (1) The results in the fourth quarter of 1998 reflect  pretax charges  totaling
   $3,013,000 for the value of in-process  research and  development  efforts at
   the date of acquisition pertaining to MDI (see Note 2) and other charges (see
   Note 1 and Note 7).

</FN>
</TABLE>

                                      F-21

<PAGE>


12.    SUBSEQUENT EVENT

Effective  January 1, 1999 the Company acquired  substantially all of the assets
of Modern Computer Systems, Inc. and certain related corporations (collectively,
MCS). MCS offers hardware and software  solutions for the back office accounting
needs of community banks and credit unions. The acquisition was accounted for as
a purchase.  The purchase  price was $6.0 million in cash and $650,000 of common
stock.  The Company  believes it will likely  write off in the first  quarter of
1999 that  portion  of the  purchase  price  allocated  to  acquired  in-process
research and development, as determined by independent appraisal.

                                      F-22

<PAGE>


                  Report of Independent Public Accountants
                       on Financial Statement Schedule

To the Board of Directors and Shareholders of CFI ProServices, Inc.

We have audited in accordance with generally  accepted auditing  standards,  the
consolidated  financial  statements  included  in CFI  ProServices,  Inc.'s 1998
Annual Report on Form 10-K, and have issued our report thereon dated January 22,
1999.  Our  audits  were made for the  purpose  of  forming  an opinion on those
statements taken as a whole. The Valuation and Qualifying  Accounts  schedule is
the responsibility of the Company's  management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the  auditing  procedures  applied  in  our  audits  of the  basic  consolidated
financial  statements  and,  in our  opinion,  fairly  states,  in all  material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.






                                                          ARTHUR ANDERSEN LLP



Portland, Oregon
January 22, 1999

                                      F-23

<PAGE>

                             CFI PROSERVICES, INC.
                       VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
                                    Additions
                            Balance At  Charged To                        Balance
                            Beginning   Costs And   Deductions            At End 
                             Of Year     Expenses      (a)      Other(b)  Of Year
                            ---------   ----------  ----------  --------  -------
<S>                         <C>         <C>        <C>          <C>       <C>    
Year ended December 31, 1996  
  Allowance for doubtful 
  accounts and 
  sales returns             $    290    $ 2,147    $ (1,514)    $   380   $ 1,303
                            =====================================================

  FASB 109 Valuation        $     49    $   140    $      -     $     -   $   189
                            =====================================================

  Amortization Of
  Intangibles:
    Purchased software      $   1,176   $    693   $  (640)     $     -   $ 1,229
    Software development    
      costs                     2,514      1,194    (1,123)           -     2,585
    Intangibles                   410      1,045          -           -     1,455
                            =====================================================
                            $   4,100   $  2,932   $(1,763)     $     -   $ 5,269
                            =====================================================

Year ended December 31, 1997
  Allowance for doubtful
  accounts and
  sales returns             $  1,303    $  4,808   $ (3,231)    $     -   $ 2,880
                            =====================================================

  FASB 109 Valuation        $    189    $      -   $    (17)    $     -   $   172
                            =====================================================

  Amortization Of
  Intangibles:
    Purchased software      $   1,229   $  1,079   $ (2,308)    $     -   $    -
    Software development    
      costs                     2,585      3,465     (5,315)          -       735  
    Intangibles                 1,455      1,772          -           -     3,227
                            =====================================================
                            $   5,269   $  6,316   $ (7,623)    $     -   $ 3,962
                            =====================================================

Year ended December 31, 1998
  Allowance for doubtful
  accounts and
  sales returns             $   2,880   $  2,005   $ (2,285)    $     -   $ 2,600
                            =====================================================

  FASB 109 Valuation        $     172   $      -   $   (72)     $    -    $   100
                            =====================================================

  Lease Loss Accrual        $       -   $    793   $     -      $    -    $   793
                            =====================================================

  Amortization Of
  Intangibles:
    Purchased software      $       -   $     19   $     -      $    -    $    19
    Software development    
      costs                       735      2,633         -           -      3,368
    Intangibles                 3,227      2,102      (566)          -      4,763
                            =====================================================
                            $   3,962   $  4,754   $  (566)     $    -    $ 8,150
                            =====================================================

<FN>

(a) Represents write-off of receivables,  fully amortized  intangibles,  and, in
1998,  goodwill  associated with a 1996 acquisition.  Also includes reduction in
FASB 109 valuation account credited to income tax expense.

(b) Includes allowance for doubtful accounts recorded as part of the acquisition
of Microbilt Financial Products Division in April 1996.

</FN>
</TABLE>

                                      F-24