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                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                               ----------------
                                   FORM 10-K

(Mark One)

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934

                  For the fiscal year ended December 31, 1996

                                      OR

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934

   For the transition period from                     to

                        COMMISSION FILE NUMBER 00021539

                               IA CORPORATION I
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

               DELAWARE                                94-3161772
     (STATE OR OTHER JURISDICTION                   (I.R.S. EMPLOYER
  OF INCORPORATION OR ORGANIZATION)              IDENTIFICATION NUMBER)


    1900 POWELL STREET, SUITE 600
        EMERYVILLE, CALIFORNIA                           94608
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)               (ZIP CODE)


      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 450-7000
       SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         Common Stock, $.01 par value
                               (TITLE OF CLASS)

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

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

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

  The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 24, 1997 was approximately $22,042,631 based upon the
last sales price reported for such date on the NASDAQ National Market. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is not necessarily
conclusive.

  At March 24, 1997, registrant had outstanding 11,067,268 shares of Common
Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

  The information called for by Part III of this Form 10-K is incorporated by
reference to the definitive proxy statement for the annual meeting of
stockholders of the Company which will be filed no later than 120 days after
December 31, 1996.

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                                IA CORPORATION I

                          1996 FORM 10-K ANNUAL REPORT

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
PART 1....................................................................   3
  Item 1. Business........................................................   3
  Item 2. Properties......................................................  21
  Item 3. Legal Proceedings...............................................  21
  Item 4. Submission of Matters to a Vote of Security Holders.............  21
PART II...................................................................  22
  Item 5. Market for the Registrant's Common Equity and Related
   Stockholder Matters....................................................  22
  Item 6. Selected Financial Data.........................................  23
  Item 7. Management's Discussion and Analysis of Financial Condition and
   Results of Operations..................................................  24
  Item 8. Financial Statements and Supplementary Data.....................  28
  Item 9. Changes in and Disagreements with Accountants on Auditing and
   Financial Disclosure...................................................  28
PART III..................................................................  29
  Item 10. Directors and Executive Officers of the Registrant.............  29
  Item 11. Executive Compensation.........................................  29
  Item 12. Security Ownership of Certain Beneficial Owners and Management.  29
  Item 13. Certain Relationships and Related Transactions.................  29
PART IV...................................................................  30
  Item 14. Exhibits and Financial Statement Schedules.....................  30
</TABLE>

                                       2
<PAGE>

                                    PART I

  This report contains certain forward-looking statements which involve risks
and uncertainties, including statements regarding the Company's strategy,
financial performance and revenue sources. The Company's actual results could
differ materially from the results anticipated in these forward-looking
statements as a result of certain factors set forth under "Item 1, Business--
Risk Factors" and elsewhere in this report.

ITEM 1. BUSINESS

  The Company develops, markets, implements and supports software solutions
for financial services organizations that require flexible automation of high-
volume, complex transactions. The Company currently sells two leading
application framework software products for advanced cash management services,
CheckVision(R) and RemitVision(TM), which are built upon the Company's
advanced, client/server complex transaction management software platform,
WorkVision(TM). IA offers scalable, enterprise-wide application framework
software products that enable its customers to manage and automate their
business processes from end to end. These software products are deployed
through professional services that include comprehensive installation,
training, ongoing maintenance, support and development services. The Company's
customers include ABN AMRO, Comerica, Crestar, First Union National Bank, GE
Capital Mortgage Corporation, Harris Bank, Mellon Bank Corporation, Sanwa Bank
of California and UMB Bank, NA.

INDUSTRY BACKGROUND

  Large organizations in service industries, such as banking, face the
challenge of capturing and retaining market share as competition intensifies
due to changing regulatory requirements, the increasing use of sophisticated
marketing tools and techniques, the introduction and implementation of
advanced customer services and the effect of consolidations. In this highly
competitive environment, organizations are under pressure to provide cost-
effective, tailored services that enable them to differentiate themselves from
their competitors and to adapt quickly and easily to customers' changing
needs.

  This level of customer responsiveness is particularly difficult to achieve
in a cost-effective manner. To provide responsive service, these organizations
need technology that enables them to more efficiently manage their business
processes which often requires the automation of high volumes of complex
transactions. Unlike simple transactions such as the single-step querying or
updating of a database, complex transactions are technologically difficult to
automate, monitor and control. They often consist of many small transactions
or steps that may be processed in geographically dispersed locations and may
take days or weeks to complete. Additionally, the sequence and completion of
complex transactions may be dependent upon external, internal or unrelated
events and may also change as business or customer needs evolve.

  As an example, commercial and retail banks are currently under pressure to
offer new value-added software products and services in order to retain and
attract valued customers. At the same time, deregulation and consolidation in
the banking industry require banks to process ever-increasing and more diverse
transactions in a greater number of locations. Commercial banks, for example,
offer custom lockbox services to process remittance transactions they receive
on behalf of customers' accounts receivable departments. The average
remittance transaction requires multiple discrete steps, for which the
processing rules and deadlines may differ from payment to payment. The
contents of the payment envelopes can vary greatly, both individually and over
time, requiring great flexibility of criteria and instructions for payment
processing. A large bank will process millions of payments per month. This
complex business process averages tens of thousands of steps per hour and
takes place in multiple locations, yet must be managed in a coherent, seamless
end-to-end manner that enables the bank to efficiently serve a growing base of
geographically dispersed customers. The required flexibility and level of
control, coupled with the fact that lockbox locations are typically
geographically distributed throughout the United States, present a complex
technological challenge for efficient, timely and accurate lockbox processing.


                                       3
<PAGE>

  Organizations in a variety of other industries face similar challenges. In
the national and international express delivery business, the ability to
compete successfully is driven by efficient multi-site processing of complex
transactions in an environment of increasing package volumes. Industries
dealing with direct customer inquiries, such as the insurance industry, face
the challenge of effectively completing complex transactions to provide one-
call completion of inquiries in a business environment where transaction
volumes and types of transactions can vary widely.

  Large service organizations face a number of common problems. In addition to
the necessity to process ever-increasing volumes of complex transactions
accurately, reliably, predictably and cost-effectively, problems include the
need for flexible technology that can be used to implement solutions quickly
in order to provide customers with differentiated services that furnish up-to-
date information on the status of transactions; the need to seamlessly monitor
and process transactions in different geographic locations; and the need to
enhance and modify the technology to adapt to evolving customer requirements.
The technology must also be scalable, allowing the customer to manage the
deployment of its technology as its transaction volume grows over time. It
must incorporate the generic business logic that applies to the specific
industry segment and application, thus permitting quick, cost-effective
customization that enables differentiation from competitors' software products
and services.

  To automate high volumes of complex transactions, large organizations have
historically implemented proprietary, mainframe-based systems. These systems,
although powerful and capable of handling massive transaction processing
tasks, are not flexible enough to meet rapidly changing customer demands. More
recently, many internal information technology departments have attempted to
leverage the increased flexibility inherent in distributed, client/server
architecture, but have achieved only limited scalability and flexibility due
to their reliance on two-tier architecture and general purpose software tools.
Also, most information technology departments lack the technical expertise and
sophistication necessary to implement high-end, object-oriented, multi-tier,
client/server systems which provide required scalability and flexibility.
Another approach has been to outsource solution development to system
integrators who offer custom high-end solutions for managing complex business
processes. These, however, are very expensive and typically require lengthy
implementation periods that delay benefits and increase risk of failure.

  Due to the limitations of existing solutions for dealing with high-volume
complex transactions, there exists a need for client/server software products
that address the requirements of organizations for rapidly deployable and
flexible software solutions that process complex transactions accurately,
reliably and predictably.

THE IA SOLUTION

  IA develops, markets, implements and supports software solutions for
financial services organizations that require flexible automation of high-
volume, complex transactions. The Company currently sells two leading
application frameworks for advanced cash management services, CheckVision and
RemitVision. The Company's solutions are deployed through professional
services that include comprehensive installation, training, ongoing
maintenance and support. The Company's strategy is to develop new application
frameworks for the financial services industry and to expand into additional
vertical markets.

  The Company's software products provide several key benefits to its
customers. IA offers scalable enterprise-wide, rather than limited department-
level solutions, thereby enabling customers to manage and automate business
processes from end to end. The software products are designed for high
performance client/server implementations and can handle millions of
transactions across heterogeneous, geographically dispersed computer networks.
At the same time, the Company's software products are flexible, allowing
processes to be modified as needs change without rewriting the entire
application, retraining personnel or interrupting the business process. These
benefits enable IA's customers to optimize their business processes, enhance
their customer service and differentiate themselves from their competitors.

                                       4
<PAGE>

  IA's solutions use powerful object-oriented application frameworks that
incorporate industry-specific domain knowledge and interoperate with legacy
systems. These application frameworks can be enhanced and reconfigured as the
customer's business changes. The Company's application frameworks contain
reusable industry-specific knowledge common to a specific market segment,
e.g., business objects and logic for integrated wholesale and retail lockbox
processing by banks. These application frameworks permit IA to rapidly and
cost-effectively deploy tailored solutions to its customers.

  The Company's application frameworks are based on its advanced high
performance WorkVision client/server object-oriented architecture, designed to
address complex, transaction-intensive enterprise business problems.
WorkVision's powerful features include a geographically distributed design
that combines multiple complex transaction management engines with
appropriately centralized or distributed management and control. WorkVision's
open architecture supports the major client/server operating systems,
databases, network software and hardware.

THE IA STRATEGY

  The Company's objective is to be a leading provider of software solutions
that handle high-volume, complex transactions. Key elements of the Company's
strategy include:

  Maintain Technological Leadership. The Company's strategy is to maintain its
technological leadership through continued investment in advanced, object-
oriented technology and application frameworks. This architecture enables IA
to provide application frameworks that incorporate industry-specific domain
knowledge and that are flexible, geographically distributed and scalable. The
architecture also permits the addition of features and functionality to the
Company's existing application framework software products to meet customers'
rapidly evolving needs. The Company believes that its open WorkVision
architecture facilitates IA's ability to develop new application frameworks
rapidly.

  Increase Penetration in Financial Services Industry. The Company's strategy
is to become a leader in providing software solutions that handle high-volume,
complex transactions for the financial services industry. The Company
currently sells two leading application frameworks for advanced cash
management services, CheckVision and RemitVision. To date, CheckVision has
been installed at 14 large banks in the United States and certain modules of
RemitVision have been installed at two of these banks. The Company is
currently under contract to install its products at three additional large
banks. IA believes that the remaining large United States banks and other
financial institutions represent a substantial market opportunity. The
Company's strategy is to develop new application frameworks for the financial
services industry as well as to add more features and functions to the
CheckVision and RemitVision application frameworks.

  Expand Marketing and Distribution Through Strategic Relationships. In May
1996, the Company entered into a strategic alliance agreement with NCR
Corporation to market and sell the Company's CheckVision cash management
software products to banks throughout the United States and Canada. NCR, a
leading provider of computer hardware and software primarily to the banking
industry, has a large sales and marketing organization and extensive
experience and customer relationships. IA intends to pursue additional
strategic relationships to expand distribution of its software products.

  Leverage Existing Customer Base. The Company recognizes that one of its most
valuable assets is its current customer base. The Company's installed
customers have provided references to prospective clients in the past and the
Company expects that its growing customer base will continue to do so. The
Company provides software maintenance services and encourages its customers to
purchase software upgrades and new software modules. In addition to software
maintenance, the Company offers advanced training and support services to its
customers' information technology departments so that they can enhance the
Company's products for their own purposes. IA's close relationship with its
customers enables the Company to cross-sell additional products within the
customer's organizations.

                                       5
<PAGE>

  Develop New Application Frameworks for Other Vertical Markets. IA's strategy
is to leverage its advanced WorkVision architecture to develop application
frameworks for other vertical markets where the Company perceives significant
opportunities. This includes expansion into markets such as pharmaceuticals
and health insurance where customers need advanced solutions incorporating
reusable industry-specific domain knowledge and high-volume, complex
transaction processing. IA has initiated marketing activities with selected
potential customers in these areas.

  The foregoing statements regarding the Company's strategy and intentions are
forward-looking statements, and actual results may vary substantially
depending upon a variety of factors, including, without limitation those
factors discussed under "Risk Factors."

PRODUCTS

  The Company currently sells two leading application framework software
products for advanced cash management services, CheckVision and RemitVision.
The Company believes check processing and remittance processing are strategic
processes for banks and other financial institutions. CheckVision and
RemitVision are built upon the Company's advanced, client/server complex
transaction management software platform, WorkVision. WorkVision is designed
to support enterprise-wide, high performance, business-critical applications.
The Company believes the flexibility and sophistication of this core
technology creates a competitive advantage for the Company in building
additional application frameworks. The Company's software products are
scalable and support geographically distributed operations. They are currently
available on Sun Solaris and NCR SVR4 UNIX platforms, and WorkVision is also
available on the HP-UX platform. The software products support client
platforms using Microsoft Windows, Microsoft NT and IBM OS/2, interoperate
with database management systems from Informix, Oracle and Sybase, and provide
access to a variety of legacy systems through SNA, FTP, TCP/IP and other
protocols.

 CheckVision

  CheckVision provides new features to commercial banks' check processing
services. CheckVision enhances and expands cash management services by
integrating transactional data and captured images, and delivering these data
to banks' customers. Delivery vehicles include CD ROM, specialized printed
statements and remote access for review and action on customers' PCs. The
current CheckVision cash management features include:

  . Positive pay services which enable a user to examine an on-line check
    image that has been presented for payment to determine whether to honor
    the check for payment. These services enhance fraud prevention and
    accounting control of disbursements to banks' customers;

  . Account reconcilement processing services which provide banks' customers
   with the ability to query and match check images to account statements.
   These services are generally provided on CD ROMs, which contain up to
   25,000 check images and their associated accounting statements, or can be
   accessed on-line for immediate verification;

  . Payable through drafts processing services which deliver on-line images
    of drafts that require the customers' authorization to honor; and

  . Inquiry services which enable banks' corporate customers to use their PCs
    to make on-line inquiries regarding their accounts for research purposes.

  CheckVision also enables banks' check processing operations to capture,
store in a multi-tiered archive, and retrieve images of checks and related
items for specialized statement rendition and research purposes. This software
is a valuable component of commercial banks' efforts to take advantage of
national trends in check presentment and branching. Currently, the typical
license fee per CheckVision customer is approximately $350,000, which includes
a runtime license for the applicable WorkVision module(s). To date, 14 large
banks have installed CheckVision at 22 sites and have licensed remote inquiry
for approximately two thousand customers.

                                       6
<PAGE>

 RemitVision

  RemitVision provides banks or other third-party remittance processors with
the ability to combine high-volume consumer payment activity with complex
corporate accounts receivable processing. RemitVision can process thousands of
individual accounts with a wide variety of business rules. Banks that develop
or acquire processing and/or production facilities across the country can use
RemitVision to link these centers into a seamless structure, thus presenting a
single service organization to their customers. This multi-site capability
also enables banks to open sites in new locations at low cost by using
RemitVision's remote operating features.

  RemitVision includes modules that can be licensed independently of the
payment processing software modules. These service modules include: exception
processing that enables corporate receivable managers to view remittances on-
line and instruct the bank on exceptions to the customers' established
business rules; CD ROM delivery of remittances and documentation received at
the lockbox bank; on-line delivery and inquiry services; and archival storage
of transactions for improved customer service.

  A typical site license fee for a RemitVision lockbox processing site will be
approximately $500,000, which will include a runtime license for the
applicable WorkVision module(s). To date, three customers have licensed
service modules of RemitVision, and the Company has entered into contracts to
license a complete lockbox processing system to three large banks, one of
which, plans to deploy RemitVision at five sites.

  The functions of the Company's CheckVision and RemitVision application
framework software products are summarized in the following table:

<TABLE>
<CAPTION>
              PRODUCT                    FUNCTION
              -------------------------------------------
           <C>            <C> <S>
            CheckVision       . Cash Management:
                                -- positive pay
                                -- account reconcilement
                                  processing
                                -- payable through drafts
                                -- inquiry
                              . Check Processing:
                                -- statements
                                -- CD ROM output
                                -- all items archive

              -------------------------------------------
            RemitVision       . Payment Processing:
                                -- wholesale lockbox
                                -- retail lockbox
                                -- credit card payments
                                -- other high volume
                                  consumer payments
                              . Exception Processing
                              . CD ROM Delivery
                              . On-line Delivery
                              . Archival Storage
</TABLE>


 WorkVision

  The WorkVision software platform provides the foundation upon which the
Company's application frameworks are built. This software platform consists of
four components, WorkHorse, WorkDesk, WorkStore and WorkXchange, the
applicable portions of which are incorporated into the Company's application
frameworks. WorkHorse is an enterprise-wide engine designed for the management
of high-volumes of complex transactions. WorkDesk is a standard GUI which
offers desktop presentation for defining, deploying, managing,

                                       7
<PAGE>

and administering a solution and for supporting end-users. WorkXchange
provides the functionality to capture complex data types. WorkStore manages
the hierarchical storage of large and small objects captured by WorkXchange,
with replication technology and optical, tape, magneto-optical, and RAID media
storage.

  WorkVision's client/server architecture incorporates an object-oriented
design specifically suited for images and multimedia. WorkVision is developed
in C++ with published APIs. A runtime site license for the applicable
WorkVision modules is typically included with the license of the Company's
application frameworks. The Company may from time to time license WorkVision
to select system integrators who develop custom applications for customers in
non-competing vertical markets and to companies who develop proprietary
applications for their own internal requirements.

  WorkVision has a number of characteristics that permit the rapid development
of application frameworks. Its geographically distributed design utilizes
multiple engines with centralized monitoring and control. WorkVision is
scalable through the use of partitioning and replication within a department,
a site or multiple locations. It provides dynamic flexibility to accommodate
changes without stopping the production system or recompiling the
application's code, and offers multi-platform support including Microsoft
Windows, Windows NT, IBM OS/2 and UNIX clients.

SERVICES

 Product Development

  The Company has a number of ongoing software development projects. The
Company expects to release enhancements to its CheckVision, RemitVision and
WorkVision software products.

  The Company's product development has been primarily funded by customers as
part of the development of software applications for such customers. To date,
the majority of the Company's total revenues has been derived from large
application development contracts. Although the Company's strategy is to
reduce the percentage of its total revenues from such contracts over time, the
Company's total revenues for the foreseeable future will continue to be
substantially dependent on revenues from large application development
contracts.

  The Company's policy is to retain ownership of developed software products.
However, once the Company has completed the development of a product for a
customer, it must then make a substantial investment to develop the underlying
technology into a commercially available product. In some cases, the Company
has in the past chosen, and may in the future choose, not to utilize the
research funded by development contracts to create a commercial product. Upon
commercialization of any such software products, the Company has agreed under
certain circumstances in the past, and may agree in the future, to pay
royalties to repay development expenses to the customer for whom the
development services were undertaken. In certain circumstances, the Company
has agreed to restrict its use of such software products to certain markets
and during limited time periods.

  The Company believes that continued revenue growth is highly dependent upon
the development and enhancement of software products that meet market needs.
Internally funded product development costs have been approximately $11.4
million to date and have not been capitalized. The Company believes that, as a
result of its product development strategy, internally funded development
costs may increase in future periods.

  The Company believes that its future success will depend, in part, on its
continuing ability to maintain its technological leadership position through
continued significant investment in its advanced, object-oriented technology
architecture and application frameworks. This architecture enables IA to
provide application frameworks that incorporate industry-specific domain
knowledge and are flexible, geographically distributed and scalable. The
Company also believes that its open WorkVision architecture facilitates IA's
ability to develop new application frameworks rapidly. The application
frameworks permit the addition of features and functionality to its existing
software products to meet customers' rapidly evolving needs.


                                       8
<PAGE>

 Professional Services

  The Company provides professional services to install its solutions at the
customers' operational sites, and to interface solutions to the customers'
operating environments, which usually include legacy applications. The Company
also assists its customers by configuring the solutions and demonstrating the
solutions' performance by executing acceptance test protocols. These services
are provided for a fee on a fixed price basis.

 Product Support

  As the Company's software is deployed in business-critical environments,
product support is important for the continuing success of the Company's
product deployment, sales and marketing. The Company offers support contracts,
for an annual fee, to customers who have entered into license agreements for
the use of the Company's software products.

  In addition to standard software maintenance services, the Company offers
several levels of technical support services. These include a choice of hours
of coverage for telephone support, remote diagnostics or on-site support.
These services are provided for a fee on a fixed price basis.

  In addition to the standard training that is included in the installation
services, the Company offers advanced training in its platform and/or
framework software technology. The scope of the training is negotiated
depending on the customer's needs, and will typically be priced in one week
increments. Advanced technology training services are performed for a fee on a
fixed price basis.

CUSTOMERS

  To date, the Company's customers for its licensed software have been
primarily banks. The Company's total revenues in any period have been
substantially dependent on a relatively small number of large customers. In
1993 and 1994, Federal Express accounted for 36% and 30% of the Company's
total revenues, respectively, and in 1995, Mellon Bank provided 36% of the
Company's total revenues. Mellon Bank and First Union National Bank provided
19% and 15%, respectively, of the Company's total revenues in 1996. Set forth
below is a representative list of the Company's financial services industry
end users as of December 31, 1996, who have signed contracts providing for
revenues to the Company of at least $100,000:

ABN AMRO                                 National City Corporation
Bank of the West                         NationsBanc Services, Inc.
Comerica                                 (NationsBank)
Crestar                                  Quest Point, L.P. (CoreStates)
Eastern Corporation Federal Credit       Signet Bank
Union (EasCorp)                          Sanwa Bank of California
Fidelity Investments                     South Trust Data Services, Inc.
First Union Corporation (First Union     The Northern Trust Company
National Bank)                           UMB Bank, NA
Fleet Services Corporation               Union Bank of California/The Bank of
GE Capital Mortgage Corporation          California
Harris Bank                              Wachovia
Mellon Bank Corporation

REPRESENTATIVE CUSTOMER INSTALLATIONS

  The Company directly targets the 120 largest banks in the United States. In
addition, the Company has begun to expand its marketing efforts to focus on
other financial service markets. Below are examples of representative
customers who have installed the Company's products.

  Union Bank of California made a strategic decision to install the Company's
CheckVision software products in order to provide a portfolio of advanced cash
management services to its corporate customers. One of these is a rapidly
growing high volume money order issuer which has reduced its exposure to check
fraud by using

                                       9
<PAGE>

CheckVision's Positive Pay feature; it allows the client to view its check
images by 8:00 am the next business day and to quickly make a pay-or-no-pay
decision on exceptions and suspect checks.

  UMB Bank, NA ("UMB"), a large commercial bank located in Kansas City,
Missouri, has been IA's development partner since 1992. Working closely with
the Company and its predecessor, UMB has created a technology infrastructure
that has enabled the bank to successfully execute strategic moves into new
product areas that support UMB's objectives of increasing fee income as a
proportion of total revenue. To enhance Fidelity Investment's shareholder
draft clearing product, UMB in 1992 acquired a check image system from IA that
transmits the images of the drafts cleared at UMB over a T1 telecommunications
link to Fidelity's image statement production system, installed by IA's
predecessor company in 1991. Based on the success of this high visibility
business relationship, UMB subsequently added other significant mutual fund
customers by providing similar check clearing and transmission services. In
1993, the Company installed a check image statement system at UMB for the
bank's checking account customers. This service, which has enabled UMB to
eliminate the mailing of canceled checks with a majority of the 30,000 monthly
statements, will now be available to its affiliated community banks. These
banks demand this cost-effective service in order to remain competitive with
their local competitors that have become branches of regional or superregional
banks, without having to make major investments in technology. Continuing to
work with IA to leverage its CheckVision capability, UMB in 1995 began
delivering advanced account reconciliation processing services, including CD
ROM delivery and remote inquiry, to its corporate customers. Currently, over
80 customers that maintain 130 accounts pay a premium fee for the efficiency,
convenience and automation of account reconciliation and check research
functions that UMB's products provide to their treasury departments. The bank
is planning to add Positive Pay and Exception Processing to its cash
management services and deliver these services to commercial customers in
several different cities through a network of geographically distributed
processing centers.

  GE Capital Mortgage Corporation, one of the nation's largest underwriters of
mortgage insurance, introduced overnight underwriting. The Company developed a
WorkVision-based enterprise solution which images, recognizes and archives all
mortgage insurance applications that are sent via Federal Express to GE's new
national processing center in Memphis, Tennessee. The IA system automates GE's
work process and transmits the application data to GE's automated loan
underwriting system called GENIUS. Underwriters can view the document images
and the GENIUS recommendation at the same time. Applications that need a more
in-depth review are automatically transmitted by the IA system to GE's local
branch. GE transmits its responses by fax so as to arrive by 8:30 am of the
day after the loan application was sent. By providing overnight response to
its customers through seamless distributed processing, GE believes it has
achieved a competitive advantage and improved customer service and
productivity.

TECHNOLOGY

  The following characteristics highlight the Company's WorkVision technology
for delivering dynamically flexible, highly scalable client/server systems to
handle high transaction volumes for geographically dispersed enterprises.

  Geographically Distributed Complex Transaction Management. The technology
enables communication and coordination of transaction elements throughout the
enterprise, regardless of geographical location, based on the defined business
rules and practices at that time. In a single system, multiple cooperating
transaction enactment engines can be configured in different geographical
locations. This enables the construction of application frameworks with
underlying enterprise-wide automated business processes, allows processing
steps to be performed where resources are available and provides for flexible
re-allocation as conditions dictate.

  Dynamic Flexibility. An administrative application provides monitoring and
control of the storage hierarchy, enabling dynamic changes in data flow
priority for optimum usage of resources without stopping production systems or
recompiling the application's code. Transaction elements can be moved from one
queue to another and/or from one location to another. All transaction
management components, i.e., map, routes and predicates, deadlines, and the
resource allocation schema can be changed dynamically at runtime and take
effect

                                      10
<PAGE>

immediately. Similarly, item definitions can be changed and new item classes
introduced dynamically. Each transaction enactment engine can be configured to
be controlled locally or remotely. These features provide the ability to take
corrective action in the face of variable work loads and/or resource
availability and to accommodate shifts in transaction work load between or
among sites.

  Scalability. The Company's object technology enhances scalability through
process replication and data partitioning. Process replication and data
partitioning also enhance system availability, as failure of a server only
degrades performance or, at worst, makes some data temporarily inaccessible.
Scalability and high availability are essential features for enterprise
applications when business growth is unpredictable.

  The Company's application frameworks are built on appropriately selected
WorkVision modules and are enhanced with application specific business
objects.

  Application Frameworks. The WorkVision platform greatly simplifies the
inherent complexity of developing a distributed application. Each application
framework is comprised of a set of simple stand-alone activities, and a set of
events and items through which the activities communicate. The application-
specific business objects are referred to by transaction elements, and used to
build the activities. The business objects encompass business specific logic
and are developed as C++ objects and/or relational tables. Each business
object and activity can be independently developed and tested, and the
WorkVision transaction and event enactment services ensure correct behavior of
the whole. The WorkVision tools are used to set up the folders, items, queues,
routes, roles, transaction enactment engines, and storage hierarchy required
by the framework. The built-in WorkVision exerciser application is used to
test the overall logic of the framework.

SALES, MARKETING AND DISTRIBUTION

  The Company sells its software products in North America through a direct
sales force that is based at the Company's headquarters in California,
covering the western United States, and at field sales offices covering the
central, southeastern, and northeastern United States. The direct sales force
currently targets large financial services organizations, including the
largest 120 United States banks, that require scalable, high performance,
distributed systems for cash management applications. The sales cycle varies
from customer to customer and typically ranges from six to 12 months.

  The Company intends to diversify its sales channels in order to increase and
accelerate bookings from indirect sales. The Company's indirect sales channel
strategy includes joint marketing agreements with firms that sell
complementary software products and distribution agreements with noncompeting
firms that have significant account presence. These agreements are expected to
expand the Company's initial target market beyond the largest 120 banks in the
United States. The Company is currently investing, and intends to continue to
invest, significant resources to develop these channels. In May 1996, the
Company entered into a strategic alliance agreement with NCR Corporation to
market and sell the Company's CheckVision cash management software products to
banks throughout the United States and Canada. NCR, a leading provider of
computer hardware and software primarily to the banking industry, has a large
sales and marketing organization and extensive experience and customer
relationships.

  The Company allocates certain sales and technical sales support resources to
investigating opportunities for new applications frameworks that take
advantage of the strengths of the WorkVision software platform. In addition to
financial services, this includes expansion into markets such as
pharmaceuticals and health insurance where customers need advanced transaction
management solutions incorporating reusable industry-specific domain
knowledge. IA has initiated marketing activities with selected potential
customers in each of these areas.

  Primarily due to the large financial services market in North America, the
Company is focusing its sales efforts on the United States and Canada, and the
Company does not intend to pursue any international markets for the next 12 to
24 months.


                                      11
<PAGE>

COMPETITION

  The Company's competitors vary in size and in scope and breadth of the
software products and services offered. The Company competes with information
and document management systems companies, including: (i) a number of private
companies and certain public companies which offer software products targeted
at one or more specific market segments such as BancTec, Broadway & Seymour,
Fiserv, IBM, NCR and Unisys; (ii) the internal information technology
departments of potential customers which develop proprietary customer
information solutions; and (iii) a number of companies, such as IBM, and TRW
targeting enterprise-wide information systems. In particular, with respect to
its CheckVision product the Company competes with Fiserv, and with respect to
its RemitVision product the Company competes with BancTec, TRW and Unisys.
Among the Company's potential competitors are also a number of large hardware
and software companies that may develop or acquire software products that
compete with the Company's software products. In competing with hardware
vendors, the Company may be at a competitive disadvantage because hardware
vendors are able to package and discount transactions of hardware and
software, thereby allowing the customer the opportunity to deal with a single
vendor.

  Many of the Company's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and larger customer bases, than
the Company. The Company's current and future competitors could introduce
software products with more features, higher scalability, greater
functionality and lower prices than the Company's software products. These
competitors could also bundle existing or new software products with other,
more established software products in order to compete with the Company.
Moreover, as the client/server solutions market develops, a number of
companies with significantly greater resources than the Company could attempt
to increase their presence in this market by acquiring or forming strategic
alliances with competitors or business partners of the Company. Further,
because there are relatively low barriers to entry for the software market,
the Company expects additional competition from other established and emerging
companies. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, operating results and financial
condition. Any material reduction in the price of the Company's software
products would negatively affect gross margins. There can be no assurance that
the Company will be able to provide software products that compete favorably
with the software products of the Company's competitors or that competitive
pressures will not require the Company to reduce its prices. The Company's
failure to provide competitive products will have a materially adverse effect
on the Company's business, operating results and financial condition.

  The principal competitive factors in the Company's market are quality,
performance, price, customer support, corporate reputation, technical
excellence and product features such as scalability, dynamic reconfigurability
and geographically distributed work process management. The Company believes
it competes favorably with respect to each of these factors.

INTELLECTUAL PROPERTY AND LICENSING

  The Company's success depends upon its proprietary technology. The Company
relies on a combination of copyright, patent, trademark and trade secret laws,
confidentiality procedures, and licensing arrangements to establish and
protect its proprietary rights. The Company presently has four patents. While
the Company's current software products are not dependent on these patents,
such patents may be utilized in future software products. As part of its
confidentiality procedures, the Company generally enters into non-disclosure
agreements with its employees, distributors and corporate partners, and limits
access to and distribution of its software products, supporting documentation
and other proprietary information. Despite these precautions, it may be
possible for a third party to copy or otherwise obtain and use the Company's
software products or technology without authorization, or to develop similar
technology independently. In addition, effective protection of intellectual
property rights is unavailable or limited in certain foreign countries where
the Company has in the past and may in the future license its software
products. There can be no assurance that the Company's protection of its
proprietary rights will be adequate or that the Company's competitors will not
independently develop

                                      12
<PAGE>

similar technology, duplicate the Company's software products or design around
any intellectual property rights upon which the Company's business is now or
may in the future be dependent.

  The Company is not aware that any of its software products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future software products. The Company expects that software product
developers will increasingly be subject to such claims as the number of
software products and competitors in the Company's industry segment grows and
the functionality of software products in the industry segment overlaps. Any
such claims, with or without merit, could result in costly litigation that
could absorb significant management time, which could have a material adverse
effect on the Company's business, operating results and financial condition.
Such claims might require the Company to enter into royalty or license
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.

  The Company's products incorporate certain software that it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's software products to perform key functions.
There can be no assurance that such firms will remain in business, that they
will continue to support their software products, or that their software
products will otherwise continue to be available to the Company on
commercially reasonable terms. The Company believes that substantially all of
the software it licenses is available from vendors other than the Company's
current vendors, or could be developed internally by the Company, and could
therefore be replaced with equivalent software in a timely manner. However, it
is possible that the loss or inability to maintain any of these software
licenses could result in delays or reductions in product shipments until
equivalent software can be developed, identified, licensed, and integrated,
which would adversely affect the Company's business, operating results, and
financial condition.

  The Company typically licenses its software products in object code to
customers under nonexclusive, nontransferable license agreements. As is
customary in the software industry, the Company does not sell or transfer
title of its software products to customers. In addition, the Company escrows
the applicable source code as part of its maintenance program, pursuant to
which the Company's source code will be released to the customer upon the
occurrence of certain events, such as the commencement of bankruptcy or
insolvency proceedings by or against the Company, or certain material breaches
of the agreement. In the event of any release of the source code from escrow,
the customer's license is generally limited to use of the source code to
maintain, support and enhance the Company's software products for the
customer's own use. Licenses for the Company's software products are usually
perpetual. Under the Company's standard form license agreement, the annual
software maintenance fee is based on a percentage of the applicable
undiscounted product license fee. The Company's published product license
price list includes discounts for multiple sites and/or multiple copies of
client viewer software, and where applicable, upgrade fees for increases in
the volume of processed transactions.

EMPLOYEES

  As of December 31, 1996, the Company employed 130 persons, including 23 in
sales and marketing; 93 in product development, delivery, and support; and 14
in general and administrative positions. None of the Company's employees is
represented by an organized association. The Company has experienced no work
stoppages and believes that its relationship with its employees is good.
Competition for qualified personnel in the software segment in which the
Company competes is intense. The Company believes that its future success will
depend in part on its continued ability to attract, hire, and retain qualified
personnel.


                                      13
<PAGE>

EXECUTIVE OFFICERS AND DIRECTORS

  The following table set forth certain information as of December 31, 1996,
with respect to each person who is an executive officer or director of the
Company:

<TABLE>
<CAPTION>
          NAME            AGE                           POSITION
          ----            ---                           --------
   <S>                    <C> <C>
   Chakravarthi V. Ravi   53  President, Chief Executive Officer and Chairman of the Board
   David M. Winkler       52  Chief Financial Officer, Vice President and Secretary
   William E. Guthrie     54  Vice President, Sales
   Geraldine McGrath      47  General Counsel
   Henry Kressel (1)      63  Director
   Peter Stalker, III
    (1)(2)                38  Director
   John Oltman (2)        51  Director
   Randy Katz (2)         41  Director
</TABLE>
--------
(1) Compensation Committee member
(2) Audit Committee member

NOTE: In February 1997, Dr. Jesse Quatse, the Company's Chief Operating
      Officer, resigned to pursue other interests. The Company has initiated a
      search for a replacement.

  Dr. Ravi was a founder of the Company and has been the Chairman, President
and Chief Executive Officer of the Company since its inception in July 1992.
Dr. Ravi was President of Litton Industries' Integrated Automation Division,
the Company's predecessor, from August 1990 to July 1992. From 1978 to July
1990, Dr. Ravi worked for Teknekron Controls Inc. and Integrated Automation in
a number of positions in general management, sales and marketing, strategic
planning, software design and implementation of high technology systems. Prior
to 1978, he was an Assistant Professor in the Electrical Engineering and
Computer Science Department of the University of California at Berkeley
specializing in computer architecture, software and telecommunications. Dr.
Ravi received an M.S. and Ph.D. in Electrical Engineering and Computer Science
from the University of California at Berkeley and a B.Tech (Hons.) in
Electrical Engineering from the Indian Institute of Technology in Bombay,
India.

  Mr. Winkler was a founder of the Company and has been Chief Financial
Officer and Vice President of the Company since its inception in July 1992.
Mr. Winkler was Chief Financial Officer and Vice President of Litton
Industries' Integrated Automation Division from December 1989 to July 1992.
Prior to December 1989, Mr. Winkler held management responsibilities for
finance and accounting, management information systems, human resources,
facilities, administrative services, and program management with Litton
Amecom, Litton Data Command Systems, and Litton Saudi Arabia Limited, all of
which are computer hardware companies. Mr. Winkler holds a B.S. in Mechanical
Engineering from the University of Notre Dame.

  Mr. Guthrie has been with the Company since its inception in July 1992, and
currently serves as Vice President, Sales. Mr. Guthrie was a Regional Sales
Director of Litton Industries' Integrated Automation Division from October
1989 to July 1992. Prior to October 1989, Mr. Guthrie was a Regional Manager
for Prime Computer, a computer manufacturing company, with responsibility for
sales within the Los Angeles region and also held sales management positions
at IBM with responsibilities in the financial services industry. Mr. Guthrie
earned an M.B.A. from Georgia State University and a B.S. in engineering from
the United States Military Academy.

  Ms. McGrath has served as General Counsel of the Company since its inception
in July 1992. From August 1987 until July 1992, Ms. McGrath served as Litton
Industries' Integrated Automation Division Counsel and Assistant Secretary.
Ms. McGrath served as General Counsel and Assistant Secretary for Integrated
Automation, Inc., a predecessor for the Company, from June 1986 until August
1987. Ms. McGrath holds a B.A. from San Francisco State University and a J.D.
from San Francisco Law School and is a member of the American Arbitration
Association's Arbitrator and Mediator panels.


                                      14
<PAGE>

  Dr. Kressel has served as a director of the Company since its inception in
July 1992. Dr. Kressel, a partner of Warburg, Pincus & Co., the general
partner of Warburg, Pincus Investors, L.P., and a managing director of E.M.
Warburg, Pincus & Co., LLC has been with E.M. Warburg, Pincus & Co., LLC since
1983. Dr. Kressel serves as a director of Level One Communications, Inc.,
Zilog, Inc., Maxis, Inc., TresCom International, Inc., NOVA Corporation, Inc.
and several privately held companies.

  Mr. Stalker has served as a director of the Company since April 1995. Mr.
Stalker, a partner of Warburg, Pincus & Co., LLC the general partner of
Warburg, Pincus Investors, L.P., and a managing director of E.M. Warburg,
Pincus & Co., LLC has been with E.M. Warburg, Pincus & Co., LLC since 1984. He
is a director of Cambridge NeuroScience, Inc., and several privately held
companies.

  Mr. Oltman has served as a director of the Company since March 1996. Mr.
Oltman is the former chairman of the board and chief executive officer of SHL
Systemhouse Inc., a company that provides client/server consulting and
integration services. Mr. Oltman was formerly Worldwide Managing Partner for
Integration Services for Andersen Consulting and a member of Andersen
Consulting's Worldwide Organization Board of Directors. Mr. Oltman serves as a
director of Vanstar and a privately held company.

  Dr. Katz has served as a director of the Company since January 1997. Dr.
Katz is the Chairman of the Electrical Engineering and Computer Science
Department at the University of California, Berkeley, and has been a professor
at UC Berkeley for 17 years. Dr. Katz is responsible for the creation of a
number of multiprocessing features used in the software industry today,
including the revolutionary high performance storage technology RAID
(Redundant Arrays of Inexpensive Disks).

RISK FACTORS

  The discussion in this report contains forward-looking statements that
involve risks and uncertainties, including statements regarding the Company's
strategy, financial performance and revenue sources. The Company's actual
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as those discussed
elsewhere in this report.

  History of Operating Losses; No Assurance of Profitability.  The Company has
incurred significant net losses since its inception, including losses of $4.0
million, $3.9 million and $1.3 million for 1993, 1994 and 1995, respectively.
At December 31, 1996, the Company had an accumulated deficit of approximately
$12.5 million. The Company achieved net income of approximately $327,000 for
the quarter ended March 31, 1995, and incurred losses during the remaining
three quarters and for the year ended December 31, 1995. While the Company
achieved net income of approximately $1.4 million for the twelve months ended
December 31, 1996, there can be no assurance that the Company will have
operating profits in any future period, and recent operating results should
not be considered indicative of future financial performance. See "Item 6,
Selected Financial Data" and "Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations."

  Variability of Quarterly Operating Results. The Company's quarterly
operating results have varied in the past, and the Company expects quarterly
operating results to vary significantly in the future. The Company's revenues
and operating results are difficult to forecast and could be materially
adversely affected by many factors, some of which are outside the control of
the Company, including, among others, the relatively long sales and
implementation cycles of the Company's software products, the variable size
and timing of individual license transactions, the timing of revenue
recognized under the percentage-of-completion method, increased competition,
the timing of new product releases by the Company and its competitors, market
acceptance of the Company's software products, delay or deferral of customer
implementation of the Company's software products, software defects or other
quality problems with the Company's software products, changes in the
Company's and its competitors' pricing policies, the mix of license and
service revenue, budgeting cycles of the Company's customers, the introduction
of indirect sales into the Company's revenue mix which could result in

                                      15
<PAGE>

lower gross margins, changes in operating expenses, changes in Company
strategy, personnel changes and general economic factors. In addition, the
Company is in the process of transitioning from providing software development
services to developing and selling software products, which entails a number
of risks, including potential declines in revenue and the need to develop the
appropriate sales, marketing and software production and distribution
infrastructure. Further, because the Company's orders range in size from
several hundred thousand dollars to several million dollars, any deferral or
cancellation of an expected new order, termination of, or delay in completion
of, an existing large application development contract may have a significant
impact on quarterly operating results. For example, the Company is currently
working on a large application development contract for several million
dollars. While the majority of the revenue pursuant to this contract has been
recognized, any delay in completing the Company's obligations under the
contract on the anticipated schedule would have an adverse effect on the
Company's operating results in the next few quarters. In addition, in the
event of any downturn in any potential customer's business or the economy in
general, purchases of the Company's software products may be deferred or
canceled. The Company has had operating profits only in the quarters ended
March 31, 1995 and 1996, June 30, 1996, September 30, 1996 and December 31,
1996 and there can be no assurance that the Company will have operating
profits in future quarters or on an annual basis.

  It typically takes the Company four to five months to install CheckVision
after an order is placed and the Company anticipates a six month to one year
installation period for RemitVision. Installation of the Company's software
products requires the cooperation of the Company's customers. To the extent
the installation of the Company's software products is delayed, the Company's
recognition of revenue may be delayed, which could have a material adverse
effect on the Company's business, operating results and financial condition.
In the past, the Company has occasionally experienced product installation
delays which resulted in strained customer relations. To date, the Company has
been successful in resolving any and all such issues. However, there is no
assurance that the company will continue to be successful in similar
situations. The Company's expense levels are based in part on its expectations
of future revenues. If revenue is below expectations, net income may be
disproportionately affected because a significant portion of the Company's
expenses does not vary with revenues. The Company may also choose to reduce
prices, increase spending in response to competition or to pursue new market
opportunities. In particular, the Company's operating margins may be
materially adversely affected in the future if new competitors, technological
advances by existing competitors, other competitive factors, or the Company's
failure to continue to obtain software development contracts require the
Company to invest significantly greater resources in software product
development efforts.

  Because of the foregoing factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons should not be relied upon as indications of future
performance. Further, it is possible that in future periods the Company's
operating results may be below the expectations of public market analysts and
investors. In such an event, the price of the Company's Common Stock would
likely be materially adversely affected. See "--Risks Associated with
Transition to Software Product Business," "--Dependence on Growth of Market
for Client/Server Applications Software in the Financial Services Industry,"
"--Lengthy Sales Cycle," "Item 6, Selected Financial Data," "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 to Notes to Consolidated Financial Statements.

  Risks Associated with Transition to Software Product Business. When the
Company was formed in 1992, the Company shifted its strategy to focus
increasingly on deriving revenue from software products rather than from
system integration services. During the transition from providing software
development services to developing and selling software products, which is
still under way, a majority of the Company's total revenues has been derived
from the provision of services pursuant to large software development
contracts, certain of which provide the basis for the Company's software
products. The Company recognizes revenue from software development contracts
on the percentage-of-completion basis. Service revenue as a percentage of
total revenues for 1996 and 1995 was 48.0% and 57.9%, respectively. In
addition, the Company is transitioning from selling hardware. Due in large
part to these transitions, the Company had not experienced significant growth
in total revenues until the recently completed 1996 fiscal year. To achieve
revenue growth and improve operating

                                      16
<PAGE>

margins, the Company must continue to increase market acceptance and sales of
the Company's software products. As the Company becomes increasingly reliant
upon software product sales, it could experience a decline in total revenues
if service revenue declines more quickly than the Company can increase revenue
from software product sales. The Company must develop and enhance its sales
and marketing capabilities and software production and distribution
infrastructure as it continues the transition from a service business to a
software product business. There can be no assurance that the Company will be
successful in creating the necessary capabilities and infrastructure in a
timely manner or at all. Any significant failure by the Company to manage the
transition successfully would have a material adverse effect on the Company's
business, operating results and financial condition and would create
significant fluctuation in quarterly operating results. See "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

  Dependence on Development Services. To date, the majority of the Company's
total revenues has been derived from large application development contracts.
Although the Company's strategy is to reduce the percentage of its total
revenues from such contracts over time, the Company's total revenues for the
foreseeable future will continue to be substantially dependent upon its
ability to perform services under existing contracts and to attract new
customers to enter into such contracts. Furthermore, the Company has
historically used the research derived from its software development contracts
as the basis for its software products and anticipates that any future
software products will arise from new or existing software development
contracts. To the extent that the Company is unable to complete work on its
existing software development contracts or to attract new customers to enter
into such contracts, the Company's ability to develop new software products
will be materially adversely affected. In addition, to the extent the Company
is required to develop future software products without software development
contracts, the Company's expenditures for software product development will
have to increase, which may materially adversely affect operating margins.
There can be no assurance that the Company will be able to successfully
complete work on its existing software development contracts, that it will be
able to attract new customers to enter into software development contracts or
that it will be able to develop new software products based on the research
undertaken in connection with new or existing software development contracts,
and any such failure would have a material adverse effect on the Company's
business, operating results and financial condition. To the extent that the
Company does develop new software products based upon technology developed in
connection with software development contracts, the Company may have to expend
substantial additional financial resources on software product development,
and there can be no assurance that such software products will achieve market
acceptance. In addition, upon commercialization of any such software products,
the Company has agreed under certain circumstances in the past, and may in the
future agree to pay royalties to repay development expenses to the customer
for whom the development services were undertaken, and any such payments could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 1, Business--Product
Development."

  Reliance on Banking Industry; Need to Penetrate Additional Segments of the
Financial Services Industry. Currently, a substantial majority of the
Company's total revenues results from services and licenses provided to banks.
The Company's future operating results will depend in part on its ability to
penetrate additional segments of the financial services industry such as the
insurance, credit card and brokerage segments. While the Company may devote
substantial resources to penetrate these and other markets, there can be no
assurance that the revenues generated from this effort, if any, will exceed
the cost of such efforts. To be successful in expanding its product offerings
to market segments other than the banking industry, the Company will be
required to create new software products and to modify its existing software
products. There can be no assurance that it will be able to create or modify
such software products effectively or that such software products, if
successfully created or modified, will achieve market acceptance. To the
extent that the Company is unable to penetrate new markets, its future
financial condition will be dependent upon its ability to further penetrate
the banking industry. If the Company is unable to adapt its software products,
or its sales and marketing efforts to meet the needs of new markets, or if the
Company is unsuccessful in its efforts to further penetrate the banking
industry, the Company's business, operating results and financial condition
could be materially adversely affected.

                                      17
<PAGE>

  Lengthy Sales Cycle. The Company's sales cycle is typically six to 12 months
and varies substantially from customer to customer. The Company believes the
purchase of its software products is discretionary and represents a strategic
decision requiring a significant capital investment by its customers. As a
result, purchase of the Company's software products generally involves a
significant commitment of management attention and resources by prospective
customers and requires multiple approvals. Accordingly, the Company's sales
are subject to a long approval process. The Company's business, operating
results and financial condition have been in the past, and could be in the
future, materially adversely affected if customers delay, reduce or cancel
orders. Such delays, reductions or cancellations may contribute to significant
fluctuations of quarterly operating results in the future and may adversely
affect such results.

  Customer Concentration. To date the Company has been highly dependent on a
concentrated customer base. In 1996, 1995, 1994 and 1993, the Company's two
largest customers provided 34%, 45%, 39% and 48% of the Company's total
revenues, respectively. In 1994 and 1993, Federal Express provided 30% and 36%
of the Company's total revenues, respectively, and in 1995, Mellon Bank
provided 36% of the Company's total revenues. Mellon Bank and First Union
National Bank provided 19% and 15%, respectively, of the Company's revenues
for the year ended December 31, 1996. The Company's reliance on a concentrated
base of customers has been due primarily to the Company's dependence on large
software development contracts. The Company intends to continue to seek
customer support for strategic development projects that may yield additional
software products and expects that it may continue to experience a dependence
on a few significant customers for the foreseeable future. If the Company is
unable to establish relationships with additional significant customers and if
the Company is unable to increase revenues derived from the sale of software
products as a percentage of total revenues, the Company's business, operating
results and financial condition could be materially adversely affected. See
"Item 1, Business--Customers."

  Rapid Technological Change and Dependence on New Software Products. The
market for the Company's software products is characterized by rapid
technological developments, evolving industry standards and rapid changes in
customer requirements. The introduction of competitive software products
responding to these trends could render the Company's existing software
products obsolete and unmarketable. As a result, the Company's success depends
upon its ability to continue to enhance its existing software products,
respond to changing customer requirements and develop and introduce in a
timely manner new software products that keep pace with technological
developments and emerging industry standards. Customer requirements include,
but are not limited to, operability across distributed heterogeneous and
changing hardware platforms, operating systems, relational databases and
networks. For example, as certain of the Company's customers start to utilize
Microsoft NT or other emerging operating systems on server platforms, it may
be necessary for the Company to enhance its software products to operate on
such platforms in order to maintain its competitive ability. There can be no
assurance that the Company's software products will achieve market acceptance,
or will adequately address the changing needs of the marketplace, or that the
Company will be successful in developing and marketing enhancements to its
existing software products, or new software products incorporating new
technology on a timely basis. If the Company is unable to develop and
introduce new software products, or enhancements to existing software
products, in a timely manner to adequately address changing market conditions
or customer requirements, the Company's business, operating results and
financial condition will be materially adversely affected.

  The Company has a number of ongoing software development projects. The
Company expects to release enhancements to its CheckVision, RemitVision and
WorkVision software products. The Company's objective is to increase the
portion of the Company's total revenues derived from these software products.
There can be no assurance the Company will release these enhancements in a
timely manner or at all, or that the features these enhanced software products
include will be features required to achieve market acceptance. The Company
has not completed an installation of the full RemitVision product.
Accordingly, the Company has no experience with installed versions of
RemitVision, and there can be no assurance that problems with the
implementation of RemitVision at customer sites will not arise and materially
adversely affect the Company's business, operating results and financial
condition. The failure of the Company's software products to achieve broader
market

                                      18
<PAGE>

acceptance and increased sales could have a material adverse effect on the
Company's business, operating results and financial condition. See "Item 1,
Business--Products."

  Risk of Software Defects and Product Liability. Software products as complex
as those offered by the Company may contain errors that may be detected at any
point in the software products' life cycles. The Company has in the past
discovered software errors in certain of its software products and has
experienced delays in shipment of software products during the period required
to correct these errors. There can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be found,
resulting in loss of, or delay in, market acceptance and diversion of
development resources, injury to the Company's reputation, or increased
service and warranty costs, any of which could have a material adverse effect
on the Company's business, operating results and financial condition.

  The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. The Company's software products are generally used to manage
data that is critical to an organization, and, as a result, the sale and
support of software products by the Company may entail the risk of product
liability claims. A liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.

  Competition. The Company's competitors vary in size and in scope and breadth
of the software products and services offered. The Company competes with
information and document management systems companies, including: (i) a number
of private companies and certain public companies which offer software
products targeted at one or more specific market segments such as BancTec,
Broadway & Seymour, Fiserv, IBM, NCR and Unisys; (ii) the internal information
technology departments of potential customers which develop proprietary
customer information solutions; and (iii) a number of companies, such as IBM
and TRW targeting the enterprise-wide information systems market. In
particular, with respect to its CheckVision software product the Company
competes with Fiserv, and with respect to its RemitVision software product the
Company competes with BancTec, TRW and Unisys. Among the Company's potential
competitors are also a number of large hardware and software companies that
may develop or acquire software products that compete with the Company's
software products. In competing with hardware vendors, the Company may be at a
competitive disadvantage because hardware vendors are able to package and
discount sales of software bundled with hardware to allow the customer the
opportunity to deal with a single vendor.

  Many of the Company's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and larger customer bases, than
the Company. The Company's current and future competitors could introduce
software products with more features, higher scalability, greater
functionality and lower prices than the Company's software products. These
competitors could also bundle existing or new software products with other,
more established software products in order to compete with the Company.
Moreover, as the client/server solutions market develops, a number of
companies with significantly greater resources than the Company could attempt
to increase their presence in this market by acquiring or forming strategic
alliances with competitors or business partners of the Company. Further,
because there are relatively low barriers to entry for the software market,
the Company expects additional competition from other established and emerging
companies. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, operating results and financial
condition. Any material reduction in the price of the Company's software
products would negatively affect gross margins. There can be no assurance that
the Company will be able to provide software products that compete favorably
with the software products of the Company's competitors or that competitive
pressures will not require the Company to reduce its prices. The Company's
failure to provide competitive products will have a materially adverse effect
on the Company's business, operating results and financial condition. See
"Item 1, Business--Industry Background and --Competition."

  Dependence on Growth of Market for Client/Server Applications Software in
the Financial Services Industry. Substantially all of the Company's current
business is in the market for client/server solutions and

                                      19
<PAGE>

services for cash management and remittance processing in the banking
industry, which is still an emerging market and which is highly fragmented and
subject to rapid change. The Company's future financial performance will
depend in large part on continued growth in the number of companies in the
financial services industry adopting client/server technology and systems
solutions requiring the software products provided by the Company. There can
be no assurance that the market for client/server software products and
services provided by the Company will continue to grow. If the client/server
software and services market segment in which the Company operates fails to
grow, or grows more slowly than the Company currently anticipates, the
Company's business, operating results and financial condition would be
materially adversely affected. See "Item 1, Business--Industry Background."

  Risks Associated with Expanding Distribution. To date, the Company has sold
its software products primarily through its direct sales force. The Company's
ability to achieve significant revenue growth in the future will depend in
large part on its success in recruiting and training sufficient direct sales
personnel and on its ability to successfully establish other distribution
channels. The Company plans to augment its direct sales force by establishing
indirect distribution channels, including the development of joint marketing
relationships with firms that have a large market presence or sell
complementary software products. The Company is in the early stage of
developing these indirect channels, and there can be no assurance that the
Company's efforts in this regard will be successful. There can be no assurance
that the Company will be able to successfully expand its direct sales force or
indirect channels or that any such expansion will result in an increase in
revenues. Any failure by the Company to expand its direct sales force or other
distribution channels could materially adversely affect the Company's
business, operating results and financial condition. See "--Dependence on and
Need to Hire Additional Key Personnel," "Item 1, Business--Strategy" and "Item
1, Business--Sales and Marketing."

  Management of Expanding and Changing Operations. The Company's growth and
transition have placed significant demands on the Company's management,
operational and technical resources. Such growth and transition are expected
to continue to challenge the Company's sales, marketing, technical and support
personnel and senior management. The Company's future performance will depend
in part on its ability to manage expanding domestic operations and to adapt
its operational systems to respond to changes in its business. The Company is
in the process of transitioning from providing software development services
as a software developer to developing and selling software products, which
entails a number of risks, including potential declines in revenue and the
need to develop the appropriate sales and marketing capabilities and software
production and distribution infrastructure. There can be no assurance that the
Company will be successful in creating the necessary capabilities and
infrastructure in a timely manner or at all. Any failure of the Company to
manage the transition successfully could have a material adverse effect on the
Company's business, operating results and financial condition. The failure of
the Company to effectively manage its growth could have a material adverse
effect on the Company's business, operating results and financial condition.
See "--Risks Associated with Transition to Software Product Business" and
"Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations."

  Dependence on and Need to Hire Additional Key Personnel. The Company's
future performance depends to a significant degree upon the continued service
of its senior management, as well as marketing, sales and product development
personnel. The Company does not have long term employment contracts with any
of its employees. The Company does not have and does not intend to obtain key
person life insurance on its personnel. The loss of one or more of the
Company's key personnel could have a material adverse effect on the Company's
business, operating results and financial condition. The Company believes that
its future success will depend in large part upon its ability to attract and
retain highly skilled management, marketing, sales and product development
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key employees or that it will be
successful in attracting, assimilating and retaining such personnel in the
future. Failure to attract, assimilate and retain key personnel could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Item 1, Business--Employees."

  Dependence on Proprietary and Licensed Technology; Risks of
Infringement. The Company's success depends in significant part upon its
proprietary technology. The Company relies on a combination of copyright,

                                      20
<PAGE>

patent, trademark and trade secret laws, confidentiality procedures, and
licensing arrangements to establish and protect its proprietary rights. The
Company presently has four patents. While the Company's current software
products are not dependent on these patents, such patents may be utilized in
future software products. As part of its confidentiality procedures, the
Company generally enters into non-disclosure agreements with its employees,
distributors and business partners, and limits access to and distribution of
its software products, supporting documentation and other proprietary
information. Despite these precautions, it may be possible for a third party
to copy or otherwise obtain and use the Company's software products or
technology without authorization, or to develop similar technology
independently. In addition, effective protection of intellectual property
rights is unavailable or limited in certain foreign countries where the
Company has in the past licensed and may in the future license its software
products. There can be no assurance that the Company's protection of its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology, duplicate the Company's software
products or design around any intellectual property rights upon which the
Company's business is now or may in the future be dependent.

  The Company's products incorporate certain software that it licenses from
third parties, including software that is integrated with internally developed
software and used in the Company's software products to perform key functions.
There can be no assurance that such firms will remain in business, that they
will continue to support their software products, or that their software
products will otherwise continue to be available to the Company on
commercially reasonable terms. The Company believes that substantially all of
the software it licenses is available from vendors other than the Company's
current vendors, or could be developed internally by the Company, and could
therefore be replaced with equivalent software in a timely manner. However, it
is possible that the loss or inability to maintain any of these software
licenses could result in delays or reductions in product shipments until
equivalent software can be developed, identified, licensed and integrated,
which would adversely affect the Company's business, operating results and
financial condition.

  The Company is not aware that any of its software products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future software products. The Company expects that software product
developers will increasingly be subject to such claims as the number of
software products and competitors in the Company's industry segment grows and
the functionality of software products in the industry segment overlaps. Any
such claims, with or without merit, could result in costly litigation that
could absorb significant management time, which could have a material adverse
effect on the Company's business, operating results and financial condition.
Such claims might require the Company to enter into royalty or license
agreements. Such royalty or license agreements, if required, may not be
available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Item 1, Business--Intellectual Property and
Licensing."

ITEM 2. PROPERTIES

  The Company occupies approximately 50,000 square feet of office space in
Emeryville, California, pursuant to a lease which expires in March 1999, with
an option to extend its term for five years. The Company also leases 4,600
square feet of storage facilities in Oakland, California. Management believes
that its current facilities are adequate to meet its needs through the next 12
months.

ITEM 3. LEGAL PROCEEDINGS

  None.

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

  No matters were submitted to a vote of security holders in the quarter ended
December 31, 1996.

                                      21
<PAGE>

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS

  The Company's common stock is traded on the NASDAQ National Market under the
symbol "IACP." Following the Company's initial public offering on November 7,
1996, the following high and low closing prices were reported by NASDAQ for
the quarter ended December 31, 1996. Such prices represent interdealer prices
and do not include retail mark-ups or mark downs or commissions, and may not
represent actual transactions.

<TABLE>
<CAPTION>
                                                                    HIGH   LOW
                                                                   ------ ------
   <S>                                                             <C>    <C>
   November 7, 1996 to December 31, 1996.......................... $6.875 $5.625
</TABLE>

  As of December 31, 1996, the Company had approximately 60 holders of record
of its common stock.

  The market price for the Common Stock may be affected by a number of
factors, some of which are outside the control of the Company, including the
announcement of new software products or product enhancements by the Company
or its competitors, quarterly variations in the Company's operating results or
the operating results of the Company's competitors or companies in related
industries, changes in earnings estimates or recommendations by securities
analysts, developments in the Company's industry, general market conditions
and other factors, including factors unrelated to the operating performance of
the Company or its competitors. In addition, stock prices for many companies
in the technology and emerging growth sectors have experienced particularly
volatile fluctuations that have often been unrelated to the operating
performance of such companies. Such factors and fluctuations, as well as
general economic, political and market conditions, such as recessions, may
materially adversely affect the market price of the Company's Common Stock.

  The Company has never paid cash dividends on its capital stock and does not
expect to pay any such dividends in the foreseeable future. Further, an
existing bank line of credit agreement restricts the Company's ability to pay
cash dividends without the bank's consent.


                                      22
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                              YEARS ENDED DECEMBER 31,
                                          ------------------------------------
                                           1996      1995      1994     1993
                                          -------  --------  --------  -------
                                           (IN THOUSANDS, EXCEPT PER SHARE
                                                        DATA)
   <S>                                    <C>      <C>       <C>       <C>
   Revenues:
     License............................. $ 7,345  $  2,110  $  1,779  $ 1,357
     Service.............................  12,347    10,150     9,429    8,977
     Maintenance.........................   2,588     3,738     3,535    3,003
     Hardware............................   3,412     1,532     2,641    3,357
                                          -------  --------  --------  -------
       Total revenues....................  25,692    17,530    17,384   16,694
                                          -------  --------  --------  -------
   Cost of revenues:
     License.............................     426       --        --       --
     Service.............................   7,023     6,068     5,058    7,149
     Maintenance.........................   1,312     2,105     1,991    1,642
     Hardware............................   2,716       865     1,721    2,082
     Amortization of purchased software..     --        --        --     2,154
                                          -------  --------  --------  -------
       Total cost of revenues............  11,477     9,038     8,770   13,027
                                          -------  --------  --------  -------
   Operating expenses:
     Sales and marketing.................   5,133     4,313     4,624    3,769
     General and administrative..........   2,646     2,318     2,484    2,590
     Product development.................   4,226     3,238     2,365    1,085
                                          -------  --------  --------  -------
       Total operating expenses..........  12,005     9,869     9,473    7,444
                                          -------  --------  --------  -------
   Operating income (loss) from
    continuing operations................   2,210    (1,377)     (859)  (3,777)
   Other income (expense):
     Interest expense....................     (55)      (14)      (20)     --
     Interest income and other...........     153        79        49      284
                                          -------  --------  --------  -------
   Income (loss) from continuing
    operations...........................   2,308    (1,312)     (830) $(3,493)
   Discontinued operations:
     Loss from discontinued operations...     --        --       (369)    (475)
     Loss on disposal of discontinued
      operations.........................     --        --     (2,657)     --
                                          -------  --------  --------  -------
   Loss from discontinued operations.....     --        --     (3,026)    (475)
                                          -------  --------  --------  -------
   Net income (loss)..................... $ 2,308  $ (1,312) $ (3,856) $(3,968)
                                          =======  ========  ========  =======
   Pro forma net income (loss) per share
    (1).................................. $  0.22  $  (0.14)
                                          =======  ========
   Pro forma shares used in per share
    calculations (1).....................  10,329     9,424
                                          =======  ========
<CAPTION>
                                                    DECEMBER 31,
                                          ------------------------------------
                                           1996      1995      1994     1993
                                          -------  --------  --------  -------
                                                   (IN THOUSANDS)
   <S>                                    <C>      <C>       <C>       <C>
   CONSOLIDATED BALANCE SHEET DATA:
   Working capital....................... $14,117  $  1,032  $  1,773  $ 5,370
   Total assets..........................  19,177     5,705     8,259   11,119
   Total debt............................     --        200       --       --
   Redeemable convertible preferred
    stock................................     --     15,448    14,275   13,102
   Stockholders' equity (net capital
    deficiency)..........................  14,576   (13,825)  (11,400)  (6,591)
</TABLE>
--------
(1)See Note 1 to Notes to Consolidated Financial Statements


                                       23
<PAGE>

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

OVERVIEW

  The Company was incorporated in July 1992, when the management of the
Company, in partnership with E.M. Warburg, Pincus & Co., LLC purchased certain
assets and liabilities of Litton Industries' Integrated Automation Division, a
leading system integrator with a primary focus on the aerospace industry and
secondary focus on the financial services and transportation industries.
Following this acquisition, the Company began its transition from a system
integrator to a provider of software development services and a developer of
application framework software products. The Company decided to de-emphasize
the aerospace market, to develop its transaction management platform into a
stand-alone software product, and to build a series of standard software
application products based upon its complex transaction management platform
targeted initially to the financial services industry. To date, a majority of
the Company's total revenues has been derived from the provision of services
to customers pursuant to large software development contracts. The Company's
objective is to increase the portion of the Company's total revenue derived
from software product sales. The Company was able to increase the amount of
software license revenue in each quarter of 1996.

  The Company currently sells two leading application framework software
products for advanced cash management services, CheckVision and RemitVision,
which are built upon the Company's advanced, client/server complex transaction
management software platform, WorkVision. CheckVision is designed to add new
products and services to a commercial bank's check processing business
offerings, and RemitVision is designed to provide banks and other remittance
processors with the ability to combine high volume consumer payment activity
with complex accounts receivable processing in one production environment. The
Company has also invested in growing a sales and marketing organization to
sell its software products. At the same time, the Company has continued to
develop specific software solutions under application development contracts
for customers primarily in the financial services industry, which the Company
believes may be the basis for future software products.

  During the transition from providing software development services to
developing and selling software products, which is still under way, a majority
of the Company's total revenues has been derived from the provision of
services to customers pursuant to large software development contracts,
certain of which provide the basis for the Company's application framework
software products. The Company recognizes revenue from software development
contracts on the percentage-of-completion basis. Service revenue as a
percentage of total revenue for 1996 and 1995 was 48.0% and 57.9%,
respectively. In addition, the Company is transitioning from selling hardware.
Due in large part to these transitions, the Company did not experience
significant growth in total revenue in 1995 and 1994 and has only recently
begun to experience such growth in the year ended December 31, 1996 as
compared to the year ended December 31, 1995. To achieve revenue growth and
improve operating margins, the Company must continue to increase market
acceptance and sales of the Company's software products. As the Company
becomes increasingly reliant upon software product sales, it could experience
a decline in total revenues if service revenue declines more quickly than the
Company can increase revenue from software product sales. The Company must
develop and enhance its sales and marketing capabilities and software
production and distribution infrastructure as it continues the transition from
a service business to a software product business. There can be no assurance
that the Company will be successful in creating the necessary capabilities and
infrastructure in a timely manner or at all. Any significant failure by the
Company to manage the transition successfully would have a material adverse
effect on the Company's business, operating results and financial condition
and would create significant fluctuation in quarterly operating results.

  The Company's total revenues are derived from software licenses, services,
maintenance and hardware. The Company licenses software to end users under
non-cancelable license agreements and provides services such as installation,
training and software maintenance. To date, the Company has provided its
software primarily under contracts requiring significant customization
services. Software license and service revenues from contracts requiring
significant customization services are recognized on the percentage-of-
completion method based on the

                                      24
<PAGE>

ratio of incurred costs to total estimated costs. Actual costs and gross
margins on such contracts could differ from the Company's estimates for a
variety of reasons, including delays in the installation of the Company's
software products or greater than anticipated contract costs, and such
differences could be material to the financial statements. Software license
revenue for contracts not requiring significant customization services is
recognized when a product has been shipped and all significant contractual
obligations have been satisfied and the resulting receivable is deemed
collectible by management. Allowances for future estimated warranty costs are
provided at the time revenue is recognized. Maintenance revenue is recognized
ratably over the term of the related agreements, which in most cases is one
year. Hardware revenue is recognized when title passes to the customer. See
Note 1 to Notes to Consolidated Financial Statements.

  At December 31, 1996, the Company had an accumulated deficit of
approximately $12.5 million. The Company achieved net income of approximately
$327,000 for the quarter ended March 31, 1995, and incurred losses during the
remaining three quarters and for the year ended December 31, 1995. While the
Company achieved profitability of approximately $2.3 million for the year
ended December 31, 1996, there can be no assurance that the Company will have
operating profits in any future period and recent operating results should not
be considered indicative of future financial performance.

RESULTS OF OPERATIONS

  The following table sets forth for the periods indicated consolidated
statement of operations data expressed as a percentage of total revenues:

<TABLE>
<CAPTION>
                                                 YEARS ENDED DECEMBER 31,
                                                -----------------------------
                                                  1996      1995       1994
                                                --------  --------   --------
   <S>                                          <C>       <C>        <C>
   Revenues:
     License...................................     28.6%     12.0%      10.2%
     Service...................................     48.0      57.9       54.2
     Maintenance...............................     10.1      21.3       20.3
     Hardware..................................     13.3       8.8       15.3
                                                --------  --------   --------
       Total revenues..........................    100.0     100.0      100.0
   Cost of revenues:
     License...................................      1.7       --         --
     Service...................................     27.3      34.6       29.1
     Maintenance...............................      5.1      12.0       11.5
     Hardware..................................     10.6       4.9        9.9
                                                --------  --------   --------
       Total cost of revenues..................     44.7      51.5       50.5
                                                --------  --------   --------
   Gross margin................................     55.3      48.5       49.5
                                                --------  --------   --------
   Operating expenses:
     Sales and marketing.......................     20.0      24.6       26.6
     General and administrative................     10.3      13.2       14.3
     Product development.......................     16.4      18.5       13.6
                                                --------  --------   --------
       Total operating expenses................     46.7      56.3       54.5
                                                --------  --------   --------
   Operating income (loss) from continuing
    operations.................................      8.6      (7.8)      (5.0)
     Interest income (expense) and other.......      0.4       0.4        0.2
                                                --------  --------   --------
   Income (loss) from continuing operations....      9.0      (7.4)      (4.8)
   Discontinued operations:
     Loss from discontinued operations.........      --        --        (2.1)
     Loss on disposal of discontinued
      operations...............................      --        --       (15.3)
                                                --------  --------   --------
   Net income (loss)...........................      9.0%     (7.4)%    (22.2)%
                                                ========  ========   ========
</TABLE>


                                      25
<PAGE>

COMPARISON OF 1996, 1995, AND 1994

REVENUES

  License. License revenue to date has been primarily derived from licenses of
the Company's CheckVision, RemitVision, and WorkVision software products.
License revenue was $7.3 million, $2.1 million, and $1.8 million in 1996,
1995, and 1994, respectively. This increase in license revenue was primarily
due to growing market acceptance of the Company's CheckVision and RemitVision
products, and to a lesser extent, revenue from its WorkVision product, which
is licensed pursuant to application framework development contracts. License
revenues from sales to aerospace customers represented 6.1%, 15.6%, and 25.9%
of license revenue in 1996, 1995, and 1994, respectively.

  Service. Service revenue has been comprised primarily of fees from software
application development contracts, and to a lesser extent, fees from
installation services and training for the Company's CheckVision and
RemitVision products. Service revenue was $12.3 million, $10.2 million, and
$9.4 million in 1996, 1995, and 1994, respectively. This increase in service
revenue occurred primarily due to an increase in installation services related
to CheckVision, and to a lesser extent, RemitVision. Service revenue from
aerospace customers represented 3.2%, 2.9%, and 9.9% of service revenue in
1996, 1995, and 1994, respectively. As the Company implements its strategy to
focus on product sales and assisting customers in deploying the Company's
software products, service revenue as a percentage of total revenues may
decrease.

  Maintenance. Maintenance revenue is generated primarily by software support
agreements that include telephone support, minor software upgrades and, in
some cases, third-party support. Maintenance revenue was $2.6 million, $3.7
million, and $3.5 million in 1996, 1995, and 1994, respectively. Maintenance
revenue decreased in 1996 as some of the remaining aerospace customers let
their maintenance contracts lapse for software products that the Company no
longer offers to new customers. Maintenance revenue from aerospace customers
represented 29.4%, 35.9%, and 39.5% of maintenance revenue in 1996, 1995, and
1994, respectively.

  Hardware. Hardware revenue was $3.4 million, $1.5 million, and $2.6 million
in 1996, 1995, and 1994, respectively. The Company has on occasion sold a
proprietary, high-margin hardware item to a single customer, but this practice
was discontinued effective January 1, 1996. The hardware revenue increase in
1996 was primarily the result of a large RemitVision contract, and to a lesser
extent, numerous CheckVision contracts for which the Company was required to
act as a reseller of certain hardware required for installation. Previously,
the Company has provided hardware to its customers where (i) the customer did
not have a relationship with a particular hardware vendor and direct purchase
by the customer would significantly delay an installation by the Company or
(ii) certain hardware that is required for the operation of the Company's
CheckVision and/or RemitVision products are not available for direct sale to
end users. In the future, the Company expects hardware revenue to be
eliminated as the Company has since found alternate hardware distribution
channels to support its customers.

COST OF REVENUES

  License. Through 1995, the Company's license revenue had consisted of a
small number of installations with license fees primarily ranging from $50,000
to several hundred thousand dollars, with negligible cost of license revenue.
With the growing market acceptance of RemitVision in 1996, cost of license
revenue due to royalties payable to third parties increased to $426,000. The
cost of license revenue as a percentage of license revenue is expected to
increase in the future if the Company's strategy of increasing revenue from
software products developed under software application framework development
contracts is successful and associated royalties become due.

  Service. Cost of service revenue is primarily comprised of employee-related
costs and fees for third-party consultants incurred in providing installation,
training and development services. Cost of service revenue was $7.0 million in
1996, $6.1 million in 1995, and $5.1 million in 1994, or 56.9%, 59.8%, and
53.6% of the related service revenue, respectively. Cost of service revenue
increased as a percentage of service revenue in 1995 as

                                      26
<PAGE>

compared to 1994 primarily due to an increase in the number of personnel hired
in anticipation of the Company's increased level of business. Cost of service
revenue increased 15.7% from 1995 to 1996 due to the higher level of service
revenue in 1996 as compared to 1995. The cost of service revenue as a
percentage of service revenue may vary between periods due to the mix of
services provided by the Company and the resources used to provide these
services.

  Maintenance. Cost of maintenance revenue is primarily comprised of employee-
related costs incurred in providing customer support and also includes the
costs of services provided by third parties for hardware-related maintenance
for certain of the installed base of customers. Cost of maintenance revenue
was $1.3 million in 1996, $2.1 million in 1995, and $2.0 million in 1994, or
50.7%, 56.3%, and 56.3% of the related maintenance revenue, respectively. In
1996, costs declined as aerospace customers let their maintenance contracts
lapse for software products that the Company no longer offers to new
customers. From 1994 to 1995, the cost of maintenance revenue increased in
absolute dollars as increased levels of maintenance were provided. Cost of
maintenance revenue may increase in the future if the Company is successful in
selling maintenance for its new software products.

  Hardware. Cost of hardware revenue consists of direct costs of hardware
supplied on behalf of customers and subcontract fees for assembly of the
Company's proprietary hardware item which the Company discontinued selling in
1995. Cost of hardware revenue was $2.7 million in 1996, $865,000 in 1995, and
$1.7 million in 1994, or 79.6%, 56.5%, and 65.2% of related hardware revenue,
respectively. In 1996, the cost of hardware revenue as a percentage of
hardware revenue increased as the Company discontinued the sale of its high
margin proprietary hardware product and acted as a reseller of certain
hardware required for installation of its products. In 1995 and 1994, the cost
of hardware revenue as a percentage of hardware revenue varied due to the
amount of a proprietary hardware item sold.

OPERATING EXPENSES

  Sales and marketing. Sales and marketing expense was $5.1 million, $4.3
million, and $4.6 million in 1996, 1995, and 1994, respectively. Sales and
marketing expense increased from 1995 to 1996 primarily because of increased
sales commissions and an increase in sales and marketing personnel. The
decline in sales and marketing expense from 1994 to 1995 was the result of the
departure of a senior sales executive. After the departure of this senior
sales executive, the position was eliminated. The Company intends to expand
its sales and marketing personnel and activities and, therefore, anticipates
these expenditures will increase in absolute dollars and may increase as a
percentage of total revenues.

  General and administrative. General and administrative expense was $2.6
million in 1996, $2.3 million in 1995, and $2.5 million in 1994, or 10.3%,
13.2%, and 14.3% of total revenues, respectively. General and administrative
expense increased 14.2% from 1995 to 1996 due primarily to growth in the
Company's infrastructure to support increased revenues. General and
administrative expense declined from 1994 to 1995 primarily due to expense of
$204,000 related to a non-compete agreement in connection with the acquisition
of certain assets and liabilities from Litton Industries being fully amortized
in 1994. To the extent the Company is successful in expanding its operations
and as a result of becoming a public entity, general and administrative
expense is expected to increase in absolute dollars.

  Product development. Product development expense was $4.2 million, $3.2
million, and $2.4 million in 1996, 1995, and 1994, or 16.4%, 18.5%, and 13.6%
of total revenues, respectively. In 1996 and 1995, product development expense
increased primarily as a result of an increase in headcount to support the
Company's RemitVision product. In the future, the Company expects that product
development expenditures will increase in absolute dollars and may increase as
a percentage of total revenues as product enhancements and new software
products are developed. In particular, to the extent the Company is required
to develop future applications without development contracts, the Company's
expenditures for product development will increase.

                                      27
<PAGE>

  Discontinued operations. In December 1994, the Company adopted a plan to
discontinue the operations of its French subsidiary IA Corporation, S.A.,
which was focused on the manufacturing, energy and transportation industries
and did not fit the Company's strategy of focusing on application framework
software products targeted to the financial services industry. The Company
recorded operating losses related to its French subsidiary of $369,000 in 1994
and recorded a loss on the disposal of IA Corporation, S.A. of $2.7 million in
1994. See Note 2 to Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

  Since inception, the Company has financed its operations primarily from
proceeds of private sales of Series A Preferred Stock and Common Stock
totaling $12.1 million, and through an initial public offering of common stock
in 1996 with net proceeds of $10.6 million. At December 31, 1996, the Company
had $10.8 million in cash and cash equivalents and $14.1 million in working
capital. The company has a $2.0 million bank line of credit agreement that
expires in May 1998. Under the terms of the credit agreement, the Company may
borrow up to $2.0 million under a revolving line of credit, which includes up
to $500,000 in commercial and standby letters of credit. There were no
borrowings under this line of credit at December 31, 1996. The line of credit
is secured by substantially all of the Company's assets. Advances under the
line of credit are limited to 80% of eligible billed accounts receivable.
Borrowings accrue interest at the bank's prime rate plus 0.5% (8.75% at
December 31, 1996). The line of credit contains financial and non-financial
covenants with which the Company was in compliance at December 31, 1996.

  The Company's operating activities used cash of $353,000 in 1996, $1.3
million in 1995, and $952,000 in 1994. The decrease in use of cash for
operating activities in 1996 as compared with 1995 was attributable to net
income offset by an increase in accounts receivable. The increase in use of
cash for operating activities in 1995 as compared with 1994 was attributable
to the net loss and increase in accounts receivable.

  The Company's investing activities in 1996, 1995 and 1994 have consisted
primarily of purchases of capital equipment and short term investments.
Capital expenditures totaled $351,000, $127,000 and $536,000 in 1996, 1995,
and 1994, respectively, to acquire furniture and equipment, primarily computer
hardware, for the Company's growing employee base. The Company currently has
no significant capital spending requirement or purchase commitments other than
a non-cancelable operating lease for its facilities. See Note 5 of Notes to
Consolidated Financial Statements.

  At December 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of $5.1 million expiring in the years 2008 through
2010 and federal tax credits of approximately $290,000 expiring in years 2008
through 2011. The Company has net operating loss carryforwards for state
purposes of approximately $1.8 million expiring in the years 1998 through 2000
and state tax credits of approximately $190,000 with an indefinite
carryforward. Due to "change in ownership" provision of the Tax Reform Act of
1986, utilization of the net operating loss carryforwards may be subject to an
annual limitation regarding their utilization against taxable income in future
periods.

   The Company believes that its existing cash, cash equivalents and short
term investments, together with cash flow from operations and available
borrowings under its revolving line of credit, will be sufficient to meet its
working capital requirements for at least the next 12 months.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  The Company's consolidated financial statements together with related notes,
report of Ernst & Young L.L.P., independent auditors, and supplementary
financial information are listed at Item 14.

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

  None.

                                      28
<PAGE>

                                   PART III

  Certain information required by Part III is omitted from this report on Form
10-K in that the Company will file its Definitive Proxy Statement for its
annual meeting of stockholders pursuant to Regulation 14A of the Securities
and Exchange Act of 1934, as amended (the "Proxy Statement"), not later than
120 days after the end of the fiscal year covered by this report, and certain
information included in the Proxy Statement is incorporated herein by
reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  Certain information with respect to persons who are executive officers of
the Registrant is set forth under the caption "Executive Officers" in Part I
of this report. The section entitled "Election of Directors" appearing in the
Registrant's proxy statement for the annual meeting of stockholders to be held
on June 17, 1997, sets forth certain information with respect to the directors
of the Registrant and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

  The section entitled "Executive Officer Compensation" appearing in the
Registrant's proxy statement for the annual meeting of stockholders to be held
on June 17, 1997, sets forth certain information with respect to the
compensation of management of the Registrant and is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The section entitled "Election of Directors" appearing in the Registrant's
proxy statement for the annual meeting of stockholders to be held on June 17,
1997, sets forth certain information with respect to the ownership of the
Registrant's Common Stock and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The section entitled "Transactions with Management" appearing in the
Registrant's proxy statement for the annual meeting of stockholders to be held
on June 17, 1997, sets forth certain information with respect to certain
business relationships and transactions between the Registrant and its
directors and officers and is incorporated herein by reference.


                                      29
<PAGE>

                                    PART IV

ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

  (a)The following documents are filed as part of this report:

     (1)Consolidated Financial Statements--see "Index to
     Consolidated Financial Statements"

     (2)Consolidated Financial Statement Schedules:

  Schedule II--Valuation and Qualifying Accounts

    All schedules, except those listed above, have been omitted because they
are not required, not applicable, or the required information is shown in the
financial statements and related notes thereto.

     (3)Exhibits
<TABLE>
        <C>    <S>
         3.1*  Certificate of Incorporation of the Registrant, as amended
               (formerly Exhibit 3.1(b))
         3.2*  Bylaws of the Registrant.
         4.1*  Stockholders' Agreement dated July 31, 1992; Amendment No. 1 to
               Stockholders' Agreement dated May 28, 1996.
        10.1+* Agreement between Mellon Bank Corporation and the Registrant
               dated March 24, 1995.
        10.2*  1992 Stock Plan.
        10.3*  1996 Stock Plan.
        10.4*  1996 Employee Stock Purchase Plan.
        10.5*  Loan and Security Agreement dated May 20, 1994 between
               Registrant and Bank of the West; First Amendment dated May 22,
               1995; Second Amendment dated February 21, 1996; Form of Third
               Amendment.
        10.6*  Severance and Non-Compete Agreement dated July 31, 1992 between
               Chakravarthi V. Ravi and the Registrant.
        10.7*  Lease by and between Watergate Tower Associates and the
               Registrant dated June 30, 1993.
        10.8*  Form of Indemnity Agreement.
        10.9*  Share Exchange Agreement dated May 29, 1996 between the
               Registrant, Warburg, Pincus Investors, L.P. and holders of the
               Registrant's Series A Preferred Stock.
        10.10* Amendment No. 1 to the Share Exchange Agreement dated November
               6, 1996 between the Registrant, Warburg, Pincus Investors, L.P.
               and holders of the Registrant's Series A Preferred Stock.
        11.1   Statement of computation of earnings per share.
        21.1*  Subsidiaries of the Registrant.
        23.1   Consent of Ernst & Young LLP, Independent Auditors.
        24.1   Power of Attorney (see page 45)
        27.1   Financial Data Schedule
</TABLE>
--------
+  Confidential treatment has been granted for portions of these agreements.
*  Incorporated by reference to the exhibits filed with the Company's
   registration statement on Form SB-2 (Registration Statement No. 333-4928-
   LA)

  (b)Reports on Form 8-K.

    No reports on Form 8-K were filed during the last quarter of the fiscal
    year ended December 31, 1996.

                                      30
<PAGE>

                                IA CORPORATION I

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                         <C>
Report of Ernst & Young, LLP, Independent Auditors.........................  32
Consolidated Balance Sheets at December 31, 1996 and December 31, 1995.....  33
Consolidated Statements of Operations for the Years Ended December 31,
 1996, December 31, 1995
 and December 31, 1994.....................................................  34
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)
 for the Years Ended
 December 31, 1996, December 31, 1995 and December 31, 1994................  35
Consolidated Statements of Cash Flows for the Years Ended December 31,
 1996, December 31, 1995
 and December 31, 1994.....................................................  36
Notes to Consolidated Financial Statements.................................  37
</TABLE>

                                       31
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
IA Corporation I

  We have audited the accompanying consolidated balance sheets of IA
Corporation I as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for each of the three years in the period ended December 31, 1996.
Our audits also included the financial statement schedule listed in the Index
at Item 14 (a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule 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 consolidated financial position
of IA Corporation I at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

                                                              ERNST & YOUNG LLP

Walnut Creek, California
January 29, 1997


                                      32
<PAGE>

                                IA CORPORATION I

                          CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                            ------------------
                                                              1996      1995
                                                            --------  --------
<S>                                                         <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents................................ $ 10,806  $  1,079
  Receivables, including unbilled receivables of $2,422 in
   1996 and $1,244 in 1995, less allowance for doubtful
   accounts of $46 in 1996 and $50 in 1995.................    7,259     3,389
  Other current assets.....................................      653       646
                                                            --------  --------
   Total current assets....................................   18,718     5,114
Property and equipment, net................................      459       391
Note receivable............................................      --        200
                                                            --------  --------
                                                            $ 19,177  $  5,705
                                                            ========  ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
 DEFICIENCY)
Current liabilities:
  Borrowings under bank line of credit..................... $    --   $    200
  Accounts payable.........................................      740       267
  Accrued compensation and related liabilities.............    1,433     1,024
  Deferred revenues........................................    2,007     2,320
  Other accrued liabilities................................      421       271
                                                            --------  --------
   Total current liabilities...............................    4,601     4,082
Commitments
Mandatorily redeemable convertible preferred stock, Series
 A, $1.00 par value:
  Authorized shares--none at December 31, 1996 and 200,000
   at December 31, 1995
  Issued and outstanding shares--none at December 31, 1996
   and 120,000 at December 31, 1995........................      --     15,448
Stockholders' equity (net capital deficiency):
  Preferred shares, $0.01 par value:
   Authorized shares--5,000,000
   Issued and outstanding shares--none at December 31, 1996
    and 1995...............................................      --        --
  Common shares, $0.01 par value:
   Authorized shares--35,000,000 at December 31, 1996, and
    7,175,000 at December 31, 1995
   Issued and outstanding shares--8,592,402 at December 31,
    1996, and 5,630,016 at December 31, 1995...............       86        56
  Class B Common shares, $0.01 par value:
   Authorized shares--5,000,000 shares at December 31,
    1996, and none at December 31, 1995
   Issued and outstanding shares--2,417,112 shares at
    December 31, 1996 and none at December 31, 1995........       25       --
  Additional paid-in capital...............................   27,121        31
  Accumulated deficit......................................  (12,484)  (13,912)
  Deferred compensation....................................     (172)      --
                                                            --------  --------
   Total stockholders' equity (net capital deficiency).....   14,576   (13,825)
                                                            --------  --------
                                                            $ 19,177  $  5,705
                                                            ========  ========
</TABLE>

                             See Accompanying Notes

                                       33
<PAGE>

                                IA CORPORATION I

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER
                                                                31,
                                                      -------------------------
                                                       1996     1995     1994
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
Revenues:
  License...........................................  $ 7,345  $ 2,110  $ 1,779
  Service...........................................   12,347   10,150    9,429
  Maintenance.......................................    2,588    3,738    3,535
  Hardware..........................................    3,412    1,532    2,641
                                                      -------  -------  -------
    Total revenues..................................   25,692   17,530   17,384
Cost of revenues:
  License...........................................      426      --       --
  Service...........................................    7,023    6,068    5,058
  Maintenance.......................................    1,312    2,105    1,991
  Hardware..........................................    2,716      865    1,721
                                                      -------  -------  -------
    Total cost of revenues..........................   11,477    9,038    8,770
Operating expenses:
  Sales and marketing...............................    5,133    4,313    4,624
  General and administrative........................    2,646    2,318    2,484
  Product development...............................    4,226    3,238    2,365
                                                      -------  -------  -------
    Total operating expenses........................   12,005    9,869    9,473
                                                      -------  -------  -------
Operating income (loss) from continuing operations..    2,210   (1,377)    (859)
Other income (expense):
  Interest expense..................................      (55)     (14)     (20)
  Interest income and other.........................      153       79       49
                                                      -------  -------  -------
Income (loss) from continuing operations............    2,308   (1,312)    (830)
Discontinued operations:
  Loss from discontinued operations.................      --       --      (369)
  Loss on disposal of discontinued operations.......      --       --    (2,657)
                                                      -------  -------  -------
Loss from discontinued operations...................      --       --    (3,026)
                                                      -------  -------  -------
Net income (loss)...................................    2,308   (1,312)  (3,856)
Preferred dividends and accretion...................     (880)  (1,173)  (1,173)
                                                      -------  -------  -------
Net income (loss) applicable to common stockholders.  $ 1,428  $(2,485) $(5,029)
                                                      =======  =======  =======
Pro forma net income (loss) per share...............  $  0.22  $ (0.14)
                                                      =======  =======
Pro forma shares used in per share calculations.....   10,329    9,424
                                                      =======  =======
</TABLE>


                             See Accompanying Notes

                                       34
<PAGE>

                                IA CORPORATION I

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            (NET CAPITAL DEFICIENCY)
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                           COMMON STOCK
                         ------------------
                                                                                CUMULATIVE      TOTAL
                                                                                  FOREIGN   STOCKHOLDERS'
                                            ADDITIONAL                           CURRENCY      EQUITY
                                             PAID-IN-  ACCUMULATED   DEFERRED   TRANSLATION (NET CAPITAL
                           SHARES    AMOUNT  CAPITAL     DEFICIT   COMPENSATION ADJUSTMENT   DEFICIENCY)
                         ----------  ------ ---------- ----------- ------------ ----------- -------------
<S>                      <C>         <C>    <C>        <C>         <C>          <C>         <C>
Balances, December 31,
 1993...................  5,899,845   $ 59   $    23    $ (6,301)       --         $(372)      $(6,591)
  Stock options
   exercised............     44,940    --        --          --         --           --            --
  Repurchase of common
   stock................    (13,251)   --        --          --         --           --            --
  Accretion of
   mandatorily
   redeemable
   convertible preferred
   stock................        --     --        --       (1,173)       --           --         (1,173)
  Cumulative translation
   adjustment...........        --     --        --          --         --           220           220
  Net loss..............        --     --        --       (3,856)       --           --         (3,856)
                         ----------   ----   -------    --------      -----        -----       -------
Balances, December 31,
 1994...................  5,931,534     59        23     (11,330)       --          (152)      (11,400)
  Stock options
   exercised............     68,845    --          8         --         --           --              8
  Repurchase of common
   stock................   (370,363)    (3)      --          (97)       --           --           (100)
  Accretion of
   mandatorily
   redeemable
   convertible preferred
   stock................        --     --        --       (1,173)       --           --         (1,173)
  Cumulative translation
   adjustment...........        --     --        --          --         --           152           152
  Net loss..............        --     --        --       (1,312)       --           --         (1,312)
                         ----------   ----   -------    --------      -----        -----       -------
Balances, December 31,
 1995...................  5,630,016     56        31     (13,912)       --           --        (13,825)
  Stock options
   exercised............    275,540      4         5         --         --           --              9
  Initial public
   offering of common
   stock, net of
   expenses of $1,283...  2,130,841     21    10,585         --         --           --         10,606
  Conversion of
   preferred stock to
   common stock.........  2,973,117     30    16,298         --         --           --         16,328
  Deferred compensation
   resulting from grant
   of options...........        --     --        202         --       $(202)         --            --
  Amortization of
   deferred
   compensation.........        --     --        --          --          30          --             30
  Accretion of
   mandatorily
   redeemable
   convertible preferred
   stock................        --     --        --         (880)       --           --           (880)
  Net income............        --     --        --        2,308        --           --          2,308
                         ----------   ----   -------    --------      -----        -----       -------
Balances, December 31,
 1996................... 11,009,514   $111   $27,121    $(12,484)     $(172)       $ --        $14,576
                         ==========   ====   =======    ========      =====        =====       =======
</TABLE>

                             See Accompanying Notes

                                       35
<PAGE>

                                IA CORPORATION I

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER
                                                              31,
                                                    -------------------------
                                                     1996     1995     1994
                                                    -------  -------  -------
<S>                                                 <C>      <C>      <C>
OPERATING ACTIVITIES
Net income (loss):
  Continuing operations............................ $ 2,308  $(1,312) $  (830)
  Discontinued operations..........................      --       --   (3,026)
Adjustments to reconcile net income (loss) to net
 cash used in operating activities:
  Depreciation and amortization:
    Continuing operations..........................     276      294      563
    Discontinued operations........................      --       --      207
  Amortization of deferred compensation............      30       --       --
  Loss on disposal of property and equipment.......      (9)      --       45
  Loss on disposal of discontinued operations......      --       --    2,657
  Changes in operating assets and liabilities:
    Receivables....................................  (3,870)  (1,433)   1,267
    Other assets...................................     193      (32)     199
    Accounts payable...............................     473      (13)    (160)
    Accrued compensation and related liabilities...     409      258      (38)
    Deferred revenues..............................    (313)     889   (1,234)
    Other accrued liabilities......................     150       21     (270)
    Net current assets of discontinued operations..      --       --     (309)
    Net other assets of discontinued operations....      --       --      (23)
                                                    -------  -------  -------
Net cash used in operating activities..............    (353)  (1,328)    (952)
INVESTING ACTIVITIES
Net proceeds from sale of discontinued business....      --       33       --
Purchases of property and equipment:
  Continued operations.............................    (351)    (127)    (425)
  Discontinued operations..........................      --       --     (111)
Proceeds from sales of property and equipment:
  Continuing operations............................      16       --        3
  Discontinued operations..........................      --       --        8
Sale of investments................................      --       --    2,811
                                                    -------  -------  -------
Net cash provided by (used in) investing
 activities........................................    (335)     (94)   2,286
FINANCING ACTIVITIES
Borrowings under bank line of credit...............     778      500      500
Repayment of borrowings under bank line of credit..    (978)    (300)    (500)
Proceeds from issuance of common stock.............  10,606       --       --
Proceeds from exercise of stock options............       9        8       --
Repurchase of common stock.........................      --     (100)      --
                                                    -------  -------  -------
Net cash provided by financing activities..........  10,415      108       --
Effect of exchange rate changes on cash............      --       --      170
Net increase (decrease) in cash....................   9,727   (1,314)   1,504
Cash at beginning of period........................   1,079    2,393      889
                                                    -------  -------  -------
Cash at end of period.............................. $10,806  $ 1,079  $ 2,393
                                                    =======  =======  =======
Supplemental disclosure of cash flow information:
  Deferred compensation related to stock option
   grants.......................................... $   202  $    --  $    --
                                                    =======  =======  =======
  Cash paid for interest........................... $    56  $    11  $    16
                                                    =======  =======  =======
Supplemental noncash investing and financing
 information:
  Conversion of preferred stock to common stock.... $16,328  $    --  $    --
                                                    =======  =======  =======
</TABLE>

                             See Accompanying Notes

                                       36
<PAGE>

                               IA CORPORATION I

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 The Company and Basis of Presentation

  IA Corporation I (the "Company") was incorporated on July 20, 1992. The
Company develops, markets, implements and supports software solutions for
financial services organizations that require flexible automation of high-
volume, complex transactions. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated.

 Use of Estimates

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

 Cash and Cash Equivalents

  Cash and cash equivalents consist of deposits with major banks, certificates
of deposit and commercial paper with original maturities of less than three
months.

  In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," all debt
securities held during 1996 and 1995 were designated as available for sale.
There were no significant gains or losses from sales of debt securities during
the year ended December 31, 1996 and 1995. At December 31, 1996, the Company
has investments in commercial paper recorded in the amount of $8,974,000,
which approximates fair market value.

 Property and Equipment

  Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives ranging
from three to seven years.

 Software Development Costs

  The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed," under which
certain software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated
lives of the related products. Technological feasibility is established upon
completion of a working model. As of December 31, 1996, such capitalized
software development costs were insignificant and all software development
costs have been charged to product development expenses in the accompanying
consolidated statements of operations.

 Revenue Recognition

  The Company licenses software to end-users under non-cancelable license
agreements and provides services such as installation, training and software
maintenance. The Company provides its software primarily under contracts
requiring significant customization services. Software license and service
revenues from contracts requiring significant customization services are
recognized on the percentage-of-completion method based on the ratio of
incurred costs to total estimated costs. Actual costs and gross margins on
such contracts could differ from management's estimates and such differences
could be material to the financial statements. Software license revenue for
contracts not requiring significant customization services is recognized when
the product has been shipped, all significant contractual obligations have
been satisfied and the resulting receivable is deemed collectible by
management. Allowances for estimated future warranty costs are provided at the
time revenue is recognized.

                                      37
<PAGE>

                               IA CORPORATION I

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  Maintenance revenue is recognized ratably over the term of the related
agreements, which in most cases is one year. Hardware revenue is recognized
when the title passes to the customer.

 Credit Risk

  The Company currently sells its services primarily to large corporations in
the financial services industry in North America. The Company extends credit
based on an evaluation of the customer's financial condition and, generally,
does not require collateral. The Company maintains reserves for potential
credit losses which management believes are adequate to cover any potential
losses. Actual credit losses may differ from management's estimates and such
differences could be material to the financial statements.

 Foreign Currency Translation

  The revenue and expenses of the Company's foreign subsidiary were translated
at monthly average exchange rates. As discussed in Note 2, the Company has
discontinued the operations of its foreign subsidiary.

 Stock-Based Compensation

   The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 and in the year ending December 31,
1996, has adopted the "disclosure only" alternative described in Statement of
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").

 Net Income (Loss) Per Share Applicable to Common Stockholders and Pro Forma
   Net Income (Loss) Per Share

  Net income (loss) per share applicable to common stockholders is computed
using the weighted average number of shares of common stock outstanding.
Common equivalent shares from stock options (using the treasury stock method)
have been included in the computation only when dilutive, except that pursuant
to the Securities and Exchange Commission Staff Accounting Bulletins, common
and common equivalent shares issued by the Company at prices below the initial
public offering price during the 12-month period prior to the Company's
initial public offering of its common stock have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method) through September 30, 1996. Per share information
calculated on this basis is as follows:

<TABLE>
<CAPTION>
                                                              YEARS ENDED
                                                             DECEMBER 31,
                                                          --------------------
                                                          1996   1995    1994
                                                          ----- ------  ------
   <S>                                                    <C>   <C>     <C>
   Net income (loss) per share applicable to common
    stockholders......................................... $0.30 $(0.38) $(0.74)
   Shares used in computing net income (loss) per share
    (in thousands)....................................... 7,795  6,596   6,767
</TABLE>

  The pro forma calculation of net income (loss) per share presented in the
consolidated statements of operations is computed as described above and also
gives retroactive effect to the conversion of all outstanding shares of
convertible preferred stock and accrued dividends into common stock upon the
closing of the Company's initial public offering in November 1996. All of the
convertible preferred stock outstanding upon the completion of the initial
public offering was automatically converted into an aggregate 2,973,117 shares
of common stock.

2. DISCONTINUED OPERATIONS

   In December 1994, the Company adopted a formal plan to discontinue the
operations of its wholly owned subsidiary domiciled in France, IA Corporation
S.A., within one year. IA Corporation S.A. was engaged in the

                                      38
<PAGE>

                               IA CORPORATION I

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

sale of software that provided a document image repository to companies
primarily in the manufacturing, energy, and transportation industries. In
conjunction with the plan to discontinue the operations of IA Corporation
S.A., in October 1995, the Company entered into an agreement with a
nonaffiliated entity to sell the capital stock of IA Corporation S.A. and a
related software license for a total purchase price of $600,000. In the year
ended December 31, 1995, $200,000 of the total purchase price was received. In
June 1996, an additional $200,000 of the purchase price was received. The
remaining purchase price of $200,000 is due in December 1997 and such amount
is included in other current assets in the accompanying balance sheet. The
Company may receive up to an additional $700,000 based upon IA Corporation
S.A. revenue levels for 1997.

   Operating results of IA Corporation S.A. for the year ended December 31,
1994, are included in discontinued operations in the consolidated statements
of operations. Revenues of the discontinued business for 1994 were $5,518,000.
The loss on disposition of this business has also been included in
discontinued operations.

3. PROPERTY AND EQUIPMENT

  Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ------------------------
                                                          1996         1995
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Computer equipment................................. $ 1,474,000  $ 1,180,000
   Furniture and fixtures.............................     185,000      143,000
   Other..............................................      31,000       72,000
                                                       -----------  -----------
                                                         1,690,000    1,395,000
   Less accumulated depreciation and amortization.....  (1,231,000)  (1,004,000)
                                                       -----------  -----------
                                                       $   459,000  $   391,000
                                                       ===========  ===========
</TABLE>

4. LINE OF CREDIT

   The line of credit agreement with a bank allows borrowings up to a maximum
of $2,000,000 with interest at the bank's prime rate plus 0.5% (8.75% at
December 31, 1996). Borrowings are limited to the lesser of $2,000,000 or a
borrowing base of 80% of eligible billed receivables. Borrowings under the
line of credit are secured by substantially all of the Company's assets. Under
the provisions of the line of credit, the Company is required to maintain
certain financial and non-financial covenants. The line of credit agreement
expires on May 15, 1998. The Company has no borrowings outstanding under the
line of credit at December 31, 1996.

5. COMMITMENTS

  The Company leases office space under non-cancelable operating leases.
Future minimum lease payments for the years ending December 31 are as follows:

<TABLE>
           <S>                                     <C>
           1997................................... $1,324,000
           1998...................................  1,201,000
           1999...................................    357,000
           2000...................................      5,000
           2001...................................      5,000
                                                   ----------
                                                   $2,892,000
                                                   ==========
</TABLE>

  Rent expense was $1,568,000, $1,547,000, and $1,291,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.


                                      39
<PAGE>

                               IA CORPORATION I

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  The Company has outstanding irrevocable letters of credit in the amount of
$131,000 at December 31, 1996 and 1995. These letters of credit, which have
terms through April 1998, collateralize the Company's obligations to third
parties for lease commitments.

6. STOCKHOLDERS' EQUITY

 Initial Public Offering

  On November 8, 1996, the Company completed its initial public offering of
2,525,000 shares of common stock (including shares sold by selling
stockholders) at $6.00 per share. The Company received net proceeds of
$10,092,000. In connection with the initial public offering, Series A
preferred stock plus all accrued dividends converted into 2,973,117 shares of
common stock, of which 2,417,112 is Class B common stock. On December 10,
1996, the underwriters exercised a portion of their overallotment option and
the Company issued an additional 130,841 shares of the Company's common stock,
realizing net proceeds of $514,000.

 Preferred Stock

  On May 28, 1996, the Company amended its Certificate of Incorporation to
allow the Board of Directors to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights of those shares without any further vote
or action by the stockholders.

 Class B Common Stock

  On May 28, 1996, the Company amended its Certificate of Incorporation to
authorize the issuance of Class B common stock. Upon the closing of the
initial public offering, 2,417,112 shares of Class B common stock was issued
in exchange for a portion of the outstanding Series A preferred stock and
accrued dividends. The Class B common stock has the same rights, preferences,
privileges, and restrictions as the common stock, except that the Class B
common stock has very limited voting rights and does not vote for the election
of directors. The shares of Class B common stock are also convertible at the
option of the holder into common stock, so long as such conversion does not
result in the holder obtaining greater than 49% of the Company's outstanding
voting securities.

 Stock Split

  On April 30, 1996, the Board of Directors approved a five-for-one stock
split of issued and outstanding common stock. On May 28, 1996, the Board of
Directors approved an additional seven-for-five stock split of issued and
outstanding common stock. All shares in the accompanying consolidated
financial statements have been retroactively adjusted to reflect the stock
splits.

 Stock Option Plan

  Under the provisions of the Company's 1992 Stock Plan (the "1992 Plan"), the
Company is authorized to issue up to 1,658,769 shares of common stock for the
grant of incentive stock options ("ISOs"), nonqualifying stock options
("NSOs"), or stock purchase rights. All options granted under the 1992 Plan
expire seven years after the date of the grant. Generally, options become
vested and exercisable 20% one year after the date of grant and then 5% at the
end of each three-month period thereafter.

  On May 28, 1996, the Company adopted the 1996 Stock Plan (the "1996 Plan")
which provides for the grant of incentive stock options, non-qualifying stock
options and stock purchase rights. All options under the 1996 Plan expire ten
years after the date of the grant and become vested and exercisable 25% one
year after date of grant and then 1/48 at the end of each month thereafter. A
total of 400,000 shares of common stock have been reserved for issuance under
the 1996 Plan.


                                      40
<PAGE>

                               IA CORPORATION I

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  Stock option data is as follows:

<TABLE>
<CAPTION>
                                                                     WEIGHTED
                                                                     AVERAGE
                                                                  EXERCISE PRICE
                                                       NUMBER OF    OF SHARES
                                                        SHARES      UNDER PLANS
                                                       ---------  --------------
   <S>                                                 <C>        <C>
   Options outstanding at December 31, 1993........... 1,095,255      $0.01
   Options granted....................................   260,400       0.01
   Options exercised..................................   (44,940)      0.01
   Options canceled...................................  (224,588)      0.01
                                                       ---------
   Options outstanding at December 31, 1994........... 1,086,127       0.01
   Options granted....................................   317,100       0.28
   Options exercised..................................   (68,845)      0.11
   Options canceled...................................  (175,917)      0.03
                                                       ---------
   Options outstanding at December 31, 1995........... 1,158,465       0.08
   Options granted....................................   455,199       1.93
   Options exercised..................................  (275,540)      0.03
   Options canceled...................................   (23,800)      1.04
                                                       ---------
   Options outstanding at December 31, 1996........... 1,314,324      $0.71
                                                       =========      =====
</TABLE>

  Included in the table above are options to purchase 397,215 shares of common
stock at an exercise price of $0.01 per share which become vested and
exercisable in July 1999, but are subject to accelerated vesting based upon
the Company's equity value, as defined, in the event of the sale, transfer, or
disposition of all or substantially all of the Company's assets, or the merger
of the Company with or into any other corporation.

  At December 31, 1996, options to purchase 109,530 shares of common stock
were exercisable at $0.01 to $0.28 per share. The weighted average fair value
of options granted during 1996 with exercise prices less than the market price
at date of grant is $0.82 per share. The weighted average fair value of
options granted during 1996 and 1995 with exercise prices equal to the market
price at date of grant, is $1.21 and $0.05 per share, respectively. At
December 31, 1996, 355,120 options to purchase common stock were available for
future option grants.

  The following table summarizes information about stock options outstanding
and exercisable at December 31, 1996:

<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                         -------------------------------------- --------------------------
                                         WEIGHTED
                             NUMBER       AVERAGE    WEIGHTED       NUMBER      WEIGHTED
                         OUTSTANDING AT  REMAINING    AVERAGE   EXERCISABLE AT   AVERAGE
  RANGE OF                DECEMBER 31,  CONTRACTUAL EXERCISABLE  DECEMBER 31,  EXERCISABLE
EXERCISE PRICES               1996         LIFE        PRICE         1996         PRICE
---------------          -------------- ----------- ----------- -------------- -----------
<S>                      <C>            <C>         <C>         <C>            <C>
$0.01-$0.28.............     904,905       4.01        $0.10       109,530        $0.16
$0.43-$1.43.............     338,359       6.22        $1.26           --           --
$3.57-$6.00.............      71,060       9.63        $5.83           --           --
                           ---------                               -------
                           1,314,324                               109,530
                           =========                               =======
</TABLE>

  During 1996, the Company issued options to purchase 455,199 shares of common
stock. The Company recorded deferred compensation of $202,000 for financial
reporting purposes with respect to 389,039 of such option grants to reflect
the difference between the exercise price and deemed fair value of the
Company's common stock. Amortization of deferred compensation for the year
ended December 31, 1996 totaled $30,000.


                                      41
<PAGE>

                               IA CORPORATION I

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, for certain Company common stock
grants, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense has been recognized.

  As adjusted information regarding net income (loss) and net income (loss)
per share is required by SFAS 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of SFAS
123. Under this method, the estimated fair value of the options is amortized
to expense over the options' vesting period. The effect of applying that
Statement's fair value method to the Company's stock-based awards results in
net income (loss) and net income (loss) per share that are not materially
different from amounts reported in 1996 and 1995. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1996 and
1995:

<TABLE>
<CAPTION>
                        YEARS ENDED DECEMBER 31,
                        ------------------------
                         1996             1995
                        -------          -------
      <S>               <C>              <C>
      Expected
       dividend yield.       0%               0%
      Expected
       volatility.....       0%               0%
      Risk-free
       interest rate..    6.09%            5.76%
      Expected life of
       the option.....  6 years          6 years
</TABLE>

  The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

  Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its adjusted effect will not be fully reflected until 1999.

 1996 Employee Stock Purchase Plan

  On May 28, 1996, the Company adopted an Employee Stock Purchase Plan (the
"Plan") under which 150,000 shares of common stock have been reserved for
issuance. The Plan allows for eligible employees to purchase stock at 85% of
the lower of the fair market value of the Company's common stock as of the
first day of each six-month offering period or the fair market value of the
stock at the end of the offering period. The Plan has 24-month offering
periods, with each offering period divided into four consecutive six-month
purchase periods. The initial offering period commenced approximately two
weeks subsequent to the effective date of the initial public offering.

7. SAVINGS PLAN

  The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code. Under the plan, employees may defer up to 18% of their pre-tax
salaries, but not more than the statutory limits. The Company

                                      42
<PAGE>

                               IA CORPORATION I

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

contributes fifty cents for each dollar contributed by a participant, with a
maximum contribution of 2% of a participant's earnings. The Company's matching
contribution to the savings plan was $124,000, $109,000 and $95,000 in 1996,
1995 and 1994, respectively.

8. INCOME TAXES

  At December 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $5,100,000 expiring in the years
2008 through 2010 and federal tax credits of approximately $290,000 expiring
in years 2008 through 2011. The Company has net operating loss carryforwards
for state income tax purposes of approximately $1,800,000 expiring in the
years 1998 through 2000 and state tax credits of approximately $190,000 with
an indefinite carryforward. Due to "change in ownership" provisions of the Tax
Reform Act of 1986, utilization of the net operating loss and tax credit
carryforwards may be subject to an annual limitation regarding their
utilization against taxable income in future periods.

  Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ------------------------
                                                          1996         1995
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Deferred tax assets:
     Net operating losses............................. $ 1,859,000  $ 2,066,000
     Tax credit carryovers............................     479,000      293,000
     Capital loss carryovers..........................   1,145,000    1,145,000
     Accrued expenses and reserves....................     907,000      788,000
     Other............................................     132,000      397,000
                                                       -----------  -----------
       Total deferred tax assets......................   4,522,000    4,689,000
                                                       ===========  ===========
   Deferred tax liabilities
     Deferred revenue.................................    (864,000)     (94,000)
     Other............................................    (130,000)    (134,000)
                                                       ===========  ===========
       Total deferred tax liabilities.................    (994,000)    (228,000)
                                                       ===========  ===========
   Net deferred tax assets............................   3,528,000    4,461,000
   Valuation allowance................................  (3,528,000)  (4,461,000)
                                                       ===========  ===========
   Net deferred tax assets............................ $         0  $         0
                                                       ===========  ===========
</TABLE>

  The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense for the year ended December 31, 1996 is as
follows:

<TABLE>
      <S>                                                                  <C>
      Tax at U.S. statutory rates.........................................  34 %
      State tax, net of federal benefit...................................   6 %
      Benefit of net operating losses..................................... (40)%
                                                                           ---
      Effective tax rate..................................................   0 %
                                                                           ===
</TABLE>

9. SIGNIFICANT CUSTOMERS

  In 1996, two customers accounted for 19% and 15%, respectively, of total
revenues. In 1995, one customer accounted for 36% of total revenues, and in
1994, another customer accounted for 30% of total revenues.

                                      43
<PAGE>

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                              BALANCE AT              BALANCE AT
                                              BEGINNING                 END OF
                                              OF PERIOD  DELETIONS(1)   PERIOD
                                              ---------- ------------ ----------
                                                        (IN THOUSANDS)
<S>                                           <C>        <C>          <C>
Year ended December 31, 1996
    Allowance for doubtful accounts..........    $ 50        $ 4         $ 46
                                                 ----        ---         ----
      Totals.................................    $ 50        $ 4         $ 46
                                                 ====        ===         ====
Year ended December 31, 1995
    Allowance for doubtful accounts..........    $ 50         --         $ 50
                                                 ----        ---         ----
      Totals.................................    $ 50         --         $ 50
                                                 ====        ===         ====
Year ended December 31, 1994
    Allowance for doubtful accounts..........    $ 50         --         $ 50
                                                 ----        ---         ----
      Totals.................................    $ 50         --         $ 50
                                                 ====        ===         ====
</TABLE>
--------
(1) Uncollectible accounts written off, less recoveries


                                       44
<PAGE>

                                  SIGNATURES

  In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, I hereunto duly authorized in the City of Emeryville, State of
California, on the 28th day of March 1997.

                                          IA CORPORATION I

                                                /s/ Chakravarthi V. Ravi
                                          By: _________________________________
                                                  Chakravarthi V. Ravi
                                              President and Chief Executive
                                                         Officer

                               POWER OF ATTORNEY

  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Chakravarthi V. Ravi, his attorney-in-fact, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute,
may do or cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
          SIGNATURES                         TITLES                   DATE
          ----------                         ------                   ----
<S>                              <C>                               <C>
  /s/ Chakravarthi V. Ravi       President, Chief Executive        March 28, 1997
-------------------------------   Officer and Chairman of the
     CHAKRAVARTHI V. RAVI         Board (Principal Executive
                                  Officer)

    /s/ David M. Winkler         Vice President and Chief          March 28, 1997
-------------------------------   Financial Officer (Principal
       DAVID M. WINKLER           Financial and Accounting
                                  Officer)

      /s/ Henry Kressel          Director                          March 28, 1997
-------------------------------
         HENRY KRESSEL

      /s/ John Oltman            Director                          March 28, 1997
-------------------------------
          JOHN OLTMAN

   /s/ Peter Stalker, III        Director                          March 28, 1997
-------------------------------
      PETER STALKER, III

       /s/ Randy Katz            Director                          March 28, 1997
-------------------------------
          RANDY KATZ
</TABLE>

                                      45