================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  -------------
                                   FORM 10-QSB
                                  -------------
(Mark One)

(X)      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1998

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

For the transition period from ____________________ to _____________________

Commission file number   0-22341
                         -------

                              AUGMENT SYSTEMS, INC.
        -----------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)


           DELAWARE                                     04-3089539
--------------------------------                    -------------------
(State or other jurisdiction of                      (I.R.S. Employer 
 incorporation or organization)                     Identification No.)

     2 ROBBINS ROAD WESTFORD, MA                                01886
----------------------------------------                      ----------
(Address of principal executive offices)                      (Zip Code)

                                  978-392-8626
              -----------------------------------------------------
              (Registrant's telephone number, including area code)

Transitional Small Business Disclosure Format:
         Yes                 No  X
             ---                ---
         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 requirement for the past 90 days. YES  X   NO
                                             ---     ---
Indicate the number of shares  outstanding  of each of the  issuer's  classes of
Stock, as of the latest  practicable  date: As of November 14, 1998, the Company
had   11,898,951   shares  of  Common   Stock,   $.01  par  value,   issued  and
outstanding.

================================================================================

<PAGE>

                              AUGMENT SYSTEMS, INC.

                                      INDEX
<TABLE>
<CAPTION>
                                                                                  PAGES
                                                                                  -----
PART I            FINANCIAL INFORMATION
<S>                                                                             <C>
         Item 1        Financial Statements

                       Balance Sheets as of December 31, 1997
                        and September 30, 1998                                      3

                       Results of Operations for the three and nine months
                        ended September 30, 1998 and 1997                           4

                       Statements of Cash Flows for the nine months
                        ended September 30, 1998 and 1997                           5

                       Notes to Financial Statements                              6-8

         Item 2        Management's Discussion and Analysis of
                        Financial Condition and Results of Operations            9-12

PART II           OTHER INFORMATION

         Item 1        Legal Proceedings                                           13
         Item 2        Changes in Securities                                       13
         Item 3        Defaults Upon Senior Securities                             13
         Item 4        Submission of Matters to a Vote of Security-Holders         13 
         Item 5        Other Information                                           13
         Item 6        Exhibits and Reports on Form 8-K                            13

         Signatures                                                                14
</TABLE>

<PAGE>

                              AUGMENT SYSTEMS, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  SEPTEMBER 30,               DECEMBER 31,
                                                                  -------------               ------------
                                                                      1998                        1997
                                                                      ----                        ----
                                                                   (unaudited)
                                     ASSETS
Current Assets:
<S>                                                               <C>                        <C>         
         Cash                                                     $    906,197               $     47,224
         Accounts receivable, net                                      285,750                    224,969
         Inventories                                                   594,542                  1,162,920
         Prepaid expenses                                              159,820                    115,100
                                                                  ------------               ------------
                  Total current assets                               1,946,309                  1,550,213

Property and equipment, net                                            252,837                    409,848
Other assets                                                           297,495                    278,745
                                                                  ------------               ------------
                  Total assets                                    $  2,496,641               $  2,238,806
                                                                  ============               ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
         Accounts payable                                         $    365,996               $  1,371,632
         Accrued expenses                                              125,780                    611,633
         Notes payable                                               1,500,000                    717,569
         Bridge financing                                                 --                      474,074
         Current portion of capital lease obligations                   42,549                     46,177
                                                                  ------------               ------------
                  Total current liabilities                          1,430,545                  3,221,085
Convertible promissory notes                                            20,743                     41,495
Capital lease obligations, less current portion                         81,951                     81,951
                                                                  ------------               ------------
                  Total liabilities                                  2,137,019                  3,344,531
                                                                  ============               ============


Stockholders' Equity (Deficit):
         Common stock, $.01 par value; 30,000,000
         shares authorized; 11,898,952 and 4,713,319
         shares issued and outstanding at September 30, 1998,
         and December 31, 1997, respectively                           118,990                     47,133
         Additional paid-in capital                                 21,487,524                 15,286,410
         Accumulated deficit                                       (21,246,892)               (16,439,268)
                                                                  ------------               ------------
                  Total stockholders' equity (deficit)                 359,622                 (1,105,752)
         Total Liabilities and Stockholders' Equity               $  2,496,641               $  2,238,806
                                                                  ============               ============
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                      -3-

<PAGE>

                              AUGMENT SYSTEMS, INC.
                            STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                    THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                       SEPTEMBER 30,                  SEPTEMBER 30,
                                                                  1998            1997            1998            1997
                                                              ------------    ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>             <C>         
Sales                                                         $     18,056    $    776,387    $    824,034    $  1,343,610
Cost of sales                                                      362,460         325,341         732,215         572,822
                                                              ------------    ------------    ------------    ------------
Gross margin                                                      (344,404)        451,046          91,819         770,788
Operating expenses:
         Research and development                                  538,724         728,409       1,956,190       1,855,329
         General and administrative                                361,586       1,452,791       1,058,520       2,522,089
         Sales and marketing                                       470,012         651,023       1,676,462       1,893,110
                                                              ------------    ------------    ------------    ------------
                  Total cost and expenses                     $  1,370,322    $  2,832,223    $  4,691,172    $  6,270,528
                                                              ------------    ------------    ------------    ------------
Loss from operations                                          $ (1,714,726)   $ (2,381,177)   $ (4,599,353)   $ (5,499,740)
                                                              ------------    ------------    ------------    ------------
Other expense:
         Net interest expense                                 $   (193,744)   $     (3,533)   $   (219,931)   $   (140,369)
                                                              ------------    ------------    ------------    ------------
                  Total other expense, net                    $   (193,744)   $     (3,533)   $   (219,931)   $   (140,369)
                                                              ------------    ------------    ------------    ------------

Net loss                                                      $ (1,908,470)   $ (2,377,644)   $ (4,819,284)   $ (5,640,109)
                                                              ------------    ------------    ------------    ------------


Net loss per common share                                            (0.16)          (0.50)          (0.44)          (1.47)

Weighted average common and common                              
 equivalent shares outstanding                                  11,898,952       4,713,319      10,851,138       3,849,583

</TABLE>

The accompanying notes are an integral part of the financial statements.


                                       -4-
<PAGE>

                              AUGMENT SYSTEMS, INC.
                             STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
                                                                                      NINE MONTHS ENDED
                                                                                 SEPTEMBER 30,  SEPTEMBER 30,
                                                                                     1998           1997
                                                                                 -------------  -------------
Cash flows from operating activities:
<S>                                                                              <C>            <C>         
         Net loss                                                                $(4,819,284)   $(5,640,109)
         Adjustments to reconcile net loss to net cash
             used in operating activities:
                  Loss on disposal of fixed assets                                                    8,850
                  Depreciation and amortization                                      197,221        128,854
         (Increase) decrease in operating assets and liabilities:
                  Accounts receivable                                                (60,781)    (1,164,870)
                  Inventory                                                          568,378       (508,653)
                  Capitalized Software                                                  --         (265,000)
                  Other assets                                                       (63,470)      (124,330)
                  Accounts payable                                                (1,288,485)       936,946
                  Accrued expenses                                                  (221,528        (36,942)
                                                                                 -----------    -----------
                           Net cash used in operating activities                  (5,687,949)    (6,665,254)

Cash flows from investing activities:
         Purchase of property and equipment                                          (40,211)      (149,650)
                                                                                 -----------    -----------
                           Net cash used for investing activities                    (40,211)      (149,650)
                                                                                 -----------    -----------
Cash flows from financing activities:
         Proceeds from issuance of common stock                                    6,034,566      8,985,240
         Proceeds from issuance of short-term promissory notes                          --        3,125,000
         Proceeds from bridge financing                                            1,500,000           --
         Repayment of bridge financing                                              (200,000)          --
         Repayment of short-term advance                                                --         (575,000)
         Payments on capital lease obligations                                          --          (14,042)
         Payments on short-term promissory notes                                    (750,000)    (3,826,248)
         Payment on long-term convertible promissory notes                           (20,753)       (20,753)
         Deferred financing costs                                                       --       (1,092,431)
                           Net cash provided by financing activities             $ 6,563,813    $ 6,581,766
                                                                                 -----------    -----------

Net increase (decrease) in cash                                                      858,973       (233,138)
                                                                                 -----------    -----------
Cash at beginning of period                                                           47,224        452,753
                                                                                 -----------    -----------
Cash at end of period                                                                906,197        219,615
                                                                                 -----------    -----------
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                       -5-

<PAGE>

                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1998

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

         Augment Systems,  headquartered in Westford,  Massachusetts,  develops,
manufactures, markets and services high performance systems that provide digital
infrastructure and workflow solutions for printing and imaging applications. The
Company's products provide a digital infrastructure that accelerates performance
up to 20 times  over the  performance  of  current  Ethernet  networks,  manages
workflow and  accommodates  the  technical  diversity  found in  image-intensive
industries.  From October 1995 and through March 1997, the Company operated as a
development  stage  company  and  engaged  principally  in the  development  and
integration  of  cross  platform,  high  performance  file  servers  with  Fibre
Channel-Arbitrated  Loop  technology.  During this time, the Company  engaged in
limited  marketing  activities  and did not  commence  shipments  of its initial
products until February 1997. During the second quarter ended June 30, 1997, the
Company  commenced  commercial  shipment of its server  product  and  recognized
initial  revenues in April 1997. In 1998, the Company has focused its efforts on
sales and marketing of existing  products,  new product  development and raising
capital to support  operations.  Since September the Company has been seeking to
identify  financing  sources to undertake and complete an equity financing of at
least $4,000,000. In November 1998 the Company was informed by a investment bank
that it would not be able to complete a follow-on equity financing.  The Company
is currently seeking alternative  sources of financing,  and no assurance can be
given that the Company will be able to initiate a private  placement,  or if one
is started,  complete a financing  to fund  ongoing  operations,  or that such a
financing will be on terms favorable to the Company.

         The  accompanying  unaudited  financial  statements  are  presented  in
accordance  with the  requirements  for Form  10-QSB and do not  include all the
disclosures  required by generally accepted  accounting  principles for complete
financial statements.  Reference should be made to the Company's Form 10-KSB for
the fiscal year ended December 31, 1997 for additional disclosures,  including a
summary of the Company's accounting policies.

         In the opinion of management of the Company,  the financial  statements
include all adjustments, consisting of only normal recurring accruals, necessary
for a fair presentation of the financial  position of Augment Systems,  Inc. The
results of operations for the three-and  nine-month  periods ended September 30,
1998 or any other interim periods, are not necessarily indicative of the results
to be expected for the full year.


2.   NET LOSS PER SHARE OF COMMON STOCK

         The  Company  follows  Statement  of  Financial   Accounting  Standards
("SFAS")  No.  128,  Earnings  per  Share,  issued by the  Financial  Accounting
Standards Board.  Under SFAS No. 128 the basic and diluted net loss per share of
common stock is computed by dividing the net loss by the weighted average number
of common shares  outstanding for the period,  including stock options issued at
nominal  amounts  within 12  months of the  Company's  Initial  Public  Offering
("IPO").  The weighted average number of common shares outstanding is summarized
as follows:
<TABLE>
<CAPTION>
                                                                                    NINE MONTH PERIOD ENDED
                                                                         SEPTEMBER 30, 1998         SEPTEMBER 30, 1997
                                                                         ------------------         ------------------
<S>                                                                         <C>                          <C>      
         Denominator for basic loss per share:
             Weighted average common stock shares
                  outstanding............................................   10,318,545                   2,560,911
         Potential dilutive common shares:
             Common stock shares issuable under stock
                  options at nominal amounts within 12
                  months of IPO........................................            -0-                   1,288,672
                                                                            ----------                  ----------
         Denominator for diluted loss per share........................     10,851,138                   4,699,229
</TABLE>

         Stock options  issued at nominal  amounts within 12 months prior to the
Company's  IPO are  considered  outstanding  for all periods  presented  for the
diluted  calculation in accordance  with the Securities and Exchange  Commission
Staff  Accounting   Bulletin  No.  98.  The  Company's  options,   warrants  and
convertible debt instruments  other than those issued for nominal amounts within
12 months of the Company's IPO are not  considered  outstanding  for the diluted
calculation since their effect is antidilutive.


                                      -6-

<PAGE>

                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1998



3.    STOCKHOLDERS' EQUITY

     In April 1997,  the Board of Directors  declared a  three-for-four  reverse
stock  split of the  Company's  Common  Stock.  All  Common  Stock and per share
information  discussed  in the  financial  statements  and notes  pertaining  to
periods  prior to April  1997 have been  adjusted  to give  effect to this stock
split.

     On May 16,  1997,  the Company  completed  its initial  public  offering of
1,800,000 shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase  Warrants at $.15 per warrant.  Each Redeemable
Common  Stock  Purchase  Warrant  entitles  the holder to purchase  one share of
Common Stock for $6.60 during the four-year period  commencing May 12, 1998. The
net  proceeds  from the  Company's  initial  public  offering,  after  deducting
underwriting discounts and commissions and certain estimated expenses payable by
the Company were approximately $8,220,000.

         In January 1998, the Company had a first closing on a private placement
of 6,180,000 shares of the Company's Common Stock at a price of $1.00 per share.
In addition,  the Company issued to the private  placement  agent as part of the
agent's commission 378,910 shares of the Company's Common Stock, in lieu of cash
compensation. In May 1998, the Company closed on an additional 575,000 shares of
the  Company's  Common  Stock at a price of $1.00 per share and  terminated  the
private  placement.  In addition,  the Company  issued to the private  placement
agent as part of the agent's  commission  51,722 shares of the Company's  Common
Stock, in lieu of cash  compensation.  The shareholders that participated in the
private  placement of 6,755,000  shares in January and May 1998 of the Company's
Common Stock and the placement  agent will receive an additional  one-half (1/2)
share, or 3,592,816 shares of the Company's Common Stock, should the Company not
meet specific  revenue  targets by the end of fiscal year 1998. The Company does
not  anticipate  meeting  specific  revenue  goals  for 1998  and has  therefore
approved the issuance of the additional shares of Common Stock. In October 1998,
the Company's Board of Directors  approved the issuance of 3,592,816  additional
shares of the Company's Common Stock.

     On June 29, 1998, the  stockholders of the Company  approved an increase in
the number of authorized shares of common stock from 30,000,000 to 50,000,000, a
one-for-three reverse stock split of the Company's Common Stock and the issuance
of an additional 10,000,000 shares of Common Stock in connection with a proposed
private  placement to be undertaken by the Company.  The reverse stock split may
only be effected upon the closing of a private placement of the Company's Common
Stock.



                                      -7-

<PAGE>

4.    FINANCING ARRANGEMENTS

         In October 1997,  the Company  entered into a note agreement with Fleet
National  Bank in the  principal  amount of $750,000 with interest at the bank's
prime rate plus 2%. This loan was  originally  payable by December 31, 1997,  or
upon completion of a financing resulting in net proceeds of at least $5,000,000.
In accordance  with the original  terms of the loan,  the Company  issued to the
bank warrants to purchase  100,000  shares of the  Company's  Common Stock at an
exercise price of $3.00 per share exercisable over 5 years.  Gross proceeds from
the loan were  $750,000.  In December  1997,  the loan  agreement was amended to
extend the due date on the loan to February 28, 1998.  In  consideration  of the
extension,  the exercise  price of the warrants was reduced from $3.00 per share
to $1.00 per share.  The term of this loan was further  extended  until April 1,
1998 and  subsequently  to July 31,  1998  pursuant  to  agreements  between the
Company and Fleet National Bank. On July 31, 1998, the Company made a payment in
the amount of $300,000 to Fleet National Bank to partially pay down the loan. At
that time,  the bank orally  agreed to extend the term of the loan an additional
two weeks until August 15, 1998,  pending the  completion  of a proposed  bridge
financing being undertaken by the Company.

         In August 1998, the Company entered into a financing  arrangement  with
an  investment  bank  to  secure  $1,500,000  in  bridge  financing  of  secured
convertible  promissory notes and common stock purchase  warrants.  In September
1998, the Company secured  $1,500,000 in bridge  financing and used a portion of
the proceeds to repay its indebtedness in full to Fleet National Bank. As a part
of the financing  arrangement the Company and the investment  bank  contemplated
undertaking an equity private  placement as a follow-on  financing to the bridge
financing. In November 1998 the Company was informed by the investment bank that
it would not be able to complete the follow-on equity financing.  The Company is
currently  seeking  alternative  sources of  financing,  and no assurance can be
given that the Company will be able to initiate a private  placement,  or if one
is started,  complete a financing required to repay the bridge financing,  which
is payable  in full in  September  1999 or upon the  closing  of  $4,000,000  in
financing by the Company, or fund ongoing  operations,  or that such a financing
will be on terms favorable to the Company.

5.    MATERIAL EVENTS

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


                                      -8-

<PAGE>
                              AUGMENT SYSTEMS, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

             THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
              TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997

INTRODUCTION

Augment   Systems,   headquartered   in   Westford,   Massachusetts,   develops,
manufactures, markets and services high performance systems that provide digital
infrastructure  and workflow  solutions  for printing and imaging  applications.
From October 1995 and through March 1997, the Company  operated as a development
stage company and engaged  principally  in the  development  and  integration of
cross platform, high performance file servers with Fibre Channel-Arbitrated Loop
technology,  resulting  in a new  paradigm  for storing and  transferring  large
files. During this time, the Company engaged in limited marketing activities and
did not commence  shipments of its initial products until February 1997.  During
the second  quarter  ended  June 30,  1997,  the  Company  commenced  commercial
shipment of its server  product and recognized  initial  revenues in April 1997.
Since 1996,  the Company has been in the  forefront of the  development  of high
performance  network and storage  solutions  using Fibre  Channel  Storage  Area
Network  (FC-SAN)   technology.   The  Company's   products  provide  a  digital
infrastructure that accelerates  performance up to 20 times over the performance
of current  Ethernet  networks,  manages workflow and accommodates the technical
diversity found in image-intensive industries..


RESULTS OF OPERATIONS

The Company  recognized  product  revenues of $18,056 and $824,034 for the three
months and nine months ended  September 30, 1998,  respectively,  as compared to
product  revenues  of  $776,387  and  $1,343,610  for the same  periods in 1997,
respectively.  Gross product  margins on product sales were negative and 11% for
the three  month and nine  months  ended  September  30 1998,  respectively,  as
compared to 58% and 57% for the same periods in 1997, respectively. Contributing
to the decrease in margins for the three and nine month  periods in 1998, is the
recognition  of  $100,000  in bad debt  expense  and  approximately  $262,000 in
obsolete  and excess  inventory.  The  Company  anticipates  that an  additional
$500,000  write-down of excess and obsolete  inventory will be recognized during
the fourth  quarter as the Company makes a transition  to a new product  family.
The Company does not anticipate  shipping  additional  product during the fourth
quarter as it is  concentrating  its  efforts on  raising  additional  funds and
development of its next  generation  product.  Prior to the second quarter ended
June  30,  1997,  the  Company  was a  development  stage  company  and  had not
recognized revenues.

The Company recognized a net loss of $1,908,407 and $4,819,284 for the three and
nine months ended September 30, 1998, respectively, as compared to net losses of
$2,377,644  and  $5,640,109  for the same  periods  in 1997,  respectively.  The
decreases  in net loss of  $469,237  and  $820,825  for the three and nine month
periods,  respectively,  is  attributable  to decrease in operating  spending in
sales and marketing  expenses and a reduction  administrative  costs  associated
with legal fees,  accountants  fees and outside  consultants  fees.  The Company
anticipates   scaling  its  operations  back   considerably  to  concentrate  on
development of its next generation product.

Research and development costs for the three and nine months ended September 30,
1998 were  $538,734 and  $1,956,190,  respectively,  as compared to $728,409 and
$1,855,329 for the same periods in 1997, respectively. The $189,675 decrease for
the three month period ended September 30, 1998 is due to a reduction in outside
engineering  consulting  costs. The $100,861 increase compared to the nine month
period ended  September 30, 1997 is primarily  due to a increase in  engineering
supplies and prototype spending and outside contractors  associated with product
development of the Company's server during the last half


                                      -9-
<PAGE>

of 1997 and the first half of 1998.  The Company  anticipates  that research and
development costs will go down as the Company eliminates engineering contractors
and consultants.

General and  administrative  costs for the three and nine months ended September
30, 1998 were $361,586 and $1,058,520,  respectively,  as compared to $1,452,791
and  $2,522,089  for the same  periods in 1997,  respectively.  The $696,934 and
$1,069,298  decreases  for the three and nine month  periods,  respectively,  is
primarily attributable to a reduction in administrative support personnel, and a
reduction in spending for outside legal, accounting and consulting services.

Selling and  marketing  costs for the three and nine months ended  September 30,
1998 were  $470,012 and  $1,676,462,  respectively,  as compared to $651,023 and
$1,893,110 for the same periods in 1997, respectively. The $181,011 and $216,648
decreases for the three and nine month periods,  respectively is attributable to
an decreases in marketing support and sales personnel in the Far East and Europe
and decreased  spending on promotional  material.  The Company  anticipates that
selling and marketing  expenses  will decrease in the fourth  quarter of 1998 as
the Company  suspends sales of its existing  product line and  concentrates  its
resources on development of its next generation product.

The  Company  plans to  reduce  its  staff  from its  current  level of 24 to 12
full-time   employees  and  concentrate  efforts  on  development  of  its  next
generation  product and raising  additional funds.  Additional  personnel may be
required depending on the level of business activity and the success of securing
additional funding.

LIQUIDITY AND CAPITAL RESOURCES

Since October 1995,  the Company has funded its  operations  principally  from a
combination of debt and equity financings totaling approximately $22,570,000. On
May 16, 1997,  the Company  completed its initial  public  offering of 1,800,000
shares  of its  Common  Stock  at a price  of  $5.50  per  share  and  2,070,000
Redeemable Common Stock Purchase  Warrants at $.15 per warrant.  Each Redeemable
Common  Stock  Purchase  Warrant  entitles  the holder to purchase  one share of
Common Stock for $6.60 during the four-year period  commencing May 12, 1998. The
net  proceeds  from the  Company's  initial  public  offering,  after  deducting
underwriting  discounts and  commissions and estimated  expenses  payable by the
Company, were approximately $8,220,000.

In July 1997,  the Company  obtained a  $3,000,000  working  line of credit from
Fleet National Bank. Borrowings on the facility will bear interest at prime plus
 .50%. Borrowings are limited to 75% of eligible domestic accounts receivable and
are  secured by all assets of the  Company.  In  October  1997,  the use of this
facility  was  temporarily  suspended  until the Company  complies  with certain
financial covenants.

In October 1997, the Company  obtained a $750,000 loan from Fleet National Bank.
The loan is secured by all of the  Company's  assets,  bears  interest  at Fleet
National  Bank's prime rate plus 2% and was  originally  payable by December 31,
1997 or upon completion of a financing  resulting in net proceeds to the Company
of at least $5,000,000. Pursuant to the original terms of this loan, the Company
issued  detachable  warrants to purchase  100,000  shares of Common  Stock at an
exercise  price of $3.00 per share  exercisable  over five years.  This loan was
extended  through and until  February  28, 1998 and the  exercise  price for the
warrants  issued in conjunction  with this loan was lowered from $3.00 per share
to $1.00 per share.  The term of this loan was further  extended  until April 1,
1998 and  subsequently  to July 31,  1998  pursuant  to  agreements  between the
Company and Fleet National Bank. On July 31, 1998, the Company made a payment in
the amount of $300,000 to Fleet National Bank to partially pay down the loan. At
that time,  the bank orally  agreed to extend the term of the loan an additional
two weeks until August 15, 1998. In September  1998 upon  completion of a bridge
financing  undertaken  by  the  Company  in  August,  the  Company  retired  the
outstanding loan with Fleet National Bank.

In December 1997, the Company entered into an agreement with Sunrise  Securities
Corp.  ("Sunrise  Securities"),  a New York based  investment  bank,  to raise a
minimum of $6,000,000 and a maximum of $9,000,000 in a private  placement of the
Company's  Common  Stock.   During  December  1997  and  January


                                      -10-
<PAGE>

1998,   Sunrise   Securities   secured   $1,000,000  in  bridge  financing  from
institutional  and private  investors in anticipation of the private  placement.
The bridge  financing  promissory  notes  accrued  interest at 8% per annum with
interest and principal payable at maturity on the initial closing of the private
placement.  In addition,  the Company  issued to the bridge  investors five year
warrants to  purchase up to 750,000  shares in the  aggregate  of the  Company's
Common Stock at $1.00 per share.  In February 1998, the Company repaid  $200,000
of these  promissory  notes plus  interest  and the holders of $800,000 of these
promissory notes converted their notes into shares of the Company's Common Stock
at $1.00 per share.  In January 1998, the Company closed on an initial amount of
$6,180,000 of a private placement initiated in December 1997. In early May 1998,
the Company closed on an additional $575,000 and terminated the offering started
in December 1997.

In August 1998,  the Company  entered  into an  agreement  with a New York based
investment bank to raise $1,500,000 in bridge financing,  of secured convertible
promissory  notes  and  common  stock  purchase  warrants  and  with a  goal  to
subsequently  raise an additional  $4,000,000 to $6,000,000 million in a private
placement  of the  Company's  Common  Stock.  In  September  1998,  the  Company
completed the $1,500,000 in bridge  financing and used a portion of the proceeds
to repay in full  its  indebtedness  to Fleet  National  Bank.  The  convertable
promissory  notes are due and  payable  upon the  earlier  of the  closing  of a
financing of a minimum of $4,000,000 or in September 1999. In November 1998, the
Company was informed by the investment  bank that they would be unable to secure
the additional funding required to repay the outstanding bridge loan and provide
the Company with the necessary working capital to support its business plan. The
Company is seeking alternative financing, however no assurance can be given that
the Company will be able to obtain additional  funding on terms favorable to the
Company, if at all. In addition as a result of the investment bank decision, the
Company has suspended sales of its current product and will also seek a buyer or
a  strategic  partner as an  alternative  means of funding the  Company.  If the
Company is  unsuccessful in either  securing  additional  financing or finding a
buyer or strategic  partner,  it will be forced to suspend all operations during
the fourth quarter of 1998.  Success of future operations is subject to a number
of  risks,  including:  the risk  that the  Company  will not be  successful  in
developing  future  products;  the risk of rapid  technological  changes  in the
server industry; the Company's limited operating history, history of losses, and
accumulated  deficit;  the Company's  need for  additional  capital;  the highly
competitive nature of the server industry;  and future unanticipated  shortfalls
in the Company's revenues.

The Company is dependent on its ability to obtain  additional  financing to fund
new product  development.  As a result of the Company's  recurring  losses,  the
Company's auditors have expressed  substantial doubt about the Company's ability
to continue as a going concern.  The  accompanying  financial  statements do not
include any adjustments  relating to the recovery and classification of recorded
asset amounts or the amounts and  classifications  of liabilities  that might be
necessary should the Company be unable to continue as a going concern.

The Company does not have any material  commitments for capital  expenditures at
this time.

YEAR 2000

Certain computer programs and microprocessors use two digits rather than four to
define  the  applicable  year.  Any  computer  program  that has  date-sensitive
software and  microprocessors  may recognize a date using "00" and the year 1900
rather than 2000.  This  phenomenon  could cause a disruption  of the  Company's
operations,  including,  among  other  things,  a  temporary  inability  to send
invoices,  or engage in similar normal business activities.  Management believes
the Company is  substantially  year 2000  compliant  with  respect to its sales,
administration, and general operations. Prior to purchasing any new equipment or
software,  it is Company policy to ensure that the  specifications  include year
2000  compliance.  However,  there can be no guarantee that the systems of other
companies on which the Company's  system will rely will be converted on a timely
basis, or that a failure to convert by another company,  or a conversion that is
incompatible with the Company's systems, would not have a material impact on the
Company.  Based on its current  assessment,  management  believes that year 2000
compliance will not have a material  adverse impact on the future  operations of
the Company.

FORWARD LOOKING STATEMENTS

Some  of the  statements  in  this  Form  10-QSB  Quarterly  Report,  as well as
statements by the Company in periodic press  releases,  oral  statements made by
the  Company's   officials  to  analysts  and  shareholders  in  the

                                      -11-
<PAGE>

course of  presentations  about  the  Company  and  conference  calls  following
quarterly earnings releases,  constitute "forward-looking statements" within the
meaning  of the  Private  Securities  Litigation  Reform  Act of 1995.  Words or
phrases denoting the anticipated  results of future events such as "anticipate,"
"believe,"  "estimate,"  "will  likely,"  "are  expected  to," "will  continue,"
"project," "trends" and similar expressions that denote uncertainty are intended
to identify such forward-looking  statements.  Such  forward-looking  statements
involve known and unknown risks,  uncertainties and other factors that may cause
the actual results,  performance or achievements of the Company to be materially
different  from any future  results,  performance or  achievements  expressed or
implied by the forward-looking statements. Such factors affecting future results
include,  but are not limited to, the Company's limited operating  history,  the
Company's need for additional  financing,  rapid technology changes,  regulatory
uncertainty,  level of demand for the Company's  products and services,  product
acceptance,  industry wide  competitive  factors,  timing of completion of major
equipment projects,  retention of qualified personnel,  the Company's dependence
on  proprietary  technology  of other third parties and  political,  economic or
other conditions.  Furthermore,  market trends are subject to changes that could
adversely  affect  future  results.  Because  of these and other  factors,  past
financial  performance  is not  necessarily  indicative  of future  performance,
historical trends should not be used to anticipate future operating results, and
the  trading  price  of the  Company's  common  stock  may be  subject  to  wide
fluctuations in response to  quarter-to-quarter  variations in operating results
and market conditions.

                                      -12-

<PAGE>

                           PART II. OTHER INFORMATION



ITEM 1.           LEGAL PROCEEDINGS
                  In March 1998, the Company's  former President and CEO, Lorrin
                  Gale,  left  the  Company  at  the  request  of the  Board  of
                  Directors. On May 29, 1998, Mr. Gale filed a complaint against
                  the  Company  in the  Superior  Court of the  Commonwealth  of
                  Massachusetts  seeking  relief  for  breach  of an  employment
                  contract.  In September 1998, the Company reached a settlement
                  with Mr. Gale, which required that the Company pay $150,000 in
                  severance  pay and an  additional  $45,000  in  increments  of
                  $15,000 over the next three years commencing in July 1999.

                  The  Company  has  received a letter  from a  printing  vendor
                  claiming  that  the  Company  owes  the  vendor  approximately
                  $50,000 for printing services rendered. The Company's position
                  is that it has  provided  consideration  to the vendor for the
                  printing  services in the form of equipment and  software,  in
                  accordance   with  an   understanding   between   the  parties
                  established   in  November  1996.  The  Company  has  filed  a
                  counterclaim and intends to defend its position vigorously.

ITEM 2.           CHANGES IN SECURITIES
                  None

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES
                  None

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  None

ITEM 5.           OTHER INFORMATION
                  None

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K
                  None


                                      -13-

<PAGE>

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                              AUGMENT SYSTEMS, INC.

Date: November 14, 1998           By: /s/Laurence Liebson
                                      -------------------
                                      Laurence Liebson
                                      President & Chief Executive Officer
                                      (Principal Executive Officer)


Date: November 14, 1998           By: /s/Duane A. Mayo
                                      ----------------
                                      Duane A. Mayo
                                      Chief Financial Officer, Treasurer 
                                       and Secretary
                                      (Principal Financial & Accounting Officer)



                                      -14-