<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                   For the Fiscal Year Ended December 31, 1998

                         Commission File Number 0-21038

                                NETWORK SIX, INC.
             (Exact name of registrant as specified in its charter)

      Rhode Island                                        05-0366090
   (State or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                       Identification Number)

      475 Kilvert Street
     Warwick, Rhode Island                                02886
(Address of principal executive offices)                (Zip Code)

       Registrant's telephone number, including area code: (401) 732-9000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10
par value

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

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

         The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of February 26, 1999 (computed by reference
to the closing price of such stock on The NASDAQ SmallCap Market) was
$3,900,800.

         As of February 26, 1999, there were 780,160 shares of the registrant's
Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         DOCUMENT                                             WHERE INCORPORATED

   Portions of the registrant's definitive Proxy
     Statement regarding the 1999 Annual
        Meeting of Stockholders                                      Part III


<PAGE>

                                NETWORK SIX, INC.

                                    Form 10-K

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

ITEM                                                                                                          PAGE

                                     Part I

<S>      <C>                                                                                                   <C>
1        Business...........................................................................................     3
2        Properties.........................................................................................    10
3        Legal Proceedings..................................................................................    10
4        Submission of Matters to a Vote of Security Holders................................................    12

                                     Part II

5        Market for Registrant's Common Equity and Related Stockholder Matters..............................    13
6        Selected Financial Data............................................................................    13
7        Management's Discussion and Analysis of Financial Condition and
             Results of Operation...........................................................................    14
8        Financial Statements and Supplementary Data........................................................    23
9        Changes in and Disagreements With Accountants on Accounting and
             Financial Disclosure...........................................................................    23

                                    Part III

10       Directors and Executive Officers of the Registrant.................................................    23
11       Executive Compensation.............................................................................    23
12       Security Ownership of Certain Beneficial Owners and Management.....................................    24
13       Certain Relationships and Related Transactions.....................................................    24

                                     Part IV

14       Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................    24
         Signatures.........................................................................................    27
</TABLE>


                                       2
<PAGE>

                                     PART I

ITEM 1.  BUSINESS.

GENERAL

         Network Six, Inc. is a systems integrator and provider of software,
information technology consulting and network services to government and
industry. Incorporated in 1976 under the name National E-F-T, Inc., the Company
has historically focused on providing its services to state government human
services agencies. In 1998, substantial portions of its revenues were derived
from contracts with such agencies. The Company today also targets its marketing
activities to many government agencies other than human service agencies, as
well as higher education and network services.

         The Company is incorporated under the laws of Rhode Island, and its
principal executive offices are located at 475 Kilvert Street, Warwick, Rhode
Island 02886, telephone number (401) 732-9000.

INDUSTRY

         Rapid improvements in the price and performance of computer and
communications equipment in the last 20 years, coupled with the growth of
sophisticated, powerful software, have resulted in a substantial increase in the
number of organizations that use computer-based information systems and in the
scope and complexity of such systems. The proliferation of both products and
suppliers of products has not only expanded the scope of tasks that can be
performed by information systems; it has also increased the complexity of such
systems.

         Information systems typically include computer hardware (mainframe,
minicomputers, and workstations), software (both custom and packaged), and
communications equipment. Effective operation of information systems depends not
only on having proper equipment and software, but also on having well-trained
and skilled personnel.

         The pace and magnitude of technological change have been so great that
it has been difficult for in-house data processing staffs to remain abreast of
developments. As a result, business and government organizations increasingly
retain third-party vendors employing skilled information technology
professionals to define, develop, and install complex custom information systems
and to provide applications software and comprehensive solutions to their
information systems needs. Business and government organizations are also
turning to third-party vendors to provide information technology services in
order to reduce their investments in technology and personnel.

STATE GOVERNMENT HUMAN SERVICES AGENCY MARKET

         State government human services agencies are among the organizations
that most need the services of outside providers of information technology
services to upgrade and maintain their computer based information systems. They
have large and burdensome caseloads, must maintain extensive records, and they
are being required to increase the capacity and enhance the capabilities of
their information systems as the federal government, which in most cases
provides a substantial portion of the funding of the programs states administer
(see chart below), requires detailed, standardized reporting of program data,
elimination of errors, and more responsive management. Yet the information
systems of many such agencies are obsolete and have limited data interfacing
capabilities. Moreover, the states often require 


                                       3
<PAGE>

them to do more with less.

         The federal government assists the states by providing financial
assistance for information systems in five major areas: (i) the Child Support
Enforcement (CSE) program; (ii) the previous welfare programs of AFDC and Jobs
Opportunities and Basic Skills (JOBS) program which have been combined into the
TANF (Temporary Assistance to Needy Families) and together with the food stamp
program; (iii) the Medicaid and experimental managed care programs; (iv) the
Child Welfare program; and (v) other programs, including Electronic Benefit
Transfer (EBT), automated program policy systems, and out sourcing and
privatization of human services agency functions. The U.S. Department of Health
and Human Services (HHS) administers these programs at the federal level, with
the exception of the food stamp program that is administered by the Food
Nutrition Service of the U.S. Department of Agriculture (USDA).

CHILD SUPPORT ENFORCEMENT. The federal government established the Child Support
Enforcement (CSE) program in 1975 in response to the increasing failure of many
parents to provide financial support to their children. The CSE program is
intended to help strengthen families and reduce dependence on government
assistance by requiring parents to support their children rather than the
government. State governments generally must locate absent parents, establish
paternity if necessary, obtain judicial support orders, and collect the support
payments required by those orders.

The Child Support Enforcement Amendments of 1984 require that that state CSE
systems, in order to receive federal funding, to meet certain federal functional
requirements covering case initiation, case management, database linkage,
financial management, enforcement, security, privacy, and reporting. Welfare
reform has had a major impact on CSE systems as well. Welfare reform mandated:
(i) changes to the way collections are distributed; (ii) added a Federal Case
Registry (FCR) which is a central repository for child support cases and
participants from all states; (iii) new interstate case processing; and (iv)
modification to federal reporting requirements.

TANF. The automated information system requirements of two distinct
federal-state programs - AFDC and Food Stamps - are usually combined at the
state level, previously under the name FAMIS or "Family Assistance Management
Information System." Welfare reform has changed the name of the program to TANF
(Temporary Assistance to Needy Families). Welfare reform has established time
limits for assistance and has made the need for education, training, job
placement, and other supportive services especially important.

The Food Stamp Program is designed to improve the nutrition of low-income
households and is also administered by state welfare agencies under the
supervision of USDA. Benefits are generally provided in the form of food stamp
coupons and are funded by the federal government, which reimburses part of the
cost of establishing an automated system and are part of the cost of operating
an automated food stamp program.

MEDICAID AND MANAGED CARE. Medicaid is a federal-state matching entitlement
program providing reimbursement for the cost of medical care to low-income
individuals who are aged, blind, disabled, or members of families with dependent
children, and to certain other pregnant women and children. Within broad federal
guidelines, each state designs and administers its own program. Eligibility
systems and claims processing systems are automated by states to handle this
program, which is typically the largest line item in a state budget. Federal
assistance is also available on a waiver basis for managed care experiments for
Medicaid recipients and similar populations.


                                       4
<PAGE>

CHILD WELFARE. In November 1993 Congress created a funding authority for
Statewide Automated Child Welfare Information Systems (SACWIS) that provided
federal funds at a 75% rate for the creation of information systems for fiscal
years 1994, 1995, 1996 and 1997. Funding levels for 1998 and beyond were and are
generally 50%. Also in December 1993, the Administration for Children and
Families of HHS published the final rules for the implementation of the section
of the Social Security Act of 1935 that requires the collection of adoption and
foster care data.

OTHER HUMAN SERVICES PROGRAMS. State human services agencies have initiated a
number of additional programs, some of which have involved the use of federal
funds. These programs include: (i) communications kiosks and voice response
systems to inform and educate citizens about human services programs and to
answer specific inquiries; (ii) privatization and out sourcing of various human
services functions such as child support collections; (iii) automated policy
systems to eliminate the volumes of federal and state regulations that must be
referred to by social workers; (iv) Electronic Benefit Transfer (EBT) systems
that involve the transfer of food stamp benefits and payments via electronic
networks that may utilize debit cards or smart cards in conjunction with
automated teller machines or point of sale devices.

FEDERAL FUNDING. Federal Financial Participation (FFP) is the term used for
federal funds provided to states to assist in delivering human services or for
establishing automated systems to assist in such delivery. From time to time
Congress will increase FFP percentages for a limited time in an attempt to
motivate states to automate or upgrade certain systems. The following is a table
of FFP percentages for state system automation by selected program as of
December 31, 1998:

<TABLE>
<CAPTION>

                                                                           Projected End Date
Program                                               FFP%                 Of Current FFP%
-------                                               ----                 ---------------
<S>                                                   <C>                  <C>
Temporary Aid to Needy Families                       Varies*              None*
Food Stamps                                           50%                  None
CSE                                                   66%-90%              September 30, 1999**
Medicaid                                              50%                  None
Medicaid/Managed Care                                 50-90%               Varies by program component
Child Welfare                                         50%-75%              None
Other Human Services Systems                          Varies               Varies by program component
</TABLE>

* States receive block grants and are 
permitted to use federal funds within their 
discretion. 
**Declines to 66%, except for certain 
welfare reform initiatives, which would be 
eligible for 80% FFP.


The FFP percentages shown above are subject to change at any time by the U.S.
Congress.

CONTRACTS AND SERVICES PROVIDED

         The Company's contracts with state agencies have covered four basic
types of projects: (i) the transfer of an entire automated information system
currently in use by another state, which may involve the development of
substantial modifications to that system and installation of the modified
system; (ii) the development of an entirely new system; (iii) the development
and installation of enhancements to an 


                                       5
<PAGE>

agency's existing system; and (iv) the provision of support services with
respect to an existing system. The following table sets forth information as of
December 31, 1998 relating to the Company's significant contracts with state
agencies since December 1994:
<TABLE>
<CAPTION>
State                  Program Area       Project                 Contract Date       Status
-----                  ------------       -------                 -------------       ------
<S>                    <C>                <C>                     <C>                 <C>
U.S. Virgin Islands    CSE                Transfer system         December 1994       In process

Idaho                  CSE                Support services        May 1995            Completed


Rhode Island           TANF/CSE           Support services        July 1995           In process

Rhode Island           Dept. of Health    Develop new system      May 1996            In process

Maine                  Child Welfare      Transfer system         April 1997          Completed
                         MACWIS                                                          warranty phase
Maine                  Child Welfare      Support services        April 1998          In process
                         MACWIS
</TABLE>

         CONTRACT PROCESS. Because most human services agency contracts involve
federal funding, they originate with a federally required Advanced Planning
Document (APD) submitted by the state agency to the federal government for
approval. The federal government reviews APDs to ensure that the system proposed
by the agency incorporates minimum functional requirements and will otherwise
meet federal, state, and user needs in a cost effective manner. Following
approval of the APD, the state agency prepares a request for proposals (RFP)
from private industry for software services and for equipment, or hardware, by
which the system will operate. Each RFP, which is also subject to approval by
the federal government, is usually divided into two parts, one soliciting
technical proposals and the other soliciting price proposals. There may be
separate RFP's for hardware and software or the RFP may be a "bundled" bid that
includes both hardware and software.

         RFPs essentially define the procuring agency's functional requirements,
and proposals submitted in response thereto by the Company and its competitors
are extensive, detailed descriptions of the manner in which the system proposed
would satisfy those requirements and the experience and qualifications of those
who would design and implement the system. The Company's cost of preparing such
proposals ranges between $50,000 and $150,000, and the Company has submitted
proposals both as a prime contractor and as a subcontractor to others. Contracts
are usually awarded on the basis of a combination of technical considerations
and price, although price can be the determinative factor as between technically
acceptable proposals. Contract award generally occurs approximately 12 months
after issuance of the RFP.


                                       6
<PAGE>

         SERVICES. The Company's contracts with state agencies are usually fixed
price agreements, except for support services which are generally time and
materials contracts, and typically involve most or all of the following services
provided by the Company:

         -   customizing and modifying an existing system to be transferred or 
             designing a new system;
         -   writing computer programs;
         -   installing the system;
         -   converting data from computer or manual files;
         -   testing the system;
         -   training personnel to operate the system;
         -   providing computers and related equipment; and
         -   managing the system.

         As a result, the services provided in performing a contract are not
technically complex, but require emphasis on carefully defining the needs of the
staffs of the agencies that administer the programs involved and adapting
existing technology to satisfy those needs. Change orders and enhancements under
existing contracts are also usually performed on a fixed-price basis and may
result in substantial additions to the base contract price. Contract performance
generally occurs over a period of 24 to 36 months.

         FEDERAL CERTIFICATION. When system development and installation are
complete, the contracting state agency is generally required to obtain federal
certification that the system meets federal requirements. There are generally no
fixed time requirements for obtaining certification, and certification of the
systems installed by the Company has generally been received between 6 and 12
months following completion of installation. Many state agencies require the
contractor to provide a performance bond, ranging from 10% to 50% of the
contract price, to be released upon completion of the warranty period or upon
certification. Total-systems contracts also often provide for a warranty period
following completion of the contract.

         Following certification of a newly installed system, it is not unusual
for state agencies to contract for support services. Services provided under
support contracts are usually paid for on the basis of an hourly rate plus
expenses with an overall limitation. The Company estimates that automated
information systems currently being installed have a useful technological life
of approximately five years and that the systems require revisions every year to
keep up with changing legislation, regulation, and its needs.

         TERMINATION. As with government contracts generally, the Company's
contracts with state human services agencies may be terminated upon relatively
short notice, with no obligation upon the agency other than to reimburse the
Company for its costs of performance through the date of termination. Such
contracts also generally impose substantial penalties for default such as
failure to obtain federal certification of the completed system.

HIGHER EDUCATION

The Company has included Higher Education as a market focus. At a local
university, the Company is working on a number of initiatives that fall under
the Strategic IT Planning umbrella. In addition to assisting the university in
building a comprehensive Strategic IT Plan, the Company has been working on
components of this plan, including Administrative Department Assessments,
Administrative Systems Planning, and Year 2000 planning and remediation. The
Company views its relationship with this customer as a true partnership and
looks forward to continued successes in helping them meet their goals 


                                       7
<PAGE>

and objectives.

The Company is working to expand the education client base. The education market
is ever evolving and is demanding more and more IT resources. The Company can
help these institutions meet their needs for new and existing systems
initiatives. Our qualifications as a successful systems integrator, with
seasoned IT professionals from a variety of disciplines, allows us to offer real
value to this market. Our success is a reflection of the value we can offer, and
we will continue to pursue opportunities for market sector growth.

NETWORK SERVICES

         The Company's network services practice continues to grow. Since 1997,
the Company has added many new accounts including private sector companies,
cities, towns, and local colleges. In addition, the Company provides network
services for current Company customers as well as for the Company offices.
Highlights of 1998 projects include work for several municipalities and higher
education customers as well as private and non-profit sector customers.

         During 1998, the Company planned and implemented a Windows NT WAN/LAN
for a non-profit center involving two primary locations made up of a total of
five buildings. Work on the project included hardware and software procurement
and installation, as well as electronic messaging, Internet access, remote
dial-in access, anti-virus, system back-up and support services.

         The Company also planned and implemented Windows NT wide-area and
local-area networks for different municipalities. Work included hardware and
software procurement and installation, as well as the installation of the
Microsoft Exchange messaging System.

         The Company has also done work for several area colleges and
universities. It conducted a high-level assessment of a university's network
infrastructure as part of a larger consulting project. The infrastructure
assessment involved a review of the university's Help Desk services,
infrastructure documentation, disaster recovery plan, network security, system
procedures and MIS organizational structure. The review concluded with a report
on the findings and recommendations for improvements. The Company was also
selected by another college to provide desktop PC configuration and
troubleshooting services. The project involved the configuration of over 350 new
Dell computers for use in administrative and academic areas.

         The Company has also provided network support to several private sector
companies. The projects include migrating an existing Novell NetWare LAN to a
Windows NT network, providing help desk support, and other network services.

COMPETITION

         The Company operates in a highly competitive market. The Company's
competitors for state human services agency contracts include firms such as
Andersen Consulting, Unisys, DRC, American Management Systems, BDM International
(now part of TRW) and Deloitte & Touche. These competitors have substantially
greater financial, technical, and marketing resources than those of the Company.
The Company believes, however, that no single contractor is dominant in its
market and that the primary competitive factors are reputation, capability and
resources, experience with similar systems, quality and reliability of service,
flexibility and price.


                                       8
<PAGE>

         With respect to other State agencies, non-profits and private sector,
there are numerous companies that provide software and system development and
information technology services. None, however, dominates the market. The
network services market is relatively young and has many companies competing for
various business opportunities.

BACKLOG

         Substantially all of the Company's revenues are derived from work to be
performed under contracts of expected duration exceeding one year. Such
contracts may be terminated on relatively short notice and may be subject
to/contingent upon state or federal funding. The Company does not believe that
contracts for work outstanding at any particular time provide a meaningful
indication of future revenue. At December 31, 1998, the Company had the
following contracts to provide services which, if fully performed, would result
in the revenues shown:
<TABLE>
<CAPTION>

                                              Contract                  Contract Revenues                   Backlog
 Contract Title                               Amount(1)                 Earned Thru 12/31/98           as of 12/31/98(2)
 --------------                               -----------               --------------------           -----------------
<S>                                           <C>                       <C>                            <C>
Rhode Island CSE                              $ 1,859,426               $   1,701,523                  $      157,903
Rhode Island Support                            5,307,043                                       
                                                                            2,828,601                       2,478,442
U.S. Virgin Islands                             5,879,074                                       
                                                                            5,533,718                         345,356
Rhode Island Dept. of Health                    2,008,788                                       
                                                                            1,729,665                         279,123
Maine Child Welfare (MACWIS) (3)                9,346,858                                       
                                                                            8,369,380                         977,478
MIM Corporation (4)                             1,311,897                                       
                                                                            1,188,327                         123,570
Others                                            157,600                                       
                                                                              129,514                          28,086
                                            -------------               -------------------            -----------------
Totals                                       $ 25,870,686               $  21,480,728                  $    4,389,958
                                            -------------               -------------------            -----------------
                                            -------------               -------------------            -----------------
</TABLE>

         (1) Contract amounts for certain of the above contracts have been
         adjusted to reflect change orders for enhancements or additional
         functionality.

         (2) The Company expects that substantially all of its backlog at
         December 31, 1998 will be realized by the end of 1999. There can be no
         assurance, however, that the Company will ultimately realize all of
         these revenues from such contracts. See Note 10 to Financial Statements
         regarding concentration of revenue.

         (3) This includes both the transfer and support services contracts.

         (4) The Company has been doing time and materials consulting for MIM
         Corporation since January 1998. The Company entered into a one-year
         support contract with them in March 1999.

EMPLOYEES

         The Company believes that its future success will depend in large part
upon its continued ability to hire and retain qualified technical and project
management personnel. There can be no assurance that the Company will be
successful in attracting and retaining sufficient numbers of qualified personnel
to conduct its business in the future.


                                       9
<PAGE>

         As of December 31, 1998, the Company had approximately 100 employees.
None of the Company's employees is represented by a labor union. The Company
believes its relations with its employees are excellent

ITEM 2.  PROPERTIES.

         The Company's principal offices are located in Warwick, Rhode Island,
approximately 12 miles from Providence. The Company leases approximately 9,500
square feet of office space at this location under a lease with an average
annual cost including utilities of approximately $186,000 that expires on
October 31, 2000. The Company also leases 3,600 square feet in Augusta, Maine to
support project activities. This lease expires June 30, 1999. The Company
believes that these offices are adequate for its current and near term needs.

ITEM 3.  LEGAL PROCEEDINGS

         In June 1995, the Company began negotiating a significant amendment to
its contract for a child support enforcement ("CSE") system with the State of
Hawaii (the State) when it determined that the total estimated cost to complete
the system would be significantly greater than expected. In March 1996, the
Company received final State and federal government approval for this contract
amendment totaling $4.4 million. As a result of numerous in-depth reviews of
this contract amendment, management determined that remaining contract costs
would exceed the contract value by $440,000, and therefore, accrued this loss in
December 1995.

         In June 1996 the Company announced a new subcontract agreement with
Complete Business Solutions, Inc ("CBSI") to expand CBSI's role in the Hawaii
CSE contract. CBSI, at the request of Hawaii, was contracted to lead a detailed
review of the current system under development. Hawaii, in turn, agreed to pay
CBSI $1.2 million from the Company's remaining contract budget when various
milestones were achieved. The Company had a significant role in the detailed
review and had hoped that its results would facilitate the resolution of open
contractual scope issues.

         On September 13, 1996, the State of Hawaii terminated its contract with
the Company, effective September 23, 1996, claiming that the Company had failed
to fulfill its obligations under the contract. In response, the Company also
terminated the contract with the State effective September 23, 1996. The Hawaii
contract, originally estimated to be a $20.7 million contract, was increased to
$25.2 million by the State and the Company in February 1996, and was the
Company's largest contract at the time. Prior to termination, approximately
$16.5 million of costs had been incurred towards completion of the contract, and
$11 million had been billed and substantially paid.

         On November 12, 1996 the State of Hawaii filed a lawsuit in the Circuit
Court of the First Circuit of the State of Hawaii against the Company and Aetna
Casualty and Surety and Federal Insurance Company for damages due to breach of
contract (the "Hawaii litigation"). Aetna Casualty and Surety and Federal
Insurance Company provided the $10.3 million performance bond on the Company's
contract with the State of Hawaii to develop and install the State's child
support enforcement system. The suit alleges the Company failed to meet
contractual deadlines, provided late, incomplete and/or unsuitable deliverables,
materially breached the contract by never completing the design, the application
programming, and the system test and systems implementation. The State is
seeking an unspecified amount for general damages, consequential and special
damages, liquidated damages, attorneys' fees, reimbursement for the cost of the
suit and interest costs that the court deems just and proper.


                                       10
<PAGE>

         The Company vigorously denies the State's allegation and, on January
23, 1997, filed a counter claim against the State alleging that the State has
breached the contract. The Company is seeking $70 million in damages and is
alleging that the State fraudulently induced the Company into designing and
building a system having capabilities and features far beyond the scope of the
Company's contract. The fraudulent inducement was in the form of withholding
payments, improper rejection of work that satisfied the requirements of the
contract and verbal and written abuse of the Company's employees and management.

         In addition, Unisys, a vendor providing equipment under the Company's
Hawaii contract, submitted a $896,000 claim against the $10.3 million
performance bond. In February of 1997, the State released all but $1.1 million
of the performance bond; the remainder is intended to cover amounts payable to
Unisys and other subcontractors. In April of 1997, after a detailed review of
their records and discussions with the Company, Unisys agreed to lower their
claim to $859,602 and Aetna Casualty and Surety paid that claim. Lockheed Martin
IMS (Lockheed), who guaranteed the performance bond, reimbursed Aetna for that
claim. In December 1997, the Company reached an agreement with Lockheed to repay
the $859,602 over a five-year period.

         On December 13, 1996 CBSI filed a lawsuit in the Superior Court of the
State of Rhode Island for $517,503, which the Company had previously accrued,
plus interest, costs and attorney's fees. The Company disputes the $517,503
owned to CBSI and filed a counterclaim against CBSI on January 13, 1997
alleging, among other things, that CBSI failed to complete its duties required
under the subcontract with the Company in a timely manner, improperly engaged in
negotiations with the State of Hawaii to complete the project, hired and
attempted to hire employees of the Company in violation of its subcontract
agreement with the Company and obtained and utilized confidential information
and proprietary intellectual property inappropriately. Also, the Company alleges
that CBSI owes the Company $482,750 as of December 31, 1996 for which the
Company has not established a reserve for uncollectibility.

         On February 3, 1997, the Company filed a third-party complaint ("TPC")
as part of the Hawaii litigation against MAXIMUS Corporation ("MAXIMUS") and
CBSI. MAXIMUS has been the State of Hawaii's contract supervisor and advisor
since the inception of the Hawaii project. The allegations the Company has made
against CBSI in this TPC are substantially similar to the allegations made
against CBSI in the Company's counterclaim to CBSI's December 13, 1996 lawsuit
brought against the Company in Rhode Island. The Company alleged, moreover, that
MAXIMUS is liable to the Company on grounds that: (i) the Company was an
intended third party beneficiary under the contract between the MAXIMUS and
Hawaii; (ii) MAXIMUS tortuously interfered in the contract between the Company
and Hawaii; (iii) MAXIMUS negligently breached duties to the Company, and (iv)
MAXIMUS aided and abetted Hawaii in Hawaii's breach of contract. The Company's
complaint seeks $70 million in damages.

         In connection with the Hawaii litigation the Company was ordered to
assign all Hawaii related leases to the State. One of the lessors has sued the
Company for failure to pay. The Company believes it was released of all
responsibility on the lease per the court order.


         Management believes that the Company's claims against the State,
MAXIMUS and CBSI have substantial merit and will vigorously pursue these claims.
There is substantial uncertainty, however, inherent in all litigation. If the
Company were not to prevail in its suit with the State, such a result could have
a material adverse financial effect on the Company and could jeopardize the
Company's ability to 


                                       11
<PAGE>

continue with its present listing on The NASDAQ SmallCap Market. Management of
the Company and its attorneys are unable to predict with any certainty the
ultimate outcome of this litigation, although it is their belief that a
unfavorable outcome is unlikely. At December 31, 1998, the Company had unbilled
work-in-process and related receivables from the State and CBSI of approximately
$3.46 million, which is slightly less than stockholders' equity of approximately
$3.8 million, for which no allowance for uncollectibility has been recorded. The
Company has not accrued for any potential liability to the State, which may
result from this litigation. In addition, the Company has not accrued for any
legal expense to be incurred in connection with this litigation, which could be
significant.

         Due to the significant uncertainty created by these events, the Company
ceased recognition of revenue on the Hawaii contract in 1996. An adjustment of
$1.8 million was recorded in the fourth quarter to reverse revenue of $1
million, $400 thousand and $400 thousand previously in the first, second and
third quarters, respectively. In addition, 1996 costs incurred related to the
Hawaii contract of $1.96 million have been charged to expense.


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

       None.

                                       12
<PAGE>

                                     PART II

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

         The Company's Common Stock is traded on The NASDAQ SmallCap Market
under the symbol "NWSS." Prior to August 2, 1993, the Common Stock was traded in
the over-the-counter market under the same symbol.

         The following table sets forth the high and low sales prices of the
Company's Common Stock as reported on The NASDAQ National Market prior to
October 29, 1998 thereafter on the NASDAQ SmallCap Market.
<TABLE>
<CAPTION>

                                                HIGH                      LOW
              <S>                             <C>                      <C>   
              1998
              First Quarter                   $ 5.38                   $ 2.75
              Second Quarter                                       
                                                6.00                     3.38
              Third Quarter                                        
                                                9.75                     3.19
              Fourth Quarter                                       
                                                5.25                     2.94

              1997
              First Quarter                   $ 2.88                   $ 0.88
              Second Quarter                                       
                                                2.13                     1.25
              Third Quarter                                        
                                                3.00                     1.75
              Fourth Quarter                                       
                                                3.88                     2.25
</TABLE>

As of December 31, 1998 there were 302 holders of record of the Common Stock,
representing approximately 391 beneficial owners. The last reported sale price
for the Common Stock, as reported on The NASDAQ SmallCap Market on February 26,
1999 was $5.00 per share.

DIVIDEND POLICY

         The Company has not paid any dividends on its Common Stock since its
formation. It presently intends to retain its earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future. The
Company's Articles of Incorporation prohibit the payment of dividends on the
Common Stock if dividends required to be paid on the Company's Series A
Convertible Preferred Stock are in arrears, which they are.

ITEM 6.  SELECTED FINANCIAL DATA.

         The following selected financial data are qualified by reference to,
and should be read in conjunction with, the Company's Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operation" contained elsewhere in or incorporated by reference in
this Form 10-K. The selected financial data for each of the five years in the
period ended December 31, 1998 are derived from the Company's audited financial
statements.


                                       13
<PAGE>


INCOME STATEMENT DATA:
<TABLE>
<CAPTION>

                                           YEAR ENDED DECEMBER 31,
                                         1998             1997              1996             1995             1994
                                         ----             ----              ----             ----             ----
<S>                                    <C>               <C>               <C>             <C>              <C>         
Contract revenue earned                $ 10,399,979      $ 11,460,437      $ 7,344,380     $ 20,985,012     $ 21,210,878
Cost of revenue earned                    6,418,678         8,620,097        7,359,649       19,299,944       13,768,838
                                       ------------      ------------      -----------     ------------     ------------
Gross profit (loss)                       3,981,301         2,840,340                         1,685,068        7,442,040
                                                                              (15,269)
Selling, general and
   administrative expense                 2,260,418         2,071,294        2,240,073        4,369,260        3,700,789
Research & development
   expense                                                                                      185,235  
                                                  -                 -                -                                 -
Restructuring expense                                                        (119,436)          537,221  
                                                  -                 -                                                  -
Income (loss) from
   operations                             1,720,883           769,046      (2,135,906)      (3,406,648)        3,741,251
Income (loss) before
   income taxes                           1,674,006           534,950      (2,533,368)      (3,792,521)        3,574,612
Net income (loss)                         1,061,006           406,950      (1,758,345)      (2,427,440)        2,109,020
Net income (loss) per share
   Basic                                                                                                 
                                               0.96              0.25           (2.71)           (3.68)             2.79
   Diluted                                                                                               
                                               0.96              0.25           (2.71)           (3.68)             2.39
Shares used in computing net income
     (loss) per share
   Basic                                    758,547           729,927          719,317          709,841          689,587
   Diluted                                  758,547           729,927          719,317          709,841          883,184
</TABLE>


BALANCE SHEET DATA:
<TABLE>
<CAPTION>

                                              YEAR ENDED DECEMBER 31,
                                         1998             1997              1996             1995             1994
                                         ----             ----              ----             ----             ----
<S>                                     <C>                 <C>           <C>              <C>               <C>        
Working capital                         $ 1,416,200         $  22,117     $(1,073,671)     $(2,075,339)      $ 6,266,622
Hawaii contract receivables*              3,459,382         3,459,382        3,571,824        5,711,022        3,691,048
Total assets                              8,700,782         9,292,103        8,273,564       14,945,273       11,930,399
Long-term obligations                     1,156,812         1,422,725          235,479          254,393          158,038
Total stockholders' equity                3,808,883         2,955,420        2,748,777        4,644,494        6,914,434
</TABLE>

* See Note 12 in the notes to the financial statements.

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

         The following analysis of the financial conditions and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and Notes thereto included elsewhere in or incorporated by
reference in this Form 10-K.


                                       14
<PAGE>

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

          This report contains forward-looking statements reflecting the
Company's expectations or beliefs concerning future events that could materially
affect Company performance in the future. All forward-looking statements are
subject to the risks and uncertainties inherent with predictions and forecasts.
They are necessarily speculative statements, and unforeseen factors, such as
competitive pressures, litigation results and regulatory and state funding
changes could cause results to differ materially from any that may be expected.
In particular, adverse decisions in on-going material litigation could have a
material adverse effect on the Company's financial condition and operating
results. See Item 3 - Legal Proceedings. Actual results and events may therefore
differ significantly from those discussed in forward-looking statements.
Moreover, forward-looking statements are made in the context of information
available as of the date stated, and the Company undertakes no obligation to
update or revise such statements to reflect new circumstances or unanticipated
events as they occur.

GENERAL

         The Company was incorporated in 1976 as National E-F-T, Inc. Initially
the Company provided consulting services with respect to electronic funds
transfer and electronic data interchange systems. In 1983 the Company changed
its name to Network Solutions, Inc. and on February 1, 1994 to Network Six, Inc.
By 1983, the Company had changed its focus to that of a regional provider of
systems development and contract computer programming services. Since 1988, the
Company has focused its efforts on providing its services to state government
human services agencies. Commencing in 1998, the Company began targeting its
marketing efforts at other state government agencies as well as non-for-profit
organizations and the private commercial sector.

          In January 1998 the Company announced a new $1.5 million line of
credit (See "Liquidity and Capital Resources") and the change of its independent
auditors from KPMG LLP to Sansiveri, Kimball & McNamee L.L.P. The Company also
announced an extension of the child support enforcement contract with the U.S.
Virgin Islands and a contract to assist MIM Corporation with the development of
a pharmaceutical benefits management system.

          On October 29, 1998 the Company's stock was transferred from the
NASDAQ National Market and moved to The NASDAQ SmallCap Market.

          The Company received comments on January 30, 1998 from the Securities
and Exchange Commission regarding the timing of revenue recognition with regard
to the Company's contract with the State of Hawaii during 1996 and whether an
allowance should be taken by the Company against the contract receivable
relating to that contract ($3,459,382 at December 31, 1998). The Company
believes that, although the outcome of the Company's litigation with the State
of Hawaii is uncertain (see Item 3 - Legal Proceedings), it is likely to prevail
in the Hawaii litigation and therefore the Company is not required to take an
allowance against that receivable.

          In April 1998 the Company announced the extension of its contract with
the State of Rhode Island, Department of Human Services, to support the InRHODES
system. The contract has been extended through June 30, 1999. The contract
extension is valued at approximately $2.8 million. InRHODES is a comprehensive
computer system that integrates data and functions for the Family Independence
Program, Food Stamps, Child Support Enforcement, Medicaid Eligibility and
General Public Assistance programs.


                                       15
<PAGE>

          In May 1998, the Company announced a three-month support contract with
the State of Maine, Department of Human Services, for the child welfare system
known as MACWIS that the Company recently developed and implemented followed by
a one-year support contract valued at $1.8 million. The $1.8 million contract
was signed in June 1998 and subsequently increased to $1.9 million.

          In May 1998 director Dana Gaebe decided not to run for re-election to
the Board of Directors. The Company wishes to thank Mr. Gaebe for his twenty-two
years of service as a Board member.

          In September 1998, the Company announced it had entered into a
$250,000 term loan with the Business Development Corporation of Rhode Island and
a $250,000 term loan with the Small Business Loan Fund Corporation, a subsidiary
of the Rhode Island Economic Development Corporation. See Liquidity and Capital
Resources.

          In December 1998, the Company announced that Mr. Ralph O. Cot, 
formally an executive with Commercial Union, a global insurance provider, had
joined the Board of Directors.

          In January 1999, the Company announced that the State of Rhode Island,
Department of Administration, had increased its contract with the Company for an
additional $2.5 million for enhancing the State's InRHODES computer system. This
brings the total value of the Company's support contract with the State of Rhode
Island for InRHODES-related work to $5.3 million.

          In February 1999 the Company announced that Dr. Samara H. Navarro,
formally Deputy Commissioner, Department of Children and Families, State of
Florida, joined the Company as Vice President of Governmental Services.

YEAR 2000 DISCLOSURE

         The Year 2000 issue concerns the inability of information systems,
primarily computer software programs, to recognize properly and process date
sensitive information subsequent to December 31, 1999. The Company has committed
resources (approximately $50,000) over the past six months to improve its
information systems ("IS project"). The Company has used this IS project as an
opportunity to evaluate its state of readiness, estimate expected costs and
identify and quantify risks associated with any potential year 2000 issues.

State of Readiness:

         In evaluating the Company's exposure to the year 2000 issue, management
first identified those systems that were critical to the ongoing business of the
Company and that would require significant manual intervention should those
systems be unable to process dates correctly following December 31, 1999. These
systems were the Company's internal time tracking system and internal
administrative system. Once these systems were identified, the following steps
were identified as those that would be required to be taken to ascertain the
Company's state of readiness:

          I.     Obtaining letters from software and hardware vendors concerning
                 the ability of their products to properly process dates after
                 December 31, 1999;

          II.    Testing the operating systems of all hardware used in the
                 Company, and internal administration systems to determine if
                 dates after December 31, 1999 can be processed correctly;

          III.   Surveying other parties who provide or process information in
                 electronic format to the


                                       16
<PAGE>

                 Company as to their state of readiness and ability to process 
                 dates after December 31, 1999; and

          IV.    Testing the identified information systems to confirm that they
                 will properly recognize and process dates after December 31,
                 1999.

         The Company anticipates completion of Step I - Step IV above for all
         material software and hardware by the end of June 1999. Any software or
         hardware determined to be noncompliant will be modified, repaired or
         replaced. The Company estimates the costs of such modifications,
         repairs and replacements to be $100,000 at this time.

Costs:

         As noted above, the Company spent approximately $50,000 over the past
six months to improve its information systems. In addition, the Company
anticipates that it will spend approximately $50,000 over the next 12 months to
further improve its information systems.

Risks:

         Effective August 4, 1998, the Securities and Exchange Commission issued
Release No. 33-7558 (the "Release") in an effort to provide further guidance to
reporting companies concerning disclosure of the year 2000 issue. In this
Release, the Commission required that registrants include in its year 2000
disclosure a reasonable description of its "most reasonably likely worst case
scenario." Based on the Company's assessment and the results of remediation
performed to date as described above, the Company believes that all problems
related to the year 2000 will be addressed on a timely basis so that the Company
will experience little or no disruption in its business immediately following
December 31, 1999. However, if unforeseen difficulties arise, or if compliance
testing is delayed or necessary remediation efforts are not accomplished in
accordance with the Company's plans described above, the Company anticipates
that its "most reasonably likely worst case scenario" (as required to be
described by the Release) is that some percentage of the Company's time tracking
related to contract labor costs would need to be processed manually for some
limited period of time. In addition, the Company anticipates that all businesses
(regardless of their state of readiness), including the Company, will encounter
some minimal level of disruption in its business (e.g., phone and fax systems,
alarm systems, etc.) as a result of the year 2000 issue. However, the Company
does not believe that it will incur any material expenses or suffer any
significant loss of revenues in connection with such minimal disruptions.

Contingency Plans:

         As discussed above, in the event of the occurrence of the "most
reasonably likely worst case scenario" the Company could hire an appropriate
level of temporary staff to manually assist with the time tracking process.

Forward Looking Statements:

         Certain information set forth above regarding the year 2000 issue and
the Company's plans to address those problems are forward looking statements
under the Securities Act and the Exchange Act. See the second paragraph of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for a discussion of forward-looking statements and related risks and
uncertainties. In addition, certain factors particular to the year 2000 issue
could cause actual results to differ materially 


                                       17
<PAGE>

from those contained in the forward looking statements, including, without
limitation: failure to identify critical information systems which experience
failures, delays and errors in the compliance and remediation efforts described
above, unexpected failures by key vendors, software providers or business
partners to be year 2000 compliant or the inability to repair critical
information systems. In any such event, the Company's results of operations and
financial condition could be adversely affected. In addition, the failure to be
year 2000 compliant of third parties outside of our control such as electric
utilities or financial institutions could adversely effect the Company's results
of operations and financial condition.

RESULTS OF OPERATIONS

         The following table sets forth for the years indicated, information
derived from the Company's Financial Statements expressed as a percentage of the
Company's contract revenue earned:
<TABLE>
<CAPTION>

                                                           YEAR ENDED DECEMBER 31,
                                                 ---------------------------------
                                                      1998          1997           1996          1995
                                                      ----          ----           ----          ----
<S>                                                 <C>           <C>            <C>           <C>   
Contract revenue earned                             100.0%        100.0%         100.0%        100.0%
Cost of revenue earned                               61.7%         75.2%         100.2%         92.0%
Gross profit                                         38.3%         24.8%          -0.2%          8.0%
Selling and administrative expenses                  21.7%         18.1%          30.5%         20.8%
Research and development expense                      0.0%          0.0%           0.0%          0.9%
Restructuring                                         0.0%          0.0%          -1.6%          2.6%
Income before income taxes                           16.1%          4.7%         -34.5%        -18.1%
Net income (loss)                                    10.2%          3.6%         -23.9%        -11.6%
</TABLE>

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

         Contract revenue earned decreased $1,060,457, or 9%, from $11,460,437
in the year ended December 31, 1997 to $10,399,980 in the year ended December
31, 1998 primarily due to the completion of the Idaho Child Support Enforcement
project in March 1997, and the substantial completion of the Rhode Island
Department of Health system (KidsNet) and the Maine Automated Child Welfare
Information System (MACWIS) projects. This decrease was offset by increased work
on the Rhode Island Department of Human Services contract due to welfare reform,
commencement of the MIM Corporation project, and increased business for the
Company's Network Services Division.

         Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, decreased $2,201,419, or 26%, from
$8,620,097 in 1997 to $6,418,678 in 1998. This was primarily due to a lower
reliance on subcontractor labor, which is generally at a higher cost than the
Company's internal staff.

         Gross profit increased $1,140,961 from $2,840,340 in 1997 to $3,981,301
in 1998. Gross profit, as a percentage of revenue was 25% for 1997 and 38% for
1998. This was primarily because of the Company's improved margins on the Maine
MACWIS support project over the Maine MACWIS project.

         Selling, general and administrative expenses increased $189,124, or 9%,
from $2,071,294 in 1997 to $2,260,418 in 1998 primarily due to an increase in
marketing and related expenses. On a percentage basis, SG&A expenses increased
from 18% in 1997 to 22% in 1998, as a percentage of 


                                       18
<PAGE>

contract revenue earned.

         Interest expense decreased $140,716 or 53% from $266,030 in 1997 to
$125,314 in 1998 due to a lower level of borrowing.

         As a result of the foregoing, income before income taxes was $1,674,006
in 1998, an increase of $1,139,056 from $534,950 in 1997. Income before income
taxes, as a percentage of contract revenue earned increased from 5% in 1997 to
16% in 1998.

         Net income of $1,061,006 in 1998 represents an increase of $654,056, or
161%, from $406,950 in 1997. As a percentage of contract revenue earned, net
income increased from 4% in 1997 to 10% in 1998. The Company's effective tax
rate was 24% for 1997 and 37% for 1998.

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

         Contract revenue earned increased $4,116,057, or 56%, from $7,344,380
in the year ended December 31, 1996 to $11,460,437 in the year ended December
31, 1997 primarily due to the commencement of the Maine Automated Child Welfare
Information System (MACWIS) and additional work on the Rhode Island support
contract in response to federal welfare reform legislation. This increase was
offset in part by the substantial completion of the Idaho and the Virgin Islands
Child Support Enforcement (CSE) projects and the West Virginia support project.

         Cost of revenue earned, consisting of direct employee labor, direct
contract expense and subcontracting expense, increased $1,260,448, or 17%, from
$7,359,649 in 1996 to $8,620,097 in 1997. This was a consequence of an increased
level of effort needed to support the higher level of business.

         Gross profit increased $2,855,609 from a loss of $15,269 in 1996 to
$2,840,340 in 1997. Gross profit as a percentage of revenue was (0.2%) for 1996
and 25% for 1997. The Company's expected lower margin on the Maine MACWIS
project, where the Company's subcontractor is playing a significant role, was
offset by higher margins on the welfare reform work on the Rhode Island support
project.

         Selling, general and administrative expenses decreased $168,779, or 8%,
from $2,240,073 in 1996 to $2,071,294 in 1997 primarily due to a reduction of
expense to support the Company's marketing and proposal efforts. On a percentage
basis, SG&A expenses decreased from 31% in 1996 to 18% in 1997, as a percentage
of contract revenue earned, primarily as a consequence of the Company's efforts
to reduce expenses and increase revenues.

         Interest expense decreased $169,895 or 39% from $435,925 in 1996 to
$266,030 due to a lower level of borrowing.

         As a result of the foregoing, income before income taxes was $534,950
in 1997, an increase of $3,068,318 from a loss of $2,533,368 in 1996. Income
before income taxes, as a percentage of contract revenue earned increased from a
loss of 34% in 1996 to 5% in 1997.

         Net income of $406,950 in 1997 represents an increase of $2,165,295
from a net loss of $1,758,345 in 1996. As a percentage of contract revenue
earned net income increased from a loss of 24% in 1996 to income of 4% in 1997.
The Company's effective tax rate was 31% for 1996 and 24% for 1997.


                                       19
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         In order to finance bid preparation costs and to obtain sufficient
collateral to support performance bonds required by some customers, the Company
has, in the past, entered into joint ventures with other firms with greater
financial resources when bidding for contracts. The Company expects to continue
and expand this practice prospectively as well as to pursue more time and
material contracts than it has historically pursued. Time and materials
contracts generally do not require performance bonds and almost always involve
less risk to deliver what the customer requires.

         The Company has historically not received its first contract progress
payments until approximately three to six months after contract award, which
itself was as much as 12 months after proposal preparation commences. The
Company was therefore required to fund substantial costs well before the receipt
of related income, including marketing and proposal costs and the cost of a
performance bond. Prospectively, the Company expects to tighten up this
timetable, thereby reducing the requirement for additional working capital.

         The Company has funded its operations through cash flows from
operations, bank borrowings, borrowings from venture partners, and private
placements of equity securities. Net cash provided by operating activities was
$1,066,014, $1,854,052 and $2,230,504 in the years ended December 31, 1998,
1997, and 1996 respectively. Fluctuations in net cash provided by operating
activities are primarily the result of changes in net income, accounts
receivable and income tax receivable, accounts payable and costs and estimated
earnings in excess of billings on contracts due to differences in contract
milestones and payment dates.

         On April 30, 1997 the Company signed a term loan (the "Loan") with its
bank which required the Company to reduce its outstanding borrowings under the
Loan from $1.8 million to the following limits: October 15, 1997 - $1,500,000,
November 15, 1997 - $1,200,000 and December 15, 1997 - $900,000. The interest
rate on the Loan was 16%, with the difference between 16% and prime plus 2%
payable at maturity, which was January 31, 1998. There were also a number of
provisions for accelerated payment to reduce the Loan balance, such as paying
the bank 50% of any contract holdbacks or income tax refunds. In addition, the
Company agreed to provide the bank with warrants to purchase 50,487 unregistered
shares of the Company's Common Stock at $1.75 per share, exercisable immediately
with an expiration date of April 30, 2002, and agreed to provide the bank 15% of
any recovery received from its litigation in Hawaii. The warrants and the bank's
right to a percentage of any recovery would terminate if the Company paid down
the Loan completely or raised $1 million of equity capital prior to maturity.
The Company's obligations under the Loan were secured by substantially all of
the assets of the Company. The Loan also provided that the Company not pay any
dividends on its capital stock without the consent of the bank. On January 26,
1998 the Loan was paid in full. As of December 31, 1997, the balance was
$1,160,000. The warrants and the bank's right to a percentage of any Hawaii
recovery were returned to the Company.

          On December 31, 1997 the Company signed a $1.5 million line of credit
with a commercial lender (the "Line of Credit"). Accounts receivable from four
of the Company's contracts secure the new Line of Credit. The Company can borrow
up to 80% of the aggregate invoice amounts and is required to repay any
borrowings within 90 days. The interest rate is prime plus five percent on
balances below $1 million and prime plus one and one half percent on balances
over $1 million. The Line of Credit also carries a six- percent annual service
fee on borrowed balances. At December 31, 1998 the Line of Credit had an
outstanding balance of zero.


                                       20
<PAGE>

         On September 21, 1998 the Company entered into two five-year term
loans, each for $250,000. One lender was the Small Business Loan Fund
Corporation, ("SBLFC"), a subsidiary of the Rhode Island Economic Development
Corporation. The other lender was the Business Development Corporation of Rhode
Island ("BDC"). The SBLFC loan carries an annual interest rate of 9.5% and must
be repaid over five years. The BDC loan carries an annual interest rate of
10.25%, and an annual deferred fee of $5,000, and must be paid back over five
years. Both term loans are secured by substantially all the assets of the
Company. The BDC was also issued five-year warrants to purchase 11,500
unregistered shares of the Company's Common Stock at a price of $4.50 per share.
The warrants expire on September 20, 2003. The fair value of the warrants was
estimated by the Company to be $36,806 using the Black-Scholes model and is
being amortized ratably over the exercise period. Such amount is included in
other noncurrent assets on the accompanying balance sheet.

         The Company believes that cash flow generated by operations will be
sufficient to fund continuing operations through the end of 1999. This assumes,
however, that there are no materially adverse decisions rendered in the ongoing
litigation with Hawaii, MAXIMUS and CBSI. See Item 3 - Legal Proceedings.

         The Company believes that inflation has not had a material impact on
its results of operations to date.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

         In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" which established standards for reporting and displaying
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This statement
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of the balance sheet. This statement is
effective for fiscal years beginning after December 15, 1997and had no effect on
the Company's financial statements for 1997 and 1998.

         In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" was issued.
This statement requires the use of the "management approach" model for segment
reporting. The management approach model is founded upon the way the Company's
management organizes segments within the Company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, management structure, or other parameters which management
uses to organize a company. The Company is required to adopt this new standard
for the year ended December 31, 1998; however, such standard had no effect on
the Company's financial statements for 1997 and 1998.

         In February 1998, Statement of Financial Accounting Standards No, 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" was
issued. This statement standardizes the disclosure requirements for pensions and
other postretirement benefits, requires additional information on changes in the
benefit calculation, and eliminates certain disclosures that are no longer
considered useful. This statement effectively revised guidance previously
provided by Statement of Financial Accounting Standards Nos., 87,88 and 106. The
Company is required to adopt the new standard for the year ended December 31,
1998; however, such standard had no effect on the Company's financial statements
for 1998.


                                       21
<PAGE>

         In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that entities recognize all derivatives as both assets and liabilities
in the statement of financial position and measure those instruments at fair
value. This standard is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Labor Considerations

Due to the technical and labor-intensive nature of the Company's business,
continued success of the Company depends largely upon the ability of management
to attract and retain highly-skilled information technology professionals and
project managers possessing the technical skills and experience necessary to
deliver the Company's services. There is a high demand for qualified information
technology professionals worldwide and they are likely to remain a limited
resource for the foreseeable future. The Company has no assurance that qualified
information technology professionals will continue to be available in sufficient
numbers, or at wages, which will enable the Company to retain current or future
employees. A material adverse effect on the Company's business, operating
results, and financial condition would be expected if the Company fails to
attract or retain qualified information technology professionals in sufficient
numbers.

Technological Considerations

Rapid technological change, evolving industry standards, changing client
preferences and new product introductions characterizes the information
technology industry. The Company's success will depend in part on its ability to
develop technological solutions that keep pace with changes in the industry.
There can be no assurance that products or technologies developed by others will
not render the Company's services noncompetitive or obsolete or that the Company
will be able to keep pace with the expected continued rapid changes in
technology. A failure by the Company to address these developments could have a
material adverse effect on the Company's business, operating results and
financial condition.

Year 2000 Client Considerations

The Company's contracts, including year 2000 projects, often involve projects
that are critical to the operations of its clients' businesses and provide
benefits that may be difficult to measure. There can be no assurance that
despite the Company's attempts to contractually limit its liability for damages
arising from errors, mistakes, omissions or negligent acts in rendering its
services, these attempts will be successful. The Company's inability to meet a
client's expectations in the delivery of its services could result in a material
adverse effect to the client's operations and, therefore, could potentially give
rise to claims against the Company or damage the Company's reputation,
detrimentally affecting its business, operating results and financial condition.

Long Term Contract Concerns

The typical contract with a client is for a term of one to three years.
Generally, there is no assurance that a client will renew its contract when it
terminates. Under such contracts, clients may reduce the use of 


                                       22
<PAGE>

the Company's services without penalty. Failure by the Company to retain its
existing clients could materially adversely effect its results of operations.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The information required by Item 8 is contained on pages F-2 to F-26 of
this report.

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

         On January 6, 1998, the Company engaged the firm of Sansiveri, Kimball
& McNamee, L.L.P. ("SKM"), as its auditors. Before the engagement, neither the
Company nor anyone on its behalf (i) consulted with the newly engaged accountant
regarding the application of accounting principles to a specific completed or
contemplated transaction or the type of audit opinion that might be rendered on
the Company's financial statements, or (ii) had been provided with advice that
was an important factor considered by the Company in reaching a decision as to
an accounting, auditing or financial reporting issue. The decision to engage SKM
was approved by the Audit Committee of the Board of Directors of the Company.

         On January 6, 1998, the Company terminated, with the concurrence of its
Audit Committee, its relationship with its auditors KPMG LLP ("KPMG"). KPMG
included in its Independent Auditors' reports dated March 28, 1997 and April 1,
1996 a statement that the accompanying financial statements had been prepared
assuming that the Company will continue as a going concern. In addition, during
the audit of the Company's financial statements for the year ended December 31,
1996, KPMG concluded that approximately $1.8 million of revenue recognized on
the Company's contract with the State of Hawaii during the first three quarters
of 1996 should not have been recognized and should have been reversed in the
respective quarters. The Company believes that the revenue was properly and
correctly recognized and that there is no reason that it should have known under
applicable accounting standards that the revenue should not have been recognized
at the time. Moreover, when the Company had reason to know that revenue under
the contract should not be recognized because of changed conditions, such
revenue was reversed in the fourth quarter of 1996 and for the year ended
December 31, 1996.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS.

         The Company currently intends to include the information required by
Item 10 for its 1999 Annual Meeting Proxy Statement ("1999 Proxy Statement") and
such proxy statement is incorporated herein by reference. Such Proxy Statement
will be filed with the Securities and Exchange Commission not later than 120
days after the Company's fiscal year end.

ITEM 11.  EXECUTIVE COMPENSATION.

         The Company currently intends to include the information required by
Item 11 in the Company's 1999 Proxy Statement and such information is
incorporated herein by reference. Such Proxy Statement will be filed with the
Securities and Exchange Commission not later than 120 days after the Company's
fiscal year end.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.


                                       23
<PAGE>

         The Company currently intends to include information required by Item
12 in the Company's 1999 Proxy Statement and such information is incorporated
herein by reference. Such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the Company's fiscal year end.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The Company currently intends to include information required by Item
13 in the Company's 1999 Proxy Statement and such information is incorporated
herein by reference. Such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the Company's fiscal year end.

                                     PART IV

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

         (a)  (1) LIST OF FINANCIAL STATEMENTS.

         The following financial statements and notes thereto of the Company and
Independent Auditors' Report thereon are included on pages F-2 to F-26 of this
report:

                 Independent Auditors' Report of Sansiveri, Kimball & McNamee
                     L.L.P. 
                 Independent Auditors' Report of KPMG LLP 
                 Balance Sheets as of December 31, 1998 and 1997 
                 Statements of Operations for the Years Ended December 31, 1998,
                     1997, and 1996
                 Statements of Stockholders' Equity for the Years Ended December
                     31, 1998, 1997, and 1996
                 Statements of Cash Flows for the Years Ended December 31, 1998,
                     1997 and 1996
                 Notes to Financial Statements

              (2) LIST OF FINANCIAL STATEMENT SCHEDULES.

              All schedules have been omitted because they are either not
applicable or not required, or the required information is provided in the
financial statements or notes thereto.

              (3) LIST OF EXHIBITS.

      Exhibit
      Number      Exhibit

         3.1      Articles of Incorporation of the Company, as amended
                  (incorporated by reference from the Company's Form
                  10, File No. 0-21038)


         3.2      Bylaws of the Company as amended (incorporated by reference


                                       24
<PAGE>

                  from the Company's Form 10, File No. 0-21038)

         10.1     Stock Purchase Agreement dated October 29, 1992 between the
                  Company and Saugatuck Capital Company Limited Partnership III
                  (incorporated by reference from the Company Form 10, exhibit
                  10.7, File No. 0-21038)

         10.2     Registration Rights Agreement dated October 29, 1992 between
                  the Company and Saugatuck Capital Company Limited Partnership
                  III (incorporated by reference from the Company's Form 10,
                  exhibit 10.8, File No. 0-21038)

         10.3     Incentive Stock Option Plan (incorporated by reference from 
                  the Company's Form 10, exhibit 10.9, File No. 0-21038)

         10.4     Deferred Compensation Agreement between the Company and Mr.
                  Robert E. Radican, as amended (incorporated by reference from
                  the Company's Form 10-K, exhibit 10.10, for the fiscal year
                  ended December 31, 1994)

         10.5     1993 Employee Stock Purchase Plan (incorporated by reference
                  from the Company's Form 10-K, exhibit 10.12, for the fiscal
                  year ended December 31, 1994)

         10.6     1993 Incentive Stock Option Plan (incorporated by reference
                  from the Company's Form 10-K, exhibit 10.18, for the fiscal
                  year ended December 31, 1993)

         10.7     Contract dated November 10, 1994, between the Company and the
                  Government of the Virgin Islands re CSE transfer system
                  (incorporated by reference from the Company's Form 10-K,
                  exhibit 10.21, for the fiscal year ended December 31, 1994)

         10.8     Non-employee Director Stock Option Plan (incorporated by
                  reference from the Company's Form 10-K, exhibit 10.12, for the
                  fiscal year ended December 31, 1996)

         10.9     Contract dated May 1996 between the Company
                  and the State of Rhode Island Department of Health
                   re RICAP system (incorporated by reference from the Company's
                  Form 10-K, exhibit 10.13, for the fiscal year ended December
                  31, 1996)

         10.10    Contract dated July 1996 between the Company and the State of
                  Rhode Island Department of Human
                  Services re support services (incorporated by reference from
                  the Company's Form 10-K, exhibit 10.14, for the fiscal year
                  ended December 31, 1996)

         10.11    Contract dated May 1996 between the Company
                  and Complete Business Solutions, Inc.
                  re walk through agreement (incorporated by reference from the
                  Company's Form 10-K, exhibit 10.15, for the fiscal year ended
                  December 31, 1996)


         10.12    Employment Agreement between the Company and Mr. 


                                       25
<PAGE>

                  Kenneth C. Kirsch dated January 1, 1997 (incorporated by 
                  reference from the Company's Form 10-K, exhibit 10.16, for the
                  fiscal year ended December 31, 1996)

         10.13    Credit Agreement dated December 31, 1997 between the Company
                  and Prinvest Financial Corporation (incorporated by reference
                  from the Company's Form 10-K, exhibit 10.17, for the fiscal
                  year ended December 31, 1997)

         10.14    Contract dated April , 1997 between the Company and the State
                  of Maine Re: Automated child welfare system (incorporated by
                  reference from the Company's Form 10-K, exhibit 10.18, for the
                  fiscal year ended December 31, 1997)

         10.15    Agreement dated December 29, 1997 between the Company and
                  Lockheed Martin IMS re note payable (incorporated by reference
                  from the Company's Form 10-K, exhibit 10.19, for the fiscal
                  year ended December 31, 1997)

         10.16    Credit Agreement dated September 23, 1998 between the Company
                  and Small Business Loan Fund Corporation, a subsidiary of the
                  Rhode Island Economic Development Corporation

         10.17    Credit Agreement dated September 23, 1998 between the Company
                  and Business Development Corporation of Rhode Island

         22.1     List of Subsidiaries (incorporated by reference from the
                  Company's Form 10, File No. 0-21038)

         23.1     Consent of Sansiveri, Kimball & McNamee L.L.P. 

         23.2     Consent of KPMG LLP


(B)      REPORTS ON FORM 8-K.

         A current report on Form 8-K, dated December 1, 1998 was filed by the
         Company and included the press release dated December 1, 1998
         announcing Ralph H. Cote as a new member of the Board of Directors.

         A current report on Form 8-K, dated November 2, 1998 was filed by the
         Company and included the press release dated October 29, 1998
         announcing the Company's listing on the NASDAQ SmallCap Market.

         A current report on Form 8-K, dated October 28, 1998 was filed by the
         Company and included the press release dated October 26, 1998,
         announcing the Company's results for the quarter ended September 30,
         1998. A Statement of Operations (without notes) for the quarters ended
         September 30, 1998 and, 1997 was included with the filing. A balance
         sheet as of September 30, 1998 and December 31, 1997 was also included
         with the filing.


                                       26
<PAGE>

SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned on the 18th day of March 1999.


                                     NETWORK SIX, INC.



                                     By: /s/ KENNETH C. KIRSCH
                                        ----------------------------------------
                                      Kenneth C. Kirsch
                                      President and Chief Executive Officer

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

<TABLE>
<CAPTION>

SIGNATURE                           TITLE                                       DATE


<S>                                 <C>                                         <C> 
/s/ KENNETH C. KIRSCH               Chairman of the Board, President,           March 18, 1999
------------------------            and Chief Executive Officer (Principal
  Kenneth C. Kirsch                 Executive Officer)


/s/ DOROTHY M. CIPOLLA              Chief Financial Officer, and                March 18, 1999
------------------------            Treasurer (Principal Financial
Dorothy M. Cipolla                  and Accounting Officer)


/s/ RALPH H. COTE                   Director                                    March 18, 1999
------------------------
Ralph H. Cote


/s/ NICHOLAS R. SUPRON              Director                                    March 18, 1999
------------------------
Nicholas R. Supron


/s/ CLIFTON C. DUTTON               Director                                    March 18, 1999
------------------------
Clifton C.  Dutton
</TABLE>


                                       27
<PAGE>


                          INDEX TO FINANCIAL STATEMENTS
                                       AND
                          FINANCIAL STATEMENT SCHEDULES




<TABLE>
<CAPTION>

                                                                                                 Page
                                                                                                 ----
<S>                                                                                              <C>
Independent Auditors' Report of Sansiveri, Kimball & McNamee L.L.P.                              F-2
Independent Auditors' Report of KPMG LLP                                                         F-3
Balance Sheets as of December 31, 1998 and 1997                                                  F-4-5
Statements of Operations for the Years Ended December 31, 1998, 1997, and 1996                   F-6
Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997, and 1996         F-7
Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996                   F-8-9
Notes to Financial Statements                                                                    F-10
</TABLE>



                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders of
Network Six, Inc.:


We have audited the accompanying balance sheet of Network Six, Inc. as of
December 31, 1998 and 1997 and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial statements of Network Six, Inc. as
of December 31, 1996 were audited by other auditors, whose report dated March
28, 1997 on those statements included an explanatory paragraph that described
significant uncertainties as to the Company's ability to continue as a going
concern.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements referred to above present fairly, in
all material respects, the financial position of Network Six, Inc. at December
31, 1998 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.

As discussed more fully in Note 12 to the financial statements, in 1996 the
State of Hawaii terminated a significant system implementation contract with the
Company and filed a lawsuit against the Company seeking an unspecified amount
for damages due to alleged breach of contract, including alleged failure to
complete the design, application programming, system test, and system
implementation. In January 1997, the Company filed a counterclaim alleging that
the State had fraudulently induced the Company into designing and building a
system having capabilities and features beyond the scope of the contract. At
December 31, 1998 and 1997, the Company had unbilled work-in-progress and
related receivables from the State of Hawaii of approximately $3.5 million.
Also, the Company is involved in other litigation related to the Hawaii contract
as discussed in Note 12.


Sansiveri, Kimball & McNamee, L.L.P.
/s/ Sansiveri, Kimball & McNamee, L.L.P.

Providence, Rhode Island
February 19, 1999



                                      F-2
<PAGE>


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Network Six, Inc.:


We have audited the accompanying statements of operations, stockholders' equity
and cash flows of Network Six, Inc. for the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Network Six,
Inc. for the year period ended December 31, 1996, in conformity with generally
accepted accounting principles.

The accompanying 1996 financial statements have been prepared assuming that the
company will continue as a going concern. As discussed more fully in note 12 to
the financial statements, in 1996 the State of Hawaii terminated a significant
system implementation contract with the Company and filed a lawsuit against the
Company seeking an unspecified amount for damages due to alleged breach of
contract, including alleged failure to complete the design, application
programming, system test and system implementation. In January 1997, the Company
filed a counterclaim alleging that the State had fraudulently induced the
Company into designing and building a system having capabilities and features
beyond the scope of the contract. Management of the Company and its attorneys
are unable to predict with any certainty the ultimate outcome of this
litigation, including the probability that this litigation will have a material
adverse impact on the Company's financial position. At December 31, 1996, the
Company had unbilled work-in-process and related receivables from the State of
Hawaii of approximately $3.5 million, which exceeded the Company's stockholders'
equity of approximately $2.7 million, for which no allowance for
uncollectability had been recorded. Additionally, the Company has not accrued
for any liability to the State which may result from this litigation. Also the
Company is involved in other litigation related to the Hawaii contract as
discussed in note 12, had suffered recurring losses and its bank financing
agreement has expired. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
these uncertainties are also described in note 12. The 1996 financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.


KPMG LLP
/s/ KPMG LLP

Providence, Rhode Island
March 28, 1997


                                      F-3
<PAGE>

                                NETWORK SIX, INC.

                                 Balance Sheets
                           December 31, 1998 and 1997
<TABLE>
<CAPTION>

ASSETS (NOTE 4)                                                              1998                  1997
---------------
                                                                       -----------------     ------------------


<S>                                                                  <C>                   <C>
Current assets:
     Cash and cash equivalents                                       $        1,442,035    $         1,291,924
                                                                                                     
     Contract receivables, less allowance for doubtful
          accounts of $69,175 in 1998 and
          $50,000 in 1997 (note 2)                                            1,966,788              2,011,379
                                                                                                     
     Costs and estimated earnings in excess of billings
          on contracts (note 3)                                               1,220,253              1,388,515
                                                                                                     
     Other assets                                                               112,433                244,257
                                                                                                       
                                                                       -----------------     ------------------

          Total current assets                                                4,741,509              4,936,075
                                                                                                     
                                                                       -----------------     ------------------


Property and equipment (note 5):
     Computers and equipment                                                    590,527                506,484
                                                                                                       
     Furniture and fixtures                                                     163,532                167,558
                                                                                                       
     Leasehold improvements                                                                             20,191
                                                                                 20,191                 
                                                                       -----------------     ------------------

                                                                                774,250                694,233
                                                                                                       
Less: accumulated depreciation and amortization                                 602,033                627,146
                                                                                                       
                                                                       -----------------     ------------------
          Net property and equipment                                            172,217                 67,087
                                                                                                        

Deferred taxes (note 6)                                                                                
                                                                                 37,097                391,475

Contract receivables and costs in excess of billings
     on Hawaii contract (notes 2, 3 and 12)                                   3,459,382              3,459,382
                                                                                                     
Other assets                                                                    290,577                438,084
                                                                                                       
                                                                       -----------------     ------------------

Total assets                                                         $        8,700,782    $         9,292,103
                                                                                                     
                                                                       -----------------     ------------------
                                                                       -----------------     ------------------

                                                                                              (continued -1)
</TABLE>


                                      F-4
<PAGE>

                                NETWORK SIX, INC.

                            Balance Sheets, continued
                           December 31, 1998 and 1997
<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY                                              1998              1997
------------------------------------
                                                                              --------------   ---------------
<S>                                                                                 <C>           <C>
Current liabilities:
     Notes payable to bank  (note 4)                                                $     -       $ 1,160,000
     Current installment of obligations under capital leases (note 5)                           
                                                                                     89,483            82,690
     Current portion of long-term debt:
          Vendors (note 7)                                                                      
                                                                                    200,000           163,871
          Others   (note 4)                                                                     
                                                                                     91,997                 -
     Accounts payable                                                                           
                                                                                     58,456           188,377
     Accrued salaries and benefits                                                              
                                                                                    579,320           449,133
     Accrued subcontractor expense                                                              
                                                                                     24,950         1,352,393
     Other accrued expenses                                                                     
                                                                                    320,982           342,465
     Billings in excess of costs and estimated earnings on contracts (note 3)                   
                                                                                    341,572           155,754
     Income taxes payable (note 6)                                                              
                                                                                    780,066            13,338
     Deferred taxes (note 6)                                                                    
                                                                                     42,491           545,869
     Preferred stock dividends payable                                                          
                                                                                    795,992           460,068
                                                                              --------------   ---------------
          Total current liabilities                                                             
                                                                                  3,325,309         4,913,958
                                                                              --------------   ---------------

Obligations under capital leases, excluding current
     installments (note 5)                                                                      
                                                                                     38,090           104,003
Long-term debt, less current portion:
          Vendors (note 7)                                                                      
                                                                                    542,239           742,239
          Others   (note 4)                                                                     
                                                                                    409,778                 -
Hawaii Payable (note 12)                                                                        
                                                                                    576,483           576,483
                                                                              --------------   ---------------
          Total Liabilities                                                                     
                                                                                  4,891,899         6,336,683
                                                                              --------------   ---------------
Commitments (notes 5, 9 and 12) 
Other information (notes 10 and 11)
Stockholders' equity (note 8):
  Series A convertible preferred stock, $3.50 par value. Authorized
    857,142.85 shares; issued and outstanding 714,285.71 shares in 1998 and
    1997; liquidation of $3.50 per share plus unpaid and accumulated dividends    2,235,674         2,235,674
  Common stock, $.10 par value. Authorized 4,000,000 shares; issued
    and outstanding 764,663 shares in 1998 and 734,294 in 1997                       76,466            73,429

Additional paid-in capital                                                        1,796,284         1,670,939
Retained earnings (accumulated deficit)                                            (299,541)       (1,024,622)
                                                                              --------------   ---------------
          Total stockholders' equity                                              3,808,883         2,955,420
                                                                              --------------   ---------------
          Total Liabilities and Stockholders' Equity                             $8,700,782       $ 9,292,103
                                                                              --------------   ---------------
                                                                              --------------   ---------------
</TABLE>


See accompanying notes to financial statements.                   (concluded -2)


                                      F-5
<PAGE>


                                NETWORK SIX, INC.

                            Statements of Operations
                  Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                            1998                1997                 1996
                                                      -----------------   -----------------    -----------------

<S>                                                       <C>                 <C>                   <C>        
Contract revenue earned (note 10)                         $ 10,399,979        $ 11,460,437          $ 7,344,380
Cost of revenue earned                                       6,418,678           8,620,097            7,359,649
                                                      -----------------   -----------------    -----------------
     Gross profit (loss)                                     3,981,301           2,840,340      
                                                                                                       (15,269)

Selling, general and administrative expenses                 2,260,418           2,071,294            2,240,073
Restructuring (note 11)                                                                               (119,436)
                                                                     -                   -
                                                      -----------------   -----------------    -----------------
     Income (loss) from operations                           1,720,883             769,046          (2,135,906)

Other deductions (income)                              
     Interest expense                                          125,314             266,030              435,925
     Interest earned                                                                            
                                                              (78,437)            (31,934)             (38,463)
                                                      -----------------   -----------------    -----------------
          Income (loss) before income taxes                  1,674,006             534,950          (2,533,368)

Income taxes (note 6)                                          613,000             128,000            (775,023)
                                                      -----------------   -----------------    -----------------

Net income (loss)                                          $ 1,061,006          $  406,950         $(1,758,345)
                                                      -----------------   -----------------    -----------------
                                                      -----------------   -----------------    -----------------

Net income (loss) per share:
Basic                                                         $   0.96            $   0.25           $   (2.71)
                                                      -----------------   -----------------    -----------------
                                                      -----------------   -----------------    -----------------
Diluted                                                       $   0.96            $   0.25           $   (2.71)
                                                      -----------------   -----------------    -----------------
                                                      -----------------   -----------------    -----------------


Shares used in computing net income per share:
Basic                                                          758,547             729,927              719,317
                                                      -----------------   -----------------    -----------------
                                                      -----------------   -----------------    -----------------

Diluted                                                        758,547             729,927              719,317
                                                      -----------------   -----------------    -----------------
                                                      -----------------   -----------------    -----------------


Preferred dividends declared                                $  335,925          $  225,307           $  187,500
                                                      -----------------   -----------------    -----------------
                                                      -----------------   -----------------    -----------------

</TABLE>


See accompanying notes to financial statements.



                                      F-6
<PAGE>


                                NETWORK SIX, INC.
                       Statements of Stockholders' Equity
                  Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                   Series A                                   Retained
                                                Convertible                Additional         Earnings                        Total
                                                  Preferred     Common        Paid-in     (Accumulated     Treasury   Stockholders'
                                                      Stock      Stock        Capital         Deficit)        Stock          Equity
                                              --------------------------------------------------------------------------------------
<S>                                           <C>             <C>        <C>              <C>            <C>          <C>          
Balance at December 31, 1995                  $   2,235,674   $ 71,517   $  1,603,770     $    739,580   $  (6,047)   $   4,644,494

Net Loss                                                                                   (1,758,345)                  (1,758,345)
Dividends declared on preferred stock      
   7.5%/share                                                                                (187,500)                    (187,500)
Shares Issued in connection
   with exercise of options 4,900 shares                           490         37,485                                        37,975
Shares Issued in connection with
   employee stock purchase plan 1,120 shares                       112         12,041                                        12,153
                                              --------------------------------------------------------------------------------------
Balance at December 31, 1996                      2,235,674     72,119      1,653,296      (1,206,265)      (6,047)       2,748,777

Net Income                                                                                                          
                                                                                               406,950                      406,950
Dividends declared on preferred stock
   7.5%/share (Q1-Q3); 13.5% (Q4)                                                             (225,307)                    (225,307)
Sale of 4,998 treasury shares                                                                                6,047           6,047
Sale of 13,102 shares of common stock                            1,310         17,643                                       18,953
                                              --------------------------------------------------------------------------------------
Balance at December 31, 1997                      2,235,674     73,429      1,670,939      (1,024,622)         -         2,955,420

Net Income                                                                                  1,061,006                    1,061,006
Dividends declared on preferred stock
   7.5%/share                                                                                (335,925)                    (335,925)

Shares Issued in connection
   with exercise of options 6,275 shares                           628         12,223                                        12,851
Sale of 24,094 shares of common stock                            2,409         76,316                                        78,725
Warrants issued with term loan                                                 36,806                -                       36,806
                                              -------------------------------------------------------------------------------------
Balance at December 31, 1998                  $   2,235,674   $ 76,466   $  1,796,284    $   (299,541)      $     -   $   3,808,883
                                              -------------------------------------------------------------------------------------
                                              -------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to financial statements.



                                      F-7
<PAGE>


                                NETWORK SIX, INC.

                            Statements of Cash Flows
                  Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                                        1998               1997                 1996
                                                                        ----               ----                 ----

<S>                                                                     <C>                 <C>              <C>          
  Net Income (loss)                                                     $1,061,006          $ 406,950        $ (1,758,345)

  Adjustments to reconcile net income (loss) to net cash 
     provided by operating activities:
       Depreciation and amortization                                        47,415            82,010               337,460
                                                                     
       Provision for doubtful accounts                                                             
                                                                            19,175            (47,856)              47,856
       Loss on sale/disposal of fixed assets                                 6,518              9,023               60,487
       Provision for deferred taxes                                      (149,000)             75,000             (394,862)
       Accrued financing fee                                               20,000                  -                    -
       Forgiveness of note payable to vendor                              (50,036)                 -                    -
       Changes in operating assets and liabilities:
       Contract receivables                                                25,416            (434,765)            (100,059)
       Cost and estimated earnings
         in  excess of billings on contracts                              168,262             476,423            1,348,138
       Income taxes receivable                                                  -             516,046            1,231,778
       Other current assets                                                131,824           (85,281)              105,186
       Due from officer                                                         -                  -               63,779
       Other noncurrent assets                                             181,548          (261,785)              256,547
       Long term amounts due from Hawaii                                        -            112,442             2,139,198
       Accounts payable                                                   (129,921)       (1,543,955)               35,333
       Accrued salaries and benefits                                       130,187           (21,634)               28,104
       Accrued subcontractor exp.                                      (1,327,443)          1,330,149            (399,613)
       Other notes payable                                                      -             698,593              207,517
       Hawaii payable                                                           -             576,483                    -
       Other accrued expenses                                             (21,483)          (165,729)            (110,675)
       Accrued restructuring                                                    -             (5,383)            (512,297)
       Billings in excess of costs
         and estimated earnings on contracts                               185,818            123,983            (355,028)
       Income taxes payable                                                766,728             13,338                    -
                                                                   ----------------   ----------------    -----------------
           Net cash provided by operating activities                     1,066,014          1,854,052            2,230,504
                                                                   ----------------   ----------------    -----------------
</TABLE>


                                      F-8
<PAGE>


                                NETWORK SIX, INC.

                       Statements of Cash Flows, Continued
                  Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                                             1998               1997                 1996
                                                                             ----               ----                 ----
<S>                                                                         <C>                <C>                <C>         
  Cash flows from investing activities:
     Proceeds from sale of assets                                           $        -         $    1,948         $     32,811
     Capital expenditures                                                     (156,299)           (21,552)             (10,277)
                                                                        ----------------   ----------------    -----------------
                Net cash provided by (used in) investing  activities          (156,299)           (19,604)              22,534
                                                                        ----------------   ----------------    -----------------


Cash flows from financing activities:
     Principal payments on capital lease obligations                           (59,120)           (55,105)            (181,235)
     Net proceeds (payments) from note payable to bank                      (1,160,000)          (640,000)          (3,200,000)
     Proceeds from long-term debt                                               500,000                         
                                                                                                         -                    -
     Payments on long-term debt                                               (132,060)                         
                                                                                                         -                    -
     Proceeds from issuance of common stock                                                                     
                                                                                 91,576             18,593              50,126
     Proceeds from sales of treasury stock                                                                      
                                                                                      -              6,047                    -
                                                                        ----------------   ----------------    -----------------
          Net cash used in financing activities                               (759,604)          (670,105)          (3,331,109)
                                                                        ----------------   ----------------    -----------------

    Net increase (decrease) in cash                                             150,111          1,164,343          (1,078,071)

    Cash at beginning of year                                                 1,291,924            127,581           1,205,652
                                                                        ----------------   ----------------    -----------------
    Cash at end of year                                                     $ 1,442,035        $ 1,291,924        $    127,581
                                                                        ----------------   ----------------    -----------------
                                                                        ----------------   ----------------    -----------------


  Supplemental cash flow information: 
     Cash (received) paid during the year for:
         Income taxes                                                       $   (4,788)        $ (467,781)        $(2,086,198)
                                                                        ----------------   ----------------    -----------------
                                                                        ----------------   ----------------    -----------------

         Interest                                                           $   89,030         $  222,376         $   399,182
                                                                        ----------------   ----------------    -----------------
                                                                        ----------------   ----------------    -----------------
</TABLE>


See accompanying notes to financial statements.


                                      F-9
<PAGE>


                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996


(1) Summary of Significant Accounting Policies

(a) Description of Business
 Network Six, Inc. (the "Company"), formerly Network Solutions, Inc., is a
 provider of software development and computer-related consulting services to
 government and industry. Founded in 1976, the Company focuses on providing its
 services to state government health and human services agencies. Currently,
 substantially all of its revenues are derived from contracts with such
 agencies. Services are provided under "time and materials" contracts and "fixed
 price" contracts. Under these contracts, which are generally awarded as a
 result of formal competitive-bidding processes, the Company provides a range of
 information technology services, consisting primarily of systems integration,
 system design, software development, hardware planning and procurement, and
 personnel training. More recently, the Company has expanded its customer base
 to include private sector, non-profit and other organizations.

(b) Revenue Recognition
 Revenues from services provided under fixed-price and modified fixed-price
 contracts are recognized on the percentage-of-completion method, measured by
 the percentage of costs incurred to date to estimated total costs for each
 contract. This method is used because management considers costs incurred to be
 the best available measure of progress on these contracts. Revenues from time
 and materials contracts are recognized on the basis of costs incurred during
 the period plus the related fee earned.

 Cost of revenues earned includes all direct material and labor costs and those
 indirect costs related to contract performance. Selling, general, and
 administrative costs are charged to expense as incurred. Provisions for
 estimated losses on uncompleted contracts are made in the period in which such
 losses are determined. Changes in job performance, job conditions and estimated
 profitability including those arising from contract penalty provisions and
 final contract settlements, may result in revisions to costs and income and are
 recognized in the period in which the revisions are determined.

 Costs and estimated earnings in excess of billings on uncompleted contracts,
 represents revenues recognized in excess of amounts billed. Billings in excess
 of costs and estimated earnings on uncompleted contracts, represents billings
 in excess of revenues recognized. For fixed price contracts, costs and
 estimated earnings are billed upon customer approval of the Company's attaining
 various phases of completion set forth in each contract. Retainage is billed
 upon customer approval on contract completion. Costs and earnings on time and
 material contracts are billed when time is expended and material costs are
 incurred. The Company also recognizes revenue from the sale of hardware to
 various customers. Revenue and related costs for these sales are recorded when
 the customer accepts delivery and installation of the hardware.

 In the state government systems integration industry, it is common practice to
 negotiate change orders to existing contracts in progress due to the custom
 nature of systems integration projects. In addition, such change orders
 generally must be submitted to the federal government for approval because a


                                      F-10
<PAGE>

                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996


portion of state systems integration projects are federally funded. Over the
years, the Company has successfully negotiated and received federal approval of
numerous contract change orders. However, the frequent need for change orders in
the systems integration business and the inherent uncertainties in obtaining
state and federal approval of change orders is a significant risk, which could
have a material impact to the Company.

(c) Cash and cash equivalents
Cash and cash equivalents include investments with an original maturity of three
months or less.

(d) Other Assets
Other assets consist of employee receivables both current and long-term
portions, lease receivables, sales tax refund receivable, prepaid insurance, and
security deposits.

(e) Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
life of the asset.

The estimated useful lives of property and equipment and leasehold improvements
are:
<TABLE>
<CAPTION>
        <S>                                 <C>      
        Leasehold improvements              30 months
        Computers and equipment              3 years
        Furniture and fixtures               5 years
</TABLE>

When the Company determines that certain property, plant and equipment is
impaired, a loss for impairment is recorded for the excess of the carrying value
over the fair market value of the asset. Fair value is determined by independent
appraisal, if an active market exists for the related asset. Otherwise, fair
value is estimated through forecasts of expected cash flows.

(f) Income Taxes

The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

(g) Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing net income
(loss), after deducting dividends on Series A convertible preferred stock by the
weighted average number of common shares, and in the case of diluted earnings
per share assuming the conversion of the convertible preferred stock and common
stock equivalents outstanding during the period. Common stock 


                                      F-11
<PAGE>

                               NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

equivalents include stock options and warrants. For 1998, 1997 and 1996, the
stock purchase warrants, options, and convertible preferred stock and related
dividends declared have not been included in the computation of net income or
loss per share, since the effect would be anti-dilutive. Therefore the numerator
of the basic and diluted earnings per share calculations were the same, as was
the denominator.

(h) Costs of Modifying Software
The costs of modifying the Company's software for year 2000 compliance are
charges to expense as incurred.

(i) Costs of Failure to be Year 2000 Compliant
Any losses that may result if the Company, its suppliers, subcontractors, or
customers fail to correct Year 2000 deficiencies are recorded only as they are
incurred.

(j) Financial Instruments
Financial Instruments consist of cash, contract accounts receivable, leases
receivable, accounts payable, lease obligations, and notes payable. The carrying
value of these financial instruments approximate their fair value, except for
the financial instruments related to the Hawaii contract for which fair value
cannot be determined due to the circumstances discussed in note 12.

(k) 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.
Significant estimates include the allowance for doubtful accounts on contract
receivables, the ultimate collectability on the Hawaii contract receivables and
estimated costs to complete under the percentage of completion method of
accounting. Actual results could differ from those estimates.

(l) Reclassifications
Certain 1996 balances have been reclassified to conform to the 1997
presentation.

(m) Recent Accounting Pronouncements
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" which established standards for reporting and displaying of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement requires
that an enterprise classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of the balance sheet. This statement is
effective for fiscal years beginning after December 15, 1997 and had no effect
on the Company's financial statements for 1997 and 1998.

In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information" was issued. This
statement requires the use of the


                                      F-12
<PAGE>

                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

"management approach" model for segment reporting. The management approach model
is founded upon the way the Company's management organizes segments within the
Company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, management structure, or
other parameters which management uses to organize a company. The Company is
required to adopt this new standard for the year ended December 31, 1998;
however, such standard had no effect on the Company's financial statements for
1997 and 1998.

             In February 1998, Statement of Financial Accounting Standards No,
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
was issued. This statement standardizes the disclosure requirements for pensions
and other postretirement benefits, requires additional information on changes in
the benefit calculation, and eliminates certain disclosures that are no longer
considered useful. This statement effectively revised guidance previously
provided by Statement of Financial Accounting Standards Nos., 87,88 and 106. The
Company is required to adopt the new standard for the year ended December 31,
1998; however, such standard had no effect on the Company's financial statements
for 1998.

         In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that entities recognize all derivatives as either assets and
liabilities in the statement of financial position and measure those instruments
at fair value. This standard is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999.

(2) Contract Receivables

<TABLE>
<CAPTION>

Contract receivables at December 31 consist of:                              1998                1997
                                                                             ----                ----
<S>                                                                     <C>                 <C>      
Time and materials and completed fixed price contracts                  $ 816,338           $ 476,552
Fixed price contracts in progress                                       1,219,625           1,584,827
                                                                  ----------------     ---------------
                                                                        2,035,963           2,061,379
              Less allowance for doubtful accounts                         69,175              50,000
                                                                  ----------------     ---------------
                                                                       $1,966,788          $2,011,379
                                                                  ----------------     ---------------
                                                                  ----------------     ---------------
</TABLE>

At December 31, 1998 and 1997, $534,300 was receivable from the State of Hawaii
("Hawaii") and CBSI, a subcontractor to the Company on the Hawaii contract. This
amount has been reclassified to a long-term asset and is included in contract
receivables and costs in excess of billings on Hawaii contract due to the
litigation discussed in note 12.



                                      F-13
<PAGE>



                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

(3) Costs and Estimated Earnings on Contracts
<TABLE>
<CAPTION>

Costs and estimated earnings on contracts at
December 31 consist of:                                                                     1998               1997
                                                                                            ----               ----
<S>                                                                                  <C>                <C>        
Beginning balance                                                                    $ 1,232,761        $ 1,833,168
Costs incurred                                                                         6,418,678          8,620,097
Estimated Earnings                                                                     3,981,301          2,840,340
                                                                               ------------------  -----------------
                                                                                      11,632,740         13,293,605
Less billings                                                                         10,754,059         12,060,844
                                                                               ------------------  -----------------
                                                                                      $  878,681        $ 1,232,761
                                                                               ------------------  -----------------
                                                                               ------------------  -----------------

Included in the accompanying balance sheets under the
following captions:                                                                         1998               1997
                                                                                            ----               ----

Costs and estimated earnings in excess of billings on contracts                      $ 1,220,253        $ 1,388,515
Billings in excess of costs and estimated earnings on contracts                        (341,572)          (155,754)
                                                                               ------------------  -----------------
                                                                                     $   878,681        $ 1,232,761
                                                                               ------------------  -----------------
                                                                               ------------------  -----------------
</TABLE>


Costs and estimated earnings on contracts at December 31, 1998 and 1997 are
expected to be billed and collected within one year. At December 31, 1998 and
1997, $2,925,082 was related to the Hawaii contract. This amount has been
reclassified to long term assets due to the litigation discussed in note 12 and
is included in contract receivables and costs in excess of billings on Hawaii
contract.

(4) Notes Payable - Secured

On April 30, 1997 the Company signed a term loan (the "Loan") with its bank
which required the Company to reduce its outstanding borrowings under the Loan
from $1.8 million to the following limits: October 15, 1997 - $1,500,000,
November 15, 1997 - $1,200,000 and December 15, 1997 - $900,000. The interest
rate on the Loan was 16%, with the difference between 16% and prime plus 2%
payable at maturity, which was January 31, 1998. There were also a number of
provisions for accelerated payment to reduce the loan balance, such as paying
the bank 50% of any contract holdbacks or income tax refunds. In addition, the
Company agreed to provide the bank with a warrant to purchase 50,487
unregistered shares of the Company's Common Stock at $1.75 per share,
exercisable immediately with an expiration date of April 30, 2002, and agreed to
provide the bank 15% of any recovery received from its litigation in Hawaii. The
warrant and the bank's right to a percentage of any recovery terminate if the
Company pays down the Loan completely or raises $1 million of equity capital
prior to maturity. The Company's obligations under the Loan were secured by
substantially all of the assets of the Company. The Loan also provided that the
Company not pay any dividends on its capital stock without the consent of the
bank. On January 26, 1998 the Loan was paid in full and the warrants and the
rights to a percentage of any Hawaii recovery were returned to the Company.


                                      F-14
<PAGE>

                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

On December 31, 1997 the Company signed a $1.5 million line of credit with a
commercial lender. Receivables from four of the Company's contracts secure the
new line of credit. The Company can borrow up to 80% of the invoice amount on a
ninety-day promissory note. The interest rate is prime plus five percent on
balances below $1 million and prime plus one and one half percent on balances
over $1 million. The line also carries a six- percent annual service fee. The
prime rate was 7.75% at December 31, 1998.

On September 21, 1998 the Company entered into two five-year term loans, each
for $250,000. One lender was the Small Business Loan Fund Corporation,
("SBLFC"), a subsidiary of the Rhode Island Economic Development Corporation.
The other lender was the Business Development Corporation of Rhode Island
("BDC"). The SBLFC loan carries an annual interest rate of 9.5% and must be
repaid over five years. The BDC loan carries an annual interest rate of 10.25%,
and an annual deferred fee of $5,000, and must be paid back over five years.
Both term loans are secured by substantially all the assets of the Company. The
BDC was also issued five-year warrants to purchase 11,500 shares of the
Company's common stock with a strike price of $4.50 per share. The warrants
expire on September 20, 2003. The fair value of the warrants was estimated by
the Company to be $36,806 using the Black-Scholes model and is being amortized
ratably over the exercise period. Such amount is included in other noncurrent
assets on the accompanying balance sheet.

Scheduled maturities of secured long-term debt, including annual deferred fee,
as of December 31, 1998 are as follows:
<TABLE>

                     <S>                   <C>
                     1999                  $     91,997
                     2000                       101,164
                     2001                       105,746
                     2002                       110,782
                     2003                        92,086
                                       ----------------
                                          $     501,775
                                       ----------------
                                       ----------------
</TABLE>

(5) Leases
The Company leases office space and equipment under several operating and
capital leases expiring at various times through 2000. Rent expense including
utilities for the years ended December 31, 1998, 1997 and 1996 was approximately
$192,000, $186,000 and $431,000, respectively. Rental obligations as of December
31, 1998 for the remainder of the lease terms are as follows:




                                      F-15
<PAGE>


                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                         Capital Leases               Operating Leases

         <S>                                 <C>                           <C>      
         1999                                $  112,736                    $ 182,600
         2000                                    36,469                      138,700
                                      ------------------            -----------------
Total lease payments                            149,205                    $ 321,300
                                                                    -----------------
                                                                    -----------------
Amount representing interest                     21,632
                                      ------------------
Net present value of payments                   127,573
Less current portion                             89,483
                                      ------------------
Long term portion                             $  38,090
                                      ------------------
                                      ------------------
</TABLE>

During 1995, the Company leased various computer equipment from its vendors,
then in turn leased those assets to two of its customers. The Company's lease
obligation is included above. The lease to the customers is accounted for as a
sales type lease. Consequently, the Company recognized a gross profit of
approximately $2,200, $5,300 and $2,500, respectively for 1998, 1997 and 1996.
Over the life of these leases the Company will recognize approximately $107,000
of lease interest income. Approximately $12,200, $18,500 and $31,500 of lease
interest income was recognized in 1998, 1997 and 1996, respectively, and is
included in contract revenue in the statement of operations.

Future minimum lease payments to be received are as follows:

<TABLE>

                     <S>                                 <C>       
                     1999                                $  164,659
                     2000                                    26,366
                                                   -----------------
                                                            191,025
              Amount representing interest                   56,938
                                                   -----------------
              Net present value of payments                 134,087
              Less current portion                           97,243
                                                   -----------------
              Long term portion                           $  36,844
                                                   -----------------
                                                   -----------------
</TABLE>


Approximately $73,700 of the net present value of payments is related to the
Hawaii contract and had been reclassified to contract receivables and costs in
excess of billings on Hawaii contract, the remainder is classified in other
assets.

(6) Income Taxes
The components of income tax expense (benefit) for the years ended December 31,
are as follows:




                                      F-16
<PAGE>



                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                                     1998             1997               1996
                                                                     ----             ----               ----
<S>                                                                   <C>              <C>              <C>       
Current taxes:                                                                                   
             Federal                                                  $599,000         $ 36,000         $(380,161)
             State                                                     163,000           17,000                 -
                                                                 --------------   --------------    ---------------
Sub total                                                              762,000           53,000          (380,161)
                                                                 --------------   --------------    ---------------
Deferred taxes:
             Federal                                                 (119,000)           53,000          (314,651)
             State                                                    (30,000)           22,000           (80,211)
                                                                 --------------   --------------    ---------------
Sub total                                                            (149,000)           75,000          (394,862)
                                                                 --------------   --------------    ---------------
Total                                                                 $613,000         $128,000         $(775,023)
                                                                 --------------   --------------    ---------------
                                                                 --------------   --------------    ---------------
</TABLE>

Actual income tax expense (benefit) for the years ended December 31, differed
from the amounts computed by applying the U.S. federal income tax rate of 34
percent to pretax income (loss) from operations as a result of the following:
<TABLE>
<CAPTION>

                                                                          1998             1997               1996
                                                                          ----             ----               ----
<S>                                                                   <C>              <C>              <C>       
Computed "expected" tax expense (benefit)                             $569,162         $181,883         $(861,345)
Increase in income tax expense (benefit)
     resulting from state and local taxes, net
     of federal income tax benefit                                      93,744           25,740           (52,939)
Change in beginning of the year balance of
     the valuation allowance for deferred tax
     asset, allocated to income tax expense                           (50,000)         (84,000)            134,000
Other, net                                                                 94            4,377               5,261
                                                                 --------------   --------------    ---------------
Total income tax expense (benefit)                                    $613,000         $128,000         $(775,023)
                                                                 --------------   --------------    ---------------
                                                                 --------------   --------------    ---------------
Effective tax rate (%)                                                     37               24               (31)
                                                                 --------------   --------------    ---------------
                                                                 --------------   --------------    ---------------
</TABLE>


Deferred tax assets and liabilities at December 31 are comprised of the
following:



                                      F-17
<PAGE>



                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                                                      1998               1997
                                                                                      ----               ----
<S>                                                                                <C>                <C>     
Deferred tax assets:
         Accounts receivable, principally due to
              allowance for doubtful accounts                                      $ 27,396           $ 19,640
         Deferred compensation                                                       61,592             77,805
         Unamortized retainage,
              due to change in tax reporting                                             -              24,409
         Property, plant and equipment depreciation                                  13,017             35,451
         Non-deductible loss on contract                                             81,012             80,350
         Vacation expense                                                            58,295             35,997
         Contingent liability                                                       202,030            200,380
         Health insurance                                                                -               1,268
         Stock bonus                                                                 31,580             16,940
         Loan facility fee                                                            9,901                  -
                                                                              --------------    ---------------
                                 Total gross deferred tax assets                    484,823            492,240
         Less valuation allowance                                                                
                                                                                          -             50,000
                                                                              --------------    ---------------
                                 Net deferred tax asset                             484,823            442,240
                                                                              --------------    ---------------

Deferred tax liability:
             Retainage, due to deferral for tax reporting                          $490,217          $ 596,634
                                                                              --------------    ---------------
                                     Net deferred tax liability                     $ 5,394          $ 154,394
                                                                              --------------    ---------------
                                                                              --------------    ---------------
</TABLE>

In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The recognition of deferred tax assets as of
December 31, 1998 and 1997 is supported by the fact that the Company has
sufficient reversals of temporary differences to support the recognition of the
deferred tax assets.

(7) Notes Payable - Vendors

On December 12, 1996 the Company restructured a $218,901 account payable with
CPL Worldgroup ("CPL") to an eighteen month unsecured note payable. CPL was a
subcontractor to the Company, and continued to provide services to the Company.
The note carried a 9.25% interest, with monthly payments of $13,071, due on the
first of the month, through June of 1998. If all note payments were made on time
and all future invoices were paid within thirty days, $50,036 of the balance
would be forgiven. All payments were made when due and the note was paid off in
February of 1998.

On December 29, 1997 the Company restructured a $842,239 account payable with
Unisys to a four year unsecured note payable. After Unisys filed a claim against
the Company's Hawaii- related performance bond, the bonding company paid Unisys,
and then Lockheed Martin IMS Corporation ("Lockheed") reimbursed the bonding
company. Lockheed had guaranteed the Company's performance bond for the 


                                      F-18
<PAGE>

                               NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

Hawaii contract. The note is payable to Lockheed and carries an initial interest
rate of five percent through 1998, six percent during 1999, seven and one half
percent in 2000 and nine percent during 2001, with such interest to be paid
monthly. Principal payments are to be made annually as follows: December 1998 -
$100,000, December 1999 - $200,000, December 2000 - $200,000 and December 2001 -
$342,239. Under certain conditions, the Company is obligated to pay Lockheed the
remaining principal balance within 15 days of receipt of funds if the Company
settles or wins its litigation against the State of Hawaii. The note has a
discount provision for early payment.

(8) Stockholders' Equity

 (a) Preferred Stock
On October 29, 1992, the Company issued 714,285.71 shares of its Series A
Convertible Preferred Stock at its par value of $3.50 per share. Proceeds from
the issuance were $2,500,000. Costs of issuance were $264,326, and were netted
against the proceeds of the offering. This stock had a redemption provision,
which was exercisable at the option of the shareholder for $3.50. On March 10,
1993, an amendment to the original Stock Purchase Agreement dated October 29,
1992 was signed. The effective date of the amendment was October 29, 1992 and
the agreement removed them redemption option and increased the dividend rate to
the preferred stockholders beginning on October 1, 1997 as noted below. In
addition, the Preferred shareholders have a right and option to require the
Company to buy back the preferred shares at a price of $5.60 per share upon a
greater than fifty percent change in the ownership of the Company's common
stock. Also, the Company has the right and option, anytime after October 30,
1997, to purchase no less than all of the preferred shares at the liquidation
value of $3.50 per share plus any accrued and unpaid dividends.

Each share of Preferred Stock may be converted at any time into Common Stock, on
a basis of four shares of Preferred Stock for one share of Common Stock and the
holders of Preferred Stock are entitled to one vote per four shares on all
matters on which stockholders are entitled to vote, including the election of
Directors. So long as there are at least 238,071 shares of Preferred Stock
outstanding, the holders thereof are entitled as a class to elect one member of
the Board of Directors. The affirmative vote of a majority of the issued and
outstanding shares of Preferred Stock is required: (i) for the issuance of a
class of equity securities with dividend rights superior to the Preferred Stock;
(ii) for the Company to engage in any transaction that would materially impair
the rights of the Preferred Stock; (iii) for the Company to declare, pay or
otherwise distribute any dividends except out of retained earnings of the
Company; (iv) to increase or decrease the size of the Company's Board of
Directors (v) or to issue Common Stock or rights to purchase Common Stock to
officers, employees, directors or consultants of the Company if the total number
of shares held by such persons would exceed 10% of the issued and outstanding
shares of Common Stock after giving effect to such issuance.

Until September 30, 1997, the holders of Preferred Stock are entitled to receive
dividends at the rate of 7.5% per share per annum payable quarterly in arrears
commencing on December 31, 1992. Effective October 1, 1997, the dividend rate
becomes the prime rate of interest as of the first business day following the
end of the quarter, plus five (5) percent. The Company is required to pay such
dividends before any dividends may be declared or paid for any of the Common
Stock. In the event the Company shall be in arrears in whole or in part with
respect to at least three quarterly dividend payments due to


                                      F-19
<PAGE>

                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

holders of Preferred Stock, such holders voting as a class are entitled to elect
two members of the Board of Directors. Accrued and unpaid dividends as of
December 31, 1998 were $795,992, which equals $1.11 per share of outstanding
Preferred Stock.

(b) Common Stock Warrants
 Warrants to purchase 3,750 shares of the Company's Common Stock at an exercise
 price ranging from $12.00-$18.00 per share were authorized and issued April 14,
 1995. At December 31, 1998 all of these warrants remain outstanding and are
 exercisable until April 14, 2000.

 Warrants to purchase 10,000 shares of the Company's Common Stock at an exercise
 price of $16.00 per share were authorized and issued in 1993. At December 31,
 1998 all of these warrants remain outstanding and are exercisable until
 November 23, 2003.

 Warrants to purchase 50,487 shares of the Company's Common Stock at an exercise
 price of $1.75 per share were authorized and issued in 1997 to the Company's
 principal lender at that time. On January 26, 1998, however, these warrants
 were returned to the Company, per the terms of the Loan agreement with the
 Company's principal lender.

 Warrants to purchase 11,500 shares of the Company's Common Stock at an exercise
 price of $4.50 per share were authorized and issued in 1998. At December 31,
 1998 all of these warrants remain outstanding and are exercisable until
 September 20, 2003.

(c) Stock Option Plan
 The Company's Board of Directors and stockholders adopted the Company's
 Incentive Stock Option Plan (the "Stock Option Plans") on April 1, 1993 and
 April 25, 1994, respectively. Options granted under the Stock Option Plans are
 intended to qualify as incentive options under Section 422(a) of the Internal
 Revenue Code of 1986, as amended. The Board of Directors administers the Stock
 Option Plans. Subject to certain limitations, the Board of Directors has
 authority to determine the exercise prices, vesting schedules and terms of the
 options. The maximum term of any option outstanding is ten years.

 The exercise price of options granted pursuant to the Stock Option Plans may
 not be less than the fair market value of the Common Stock on the date of
 grant. The exercise price of options granted to any participants who own stock
 possessing more than 10% of the total combined voting power of all classes of
 outstanding stock of the Company must be at least equal to 110% of the fair
 market value of the Common Stock on the date of grant. Any options granted to
 such participants must expire within ten years from the date of grant. Stock
 options under the Stock Option Plans are not transferable, except by estate
 succession.

 In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
 "Accounting and Disclosure for Stock Based Compensation," which provides for a
 fair value based methodology of accounting for all stock option plans.


                                      F-20
<PAGE>

                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

The Company applies APB Opinion 25 and related interpretations in accounting for
these plans. Since options were granted at fair market value at date of grant,
no compensation cost has been recognized. Had compensation cost been determined
pursuant to SFAS No. 123, the Company's net income (loss) and net income (loss)
per share would have been adjusted to the pro forma amounts indicated in the
table below. The effects on pro forma net income (loss) obtained from applying
SFAS No. 123 may not be representative of the effects on reported net income
(loss) for future years.
<TABLE>
<CAPTION>

                                                          1998               1997
                                                          ----               ----
    <S>                      <C>                   <C>                  <C>      
    Net income (loss):       As Reported           $ 1,061,006          $ 406,950
                             Pro Forma                 904,264            376,570
                                                       
    Net income (loss)
    per share:               As Reported             $    0.96           $   0.25
                             Pro Forma                    0.75               0.18 
                                                                  
</TABLE>

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998 and 1997, respectively; no dividend yield;
expected volatility of 85.2% and 86.8%; risk-free interest rate of 4.9% and
6.1%; and expected lives of five years. The weighted-average fair market value
of options granted during 1998 and 1997 was $2.56 and $1.13, respectively.

A summary of the status of the Company's stock option plan as of December 31,
1998, 1997 and 1996 and changes during the years on those dates is presented
below:

<TABLE>
<CAPTION>

                                  1998                                  1997                           1996
                             --------------------------------------------------------------------------------------------------

                                                        Weighted                        Weighted                      Weighted
                                                         Average                         Average                       Average
                             Shares                     Exercise   Shares               Exercise   Shares             Exercise
                                                           Price                           Price                         Price
                             ------------------------------------  ------------------------------  ----------------------------
<S>                                  <C>                <C>                               <C>            <C>           <C>    
Outstanding at
     beginning of year               136,225            $   1.64                          $ 1.71         41,281        $ 28.62
                                                                           92,850
Granted                              131,410                                                            152,550           4.32
                                                            3.65           71,600           1.58
Cancelled                                                                                              (81,950)          15.76
                                           -                   -                -              -
Exercised                            (6,275)                                                            (4,900)           7.75
                                                            2.05                -              -
Forfeited                            (8,920)                             (28,225)                      (14,131)          24.93
                                                            2.59                            1.71
Outstanding at
                             ----------------                      ---------------                 -------------
     end of year                     252,440                              136,225                        92,850           1.71
                                                               -                            1.64
                             ----------------                      ---------------                 -------------
                             ----------------                      ---------------                 -------------
Exercisable at year end               80,750                                                             55,700           1.86
                                                            1.88           46,392           1.82
                             ----------------                      ---------------                 -------------
                             ----------------                      ---------------                 -------------
</TABLE>


                                      F-21
<PAGE>



                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

The following table summarizes information about the Company's stock options,
considered compensation under SFAS 123, outstanding at December 31, 1998:
<TABLE>
<CAPTION>

                                      Options Outstanding                Options Exercisable
                              -------------------------------------     ------------------------

                              Number               Weighted Avg.        Number
                              Outstanding          Remaining            Exercisable
Exercise Price                At Dec 31, 1998      Contractual Life     At Dec 31, 1998
--------------                ---------------      ----------------     ---------------
       <S>                               <C>                   <C>           <C>
       $1.125                                                                 6,250
                                         18,750                8.1
        1.500                                                                25,483
                                         37,600                8.5
        1.750                                                                15,517
                                         44,050                8.3
        2.000                                                                26,000
                                         26,000                8.0
        3.000                                                                 2,500
                                         48,290                9.5
        3.125                                                            
                                         18,750                9.2                -
        3.750                                                                 2,500
                                          2,500                9.9
        4.000                                                            
                                          4,000                9.4                -
        4.125                                                                 2,500
                                          2,500                9.5
        4.500                                                            
                                         50,000                9.1                -
                              ------------------                        ------------
                                        252,440                               80,750
                              ------------------                        ------------
                              ------------------                        ------------
</TABLE>

At December 31, 1998, 1997, and 1996, common shares reserved for issuance under
these plans were 275,000, 200,000 and 125,000, respectively. At December 31,
1998, 1997 and 1996, common shares available under the Non-Employee Director
Option Plan were 50,000, 25,000 and 25,000, respectively. Each director will be
awarded 2,500 options, each year in January, for a maximum of 10,000 options per
director.

(9) Commitments
The Company has a profit sharing plan under which all full-time employees with
at least one year of service with the Company are eligible to participate. The
Board of Directors administers the profit sharing plan and establishes the
formula for each year's distributions. Distributions for each calendar year are
made in the following year to eligible employees who were employed for the full
previous calendar year. There was no profit sharing plan expense for the years
ended December 31, 1998, 1997 and 1996.

The Company sponsors a 401(k) Plan Trust in which all employees are eligible to
participate. Participants can contribute up to 15% of total compensation subject
to the annual Internal Revenue Service dollar limitation.

Pursuant to a consulting agreement and a deferred compensation agreement with
the former Chairman, the Company agreed to pay $48,000 per year for a fixed
number of consulting hours, and also fund $60,000 per year to a non-qualified
deferred compensation plan. The original term for the consulting


                                      F-22
<PAGE>

                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

agreement was seven years and eight years for the deferred compensation
agreement. Effective September 1995, the consulting agreement was amended to
eliminate the required consulting payments of $48,000 per year. The payments to
the deferred compensation agreement will remain at $60,000 per year through the
end of 2001. Accordingly, in the third quarter of 1995, the Company was required
to record a liability and a related expense of approximately $245,000 for the
present value of the deferred compensation payments, which will be paid at
$5,000 per month through the end of 2001.

(10) Concentration of Revenue
During 1998, 1997 and 1996 the Company had the following sales from customers
whose individual sales exceeded 10% of the Company's total sales:
<TABLE>
<CAPTION>

                                            1998                  1997                 1996
                                            ----                  ----                 ----
<S>                                         <C>                  <C>                  <C>        
Rhode Island DHS                            $ 5,361,955          $ 4,222,923          $ 2,399,170
Maine Dept of Human Services                  2,651,893            5,721,103                    -
MIM Corporation                               1,188,327                   -                     -
Virgin Islands                                        -                   -             1,026,195
RI Dept of Health                                     -                   -               927,372
                                      ------------------    -----------------    -----------------
                                            $ 9,202,175          $ 9,944,026          $ 4,352,737
                                      ------------------    -----------------    -----------------
                                      ------------------    -----------------    -----------------
</TABLE>

(11) Restructuring
In December 1995 as a result in the decrease in the Company's backlog,
management approved a plan of reorganization of the Company in an effort to
reduce expenses and operate more efficiently while still maintaining a firm
commitment to deliver high quality services. Under the plan, the Company
targeted a reduction in work force of approximately 30 to 35 positions through
an involuntary separation plan. These positions were from the technical,
administrative and middle management levels. Estimated salaries, related payroll
taxes and other costs associated with these reductions amounted to approximately
$537,000, of which approximately $20,000 was paid in 1995, and has been included
as a restructure charge in the accompanying statement of operations for 1995. In
1996, 42 positions were eliminated and the Company renegotiated the facilities
lease and returned unneeded space to the landlord. Approximately $119,000 has
been included as a reversal of a restructure charge in the accompanying
statement of operations for 1996.

(12) Litigation
In June 1993, the Company entered into a fixed price contract with the State of
Hawaii (the State) for the transfer of a Child Support Enforcement System to the
State of Hawaii. In June 1995, the Company began negotiating a significant
amendment to its contract with the State when it determined that the total
estimated cost to complete the system would be significantly greater than
expected. In the first quarter of 1996, the Company received final state and
federal approval for this contract amendment totaling an incremental $4.4
million. However, at December 31, 1995, as a result of in-depth reviews of this
contract, management determined that contract costs continued to increase and
expected to realize a gross loss on the entire contract of approximately
$440,000, which was recorded in December 1995.


                                      F-23
<PAGE>

                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

While at December 31, 1995 management of the Company believed that the actual
costs to complete this contract would be within its latest cost estimates, due
to uncertainties inherent in the estimation process and in the Company's latest
negotiations to reach a final definitive plan for the completion of the
contract, it was management's position that these estimates could need further
revision.

In 1996, the Company continued in its attempts to negotiate a final definitive
plan with the State and at the end of the first quarter of 1996, it furloughed
substantially all of its technical employees in Hawaii while it continued its
negotiations on site with key management and administrative personnel. In
conjunction with these negotiations, the State requested that the Company hire
Complete Business Solutions, Inc. (CBSI) to conduct a detailed review of the
system to facilitate the resolution of open contractual scope issues. On
September 13, 1996, the State of Hawaii terminated its contract with the
Company, and therefore CBSI's contract was automatically terminated effective
September 23, 1996, claiming that the Company had failed to fulfill its
obligations under the contract. In response, the Company also terminated the
contract with the State effective September 23, 1996.

On November 12, 1996, the State filed a lawsuit against the Company and its
bonding companies, Aetna Casualty and Surety (Aetna) and Federal Insurance
Company for damages due to breach of contract. The suit alleges that the Company
failed to meet contractual deadlines, provided late, incomplete and/or
unsuitable deliverables, and materially breached the contract by never
completing the design, the application programming, the system test, and systems
implementation. The State is seeking an unspecified amount for general damages,
consequential and special damages, liquidated damages, attorneys' fees,
reimbursement for the cost of lawsuit and interest costs that the court deems
just and proper.

In late 1996, Unisys, a vendor providing equipment to the Company on the Hawaii
contract, submitted an $896,000 claim against the $10.3 million performance bond
posted on behalf of Hawaii to ensure the Company's performance on the contract.

On December 13, 1996, Complete Business Solutions, Inc. (CBSI), a subcontractor
on the Hawaii contract, filed a lawsuit against the Company in the Superior
Court of the State of Rhode Island for $517,503 which the Company has accrued,
plus interest, costs and attorney's fees. The Company disputes the $517,503 owed
to CBSI and filed a counterclaim against CBSI on January 13, 1997 alleging,
among other things, that CBSI failed to complete its duties required under the
subcontract with the Company related to the detailed review of the system in a
timely manner, improperly engaged in negotiations with the State of Hawaii to
complete the project, hired and attempted to hire employees of the Company in
violation of its subcontract agreement with the Company and obtained and
utilized confidential information inappropriately. Also, the Company alleges
that CBSI owes the Company $482,750 as of December 31, 1996 for which the
Company has not established a reserve for uncollectibility. In February 1997,
the State of Hawaii released Aetna from all but $1.1 million of the performance
bond. In addition, Hawaii hired Lockheed/Martin IMS, the guarantor of the Aetna
bond, to complete the system, incorporating changes to comply with the recent
welfare reform legislation, for approximately $19 million.

On January 23, 1997, the Company filed a counterclaim against the State alleging
that the State had


                                      F-24
<PAGE>

                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

fraudulently induced the Company into designing and building a system having
capabilities and extraordinary features far beyond the scope of the contract and
industry standards. The Company is seeking damages of $70 million together with
prejudgment interest, costs and attorneys' fees.

On February 3, 1997, the Company filed a third-party complaint ("TPC") in the
Hawaii litigation against MAXIMUS Corporation ("MAXIMUS") and CBSI. MAXIMUS has
been the State of Hawaii's supervisor and advisor on the contract since the
inception of the Hawaii project. The allegations the Company has made against
CBSI in this TPC are substantially similar to the allegations made against CBSI
in the Company's counterclaim to CBSI's December 13, 1996 lawsuit brought
against the Company in Rhode Island. The Company alleged, moreover, that MAXIMUS
is liable to the Company on grounds that: (i) the Company was an intended third
party beneficiary under the contract between MAXIMUS and Hawaii; (ii) MAXIMUS
tortuously interfered in the contract between the Company and Hawaii; (iii)
MAXIMUS negligently breached duties to the Company and (iv) MAXIMUS aided and
abetted Hawaii in Hawaii's breach of contract. The Company's complaint seeks $70
million in damages.

In connection with the Hawaii litigation the Company was ordered to assign all
Hawaii related leases the to State. One of the lessors has sued the Company for
failure to pay. The Company believes it was released of all responsibility on
the lease per the court order.

Management of the Company and its attorneys are unable to predict with any
certainty the ultimate outcome of this litigation, although it is their belief
that an unfavorable outcome is unlikely. If the Company is unable to prevail in
its suit with the State such a result could have a material adverse financial
effect on the Company and could jeopardize the Company's ability to continue
with its present listing on The NASDAQ SmallCap Market. At December 31,1998, the
Company had unbilled work-in-process and related receivables from the State and
CBSI of approximately $3.5 million, which is slightly less than stockholders'
equity of approximately $3.8 million, for which no allowance for
uncollectibility has been recorded. The Company has not accrued for any
potential liability to the State, which may result from this litigation. In
addition, the Company has not accrued for any legal expenses to be incurred in
connection with this litigation, which could be significant.

Due to the significant uncertainty created by these events, the Company ceased
recognition of revenue on the Hawaii contract in 1996. An adjustment of $1.8
million was recorded in the fourth quarter to reverse revenue of $1 million,
$400 thousand and $400 thousand previously recorded in the first, second and
third quarters, respectively. In addition, 1996 costs incurred related to the
Hawaii contract of $1.96 million have been charged to expense.





                                      F-25
<PAGE>


                                NETWORK SIX, INC.

                          Notes to Financial Statements
                        December 31, 1998, 1997 and 1996

(13) Quarterly Financial Data (unaudited)

The following is a summary of quarterly results from operations:


<TABLE>
<CAPTION>

                                                                         Quarter
1998:                                                  First            Second          Third          Fourth
<S>                                              <C>               <C>            <C>              <C>       
Contract revenue earned                          $ 2,221,618       $ 3,253,696    $ 2,662,603      $2,262,062
Gross profit                                         774,962         1,095,167      1,127,215         983,957
Net income                                           140,465           309,798        298,136         312,607
Earnings per share                                      0.08              0.30           0.28            0.30
Weight average shares outstanding                    749,503           756,176        763,880         764,630

1997:
Contract revenue earned                          $ 1,414,186       $ 3,431,835    $ 3,572,313      $3,042,103
Gross profit                                         441,045           838,487        806,762         754,046
Net income (loss)                                  (132,187)           242,797        116,690         179,650
Earnings (loss) per share                             (0.24)              0.27           0.09            0.13
Weight average shares outstanding                    721,192           729,927        734,294         734,294
                                                                       

</TABLE>



                                      F-26