SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                   For the Fiscal Year ended December 31, 1997

                                       OR

   [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
                                EXCHANGE OF 1934

                   For the Transition Period From ____ to ____

                          Commission File No. 33-20432

                             PROFORMIX SYSTEMS, INC.
              Exact Name of Registrant as Specified in its Charter

                 DELAWARE                                75-2228828
       State or Other Jurisdiction of                   IRS Employer
        Incorporation or Organization               Identification Number

   50 Tannery Road, Branchburg, New Jersey                  08876
   Address of Principal Executive Offices                 Zip Code

                                 (908) 534-6400
                Registrants Telephone Number, Including Area Code

                           WHITESTONE INDUSTRIES, INC.
                             (Former Conformed Name)

                                  July 14, 1997
                              (Date of Name Change)

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      NONE

             Title of Each       Class Name of Each Exchange on Which Registered
                 NONE                               NONE

      Securities Registered pursuant to Section 12(g) of the Exchange Act:
                                      NONE

<PAGE>

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days.

                                 Yes _X_  No ___

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

      The  Registrant's  revenues  for the fiscal year ended  December 31, 1997,
were $3,125,009.

Common stock, par value $.0001 per share ("Common Stock"), was the only class of
voting  stock of the  Registrant  outstanding  on April  8,  1998.  Based on the
closing  price of the  Common  Stock  on the OTC  Electronic  Bulletin  Board as
reported on April 8, 1998, ($4.75),  the aggregate market value of the 3,049,585
shares of the Common Stock held by persons  other than  officers,  directors and
persons  known to the  Registrant  to be the  beneficial  owner  (as the term is
defined under the rules of the Securities and Exchange  Commission) of more than
five  percent  of  the  Common  Stock  on  April  8,  1998,  was   approximately
$14,485,000.  By the foregoing  statements,  the  Registrant  does not intend to
imply that any of the officers,  directors,  or beneficial owners are affiliates
of the registrant or that the aggregate  market value,  as computed  pursuant to
rules of the Securities and Exchange Commission, is in any way indicative of the
amount which could be obtained for such shares of Common Stock.

      As of April 8, 1998,  3,824,965 shares of Common Stock,  $.0001 par value,
were outstanding.

             DOCUMENTS INCORPORATED BY REFERENCE: SEE EXHIBIT INDEX


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<PAGE>

                             PROFORMIX SYSTEMS, INC.

                                    CONTENTS


PART I.                                                                     Page

    Item  1. Business....................................................      4

    Item  2. Properties .................................................     10

    Item  3. Legal Proceedings ..........................................     10

    Item  4. Submission of Matters to a Vote of Security Holders ........     10

PART II.

    Item  5. Market for Registrant's Common Equity and
             Related Shareholder Matters ................................     11

    Item  6. Management's' Discussion and Analysis of
             Financial Condition and Results of Operations ..............     13

    Item  7. Financial Statements and Supplementary Data ................     16

    Item  8. Changes in and Disagreements with Accountants
             on Accounting and Financial Disclosure .....................     16

PART III.

    Item  9. Directors and Executive Officers of the Registrant .........     17

    Item 10. Executive Compensation .....................................     19

    Item 11. Security Ownership of Certain Beneficial Owners
             and Management .............................................     21

    Item 12. Certain Relationships and Related Transactions .............     22

    Item 13. Exhibits and Reports on Form 8-K ...........................     22

             Signatures..................................................     23

             Exhibit Index...............................................     24


                                       3
<PAGE>

                                     PART I

ITEM 1: BUSINESS

Background

      Proformix Systems, Inc. (the "Company" or "Proformix") was incorporated as
a Delaware  corporation  on April 19, 1988 under the name  Fortunistics  Inc. On
March 4, 1993, the Company  changed its name to Whitestone  Industries,  Inc. On
July 14, 1997, the Company changed its name to Proformix Systems, Inc.

      On June 16, 1997, Royal Capital, Inc. ("Royal"), a New Jersey corporation,
entered  into an  agreement  with  Whitestone  Industries,  Inc.,  and its  then
president,  Donald R. Yu,  whereby  Royal  (i)  acquired  100,000  shares of the
Company's  preferred stock held by Mr. Yu, and (ii) acquired the voting proxy of
1,120,000 shares of common stock. The consideration paid to Mr. Yu was $100,000.
As a result, Royal obtained a voting majority of the Company's capital stock.

      On June 24,  1997,  the Company,  Royal,  and  Proformix,  Inc., a company
incorporated  in the  State  of  Delaware  in  October  1991,  entered  into  an
acquisition agreement ("Acquisition  Agreement") whereby the Company would offer
to acquire the  outstanding  stock of Proformix,  Inc. At that time, the Company
effected a 1:137 reverse split of its  outstanding  shares of common stock,  and
spun off the shares of its wholly  owned  subsidiary  Golden Bear  Entertainment
Corporation to its then current shareholders in the form of a stock dividend.

      Pursuant to the Acquisition  Agreement,  Proformix Inc.  shareholders were
offered  one share of the  Company's  common  stock for every  3.4676  shares of
Proformix.  Inc.  common stock,  and one share of preferred  stock for every one
share of Proformix, Inc. preferred stock. At the time of this filing, holders of
approximately  97% of  Proformix,  Inc.  common  stock have  agreed to the stock
exchange and tendered their shares. The business combination which took the form
of a reverse acquisition has been accounted for as a purchase.  As a result, the
Company and  Proformix,  Inc.  remain as two  separate  legal  entities  whereby
Proformix,  Inc. operates as a subsidiary of the Company.  The operations of the
newly  combined  entity are  currently  comprised  solely of the  operations  of
Proformix, Inc.

      For a detailed  description of the Company's  business before 1997, please
refer to the Company's  report on Form 10-KSB for the fiscal year ended December
31, 1996, incorporated herein by reference thereto.

      The Company is currently subject to the reporting  requirements of Section
15(d) of the  Securities  Exchange Act of 1934. The Company has the authority to
issue an aggregate  of thirty  million  (30,000,000)  common  shares,  par value
$.0001, three million (3,000,000) Series A preferred shares, par value $.01, and
two thousand five hundred (2,500) cumulative preferred shares, par value $.001.

      As of December 31, 1997,  there were  outstanding  2,898,507 common shares
and 10 cumulative preferred shares.


                                       4
<PAGE>

Narrative Description of Business

      The Company designs,  develops,  manufactures,  and markets research-based
ergonomic accessory products for the computerized  workplace. As the utilization
of computers in the office has increased significantly in the last years, so has
the rate of health  problems  believed  to be related  to the use of  computers.
Computer  ergonomics  focuses on optimizing the design of technology that allows
people to  successfully  interact with  computers,  with a minimum of associated
health risks. A successful  technology  delivery system  positively  impacts the
cost of doing business by improving the comfort,  productivity, job satisfaction
and safety of the computer user,  while  reducing the costs of  absenteeism  and
work  related  disability.  Ergonomists  know  that  science  and  research  are
prerequisite to the design of effective products. Most suppliers, however, treat
ergonomic  equipment  as a  sideline,  afterthought  or  detail.  The  Proformix
approach  is markedly  different.  By  scientifically  testing,  evaluating  and
verifying  design  concepts  and  systems,  the  Company is able to provide  its
customers with appropriate and effective technologies.

      The corporate  philosophy of the Company on such products  considers  both
the entire body and the work being  performed,  resulting in  computerized  work
settings that are as safe, comfortable, and productive as they can be. Moreover,
because  optimizing how people use computers is the only concern of the Company,
its customers benefit from an unequaled package of research,  design, education,
training and service delivered in the most cost-effective manner possible.

      During 1996,  the issues of  repetitive  stress  injuries  ("RSI") and the
potential of liability to employers  from the effects of carpal tunnel  syndrome
and other RSI's on employees was forcibly  brought to the forefront of corporate
consciousness  through a widely  publicized  suits  involving  a major  computer
maker. In a parallel  development,  there appears to be a renewed effort by both
federal and state government to develop laws dealing with ergonomics in the work
environment.  The  impact of RSI's is  rising.  The  Bureau of Labor  Statistics
reports  that 25% of all  injuries  that  result  in lost  work  time are due to
repetitive stress problems.  These injuries  technically  comprise more than 100
different  types of  job-induced  injuries  resulting  from wear and tear on the
body. Moreover, they currently cost employers an estimated $20 billion a year in
workman's   compensation  claims.  The  federal  government  estimates  that  an
additional $80 billion is lost in related costs such as absenteeism  and reduced
productivity.  The RSI issues in the United  States are  mirrored in the rest of
the developed world. The Company believes that the growing  recognition of these
trends will give rise to a rapidly expanding market for the Company's products.

The Industry

      The  Company  operates  in only one  business  segment:  the  development,
manufacturing,  and sales of ergonomic  products for the computerized  workplace
environment.  More  specifically,  the Company sells specialized  keyboard trays
integrated with  touchpad-based  data entry devices,  and complemented by a wide
array of peripheral  accessories such as mousing  platforms,  monitor risers and
glare  screens  and copy  holders.  In  addition,  the Company  licenses  highly
sophisticated  and proprietary  software that provides  computer based training,
workpacing and monitoring  tools, as well as a computer  workstation  assessment
tool.  All these  product  offerings  generally  subscribe to  ergonomic  design
criteria, supported by independent research.

      Historically,  accessory  products similar to the Company's  products have
been sold along with traditional office furniture  products through  established
reseller or dealer  channels,  and, to a lesser  degree,  through  office supply
stores.  The  Company  early on  recognized  that  keyboard  trays  and  similar


                                       5
<PAGE>

accessories  are not just an adjunct to the office  furniture  but, owing to the
fact that they actually  constitute the interface between the human operator and
the  computer,  occupy  a  critical  juncture  in the  greatest  number  of work
processes in today's  information and data processing  driven economy,  and that
their importance in terms of potential for  productivity  enhancement and health
risk amelioration has been largely and significantly underestimated in the past.
The Company  thus set out to promote  awareness of the health risks and negative
effect on  productivity  associated  with many of the  traditional  tools of the
computerized  workplace,  and to develop  alternatives  based on the  science of
Ergonomics.  In doing so, it positions itself outside of the traditional  office
furniture industry, towards areas associated with risk management,  productivity
enhancement and employee wellness.

      The Company's business operates primarily in the United States of America.
The Company did not derive  material  revenues  from  export  sales,  nor did it
maintain any foreign operations.

Products, Patents, Trademarks

      As the number of computers has grown,  so has the number of computer users
who experience cumulative trauma disorders ("CTDs"). These disorders,  inclusive
of back ache, neck ache,  tenosynovitis and carpal tunnel syndrome, are believed
to result  from minor  injuries  to the  musculo-skeletal  system  caused by the
physical stress of performing work using computers and computer accessories over
a prolonged period of time. Recently, studies have indicated that these injuries
may be attributed to computer users not maintaining  correct posture and neutral
positions when using computers.

      In 1991 Cornell University  undertook  laboratory testing and engaged in a
study on  ergonomics  and computer  accessories,  focusing  specifically  on the
ergonomic design of the Company's  keyboard trays and accessories,  to determine
whether their design, and the theory behind such design, provided computer users
with an  "always  neutral"  position  of wrist  and arm as well as  whether  the
computer user's positions were natural and correct.  Such study further assessed
whether the Company's  products  could be shown to alleviate or prevent  certain
CTDs. The study was first published in December 1991. Cornell University and the
Honeywell  Corporation  administered  further testing, the results of which were
published in January 1995.

      The findings of Cornell  University  verified that the inclining  slope of
conventional  keyboards put increased  pressure on the carpal  tunnel,  a narrow
channel in the wrist containing a nerve,  artery and nine flexor tendons,  which
could  cause  inflammation  or damage and  increased  the risk of carpal  tunnel
syndrome.  Initially,  the study found that the downward  sloping and  increased
palm support of the Proformix  Keyboarding  System  provided the computer  users
with a combined Aalways  neutral" wrist position with broad palm support,  which
minimized pressure on the carpal tunnel and muscular activity associated with an
unsupported  forearm,  67% of the  time.  The  study  found  that the  Company's
keyboarding  system  guides  computer  users  to sit  with  their  arms and legs
properly positioned in order to reduce back, neck, shoulder, and eye strain.

      The  center  piece  of  the  Company's  product  offerings  is a  patented
keyboarding  system  consisting of a unique height  adjustable  keyboard support
platform  embracing a preset negative or forward slope and integrated palm rest.
In addition,  there are several  variations  of mouse  platforms  and  accessory
products such as document holders, monitor risers, and glare screens.

      A newer version of the Company's  keyboarding system, the IntelliTray(TM),
introduced  in  1997,  integrates  a  touchpad  input  device  based  on  Cirque
Corporation's Glidepoint(TM) technology into the palm rest, a design feature for
which a patent is pending.


                                       6
<PAGE>

      Proformix  also recently  introduced  its new  ErgoRanger(TM)  keyboarding
system which offers enhanced  installation and user flexibility while preserving
the ergonomic design advantages of the Company's basic keyboarding system.

      Perhaps  most  importantly,  the  Company  intends to offer  comprehensive
ergonomic-based   productivity   solutions  that  include  proprietary  software
developed to train people  working on computers,  monitor  computer-use  related
activities and evaluate a user's risk exposure and propensity  towards injury or
loss of effectiveness  in connection with his/her  day-to-day work. This package
enables a company  to not only  address  the  issue of  health  risks  involving
employees  and to  minimize  resulting  potential  liabilities,  but  delivers a
powerful tool to increase overall productivity.

      The Company holds title,  by assignment,  to a United States patent for an
"Adjustable Ergonomic Support for Computer Keyboards",  as amended, and a United
States patent for a "Hinged Connection for a Tilt-Up Device", as well as several
trademarks. There can be no assurance, however, that the Company's products will
not be vulnerable to attempts by competitors  to copy them or obtain  protection
on similar products.  In addition,  there can be no assurance that a third party
will not design  products  which  perform the same or similar  functions  as the
Company's  products,  using  technology other than that covered by the Company's
patents.

      The Company also (i) has been granted a license for the  exclusive  rights
to ErgoSure(TM), a RULA (Rapid Upper Limb Assessment) based evaluation tool, and
(ii) in February 1998 acquired the rights to  ErgoSentry(TM),  a computer  based
training and work pacing system and monitoring  tool. While the Company believes
that it currently has a strategic  competitive  advantage in ergonomic software,
there  can be no  assurance  that  competitors  will  not  attempt  to copy  the
Company's products or obtain protection on similar products.

      On March 6, 1998, the Company executed a letter of intent,  with Vanity to
issue a tender offer for the  outstanding  stock of Vanity  Software  Publishing
Corporation, a Canadian privately held firm. Vanity owns all rights to a certain
ergonomic software package known as "ErgoBreak".

Business Strategy

      In the past,  the  Company  has  focused  its  marketing  approach  almost
exclusively towards broad-based distribution of its products through established
OEM,  dealer,  and other  reseller  channels  within the contract  furniture and
office supply  industries.  While  successful in that approach,  the Company has
begun,  without  abandoning  the before  mentioned  strategy,  to strengthen its
direct   sales   force  and   marketing   tools  to   develop  a  more   focused
dealer-supported  targeted approach towards bringing overall ergonomic solutions
through the combination of its patented  keyboarding systems and its proprietary
ergonomic software, to larger commercial and industrial users. Key parameters of
this new marketing approach are the emphasis on risk management and productivity
enhancement,  and the  development  of strategic  marketing  relationships  with
leading ergonomic consultants.

Manufacturing

      The Company performs most of the assembly,  quality  assurance,  packaging
and  shipping of its products in its  Branchburg,  New Jersey,  facilities.  The
Company  owns  all of the  molding  tools  for the  manufacture  of the  plastic
components of its products.  The Company  subcontracts all of its  manufacturing


                                       7
<PAGE>

and  some  of its  assembly  requirements  to  several  companies  within  close
proximity  of the  Company's  facilities.  In the event that any of the  primary
suppliers  became  unable or unwilling to provide such  services to the Company,
while  potentially  causing some delays or disruptions in the flow of materials,
there are other comparable potential suppliers available which could be utilized
in such event.  The Company's molds are insured for  replacement,  although they
are made of steel and  aluminum  and are  therefore  at little  risk for fire or
smoke or water damage.

Competition

      In its hardware business,  the Company competes with established suppliers
of office  furniture and with other  entities.  A majority of the companies with
which the Company  competes  are  substantially  larger,  have more  substantial
histories, backgrounds, experience and records of successful operations, greater
financial,  technical,  marketing and other  resources,  more employees and more
extensive  facilities  than the Company now has, or will have in the foreseeable
future. It is also likely that other competitors will emerge in the near future.
The Company  competes with these entities on the basis of the quality and design
of its patented  products whose  ergonomically  advantageous  features have been
confirmed through independent research.  However, there can be no assurance that
the Company will be successful,  now or in the future, in its efforts to compete
profitably.

      With respect to its ergonomic software business,  the Company is not aware
of any products  which  directly  compete with its newly  introduced  integrated
software  product  suite which is  marketed by the Company  under the trade name
"EMS".  Although there are several competitors to individual  component parts of
EMS, no other product offers a comparable breadth of function and integration in
such areas as worksite evaluation, employee training and workpacing.

Seasonality and Dependency

      The industry  segment in which the Company does  business is not seasonal.
The Company in 1997 derived 39% of its total  business  from one  customer,  and
expects to do a significant  amount of business with this same customer in 1998.
Accordingly,  the loss of this  customer,  unless  replaced with one or more new
accounts of comparable  magnitude,  would have a material  adverse effect on the
results of operations of the Company.

License Agreements

      On  December  1,  1997,  the  Company  entered  into a two  year  Software
Distribution  and Option  Agreement  with  Cornell  Ergonomics  Inc., a Delaware
corporation,  pursuant  to  which  it is  licensed  on an  exclusive  basis,  to
distribute and sub-license a certain  software product known as "ErgoSure" which
the Company intends to market in conjunction  with its own proprietary  software
products.  The Agreement also grants the Company the right to acquire full title
and   ownership  to  that  product,   at  a  later  time  and  under   specified
circumstances.

Agreement to Acquire Rolina Corporation

      In  September  1997 the Company  started  negotiations  to acquire,  for a
combination of cash and equity,  Magnitude  L.L.C.  ("Magnitude or Rolina"),  an
early stage software business which had developed an ergonomic  software product
that was  being  marketed  under the name,  ErgoSentry.  Magnitude  


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<PAGE>

subsequently changed its name to Rolina Corporation. The transaction with Rolina
closed in February  1998.  Steven D. Rudnik,  the  president  and CEO of Rolina,
entered  into an  employment  agreement  with  the  Company  and  was  appointed
president of the Company's software division.

Employees

      As of December 31, 1997,  the Company  employed 25 persons,  of whom three
were  primarily  engaged  in  research  and  development  and  software  related
activities, eight were primarily engaged in sales and marketing, five in general
managerial,  administrative and clerical  functions,  and nine in operations and
assembly and shipping of the Company's  products.  The Company has no collective
bargaining agreements with its employees.


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<PAGE>

ITEM 2:  PROPERTIES

      The  Company  leases  approximately  14,100  square  feet  of  office  and
warehouse space at 50 Tannery Road,  Branchburg,  New Jersey, where it maintains
its executive and administrative  headquarters,  product assembly,  warehousing,
and  distribution  facilities.  The current lease  agreement ends on October 31,
1999,  and calls for  monthly  rental  payments  of  approximately  $6,200  plus
expenses.

ITEM 3: LEGAL PROCEEDINGS

      In November  1996,  Proformix,  Inc.  became the  subject of two  lawsuits
instituted by a shareholder  and members of his family.  One suit alleged breach
of contract and was seeking  damages of $1,250,000.  The other suit alleged that
plaintiff and members of his family have been damaged  because  Proformix,  Inc.
did not act in the best interest of its  shareholders in failing to enter into a
merger with an entity named Regency,  Affiliates.  It is the Company's  position
that both of these suits were without merit.  However, in order to save time and
management  resources the Company agreed to a settlement  with the plaintiffs in
both cases pursuant to which the claims will be dismissed against payment by the
Company of $20,000.

      In February  1997, the Company  instituted a lawsuit in the U.S.  District
Court  for the  Northern  District  of  California,  (Donald  Yu and  Whitestone
Industries,  Inc.  vs.  Alex  Vilnis,  Baltic  Trust  Company  et al;  Case  No.
C97-0484MHP)  against Mr. Alex Vilnis,  Vilnis Laurins, The Baltic Trust Company
and the International  Exchange Co. Ltd. of Latvia.  Both of these companies are
controlled by Mr. Alex Vilnis. The Company is alleging fraud and is also seeking
to obtain  equitable  relief involving the cancellation of 15,940 current common
shares  (equivalent  to  pre-split  2,183,750  shares)  issued to  International
Exchange  Co.  Ltd.  The  Company had sought to enter into a loan and stock sale
financing agreement with Baltic Trust Co. and subsequently  ascertained that the
transaction  involved a scheme  pursuant to which the Company  would not receive
the negotiated  consideration for the issuance of its shares. As a result of the
initiation  of the  lawsuit,  the Company  has been  successful  in  obtaining a
temporary  restraining  order with regard to any possible transfer of the shares
at issue,  and is in the  process of  obtaining a default  judgment  against the
above  defendants.  While the Company  anticipates  that it will be difficult to
obtain and enforce any damages awarded to the Company, it believes that it would
be in a  position  to  successfully  preempt  any  effort by the  defendants  to
transfer or liquidate the shares.

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

      No matters were  submitted to a vote of the security  holders  during this
fiscal period.


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<PAGE>

                                    PART II

ITEM 5:  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         SHAREHOLDER MATTERS

      The Company's  common stock  currently  trades on the Electronic  Bulletin
Board of the OTC market, under the symbol PRFX. Since the Company's  acquisition
of Proformix, Inc. in July 1997, the Common Stock has been listed as follows (no
price notations for prior quarters are listed here because any such share prices
and trading  reflected  activities  which bear no  resemblance  to the Company's
current business):

                                             OTC-BB
                                             ------
1997                                High/Ask         Low/Bid
----                                --------         -------
    Third Quarter ................    $7             $6 1/8
    Fourth Quarter ...............     7              3 1/4

      As of December 31, 1997,  there were  approximately  200  shareholders  of
record for the  Company's  common stock.  The number of record  holders does not
include holders whose securities are held in street name.

      The Company has not declared or paid, nor has it any present  intention to
pay,  any cash  dividends  on its common  stock.  The Company is obliged,  under
certain  circumstances,  to pay cash  dividends  on its  outstanding  cumulative
preferred stock.

Recent Sales of Unregistered Securities

      Pursuant to an Offering  Memorandum  dated  August 14,  1997,  the Company
issued a total of 28,611  shares of common  stock at a purchase  price of $4.50,
and 28,611  warrants for the purchase of common stock  exercisable  at $4.50 per
share,  thereby raising  $128,750 in gross proceeds.  The aforesaid  offering of
securities was made in reliance on the exemption provided by Regulation D of the
Securities Act of 1933, as amended  ("Securities Act"), and Rule 506 promulgated
thereunder.

      During the  fourth  quarter  of 1997 and the first  quarter  of 1998,  the
Company issued the following securities:

      (i) 150,000  shares of common stock to an entity which provides a platform
for advertising the Company's  products.  The Company  received as consideration
advertising  credits equivalent to $900,000 in retail value. The issuance of the
aforesaid  shares was made pursuant to Section 4(2) of the Securities Act, which
exempts transactions not involving a public offering;

      (ii) 50,000 shares of common stock at a purchase  price of $2.00 per share
to an individual.  The Company issued the aforesaid  shares  pursuant to Section
4(2) of the Securities Act;

      (iii)  26,387  shares  of common  stock to  Proformix,  Inc.  shareholders
pursuant to the  Company's  acquisition  of Proformix,  Inc. and its  subsequent
exchange offer to Proformix, Inc. shareholders.  The Company issued these shares
pursuant to Section 4(2) of the Securities Act;


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<PAGE>

      (iv) 100,644  shares of common stock to Royal  Capital,  Inc.  pursuant to
Royal's  exercise of a stock  option at $1.7338 per share.  The stock option was
granted for services  rendered,  and the shares were issued  pursuant to Section
4(2) of the Securities Act;

      (v) 465,500  shares of common  stock issued to foreign  entities,  thereby
raising  $862,000 in gross proceeds,  pursuant to Regulation S of the Securities
Act;


                                       12
<PAGE>

ITEM 6:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

      The  selected  financial  information  presented  below under the captions
"Statement of Operations"  and "Balance  Sheet" for the years ended December 31,
1997 and 1996 is derived from the financial statements of the Company and should
be read in conjunction with the financial statements and notes thereto.

      On July 2, 1997,  the Company then known as  Whitestone  Industries  Inc.,
after divesting itself of substantially all operations, assets, and liabilities,
extended  an offer to all  holders of the common  stock of  Proformix,  Inc.  to
exchange  their shares into newly to be issued common stock of the Company.  The
business  combination  which  took the form of a  reverse  acquisition  has been
accounted  for as a  purchase.  Subsequent  to the  exchange,  the  Company  and
Proformix,  Inc. remain as two separate legal entities whereby  Proformix,  Inc.
operates as a subsidiary of Proformix Systems,  Inc., however, the operations of
the newly combined  entity are comprised  solely of the operations of Proformix,
Inc.  and its  wholly  owned  subsidiary  Corporate  Ergonomic  Solutions,  Inc.
Therefore,  the  discussion  below only pertains to the operations of Proformix,
Inc. for the prior fiscal year and the current fiscal year until the date of the
acquisition of Proformix, Inc. through the Company, and to the operations of the
Company  thereafter.  The past results of operations for Whitestone  Industries,
Inc. are summarized as Discontinued  Operations.  All intercompany  accounts and
transactions have been eliminated in consolidation.

SELECTED FINANCIAL DATA

                                                       December 31,
                                                       ------------
                                                 1997                1996
                                                 ----                ----
Balance Sheet
    Total assets .......................    $   1,152,250        $  1,659,901
    Current liabilities ................        3,429,825           4,346,890
    Long-term debt .....................        1,719,435             717,378
    Working capital (deficit) ..........       (2,806,682)         (3,559,266)
    Shareholders' Equity (deficit) .....    $ (3,997,010)        $ (3,430,885)

                                               For The Year Ended December 31,
                                               ------------------------------
                                                 1997                1996
                                                 ----                ----
Statement of Operations
    Total revenues .....................    $  3,125,009         $  3,284,243
    Operating loss .....................      (1,128,170)            (515,005)
    Loss before extraordinary item .....      (1,507,745)          (1,376,093)
    Net loss ...........................      (1,507,745)          (2,045,806)
    Net loss per common share ..........    $      (0.76)        $      (1.84)
    Number of shares used in computing
    per share data .....................       2,094,724            1,160,864


                                       13
<PAGE>

Results of Operations for the Year Ended December 31, 1997

      For the year ended  December 31, 1997,  the Company had gross  revenues of
$3,125,009  (previous year $3,284,243)  generated  exclusively by its subsidiary
Proformix, Inc. through its keyboarding systems business.

      Gross profits  amounted to $1,673,805  for a 54% gross margin  ($2,279,051
respectively  69% in 1996).  After deducting  selling expenses of $1,181,030 and
general and  administrative  expenses  of  $1,620,945,  the Company  realized an
operating  loss of  $1,128,170  (compared  to an  operating  loss of $515,005 in
1996).  Non-operating  expenses  after  offset  against  $90,977  gain  from the
restructuring of certain liabilities,  totaled $379,575,  including $338,038 net
interest  expense  and  $132,514  loss on  disposal  of  assets,  primarily  for
write-offs of obsolete molds and tooling because of changes in product design in
the course of on-going development efforts.

      During the year, the Company made extraordinary efforts to complete design
enhancements to its existing  products,  and expand its product line in order to
appeal to a wider range of potential customers.  Also, it restructured its sales
force after experiencing  relatively  disappointing  results from its efforts to
expand its  presence  in the office  supplies  market as  represented  by larger
national  distributors  and chain  stores,  to change  towards a more direct and
focused selling approach  directed to larger  commercial users, with the goal of
being able to more  effectively  present its enlarged  product  spectrum to this
audience. In particular, the addition of proprietary ergonomic software products
during the latter  part of the year and at the  beginning  of 1998 (see  Section
"Subsequent Events" in Notes to Financial Statements, attached hereto as Exhibit
A) transformed the Company from a source of mere hardware products to a supplier
of  total  ergonomic   packages   including  risk  management  and  productivity
enhancement  tools  which are novel and  unparalleled  in the  industry,  and of
particular potential interest to the medium and large corporate customer.  These
undertakings  in the  face of very  limited  financial  resources  strained  the
Company's personnel,  financial, and operational resources, and are contributing
reason for the  overall  disappointing  developments  in revenue  growth and net
operating results. However, at the end of the year the Company finds itself well
positioned to aggressively  pursue a much larger and potentially  more rewarding
market than earlier in the year.

      The  decrease in gross  margin from the year before stems from (i) changes
in product  design,  in particular  the  introduction  of the  IntelliTrayJ  and
ErgoRangerJ  products which carry a somewhat lesser margin,  and (ii) changes in
the  customer-,  discount-,  and sales  channel  mix.  The  latter  changes  are
attributed to relatively  permanent shifts in the market place and the manner in
which the Company  responded and are not expected to reverse  themselves.  While
having a dampening  effect on the Company's gross margin they also gave rise, on
the other hand, to parallel developments which decreased selling expenses,  thus
more or less balancing out.  Looking  forward,  however,  management  expects to
again incur increases in selling expenses, as a planned further restructuring to
a more direct marketing strategy,  coupled with more aggressive  advertising and
promotional campaigns, takes hold. These increases in expenses will be justified
by the expected growth in revenues.

      General and administrative expenses increased by 18% over the level of the
preceding year,  primarily due to staff expansions and non-recurring  recruiting
expenses.  A portion of the increase was also attributable to the transformation
of the previously private company Proformix, Inc. into a public entity by way of
the reverse acquisition, and the maintenance of that status since then.

      Continuing  operations  yielded a net loss of  $1,507,745  or $(0.76)  per
share for the year.  This  compares to a net loss of  $2,045,806  or $(1.84) per
share during the previous year.


                                       14
<PAGE>

Liquidity and Capital Resources

      On  June  24,  1997,  the  Company,  Royal  Capital  Inc.  (a  New  Jersey
corporation)  and Proformix,  Inc.,  entered into an acquisition  agreement as a
consequence of which the Company, on July 2, 1997, issued a stock exchange offer
to the  shareholders  of  Proformix,  Inc. In order to enter into the  aforesaid
agreement,  the  Company's  then Board of Directors  authorized a 137:1  reverse
split of its outstanding  shares of common stock, and spun off the shares of its
wholly  owned  subsidiary  Golden  Bear  Entertainment  Corporation  to its then
current shareholders in form of a stock dividend. This distribution  effectively
eliminated all assets and liabilities from the books of the Company prior to the
acquisition of Proformix, Inc. The business combination which took the form of a
reverse  acquisition  has been  accounted  for as a purchase.  Subsequent to the
exchange, the Company and Proformix,  Inc. remain as two separate legal entities
whereby Proformix,  Inc. operates as a subsidiary of Proformix Systems, Inc. The
operations of the newly combined  entity are currently  comprised  solely of the
operations of Proformix, Inc., whereby the parent company's role, i.e. Proformix
Systems, Inc., centers around the undertaking of financing efforts.

      At December 31, 1997, the working capital  deficit  amounted to $2,806,682
as opposed  to a deficit of  $3,559,266  at  December  31,  1996.  The  relative
increase in working  capital was a direct  consequence  of financing  activities
more closely described below, which more than offset the losses incurred.

      These  financing   activities  fall  roughly  into  two  areas:   (1)  the
restructuring by Proformix,  Inc.,  prior to the acquisition by the Company,  of
debt  incurred in a 1995 Private  Placement  Offering by Proformix,  Inc.  which
transferred  in excess of  $1,000,000  in current  notes  payable  to  long-term
liabilities  (see "Notes to Financial  Statements" - Exhibit A) coupled with the
conversion of approximately  $345,000 in accrued interest and other  liabilities
into  equity,  and (2) the  raising by the Company of new capital in the form of
proceeds derived from the private  placement of the Company's common shares with
domestic  investors  under  exemptions  pursuant to Rule 506,  and with  foreign
investors pursuant to Regulation S promulgated under the Securities Act of 1933,
as amended,  totaling $605,750 by December 31, 1997, with an additional $275,000
funds received under  subscriptions for subsequent  equity issuance.  The latter
activities not only  relatively  strengthened  the balance sheet but contributed
needed   liquidity  to  ameliorate  a  severe  cash  shortage   which   hampered
management's progress in speedily repositioning the Company,  throughout a major
part  of the  year.  Instrumental  in  these  capital  raising  efforts  was the
engagement and  cooperation of Royal Capital Inc., with whom the Company entered
into a consulting agreement in May 1997 (see "Business").  These capital raising
efforts will continue into the new year,  and are expected to yield a sufficient
amount of equity and cash for  management  to further  stabilize  the  financial
situation  of  the   Company,   and  complete  its  plans  with  regard  to  the
repositioning  of  Proformix  in  a  technology  company  focused  on  providing
ergonomic solutions for risk curtailment and productivity enhancement.

      Between  January 1, 1998,  and April 15,  1998,  the  Company  received an
aggregate  $2,837,000 in additional  equity capital against  issuance of 788,366
shares, including $2,562,000 in cash and $275,000 representing the conversion of
subscription  prepayments  received  prior to December  31,  1997.  In addition,
250,000 shares were issued for consulting services.  This additional capital and
the cash  flow  generated  by  expected  increases  in sales are  considered  by
management to be sufficient for the Company to meet its current and  anticipated
future obligations.


                                       15
<PAGE>

ITEM 7:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The Company's Financial  Statements and Notes to Financial  Statements are
attached hereto as Exhibit A and incorporated herein by reference.

ITEM 8:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

      On July 26, 1997, the Company dismissed Feldman Radin & Co., P.C. ("FRC"),
the Company's former independent accountant, previously engaged as the principal
accountant to audit the Company's  financial  statements.  On July 26, 1997, the
Company's  Board of Directors  recommended  and approved the hiring of Rosenberg
Rich Baker Berman & Company,  Certified Public  Accountants  ("Rosenberg"),  380
Foothill Road,  Bridgewater,  New Jersey, as the Company's principal independent
accountant.

      The Company is unaware of any disagreements between the Company and FRC on
any  matter  of  accounting   principles  or  practices,   financial   statement
disclosure,  or  auditing  scope or  procedure.  The Company  authorized  FRC to
respond fully to inquiries of Rosenberg  concerning  the subject  matter of each
and every disagreement or event, if any, known by FRC.


                                       16
<PAGE>

                                    PART III

ITEM 9:  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
         PERSONS

The names and ages of all directors and executive officers of the Company are as
follows:

          Name                     Position                Term(s) of Office
          ----                     --------                -----------------

Michael G. Martin, Age 48  President, Chief Executive    July 31, 1997, 
                           Officer                       until January 15, 1998

Michael G. Martin, Age 48  Director, Chairman            July 31, 1997, 
                           of the Board                  until present

Jerry Swon, Age 48         President, Chief Executive    January 15, 1998, 
                           Officer                       until present

Joerg H. Klaube, Age 56    Vice President, Secretary,    July 31, 1997, 
                           Chief Financial Officer       until present

John M. Perry, Age 54      Executive Vice President      July 31, 1997,
                                                         until February 13, 1998

Peter J. Buscetto, Age 50  Director                      October 7, 1997, 
                                                         until present

Paul Chernis, Age 63       Director                      July 31, 1997, 
                                                         until present

      There  are no  family  relationships  among  the  Company's  Officers  and
Directors.

      All Directors of the Company hold office until the next annual  meeting of
the shareholders and until successors have been elected and qualified. Executive
Officers of the Company are  appointed  by the Board of  Directors at the annual
meeting of the Company's  shareholders and hold office for a term of one year or
until they resign or are removed from office.

Resumes:

      Michael G. Martin - Chairman of the Board.  Mr. Martin founded  Proformix,
Inc. in 1991 and has served as President and a Director of that entity since its
inception,  and as President,  CEO, and Director of the Company since July 1997.
Prior to forming Proformix,  Inc., from 1983 to 1987,  Mr.Martin founded and was
President of  CenterCore  Inc.,  where he developed the  CenterCore  Workstation
system for office  furniture.  Between 1987 and Proformix,  Inc.'s  inception in
1991,  Mr.Martin was researching,  developing and testing ergonomic products for
what is now the Company.

      Jerry Swon - President and Chief Executive Officer. Mr. Swon was appointed
President  and Chief  Executive  Officer in January  1998.  Prior to joining the
Company, Mr. Swon was Chairman of Royal Capital,  Inc., a New Jersey corporation
specializing in acquisitions and project financing.  From 1993 to 1996, Mr. Swon
was President and CEO of Concord Energy, Inc., a public oil and gas company.


                                       17
<PAGE>

      Joerg H. Klaube - Chief Financial  Officer.  Mr. Klaube joined  Proformix,
Inc. in December 1994 as Vice President Finance &  Administration.  From 1993 to
1994 he was  Vice  President  Administration  for  Comar  Technologies  Inc.,  a
computer  retail  firm,  and  from  1983 to 1993  Chief  Financial  Officer  for
Unitronix  Corporation,  a public software  design and computer  marketing firm.
Prior to that, Mr. Klaube was employed for 16 years with Siemens Corp., the U.S.
subsidiary  of Siemens AG, where he served most recently as Director of Business
Administration  for its  Telecommunications  Division.  He  graduated  from  the
Banking  School  in  Berlin,  Germany,  and  holds an MBA  degree  from  Rutgers
University.

      John M. Perry -  Executive  Vice  President  in charge of  Operations  for
Proformix,  Inc.,  since  September  1994. Mr. Perry resigned from the Company's
employ effective February 13, 1998.

      Peter J. Buscetto - Director.  Mr. Buscetto was appointed  director of the
Company in October 1997. He is President /CEO of PJB Associates, Inc., a Georgia
consulting and investment  company.  Mr. Buscetto has an extensive marketing and
operational  background that extends over twenty-five years in the retail field.
He was involved  with the  expansion of CompUSA  where he served as Senior VP of
Operations,  CCO, and President of CompUSA East. Prior to that, he spent fifteen
years with the Hechinger Company, a Landover based Home Center company.  He held
various operational  positions with the Hechinger Company, the last of which was
Senior VP  Operations  for Home  Quarters  and a wholly  owned  subsidiary.  PJB
Associates is actively  involved with several  companies both as an investor and
consultant, throughout the US and Europe.

      Paul  Chernis -  Director.  Mr.  Chernis  was  appointed a director of the
Company in July 1997. He has been a partner in the law firm Silverman,  Collura,
Chernis &  Balzano,  P.C.  since  June 1990 and  specializes  in  corporate  and
securities law. His law firm renders legal services to the Company.  Mr. Chernis
is a  graduate  of New York  University  School of Law,  and  prior to  entering
private practice in 1972, he served as Assistant  Regional  Administrator of the
New York Regional Office of the Securities and Exchange Commission.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

      The Company is not subject to the reporting  requirements of Section 16(a)
of the Securities Exchange Act of 1934.


                                       18
<PAGE>

ITEM 10: EXECUTIVE COMPENSATION

      The  following  table  sets  forth  the cash  compensation  and  executive
capacities  for the fiscal year ended  December  31,  1997,  for each  executive
officer  whose  aggregate  cash  remuneration  exceeded  $100,000,  and  for all
executive officers as a group:

Name of individual    Capacity in which served   Aggregate cash compensation (1)
------------------    ------------------------   -------------------------------
Michael G. Martin     President, CEO, Director             $ 108,347  (2)

All executive officers
as a group (3 persons)                                     $ 261,966  (3)

----------
(1)   The  value  of  other  non-cash  compensation  extended  to  or  paid  for
      individuals  named  above  did  not  exceed  10%  of  the  aggregate  cash
      compensation  paid to such individual,  or to all executive  officers as a
      group.

(2)   In September  1997 the Company issued 60,000 shares of its common stock to
      Mr. Martin pursuant to an employment  agreement entered into in July 1997.
      The shares at the time of the grant were assumed to have a de minimis fair
      market value  because of the  Company's  financial  situation,  history of
      losses, and a then thin trading market for its securities.

(3)   In June 1997  Proformix,  Inc.  issued  75,000 shares of its common stock,
      subsequently  exchanged  into  21,629  shares of the  common  stock of the
      Company, to Mr. Perry as additional  compensation.  The shares at the time
      of the grant were assumed to have a de minimis  fair market value  because
      of Proformix, Inc.'s financial situation and history of losses


                                       19
<PAGE>

Stock Options:

      The  following  table sets forth  stock  options  granted  pursuant to the
Company's  1997  Stock  Option  Plan  to  executive  officers,   directors,  and
beneficial  owners of more than 10 percent of any class of equity  securities of
the Company:

--------------------------------------------------------------------------------
              Number of Common    % of Total Options
              Shares Underlying  Granted to Employees   Exercise     Expiration
Name          Options Granted       in Fiscal Year     Price ($/Sh.)    Date
--------------------------------------------------------------------------------

J. Klaube           28,838*              9.2             1.7338        4/30/04
J. Klaube           40,000              12.4             4.50          10/15/04
J. Perry            40,000              12.4             4.50          10/15/04
P. Buscetto         40,000               n/a             2.00          10/15/04
P. Chernis**        40,000               n/a             2.00          10/15/04
                   
      The following  options were granted to a beneficial  owner of more than 10
percent of common equity  securities of the Company,  outside the Company's 1997
Stock Option Plan:

Royal Capital Inc.  192,256*             n/a             1.0428        12/31/97
Royal Capital Inc.  166,622*             n/a             1.7338        5/12/98
Royal Capital Inc.  166,622*             n/a             3.4676        5/12/99
Royal Capital Inc.  166,622*             n/a             5.6175        5/12/00

----------
* Options  granted by Proformix,  Inc. prior to its  acquisition by the Company,
and  subsequently  converted into options for Proformix  Systems,  Inc. stock in
accordance  with the exchange  ratio  stipulated in the Stock  Exchange Offer of
July 2, 1997.

** Mr. Chernis has assigned 2/3 of his options to two of his law partners.

1997 Stock Option Plan:

      The  Company's  1997 Stock Option Plan, as filed with the  Securities  and
Exchange Commission ("Commission") on July 1, 1997 with an Information Statement
pursuant to Section 14(c),  and with a Registration  Statement on Form S-8 filed
with the Commission on September 8, 1997, is hereby incorporated by reference.

Compensation of Directors:

      The Company currently pays no outside directors' fees.


                                       20
<PAGE>

ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

      The  following  table  sets  forth,  as of April 8,  1998,  the record and
beneficial  ownership  of  common  stock  of the  Company  by each  officer  and
director,  all officers and  directors as a group,  and each person known to the
Company  to  own  beneficially,  or of  record,  five  percent  or  more  of the
outstanding shares of the Company:

Title      Name and Address of        Amount and Nature of          Percent
of Class   Beneficial Owner           Beneficial Ownership (1)      of Class
--------   ----------------           ------------------------      --------

Common     Michael G. Martin                660,153                  17.26%
Stock      65 Nicole Avenue              
           Bridgewater, NJ 08807         
                                         
           Jerry Swon                       615,093(2)                14.2%
           5 Kerby Lane                                
           Mendham, NJ 07945                           
                                                       
           Joerg Klaube                      28,838(3)                 **
           4 Claire Drive                              
           Bridgewater, NJ 08807                      
                                         
           John M. Perry                     21,629(4)                 **
           11 Rupells Road               
           Clinton, NJ 08809             
                                         
           Peter Buscetto                      0                       **
                                         
           Paul Chernis                        0                       **
                                         
           Royal Capital Inc.               541,201(5)               12.51%
           75 Claremont Road             
           Bernardsville, NJ 07924       
                                         
           All Directors and Officers     1,304,084                  29.96%
           as a Group (5 persons)     

----------
(1) For  purposes of this table,  a person or group of persons is deemed to have
"beneficial  ownership"  of any shares of Common Stock which such person has the
right to acquire  within 60 days of April 8, 1998. For purposes of computing the
percentage of outstanding shares of Common Stock held by each person or group of
persons named above,  any security  which such person or persons has or have the
right to acquire within such date is deemed to be outstanding  but is not deemed
to be outstanding  for the purpose of computing the percentage  ownership of any
other person.  Except as indicated in the footnote to this table and pursuant to
applicable  community  property laws, the Company  believes based on information
supplied by such persons,  that the persons named in this table have sole voting
and  investment  power with  respect to all  shares of Common  Stock  which they
beneficially own.

(2) Includes  541,201 shares and options owned by  Royal Capital Inc. and 73,892
shares owned by Jane Swon, Mr. Swon's wife.  Jerry Swon is Chairman and his wife
Jane is the principal stockholder of Royal Capital, Inc.

(3) Represents options to purchase a like number of shares.

(4) Mr.  Perry is no longer with the Company.  

(5) Includes options to purchase 499,866 shares.


                                       21
<PAGE>

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      In June 1997, Royal Capital Inc.  received  2,900,000 shares of the common
stock  of  Proformix,  Inc.  for  services  rendered  pursuant  to a  consulting
agreement  dated May 12, 1997.  These  shares were  subsequently  exchanged  for
836,313  shares  of  the  Company's  common  stock  upon   consummation  of  the
acquisition of Proformix, Inc.

      In June 1997,  Anthony W. Schweiger  received 700,000 shares of the common
stock  of  Proformix,  Inc.  for  services  rendered  pursuant  to a  consulting
agreement  dated May 12, 1997.  These  shares were  subsequently  exchanged  for
201,869  shares  of  the  Company's  common  stock  upon   consummation  of  the
acquisition of Proformix, Inc.

      In June 1997, John M. Perry, then Executive Vice President of the Company,
received  75,000  shares of the common stock of  Proformix,  Inc. as  additional
compensation.  These shares were subsequently exchanged for 21,629 shares of the
Company's common stock pursuant to the acquisition of Proformix, Inc.

      In September  1997,  Michael G.  Martin,  Chairman and CEO of the Company,
received  60,000  shares  of the  common  stock of the  Company,  as  additional
remuneration pursuant to his employment agreement dated July 18, 1997.

ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

      The Exhibits that are filed with this report or that are  incorporated  by
reference are set forth in the Exhibit Index attached hereto.

(b)   Reports on Form 8-K

      There were no reports filed on Form 8-K during the quarter ended  December
31, 1997.


                                       22
<PAGE>

                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) of the  Securities  Exchange  Act, the
Registrant has caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.

    PROFORMIX SYSTEMS, INC.

    By:  /s/ Jerry Swon                               Date:       April 15, 1998
         -----------------------------                                          
         Jerry Swon
         President, Chief Executive Officer
         (Principal Executive Officer)

    By:  /s/ Joerg H. Klaube                          Date:       April 15, 1998
         -----------------------------                                          
         Joerg H. Klaube
         Secretary, Chief Financial Officer
         (Principal Financial Officer)

In accordance with the requirements of the Securities  Exchange Act, this Report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

         Name                                                  Date
         ----                                                  ----

         /s/ Michael G. Martin                                    April 15, 1998
         --------------------------                             
         Michael G. Martin, Chairman                      

         /s/ Peter J. Buscetto                                    April 15, 1998
         --------------------------                                
         Peter J. Buscetto, Director                      

         /s/ Paul Chernis                                         April 15, 1998
         --------------------------                      
         Paul Chernis, Director                           


                                       23
<PAGE>

EXHIBIT INDEX

(A)      Financial Statements and Notes to Financial Statements

(2.1)    Agreement dated June 16, 1997, between the Company,  Royal Capital Inc.
         and Donald Yu

(2.2)    Stock  Exchange  Agreement  dated June 24,  1997,  between the Company,
         Royal Capital Inc. and Proformix Inc.

(2.3)    Information  Statement  pursuant  to  Section  14(c) as filed  with the
         Commission on July 1, 1997,  regarding Change of Name, Stock Split, and
         Ratification  of  1997  Stock  Option  Plan,   incorporated  herein  by
         reference.

(2.4)    Stock  Exchange  Offer  dated  July  2,  1997,  by the  Company  to the
         shareholders  of  Proformix,  Inc. and  Statement  regarding  Change in
         Control of registrant and Acquisition or Disposal of Assets, filed with
         the  Commission  on Form 8-K on July 17, 1997,  incorporated  herein by
         reference.

(4)      Designation for Cumulative Preferred Stock filed January 13, 1998, with
         the State of Delaware, and incorporated herein by reference.

(10.1)   Consulting  Agreement  dated May 12, 1997,  between  Proformix Inc. and
         Royal Capital Inc.

(10.2)   Consulting  Agreement  dated May 12, 1997,  between  Proformix Inc. and
         Anthony W.  Schweiger  filed by the Company with the Commission on Form
         S-8 on August 19, 1997, and incorporated herein by reference.

(10.3)   Employment  Agreement  dated July 18,  1997,  between  the  Company and
         Michael G. Martin filed by the Company with the  Commission on Form S-8
         on August 19, 1997, and incorporated herein by reference.

(11)     Statement re: Computation of earnings per share.

(16)     Documentation regarding change in certifying accountant incorporated by
         reference to Form 8-K filed on July 31, 1997, filed by the Company with
         the Commission, and incorporated herein by reference.

(21)     Subsidiaries of the Company:

         (i) Proformix, Inc. is a corporation formed under the laws of the State
         of Delaware and is the name under which it conducts business.

         (ii) Corporate  Ergonomic  Systems Inc. - a wholly owned  subsidiary of
         Proformix,  Inc. - is a corporation  formed under the laws of the State
         of New Jersey and is the name under which it conducts business.

(23)     Independent Auditors' Consent - attached to Exhibit A.

(27)     Financial Data Schedule - attached to Exhibit A.


                                       24
<PAGE>

OTHER DOCUMENTS INCORPORATED HEREIN BY REFERENCE

(a)      The  Company's  Quarterly  Reports on Form 10-QSB for the periods ended
         March 31, 1997, June 30, 1997, and September 30, 1997.

(b)      All other  reports  filed by the Company  pursuant to Section  13(a) or
         15(d) of the  Exchange  Act  since  the  Company's  fiscal  year  ended
         December 31, 1996.


                                       25

<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                 Index to the Consolidated Financial Statements
                                December 31, 1997

                                                                            Page

Independent Auditors' Report............................................      1

Financial Statements

     Consolidated Balance Sheet.........................................      2

     Consolidated Statements of Operations..............................      3

     Consolidated Statement of Stockholders Equity (Deficit)............     4-5

     Consolidated Statements of Cash Flows..............................     6-7

     Notes to the Consolidated Financial Statements.....................    8-20


<PAGE>

                          Independent Auditors' Report

To the Board of Directors and Stockholders of
Proformix Systems, Inc. and Subsidiaries

We have  audited  the  accompanying  consolidated  balance  sheet  of  Proformix
Systems,  Inc.  and  Subsidiaries  as of  December  31,  1997  and  the  related
consolidated statements of operations,  stockholders' equity (deficit), and cash
flows for the two years  ended  December  31,  1997 and  1996.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of Proformix Systems,
Inc. and  Subsidiaries as of December 31, 1997 and the  consolidated  results of
their  operations and their cash flows for the years ended December 31, 1997 and
1996, in conformity with generally accepted accounting principles.

Bridgewater, New Jersey
March 23, 1998
(April 15, 1998, as to SUBSEQUENT EVENTS)


                                                                               1
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                           Consolidated Balance Sheet
                                December 31, 1997

        Assets
Current Assets
     Cash                                                           $     4,546
     Accounts receivable net of allowance
     for doubtful accounts of $27,058                                   314,492
     Inventories                                                        256,501
     Prepaid expenses                                                    47,604
                                                                    -----------
           Total Current Assets                                         623,143
Property, plant and equipment                                           423,125
Other assets                                                            105,982
                                                                    -----------
           Total Assets                                               1,152,250
                                                                    ===========

           Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
     Accounts payable and accrued expenses                            1,363,716
     Trade acceptance payable                                            44,860
     Subscriptions payable                                              275,000
     Dividends payable                                                   27,000
     Loans payable                                                      866,579
     Current maturities of notes payable                                450,000
     Current maturities of long-term debt                               394,081
     Current maturities of capitalized
       lease obligations                                                  8,589
                                                                    -----------
           Total Current Liabilities                                  3,429,825
Notes payable, less current portion                                   1,150,000
Long-term debt, less current portion                                    551,460
Obligations under capital leases,
  excluding current maturities                                           17,975
                                                                    -----------
           Total Liabilities                                          5,149,260
                                                                    -----------
Minority Interest                                                         --
Stockholders' Equity (Deficit)
     Preferred stock Series A, $.01 par value,
       authorized 3,000,000 shares; issued and
       outstanding, 0 shares                                              --
     Cumulative preferred stock, $.0001 par value;
       2,500 shares authorized, 10 shares
       issued and outstanding                                             --
     Common stock, $.0001 par value,
       30,000,000 shares authorized;
       2,898,507 shares issued
       and outstanding                                                      290
     Contributed capital                                                243,000
     Additional paid in capital                                       2,314,856
     Accumulated deficit                                             (6,555,156)
                                                                    -----------
           Total Stockholders' Equity (Deficit)                      (3,997,010)
                                                                    -----------
           Total Liabilities and Stockholders' Equity (Deficit)     $ 1,152,250
                                                                    ===========

See notes to the consolidated financial statements. 


                                                                               2
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                      Consolidated Statements of Operations
                            
                                                       Year Ended December 31,
                                                     ---------------------------
                                                         1997           1996
                                                     -----------    -----------
Net Sales                                            $ 3,125,009    $ 3,284,243
Cost of goods sold                                     1,451,204      1,005,192
                                                     -----------    -----------
Gross Profit                                           1,673,805      2,279,051
Selling, general and administrative
  expenses                                             2,801,975      2,794,056
                                                     -----------    -----------
(Loss) From Operations                                (1,128,170)      (515,005)
                                                     -----------    -----------
Other Income (Expense)
     Miscellaneous income                                 90,977           --
     Obsolete production return reserve                     --         (425,529)
     Lawsuit settlement                                     --          (64,489)
     Interest expense                                   (338,038)      (339,236)
     Loss on disposition of assets                      (132,514)       (31,834)
                                                     -----------    -----------
       Total Other (Expense)                            (379,575)      (861,088)
                                                     -----------    -----------
(Loss)  Before Provision for Income
  Taxes and Extraordinary Item                        (1,507,745)    (1,376,093)
Provision for Income Taxes                                  --             --
                                                     -----------    -----------
(Loss) Before Extraordinary Item                      (1,507,745)    (1,376,093)
                                                     -----------    -----------
Extraordinary Item - abandoned initial
  public offering expenses
  (net of $0 income tax effect)                             --         (669,713)
                                                     -----------    -----------

Net (Loss)                                           $(1,507,745)   $(2,045,806)
                                                     ===========    ===========
Net (Loss) Per Common Share:
     (Loss) Before Extraordinary Item                $      (.76)   $     (1.26)
                                                     ===========    ===========
     Net (Loss)                                      $      (.76)   $     (1.84)
                                                     ===========    ===========
Weighted Average of Common Shares
  Outstanding                                          2,094,724      1,160,864
                                                     ===========    ===========

See notes to the consolidated financial statements. 


                                                                               3
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
            Consolidated Statement of Stockholders' Equity (Deficit)
                     Years Ended December 31, 1997 and 1996
                                                                   
<TABLE>
<CAPTION>
                                          Convertible              Cumulative                          
                                        Preferred Shares        Preferred Shares             Common Stock 
                                      -------------------   -----------------------      -------------------       
                                       Shares     Amount      Shares       Amount          Shares     Amount
                                      --------  ---------   ---------    ----------      ---------    ------   
<S>                    <C>                     <C>                 <C>   <C>             <C>           <C>      
     Balances, January 1, 1996              -- $       --          10    $      --       4,417,655     4,418    
Retirement of 1,000,000 shares for                    
   consideration of $75,000                 --         --          --           --      (1,000,000)   (1,000)
Dividends on cumulative preferred
   shares                                   --         --          --           --            --        --   
Dividends cumulative preferred
   shares waived                            --         --          --           --            --        --   
Net loss, year ended December 31,           --         --          --           --            --        -- 
                                      --------  ---------   ---------    ----------      ---------    ------
     Balances, December 31, 1996            --         --          10           --       3,417,655     3,418
Dividends on cumulative preferred
   shares                                   --         --          --           --            --        --   
Dividends on cumulative preferred
   shares waived                            --         --          --           --            --        --   
Issuances of common stock granted
   for services performed                   --         --          --           --       1,210,000     1,210
Issuances of common stock pursuant
   to stock option exercise per                          
   consulting agreement                     --         --          --           --         701,343       702
Issuance of common stock for
   conversion of accrued interest 
   on private placement notes               --         --          --           --         281,539       282
Issuance of common stock pursuant to
   consulting agreement                     --         --          --           --       2,900,000     2,900
                                      --------  ---------   ---------    ----------      ---------    ------
         Subtotal - Proformix, Inc.         --         --          10         --         8,510,537     8,512
                                      --------  ---------   ---------    ----------      ---------    ------
Exchange of Proformix, Inc.
   preferred stock for preferred                   
   stock of the Company                     --         --         (10)        --            --          --   
Recapitalization pursuant to reverse                  
  acquisition:                                        
Exchange of Proformix, Inc.
  common shares 3.4676 to 1 common                      
  share of the Company                      --         --          --           --      (8,266,757)   (8,267)
Proformix, Inc. common shares
  not tendered and accounted 
  for as a minority interest                --         --          --           --        (243,780)     (245)
                                      --------  ---------   ---------    ----------      ---------    ------
         Subtotal - Proformix, Inc.         --         --          --           --            --        --   
                                      --------  ---------   ---------    ----------      ---------    ------
                                                
<CAPTION>
                                                     Additional                        Stockholders'
                                    Contributed        Paid in        Accumulated         Equity
                                      Capital          Capital          Deficit          (Deficit)
                                   -----------      ------------      ------------     -------------
<S>                                   <C>           <C>               <C>               <C>           
     Balances, January 1, 1996        $ 81,000      $ 1,435,108       $(2,821,605)      $(1,301,079)  
Retirement of 1,000,000 shares for  
   consideration of $75,000               --            (74,000)             --             (75,000)
Dividends on cumulative preferred   
   shares                                 --               --              (9,000)           (9,000)
Dividends cumulative preferred      
shares waived                           81,000             --             (81,000)             --
Net loss, year ended December 31,         --               --          (2,045,806)       (2,045,806)
                                       -------        ---------        ----------        ----------
     Balances, December 31, 1996       162,000        1,361,108        (4,957,411)       (3,430,885)
Dividends on cumulative preferred   
   shares                                 --               --              (9,000)           (9,000)
Dividends on cumulative preferred   
   shares waived                        81,000             --             (81,000)             --
Issuances of common stock granted   
   for services performed                 --             44,790              --              46,000
Issuances of common stock pursuant  
   to stock option exercise per        
   consulting agreement                   --            216,636              --             217,338
Issuance of common stock for        
   conversion of accrued interest 
   on private placement notes             --            281,250              --             281,532
Issuance of common stock pursuant 
   to consulting agreement                --             (2,900)             --                --
                                       -------        ---------        ----------        ----------
         Subtotal - Proformix, Inc.    243,000        1,900,884        (5,047,411)       (2,895,015)                         
                                       -------        ---------        ----------        ----------                         
Exchange of Proformix, Inc.         
   preferred stock for preferred 
   stock of the Company                   --              --                 --                --
Recapitalization pursuant 
  to reverse acquisition:                      
Exchange of Proformix, Inc.    
   common shares 3.4676 to 1 
   common share of the Company            --              8,267              --                --
Proformix, Inc. common shares  
   not tendered and accounted 
   for as a minority interest             --                245              --                --
                                       -------        ---------        ----------        ----------   
         Subtotal - Proformix, Inc.    243,000        1,909,396        (5,047,411)       (2,895,015)
                                       -------        ---------        ----------        ----------   
</TABLE>

See notes to the consolidated financial statements.


                                                                               4
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
            Consolidated Statement of Stockholders' Equity (Deficit)
                     Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>

                                               Convertible              Cumulative                        
                                             Preferred Shares        Preferred Shares              Common Stock                     
                                            -------------------   ---------------------   ----------------------------           
                                             Shares     Amount     Shares      Amount         Shares          Amount
                                            --------  ---------   --------   ----------   -------------   ------------ 
<S>                                         <C>       <C>         <C>        <C>          <C>             <C>   
  Opening common and preferred stock of
     the Company prior to the exchange
     with Proformix, Inc.                        --         --     35,036           --           43,064           4     
  Cancelation of the Company's preferred
     stock                                       --         --    (35,036)          --               --          --     
  Issuance of common stock of the Company
     to Royal Capital, Inc.                      --         --         --           --          313,600          32     
  Fractional shares canceled                     --         --         --           --              (18)         --     
  Exchange of the Company's common stock,
     one common share for 3.4676 common 
     shares of Proformix, Inc.                   --         --         --           --        2,384,000         238     
  Exchange of the Company's preferred
     stock for preferred stock of
     Proformix, Inc.                             --         --         10           --               --          --     
                                            --------  ---------  ---------   ----------   -------------   ---------    
           Subtotal - the Company                --         --         10           --        2,740,646         274     
                                            --------  ---------  ---------   ----------   -------------   ---------    

  Issuance of common stock to President
     pursuant to grant                           --         --         --           --           60,000           6     
  Issuance of common stock to domestic
     private individuals pursuant to 
     an exemption under Rule 506                 --         --         --           --           28,611           3     
  Issuance of common stock to foreign
     investors pursuant to Reg. S.               --         --         --           --           69,250           7     

  Net loss, year ended December 31, 1997         --         --         --           --               --          --     
                                            --------  ---------  ---------   ----------   -------------   ---------    
       Balances, December 31, 1997               --   $     --          10   $      --        2,898,507   $     290   
                                            ========  =========  =========   ==========   =============   =========    

<CAPTION>
                                                                                                     Total
                                                                Additional                       Stockholders
                                               Contributed        Paid in       Accumulated         Equity
                                                 Capital          Capital         Deficit          (Deficit)
                                              -------------    ------------    --------------    -------------
<S>                                                   <C>               <C>              <C>              <C>                   
  Opening common and preferred stock of
     the Company prior to the exchange 
     with Proformix, Inc.                               --              (4)               --               --
  Cancelation of the Company's preferred
     stock                                              --              --                --               --
  Issuance of common stock of the Company
     to Royal Capital, Inc.                             --             (32)               --               --
  Fractional shares canceled                            --              --                --               --
  Exchange of the Company's common stock,
     one common share for 3.4676 common 
     shares of Proformix, Inc.                          --            (238)               --               --
  Exchange of the Company's preferred
     stock for preferred stock of
     Proformix, Inc.                                    --              --                --               --
                                              -------------    ------------    --------------    -------------
           Subtotal - the Company                       --       1,909,122                --               --
                                              -------------    ------------    --------------    -------------
  Issuance of common stock to President
     pursuant to grant                                  --              (6)               --               --
  Issuance of common stock to domestic
     private individuals pursuant 
     to an exemption under 
     Rule 506                                           --         128,747                --          128,750
  Issuance of common stock to foreign
     investors pursuant to Reg. S.                      --         276,993                --          277,000
  Net loss, year ended December 31, 1997                --              --        (1,507,745)      (1,507,745)
                                              -------------    ------------    --------------    -------------
       Balances, December 31, 1997            $    243,000     $ 2,314,856     $  (6,555,156)    $ (3,997,010)
                                              =============    ============    ==============    =============
</TABLE>

See notes to the consolidated financial statements.


                                                                               5
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows

                                                      Year Ended December 31,
                                                    ---------------------------
                                                        1997           1996
                                                    -----------    ------------

Cash Flows From Operating Activities
     Net Income (Loss)                              $(1,507,745)   $(2,045,806)
     Adjustments to Reconcile Net (Loss) to 
       Net Cash
       (Used) by Operating Activities
        Depreciation and amortization                   268,155        109,072
        Loss on disposition of assets                   132,514         31,834
        Bad debt provision                                  370           --
        Forgiveness of debt                              90,977           --
     Decreases (Increases) in Assets
        Accounts receivable                             144,674        801,643
        Inventories                                      11,139         86,011
        Prepaid expenses                                 11,337         83,594
        Other assets                                     (1,127)       214,449
     Increases in Liabilities
        Accounts payable and accrued expenses           170,117        517,556
        Trade acceptance payable                         44,860           --
        Advances payable                                275,000           --
                                                    -----------    ------------
          Net Cash (Used) by Operating Activities      (359,729)      (201,647)
                                                    -----------    ------------
Cash Flows From Investing Activities
        Purchases of equipment and fixtures             (56,372)      (119,762)
                                                    -----------    ------------
          Net Cash (Used) by Investing Activities       (56,372)      (119,762)
                                                    -----------    ------------
Cash Flows From Financing Activities
     Repayment of notes payable                            --          (12,163)
     Proceeds from long-term debt                          --          111,007
     Repayment of long-term debt                       (148,950)      (135,000)
     Repayment of capital lease obligations              (7,660)          --
     Repayment of officer loans payable                 (30,000)          --
     Proceeds from loans payable                         25,000        416,579
     Repayment of loans payable                         (25,000)       (75,307)
     Proceeds from issuance of common stock             605,750           --
                                                    -----------    ------------
         Net Cash Provided by Financing Activities      419,140        305,116
                                                    -----------    ------------
Net increase (decrease) in cash                           3,039        (16,293)
Cash at beginning of period                               1,507         17,800
                                                    -----------    ------------
Cash at end of period                               $     4,546    $     1,507
                                                    ===========    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
       Interest Paid                                $   142,875    $   117,044
                                                    ===========    ============
       Taxes Paid                                   $       425    $      --
                                                    ===========    ============


     See notes to the consolidated financial statements.


                                                                              6
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows

                                                    Year Ended December 31,
                                               -------------------------------
                                                   1997              1996
                                               -----------      --------------
  Schedule of non-cash financing activities
Promissory note issued in connection
with retirement of 1,000,000 Proformix, 
Inc. common shares                             $       --       $       75,000
                                               ===========      ==============
Capitalized lease obligations incurred 
for use of equipment                           $       --       $       25,644
                                               ===========      ==============
In connection  with the issuance of 
common  stock,  281,539 Proformix,  
Inc. shares were issued as  
consideration  for accrued  
interest on $1,175,000 of 
private placement notes                        $   281,539      $           --
                                               ===========      ==============
Promissory  note issued in connection  
with  retirement  of other promissory 
notes and the repayment of a past due 
subordinated debenture                         $   316,849      $           --
                                               ===========      ==============
In connection  with the issuance of
common stock,  75,000  Proformix, Inc. 
shares were issued as consideration 
for past services                              $    46,000      $           --
                                               ===========      ==============
In connection with a stock option  
exercise,  34,676  Proformix, Inc. 
shares were issued in connection 
with a reduction in accrued expenses          $    17,338      $           --
                                              ===========      ==============

     See notes to the consolidated financial statements.


                                                                               7
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                 Notes to the Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Nature of Organization

         Proformix   Systems,   Inc.  (the   "Company"  or    "Proformix")   was
         incorporated  as a Delaware  corporation  on  April 19,  1988 under the
         name  "Fortunistics,   Inc.",   subsequently   changed  to  "Whitestone
         Industries, Inc." (Whitestone).
         
         On  June  16,  1997,  Royal  Capital,  Inc.  ("Royal"),  a  New  Jersey
         Corporation,  entered into an agreement with the Company, then known as
         Whitestone Industries,  Inc., and its then president, whereby Royal (i)
         acquired  100,000 shares of the Company's  preferred  stock held by the
         President and (ii)  acquired the voting proxy of 1,120,000  (pre-split)
         shares of common  stock.  The  consideration  paid to the President was
         $100,000.  Thus,  Royal  obtained a voting  majority  of the  Company's
         capital stock.

         On June 24, 1997, the Company,  Royal,  and Proformix,  Inc., a company
         incorporated in the State of Delaware in October 1991,  entered into an
         acquisition  agreement as a consequence of which the Company on July 2,
         1997,   submitted  a  stock  exchange  offer  to  the  shareholders  of
         Proformix,  Inc. In order to enter into the  aforesaid  agreement,  the
         Company's  then Board of Directors  authorized a 137:1 reverse split of
         its outstanding  shares of common stock, and spun off the shares of its
         wholly owned subsidiary  Golden Bear  Entertainment  Corporation to its
         then  current  shareholders  in the  form  of a  stock  dividend.  This
         distribution effectively eliminated all assets and liabilities from the
         books of the Company prior to the acquisition of Proformix, Inc.

         The exchange offer to the Proformix,  Inc.  shareholders  gave them the
         choice to exchange their shares of the common stock in Proformix,  Inc.
         into  newly to be  issued  common  stock of  Whitestone  at the rate of
         3.4676 shares of Proformix,  Inc. common stock to 1 share of Whitestone
         common stock, and to holders of Proformix  Cumulative  Preferred Stock,
         to exchange their shares into newly to be issued  Cumulative  Preferred
         Stock of  Whitestone  at the rate of 1 to 1. The  exchange  transaction
         resulted   in  the   former   Proformix,   Inc.   shareholders   owning
         approximately 90% of the combined entity.  Holders of approximately 97%
         of Proformix,  Inc.  common stock have agreed to the stock exchange and
         tendered their common shares in exchange for Whitestone  common shares.
         The  remaining  3% of  Proformix,  Inc.  stockholders  hold a  minority
         interest which is valued at $0.

         For  accounting  purposes,  the  acquisition  has  been  treated  as an
         acquisition of Whitestone by Proformix,  Inc. and a recapitalization of
         Proformix,  Inc. The historical  financial  statements prior to July 2,
         1997 are those of Proformix, Inc. Proforma information is not presented
         since the combination is considered a  recapitalization.  Subsequent to
         the exchange,  the Company and Proformix,  Inc.  remain as two separate
         legal entities whereby Proformix,  Inc. operates as a subsidiary of the
         Company,  however,  the  operations  of the newly  combined  entity are
         currently comprised solely of the operations of Proformix, Inc.

         Concurrent with the stock exchange offer,  the Company changed its name
         to Proformix Systems, Inc.

         Proformix designs, manufactures,  markets and distributes ergonomically
         designed  computer  keyboard  trays,  peripheral  items and accessories
         (together,  a "Keyboarding  System")  designed to alleviate and prevent
         certain health problems believed to be related to the use of computers.

         Proformix   Inc.'s  wholly  owned   subsidiary,   Corporate   Ergonomic
         Solutions,  Inc.  (Ergonomics)  was  incorporated  in the  State of New
         Jersey during October 1992.  Ergonomics,  which commenced operations in
         September 1997, was formed  primarily to market  Proformix's  products.
         Prior to that, its operations had not been significant.

                                                                               8
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                 Notes to the Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

     Principles of Consolidation

         The  consolidated   financial    statements  include  the  accounts  of
         Proformix  Systems,  Inc.  and its  subsidiaries,  Proformix,  Inc. and
         Corporate  Ergonomic   Solutions,  Inc.  All  significant  intercompany
         balances and transactions have been eliminated.

     Inventories

         Inventory  consists  of product components and finished goods which are
         stated at the lower  of cost  (determined  by the  first-in,  first out
         method) or market.

     Depreciation and Amortization

         Property,  plant and equipment are recorded at cost. Certain molds were
         being  depreciated  using the units of production  method based upon an
         estimated  useful life of 1,000,000  units.  During  1997,  the company
         changed the estimated  useful life of these molds to 300,000 units. The
         effect of this change in estimate  increased the Company's net loss for
         1997 by $169,073. Depreciation on equipment, furniture and fixtures and
         leasehold improvements is computed on the straight line method over the
         estimated  useful lives of such assets between 5-10 years.  Maintenance
         and repairs are charged to operations as incurred.

         System  design  costs are  amortized on a  straight-line  basis over an
         estimated  useful  life of 10 years.  Organization  costs and  deferred
         finance  charges are  amortized   using the straight line method over a
         period of 4-5 years.

     Securities Issued for Services

         The Company accounts for stock options issued for services by reference
         to the fair market  value of the  Company's  stock on the date of stock
         issuance or option grant. Compensation expense is recorded for the fair
         market value of the stock  issued,  or in the case of options,  for the
         difference  between the stock's  fair market value on the date of grant
         and the option exercise price.


                                                                               9
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                 Notes to the Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

     Securities Issued for Services, Continued

         Effective  January 1, 1996, the Company adopted  Statement of Financial
         Accounting  Standard  (SFAS)  No.  123,   "Accounting  for  Stock-based
         Compensation".  The statement generally suggests, but does not require,
         employee stock-based  compensation  transactions be accounted for based
         on the fair value of the  consideration  received  or the fair value of
         the equity instruments issued,  whichever is more reliably  measurable.
         As permitted by the  statement,  the Company has elected to continue to
         follow the requirements of Accounting  Principles Board Opinion No. 25,
         "Accounting  for Stock  Issued to  Employees",  which does not  require
         compensation to be recorded if the  consideration  to be received is at
         least equal to the fair value at the measurement  date. The adoption of
         SFAS  No.  123  does  not  have a  material  impact  on  the  financial
         statements.

     Deferred Offering Costs

         Deferred   offering   costs   amounting  to  $669,713   consisting   of
         professional  fees had been incurred related to a contemplated  initial
         public  offering  of  Proformix,  Inc.'s  common  stock  and  had  been
         capitalized  during  1995.  At December  31,  1996,  these  capitalized
         deferred costs were expensed as an extraordinary  item since Proformix,
         Inc. abandoned the pursuit of its initial public offering.

     Income Taxes

         The  Company  provides  for income  taxes  based on enacted tax law and
         statutory  tax rates at which items of income and expenses are expected
         to be settled in the  Company's  income tax  return.  Certain  items of
         revenue and expense are  reported  for Federal  income tax  purposes in
         different  periods  than  for  financial  reporting  purposes,  thereby
         resulting in deferred income taxes.  Deferred taxes are also recognized
         for  operating  losses  that are  available  to offset  future  taxable
         income.  Valuation  allowances are established when necessary to reduce
         deferred tax assets to the amount expected to be realized.  The Company
         has  incurred  net  operating   losses  for   financial-reporting   and
         tax-reporting purposes.  Accordingly,  the benefit for income taxes has
         been  offset  entirely  by a  valuation  allowance  against the related
         deferred tax asset for the year ended December 31, 1997.

     Net Loss Per Share

         Net loss per share,  in  accordance  with the  provisions  of Financial
         Accounting  Standards Board No. 128,  "Earnings Per Share", is computed
         by dividing net loss by the weighted average number of shares of Common
         Stock outstanding during the period.  Common Stock equivalents have not
         been   included  in  this   computation   since  the  effect  would  be
         anti-dilutive.

     Revenue Recognition

         Revenue  from  product  sales is  recognized  at the  time of  shipment
         provided  that   the  resulting   receivable   is   deemed  probable of
         collection.

     Use of Estimates

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


                                                                              10
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                 Notes to the Consolidated Financial Statements

CONCENTRATIONS OF BUSINESS AND CREDIT RISK

     The Company maintains cash balances in several financial institutions which
     are insured by the Federal  Deposit  Insurance  Corporation up to $100,000.
     Balances in these  accounts  may, at times,  exceed the  federally  insured
     limits.

     The Company  provides  credit in the normal course of business to customers
     located   throughout  the  U.S.  The  Company   performs  on  going  credit
     evaluations of its customers and maintains allowances for doubtful accounts
     based  on  factors  surrounding  the  credit  risk of  specific  customers,
     historical trends, and other information.

INVENTORIES

     Inventories consisted of the following at December 31, 1997:

               Product components                            $      119,408
               Finished goods                                       137,093
                                                             --------------
                                                             $      256,501
                                                             ==============
ROPERTY, PLANT AND EQUIPMENT

     Property,  plant and  equipment  consist of the  following  at December 31,
     1997:

               Molds                                         $      627,617
               Equipment                                            133,494
               Furniture and fixtures                                50,696
               Leasehold improvements                                16,035
               Transportation equipment                               3,075
                                                            ---------------
                                                                    830,917
               Less accumulated depreciation                        407,792
                                                            ---------------
                                                            $       423,125
                                                            ===============

Depreciation expense charged to operations was $237,189 and $68,434 in 1997  and
1996, respectively.

LOANS PAYABLE
     
Proformix, Inc. had   borrowings  under short term loan agreements with the 
     following terms and conditions at December 31, 1997:

   On April 17, 1997, Proformix,  Inc. issued a $316,849 one-year
      5%  promissory  note to a private  investor in exchange for
      retiring other promissory notes and the repayment of a past
      due subordinated  debenture with the face value of all such
      obligations  to third parties  equaling the 5% note to that
      investor.                                                         $316,849

   Pursuant to five promissory  notes signed  throughout 1995 and
      1996, several investors advanced Proformix, Inc. a total of
      $190,000  payable  upon  demand  with  interest  at 12% per
      annum.                                                             135,000

   On December  4,  1996,  Proformix,  Inc.  repurchased  500,000
      shares  of  its  common  stock  and  retired  same  against
      issuance  of  a  promissory  note  maturing  twelve  months
      thereafter  accruing  interest  at 5%  per  annum  and  due
      December 4, 1997. This note is overdue at December 31, 1997
      and no demand for payment has been made  through  March 23,
      1998.                                                               75,000



                                                                              11
<PAGE>

               Proformix Systems, Inc. and Subsidiaries
            Notes to the Consolidated Financial Statements

LOANS PAYABLE, Continued

   Pursuant to a  promissory  note dated  January  22,  1996,  an
      officer of the Company advanced the sum of $64,730 which is
      due upon  demand and  accruing  interest at the rate of 12%
      per annum.                                                          64,730
    
   Line of  credit  extended  by  Carnegie  Bank on March 4, 1996
      amounting  to $250,000  due March 4, 1997  unless  demanded
      earlier  accruing  interest  at the prime  rate plus 2% per
      annum  with the prime  rate  defined  as quoted by the Wall
      Street Journal.  The agreement requires that the line shall
      be  completely   out  of  debt  for  at  least  one  thirty
      consecutive  day period  annually (a requirement not met by
      Proformix,   Inc.)  and  is   collateralized   by  all  the
      inventory,  accounts receivable,  equipment,  and financial
      instruments of Proformix, Inc. In May 1997, Proformix, Inc.
      obtained an  extension  through  September  30, 1997 and is
      currently negotiating with the bank for a further extension
      of the maturity of this loan. While a verbal  moratorium of
      principal  has  been  agreed  to  by  Proformix,  Inc.  and
      Carnegie Bank, N.A.  pending a review of Proformix,  Inc.'s
      future  ability to pay,  this  obligation  is overdue as of
      December  31,  1997 and no demand for payment has been made
      through March 23, 1998.                                            250,000

   Pursuant to a promissory  note dated  November  17,  1997,  an
      investor, who was a consultant to the Company, advanced the
      Company $25,000.  The note bears interest at 12% and is due
      January  7, 1998.  This note was not paid on the  scheduled
      due  date  but  has  been  extended  pursuant  to a  verbal
      agreement.                                                          25,000
                                                                      ----------
                   Total                                              $  866,579
                                                                      ==========

NOTES PAYABLE

Private Placement Offering

 During February  through June 1995, an underwriter  acting as placement
 agent  offered  on behalf of  Proformix,  Inc.  in a private  placement
 offering a minimum of five (5) and a maximum of twenty (20) units.  The
 first 5 units were  offered on a "best  efforts  all or none" basis and
 the remaining 15 units on a "best efforts"  basis.  Each unit consisted
 of a $100,000,  12%  promissory  note and 10,000  shares of  Proformix,
 Inc.'s common stock.  The promissory  notes were  originally due on the
 earlier of 12 months from their  issuance or the completion of a public
 or private  financing of either debt or equity securities of Proformix,
 Inc. whereby,  if such financing was for less than the principal amount
 of said  notes,  then the  principal  amount of said  notes  were to be
 repaid on a pro-rata basis. These notes were subsequently  extended for
 an additional 6 months,  and further by an additional 9 months.  In May
 1997  a  restructuring   agreement  caused  the   reclassification   of
 $1,150,000 of these notes to long-term debt.  These notes were extended
 and modified to (i) mature by April 30,  2000,  (ii) change from 12% to
 8%, (iii) convert all interest accrued until April 30, 1997 into shares
 of common stock of Proformix,  Inc. and (iv) paying future  interest in
 cash an a quarterly  basis.  One such note,  however,  for $100,000 was
 still being  negotiated for purchase and  restructuring  as of December
 31, 1997. The remaining $450,000 of non-restructured notes are shown in
 current liabilities and are in default as of December 31, 1997.

 The private offering was completed in June 1995 resulting in Proformix,        
 Inc.  selling a total of sixteen (16) units and  receiving net proceeds
 of $1,364,061 after deducting private placement agent's  commission and
 legal fees amounting of $235,939. In connection  therewith,  Proformix,
 Inc.  issued 160,000 shares of its $.001 common stock at par. The total
 amount of such notes outstanding at December 31, 1997 was $1,600,000.


                                                                              12
<PAGE>

               Proformix Systems, Inc. and Subsidiaries
                   Notes to the Financial Statements

LONG-TERM DEBT

Long-term debt as of December 31, 1997 is comprised of the following:

  Pursuant to a promissory note signed on July 28, 1993,  Proformix,
  Inc. borrowed a total of $1,000,000  repayable with interest at 2%
  above the lending  institutions'  prime  lending  rate.  Principal
  payments on such note  commenced on July 31, 1994.  The note had a
  scheduled maturity date of June 30, 1997 and is secured by a first
  security  interest  in  all  tangible  and  intangible  assets  of
  Proformix,  Inc.  Payments of all principal,  interest,  and other
  related expenses have been guaranteed by an officer of the Company
  who  further  collateralized  these  obligations  with a  $300,000
  certificate  of  deposit  and his 100%  interest  in his equity in
  Proformix,  Inc. In addition,  the loan is  guaranteed  by the New
  Jersey Economic Development Authority (NJEDA) which will assume an
  amount  equal to  seventy-five  percent  of the  then  outstanding
  principal amount upon an event of default. The note was originally
  payable in thirty-six  (36)  consecutive  monthly  installments of
  $27,778. On September 26, 1994, Proformix,  Inc. negotiated a nine
  month  principal   moratorium  on  the  note  effective  with  the
  principal  payment that was due and not made on July 31, 1994. The
  principal payments deferred pursuant to the moratorium amounted to
  $250,002  and were due June 30,  1997.  As of December  31,  1995,
  Proformix,  Inc.  was not in  compliance  with  certain  covenants
  related  to the loan  agreement  with  the  lender.  As a  result,
  Proformix,  Inc.  requested and obtained a waiver as to compliance
  with such  covenants  from the lender from June 30,  1994  through
  December 30, 1995.
 
  On March 4, 1996, Proformix,  Inc. refinanced the repayment of its
  long-term debt. The remaining  balance of $663,888 is payable with
  fixed  principal  payments of $15,000 plus interest at Wall Street
  Journal  prime plus 2%.  Payments of all  principal,  interest and
  other related expenses  continue to be guaranteed by an officer of
  the Company who has  collateralized  this obligation with $225,000
  consisting  of  marketable   securities  and/or   certificates  of
  deposit.  Such marketable securities with a value of $242,951 have
  been taken by the lending institution as collateral.  In addition,
  the loan  remains  guaranteed  by the NJEDA  which will  assume an
  amount  equal to  seventy-five  percent  of the  then  outstanding
  principal  amount  upon an event of  default.  In  February  1997,
  Proformix,  Inc. requested and obtained a 3 months of deferment on
  principal payments. In May 1997, Proformix, Inc. requested another
  3 month  deferment for principal  payments as to which it obtained
  approval,  subject to repayment of the remaining  principal at the
  earlier  (a) the  receipt by  Proformix,  Inc. of new equity in an
  amount no less than $1,500,000 or (b) June 30, 1998.                  $663,888
 
  Note to an  officer  of the  Company  issued  in place of  accrued
  royalties,  principal  due April 14, 1998  accruing  interest at a
  rate of 5% per annum.                                                  111,007
 
  Discounted  present  value  of  a  non-interest   bearing  $70,000
  settlement with a former investor of Proformix, Inc. to be paid in
  24 equal monthly  payments  commencing  July 1, 1997.  The imputed
  interest rate used to discount the note is 8% per annum.                49,318
 
  Discounted  present  value  of  a  non-interest  bearing  $176,000
  settlement with former counsel of Proformix, Inc. to be paid in 24
  monthly  payments  commencing   September  1,  1997.  The  imputed
  interest rate used to discount the note is 8% per annum.               121,328
                                                                         -------
             Total                                                       945,541
                 Less current maturities                                 394,081
                                                                         -------
                 Long-term debt, net of current maturities              $551,460
                                                                        ========
 
 
                                                                              13
 <PAGE>

               Proformix Systems, Inc. and Subsidiaries
                   Notes to the Financial Statements

LONG-TERM DEBT, Continued
       
         Total maturities of long-term debt are as follows:

         Year Ending December 31,
                    1998                                    $394,080
                    1999                                     247,573
                    2000                                     180,000
                    2001                                     123,888
                                                            --------
                                                            $945,541
                                                            ========
                                                                                
CAPITALIZED LEASE OBLIGATIONS

       The Company leases office equipment under a non-cancelable  capital lease
       agreement  expiring  January 19, 2001.  The capital lease  obligation has
       been  recorded at the present  value of future  minimum  lease  payments,
       discounted  at a  interest  rate  of  8.643%.  The  capitalized  cost  of
       equipment  at December  31, 1997  amounted to $13,936 net of  accumulated
       depreciation of $9,292.

       The following is a schedule of minimum  lease  payments due under capital
       leases at December 31, 1997:

       Year Ending December 31,
       ------------------------
       1998                                                       $       11,096
       1999                                                                8,876
       2000                                                                8,876
       2001                                                                2,219
                                                                  --------------
       Total minimum capital lease payments                               31,067
       Less amounts representing interest                                  4,503
                                                                  --------------
       Present value of net minimum capital 
         lease payments                                                   26,564
       Less current maturities of capital 
         lease obligations                                                 8,589
                                                                  --------------
       Obligations under capital leases, 
         excluding current maturities                             $       17,975
                                                                  ==============


                                                                              14
<PAGE>

               Proformix Systems, Inc. and Subsidiaries
              Notes to Consolidated Financial Statements

INCOME TAXES

     At December 31, 1997,  The Company has net  operating  loss carry  forwards
     approximating  $6,400,000  which expire between the years 2008 and 2012 and
     are subject to certain annual limitations.
 
     The Company's total deferred tax asset and valuation  allowance at December
     31, 1997 are as follows:
 
              Total deferred tax asset                          $     2,560,000
              Less valuation allowance                               (2,560,000)
                                                                ----------------
              Net deferred tax asset                            $             -
                                                                ================
 
401(k) PLAN
 
     The Company adopted the qualified  Proformix,  Inc.  sponsored  401(k) plan
     covering  substantially  all  full  time  employees  under  which  eligible
     employees may elect to contribute, within statutory limits, a percentage of
     their annual compensation.  The Company matches up to 50% of the employee's
     contribution  which may not exceed 3% of the employee's total  compensation
     for the plan year.  Contributions  to the plan were $17,800 and $15,364 for
     the years ended December 31, 1997 and 1996, respectively.
 
STOCK OPTION PLANS
 
     In April 1996, Proformix,  Inc. adopted its 1996 Stock Incentive Plan ("the
     1996 Plan"). The 1996 Plan provides that certain options granted thereunder
     are  intended to qualify as  "incentive  stock  options"  (ISO)  within the
     meaning of Section 422A of the United States Internal Revenue Code of 1986,
     while non-qualified options may also be granted under the Plan. The initial
     plan and subsequent  amendments provided for authorization of up to 480,000
     shares.  Pursuant to the above  described  stock  exchange offer on July 2,
     1997,  all options  under the 1996 Plan were  converted  into shares of the
     Company at a rate of 3.4676  shares of  Proformix,  Inc.  to 1 share of the
     Company.
 
     In September  1997, the Company adopted its 1997 Stock Incentive Plan ("the
     1997 Plan"). The 1997 Plan provides that certain options granted thereunder
     are  intended to qualify as  "incentive  stock  options"  (ISO)  within the
     meaning of Section 422A of the United States Internal Revenue Code of 1986,
     while non-qualified options may also be granted under the Plan. The initial
     plan and subsequent  amendments provided for the grant of options for up to
     1,000,000 shares.  The purchase price per share of common stock deliverable
     upon  exercise  of each ISO shall not be less than 100% of the fair  market
     value of the common stock on the date such option is granted.  If an ISO is
     issued to an individual  who owns,  at the time of grant,  more than 10% of
     the total  combined  voting  power of all classes of the  Company's  common
     stock, the exercise price of such option shall be at least 110% of the fair
     market  value of the common  stock on the date of grant and the term of the
     option  shall not exceed  five years from the date of grant.  The  purchase
     price of shares subject to non-qualified  stock options shall be determined
     by a committee  established  by the Board of Directors  with the  condition
     that such prices shall not be less than 85% of the fair market value of the
     common stock at the time of grant.
 
 
                                                                              15
 <PAGE>
 
                     Proformix Systems, Inc. and Subsidiaries
                  Notes to the Consolidated Financial Statements
 
 STOCK OPTION PLANS (cont.)
 
                                                  Qualified and Non-Qualified
                                                Shares Under Option December 31,
                                               ---------------------------------
                                                    1997               1996
                                               ---------------    --------------
Outstanding, beginning of year                             --                 --
Granted during the year                               596,144                 --
                                               ---------------    --------------
Exercised during the year at $1.73 per share          (10,000)                --
                                               ---------------    --------------
Outstanding, end of year (at prices ranging  
  from $1.73 to $4.50 per share)                      586,144                 --
                                               ===============    ==============
  Eligible, end of year for exercise (at  
    prices ranging from $1.73 to $4.50 
    per share)                                        283,144                 --
                                               ===============    ==============

At December 31, 1997, the weighted  average  exercise price and weighted average
remaining   contractual   life  is  $3.36  per  share  and  6  years  4  months,
respectively.

At December 31, 1997, there were 552,280 shares reserved for future grants.

WARRANTS
The Company issued common stock purchase warrants as follows:

                          Exercise           
                  No. of  Price                                        Vesting
 Date of Grant    Shares  Per Share        Exercise Term                Rights
---------------   ------  --------- ------------------------------   -----------
                                         Start          Expiration
                                    --------------   ---------------

May 1, 1997       10,000  $4.00     May 1, 1997      April 30, 2000   Upon Issue
August 14, 1997   28,611   4.50     August 14, 1997  August 14, 1999  Upon Issue

At December 31, 1997,  there were 38,611 shares  eligible for exercise at prices
ranging from $4.00 to $4.50 per share.

COMMITMENTS AND CONTINGENCIES

     Lease Agreement

         Proformix,   Inc.  leases  its  administrative  offices  and  warehouse
         pursuant  to a lease  agreement  dated  November  1,  1993.  which  was
         extended on November  1, 1996.  Such lease  expires on October 31, 1999
         and requires monthly payments of $5,974 from May 1, 1994 to October 31,
         1996,  $6,094  from  November 1, 1996 to April 30, 1998 and $6,216 from
         May 1,  1998 to  October  31,  1999.  Ergonomics  leases  office  space
         pursuant  to a lease  agreement  dated  November  1,  1997.  Such lease
         expires  November 1, 1998 and requires  monthly payments of $600. Under
         such lease agreements,  Proformix,  Inc. and Ergonomics are required to
         make future  minimum lease  payments as follows  (including  Proformix,
         Inc.'s operating expenses which approximate $1,750 per month):

  Year Ending December 31,
  ------------------------

       1998                                              $     100,504
       1999                                                     79,660
                                                         -------------
             Total                                       $     180,164
                                                         =============

Included in general and  administrative  expenses is rent expense which amounted
to  $96,544  and  $92,580  for the  years  ended  December  31,  1997 and  1996,
respectively.


                                                                              16
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                 Notes to the Consolidated Financial Statements

COMMITMENTS AND CONTINGENCIES, Continued

Litigation

     In October  1996,  the Company  entered  into an  agreement  with a Latvian
     company to obtain  certain  financing.  The Latvian  company  agreed to buy
     700,000  pre-split shares of the Company's common stock for $500,000 and to
     additionally provide loan financing of $400,000, to be secured by 1,483,750
     pre-split shares of stock owned by certain shareholders.  Subsequent to the
     issue and transfer of the 2,183,750  pre-split shares,  the Company learned
     that the agreed to funds were not provided and in February  1997, a lawsuit
     was  filed  as to  ownership  of the  2,183,750  pre-split  shares  (15,940
     post-split) transferred. Since then, these shares have been enjoined by the
     United  States  District  Court for the  Northern  District  of  California
     pending  resolution.  The Company is not aware of any further  developments
     regarding this matter and expects a favorable outcome.

     Two lawsuits were instituted  against  Proformix,  Inc. by a stockholder of
     Proformix, Inc.

     One suit  asserts that the  stockholder  had a  consulting  agreement  with
     Proformix,  Inc.  pursuant  to which  Proformix,  Inc.  had  agreed  to pay
     $125,000 a year for five years and that  Proformix,  Inc. has  defaulted in
     performance of its obligations.

     The  stockholder  has also  initiated  suit along  with  other  shareholder
     members  of his family  alleging  damages  because  Proformix,  Inc.  acted
     inconsistent   with  the  best   interest   of  its   stockholders.   Other
     miscellaneous claims were asserted in that suit.

     It is  Proformix,  Inc.'s  position  that both of these  suits are  without
     merit, however, a verbal settlement had been reached with the plaintiffs in
     both cases pursuant to which all claims would be dismissed upon  Proformix,
     Inc. making six monthly payments  totaling $20,000  commencing  November 1,
     1997.  This  potential  liability has been  recorded by Proformix,  Inc. No
     payments  have yet been made by Proformix,  Inc.  since it has not received
     from the  plaintiff's  attorneys the necessary  settlement  documents.  The
     settlement may also be contingent upon approval by a bankruptcy court since
     the stockholder has filed a petition of reorganization.

     An additional  suit was bought  against  Proformix,  Inc. by a claimant for
     legal  fees.  The  suit  was  settled  upon the  agreement  by the  Company
     (guaranteed  by an  officer  of the  Company)  to pay a total  of  $176,000
     consisting  of an  initial  payment  of  $20,000  and the  balance in equal
     monthly installments of $6,500 each over a period of 24 months,  commencing
     September 1, 1997. In addition,  the Company and the officer agreed that in
     the event any payment was in default,  they each would consent to judgement
     for the total legal fees  demanded of $238,564  less any  payments  made to
     that point. The Company was not in default as of December 31, 1997.

Licensing Agreement

     On August  29,  1997,  the  Company  signed a letter  of intent to  acquire
     Cornell  Ergonomics  ("Cornell") a software developer of a unique ergonomic
     assessment  tool. This agreement was subsequently  revised,  on December 1,
     1997,  through a Software  Distribution  and Option  Agreement  whereby the
     Company obtained a two-year exclusive license to distribute and sub-license
     a certain software product. The Company also has the exclusive right, under
     certain  circumstances,  to purchase either the assets of Cornell or all of
     the issued and outstanding capital stock of Cornell.


                                                                              17
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                 Notes to the Consolidated Financial Statements

COMMITMENTS AND CONTINGENCIES, Continued

Employment Agreements

     In July of 1997 the  Company  entered  into an  employment  agreement  with
     Proformix,  Inc.'s President, to serve as the Company's President and Chief
     Executive  Officer  for a period  of five  years.  Base  salary  under  the
     agreement is $108,000  per annum with annual  increases  determined  by the
     Board of Directors.  The agreement also calls a first year bonus of 140,000
     shares of the Company's stock, and 200,000 shares in any year thereafter in
     which the Company's after tax net profits exceed $1,000,000 for each of its
     first three full fiscal years during the  employment  term  beginning  with
     calendar year 1998. Eligibility for benefit programs, with the exception of
     any   key    employee    stock    option    plan,    and   a   fully   paid
     medical/hospitalization policy is provided under the agreement. The Company
     will also provide reimbursement of ordinary and necessary business expenses
     and a monthly car allowance. A  noncompetition/nonsolicitation  restriction
     applies  for 36 months  after  termination  of  employment.  The  agreement
     provides for severance compensation equal to three months of base salary if
     employment is terminated by the Company for cause.

     The Vice President and Chief Financial  Officer of Proformix,  Inc. entered
     into an employment agreement on April 15, 1996. The agreement is for a term
     of three  years  expiring  April  14,  1999.  Pursuant  to the terms of the
     agreement,  the officer is to receive an annual salary of $100,000  subject
     to annual  review by the Board of  Directors  with the first such review at
     September 1, 1996, and an annual bonus as determined by the Board. Pursuant
     to the agreement, Proformix, Inc. would pay the premiums on a $400,000 life
     insurance policy for the benefit of individuals  designated by the officer.
     The agreement restricts the officer from competing with Proformix, Inc. for
     a period of two years after the termination of his employment under certain
     circumstances.  The  agreement  provides for severance  compensation  to be
     determined  pursuant  to a formula  established  therein  to be paid to the
     officer  if  his  employment  with  Proformix,  Inc.  is not  renewed  upon
     expiration  of the initial or any renewal term thereof,  his  employment is
     terminated by Proformix,  Inc. other than as permitted by the agreement, or
     any  successor  to  Proformix,  Inc.after  a  change  of  control  or other
     reorganization of Proformix, Inc. fails to assume the agreement.

Consulting Agreements

     On May 12, 1997, the Company's  subsidiary  Proformix,  Inc. entered into a
     financial and  marketing  consulting  agreement  with Royal  Capital,  Inc.
     ("Royal"),  whereby  Royal would act as a  consultant  to the  company.  In
     consideration  of such  services,  Royal was granted,  in addition to other
     consideration,  2.4 million options to purchase common shares of Proformix,
     Inc.  (equal  to  692,122  recapitalized  shares  of  the  Company)  or any
     succeeding  or acquiring  entity at exercise  prices  ranging from $1.04 to
     $5.62 per share of the  Company.  Through  December  31,  1997  options  to
     acquire  192,256  shares of the Company were  exercised at a price of $1.04
     per share. As of March 23, 1998, an aggregate of  approximately  $1,840,000
     in additional equity has been raised pursuant to Royal's efforts.

     In  December  1997 the  Company  started  negotiations  with  Royal for the
     purpose of raising  another  $1,500,000  to  $2,000,000 on terms similar to
     those of the May 1997 agreement.

     On May 12, 1997, the Company's subsidiary  Proformix,  Inc. entered into an
     agreement with a management consultant.  In consideration of such services,
     whereby,  in addition to other  consideration,  the  consultant was awarded
     150,000  stock  options to Proformix  Inc.'s  common stock (equal to 43,258
     shares of the Company of which 33,258  remain  unexercised  at December 31,
     1997).


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<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                 Notes to the Consolidated Financial Statements

RELATED PARTY TRANSACTIONS

  Additional Remuneration

     In June 1997, an Executive  Vice President of the Company  received  75,000
     shares of the common stock of Proformix,  Inc.,  subsequently  converted to
     21,629   shares  of  the  common  stock  of  the  Company,   as  additional
     remuneration.

     In September 1997, an officer of the Company  received 60,000 shares of the
     common stock of the Company,  as additional  remuneration,  pursuant to his
     employment agreement of July 18, 1997.

  Subscriptions Payable

     During July 1997 one of the Company's  board  members  advanced the Company
     $100,000 as evidenced by two 8%  promissory  notes which were  subsequently
     agreed  to be  converted  to common  shares  pursuant  to the  filing of an
     Offering  Memorandum  offering shares pursuant to an exemption  provided by
     Rule 504 of Regulation D promulgated  under the  Securities Act of 1933, as
     amended. The Company, however, decided not to consummate such offering, and
     instead  pursued an offering  under Rule 506 of  Regulation  D  promulgated
     under the Securities Act of 1933, as amended, under which the notes will be
     converted  to  common  shares  and  warrants.  Pending  completion  of such
     transactions  any funds received have been  accounted for as  subscriptions
     payable.  During  November and  December  1997,  one investor  advanced the
     Company  $175,000  which was to be used for the  purchase  of common  stock
     pursuant to the filing of a Private Placement  offering shares to qualified
     investors  pursuant to an exemption  provided by  Regulation S  promulgated
     under the  Securities Act of 1933, as amended.  Pending  completion of such
     transaction,  these funds have been accounted for as subscriptions payable.
     On January  26,  1998,  87,500  shares of common  stock were issued to this
     investor.

MAJOR CUSTOMERS

     For the year ended  December  31, 1997,  the Company had a major  customer,
     sales to which represented approximately 39% of the Company's revenues. The
     Company  had an  accounts  receivable  balance  due from this  customer  of
     $156,710 at  December  31,  1997.  The loss of this  customer  would have a
     materially adverse effect on the Company.

MAJOR SUPPLIERS

     The  Company  owns all of the  molding  tools  for the  manufacture  of the
     plastic  components of its products.  The Company  subcontracts  all of its
     manufacturing  and some of its Company's  assembly  requirements to several
     companies  within close proximity of the Company's  facilities.  Among them
     are one supplier which undertakes all of the injection-molding, and another
     supplier which  manufactures  most of the metal components of the Company's
     product  lines.  In the event that  either of these two  primary  suppliers
     became unable or unwilling to provide such  services to the Company,  while
     potentially  causing some delays or  disruptions  in the flow of materials,
     there are other  comparable  potential  suppliers  available which could be
     utilized in such an event. The Company's molds are insured for replacement,
     although  they are made of steel and aluminum  and are  therefore at little
     risk for fire, smoke or water damage.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     Cash,  accounts  receivable,  accounts  payable,  accrued  expenses,  notes
     payable,  long-term debt and capitalized  lease  obligations:  

     The  Carrying  amount  approximates  fair  value  because of the short term
     maturity of these instruments.


                                                                              19
<PAGE>

                    Proformix Systems, Inc. and Subsidiaries
                 Notes to the Consolidated Financial Statements

FAIR VALUE OF FINANCIAL INSTRUMENTS  (continued)

  Limitations

     Fair  value  estimates  are made at a  specific  point  in  time,  based on
     relevant information and information about the financial instrument.  These
     estimates are subjective in nature and involve uncertainties and matters of
     significant  judgment and therefore  cannot be determined  with  precision.
     Changes in assumptions could significantly affect the estimates.

SUBSEQUENT EVENTS

  Formation of Proformix Software, Inc.

     On January 14,  1998,  Proformix  Systems,  Inc.  formed a new wholly owned
     subsidiary, Proformix Software, Inc. as a Delaware corporation.

  Acquisition of Rolina Corporation

     On February 2, 1998,  Proformix Software,  Inc.,  Proformix Systems,  Inc.,
     Rolina  Corporation (a New Jersey  corporation),  and it's sole shareholder
     entered into an Agreement  and Plan of Merger  whereby  Proformix  Systems,
     Inc.  acquired  100% of the  outstanding  stock of Rolina and merged Rolina
     into Proformix Software, Inc. The only material asset of Rolina were rights
     to  certain   ergonomic   software   packages  known  as  "ErgoSentry"  and
     "Surveyor", and associated customer lists.

  Changes in Key Personnel

     In January 1998, the President of the Company relinquished his position and
     became  Chairman of the Company's Board of Directors.  Simultaneously,  the
     former  Chairman of the Board of Directors of Royal Capital,  Inc.  assumed
     the President and CEO of Proformix Systems, Inc. and its subsidiaries.

     In February 1998, the Company's  Executive Vice President resigned from his
     employment with the Company.

  Acquisition of Vanity Software Publishing Corp.

     On March 6, 1998, the Company  executed a letter of intent,  with Vanity to
     issue  a  tender  offer  for  the  outstanding  stock  of  Vanity  Software
     Publishing  Corporation,  a Canadian  privately held firm.  Vanity owns all
     rights to a certain ergonomic software package known as "ErgoBreak".

  Capital Raising Activities

     Between  January 1, 1998,  and April 15,  1998,  the  Company  received  an
     aggregate  $2,837,000  in additional  equity  capital  against  issuance of
     788,366 shares,  including $2,562,000 in cash and $275,000 representing the
     conversion of subscription prepayments received prior to December 31, 1997.
     In  addition,  250,000  shares were issued for  consulting  services.  This
     additional  capital and the cash flow  generated  by expected  increases in
     sales are considered by management to be sufficient for the Company to meet
     its current and anticipated future obligations.


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