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

                       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 June 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 incorporation     (I.R.S.Employer Identification
 or organization)                                   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 August 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
<S>                                                                                    <C>
PART I            FINANCIAL INFORMATION

     Item 1       Financial Statements

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

                  Results of Operations for the six months and three months
                    ended June 30, 1998 and 1997                                            4

                  Statements of Cash Flows for the six months
                    ended June 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                   13-14
     Item 5       Other Information                                                        14
     Item 6       Exhibits and Reports on Form 8-K                                         14

         Signatures                                                                        15

</TABLE>


                                      -2-

<PAGE>

                              AUGMENT SYSTEMS, INC.
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                               June 30,       December 31,
                                                                             ------------------------------
                                                                                 1998             1997
                                                                                 ----             ----
                                                                              (unaudited)
                                               ASSETS
Current Assets:
<S>                                                                          <C>             <C>
         Cash                                                                $  1,201,952    $     47,224
         Accounts receivable, net                                                 643,943         224,969
         Inventories                                                              973,287       1,162,920
         Prepaid expenses                                                         383,172         115,100
                                                                             ------------    ------------
                  Total current assets                                          3,202,354       1,550,213

Property and equipment, net                                                       320,044         409,848
Other assets                                                                      278,745         278,745
                                                                             ------------    ------------
                  Total assets                                               $  3,801,143    $  2,238,806
                                                                             ============    ============
                             LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
         Accounts payable                                                    $    348,414    $  1,371,632
         Accrued expenses                                                         320,632         611,633
         Notes payable                                                            717,569         717,569
         Bridge financing                                                            --           474,074
         Current portion of capital lease obligations                              43,930          46,177
                                                                             ------------    ------------
                  Total current liabilities                                     1,430,545       3,221,085
Convertible promissory notes                                                       41,495          41,495
Capital lease obligations, less current portion                                    81,951          81,951
                                                                             ------------    ------------
                  Total liabilities                                             1,553,791       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 June 30, 1998,
         and December 31, 1997, respectively                                      118,990          47,133
         Additional paid-in capital                                            21,487,524      15,286,410
         Accumulated deficit                                                  (19,359,162)    (16,439,268)
                                                                             ------------    ------------
                  Total stockholders' equity (deficit)                          2,247,352      (1,105,725)
                                                                             ------------    ------------
         Total Liabilities and Stockholders' Equity                          $  3,801,143    $  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             Six Months Ended
                                                       June 30,                       June 30,
                                                1998              1997         1998             1997
                                                ----------------------         ---------------------

<S>                                          <C>             <C>            <C>             <C>
Sales                                        $    330,464    $   567,233    $    805,978    $   567,223
Cost of sales                                     140,356        247,481         369,755        247,481
                                             ------------    -----------    ------------    -----------
Gross margin                                      190,108        319,742         436,223        319,742
Operating expenses:
         Research and development                 697,443        662,873       1,417,466      1,126,920
         General and administrative               477,081        580,160         706,014      1,069,298
Sales and marketing                               482,771        700,400       1,206,450      1,242,087

                  Total cost and expenses    $  1,657,295    $ 1,943,433    $  3,329,930    $ 3,438,305
                                             ------------    -----------    ------------    -----------
Loss from operations                         $ (1,467,187)   $(1,623,691)   $  2,893,707    $(3,118,563)
                                             ------------    -----------    ------------    -----------
Other expense:

         Net interest expense                $      2,244    $    49,771    $     26,187    $   143,902
                                             ------------    -----------    ------------    -----------
                  Total other expense, net   $      2,244    $    49,771    $     26,187    $   143,902
                                             ------------    -----------    ------------    -----------

Net loss                                     $ (1,469,431)   $(1,673,462)   $ (2,919,894)   $(3,262,465)
                                             ------------    -----------    ------------    -----------
Net loss per common share                           (0.13)         (0.43)          (0.28)         (0.96)

Weighted average common and common             11,485,824      3,902,330      10,318,545      3,410,557
            equivalent shares outstanding

</TABLE>
The accompanying notes are an integral part of the financial statements.



                                       -4-


<PAGE>

                              AUGMENT SYSTEMS, INC.
                             STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
                                                                                    Six Months Ended
                                                                                 June 30,      June 30,
                                                                                   1998          1997
                                                                                   ----          ----
<S>                                                                            <C>            <C>
Cash flows from operating activities:
         Net loss                                                               (2,919,894)   (3,262,465)
         Adjustments  to  reconcile  net  loss to net  cash                    
          used  in  operating                                                  
             activities:                                                       
                  Depreciation and amortization                                    136,516        42,033
         (Increase) decrease in operating assets and liabilities:              
                  Accounts receivable                                             (418,974)     (513,761)
                  Inventory                                                        189,633    (1,055,581)
                  Other assets                                                    (267,873)      (18,200)
                  Accounts payable                                              (1,164,041)      488,588
                  Accrued expenses                                                (626,698)     (104,308)
                                                                                ----------    ----------
                           Net cash used in operating activities                (5,071,331)   (4,423,694)
                                                                                ----------    ---------- 
Cash flows from investing activities:                                          
         Purchase of property and equipment                                        (41,677)      (57,493)
                                                                                ----------    ----------
                           Net cash used for investing activities                  (41,677)      (57,493)
                                                                                ----------    ---------- 
Cash flows from financing activities:                                          
         Proceeds from issuance of common stock                                  5,967,736     8,985,240
         Proceeds from issuance of short-term promissory notes                        --       2,775,000
         Proceeds from bridge financing                                            500,000          --
         Repayment of bridge financing                                            (200,000)         --
         Repayment of short-term advance                                              --        (575,000)
         Payments on capital lease obligations                                        --          (9,210)
         Payments on short-term promissory notes                                      --      (3,585,000)
         Payment on long-term convertible promissory notes                            --         (20,753)
         Interest on short-term promissory notes                                      --        (137,283)
         Deferred financing costs                                                     --        (716,170)
                                                                                ----------    ---------- 
                           Net cash provided by financing activities             6,267,736     6,716,825
                                                                                ----------    ---------- 

Net increase (decrease) in cash                                                  1,154,728     2,235,638
                                                                                ----------    ----------
Cash at beginning of period                                                         47,224       452,753
                                                                                ----------    ----------
Cash at end of period                                                            1,201,952     2,688,391
                                                                                ----------    ---------- 
</TABLE>

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



                                       -5-

<PAGE>

                              AUGMENT SYSTEMS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                                  June 30, 1998

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

         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.  The Company's  initial  target  markets are  electronic
prepress,  geographic  information  systems (GIS),  medical  imaging,  and video
editing,  all of which require the rapid and  efficient  movement of large image
and data files over networks.

         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 six month periods ended June 30, 1998 or
any other interim period,  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>
                                                                                    Six Month Period Ended
                                                                              June 30, 1998        June 30, 1997
                                                                              -------------        -------------
<S>                                                                              <C>                  <C>      
         Denominator for basic loss per share:
             Weighted average common stock shares
                  outstanding............................................        10,318,545           3,410,557
         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                                  10,318,545           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

                                  June 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.

     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.


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 bridge loan,  the Company  issued
detachable  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
were  $750,000.  The Company  allocated  proceeds  of $81,077 to the  detachable
warrants and $668,923 to the note.  The discount on the debt is being  amortized
over 5 months,  the term of the extended loan. As of December 31, 1997,  $48,646
was charged to  interest  expense.  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 detachable  warrants
was reduced  from $3.00 per share to $1.00 per share.  The term of this loan was
further  extended until April 1,



                                      -7-

<PAGE>

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.  The Company
intends to use a portion of the  proceeds  of the bridge  financing  to repay in
full its  indebtedness  to Fleet  National  Bank.  Although no assurance  can be
given, the Company anticipates the bridge financing to close on or before August
17,  1998.  The  Company  and the  investment  bank have the right to extend the
bridge  financing  for up to an  additional  thirty (30) days.  In the event the
bridge financing is not completed by August 17, 1998, then the Company will need
to seek an  extension  of the term of its loan  with  Fleet  National  Bank.  No
assurance  can be given that Fleet  National  Bank will agree to any  additional
extension of the term of the Loan.

5.    MATERIAL SUBSEQUENT EVENTS

         In  February  1998,  the NASD  changed  the  listing  requirements  for
companies whose securities are listed on the 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 SIX MONTHS ENDED JUNE 30, 1998 COMPARED
                 TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1997

INTRODUCTION

Augment Systems, Inc. develops, manufactures, sells and distributes Storage Area
Networking  solutions for managing large image and data files. 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
that 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. The Company's
initial target markets are electronic prepress,  geographic  information systems
(GIS),  medical imaging,  and video editing,  all of which require the rapid and
efficient movement of large image and data files over networks.


RESULTS OF OPERATIONS

The Company  recognized  product revenues of $330,464 and $805,978 for the three
months and six months ended June 30, 1998, respectively,  as compared to product
revenues of $567,223 and  $567,223  for the same periods in 1997,  respectively.
Gross product  margins on product sales were 59% and 55% for the three month and
six months ended June 30 1998, respectively,  as compared to 56% and 56% for the
same periods in 1997, respectively.  Contributing to the improved margins during
the three month period ended June 30, 1998 was recognition of a software license
fee of $100,000 to a major customer in the video market. The Company anticipates
revenues for the balance of 1998 will remain  fairly  consistent  with the first
half of the year, as the main focus of the Company will be on continued  product
development.  Gross product  margins may vary slightly with the  distribution of
products to original equipment manufacturers  ("OEM's"),  third party resellers,
end users and potential  competition from other  suppliers.  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 $1,469,431 and $2,919,894 for the three and
six months  ended June 30,  1998,  respectively,  as  compared  to net losses of
$1,673,462  and  $3,262,465  for the same  periods  in 1997,  respectively.  The
decreases  in net loss of  $204,031  and  $342,571  for the  three and six month
periods,  respectively,  is attributable to an 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 a slight decrease in operating spending for the second half of 1998,
as the Company reduces spending associated with its European operation and makes
a transition from engineering contractors to full time employees.

Research and development  costs for the three and six months ended June 30, 1998
were  $697,443  and  $1,417,466,  respectively,  as  compared  to  $662,873  and
$1,126,920 for the same periods in 1997, respectively. The $290,546 increase for
the six month period, is primarily due to a increase in engineering supplies and
prototype spending and outside  contractors  associated with product development
of the Company's server.  The Company  anticipates that research and development
costs will go down  slightly for the second half of 1998 as the Company  makes a
transition from engineering contractors and consultants to full time employees.



                                      -9-

<PAGE>

General  and  administrative  costs for the three and six months  ended June 30,
1998 were  $477,081  and  $706,014,  respectively,  as compared to $580,160  and
$1,069,298 for the same periods in 1997, respectively. The $103,079 and $363,284
decreases  for the three  and six  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 six months  ended June 30, 1998
were  $482,771  and  $1,206,450,  respectively,  as  compared  to  $700,400  and
$1,242,087 for the same periods in 1997, respectively.  The $217,629 and $35,637
decreases for the three and six 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 increase slightly toward the end of 1998 as
the  Company  develops  its sales and  distribution  channels  and  expands  its
marketing efforts.

The Company currently has 24 full-time  employees and 8 independent  contractors
and plans to hire an  additional  12 full-time  employees in various  capacities
over the next 12 months.  Additional  personnel may be required depending on the
level of  business  activity.  The Company  expects,  however,  to continue  its
current  practice of utilizing  independent  consultants  on an as-needed  basis
rather than exclusively hiring additional full-time employees.

LIQUIDITY AND CAPITAL RESOURCES

Since October 1995,  the Company has funded its  operations  principally  from a
combination of debt and equity financings totaling approximately $21,220,000. 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,  pending the  completion  of a proposed  bridge
financing being undertaken by the Company, which is described below.

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  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 



                                      -10-

<PAGE>

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.  The Company intends to use
a  portion  of the  proceeds  of the  bridge  financing  to  repay  in full  its
indebtedness  to Fleet  National Bank.  Although no assurance can be given,  the
Company  anticipates the bridge financing to close on or before August 17, 1998.
The  Company  and the  investment  bank  have the  right to  extend  the  bridge
financing  for up to an  additional  thirty  (30) days.  In the event the bridge
financing is not  completed  by August 17,  1998,  then the Company will need to
seek an extension of the term of its loan with Fleet National Bank. No assurance
can be given that Fleet National Bank will agree to any additional  extension of
the term of the Loan.  which is  anticipated to close by the end of August 1998.
In  addition,  the  Company  anticipates  raising an  additional  $4,000,000  to
$6,000,000 in a private  placement of its Common Stock during the fourth quarter
of 1998.  The  additional  funds raised in the private  placement may be used to
repay any portion of the  promissory  notes issued in the bridge  financing that
are not  converted to Common Stock upon the closing of such  additional  private
placement and will be used to support  ongoing  product  development and ongoing
operations of the Company.

There can be no  assurance,  however,  that the Company will be able to complete
the  bridge  financing  in August  1998,  or  complete  the  subsequent  private
placement  anticipated  in the  fourth  quarter  of 1998,  nor can  there be any
assurance  that the Company will be able to obtain  additional  funding on terms
favorable to the Company,  if at all. If cash flow from  operations,  the bridge
financing and the private placement is not sufficient,  there will be a material
adverse  affect  on the  Company's  ability  to  continue  to fund  new  product
development,  expand its sales distribution channels, and continue as an ongoing
operation.  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 and expand its sales  distribution  channels,  generate
sufficient  funds from the sales of products in the normal  course of  business,
and ultimately to generate profitable  operations.  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.


                                      -11-

<PAGE>

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  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.  The  Company  intends  to  vigorously  defend  this
                  lawsuit  and  violation  of  the  Massachusetts  Wage  Payment
                  Statute and management  believes that it has defenses  against
                  Mr.  Gale's  claims of (i)  $250,000 in  severance  pay,  (ii)
                  accrued  vacation pay of  approximately  $7,200  pertaining to
                  fiscal  year  1998 , (iii)  continuation  of  health  and life
                  benefits,  (iv)  treble  damages for any loss of wages and (v)
                  interest and related legal fees and expences.

                  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  is  currently
                  negotiating  a settlement  of the matter.  No formal claim has
                  been filed in any court with respect to this matter.

ITEM 2.           CHANGES IN SECURITIES
                  None

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES
                  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.  This loan was
                  extended  until  February 28, 1998 and 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   $1,500,000  bridge
                  financing being undertaken by the Company. The Company intends
                  to use a portion of the  proceeds of the bridge  financing  to
                  repay  in  full  its  indebtedness  to  Fleet  National  Bank.
                  Although no assurance  can be given,  the Company  anticipates
                  the bridge  financing  to close on or before  August 17, 1998.
                  The Company and the  investment  bank have the right to extend
                  the bridge financing for up to an additional thirty (30) days.
                  In the event the bridge  financing is not  completed by August
                  17,  1998,  then the Company will need to seek an extension of
                  the term of its loan with Fleet  National  Bank.  No assurance
                  can be  given  that  Fleet  National  Bank  will  agree to any
                  additional extension of the term of the Loan.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  The  following  matters  were  submitted  to  a  vote  of  the
                  stockholders of the Company at a Special Meeting in lieu of an
                  Annual  Meeting of  Stockholders  held on June 29,  1998.  The
                  holders of  6,430,790  shares of Common  Stock were present or
                  represented by proxy,  and  accordingly,  a quorum was present
                  and matters were voted on as follows:

                  (a)      The following persons were elected directors:
<TABLE>
<CAPTION>
                                                     Votes for        Votes against   Votes withheld
                                                     ---------        -------------   --------------
<S>                                                  <C>                  <C>             <C>
                           Laurence S. Liebson       6,423,300            7,490           - 0 -
                           Duane A. Mayo             6,423,300            7,490           - 0 -
                           Fred L. Chanowski         6,423,300            7,490           - 0 -
                           Jeffrey Leventhal         6,423,300            7,490           - 0 -
</TABLE>



                                      -13-

<PAGE>

                  (b)      The following resolutions were submitted to a vote of
                           the shareholders at the meeting:

                           (1)      To  approve  an  amendment  to the  Restated
                                    Certificate of Incorporation to increase the
                                    number of authorized  shares of Common Stock
                                    from    30,000,000   to   50,000,000.    The
                                    resolution  was  passed;   6,398,499  shares
                                    voting  in  favor,   23,294   shares  voting
                                    against and 8,997 shares abstaining.
                           (2)      To approve  an  amendment  to the  Company's
                                    1995  Stock  Option  Plan  to  increase  the
                                    number of  shares  authorized  for  issuance
                                    under the Plan from  800,000  to  4,800,000.
                                    The resolution was passed;  6,371,205 shares
                                    voting  in  favor,   50,588   shares  voting
                                    against and 8,997 shares abstaining.
                           (3)      To approve the issuance of up to  10,000,000
                                    shares of Common Stock in connection  with a
                                    proposed private  placement.  The resolution
                                    was passed  6,425,490 shares voting in favor
                                    and 5,300 shares abstaining.
                           (4)      To  approve  an  amendment  to the  Restated
                                    Certificate  of  Incorporation  to adopt a 1
                                    for 3 reverse  stock split of the  Company's
                                    issued and  outstanding  Common  Stock.  The
                                    resolution  was  passed;   6,405,106  shares
                                    voting  in  favor,   25,684   shares  voting
                                    against.
                           (5)      To ratify the designation of BDO Seidman LLP
                                    as  independent  accountants  for the period
                                    ending December 31, 1999. The resolution was
                                    passed;  6,424,490  shares  voting in favor,
                                    5,300 shares voting against and 5,300 shares
                                    abstaining.


ITEM 5.           OTHER  INFORMATION

                  In February  1998,  the NASD changed the listing  requirements
                  for  companies  whose  securities  are  listed  on the  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."

                  If a  stockholder  intends to present a proposal at the Annual
                  Meeting  of  Stockholders  of the  Company  in 1999 (the "1999
                  Annual  Meeting")  and does not  submit  such  proposal  on or
                  before February  1,1999, such proposal will not be included in
                  the proxy  statement and proxy card related to the 1999 Annual
                  Meeting.  Nonetheless,  such  stockholder  may  raise  such  a
                  proposal at the 1999 Annual Meeting;  however,  as a result of
                  the  adoption by the SEC on May 21, 1998 of new rule 14a-4 (C)
                  (1) under the Securities  Exchange Act of 1934, as amended, if
                  a  proponent  of a  shareholder  proposal  fails to notify the
                  Company  at least 45 days  prior to June 15,  1999  (June  15,
                  being the month and day of mailing  the  Company's  1998 proxy
                  statement),  then  management  proxies would be allowed to use
                  their  discretionary  voting  authority when such  shareholder
                  proposal  is  raised  at  the  annual  meeting,   without  any
                  discussion of the matter in the proxy statement.


ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K
                  (a)  Exhibits:

                  3(i) Articles of Amendment to Articles of Incorporation  filed
                       July 14, 1998.
     
                  (b)  Reports on Form 8-K:

                  A report  on Form 8-K was  filed on April 1,  1998  announcing
                  that  Lorrin  Gale,  the  former  President  and CEO  would be
                  leaving the Company.

                  A report on Form 8-K was filed on April 17, 1998 pursuant to a
                  request from NASD to file its  unaudited  Balance  Sheet as of
                  January 31, 1998.




                                      -14-

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


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





                                      -15-


<PAGE>

                               STATE OF DELEWARE
                        OFFICE OF THE SECRETARY OF STATE
                        --------------------------------


I,  EDWARD J.  FREEL,  SECRETARY  OF STATE OF THE STATE OF  DELEWARE,  DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE  CERTIFICATE OF AMENDMENT
OF "AUGMENT SYSTEMS,  INC.", FILED IN THIS OFFICE ON THE FOURTEENTH DAY OF JULY,
A.D. 1998, AT 11 O'CLOCK.






                         [STATE SEAL]    /s/ Edward J.  Freel
                                         -----------------------------------
                                         EDWARD J. FREEL, SECRETARY OF STATE


                                         AUTHENTICATION:
2229490 8100                                                  9246947   
981314422                                          DATE:      08-11-98