SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-KSB


(Mark One)
|X|  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934
For the fiscal year ended December 31, 1997

                                      OR

| |  TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934
For the transition period from __________ to __________


                           Commission File No. 0-20943


                               INTELLIGROUP, INC.
                 ----------------------------------------------
                 (Name of Small Business Issuer in Its Charter)


       New Jersey                                      11-2880025
---------------------------------           ------------------------------------
(State or Other Jurisdiction                (I.R.S. Employer Identification No.)
of Incorporation or Organization)



517 Route One South, Iselin, New Jersey                               08830
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                              (Zip Code)


                                 (732) 750-1600
                           ---------------------------
                           (Issuer's Telephone Number,
                              Including Area Code)


         Securities registered under Section 12(b) of the Exchange Act:

                                                 Name of Each Exchange
          Title of Each Class                     on which Registered
          -------------------                    ---------------------


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

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

         Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $.01 par value
                          ----------------------------


<PAGE>



     Check  whether  the Issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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:
              -------       -------

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained, to the best of Issuer'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. [X]

     State   Issuer's   revenues  for  fiscal  year  ended  December  31,  1997:
$80,189,000.

     State the aggregate market value of the voting stock held by non-affiliates
of the Issuer: $82,019,915 at February 28, 1998 based on the last sales price on
that date.

     State the number of shares  outstanding of each of the Issuer's  classes of
common stock, as of February 28, 1998:

          Class                    Number of Shares
          -----                    ----------------

Common Stock, $.01 par value          11,993,697

     Transitional Small Business Disclosure Format

         Yes:           No:   X
              -------       -------

     The  following  documents  are  incorporated  by reference  into the Annual
Report on Form 10-KSB:  Portions of the Issuer's  definitive Proxy Statement for
its 1998 Annual Meeting of Shareholders  are incorporated by reference into Part
III of this Report.


<PAGE>


                                TABLE OF CONTENTS
                                -----------------

         Item                                                     Page
         ----                                                     ----

PART I   1.  Business.............................................  1

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

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

         4.  Submission of Matters to a Vote of Security Holders.. 12

PART II  5.  Market for the Company's Common Equity and Related
             Shareholder Matters.................................. 13

         6.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations.................. 14

         7.  Financial Statements................................. 21

         8.  Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure.................. 21

PART III 9.  Directors, Executive Officers, Promoters and Control
             Persons; Compliance with Section 16 (a) of the
             Exchange Act......................................... 22

         10. Executive Compensation............................... 22

         11. Security Ownership of Certain Beneficial Owners
             and Management....................................... 22

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

PART IV  13. Exhibits, List and Reports on Form 8-K............... 23

SIGNATURES   ..................................................... 24

EXHIBIT INDEX..................................................... 26

FINANCIAL STATEMENTS..............................................F-1


                                      -i-

<PAGE>


                                     PART I


Item 1. Business.


General

     Intelligroup,  Inc. ("Intelligroup" or the "Company") provides a wide range
of information technology services,  including  enterprise-wide business process
solutions,  internet  applications  services,  systems  integration  and  custom
software  development  based on  leading  technologies.  The  Company  has grown
rapidly  since 1994 when it made a strategic  decision to diversify its customer
base by expanding the scope of its integration and development services,  and to
utilize  SAP  America,  Inc.  ("SAP")  software as a primary  tool to  implement
enterprise-wide  business process  solutions.  In 1995, the Company became a SAP
National  Implementation  Partner and also began to utilize  Oracle  products to
diversify its service  offerings.  In 1997, the Company  achieved  National Logo
Partner status with SAP. The Company  believes that such status and  designation
will result in direct referrals and enhanced industry recognition. In July 1997,
the Company achieved  AcceleratedSAP  Partner Status with SAP by meeting certain
performance  criteria  established by SAP. The Company's  current agreement with
SAP expires on December 31, 1998 and provides for an automatic  one year renewal
period unless either party  provides at least six weeks prior written  notice of
its  intention  not  to  renew.  This  agreement  contains  no  minimum  revenue
requirements or cost sharing  arrangements  and does not provide for commissions
or  royalties  to either  party.  Also in 1997,  the  Company  began to  provide
implementation  services to PeopleSoft and Baan  licensees to further  diversify
its service  offerings.  In July 1997, the Company was awarded an implementation
partnership status by PeopleSoft.  In September 1997, the Company was awarded an
international  consulting  partnership  status  by Baan.  The  Company's  custom
software  development  services  are  enhanced  by its access to  qualified  and
experienced  programmers at its Advanced  Development  Center ("ADC") located in
India and  connected to the Company's  headquarters  in the United States and to
certain  customer sites by dedicated,  high speed satellite  links.  The Company
provides  its  services  directly  to end-user  organizations  or as a member of
consulting teams assembled by other information technology consulting firms. The
number of  customers  billed by the Company has grown  substantially  from three
customers in 1993 to 167 customers in 1997. The Company's  customers are Fortune
1000 and  other  large and  mid-sized  companies,  as well as other  information
technology  consulting firms, and include AT&T,  Bristol-Myers  Squibb,  Ernst &
Young LLP, IBM, ICS and Price Waterhouse LLP.

     The Company was  incorporated  in New Jersey in October 1987 under the name
Intellicorp,   Inc.  to  provide   systems   integration   and  custom  software
development. The Company's name was changed to Intelligroup,  Inc. in July 1992.
In March  1994,  the  Company  acquired  Oxford  Systems  Inc.  ("Oxford")  in a
pooling-of-interests  transaction.  On December 31, 1996, Oxford was merged into
the  Company  and  ceased  to  exist as an  independent  entity.  The  Company's
executive offices are located at 517 Route One South,  Iselin,  New Jersey 08830
and its telephone number is (732) 750-1600.


                                      -1-
<PAGE>

     "Intelligroup,"  "4SIGHT,"  "4SIGHTplus" and the Company's logo are service
marks and "4SIGHT Development  Manager" and "OIM" are trademarks of the Company.
All other trade names,  trademarks  or service marks  referenced  herein are the
property of their respective owners and are not the property of the Company.

     This Form 10-KSB contains forward-looking  statements within the meaning of
Section 21E of the  Securities  Exchange  Act of 1934,  as  amended,  including,
without  limitation,  statements  regarding the Company's  intention to shift to
higher margin turnkey  management  assignments and more complex  projects and to
utilize its proprietary  implementation  methodology in an increasing  number of
projects.  Such  forward-looking  statements  include  risks and  uncertainties,
including,  but not limited to: (i) the substantial variability of the Company's
quarterly  operating  results caused by a variety of factors,  many of which are
not within the Company's  control,  including (a) seasonal  patterns of hardware
and  software  capital  spending  by  customers,   (b)  information   technology
outsourcing trends, (c) the timing, size and stage of projects,  (d) new service
introductions by the Company or its competitors, (e) levels of market acceptance
for the Company's  services or (f) the hiring of additional  staff; (ii) changes
in the Company's  billing and employee  utilization  rates;  (iii) the Company's
ability to manage its growth  effectively  which will require the Company (a) to
continue developing and improving its operational,  financial and other internal
systems,  as well as its  business  development  capabilities,  (b) to  attract,
train,  retain,  motivate and manage its employees,  (c) to continue to maintain
high rates of employee  utilization  at  profitable  billing  rates and,  (d) to
maintain  project  quality,  particularly if the size and scope of the Company's
projects increase;  (iv) the Company's ability to maintain an effective internal
control  structure;  (v) the  Company's  limited  operating  history  within its
current  line  of  business;   (vi)  the  Company's   reliance  on  a  continued
relationship with SAP America and the Company's present status as a SAP National
Implementation  Partner and its status as a SAP National Logo Partner; (vii) the
Company's  substantial reliance on key customers and large projects;  (viii) the
highly  competitive nature of the markets for the Company's  services;  (ix) the
Company's ability to successfully  address the continuing changes in information
technology,  evolving industry  standards and changing  customer  objectives and
preferences;  (x) the Company's  reliance on the  continued  services of its key
executive officers and leading technical  personnel;  (xi) the Company's ability
to attract and retain a  sufficient  number of highly  skilled  employees in the
future;  (xii) uncertainties  resulting from pending litigation matters and from
certain pending and potential  administrative and regulatory immigration and tax
law  matters;  and (xiii) the  Company's  ability  to protect  its  intellectual
property  rights.  The Company's  actual results may differ  materially from the
results discussed in such forward-looking statements.

Industry Background

     Many  large  and  mid-sized  businesses  face a rapidly  changing  business
environment,  intense global competition and accelerating  technological change.
To remain competitive,  such businesses  continually seek to improve the quality
of products and services,  lower costs, reduce cycle times and increase value to
customers.  Businesses  are  implementing  and  utilizing  advanced  information
technology  solutions that enable them to redesign  their business  processes in
such areas as product development,  service delivery,  manufacturing,  sales and
human resources. The


                                      -2-
<PAGE>

ability of an organization to integrate and deploy redesigned business processes
and related information  technologies timely and cost effectively is critical in
the changing business environment.

     Concurrently,   businesses  are  migrating  from  legacy  systems   running
proprietary  software to open systems and client/server  architectures  based on
personal  computers,  local area network/wide area network  ("LAN/WAN"),  shared
databases and packaged software  applications.  Such client/server systems, when
developed and implemented appropriately,  enable the creation and utilization of
more functional and flexible  applications which are critical to the competitive
needs  of  businesses.  Organizations  often  acquire  packaged  enterprise-wide
business  software  applications  for  client/server  systems,  including  those
offered  by  leading  vendors,  such as SAP,  Oracle,  PeopleSoft  or Baan,  and
implement or customize these  applications  to match their needs.  Organizations
also may develop customized  software  applications  designed for their specific
business needs.

     Despite the  advantages  of  client/server  systems,  the  complex  task of
developing and  implementing  enterprise-wide,  mission-critical,  client/server
solutions presents significant  challenges for most organizations and often is a
time  consuming and costly  undertaking.  Implementing  client/server  solutions
typically   requires   significant   allocation  of  organizational   resources.
Information  technology  managers  must  integrate  and manage open  systems and
distributed computing  environments  consisting of multiple computing platforms,
operating systems,  databases and networking  protocols,  and implement packaged
enterprise software applications to support business objectives.  Companies also
must continually keep pace with new technological  developments which can render
internal  information   technology  skills  outmoded.   Professionals  with  the
requisite technology skills often are in short supply and many organizations are
reluctant to expand their internal information systems department for particular
projects. At the same time, external economic factors encourage organizations to
focus  on their  core  competencies  and trim  work  forces  in the  information
technology  management area.  Accordingly,  organizations  often lack sufficient
technical  resources  necessary  to  design,   develop  and  implement  emerging
information technology solutions on a timely basis.

     To support their information technology needs, many businesses increasingly
engage experienced  outside specialists to develop and implement  solutions,  in
shorter timeframes and at lower costs, while reducing implementation risks. As a
result, demand for information technology services has grown significantly.

The Intelligroup Solution

     Intelligroup  provides  information  technology  services  to  develop  and
implement  cost-effective  client/server business solutions on a timely basis by
combining its expertise in a wide range of technologies  and business  processes
with its  proprietary  implementation  methodology and  development  tools.  The
Company believes it offers the following advantages:

     Expertise in a Wide Range of Technologies:  The Company's  consultants have
expertise with SAP, Oracle, PeopleSoft and Baan products and with a wide variety
of   leading   computing   technologies,   including   internet,   client/server
architectures, object-oriented technologies, CASE,


                                      -3-
<PAGE>

distributed  database  management  systems,   micro-to-mainframe   connectivity,
Lan/Wan  and  telecommunications  technologies.  Since  many  of  the  Company's
customers have invested in a variety of technologies,  including legacy systems,
the Company also develops solutions for these environments.

     Accelerated   Implementation  Methodology  and  Toolset:  The  Company  has
developed  a  proprietary  implementation  methodology,  4SIGHT,  as  well  as a
software-based   implementation  toolset,  4SIGHTplus,  which  are  designed  to
minimize  the time  required  to  develop  and  implement  SAP,  Oracle and Baan
solutions for its customers. 4SIGHT and 4SIGHTplus are designed to be technology
independent  and  modular  so  that  they  may  be  utilized  by  the  Company's
consultants and project managers in other packaged  applications  development or
software customization projects.

     Value-Oriented  Implementation:  The Company provides  experienced  project
managers  and  consultants  to its  customers.  The  Company  believes  that its
personnel are effective because of their industry experience.  In addition,  the
Company has the ability to develop and implement  business solutions through its
offshore  ADC in  India,  which  gives  the  Company  access  to  qualified  and
experienced programmers at a reduced labor cost.

     Customer-Driven  Approach:  The Company's  project managers and consultants
maintain  on-going  communication and close interaction with customers to ensure
that  they are  involved  in all  facets  of a  project  and that the  solutions
designed and implemented by the Company meet the customer's needs. The Company's
goal is to provide  training to its  customers  during a project to achieve high
levels  of  self-sufficiency   among  its  customers'  end  users  and  internal
information  technology  personnel.  The  Company  believes  that its ability to
deliver the requisite  knowledge  base to its customers is critical to fostering
long-term relationships with, and generating referrals from, existing customers.

Intelligroup Services

     Intelligroup  provides a wide  range of  information  technology  services,
including (i)  enterprise-wide  business process solutions utilizing SAP R/3, as
well as Oracle,  PeopleSoft and Baan products, all of which are leading software
applications;  (ii) internet application services; and (iii) systems integration
and  custom  software  development  solutions  in a wide  variety  of  computing
environments   utilizing   leading   technologies,    including    client/server
architectures,   object-oriented   technologies,   CASE,   distributed  database
management systems, LAN/WAN and telecommunications  technologies.  The Company's
services   range  from  providing   customers   with  a  single   consultant  to
multi-personnel  full-scale projects. The Company provides these services to its
customers  primarily on a time and  materials  basis and pursuant to  agreements
which are terminable upon relatively short notice. The Company's custom software
development  services are enhanced by its access to  qualified  and  experienced
programmers at the ADC and connected to the Company's headquarters in the United
States and to certain customer sites by dedicated, high speed satellite links.



                                      -4-
<PAGE>

Enterprise-Wide Business Process Solutions

     The Company  designs,  develops,  integrates and  implements  sophisticated
business process solutions utilizing SAP R/3, as well as Oracle,  PeopleSoft and
Baan  products,  and  incorporating  best business  practices  and methods.  The
Company  builds  business  solutions  for  its  customers  by  focusing  on each
customer's business objectives and by providing business process re-engineering,
information systems strategic planning, technology implementation, comprehensive
training and  organizational  change management  services.  The Company believes
that its expertise in a wide variety of  technologies,  coupled with its ability
to   provide   comprehensive   business   process   solutions   and  timely  and
cost-effective  implementation of new business systems, enables its customers to
achieve  substantial  improvements  in  efficiency  and  effectiveness  in their
businesses and fosters long-term customer relationships.

     4SIGHT  Development  Manager:  The Company utilizes its 4SIGHT  Development
Manager,  formerly  known as  "On-line  Project  Management  System," to monitor
enterprise-wide  business process solutions  development  projects.  The Company
designed  4SIGHT  Development  Manager as a SAP  subsystem  developed in R/3 and
installable  on customers'  SAP systems.  4SIGHT  Development  Manager  provides
real-time  information  relating to: the current  stage of  development  of each
program;  the  number of  man-hours  spent at each stage of  development;  total
man-hours spent on development  during any interval of time;  programs developed
by each  programmer;  analysis  of time spent on the  development  project;  and
technical information,  including source code,  documentation and tables used in
the system. The Company believes that 4SIGHT  Development  Manager also shortens
the turn-around  time for program  development as it streamlines the information
flow between the Company's offices and customer sites.

     Accelerated  Implementation  Methodology and Software-Based  Implementation
Toolset: As a result of its experience in implementing SAP software, the Company
has developed a proprietary  methodology,  4SIGHT,  for implementing  enterprise
business software applications and 4SIGHTplus,  a software-based  implementation
toolset.  4SIGHT and  4SIGHTplus,  initially  used by the  Company  in  projects
implementing  SAP R/3,  are designed to be portable to other  packaged  software
applications  and to be adaptable to the scope of a particular  project.  4SIGHT
and  4SIGHTplus  have been  adapted  for  Oracle and Baan  implementations.  The
Company   believes  that  the  use  of  4SIGHT  and  4SIGHTplus   throughout  an
implementation  project may enable its customers to realize  significant savings
in time and resources.

Internet Application Services

     In August 1997, the Company announced its internet application  services, a
comprehensive set of internet  consulting  approaches designed to help companies
develop  innovative ways to reach their customers,  suppliers and target markets
by  leveraging  the power of the  internet  and  corporate  intranets.  Internet
application  services  include an Internet  Strategy  for  Enterprise,  Internet
Application Architecture and Internet Application Development.


                                      -5-
<PAGE>


     Internet  Strategy for Enterprise:  Internet  Strategy for Enterprise helps
companies  define  their   internet/corporate   intranet   strategy,   including
infrastructure, security, encryption, proof-of-concept,  application hosting and
deployment, training, change management and technology evaluation.

     Internet  Application   Architecture:   Internet  Application  Architecture
enables companies to identify their Internet application needs and determine the
most  appropriate  and  cost-effective  technologies  in  which  to make  robust
application development on the Internet possible.

     Internet Application Development:  Internet Application Development assists
companies in implementing their internet/corporate intranet strategy and rapidly
developing and deploying their Internet applications.

Systems Integration and Custom Software Development

     The Company  provides a broad range of systems  integration  and customized
application solutions to customers in a wide variety of industries.  The Company
is engaged by customers to undertake  feasibility studies,  systems engineering,
custom software development and tailoring, migration strategies, systems design,
development,  testing,  integration,  implementation,  training and support in a
wide variety of computing environments. The Company, in providing such services,
utilizes leading technologies,  including internet, client/server architectures,
object-oriented  technologies,  CASE,  distributed  database management systems,
LAN/WAN and telecommunications technologies.

Advanced Development Center

     The Company provides cost-effective, timely custom software development and
tailoring in the United  States,  at customer sites and through the ADC. The ADC
is connected to the Company's  headquarters  in the United States and to certain
customer sites by dedicated, high speed satellite links. The ADC is staffed with
qualified and experienced  programmers,  including those with SAP  configuration
expertise and SAP's ABAP/4 programming capability. Additionally, the programmers
at the ADC have performed work with Baan as well as internet custom programming.
The  Company  utilizes  the  programmers  at the ADC,  in  conjunction  with its
consultants  in the United  States  who are on site at  customer  locations,  to
provide its customers with savings in development and  implementation  costs and
time to project completion.  All SAP and Baan development projects undertaken by
the ADC are  monitored  by the  Company's  4SIGHT  Development  Manager.  4SIGHT
Development  Manager also minimizes the turn-around time for program development
as it streamlines the information  flow between  customer sites and the ADC. The
Company  has  utilized  the  ADC to  provide  similar  development  services  to
customers  that  utilize  software  applications  other than SAP  software.  The
Company   owns  99.8%  of  the  shares  of   Intelligroup   Asia   Private  Ltd.
("Intelligroup  Asia") which operates the ADC. The remaining shares are expected
to be  transferred  to the  Company  by  the  founders  later  this  year.  Upon
consummation  of  such  transfer,  Intelligroup  Asia  will  be  a  wholly-owned
subsidiary of the Company.


                                      -6-
<PAGE>

Sales and Marketing

     The Company  historically has generated new sales leads from referrals from
existing  customers,  and  from  introductions  to  potential  customers  by the
Company's  alliance  partners,  which often need to recommend  qualified systems
integrators to implement their software products.  In addition,  the Company has
been  introduced to customers by certain of its  competitors,  such as "Big Six"
accounting firms, which at times require the Company's  expertise and ability to
deliver qualified  personnel for complex projects.  In January 1997, the Company
began to dedicate an increased  level of  resources  to more  focused  sales and
marketing  efforts.  The Company will continue to market to potential  customers
with  demonstrated  needs  for  the  Company's  expertise  in  core  information
technologies  and  solutions  such as SAP. To implement  this plan,  the Company
intends to continue to expand its dedicated  sales and marketing force by hiring
several individuals with experience in the industry sectors in which the Company
has prior experience.

     Among  its sales and  marketing  efforts,  the  Company's  sales  force has
presented the Company's expertise at SAPPHIRE, the annual SAP conference for SAP
service  providers and  end-users,  and uses direct  marketing  techniques.  The
Company intends to increase its  participation in  industry-recognized  programs
and trade shows. Most importantly, however, the Company believes that satisfying
customer  expectations  within budgets and time schedules is critical to gaining
repeat business and obtaining new business from referrals.  The Company believes
that it has consistently met customer  expectations  with respect to budgets and
time schedules.

     As of December 31, 1997, the Company's  sales and marketing group consisted
of 25  employees  in the United  States,  six for the  geographical  area of the
United Kingdom and Denmark, and two for the geographical area of New Zealand and
Australia.  The Company  markets and  delivers  its  services to customers on an
international basis through its network of offices.  The Company's  headquarters
in New Jersey  and its  branch  offices  in Foster  City,  California;  Atlanta,
Georgia; Chicago, Illinois; Boston,  Massachusetts;  and Dallas, Texas serve the
United States market.  Intelligroup  Asia serves as the Company's sales agent in
Asia and the  Middle  East.  In  addition,  the  Company  also  has  established
operations in New Zealand,  Denmark and Australia, and currently has information
technology consultants on-site at customer locations. The Company recently added
sales and marketing  capabilities in New Zealand.  In November 1996, the Company
commenced  operations  in  Singapore  with  the  incorporation  of  Intelligroup
Singapore Private Ltd. Each of the Company and Rajkumar Koneru,  President of US
Operations, Chief Executive Officer and Director of the Company, own 50% of such
company.

     The  Company's  services  require a  substantial  financial  commitment  by
customers and,  therefore,  typically involve a long sales cycle. Once a lead is
generated,  the Company endeavors to understand quickly the potential customer's
business needs and objectives in order to develop the  appropriate  solution and
bid  accordingly.  The Company's  project  managers are involved  throughout the
sales cycle to ensure mutual understanding of customer goals,  including time to
completion,  and technological  requirements.  Sales cycles for complex business
solutions projects


                                      -7-
<PAGE>

typically range from one to six months from the time the Company initially meets
with a  prospective  customer  until the customer  decides  whether to authorize
commencement of an engagement.

Customers

     The Company provides its services  directly to Fortune 1000 and other large
and mid-sized companies, many of which have information-intensive, multinational
operations,  or as a member of a consulting team assembled by other  information
technology  consultants,  such as "Big  Six"  accounting  firms.  The  number of
customers billed by the Company has grown  substantially from three customers in
1993 to 167 customers in the year ended December 31, 1997.

     The  Company's  ten largest  customers  accounted  for,  in the  aggregate,
approximately  56%,  66%  and  54%  of its  revenue  in  1995,  1996  and  1997,
respectively. In 1995, Ernst & Young LLP and Price Waterhouse LLP each accounted
for more than 10% of revenue.  During 1996 and 1997,  Price  Waterhouse  LLP and
Bristol-Myers Squibb each accounted for more than 10% of revenue. Currently, the
Company is engaged in 12 projects for Price  Waterhouse  LLP. In 1995,  1996 and
1997, 50%, 44% and 38%, respectively,  of the Company's revenue was generated by
serving  as a member  of  consulting  teams  assembled  by  leading  information
technology  consulting  firms retained by  organizations  to manage  projects to
provide enterprise-wide business process solutions.

     Although  the Company has  contracts  with many of its large  customers  to
provide its services,  in general such contracts are terminable  upon relatively
short notice,  typically not more than 30 days.  There can be no assurance  that
the Company's  customers  will continue to enter into contracts with the Company
or that existing contracts will not be terminated.

     Many of the Company's engagements involve projects that are critical to the
operations  of its  customers'  businesses  and  provide  benefits  that  may be
difficult to quantify.  The Company's  failure or inability to meet a customer's
expectations  in the  performance  of its  services  could  result in a material
adverse  change to the customer's  operations  giving rise to claims for damages
against the Company or causing  damage to the  Company's  reputation,  adversely
affecting  its  business,  financial  condition  and results of  operations.  In
addition,  certain of the Company's  agreements  with its customers  require the
Company to indemnify the customer for damages arising from services provided to,
or on  behalf  of,  such  customer.  Under  certain  of the  Company's  customer
contracts,  the Company  warrants  that it will repair  errors or defects in its
deliverables  without  additional  charge to the  customer.  The Company has not
experienced,  to date, any material claims against such warranties.  The Company
recently  purchased and maintains  errors and omissions  insurance to insure the
Company for damages and expenses  incurred in connection with alleged  negligent
acts, errors or omissions.

Competition

     The markets for the Company's services are highly competitive.  The Company
believes that its principal competitors include the internal information systems
groups of its prospective


                                      -8-
<PAGE>

customers,  as well as consulting and software integration firms,  including the
"Big Six" accounting firms, IBM Global Services,  Cambridge Technology Partners,
SHL  Systemhouse  (a  subsidiary  of MCI),  Computer  Sciences  Corporation  and
software  applications vendors, some of which are also customers of the Company.
In  addition,  the Company  competes  with smaller  companies  such as Plaut and
Spearhead Systems  Consultants (US) Ltd. Many of the Company's  competitors have
longer  operating  histories,  possess greater industry and name recognition and
have significantly greater financial, technical and marketing resources than the
Company.  In  addition,  there are  relatively  low  barriers  to entry into the
Company's  markets and the  Company has faced,  and expects to continue to face,
additional competition from new entrants into its markets.

     The Company believes that the principal  competitive factors in its markets
include  quality  of  service  and   deliverables,   speed  of  development  and
implementation,  price, project management capability and technical and business
expertise. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside its control, including the ability of
its competitors to hire,  retain and motivate  project managers and other senior
technical staff, the development by others of services that are competitive with
the  Company's  services and the extent of its  competitors'  responsiveness  to
customer needs.

     The  Company  believes  that it  competes  based on its  expertise  in SAP,
Oracle,  PeopleSoft and Baan products and a wide variety of technologies.  There
can be no  assurance  that  the  Company  will be able to  continue  to  compete
successfully with existing and new competitors.

Employees

     As of December 31, 1997, the Company employed 772 full-time  employees,  of
whom 668 were engaged as consultants or as software developers,  31 were engaged
in sales and  marketing,  and 73 were  engaged in finance,  administration,  and
management.  Of the total  number of  employees,  529 were  based in the  United
States,  178 were based in India, one was based in Australia,  two were based in
Denmark,  23 were based in New Zealand,  39 were based in the United Kingdom and
no  employees  were based in  Singapore.  In  addition,  the Company  engaged 40
independent contractors to perform information technology services.

     None of the  Company's  employees  is  covered by a  collective  bargaining
agreement. Substantially all of the Company's employees have executed employment
agreements  containing  non-competition,   non-disclosure  and  non-solicitation
clauses.  In addition,  the Company requires that all new employees execute such
agreements  as a condition of employment  by the Company.  The Company  believes
that it has been successful in attracting and retaining  skilled and experienced
personnel.  There is increasing  competition for experienced sales and marketing
personnel and technical professionals.  The Company's future success will depend
in part on its ability to continue to attract, retain, train and motivate highly
qualified  personnel.  The Company considers  relations with its employees to be
good.



                                      -9-
<PAGE>

Intellectual Property Rights

     The  Company's  success  is  dependent,   in  part,  upon  its  proprietary
accelerated implementation methodology, development tools and other intellectual
property  rights.  The  Company  relies  upon a  combination  of  trade  secret,
non-disclosure and other contractual  arrangements,  and copyright and trademark
laws,  to protect its  proprietary  rights.  The Company  generally  enters into
confidentiality  agreements with its employees,  consultants and customers,  and
limits access to and  distribution of its proprietary  information.  The Company
also requires that  substantially all of its employees and consultants assign to
the Company their rights in  intellectual  property  developed while employed or
engaged by the Company.  There can be no  assurance  that the steps taken by the
Company  in this  regard  will be  adequate  to  deter  misappropriation  of its
proprietary  information or that the Company will be able to detect unauthorized
use of and take appropriate steps to enforce its intellectual property rights.


Item 2. Properties.

     The Company owns no real property and currently  leases or subleases all of
its office space. The Company subleases its headquarters in Iselin,  New Jersey,
totaling  approximately  13,200  square feet.  The sublease  expires in November
1999.  The  Company  uses  such  facility  for  certain  technical  and  support
personnel,   sales  and  marketing,   administrative,   finance  and  management
personnel.  The  Company  also  leases or  subleases  offices  for its sales and
operations in Foster City,  California;  Atlanta,  Georgia;  Chicago,  Illinois;
Boston,  Massachusetts;  and Dallas,  Texas;  and  operations  in Hyderabad  and
Bombay,  India;  Australia;  New  Zealand;  Denmark;  Singapore  and the  United
Kingdom. The Company is reviewing the adequacy of its leased facilities in light
of its expanded staff and expects to increase the size of its leased facilities.
The Company expects to move its headquarters to nearby Edison, New Jersey in the
summer of 1998.  The  Company  has  negotiated  a lease  with the  landlord  for
approximately 48,475 square feet, but is awaiting the return of a fully executed
lease. The Company expects to be able to sublet its current headquarters for the
remainder of the term of its sublease,  however,  there is no assurance that the
Company will be able to find a subtenant.


Item 3. Legal Proceedings.

     The Company had been  investigated by the  Immigration  and  Naturalization
Service  (the "INS") and on April 2, 1997,  the Company  received two Notices of
Intent to Fine from the INS in  relation  to  violations  by the  Company of the
Immigration Reform and Control Act of 1990.  Specifically,  the INS investigated
whether the Company  improperly  employed certain foreign  national  individuals
prior to their obtaining  appropriate work  authorization and failed to complete
proper employment eligibility  verification forms for all employees. The Company
cooperated fully with the INS.  Pursuant to settlement  agreements  signed April
28, 1997,  fines  totaling  approximately  $42,000 were assessed and paid by the
Company.  Such amounts were accrued as of December 31, 1996. The Company employs
many foreign  national  individuals and has implemented  procedures and controls
which it believes will ensure full compliance  with the  Immigration  Reform and
Control Act of 1990 and related  regulations.  The Company now employs  in-house
counsel to oversee this function.


                                      -10-
<PAGE>

     On February 16, 1996, the Company,  as plaintiff,  filed a complaint in the
Superior Court of New Jersey,  Chancery  Division,  Middlesex County,  against a
former  consultant  to the Company,  seven  former  employees of the Company and
Pegasus Systems, Inc. ("Pegasus"), a corporation which currently employs certain
of such individuals (collectively, the "Defendants"). The complaint, which seeks
damages and  injunctive  relief  against the  Defendants,  alleges,  among other
things,   misappropriation  of  proprietary  information,   unfair  competition,
tortious interference,  breach of employment agreements,  breach of a consulting
agreement between the Company and Pegasus,  and breach of duty of loyalty,  good
faith and fair dealing. Upon the filing of its complaint, the Company obtained a
temporary  restraining  order and in May 1996 obtained a preliminary  injunction
prohibiting  the Defendants  from using or disclosing the Company's  proprietary
information, prohibiting the Defendants from contacting or soliciting certain of
the Company's  customers  and  prohibiting  the  Defendants  from  recruiting or
attempting  to recruit  the  Company's  employees,  agents or  contractors.  The
preliminary  injunction  remains  in effect  and the  Company  intends to pursue
vigorously enforcement of the injunction against the Defendants.  The Defendants
have filed an answer and counterclaim. Pegasus has asserted a breach of contract
counterclaim  against the Company alleging that the Company owes it $129,000 for
consulting services.  Pegasus and two of the individual Defendants also asserted
claims against the Company and two of its officers for tortious interference and
defamation.  In addition, one of the individual Defendants has asserted that the
Company  owes him $70,000 in  commissions.  In addition to monetary  damages the
Defendants  seek  injunctive  relief.  The  Defendants  unsuccessfully  sought a
temporary  restraining  order  against  the  Company.  The  Company  denies  the
allegations made and intends to defend vigorously the counterclaims. The Company
does not believe that the outcome of these claims and counterclaims  will have a
material effect upon the Company's  business,  financial condition or results of
operations.

     Oxford Systems Inc.  ("Oxford"),  a New Jersey  corporation  and formerly a
wholly-owned  subsidiary  of the  Company  which was merged  into the Company in
December 1996,  was named as a defendant in a civil  complaint that was filed on
June 8, 1995, by Design Strategy Corp.  ("Design  Strategy"),  in New York State
Supreme Court in the County of New York.  Design  Strategy  alleges that another
named defendant, Citibank N.A. ("Citibank"), contracted with Design Strategy for
database  administration  services.  Design  Strategy  claims that  Citibank and
Oxford  conspired  to  deprive it of  commissions,  tortiously  interfered  with
contract,   engaged  in  unfair   competition,   damaged  its   reputation   and
misappropriated  services.  Design Strategy settled its claims against Citibank.
Design  Strategy then moved to amend its complaint to substitute the Company for
Oxford  and  to  join  Nagarjun   Valluripalli,   the  Company's   President  of
International  Operations,  as defendants.  At the same time, Oxford and another
defendant  cross-moved for summary judgment.  Thereafter,  on September 9, 1997,
the New York State  Supreme Court granted  Design  Strategy's  motion to add the
Company and Mr.  Valluripalli as defendants  while  simultaneously  granting the
Company's  cross-motion for summary  judgment.  On September 18, 1997, the Court
entered a decision  and order  dismissing  Design  Strategy's  complaint  in its
entirety.  Subsequently,  on October 17, 1997, Design Strategy filed a notice of
motion of  reargument  of the  Decision  and a notice of  appeal.  The appeal is
currently  scheduled to be heard in June 1998. The Company does not believe that
the  outcome of these  claims  will have a material  effect  upon the  Company's
business, financial condition or results of operations.


                                      -11-
<PAGE>

     On February 13, 1998,  Russell  Schultz,  a former employee of the Company,
filed a complaint in the Superior  Court of New Jersey,  Law Division,  Monmouth
County, naming the Company as a defendant.  The complaint,  which seeks damages,
alleges,  among other things,  that the Company  misrepresented  plaintiff's job
description in order to induce plaintiff to leave his prior employer,  failed to
provide  stock  options  to  the  plaintiff  and  violated  plaintiff's  written
employment  contract.  The Company was served  with the  complaint  on March 16,
1998, and is still in the process of evaluating the merits of the claims.  It is
too early in the litigation  process to determine the impact,  if any, that such
litigation will have upon the Company's business, financial condition or results
of operations.

     There is no other  material  litigation  pending to which the  Company is a
party or to which any of its property is subject.


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

     Not applicable.



                                      -12-
<PAGE>


                                     PART II


Item 5. Market for the Company's Common Equity and Related Shareholder Matters.

     The Common Stock has been quoted on the Nasdaq  National Market (the "NNM")
under the symbol "ITIG" since September 27, 1996 when the Company  conducted its
initial public offering. The following table sets forth, for each of the periods
indicated,  the high and low sale prices per share of Common  Stock as quoted on
the NNM. The prices shown represent  quotations among securities dealers, do not
include retail markups,  markdowns or commissions  and may not represent  actual
transactions.

               Quarter Ended                 High         Low
               ----------------------   -------------  -------------

               September 30, 1996            $13 7/8      $12 5/8
               (from September
               27, 1996)
               December 31, 1996             $19 3/4      $11
               March 31, 1997                $12 3/4      $9 7/8
               June 30, 1997                 $11 7/8      $8 1/4
               September 30, 1997            $23 1/2      $9 1/2
               December 31, 1997             $25 7/8      $13 3/4

     As of February 28, 1998, the approximate number of holders of record of the
Common Stock was 116 and the  approximate  number of  beneficial  holders of the
Common Stock was 800.

     The Company has never  declared or paid any dividends on its capital stock.
The  Company  intends  to retain  any  earnings  to fund  future  growth and the
operation of its business,  and, therefore,  does not anticipate paying any cash
dividends  in  the  foreseeable  future.   Furthermore,   the  Company's  credit
arrangement with PNC Bank,  National  Association,  which expires on January 22,
1999, contains,  among other provisions,  a covenant which prohibits the Company
from  paying  cash  dividends  or  making  other   distributions  of  assets  to
shareholders.

     All information  relating to the Common Stock of the Company in this Annual
Report on Form  10-KSB  reflects a  81,351.1111-for-1  stock split of the Common
Stock effected July 12, 1996, prior to the Company's  initial public offering of
its Common Stock in September 1996. Within the past three years, the Company has
issued and sold certain unregistered securities.  On April 19, 1996, the Company
issued  and  sold  five-year  9.0%  subordinated  debentures  in  the  aggregate
principal  amount of $6.0  million  to  Summit  Ventures  IV,  L.P.  and  Summit
Investors III, L.P. with warrants to purchase up to 20.8% of the Common Stock of
the Company.  Such warrants were exercised for an aggregate of 1,364,000  shares
of Common  Stock upon  effectiveness  of the  Company's  registration  statement
relating to its initial  public  offering on September 26, 1996. On May 1, 1997,
the Company sold to Mr. Uma Pandey 14,667  shares of the Company's  Common Stock
and to Ms. Eileen Clark 100 shares of the Company's Common Stock. Thereafter, on
June 3, 1997, the Company sold to Mr. Paul Coombs 28,000 shares of the Company's
Common Stock. Each of the sales to Messrs.  Pandey and Coombs and Ms. Clark were
made pursuant to the exercise of stock options that were issued on July 12, 1996
at an


                                      -13-
<PAGE>

exercise price of $8.00 per share. No underwriter was employed by the Company in
connection  with the issuance and sale of the  restricted  securities  described
above.  The Company claims that the issuance and sale of all of such  securities
were  exempt from  registration  under  Section  4(2) of the  Securities  Act as
transactions not involving a public offering.  Appropriate  legends were affixed
to the  certificates  evidencing  such  securities.  All recipients had adequate
access to information relating to the Company.  There were no other unregistered
securities sold by the Company within the past three years.


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

Overview

     The  Company  provides a wide  range of  information  technology  services,
including  enterprise-wide  business process solutions,  systems integration and
custom software development based on leading technologies. The Company has grown
rapidly  since 1994 when it made a strategic  decision to diversify its customer
base by expanding the scope of its integration  and development  services and to
utilize SAP  software as a primary tool to  implement  enterprise-wide  business
process  solutions.  In 1995, the Company  became a SAP National  Implementation
Partner  and also began to utilize  Oracle  products  to  diversify  its service
offerings.  In 1997, the Company achieved National Logo Partner status with SAP.
The  Company's  current  contract  with SAP  expires on  December  31,  1998 and
provides for an automatic  one-year  renewal period unless either party provides
at least six weeks prior  written  notice of its  intention  not to renew.  This
agreement contains no minimum revenue  requirements or cost sharing arrangements
and does not provide for commissions or royalties to either party. In July 1997,
the Company achieved  AcceleratedSAP  Partner Status with SAP by meeting certain
performance  criteria  established  by SAP.  Also, in 1997, the Company began to
provide  implementation  services to  PeopleSoft  and Baan  licensees to further
diversify  its service  offerings.  The  Company  recently  expanded  its Oracle
applications implementation services practice and added upgrade services to meet
market demand of mid-size to large companies that are  implementing or upgrading
Oracle  applications.  In July 1997,  the Company was awarded an  implementation
partnership status by PeopleSoft.  In September 1997, the Company was awarded an
international consulting partnership status by Baan.

     The  Company  generates  revenue  from  professional  services  rendered to
customers.  Revenue is  recognized  as services  are  performed.  The  Company's
services   range  from  providing   customers   with  a  single   consultant  to
multi-personnel  full-scale projects. The Company provides these services to its
customers  primarily  on a time and  materials  basis and  pursuant  to  written
contracts which can be terminated  with limited  advance  notice,  typically not
more than 30 days, and without  significant  penalty,  generally limited to fees
earned and expenses incurred by the Company through the date of termination. The
Company provides its services directly to end-user  organizations or as a member
of a consulting team assembled by another information technology consulting firm
to Fortune 1000 and other large and mid-sized  companies.  The Company generally
bills its customers semi-monthly for the services provided by its consultants


                                      -14-
<PAGE>

at contracted rates.  Where contractual  provisions  permit,  customers also are
billed for  reimbursement of expenses  incurred by the Company on the customers'
behalf.

     The Company recently has provided services on certain projects in which it,
at the request of the clients, offered a fixed price for its services,  however,
none of  these  projects  are  currently  material  to the  Company's  business,
financial condition and results of operations.  The Company believes that, as it
pursues its strategy of making  turnkey  project  management a larger portion of
its  business,  it will likely be  required  to offer fixed price  projects to a
greater  degree.  The Company has had limited  prior  experience  in pricing and
performing  under fixed price  arrangements  and believes that there are certain
risks related  thereto.  There can be no assurance that the Company will be able
to complete  such  projects  within the fixed price  timeframes.  The failure to
perform  within  such  fixed  price  contracts,  if entered  into,  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

     The  Company has derived  and  believes  that it will  continue to derive a
significant  portion  of its  revenue  from a limited  number of  customers  and
projects.  For the years ended  December 31, 1997 and 1996,  the  Company's  ten
largest customers accounted for in the aggregate of approximately 54% and 66% of
its  revenue,  respectively.  During  1997 and 1996,  Price  Waterhouse  LLP and
Bristol-Myers  Squibb each accounted for more than 10% of revenue. For the years
ended  December  31,  1997 and 1996,  38% and 44% of the  Company's  revenue was
generated  by  serving  as a  member  of  consulting  teams  assembled  by other
information  technology  consulting  firms.  There can be no assurance that such
information  technology  consulting firms will continue to engage the Company in
the future at current  levels of  retention,  if at all.  During the years ended
December 31, 1997 and 1996, 68% and 74%,  respectively,  of the Company's  total
revenue was derived  from  projects  in which the Company  implemented  software
developed by SAP.  During 1997,  14% of the Company's  total revenue was derived
from projects in which the Company implemented  software developed by Oracle. In
1996,  the Oracle  projects  accounted for less than 10% of the Company's  total
revenue.  During the year ended  December  31,  1997,  approximately  33% of the
Company's  revenue was derived from engagements at which the Company had project
management responsibilities,  compared to 16% during the year ended December 31,
1996.

     The Company's most significant cost is project  personnel  expenses,  which
consist of consultant salaries, benefits and payroll-related expenses. Thus, the
Company's financial performance is based primarily upon billing margin (billable
hourly rate less the cost to the Company of a consultant on an hourly basis) and
personnel  utilization rates (billable hours divided by paid hours). The Company
believes that turnkey  project  management  assignments  typically  carry higher
margins. The Company has been shifting to such higher-margin  turnkey management
assignments  and more complex  projects by leveraging its  reputation,  existing
capabilities,  proprietary  implementation  methodology,  development  tools and
offshore development  capabilities with expanded sales and marketing efforts and
new service offerings to develop turnkey project sales  opportunities  with both
new and existing  customers.  The  Company's  inability to continue its shift to
higher-margin  turnkey  management  assignments  and more  complex  projects may
adversely impact the Company's future growth.


                                      -15-
<PAGE>

     Since  late 1994,  the  Company  has made  substantial  investments  in its
infrastructure in order to support its rapid growth.  For example,  in 1994, the
Company  established  and funded an  operations  in India,  the ADC, and in 1995
established a sales office in  California.  In addition,  from 1994 to date, the
Company has  incurred  expenses  to develop  proprietary  development  tools and
4SIGHT and 4SIGHTplus,  its proprietary accelerated  implementation  methodology
and toolset. Commencing in 1995, the Company has been increasing its sales force
and its marketing,  finance,  accounting and  administrative  staff. The Company
employed 31 such  personnel as of December  31, 1997,  as compared to eight such
personnel  as of January 1, 1995.  During  1997,  the Company  opened  sales and
operations  offices in Atlanta,  Boston and  Dallas.  In addition to the ADC and
sales offices in India, the Company also has offices in, Australia, Denmark, New
Zealand, Singapore and the United Kingdom. The Company is reviewing the adequacy
of its leased  facilities in light of its expanded staff and expects to increase
the size of its leased facilities.  The Company expects to move its headquarters
to nearby Edison, New Jersey in the summer of 1998. The Company has negotiated a
lease with the landlord for  approximately  48,475 square feet,  but is awaiting
the return of a fully executed  lease.  The Company expects to be able to sublet
its current headquarters for the remainder of the term of its sublease, however,
there is no assurance that the Company will be able to find a subtenant.

Results of Operations

     The following table sets forth for the periods  indicated certain financial
data as a percentage of revenue:

                                                           Percentage of Revenue
                                                           ---------------------
                                                         Year Ended December 31,
                                                         -----------------------

                                                                1996        1997

Revenue..................................................        100.0%   100.0%
Cost of sales............................................         71.2     69.8
                                                                ------    ------
  Gross profit..........................................          28.8     30.2
Selling, general and administrative expenses.............         21.0     22.5
                                                                ------    ------
  Operating income......................................           7.8      7.7
Factor fees / Interest expense (income), net.............          2.6     (0.4)
                                                                ------    ------
Income before provision for income taxes and                       5.2      8.1
  extraordinary charge...................................
Provision for income taxes...............................          1.1      2.5
                                                                ------    ------
Income before extraordinary charge.......................          4.1      5.6
Extraordinary charge, net of income tax benefit..........          2.4        --
                                                                ------    ------
Net income...............................................          1.7%     5.6%
                                                                ======    ======


     Year Ended December 31, 1996 Compared to Year Ended December 31, 1997

     Revenue.  Revenue increased by 69.9%, or $33.0 million,  from $47.2 million
in 1996 to $80.2 million in 1997.  This increase was  attributable  primarily to
increased  demand  for  the  Company's  SAP  related  implementation  consulting
services and, to a lesser extent,  to increased demand for the Company's systems
integration and custom software development services.


                                      -16-
<PAGE>

     Gross profit.  The Company's cost of sales  includes  primarily the cost of
salaries to consultants  and related  employee  benefits and payroll taxes.  The
Company's cost of sales increased by 66.6%, or $22.4 million, from $33.6 million
in 1996 to $56.0  million in 1997.  The increase was due to increased  personnel
costs  resulting  from the  hiring of  additional  consultants  to  support  the
increase  in demand for the  Company's  services.  The  Company's  gross  profit
increased  by 78.2%,  or $10.6  million,  from  $13.6  million  in 1996 to $24.2
million in 1997.  Gross profit margin increased from 28.8% of revenue in 1996 to
30.2% of  revenue  in  1997.  The  increase  in such  gross  profit  margin  was
attributable  to  the  increase  in  implementation   services  projects  and  a
combination of improved  billing  margins,  greater  consultant  utilization and
achieving certain customer performance incentives.

     Selling,  general  and  administrative   expenses.   Selling,  general  and
administrative  expenses consist  primarily of  administrative  salaries,  sales
person compensation, travel and entertainment, some of the costs associated with
the ADC and related  development costs and professional fees.  Selling,  general
and  administrative  expenses  increased by 82.1%,  or $8.1  million,  from $9.9
million in 1996 to $18.0  million in 1997,  and  increased  as a  percentage  of
revenue from 21.0% to 22.5%,  respectively.  The  increases in such  expenses in
absolute  dollars  and as a  percentage  of revenue  were due  primarily  to the
expansion of the Company's sales and marketing  activities in 1997 and increased
travel and  entertainment  expenses  due to the growth of the  business  and the
employee  base.  Such expenses were  increased to support the continued  revenue
growth of the  Company  in the United  States  and  abroad.  In  addition,  such
expenses  increased  due to increased  sales and  management  recruiting  costs,
support services, and an increase in the provision for doubtful accounts.

     Factor fees/Interest  (income) expense, net. Factor fees in the 1996 period
were the charges incurred by the Company to finance its accounts receivable.  On
October 10, 1996,  the Company  repaid the factor with a portion of the proceeds
from  the  Company's  initial  public  offering,   approximately  $4.4  million,
consisting of all amounts  outstanding  under the agreement  with its factor and
terminated  its factor  agreement.  Subsequent to the Company's  initial  public
offering,  interest income has been earned on interest bearing cash accounts and
short term investments.

     Provision for Income Taxes.  The  Company's  effective  income tax rate was
31.3% and 20.5% for the years ended December 31, 1997 and 1996.  During 1997 and
1996 the Company  reduced  their  valuation  allowance by $207,000 and $461,000,
respectively as management determined that it was more likely than not, that the
applicable  portion of the net deferred tax asset would be or had been realized.
The 1997 and 1996 valuation allowance reduction favorably impacted the effective
income tax rate by 3% and 14%, respectively. In 1996, the Company elected a five
year tax  holiday  in India in  accordance  with a local tax  incentive  program
whereby  no  income  tax will be due  during  such  period.  For the year  ended
December 31, 1997, the tax holiday favorably  impacted the effective tax rate by
approximately 8%. There was no significant impact for 1996. Based on current and
anticipated  profitability,  management believes all net deferred tax assets are
more likely than not to be realized.


                                      -17-
<PAGE>

     Backlog

     The Company  normally  enters into written  contracts with its customers at
the time it commences work on a project. These written contracts contain varying
terms  and  conditions  and  the  Company  does  not  generally  believe  it  is
appropriate  to  characterize  such written  contracts as creating  backlog.  In
addition, because these written contracts often provide that the arrangement can
be terminated with limited advance notice and without significant  penalty,  the
Company does not believe that projects in process at any one time are a reliable
indicator or measure of expected  future  revenue.  In the event that a customer
terminates  a project,  the  customer  remains  obligated to pay the Company for
services performed by it through the date of termination.

     Liquidity and Capital Resources

     The Company funds its  operations  primarily  from cash flow generated from
operations,  and to a lesser  extent,  from  cash  balances  generated  from the
Company's initial and follow-on public offerings consummated in October 1996 and
July 1997,  respectively.  On July 2, 1997, the Company  consummated a follow-on
public  offering (the  "Offering") of 1,000,000  shares of its Common Stock at a
price to the  public of $9.50  per  share.  On July 15,  1997 and as part of the
Offering,  an additional  150,000 shares at $9.50 per share were issued to cover
overallotments.  The net  proceeds  to the  Company  from  the  Offering,  after
underwriting discounts and commissions and other expenses of the Offering,  were
approximately $9.9 million.

     Cash used in operating  activities  was $7.2 million  during the year ended
December 31, 1997,  resulting  primarily from the growth in accounts  receivable
and  unbilled  services.  Cash used in operating  activities  for the year ended
December 31, 1996 was $4.3 million.

     The  Company  had working  capital of $15.7  million  and $29.0  million at
December 31, 1996 and 1997, respectively.

     In accordance with investment guidelines approved by the Company's Board of
Directors,  cash balances in excess of those  required to fund  operations  have
been invested in short-term U.S. Treasury securities and commercial paper with a
credit rating no lower than A1/P1.

     The Company  invested  $1.1 million and $2.5 million in computer  equipment
and furniture in 1996 and 1997, respectively.

     The Company's  factoring  agreement  required that the Company offer all of
its trade accounts receivable to the factor for financing;  however,  the factor
was under no obligation to accept any or all of such receivables.  For a variety
of reasons,  including  the rapid growth of the  Company,  the lack of available
tangible  security  to  utilize as  collateral  and the  absence  of  historical
operating  profits  prior to  1996,  the  Company  was  unable  to  obtain  more
traditional  financing.  On October 10, 1996, the Company  repaid  approximately
$4.4 million consisting of all amounts  outstanding under the agreement with the
factor and terminated the factoring agreement.

     In March 1996, in anticipation of the debenture  financing described below,
the Company obtained a $750,000 line of credit,  payable on demand, from a bank.
The  line of  credit  carried  interest  at the  federal  funds  rate  plus  1%.
Borrowings under the line totaled $200,000 at March


                                      -18-
<PAGE>

31,  1996 and  $300,000  in April  1996,  when the  Company  repaid all  amounts
outstanding under such line in connection with the debenture financing described
below.  The line of credit has been  terminated in accordance  with the terms of
such debenture financing.

     In April  1996,  the  Company  issued and sold  five-year  9%  subordinated
debentures in the aggregate  principal amount of $6.0 million to Summit Ventures
IV, L.P. and Summit Investors III, L.P. The subordinated  debentures were issued
to raise funds for working capital and general corporate purposes, to repurchase
from the then-current shareholders,  Messrs. Pandey, Koneru and Valluripalli, an
aggregate of 4,881,066  shares of Common Stock for an aggregate of $1.5 million,
to repay approximately $300,000 outstanding under a $750,000 credit facility and
to satisfy  approximately  $358,000 of cash overdrafts.  Upon receipt of the net
proceeds from the Company's initial public offering in October 1996, the Company
prepaid  approximately $6.3 million,  representing all amounts outstanding under
such debentures, including interest.

     Subsequent  to  December  31,  1995,  the  Company  determined  that it had
unrecorded  and  unpaid  federal  and state  payroll-related  taxes for  certain
employees.  As a result of the  Company's  voluntary  disclosure to the Internal
Revenue Service of certain unpaid tax liabilities,  on June 5, 1996, the Company
received an audit  assessment from the Internal  Revenue Service for unpaid 1994
and 1995 federal  income tax  withholding,  FICA and FUTA taxes in the aggregate
amount of $814,000, of which approximately  $800,000 was paid in August 1996. No
interest  or  penalties  were  assessed.  Reserves,  aggregating  $1.0  million,
including  the amount of the Internal  Revenue  Service audit  assessment,  were
recorded  at  December  31,  1995.  No  assurance  may be given,  however,  that
interest, penalties or additional state or federal taxes will not be assessed in
the future. The Company's principal  shareholders,  Messrs.  Pandey,  Koneru and
Valluripalli,  have agreed to indemnify the Company for any and all losses which
the Company may sustain,  in excess of the $1.0 million reserve,  net of any tax
benefits  realized by the Company,  arising from or relating to federal or state
tax,  interest or penalty payment  obligations  resulting from the above subject
matter.  The Company  believes  that its failure to record and pay 1994 and 1995
federal and state  payroll-related  taxes for certain employees  resulted from a
combination  of  factors,  including  lack  of  internal  controls  and  lack of
financial  expertise and oversight.  The Company hired a Chief Financial Officer
in January 1996 who has implemented  accounting and financial controls to ensure
the Company's compliance with payroll tax regulations.

     In January  1997,  and as later  amended on August 18,  1997,  the  Company
entered into a two-year  credit  agreement with a bank (the "Bank").  The credit
facility with the Bank has two  components  comprised of (i) a revolving line of
credit pursuant to which the Company may borrow up to $7.5 million either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the  Company's  option),
and (ii)  equipment term loans pursuant to which the Company may borrow up to an
aggregate  of  $350,000  (at the Bank's  prime rate plus 1/4 of 1% per annum) to
purchase  equipment.  The credit agreement  contains covenants which require the
Company to (i) maintain its working  capital during the year at no less than 90%
of the working capital at the end of the immediately  preceding  fiscal year and
at the end of each fiscal  year at no less than 105% of its  working  capital at
the end of the immediately preceding fiscal year; and (ii) maintain its tangible
net worth  during the year at no less than 95% of its  tangible net worth at the
end of the immediately  preceding fiscal year and at the end of each fiscal year
at no less than 108% of


                                      -19-
<PAGE>

tangible net worth at the end of the  immediately  preceding  fiscal  year.  The
Company's   obligations  under  the  credit  agreement  are   collateralized  by
substantially all of the Company's assets, including its accounts receivable and
intellectual  property.  The Company's obligations under the credit facility are
payable at the expiration of such facility on January 22, 1999.  These terms are
subject to the Company  maintaining an unsubordinated debt to tangible net worth
ratio of no greater than one to one and an earnings before interest and taxes to
interest  expense  ratio of no less than three to one.  The Bank also  agreed to
release the  collateral  securing  the  revolving  line of credit if the Company
meets certain financial criteria at December 31, 1997. At December 31, 1997, the
Company failed to meet such certain  financial  criteria,  and as a result,  the
Bank did not release the collateral securing the revolving line of credit.

     As of  December  31,  1997,  there  were no amounts  outstanding  under the
revolving line of credit and no equipment term loans outstanding.

     The Company believes that its available funds, together with current credit
arrangements and the cash flow expected to be generated from operations, will be
adequate to satisfy its current and planned  operations for at least the next 12
months.

Recently Issued Accounting Standards

     Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" was issued in February  1997 and  replaces  Accounting  Principles  Board
("APB")  Opinion  No. 15.  The new  statement  simplifies  the  computations  of
earnings per share  ("EPS") by replacing  the  presentation  of primary EPS with
basic EPS, which is computed by dividing income available to common shareholders
by the  weighted-average  number of common  shares  outstanding  for the period.
Diluted EPS under the new  statement is computed  similarly to fully diluted EPS
pursuant to APB  Opinion  No. 15. The  Company has adopted  SFAS No. 128 and has
restated 1996 EPS for comparative purposes. SFAS No. 128 did not have a material
impact  on  the   computation  of  the  earnings  per  share  presented  in  the
consolidated financial statements.

     SFAS No.  130,  "Reporting  Comprehensive  Income" was issued in June 1997.
This  statement is effective for the Company's  fiscal year ending  December 31,
1998.  This statement  addresses the reporting and  displaying of  comprehensive
income and its components. Adoption of SFAS No. 130 relates to disclosure within
the financial  statements  and is not expected to have a material  effect on the
Company's financial statements.

     SFAS No. 131,  "Disclosures  about  Segments of and  Enterprise and Related
Information"  was issued in June  1997.  This  statement  is  effective  for the
Company's  fiscal year ending December 31, 1998. This statement  changes the way
public  companies report  information  about segments of their business in their
annual  financial  statements  and  requires  them to  report  selected  segment
information  in their  quarterly  reports.  Adoption  of SFAS No. 131 relates to
disclosure  within  the  financial  statements  and is not  expected  to  have a
material effect on the Company's financial statements.


                                      -20-
<PAGE>

Item 7. Financial Statements.

     The financial  statements  required to be filed pursuant to this Item 7 are
included  in  this  Annual  Report  on  Form  10-KSB.  A list  of the  financial
statements filed herewith is found at "Item 13.  Exhibits,  List, and Reports on
Form 8-K."


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

     Not applicable.



                                      -21-
<PAGE>


                                    PART III


Item 9. Directors, Executive Officers, Promoters and Control Persons;
        Compliance with Section 16(a) of the Exchange Act.

     The information relating to the Company's directors,  nominees for election
as directors and executive  officers under the headings  "Election of Directors"
and "Executive  Officers" in the Company's  definitive  proxy  statement for the
1998 Annual Meeting of Shareholders is incorporated  herein by reference to such
proxy statement.


Item 10. Executive Compensation.

     The discussion under the heading "Executive  Compensation" in the Company's
definitive  proxy  statement  for the 1998  Annual  Meeting of  Shareholders  is
incorporated herein by reference to such proxy statement.


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

     The discussion under the heading "Security  Ownership of Certain Beneficial
Owners and Management" in the Company's  definitive proxy statement for the 1998
Annual Meeting of Shareholders is incorporated herein by reference to such proxy
statement.


Item 12. Certain Relationships and Related Transactions.

     The  discussion  under  the  heading  "Certain  Relationships  and  Related
Transactions"  in the Company's  definitive  proxy statement for the 1998 Annual
Meeting  of  Shareholders  is  incorporated  herein by  reference  to such proxy
statement.



                                      -22-
<PAGE>


                                     PART IV


Item 13. Exhibits, List, and Reports on Form 8-K.

         (a)  (1) Financial Statements.

              Reference  is made to the Index to Financial  Statements  on Page
          F-1.

          (a)  (2) Financial Statement Schedules.

               None.

          (a)  (3) Exhibits.

               Reference is made to the Index to Exhibits on Page 26.

          (b)  Reports on Form 8-K.

               No  reports on Form 8-K were filed  during the  Company's  fourth
          fiscal quarter.



                                      -23-
<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 30th day of March,
1998.


                                          INTELLIGROUP, INC.



                                          By: /s/ Rajkumar Koneru
                                             -----------------------------------
                                             Rajkumar Koneru, Chief Executive
                                             Officer and President of U.S.
                                             Operations




                                      -24-
<PAGE>



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

         Signature                   Title                         Date
         ---------                   -----                         ----

/s/ Rajkumar Koneru         Chief Executive Officer,            March 30, 1998
-------------------------   President of U.S. Operations
 Rajkumar Koneru            and Director (principal
                            executive officer)

/s/ Ashok Pandey            Chairman of the Board,              March 30, 1998
-------------------------   President of Corporate
Ashok Pandey                Services, Acting Chief
                            Financial Officer and Director
                            (principal financial and
                            accounting officer)

/s/ Nagarjun Valluripalli   President of International          March 30, 1998
-------------------------   Operations and Director
Nagarjun Valluripalli

                            Director                            March   , 1998
-------------------------
Klaus Besier

/s/ David Finley            Director                            March 30, 1998
--------------------------
David Finley

                            Director                            March   , 1998
-------------------------
Kevin P. Mohan

                            Director                            March   , 1998
-------------------------
Thomas S. Roberts



                                      -25-
<PAGE>



                                  EXHIBIT INDEX


        Exhibit No.                    Description of Exhibit
        -----------                    ----------------------

           2        Agreement  and Plan of Merger of the  Company and its wholly
                    owned  subsidiary  Oxford  Systems  Inc.   (Incorporated  by
                    reference to the Company's  Annual Report on Form 10-KSB for
                    the year ended December 31, 1996).

          3.1       Amended   and   Restated   Certificate   of   Incorporation.
                    (Incorporated  by  reference to the  Company's  Registration
                    Statement on Form SB-2 (Registration Statement No. 333-5981)
                    declared  effective on September 26, 1996).

          3.2       Amended and Restated  Bylaws.  (Incorporated by reference to
                    the   Company's   Registration   Statement   on  Form   SB-2
                    (Registration  Statement No. 333-5981) declared effective on
                    September  26, 1996).

          4.1       Debenture  and Warrant  Purchase  Agreement  dated April 10,
                    1996 by and between the Company,  Messrs. Pandey, Koneru and
                    Valluripalli   and  Summit  Ventures  IV,  L.P.  and  Summit
                    Investors  III,  L.P.  (Incorporated  by  reference  to  the
                    Company's  Registration Statement on Form SB-2 (Registration
                    Statement No. 333-5981)  declared effective on September 26,
                    1996).

          4.2       Warrant  Agreement  dated  April 10, 1996 by and between the
                    Company and Summit  Ventures IV, L.P.  and Summit  Investors
                    III,  L.P.  (Incorporated  by  reference  to  the  Company's
                    Registration Statement on Form SB-2 (Registration  Statement
                    No. 333-5981) declared effective on September 26, 1996).

          4.3       Registration  Rights  Agreement  dated April 10, 1996 by and
                    between the Company and Summit  Ventures IV, L.P. and Summit
                    Investors  III,  L.P.  (Incorporated  by  reference  to  the
                    Company's  Registration Statement on Form SB-2 (Registration
                    Statement No. 333-5981)  declared effective on September 26,
                    1996).

          4.4       Redemption Agreement dated April 10, 1996 by and between the
                    Company and Summit  Ventures IV, L.P.  and Summit  Investors
                    III,  L.P.  (Incorporated  by  reference  to  the  Company's
                    Registration Statement on Form SB-2 (Registration  Statement
                    No.  333-5981)  declared  effective on September  26, 1996).


          10.1*     1996 Stock Plan of the Company.  (Incorporated  by reference
                    to  the  Company's   Registration  Statement  on  Form  SB-2
                    (Registration  Statement No. 333-5981) declared effective on
                    September 26, 1996).

          10.2*     1996 Non-Employee Director Stock Option Plan.  (Incorporated
                    by reference to the Company's Registration Statement on Form
                    SB-2   (Registration   Statement  No.   333-5981)   declared
                    effective on September 26, 1996).

          10.3*     Employment  Agreement dated June 1, 1996 between the Company
                    and  Ashok  Pandey.   (Incorporated   by  reference  to  the
                    Company's  Registration Statement on Form SB-2 (Registration
                    Statement No. 333-5981)  declared effective on September 26,
                    1996).




                                      -26-
<PAGE>


        Exhibit No.                    Description of Exhibit
        -----------                    ----------------------

          10.4*     Employment  Agreement dated June 1, 1996 between the Company
                    and  Rajkumar  Koneru.  (Incorporated  by  reference  to the
                    Company's  Registration Statement on Form SB-2 (Registration
                    Statement No. 333-5981)  declared effective on September 26,
                    1996).

          10.5*     Employment  Agreement dated June 1, 1996 between the Company
                    and Nagarjun Valluripalli. (Incorporated by reference to the
                    Company's  Registration Statement on Form SB-2 (Registration
                    Statement No. 333-5981)  declared effective on September 26,
                    1996).

          10.6*     Employment  Agreement dated June 1, 1996 between the Company
                    and  Robert M.  Olanoff,  together  with  Change in  Control
                    Severance  Pay  Agreement  dated  June 1, 1996  between  the
                    Company and Robert M. Olanoff. (Incorporated by reference to
                    the   Company's   Registration   Statement   on  Form   SB-2
                    (Registration  Statement No. 333-5981) declared effective on
                    September 26, 1996).

          10.7*     Employment  Agreement dated June 1, 1996 between the Company
                    and Paul Coombs. (Incorporated by reference to the Company's
                    Registration Statement on Form SB-2 (Registration  Statement
                    No. 333-5981) declared effective on September 26, 1996). See
                    Exhibit  10.21.

          10.8      Form  of  Indemnification  Agreement  entered  into  by  the
                    Company   and   each   of  its   Directors   and   officers.
                    (Incorporated  by  reference to the  Company's  Registration
                    Statement on Form SB-2 (Registration Statement No. 333-5981)
                    declared  effective on September  26,  1996).

          10.9      Sublease Agreement between Micrognosis,  Inc., as sublessor,
                    the Company, as sublessee, with master lease.  (Incorporated
                    by reference to the Company's Registration Statement on Form
                    SB-2   (Registration   Statement  No.   333-5981)   declared
                    effective on September 26, 1996).

          10.10     Employee's    Invention   Assignment   and   Confidentiality
                    Agreement.  (Incorporated  by  reference  to  the  Company's
                    Registration Statement on Form SB-2 (Registration  Statement
                    No.  333-5981)  declared  effective on September  26, 1996).

          10.11     Intentionally  Left Blank.

          10.12     Services   Provider   Agreement   by  and   between   Oracle
                    Corporation   and  the   Company   dated   July  26,   1994.
                    (Incorporated  by  reference to the  Company's  Registration
                    Statement on Form SB-2 (Registration Statement No. 333-5981)
                    declared  effective  on  September  26,  1996).  See Exhibit
                    10.20.

          10.13     Amended and Restated Agreement by Messrs. Pandey, Koneru and
                    Valluripalli  dated July 16, 1996 to  indemnify  the Company
                    for  certain  losses.  (Incorporated  by  reference  to  the
                    Company's  Registration Statement on Form SB-2 (Registration
                    Statement No. 333-5981)  declared effective on September 26,
                    1996).

          10.14     Factoring Agreement by and between Access Capital,  Inc. and
                    the Company  dated as of October 20,  1995,  with  exhibits.
                    (Incorporated  by  reference to the  Company's  Registration
                    Statement on Form SB-2 (Registration Statement No. 333-5981)
                    declared effective


                                      -27-
<PAGE>

       Exhibit No.                    Description of Exhibit
        -----------                    ----------------------

                    on September 26, 1996). See Exhibit 10.17.

          10.15     Agreement of Waiver and Consent  dated as of June 4, 1996 by
                    and among the Company,  certain shareholders of the Company,
                    and Summit Ventures IV, L.P. and Summit Investors III, L.P.,
                    with Amendment No. 1 thereto.  (Incorporated by reference to
                    the   Company's   Registration   Statement   on  Form   SB-2
                    (Registration  Statement No. 333-5981) declared effective on
                    September 26, 1996).  See Exhibit 10.24.

          10.16     Agreement by and between the Company and  Intelligroup  Asia
                    Private   Limited    ("Intelligroup   Asia")   relating   to
                    operational  control  of  Intelligroup  Asia,  with  related
                    agreements.  (Incorporated  by  reference  to the  Company's
                    Registration Statement on Form SB-2 (Registration  Statement
                    No.  333-5981)  declared  effective on September  26, 1996).

          10.17     Letter agreements  terminating factoring arrangements by and
                    between  each of the Company and Oxford  Systems  Inc.,  and
                    Access Capital,  Inc. dated October 10, 1996.  (Incorporated
                    by reference to the  Company's  Annual Report on Form 10-KSB
                    for the year ended  December 31, 1996).  See Exhibit  10.14.

         10.18      Loan and  Security  Agreement  between  PNC  Bank,  National
                    Association  and the Company  dated as of January 22,  1997,
                    and related  documents.  (Incorporated  by  reference to the
                    Company's  Annual  Report on Form  10-KSB for the year ended
                    December  31, 1996 filed with the  Securities  and  Exchange
                    Commission  on March 28,  1997).  See Exhibit  10.28.

         10.19      Intentionally Left Blank.

         10.20      Amendment  No.  1 to  Services  Provider  Agreement  by  and
                    between  Oracle  Corporation  and the Company dated December
                    30, 1996. (Incorporated by reference to the Company's Annual
                    Report on Form 10-KSB for the year ended December 31, 1996).
                    See Exhibit  10.12.

         10.21*     Amendment  No. 1, dated  February  18, 1997,  to  Employment
                    Agreement  dated June 1, 1996,  between the Company and Paul
                    Coombs.  (Incorporated  by reference to the Company's Annual
                    Report on Form 10-KSB for the year ended December 31, 1996).
                    See Exhibit 10.7.

         10.22      R/3  National  Logo  Partner  Agreement  by and  between SAP
                    America,  Inc.  and the Company  dated as of April 29, 1997.
                    (Incorporated  by  reference to the  Company's  Registration
                    Statement   on  Form  SB-2   (Registration   Statement   No.
                    333-29119) declared effective on June 26, 1997). See Exhibit
                    10.25.

         10.23*     Employment  Agreement  dated  December  6, 1996  between the
                    Company and Anthony Knight,  as amended on February 18, 1997
                    (Incorporated by reference to the Company's Quarterly Report
                    on Form 10-QSB for the quarter ended March 31, 1997).

         10.24      Amended and Restated  Agreement of Waiver and Consent  dated
                    June 6, 1997 by and among the Company,  certain shareholders
                    of  the  Company,   Summit  Ventures  IV,  L.P.  and  Summit
                    Investors III, L.P.



                                      -28-
<PAGE>

        Exhibit No.                    Description of Exhibit
        -----------                    ----------------------

                    (Incorporated  by referenced  to the Company's  Registration
                    Statement   on  Form  SB-2   (Registration   Statement   No.
                    333-29119) declared effective on June 26, 1997). See Exhibit
                    10.15.

         10.25      ASAP Partner Addendum to R/3 National Logo Partner Agreement
                    between SAP America,  Inc. and the Company effective July 1,
                    1997 (amends existing R/3 National Logo Partner  Agreement).
                    (Incorporated by reference to the Company's Quarterly Report
                    on Form 10-QSB for the quarter  ended  September  30, 1997).


         10.26      Implementation  Partner Agreement between  PeopleSoft,  Inc.
                    and the Company  effective July 15, 1997.  (Incorporated  by
                    reference to the Company's  Quarterly  Report on Form 10-QSB
                    for the quarter ended September 30, 1997).

         10.27      Consulting  Alliance  Agreement with Baan International B.V.
                    and the Company effective September 29, 1997.  (Incorporated
                    by  reference  to the  Company's  Quarterly  Report  on Form
                    10-QSB for the quarter  ended  September  30,  1997).

         10.28      Amendment to Loan and Security  Agreement dated as of August
                    18, 1997 by and between PNC Bank,  National  Association and
                    the Company (amends Loan and Security  Agreement dated as of
                    January  22,  1997.   (Incorporated   by  reference  to  the
                    Company's  Quarterly  Report on Form  10-QSB for the quarter
                    ended  September  30,  1997).

         21**       Subsidiaries  of the  Registrant.

         23**       Consent  of  Arthur Andersen  LLP.

         27**       Financial  Data  Schedule  for the year ended  December  31,
                    1997.


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

*    A management  contract or compensatory  plan or arrangement  required to be
     filed as an exhibit pursuant to Item 13(a) of Form 10-KSB.

**   Filed herewith. All other exhibits previously filed.



                                      -29-
<PAGE>



                       INTELLIGROUP, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                        Page
                                                                        ----

Report of Independent Public Accountants..........................      F-2

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 1997 and 1996......      F-3

Consolidated Statements of Income for the years ended December
  31, 1997 and 1996...............................................      F-4

Consolidated Statements of Shareholders' Equity (Deficit) for the
  years ended December 31, 1997 and 1996..........................      F-5

Consolidated Statements of Cash Flows for the years ended
  December 31, 1997 and 1996......................................      F-6

Notes to Consolidated Financial Statements........................      F-7



                                      F-1
<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of Intelligroup, Inc.:

     We  have  audited  the   accompanying   consolidated   balance   sheets  of
Intelligroup,  Inc. and  subsidiaries  as of December 31, 1997 and 1996, and the
related  consolidated  statements of income,  shareholders' equity (deficit) and
cash  flows  for the  years  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

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



                                          ARTHUR ANDERSEN LLP

Princeton, New Jersey
February 5, 1998



                                      F-2
<PAGE>


                       INTELLIGROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1996

<TABLE>

                                                        1997           1996
                                                    ------------   -------------
                     Assets
<S>                                                <C>             <C>
Current Assets:
  Cash and cash equivalents......................  $ 8,391,000     $7,479,000
  Accounts receivable, less allowance for
   doubtful accounts of
   $799,000 and $546,000 at December 31, 1997       17,668,000      8,538,000
   and 1996, respectively........................
  Unbilled services..............................    7,834,000      2,916,000
  Deferred income taxes..........................      404,000        331,000
  Other current assets...........................      668,000        492,000
                                                   -----------    -----------
     Total current assets........................   34,965,000     19,756,000

Equipment, net...................................    3,366,000      1,281,000
Other assets.....................................      337,000        225,000
                                                   -----------    -----------
                                                   $38,668,000    $21,262,000
                                                    ==========     ==========

       Liabilities and Shareholders' Equity
Current Liabilities:
  Accounts payable...............................  $ 1,353,000     $  406,000
  Accrued payroll and related taxes..............    2,636,000      1,814,000
  Accrued expenses and other liabilities.........    1,074,000      1,268,000
  Income taxes payable...........................      901,000        535,000
  Current portion of obligations under capital
    leases.......................................       20,000         20,000
                                                   -----------    -----------
     Total current liabilities...................    5,984,000      4,043,000
                                                   -----------    -----------
Obligations under capital leases, less current
  portion........................................       51,000         57,000
                                                   -----------    -----------

Deferred income taxes............................      171,000             --
                                                   -----------    -----------
Commitments and contingencies

Shareholders' Equity
  Preferred stock, $.01 par value, 5,000,000
   shares authorized, none issued or
   outstanding...................................           --             --
  Common stock, $.01 par value, 25,000,000
   shares authorized, 11,987,981 and
   10,735,600 shares issued and outstanding
   at December 31, 1997 and
   1996, respectively............................      120,000        107,000

  Additional paid-in capital.....................   30,175,000     19,201,000
  Retained earnings (deficit)....................    2,325,000     (2,146,000)
  Currency translation adjustments...............     (158,000)            --
                                                    -----------    ----------
     Total shareholders' equity .................   32,462,000     17,162,000
                                                    -----------    ----------
                                                   $38,668,000    $21,262,000
                                                    ==========     ==========
</TABLE>


                 See notes to consolidated financial statements



                                      F-3
<PAGE>


                       INTELLIGROUP, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                 For the Years Ended December 31, 1997 and 1996

<TABLE>

                                                        1997           1996
                                                    ------------   -------------
<S>                                                 <C>            <C>

Revenue........................................     $80,189,000    $47,189,000
Cost of sales..................................      55,976,000     33,605,000
                                                    -----------     ----------
     Gross profit..............................      24,213,000     13,584,000

Selling, general and administrative expenses...      18,041,000      9,908,000
                                                    -----------     ----------
     Operating income..........................       6,172,000      3,676,000
                                                    -----------     ----------
Other expenses:
  Interest (income) expense, net...............        (338,000)       236,000
  Factor charges...............................              --        999,000
                                                     ----------     ----------
                                                       (338,000)     1,235,000
Income before provision for income taxes and          6,510,000      2,441,000
  extraordinary charge.........................

Provision for income taxes.....................       2,039,000        500,000
                                                     ----------     ----------

Income before extraordinary charge.............       4,471,000      1,941,000

Extraordinary charge-Loss on early
  extinguishment of debt, net of income tax                  --      1,148,000
  benefit of $296,000..........................      ----------     ----------

Net income.....................................     $ 4,471,000     $  793,000
                                                     ==========     ==========

Earnings per share:

  Basic earnings per share:

     Income before extraordinary charge........     $      0.39     $     0.20

     Extraordinary charge, net of income tax                 --          (0.12)
       benefit.................................      -----------     ----------

      Net income per share.....................     $      0.39    $      0.08
                                                     ===========    ===========

     Weighted average number of common shares
       - Basic.................................      11,362,000      9,729,000
                                                     ==========     ==========

  Diluted earnings per share:

     Income before extraordinary charge........     $      0.38    $      0.17

     Extraordinary charge, net of income tax                 --          (0.10)
       benefit.................................      -----------    ----------

      Net income per share.....................     $      0.38    $      0.07
                                                     ===========    ==========

     Weighted average number of common shares
       - Diluted...............................      11,842,000     10,989,000
                                                     ===========    ==========
</TABLE>


                See notes to consolidated financial statements.



                                      F-4
<PAGE>



                       INTELLIGROUP, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                 For the Years Ended December 31, 1997 and 1996


<TABLE>

                                                                                                      Cumulative
                                                                                     Retained         Foreign          Total
                                              Common Stock            Additional     Earnings         Currency         Shareholders'
                                              ------------            Paid in        (Accumulated     Translation      Equity
                                         Shares         Amount        Capital        Deficit)         Adjustments      (Deficit)
                                         ------         ------        ----------     ------------     -----------      -------------
<S>                                      <C>            <C>           <C>            <C>              <C>              <C>

Balance at December 31, 1995............ 12,202,666     $ 122,000     $        --    $ (1,488,000)    $         --     $(1,366,000)
Repurchase and retirement of common
  stock................................. (4,881,066)      (49,000)             --      (1,451,000)              --      (1,500,000)
Issuance of common stock, net of
  related costs.........................  2,050,000        20,000      17,815,000              --               --      17,835,000
Exercise of warrants....................  1,364,000        14,000       1,386,000              --               --       1,400,000
Net income..............................         --            --              --         793,000               --         793,000
                                         ----------      ---------     ----------     -----------       ----------      ----------
Balance at December 31, 1996............ 10,735,600        107,000     19,201,000      (2,146,000)              --      17,162,000
Issuance of common stock, net of
  related costs......................... 1,150,000          12,000      9,888,000              --               --       9,900,000
Exercise of stock options...............   102,381           1,000        838,000              --               --         839,000
Tax benefit from exercise of stock
  options...............................        --              --        248,000              --               --         248,000
Currency Translation  adjustments.......        --              --             --              --         (158,000)       (158,000)
Net income..............................        --              --             --       4,471,000               --       4,471,000
                                         ----------       ---------    ----------     -----------       ----------      ----------
Balance at December 31, 1997............ 11,987,981       $ 120,000   $30,175,000     $ 2,325,000       $ (158,000)    $32,462,000
                                         ==========        ========    ==========      ==========        =========      ==========

</TABLE>









                                      F-5
<PAGE>


                       INTELLIGROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 1997 and 1996

<TABLE>

                                                        1997            1996
                                                     ------------    ------------
<S>                                                  <C>             <C>
Cash flows from operating activities:
  Net income......................................   $ 4,471,000     $  793,000
  Adjustments to reconcile net income to net
    cash used in operating activities:
      Depreciation and amortization...............       392,000        214,000
      Provision for doubtful accounts.............       765,000        590,000
      Extraordinary charge........................            --      1,444,000
      Deferred income taxes.......................        98,000       (331,000)
      Tax benefit from exercise of stock options..       248,000             --
  Changes in operating assets and liabilities:
      Restricted cash deposited in escrow.........            --        100,000
      Accounts receivable.........................    (9,895,000)    (4,399,000)
      Unbilled services...........................    (4,918,000)    (1,347,000)
      Other current assets........................      (176,000)      (489,000)
      Other assets................................      (112,000)      (197,000)
      Cash overdraft..............................            --        (83,000)
      Accounts payable............................       947,000     (1,074,000)
      Accrued payroll and related taxes...........       822,000       (754,000)
      Accrued expenses and other liabilities......      (194,000)       736,000
      Income taxes payable........................       366,000        535,000
                                                     -----------      ---------
        Net cash used in operating activities.....    (7,186,000)    (4,262,000)
                                                     -----------      ---------

Cash flows from investing activities:
  Purchases of equipment..........................    (2,477,000)    (1,143,000)
                                                     -----------      ---------

Cash flows from financing activities:
  Proceeds from issuance of common stock, net          9,900,000     17,835,000
    of issuance costs.............................
  Proceeds from exercise of stock options.........       839,000             --
  Proceeds from subordinated debentures and
    warrants, net of issuance costs...............            --      5,888,000
  Repayment of subordinated debentures............            --     (6,000,000)
  Repurchase of common stock......................            --     (1,500,000)
  Repayments to factors, net......................            --     (3,343,000)
  Repayments of lines of credit, net..............            --        (45,000)
  Principal payments under capital leases.........        (6,000)       (22,000)
                                                     -----------     ----------
        Net cash provided by financing activities     10,733,000     12,813,000
                                                     -----------     ----------
  Effect of foreign currency exchange rate              (158,000)            --
    changes on cash...............................
        Net increase in cash and cash equivalents        912,000      7,408,000
Cash and cash equivalents at beginning of year...      7,479,000         71,000
                                                     -----------     ----------
Cash and cash equivalents at end of year..........   $ 8,391,000    $ 7,479,000
                                                     ===========     ==========
Supplemental disclosures of cash flow information:
  Cash paid for interest..........................   $       --     $ 1,264,000
                                                    ============     ==========
  Cash paid for income taxes......................   $ 1,795,000    $       --
                                                    ============     ==========

</TABLE>

                See notes to consolidated financial statements.


                                      F-6
<PAGE>


                       INTELLIGROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Summary of Significant Accounting Policies

Business

     Intelligroup,  Inc., and its  subsidiaries  (the "Company")  provide a wide
range of information  technology services,  including  enterprise-wide  business
process solutions,  systems integration and custom software development based on
leading  technologies.  The Company  markets its  services to a wide  variety of
industries  primarily  in the  United  States.  The  majority  of the  Company's
business is with large established companies, including consulting firms serving
numerous industries.

Principles of Consolidation and Use of Estimates

     The accompanying financial statements include the accounts of Intelligroup,
Inc.  and  its  majority  owned   subsidiaries.   Minority  interests  were  not
significant at December 31, 1997 and 1996. All significant intercompany balances
and transactions have been eliminated.

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

Cash and Cash Equivalents

     Cash  and  cash  equivalents   consist  of  investments  in  highly  liquid
short-term instruments, with maturities of three months or less from the date of
purchase.

Equipment

     Equipment is stated at cost, less accumulated depreciation. Depreciation is
provided using the  straight-line  method over the estimated useful lives of the
assets (five years).  Costs of maintenance and repairs are charged to expense as
incurred.

Revenue Recognition

     The Company generates revenue from professional services rendered.  Revenue
is recognized as services are performed with the corresponding cost of providing
those  services  reflected as cost of sales.  Substantially  all  customers  are
billed on a per diem  basis  whereby  actual  time is  charged  directly  to the
customer.  Billings to customers  for  out-of-pocket  expenses are recorded as a
reduction of expenses incurred.  Unbilled services at December 31, 1997 and 1996
represent  services provided which are billed  subsequent to year-end.  All such
amounts are anticipated to be realized in the following year.



                                      F-7
<PAGE>

Note 1 - Summary of Significant Accounting Policies - (Continued)

Allowance for Doubtful Accounts

     The Company  provides an  allowance  for  doubtful  accounts  arising  from
services,  which is based upon a review of  outstanding  receivables  as well as
historical collection  information.  In determining the amount of the allowance,
management is required to make certain estimates and assumptions.  The provision
for  doubtful   accounts  totaled  $765,000  and  $590,000  in  1997  and  1996,
respectively.  Credit is granted to substantially  all customers on an unsecured
basis.

Recoverability of Long-Lived Assets

     The  Company  reviews  the  recoverability  of its  long-lived  assets on a
periodic  basis in order to identify  business  conditions  which may indicate a
possible impairment.  The assessment for potential impairment is based primarily
on the Company's  ability to recover the  unamortized  balance of its long-lived
assets from expected  future cash flows from its  operations on an  undiscounted
basis.

Stock-Based Compensation

     Stock-based  compensation  is recognized  using the intrinsic value method.
For disclosure purposes, pro forma net income and earnings per share impacts are
provided as if the fair market value method had been applied.

Currency Translation

     Assets and liabilities  relating to foreign  operations are translated into
U.S.  dollars using exchange  rates in effect at the balance sheet date;  income
and expenses are translated  into U.S.  dollars using monthly  average  exchange
rates  during  the year.  Translation  adjustments  associated  with  assets and
liabilities  are  excluded  from  income and  credited  or charged  directly  to
shareholders' equity. Translation adjustments for 1996 were not material.

Concentrations

     For the years ended December 31, 1997 and 1996,  approximately  68% and 74%
of revenue,  respectively,  was  derived  from  projects in which the  Company's
personnel implemented software developed by SAP. The Company's future success in
its   SAP-related   consulting   services   depends  largely  on  its  continued
relationship   with  SAP  and  on  its  continued   status  as  a  SAP  National
Implementation  Partner,  which  was  first  obtained  in  1995.  The  Company's
agreement  with SAP  (the  "Agreement")  is  awarded  on an  annual  basis.  The
Company's current contract expires on December 31, 1998. This Agreement contains
no minimum revenue


                                      F-8
<PAGE>

Note 1 - Summary of Significant Accounting Policies - (Continued)

requirements or cost sharing  arrangements  and does not provide for commissions
or royalties to either party. In February 1997, the Company  achieved a National
Logo  Partner  relationship  with SAP.  For the year ended  December  31,  1997,
approximately  14% of revenue was derived from  projects in which the  Company's
personnel implemented software developed by Oracle.

     A substantial  portion of the Company's revenue is derived from projects in
which an information  technology consulting firm other than the Company has been
retained by the end-user  organization to manage the overall project.  For years
ended  December 31, 1997 and 1996, 38% and 44%,  respectively,  of the Company's
revenue was  generated by serving as a member of consulting  teams  assembled by
other information technology consulting firms.

     One customer accounted for approximately 11% and 13% of revenue in 1997 and
1996, respectively. Accounts receivable due from this customer was approximately
$1,628,000  and  $2,268,000  as of  December  31,  1997 and 1996,  respectively.
Another customer accounted for approximately 12% and 20% of revenue for 1997 and
1996, respectively. Accounts receivable due from this customer was approximately
$2,049,000 and $988,000 as of December 31, 1997 and 1996, respectively.

Foreign Operations

     Revenues  and  identifiable   assets  from  foreign   operations  were  not
significant in 1997 and 1996.  During 1997,  approximately  $2,100,000 of income
from operations was generated from foreign  operations  while during 1996 income
from foreign operations was not significant.

Income Taxes

     The  Company  accounts  for income  taxes  pursuant  to the  provisions  of
Statement of Financial  Accounting  Standards  No. 109,  "Accounting  for Income
Taxes," ("SFAS No. 109") which utilizes the liability  method and results in the
determination  of deferred  taxes based on the  estimated  future tax effects of
differences  between  the  financial  statement  and tax  bases  of  assets  and
liabilities,  using enacted tax rates currently in effect.  The Company does not
provide  for   additional   U.S.   income   taxes  on   undistributed   earnings
(approximately  $1,855,000)  considered  to be  permanently  invested in foreign
subsidiaries.





                                      F-9
<PAGE>


Note 1 - Summary of Significant Accounting Policies - (Continued)

Earnings Per Share

     In the fourth quarter of 1997, the Company  adopted  Statement of Financial
Accounting  Standards  ("SFAS") No. 128  "Earnings  per share,"  which  requires
certain  changes to the manner in which  earnings per share ("EPS") is reported.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997,  and,
requires  restatement of previously reported earnings per share. The computation
of basic earnings per share and diluted earnings per share were as follows:

                                               1997                 1996
                                       ---------------------  -----------------

Net Income                                  $ 4,471,000           $  793,000
                                             ----------            ---------

Denominator:

   Weighted average number of common
   shares...........................         11,362,000            9,729,000
                                            -----------           ----------
   Basic earnings per share.........        $      0.39           $     0.08
                                             ==========            =========

Denominator:

   Weighted average number of common
   shares...........................         11,362,000            9,729,000
   Common share equivalents of
   outstanding stock options........            480,000            1,260,000
                                            -----------           ----------
Total shares........................         11,842,000           10,989,000
                                            -----------           ----------
Diluted earnings per share..........        $      0.38           $     0.07
                                             ==========            =========


Recently Issued Accounting Standards

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting  Comprehensive  Income,"  which  establishes  standards for reporting
comprehensive  income and its components,  and SFAS No. 131,  "Disclosures about
Segments of an Enterprise and Related  Information,"  which establishes  revised
reporting and disclosure  requirements for operating  segments.  These standards
increase  financial  reporting  disclosures  and  will  have  no  impact  on the
Company's financial position or results from operations.

Financial Instruments

     Financial  instruments that potentially  subject the Company to credit risk
consist  principally of trade receivables and unbilled  services.  Management of
the Company believes the fair value of accounts receivable and unbilled services
approximates the carrying value.



                                      F-10
<PAGE>


Note 2 - Equipment

     Equipment consists of the following as of December 31:

                                                    1997               1996
                                              -----------------  ---------------
       Vehicles.............................    $   26,000         $   26,000
       Furniture............................       285,000             98,000
       Equipment............................     3,690,000          1,400,000
                                                ----------          ---------

                                                 4,001,000          1,524,000

       Less-Accumulated depreciation........      (635,000)          (243,000)
                                                ----------          ---------

                                                $3,366,000         $1,281,000
                                                ==========          =========

     Included in the above is $102,000 of equipment held under capital leases at
December  31, 1997 and 1996.  Depreciation  expense was $392,000 and $144,000 in
1997 and 1996, respectively.

Note 3 - Lines of Credit and Subordinated Debentures

     In January  1997,  and as later  amended on August 18,  1997,  the  Company
entered into a two-year  credit  agreement with a bank (the "Bank").  The credit
facility with the Bank has two  components  comprised of (i) a revolving line of
credit pursuant to which the Company may borrow up to $7.5 million either at the
Bank's prime rate per annum or the EuroRate plus 2% (at the  Company's  option),
and (ii)  equipment term loans pursuant to which the Company may borrow up to an
aggregate  of  $350,000  (at the Bank's  prime rate plus 1/4 of 1% per annum) to
purchase  equipment.  The credit agreement  contains covenants which require the
Company to (i) maintain its working  capital during the year at no less than 90%
of the working capital at the end of the immediately  preceding  fiscal year and
at the end of each fiscal  year at no less than 105% of its  working  capital at
the end of the immediately preceding fiscal year; and (ii) maintain its tangible
net worth  during the year at no less than 95% of its  tangible net worth at the
end of the immediately  preceding fiscal year and at the end of each fiscal year
at no less  than  108%  of  tangible  net  worth  at the end of the  immediately
preceding fiscal year. The Company's  obligations under the credit agreement are
collateralized  by  substantially  all of the  Company's  assets,  including its
accounts receivable and intellectual  property.  The Company's obligations under
the credit  facility are payable at the  expiration  of such facility on January
22, 1999. These terms are subject to the Company  maintaining an  unsubordinated
debt to tangible  net worth ratio of no greater  than one to one and an earnings
before  interest  and taxes to interest  expense  ratio of no less than three to
one. The Bank also agreed to release the collateral  securing the revolving line
of credit if the Company meets certain financial  criteria at December 31, 1997.
At  December  31,  1997,  the  Company  failed  to meet such  certain  financial
criteria,  and as a result, the Bank did not release the collateral securing the
revolving  line of credit.  The Company has not  utilized  this credit  facility
since its inception.

     In March 1996, in anticipation of the debenture  financing described below,
the Company obtained a $750,000 line of credit,  payable on demand, from a bank.
The  line of  credit  carried  interest  at the  federal  funds  rate  plus  1%.
Borrowings  under the line  totaled  $300,000  in April  1996,  when the Company
repaid all amounts outstanding under such line in connection with the



                                      F-11
<PAGE>


Note 3 - Lines of Credit and Subordinated Debentures - (Continued)

     debenture financing described below. The line of credit has been terminated
in accordance  with the terms of such debenture  financing.  The Company has not
utilized this credit facility since its inception.

     In April  1996,  the  Company  issued and sold  five-year  9%  subordinated
debentures in the aggregate  principal amount of $6.0 million to Summit Ventures
IV, L.P. and Summit Investors III, L.P. The subordinated  debentures were issued
to raise funds for working capital and general corporate purposes, to repurchase
from the then-current shareholders,  Messrs. Pandey, Koneru and Valluripalli, an
aggregate of 4,881,066  shares of Common Stock for an aggregate of $1.5 million,
to repay approximately  $300,000  outstanding under the $750,000 credit facility
described above and to satisfy approximately  $358,000 of cash overdrafts.  Upon
receipt of the net  proceeds  from the  Company's  initial  public  offering  in
October 1996, the Company prepaid  approximately $6.3 million,  representing all
amounts outstanding under such debentures, including interest.

Note 4 - Loans Payable to Factors

     On October 20, 1995, the Company entered into a factoring  agreement with a
financing  institution  (the  "Factor")  under which the Company was required to
offer all its trade accounts  receivable to the Factor for  financing;  however,
the Factor was not  obligated to accept them.  The  agreement  had a term of one
year with  automatic  one-year  renewals  unless the  Company or the Factor gave
notice of  cancellation.  The Factor charged an  administration  fee of 0.75% on
each  invoice plus an  additional  0.75% for each 15-day  increment  the invoice
remained unpaid,  to a maximum of 120 days, or 6.5%. If the amount of a factored
receivable  was not paid by reason of financial  inability of the customer,  the
Company was not liable to reimburse the Factor. If, however, the Factor, through
legal action or otherwise,  settled,  compromised  or assigned the claim for any
receivable,  the  amount  of  any  reduction  resulting  from  such  settlement,
compromise  or  assignment  reduced the balance due to the Company.  The Company
used  approximately  $4.4 million of the net proceeds from the Company's initial
public  offering  to repay  loans  from the  Factor  (See  Note 8).  The  Factor
agreement was terminated in October 1996.



                                      F-12
<PAGE>


Note 5 - Income Taxes

     Income tax  attributable to income from continuing  operations  consists of
the following:

                                                    1997              1996
                                              -----------------  ---------------

             Current:
               Federal.......................   $  1,384,000       $  631,000
               State.........................        389,000          200,000
               Foreign.......................        168,000               --
                                                 -----------        ---------
                                                   1,941,000          831,000
                                                 -----------        ---------

             Deferred:
               Federal.......................         76,000         (259,000)
               State.........................         22,000          (72,000)
                                                 -----------        ---------
                                                      98,000         (331,000)
                                                 -----------        ---------

             Total...........................   $  2,039,000       $  500,000
                                                 ===========        =========

     The provision for income taxes differs from the amount computed by applying
the statutory rate of 35% to income before income taxes.  The principal  reasons
for this difference are:

                                                        1997             1996
                                                  -----------------  -----------

       Tax at federal statutory rate.............        35%            35%
       Nondeductible expenses....................         1              1
       State income tax, net of federal benefit..         4             (3)
       Utilization of net operating loss                 --             (8)
         carryforwards...........................
       Foreign losses for which no benefit is            --              9
         available...............................
       Changes in valuation allowance............        (3)           (14)
       Foreign Operations taxed at less than
         U.S. statutory rate, primarily India....        (9)            --
       Other.....................................         3             --
                                                      ------         -----
       Effective tax rate........................        31%            20%
                                                      ======         =====

     In 1996, the Company elected a five year tax holiday in India in accordance
with a local tax incentive  program whereby no income taxes will be due for such
period.


     Deferred  income  taxes  reflect  the tax effect of  temporary  differences
between the carrying amount of assets and  liabilities  for financial  reporting
purposes and the amounts used for income



                                      F-13
<PAGE>


Note 5 - Income Taxes - (Continued)


tax purposes.  The significant  components of the Company's  deferred tax assets
and  liabilities  under SFAS No.  109 as of  December  31,  1997 and 1996 are as
follows:

                                                       1997              1996
                                                  --------------    ------------
       Deferred tax assets:
         Allowance for doubtful accounts.........    $ 327,000      $  224,000
         Certain accrued liabilities.............       77,000         146,000
         Net operating losses....................           --         131,000
         Other...................................           --          37,000
                                                      --------         -------
       Total deferred tax assets.................      404,000         538,000

       Deferred tax liability-accelerated              171,000              --
         depreciation............................

       Valuation allowance for deferred tax
         assets..................................           --       (207,000)
                                                      --------       ---------

       Net deferred tax assets...................    $ 233,000      $ 331,000
                                                      ========        ========

     Realization  of the net  deferred  tax assets is dependent on the timing of
the  reversal of temporary  differences.  Although  realization  is not assured,
management  believes it is more likely than not,  that the 1997 net deferred tax
assets will be realized.  The Company reduced their valuation  allowance in 1997
and 1996. The 1996 reduction was as a result of current and  anticipated  future
profitability.  The Company's 1996 valuation  allowance related primarily to the
net  operating  loss of a  foreign  subsidiary  which  was  not yet  profitable,
however, such subsidiary was able to utilize their net operating loss in 1997.

Note 6 - Commitments and Contingencies

Employment Agreements

     As of December 31,  1997,  the Company had two year  employment  agreements
with five key employees with remaining  aggregate  compensation of approximately
$360,000.

Payroll and Related Taxes

     As of December 31,  1995,  the Company had  $1,000,000  included in accrued
payroll and taxes  resulting  from unpaid  federal and state  payroll  taxes for
certain  employees.  As a result of the  Company's  voluntary  disclosure to the
Internal  Revenue  Service  ("IRS")  on June 5,  1996,  the IRS  issued an audit
assessment  to the Company  for  $814,000  which had been  included in the above
accrual.  The assessment was paid in 1996. The Company's principal  shareholders
have agreed to  indemnify  the Company for any and all losses  which the Company
may sustain in excess of the amounts  accrued as of  December  31, 1995  arising
from  or  relating  to  federal  or  state  tax,  interest  or  penalty  payment
obligations, net of any tax benefits realized by the Company, resulting from the
subject matter discussed above.



                                      F-14
<PAGE>


Note 6 - Commitments and Contingencies - (Continued)

Leases

     The Company  leases  office space and office  equipment  under  capital and
operating  leases that have initial or remaining  non-cancelable  lease terms in
excess of one year as of December  31, 1997.  Future  minimum  aggregate  annual
lease payments are as follows:

        For the Years Ending December 31,       Capital       Operating
       ------------------------------------  -------------  -------------
       1998..............................      $20,000       $493,000
       1999..............................       20,000        456,000
       2000..............................       20,000        258,000
       2001..............................       20,000        260,000
       2002..............................           --        228,000
                                               -------
                                                80,000
       Less-Interest.....................       (9,000)
                                               -------
                                                71,000
        Less-Current portion..............     (20,000)
                                               -------
                                              $ 51,000
                                               ========

     The  Company is in the process of  finalizing  a ten year lease for its new
corporate  headquarters.  Annual  rent  expense is  anticipated  to  approximate
$1,200,000.  Rent  expense  for the years ended  December  31, 1997 and 1996 was
$388,000 and $176,000, respectively.

Legal

     The  Company  is  engaged  in  certain   other  legal  and   administrative
proceedings.  Management believes the outcome of these proceedings will not have
a material  adverse  effect on the  Company's  financial  position or results of
operations.

Note 7 - Stock Option Plans and Warrants

     The  Company's  stock  option  plans  permit  the  granting  of  options to
employees,  non-employee directors and consultants.  The Option Committee of the
Board of Directors  generally has the authority to select individuals who are to
receive  options  and to  specify  the terms and  conditions  of each  option so
granted,  including  the  number of shares  covered by the  option,  the type of
option  (incentive  stock option or  non-qualified  stock option),  the exercise
price,  vesting  provisions,  and the overall  option term. A total of 1,590,000
shares  of Common  Stock  have  been  reserved  for  issuance  under the  plans.
Subsequent  to December 31,  1997,  the Company  granted  options to purchase an
aggregate  of 226,850  shares of its  Common  Stock to  certain  employees  at a
weighted  average  exercise price of $16.12 per share. All of the options issued
pursuant to these plans expire ten years from the date of grant.




                                      F-15
<PAGE>

Note 7 - Stock Option Plans and Warrants - (Continued)

     In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
which  was  effective  January  1,  1996,  the fair  value of  option  grants is
estimated  on the date of grant  using the  Black-Scholes  option-pricing  model
using the following weighted-average assumptions: expected volatility of 62% and
41%, risk-free interest rate of 7.0% and 5.6%; and expected lives of 4.5 and 3.1
years,  in 1997 and 1996,  respectively.  The  weighted  average  fair  value of
options granted during 1997 and 1996 was $6.96 and $2.93, respectively.

                                                 Weighted
                               Number of          Average
                                Shares        Exercise Price
---------------------------------------------------------------
Options Outstanding,
   December 31, 1995                  --                --
Granted                          580,000              8.38
Canceled                         (8,200)              8.00
---------------------------------------------------------------
Options Outstanding,
   December 31, 1996
   (none exercisable)            571,800              8.39
Granted                          647,640             11.52
Exercised                      (102,381)              8.20
Canceled                        (74,113)              9.78
---------------------------------------------------------------
Options Outstanding,
   December 31, 1997
   (93,674 exercisable)        1,042,946             10.25
                               =========             =====



                                      F-16
<PAGE>



Note 7 - Stock Option Plans and Warrants - (Continued)

     The following table summarizes  information about stock options outstanding
and exercisable at December 31, 1997:

                  Outstanding                        Exercisable
                  -----------                        -----------

                             Weighted     Weighted                   Weighted
  Exercise     Number of     Average       Average     Number of     Average
 Price Range     shares     Remaining     Exercise       shares      Exercise
                             Life (in       Price                     Price
                              years)
--------------------------------------------------------------------------------
$8 to 10         398,306        8.6         $8.20        73,402        $8.22
$10 to 12        554,440        9.3        $10.82        16,272       $10.99
$12 to 15         50,200        9.4        $13.33         4,000       $12.13
$15 to 22         40,000        9.8        $18.92            --           --
$8 to 22       1,042,946        9.0        $10.25        93,674        $8.87


     As permitted by SFAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value.  Accordingly,  no compensation  cost has
been  recognized  for the stock  option  plans.  Had  compensation  cost for the
Company's  stock  option  plans been  determined  based on the fair value option
pricing method of accounting, the tax-effective impact would be as follows:


                                        1997                     1996
--------------------------------------------------------------------------------
Net income:
   as reported                    $ 4,471,000              $  793,000
   pro forma                      $ 3,469,000              $  434,000
--------------------------------------------------------------------------------
Basic Earnings per Share:
   as reported                          $0.39                   $0.08
   pro forma                            $0.31                   $0.04
--------------------------------------------------------------------------------
Diluted Earnings per Share:
   as reported                          $0.38                   $0.07
   pro forma                            $0.29                   $0.04


     The subordinated  debenture  holders (see Note 3) received warrants for the
purchase of up to 20.8% of the fully  diluted  Common Stock of the  Company,  as
defined,  at a nominal  exercise price (less than $0.25 in the  aggregate).  The
warrants  were  exercised  in September  1996 which  resulted in the issuance of
1,364,000 shares of the Company's Common Stock.



                                      F-17
<PAGE>


Note 8 - Initial Public Offering, Stock Split and Preferred Stock Authorization

     In July 1996, the Company's Board of Directors recommended and shareholders
approved an amendment to the Company's Certificate of Incorporation to effect an
81,351.1111-for-1  stock split.  All common  shares and per share amounts in the
accompanying  financial  statements  have been  adjusted  retroactively  to give
effect to the stock split.

     The Company's  initial public offering for the sale of 2,050,000  shares of
its Common Stock became  effective on September 26, 1996 and the net proceeds of
approximately $19,065,000 (before deducting expenses of the offering paid by the
Company)  were  received on October 2, 1996.  A portion of the net  proceeds was
used to prepay subordinated debentures and repay other debt (See Notes 3 and 4).

     On July 2, 1997, the Company  consummated a follow-on  public offering (the
"Offering") of 1,000,000  shares of its Common Stock at a price to the public of
$9.50 per share.  On July 15, 1997 and as part of the  Offering,  an  additional
150,000  shares at $9.50 per share were  issued and sold by the Company to cover
over-allotments.  The net  proceeds  to the  Company  from the  Offering,  after
underwriting discounts and commissions and other expenses of the Offering,  were
approximately $9,900,000.



                                      F-18