<PAGE>
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                     FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                                ACT OF 1934
 
For the fiscal year ended: DECEMBER 31, 1997     Commission File Number: 0-23384
 
                                INSO CORPORATION
             (Exact name of registrant as specified in its charter)
 
DELAWARE                                                              04-3216243
(State or other jurisdiction of incorporation                   (I.R.S. Employer
or organization)                                             Identification No.)
 
31 ST. JAMES AVENUE, BOSTON, MA                                            02116
(Address of principal executive offices)                              (Zip code)
 
                                 (617) 753-6500
              (Registrant's telephone number, including area code)
 
          Securities Registered Pursuant to Section 12(g) of the Act:
                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                                (Title of class)
 
    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes: /X/ No:
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
 
Class                                          Outstanding at March 12, 1998
COMMON STOCK (PAR VALUE $.01 PER SHARE)                           14,717,168
 
    As of March 12, 1998, the aggregate market value of voting stock held by
non-affiliates of the registrant was $151,753,952.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    Portions of the Registrant's Definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference into Part III.

<PAGE>

INSO CORPORATION FORM 10-K PART I
 
ITEM 1. BUSINESS
 
    Inso Corporation ("Inso" or the "Company") is a supplier of software
solutions for sharing and publishing electronic information. Inso provides
software solutions for the distribution of all forms of electronic information,
from simple memos to complex technical manuals, in environments ranging from
desktop computers to the Internet. Through enterprise license agreements,
integration in popular software products, and bundling agreements, Inso
technology is installed on more than 70 million desktops worldwide. Inso's
products are focused on three main areas: Electronic Publishing Solutions,
Dynamic Document Exchange, and Lexical and Linguistic Products. The Company's
Electronic Publishing Solutions products enable corporate and commercial
publishers to convert, manage, and distribute electronic content from a wide
variety of sources via multiple media types including the World Wide Web,
intranets, CD-ROM, and print. Dynamic Document Exchange products enable users to
filter, view, copy, print, and publish electronic information, regardless of
format or structure. Inso also develops and markets a line of Lexical and
Linguistic products that enhance the quality of written communications by
reducing or eliminating many different types of writing errors, and provides
access to authoritative reference information in electronic form. Inso develops
products which are compatible with Standard Generalized Markup Language
("SGML"), Hypertext Markup Language ("HTML"), and eXtensible Markup Language
("XML"). The Company markets its products worldwide to corporations, government
organizations and end-users, as well as to original equipment manufacturers
("OEMs") of computer hardware, software, and consumer electronics products.
 
ELECTRONIC PUBLISHING SOLUTIONS PRODUCTS
 
    The Company's Electronic Publishing Solutions products consist of a line of
componentized products designed to meet the electronic publishing needs of
software developers and end-users in a wide variety of implementations. The
Company's products serve various electronic publishing needs, from individual
document access and navigation to the distribution of large and technically
complex data sets to thousands of users. These products are marketed worldwide
primarily through direct and reseller channels to corporations and other
enterprise publishers. These products are designed for use in desktop,
proprietary network, and Internet environments, including intranets and the
World Wide Web. Starting in 1996 and continuing during 1997, the Company has
been implementing an Electronic Publishing Solutions initiative to provide its
customers with a broad spectrum of software solutions through the integration of
its complementary technologies and core competencies. The Company anticipates
that it will continue to make significant investments in product development and
marketing programs to support this initiative during 1998.
 
    With more than seven years of experience in engineering, developing, and
marketing products based upon SGML, and now XML, Inso has become a leading
provider of standards-based electronic publishing solutions for large-volume
corporate and commercial publishers. The DynaText-Registered Trademark-
Professional Publishing System provides publishers with a single, automated
production process for the creation and delivery of highly navigable and
searchable electronic documents on the Web, CD-ROM, and LANs. The recently
released DynaBase-Registered Trademark- Dynamic Web Publishing System is a
comprehensive, integrated solution for professional Web publishing, focusing on
the management and delivery of information for large, dynamic Web sites.
 
    Inso employees are involved in electronic publishing standards development.
Staff members include early pioneers in developing SGML, the international
standard for open interchange of documents; HTML, the current language for
interchange of text on the World Wide Web; and XML, a recently approved standard
that is designed to provide greater information interchange functionality for
the Web. XML has been endorsed by major independent software vendors and
Internet organizations, including the W3C (World Wide Web Consortium).
 
    Inso's Electronic Publishing Solutions products support XML, SGML, and 
HTML. These products also provide support for dynamic information delivery. 
Dynamic information delivery represents an evolution from the current static 
(or pre-assembled) method of information delivery. Static information is 
delivered as the entire document or file in which the desired piece of 
information was originally created and stored. Dynamic information is the 
element of desired information only, free of the constraint of the original 
format, and free of surrounding and unwanted information. The desired 
information may be combined with desired information from within other 
documents, and automatically assembled into a new "virtual document" by 
Inso's "client-aware" software products based upon criteria such as user 
preference, profile, and browser.
 
DYNAMIC DOCUMENT EXCHANGE PRODUCTS
 
    The Company's Dynamic Document Exchange products include its file-viewing
and conversion products, and its "on demand" Web publishing products. These
products allow organizations to share documents across networks, intranet, and
Internet environments, and electronic mail systems with different applications
and operating system platforms. These products are marketed both to OEMs and
through direct and reseller channels. These products include the Quick View
Plus-Registered Trademark-enterprise viewing product, the Outside
In-Registered Trademark- viewing technology, the
ImageStream-Registered Trademark- graphics filters, the Word for Word text
filters, and the Outside In-Registered Trademark- HTML Export product. Quick
View Plus provides corporations and consumers with the ability to view, copy,
and print files originating in more than 250 applications and in disparate
operating system environments. The Outside In viewing and HTML Export OEM
products provide file viewing and Web delivery functionality to software vendors
and corporate software developers. During 1997, the Company released the first
version of Outside In HTML Export and new versions of both Outside In and Quick
View Plus, including the Company's first commercially available file viewing
product for the major UNIX operating system platforms. Also during 1997, the
Company released a new version of ImageStream that incorporates substantial
improvements in the coverage of graphical document and data types.
 
    As indicated above, during 1997, the Company introduced Outside In HTML
Export, an OEM product that dynamically converts hundreds of proprietary formats
into high-quality HTML to enable document access via standard Web browsers. As a
result, products that integrate this technology enable businesses to share
documents across corporate intranets or the Internet without a lengthy
conversion process and without requiring proprietary technology to be installed
on consumers' desktops. In 1998, the Company expects to expand the product to
include support for the new XML standard.

<PAGE>

    On February 6, 1997, the Company acquired the intellectual property and
other assets of Adobe Systems, Inc.'s document access and conversion business,
formerly known as Mastersoft, including the Word for Word document conversion
technology, the Viewer 95-Registered Trademark- file access and display
technologies, and the end-user products formerly marketed under the name Adobe
File Utilities. (See "Acquisition of Mastersoft.") The acquisition of these
assets also included related customer agreements. The Mastersoft business
operates as part of Inso Chicago Corporation ("Inso Chicago").
 
LEXICAL AND LINGUISTIC PRODUCTS
 
    The Company's Lexical and Linguistic products include its Proofing Tools 
software programs and related databases, which correct errors in spelling, 
grammar, punctuation, capitalization, spacing, and other mistakes in 
documents created by users of computer applications, as well as its 
Information Products, which provide authoritative reference content in 
searchable electronic form. These products are marketed primarily through OEM 
channels. The Company's Proofing Tools products include International 
CorrectSpell-TM-, a spelling correction system; CorrecText-Registered 
Trademark- Grammar Correction System, a leading English grammar correction 
technology used in word processors; and International ProofReader-TM-, a 
multilingual proofreading system available in 10 languages that addresses 
numerous classes of writing errors and style problems. In 1997, the Company 
released a Java version of International ProofReader and new versions of 
CorrectEnglish-TM-, a writing system that targets the specific errors made by 
native speakers of Chinese, French, German, Japanese, and Spanish when 
producing English-language documents. Also in 1997, the Company released 
NativeEnglish, an end-user version of CorrectEnglish for native speakers of 
French, German, and Spanish.

ACQUISITION OF MASTERSOFT
 
    On February 6, 1997, the Company acquired the intellectual property and
certain other assets of Adobe Systems, Inc.'s document access and conversion
business, formerly known as Mastersoft, for $2,965,000 using available cash. The
transaction was accounted for as a purchase and included the acquisition of
certain technology under research and development, which resulted in a charge to
the Company's consolidated results for the quarter ended March 31, 1997, of
$1,800,000, or $0.13 per share. The Mastersoft business operates as part of Inso
Chicago under the Inso name. (See Note 4 of "Notes to Consolidated Financial
Statements" for additional information with respect to acquisitions.)
 
ACQUISITION OF LEVEL FIVE RESEARCH, INC.
 
    On April 22, 1997, the Company acquired all of the outstanding capital stock
of privately held Level Five Research, Inc. from Information Builders, Inc. for
$5,000,000 using available cash. The Company also caused, at the time of
acquisition, Level Five Research, Inc. to enter into noncompetition agreements
with key executives and made aggregate payments of $300,000 in cash under those
agreements. Level Five Research, Inc., now Inso Florida Corporation, is a
developer of software and systems that apply intelligent technologies to data
access management. The transaction was accounted for as a purchase and included
the purchase of certain technology under research and development, which
resulted in a charge to the Company's consolidated results for the quarter ended
June 30, 1997, of $3,600,000, or $0.25 per share. (See Note 4 of "Notes to
Consolidated Financial Statements" for additional information with respect to
acquisitions.)
 
INFORMATION PLEASE LLC
 
    On April 23, 1997, the Company entered into an agreement for the further
development and marketing of the Information Please-Registered Trademark-
Almanac product line, with Information Please LLC (the "Partnership"). The
Company transferred ownership of the Information Please brand and the
intellectual properties that compose the almanac product line to the
Partnership. In addition, some of the Company's technical and editorial staff
members became employees of the Partnership. The Company retained a 19.8%
ownership position in the new venture. As of December 31, 1997, the Company's
investment in Information Please LLC approximated $2,600,000. (See Note 4 of
"Notes to Consolidated Financial Statements" for additional information with
respect to Information Please LLC.)
 
ACQUISITION OF HENDERSON SOFTWARE, INC.
 
    On November 24, 1997, the Company acquired all of the outstanding stock of
privately held Henderson Software, Inc. for $750,000 using available cash.
Henderson Software is a provider of Computer Graphics Metafile viewing and
filtering solutions. The transaction was accounted for as a purchase and
included the purchase of certain technology under research and development,
which resulted in a charge to the Company's consolidated results for the quarter
ended December 31, 1997 of $700,000, or $0.05 per share. (See Note 4 of "Notes
to Consolidated Financial Statements" for additional information with respect to
acquisitions.)
 
ACQUISITION OF VIEWPORT DEVELOPMENT AB
 
    On March 12, 1998, the Company acquired all of the outstanding stock of
privately held ViewPort Development AB for $2,500,000 using available cash.
ViewPort, through its wholly owned subsidiary Synex Information AB, is a
developer of browser engines and application development toolkits for viewing
SGML information. The transaction will be accounted for as a purchase. The
acquisition includes certain technology under research and development, which
will be written-off with a one-time charge, estimated to be between $1,800,000
and $2,200,000 to the Company's consolidated results for the quarter ending
March 31, 1998. (See Note 13 of "Notes to Consolidated Financial Statements" for
additional information.)

INTERNATIONAL OPERATIONS
 
    During 1997, the Company expanded the scope of its international operations.
The Company's international operations primarily support direct and indirect
distribution of products to corporate, government, and end-user customers.

<PAGE>

MARKETING, SALES, AND DISTRIBUTION
 
    The Company's sales and marketing organization, consisting of 135
individuals, is managed from the Company's headquarters in Boston,
Massachusetts, and includes sales representatives or account managers in several
major markets worldwide. The Company's corporate and governmental sales efforts
are conducted through sales forces dedicated to each of its product lines, under
unified geographic sales management. The Company conducts its OEM sales through
a dedicated account management program for large customers and through worldwide
new business development efforts.
 
    The Company, through its various subsidiaries, currently has operations in
many major European countries, as well as Japan and Australia. These operations
manage sales of the Company's products to end-users directly and through
networks of value-added resellers and distributors, as well as to OEMs.
Approximately $17,079,000 of the Company's revenues during 1997 originated with
customers outside the United States. The Company believes that a substantial
amount of products are shipped internationally by its domestic OEM customers.
Accordingly, the actual use of the Company's products by overseas end-users is
higher than the export revenues reported for accounting purposes in the
Company's "Notes to Consolidated Financial Statements."
 
CUSTOMERS
 
    For the year ended December 31, 1997, Microsoft Corporation ("Microsoft")
accounted for 28% of the Company's revenues compared to 35% for the year ended
December 31, 1996. As a result of the termination of its most significant
license with Microsoft, the Company expects that revenues received from
Microsoft will decline substantially in 1998.
 
RESEARCH AND DEVELOPMENT
 
    The Company operates in an industry that is subject to rapid technological
change, and its ability to compete and operate successfully depends on, among
other factors, its ability to anticipate such change. Accordingly, the Company
is committed to the development of new products and the continuing evaluation of
new technologies. During 1997 the Company made significant investments in
research and development in new products for use on or in conjunction with the
Internet and the World Wide Web, particularly the Outside In XML/HTML Export
product and the DynaBase Dynamic Web Publishing System. The rapid changes that
characterize these markets may require that the Company make substantial
additional investments in research and development in order to respond to
unforeseen market or technological developments. The Company expects to make
significant investments in 1998 in both its Electronic Publishing Solutions and
its Dynamic Document Exchange products. During 1997, 1996, and 1995, the
Company's expenditures for developing new products and product enhancements were
$29,015,000, $19,084,000, and $10,170,000, respectively. These expenditures
represented 35%, 27%, and 23%, respectively, of total revenues for those
periods. Of these amounts, $6,355,000, $2,865,000, and $1,364,000, respectively,
were capitalized in accordance with applicable accounting principles and are
subject to amortization over subsequent periods. The balance was charged as
product development expense.
 
COMPETITION
 
    The market for Electronic Publishing Solutions is characterized by a 
number of large participants offering full or partial solutions, based on 
both proprietary formats and open standards-based formats. Participants in 
this market include Adobe Systems, Inc. and its affiliates, an affiliate of 
Open Market, Inc., Quark Inc., SoftQuad International, Inc., and Vignette 
Corporation. In addition, there are a number of smaller organizations serving 
segments of the Electronic Publishing Solutions market. As the market for 
Electronic Publishing Solutions grows, the Company expects to face additional 
competition from participants offering standards-based solutions such as 
those offered by the Company. The Company expects that as it broadens its 
Electronic Publishing Solutions product line to include formats such as XML, 
it will encounter significant competition from a large number of 
participants. The Company also faces limited competition in certain market 
segments from large companies such as Oracle Corporation and International 
Business Machines Corporation. The Company believes that the principal 
competitive factors in this market are product quality and scalability, with 
price being a secondary factor.
 
    Competition in the markets for the Company's Dynamic Document Exchange
products is significant. The Company's viewing and conversion products, and its
on- demand Web publishing system, compete with offerings from Verity, Inc. in
the OEM market and from other proprietary file-viewing products. The Company
believes that the principal competitive factors in the direct corporate and
government market are product quality, compatibility with multiple applications
and operating systems, and update frequency, with price being a secondary
factor. The Company believes that the principal competitive factors in the OEM
market for Dynamic Document Exchange products are price, format coverage, and
ease of implementation.
 
    The Company believes that the principal competitive factors in the markets
for its Lexical and Linguistic products are product quality, ease of
implementation, language coverage, platform support, and price. Some of the
Company's competitors and potential competitors have substantially greater
development, marketing, sales, and financial resources than the Company.
 
    Many of the Company's competitors and potential competitors have
substantially greater development, marketing, sales, and financial resources
than the Company.
 
EMPLOYEES
 
    As of December 31, 1997, the Company had 439 employees, including 221 in
research and development, 135 in sales and marketing, and 83 in financial and
administrative positions.
 
    The Company believes that its future success will depend in large part upon
its continued ability to recruit and retain highly qualified technical,
managerial, and marketing personnel. To date, the Company has been successful in
attracting and retaining skilled employees. None of the Company's employees is
represented by a labor union, and the Company considers its relationship with
its employees to be satisfactory.

<PAGE>

ITEM 2. PROPERTY

    The Company's corporate headquarters are located in Boston, Massachusetts,
where the Company leases approximately 90,000 square feet of space. This lease
term expires November 2005. Inso Chicago leases approximately 28,230 square feet
of space in downtown Chicago, Illinois, with a lease term expiring September
2006. Inso Providence leases approximately 44,300 square feet of space in
Providence, Rhode Island. This lease has a term expiring in January 2007, and
includes options on contiguous space at a fixed rate as well as extension
provisions. The Company leases an aggregate of approximately 24,000 square feet
of office space in Kansas City, Missouri; Scottsdale, Arizona; Melbourne,
Florida; Portland, Oregon; and Boulder, Colorado, for certain of its product
development operations. In addition, the Company leases office space in the
United States and overseas for its worldwide marketing and sales activities. The
Company does not own any real property.
 
    The Company believes that the space currently under lease to the Company is
adequate for its current needs and that suitable additional or substitute space
will be available as needed to accommodate further physical expansion of the
Company's operations and for additional sales offices.
 
ITEM 3. LEGAL PROCEEDINGS
 
    The Company has, from time to time, become a party to claims and lawsuits in
the ordinary course of business. The Company is not a party to any litigation
that it believes would have a material adverse impact on its business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    None.
 
EXECUTIVE OFFICERS OF THE COMPANY
 
    Bruce G. Hill, who is 34 years old, has been Vice President, General
Counsel, and Secretary of the Company since March 1994 and Vice President of
Business Development since July 1997. Prior to joining the Company, Mr. Hill had
been an associate attorney specializing in corporate and mergers and
acquisitions matters at the law firm of Skadden, Arps, Slate, Meagher & Flom in
Boston, Massachusetts, from 1988 until March 1994.
 
    Kirby A. Mansfield, who is 43 years old, has been Vice President and General
Manager of Inso Boston since July 1997. From the inception of the Company until
June 1994, Mr. Mansfield was Vice President of Marketing and Business
Development. From June 1994 through June 1997, Mr. Mansfield was Vice President
of Business Development. Mr. Mansfield joined Houghton Mifflin Company
("Houghton Mifflin") in July 1989 initially as a consultant to the Software
Division and subsequently as the Division's Director of Technical Development.
Mr. Mansfield was appointed a Vice President of the Software Division in
February 1992 and became Vice President and Director of Marketing and Business
Development of the Software Division in October 1993.
 
    Graham Marshall, who is 50 years old, has been Vice President, General
Manager of Inso Electronic Publishing Solutions since January 1997. Prior to
joining the Company, Mr. Marshall held various key international electronic
publishing positions within Reed Elsevier beginning in 1981. Mr. Marshall held
the positions of Managing Director of Butterworth Asia from September 1996 to
January 1997, President of Butterworth Legal Publishers from April 1995 to
September 1996, and manager of business units in the United Kingdom, United
States, and Asia from January 1988 to April 1995.
 
    Michael E. Melody, who is 54 years old, has been Vice President, Strategic
Planning and Operations of the Company since January 1997. Mr. Melody was Vice
President and General Manager of Information Products of the Company from March
1996 until January 1997. From October 1994 through February 1996, Mr. Melody was
Principal of Michael E. Melody, Consulting. From October 1990 through September
1994, Mr. Melody was Executive Vice President, College and Software Publishing
of Houghton Mifflin. Prior to joining Houghton Mifflin, Mr. Melody held various
executive positions with Simon & Schuster, Macmillan Publishing Company, and
Prentice-Hall, Inc.
 
    Patricia A. Michaels, who is 31 years old, has been Assistant Vice President
and Corporate Controller of the Company since September 1997. From April 1997 to
September 1997, Ms. Michaels was the Company's Director of Accounting and
Finance. From January 1996 to April 1997, Ms. Michaels was the Company's Finance
Manager. Prior to joining the Company, Ms. Michaels had been employed with Ernst
& Young LLP since 1989.
 
    Scott D. Norder, who is 32 years old, has been Vice President, General
Manager of Inso's Chicago and Kansas City operations since January 1997. Mr.
Norder became Vice President and General Manager of Inso Chicago in June 1995.
Mr. Norder was Vice President of Engineering for Systems Compatibility
Corporation, now Inso Chicago, from April 1991 to June 1995. Prior to that time,
Mr. Norder held key leadership positions within the development organization of
Systems Compatibility Corporation since 1987.
 
    Betty J. Savage, who is 39 years old, has been Vice President, Chief
Financial Officer, and Treasurer of the Company since its inception. Prior to
joining the Company, Ms. Savage had been employed with Ernst & Young LLP in
auditing and other capacities since 1980.
 
    Paul A. Savage, who is 47 years old, has been Vice President of Worldwide
Sales and Service since October 1997. Previously, Mr. Savage was Vice President
of Sales and Service with Inso's Electronic Publishing Solutions group in
Providence, Rhode Island. Prior to joining Inso in October 1996, Mr. Savage
spent more than 17 years at Digital Equipment Corporation. His most recent
assignment at Digital was Director of Worldwide Sales Operations for the Network
and Systems Integration Services business unit.

    Steven R. Vana-Paxhia, who is 50 years old, has been President and Chief
Executive Officer and a director of the Company since its inception on November
10, 1993. Mr. Vana-Paxhia was Director of the Software Division of Houghton
Mifflin from November 1990 until March 1994 and was a Vice President of Houghton
Mifflin from April 1991 until March 1994. Prior to joining Houghton Mifflin, Mr.
Vana-Paxhia was Managing Director of Macmillan's Berlitz Translation Services
from November 1987 until April 1990. Mr. Vana-Paxhia is also a director of
MathSoft, Inc., a software company.

<PAGE>
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
    The Common Stock of the Company trades on the Nasdaq National Market of The
Nasdaq Stock Market under the symbol "INSO." The following table sets forth the
high and low sale prices of the Company's Common Stock for the fiscal periods
listed below as reported on the Nasdaq National Market. Such information
reflects interdealer prices, without retail markup, markdown, or commission, and
may not represent actual transactions.
 
<TABLE>
<CAPTION>
                                                                               1997       1997       1996       1996
QUARTER ENDED                                                                  HIGH        LOW       HIGH        LOW
---------------------------------------------------------------------------  ---------  ---------  ---------  ---------
<S>                                                                          <C>        <C>        <C>        <C>
March 31...................................................................  $   43.25  $   28.50  $   50.25  $   31.25
June 30....................................................................      44.63      17.88      68.00      45.75
September 30...............................................................      21.75       9.88      58.50      39.25
December 31................................................................      13.63       9.38      63.25      34.00
</TABLE>
 
    As of March 12, 1998, the Company's Common Stock was held by 490 holders of
record. The Company has paid no dividends on its common stock since its
formation and has no current plans to do so.
 
ITEM 6. SELECTED FINANCIAL DATA
 
STATEMENT OF OPERATIONS DATA

<TABLE>
<CAPTION>
                                                                                           YEARS ENDED DECEMBER 31
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
                                                               1997(1)    1996(1)    1995(1)     1994       1993
                                                             ---------  ---------  ---------  ---------  ---------
<S>                                                          <C>        <C>        <C>        <C>        <C>
Net revenues...............................................  $  81,869  $  70,534  $  43,387  $  23,463  $  13,757
Gross profit...............................................     73,919     62,225     37,595     20,389     11,887
Restructuring expenses.....................................      5,848          0          0          0          0
Purchased in-process research and development..............      6,100     38,700      5,500          0          0
Total operating expenses...................................     75,791     76,302     26,017     11,856      7,501
Operating (loss) income....................................     (1,872)   (14,077)    11,578      8,533      4,386
Income (loss) before provision for income taxes............      2,504    (11,073)    13,046      8,852      4,386
Provision for income taxes.................................      2,944     10,207      7,052      3,189      1,811
Net (loss) income..........................................       (440)   (21,280)     5,994      5,663      2,575
(Loss) earnings per common share(2,3)......................  ($   0.03) ($   1.61) $     .49  $     .49  $     .22
(Loss) earnings per common share-assuming dilution(2,3)....  ($   0.03) ($   1.61) $     .49  $     .48  $     .22
</TABLE>

BALANCE SHEET DATA

<TABLE>
<CAPTION>
                                                                                            YEARS ENDED DECEMBER 31
(IN THOUSANDS)
                                                                1997       1996       1995       1994       1993
                                                              ---------  ---------  ---------  ---------  ---------
<S>                                                           <C>        <C>        <C>        <C>        <C>
Working capital.............................................  $  85,558  $  84,261  $  55,460  $  15,522  $   1,802
Deferred income tax benefit, net............................      5,917      4,930      3,847      4,175          0
Total assets................................................    138,083    136,272     91,129     33,494      6,373
Stockholders' equity(4).....................................    115,478    113,413     75,163     27,614      3,238
</TABLE>
 
------------------------
 
(1) THE COMPANY'S 1995 RESULTS INCLUDE THE OPERATIONS OF SYSTEMS COMPATIBILITY
    CORPORATION SINCE ITS ACQUISITION ON APRIL 1, 1995. THE COMPANY'S 1996
    RESULTS INCLUDE THE OPERATIONS OF ELECTRONIC BOOK TECHNOLOGIES, INC. AND
    IMAGEMARK SOFTWARE LABS SINCE THEIR ACQUISITION DATES OF JULY 16, 1996, AND
    JANUARY 9, 1996, RESPECTIVELY. THE COMPANY'S 1997 RESULTS INCLUDE THE
    OPERATIONS OF MASTERSOFT, LEVEL FIVE RESEARCH, INC., AND HENDERSON SOFTWARE,
    INC. SINCE THEIR ACQUISITION DATES OF FEBRUARY 6, 1997, APRIL 22, 1997, AND
    NOVEMBER 24, 1997, RESPECTIVELY. (SEE NOTE 4 OF "NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS.")
 
(2) THE EARNING PER SHARE AMOUNTS PRIOR TO 1997 HAVE BEEN RESTATED AS REQUIRED
    TO COMPLY WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128,
    "EARNINGS PER SHARE." (SEE NOTE 9 OF "NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS.")
 
(3) ASSUMES THAT THE 11,560,000 SHARES OF COMMON STOCK OUTSTANDING IMMEDIATELY
    AFTER THE COMPANY'S INITIAL PUBLIC OFFERING WERE OUTSTANDING THROUGHOUT
    1993.
 
(4) STOCKHOLDERS' EQUITY PRIOR TO 1994 REPRESENTS HOUGHTON MIFFLIN COMPANY'S NET
    ASSET INVESTMENT IN THE COMPANY DURING THE TIME THE COMPANY OPERATED AS A
    DIVISION OF HOUGHTON MIFFLIN COMPANY.

<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
RESULTS OF OPERATIONS
 
    The Company derives its revenues from royalties, including initial
nonrefundable royalties, from license arrangements with OEMs, one-time and
annual licenses, software maintenance fees from site-license agreements with
corporate and government customers, and from one-time fees for direct licenses
to consumers. Revenues from corporate and government site-license agreements
generally consist of a one-time license fee based on the number of individual
users licensed or an annual distribution license fee based on the extent of the
customer's distribution. For each site-license agreement, an annual software
maintenance fee is calculated based upon a percentage of the one-time or annual
license fee. Payment of the maintenance fee permits customers to receive updates
and enhancements to the software licensed for the duration of the maintenance
agreement. Royalty revenues are earned in one of the following ways: as a
percentage of net revenues from product unit sales by licensees that incorporate
the Company's products, as a fixed per-unit royalty, or as a regular periodic
fee based on estimated shipments or usage over time. Royalty revenues are
generally recognized in the Company's financial statements in the quarter in
which amounts due to the Company have been determined. In the event that further
substantial support or performance obligations exist, revenues are recognized
when such obligations are met. Revenues from initial nonrefundable royalty
arrangements are recognized at the time of product acceptance by the licensee if
no significant obligation relating to the underlying contract remains to be
completed.
 
    The Company generates a significant portion of its revenues from 
customers outside the United States. Such revenues totaled $17,079,000, 
$15,315,000, and $5,673,000 for the years ended December 31, 1997, 1996, and 
1995, respectively. The Company believes that a substantial amount of 
products are shipped internationally by its domestic OEM customers. 
Accordingly, the actual use of the Company's products by overseas end-users 
is higher than the export revenues reported for accounting purposes in the 
Company's "Notes to Consolidated Financial Statements." The Company expects 
that the international market will continue to account for a significant 
portion of its total business. The Company's export revenues are transacted 
primarily in U.S. dollars. Therefore, the Company believes that it is not 
exposed to any significant risk with respect to changing currency exchange 
rates in connection with its business with international customers. The 
Company also denominates the prices for its corporate and end-user products 
sold internationally in U.S. dollars. Business with overseas end-users may be 
subject to greater currency exchange rate risk in the future. (See "Certain 
Factors that May Affect Future Operating Results.") 

   Cost of revenues primarily comprises royalty expense for the licensing of 
technology, content databases, published reference works from Houghton 
Mifflin Company and other third parties; fulfillment; and the amortization of 
capitalized product development costs and intangible assets from the 
acquisitions and license agreements described in Notes 4 and 6 of the "Notes 
to Consolidated Financial Statements." The level of amortization expense of 
capitalized product development costs is directly related to the amount of 
product development costs capitalized in each year and the time frame in 
which a specific product is made available for general release to customers.
 
    The following table sets forth, for the periods indicated, certain income
statement data expressed as a percentage of revenues.

PERCENTAGE OF REVENUES
 
<TABLE>
<CAPTION>
                                                                                                   YEARS ENDED DECEMBER 31
                                                                                             1997       1996       1995
                                                                                           ---------  ---------  ---------
<S>                                                                                        <C>        <C>        <C>
Net revenues.............................................................................      100.0%     100.0%     100.0%
Cost of revenues.........................................................................        9.7       11.8       13.3
                                                                                           ---------  ---------  ---------
    Gross profit.........................................................................       90.3       88.2       86.7
Operating expenses:
    Sales and marketing..................................................................       31.0       16.9       12.1
    Product development..................................................................       27.7       23.0       20.3
    General and administrative...........................................................       19.3       13.4       14.9
    Restructuring expenses...............................................................        7.1         --         --
    Purchased in-process research and development........................................        7.5       54.9       12.7
                                                                                           ---------  ---------  ---------
Total operating expenses.................................................................       92.6      108.2       60.0
                                                                                           ---------  ---------  ---------
Operating (loss) income..................................................................       (2.3)     (20.0)      26.7
Net investment income....................................................................        5.4        4.3        3.4
                                                                                           ---------  ---------  ---------
Income (loss) before provision for income taxes..........................................        3.1      (15.7)      30.1
Provision for income taxes...............................................................        3.6       14.5       16.3
                                                                                           ---------  ---------  ---------
Net (loss) income........................................................................       (0.5)%    (30.2)%     13.8%
                                                                                           ---------  ---------  ---------
                                                                                           ---------  ---------  ---------
</TABLE>
 
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
 
    Revenues for 1997 increased $11,335,000, or 16%, to $81,869,000 compared to
$70,534,000 for 1996. Approximately 4% of revenues in 1997 included revenues
from the acquisitions of Mastersoft, Level Five Research, Inc., and Henderson
Software, Inc. Direct and retail sales of products such as Quick View Plus and
DynaText significantly contributed to the increase in revenues during 1997 as
compared to 1996, resulting in direct and distribution sales of 35% of total

<PAGE>

revenues. Hewlett-Packard Company, Lucent Technologies, Inc., and Banque 
Paribas were among the licensees who entered into site-license agreements 
with the Company for Quick View Plus during 1997. American Honda Motor 
Company licensed DynaText, and Siemens Nixdorf licensed both DynaText and 
DynaWeb-Registered Trademark-. Non-refundable royalty advances and royalty 
revenues for 1997 decreased 9% as compared to the same period in 1996. 
Non-refundable royalty advances and royalty revenues were both affected in 
1997 by weakness in the OEM markets served by certain Lexical and Linguistic 
products of the Company as well as a decline in royalty revenues from 
Microsoft Corporation.
 
    Gross profit increased $11,694,000, or 19%, to $73,919,000 in 1997 from
$62,225,000 in 1996. Gross profit as a percentage of revenues for 1997 was 90%
compared to 88% for 1996. The increase in gross profit percentage was primarily
attributable to higher revenues from Quick View Plus, Outside In, DynaText, and
Viewer 95, which carry lower royalty burdens.
 
    Total operating expenses decreased $511,000 to $75,791,000 in 1997 from
$76,302,000 in 1996. Included in total operating expenses for 1997 were
acquisition charges of $6,100,000 for certain purchased technology under
research and development by Mastersoft, Level Five Research, Inc., and Henderson
Software, Inc. at the time of their 1997 acquisitions. Also included in the
total operating expenses for 1997 were restructuring expenses of $5,848,000
relating to certain of the Company's Lexical and Linguistic products. Included
in total operating expenses for 1996 were acquisition charges of $38,700,000 for
certain purchased technology under research and development by Electronic Book
Technologies, Inc. and ImageMark Software Labs, Inc. at the time of their 1996
acquisitions. Excluding the 1997 and 1996 aforementioned expenses, operating
expenses increased $26,241,000 or 70% for the year ended December 31, 1997,
compared to the year ended December 31, 1996. The Company's 1997 operating
expenses as a percent of revenue were affected by the decline in non-refundable
royalty advances and royalty revenues, as discussed above.
 
    Sales and marketing expenses consist primarily of salaries, commissions, and
bonuses for sales and marketing personnel, and promotional expenses. Sales and
marketing expenses increased $13,485,000 to $25,409,000 for 1997 from
$11,924,000 for 1996. The increase reflects increased costs for staff additions,
emphasis on new markets (corporate and consumer), new expenses from acquired
companies, and higher commissions due to increased revenues. During 1997, these
expenses also included certain one-time charges related to the reorganization of
the sales and marketing departments. Sales and marketing expenses were 31% of
revenues for 1997 compared to 17% for 1996.
 
    Product development costs consist primarily of personnel costs and, to a
lesser extent, fees paid for outside software development and consulting
services. Product development expenses increased $6,441,000 to $22,660,000 for
1997 from $16,219,000 for 1996. The increase in product development costs was
primarily due to the Company's investments in viewing, conversion, and other
information-sharing, publishing, and distribution products. Examples of these
products include DynaBase, DynaText, Outside In HTML Export, and DynaWeb. The
Company's total product development costs, including capitalized costs, were
$29,015,000, or 35% of revenues, for 1997 compared to $19,084,000, or 27% of
revenues, for 1996.
 
    General and administrative expenses increased $6,315,000 to $15,774,000 for
1997 compared to $9,459,000 for 1996. The increase in general and administrative
expenses was primarily due to goodwill amortization related to the Company's
acquisitions as well as increases in personnel and general expenses required to
support the growth in the Company's operations. General and administrative
expenses increased as a percentage of revenues to 19% for 1997 compared to 13%
for 1996.
 
    The acquisitions of Mastersoft, Level Five Research, Inc., and Henderson
Software, Inc. included the purchase of certain technology under research and
development, which resulted in charges to the Company's 1997 consolidated
results of $6,100,000, or $0.43 per share.
 
    In June 1997, the Company adopted a plan of restructuring aimed at a 
continuing focus on strategic products while reducing costs and streamlining 
the organization. As part of the restructuring, the Company substantially 
reduced its spending on products in slower growing markets and redirected its 
resources to those products with larger market opportunities. The plan 
primarily affected certain Lexical and Linguistic products of the Company. As 
a result of the restructuring plan, the Company recorded $5,848,000 of 
expenses. The charge included $320,000 of severance for 17 employees in 
development; $315,000 of estimated lease obligations, net of estimated 
sublease income, for the impact of affected leases; $3,353,000 for the 
write-off of capitalized software and other assets; and $1,860,000 for the 
write-off of prepaid royalties. Of the total restructuring expenses recorded, 
the total remaining actual cash outlays to be made by the Company 
approximates $360,000. The Company anticipates that a substantial portion of 
the amount will be paid in 1998.
 
    The Company's 1997 effective tax rate was influenced by acquisitions, tax
planning initiatives, and certain income tax accruals. Excluding the related
income tax impact, the Company's effective tax rate for 1997 was 34% compared to
37% in 1996, excluding the 1996 charge for purchased in-process research and
development.
 
    Excluding the $6,100,000 ($0.43 per share) Mastersoft, Level Five Research,
Inc., and Henderson Software, Inc. purchased in-process research and development
charges and restructuring expenses of $5,848,000 ($0.26 per share), net income
and earnings per share for 1997 would have been $9,344,000 and $0.64,
respectively.
 
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
 
    Revenues for 1996 increased $27,147,000, or 63%, to $70,534,000 compared to
$43,387,000 for 1995. Revenues for 1995 included $1,500,000 of revenue earned
from royalty audits. Excluding that revenue, the 1996 total increased 68% over
1995. Revenues in 1996 included revenues from the acquisition of Electronic Book
Technologies, Inc., now Inso Providence, and ImageMark Software Labs, Inc., now
Inso Kansas City, described in Note 4 of the "Notes to Consolidated Financial
Statements," since their acquisition dates of July 16, 1996, and January 9,
1996, respectively. Revenues from Inso Providence and Inso Kansas City accounted
for approximately 15% of the total revenues in 1996. Royalty revenues increased
37%, excluding the revenues earned from royalty audits, as a result of increased
sales by existing licensees as well as the number of licensees making royalty
payments, which increased to 164 at December 31, 1996 from 110 at December 31,
1995. The increase in the number of licensees making royalty payments reflects
new licensees resulting from the Inso Kansas City acquisition, as well as
royalty flow from existing licensees who have earned their prepaid minimum
royalties. Nonrefundable and recurring royalties from the Company's CorrecText
Grammar Correction System, Outside In viewing technology, and ImageStream
graphics filters contributed substantially to the revenue gains. Nonrefundable
royalty revenues for 1996 increased 88%, reflecting the addition of 191 new OEM
licenses in 1996 compared to 149 new OEM licenses in 1995. New licenses for 1996
included Netscape Communications Corporation, Corel Corporation, Open Text
Corporation, Verity, Inc., and Alta Vista. New products released during 1996
were 

<PAGE>

CyberSpell-TM-, InWords-TM-, SciWords-TM-, BizWords-TM-, IntelliScope-Registered
Trademark- Query Expander, IntelliScope-Registered Trademark- Retrieval 
Enhancer, and ImageStream for Microsoft-Registered Trademark-Office. The 
Company also released additional language versions for its CorrectEnglish ESL 
writing system and IntelliScope products. In addition, new versions of Quick 
View Plus and the IntelliFinder-Registered Trademark- Reference Engine as 
well as electronic versions of The 1996 Information Please Sports Almanac, 
The 1996 Information Please Almanac, and The 1997 Information Please Business 
Almanac were released in 1996.
 
    Gross profit as a percentage of revenues was 88% in 1996 compared to 87% in
1995. Royalty costs decreased as a percentage of revenues as a result of a
greater proportion of 1996 revenues being derived from the Outside In, Quick
View Plus, and ImageStream products, which carry lower royalty burdens.
Amortization expense for capitalized software and intangibles increased due to
the release of new products described above as well as amortization of costs
related to the Inso Kansas City and Inso Providence acquisitions.
 
    Sales and marketing expenses consist primarily of salaries, commissions, and
bonuses for sales and marketing personnel and promotional expenses. Sales and
marketing expenses for 1996 increased 127% to $11,924,000 from $5,253,000 for
1995, reflecting increased staff due to the Company's acquisitions, entry into
new markets (corporate and consumer), staff additions in product marketing to
support the higher levels of sales, and higher commissions due to increased
revenues. Sales and marketing expenses increased as a percentage of sales to 17%
for 1996 compared to 12% for 1995. The increase as a percentage of sales was due
primarily to the sales and marketing efforts at Inso Providence.
 
    Product development expenses consist primarily of personnel costs and, to 
a lesser extent, fees paid for outside software development and consulting 
services. Product development expenses increased 84% to $16,219,000 for 1996 
from $8,806,000 for 1995. The increase in product development costs was 
primarily due to investments in CorrectEnglish ESL writing system products, 
IntelliScope products, Quick View Plus, CyberSpell, DynaBase, DynaText 
products, and various reference works. As a percentage of revenues, product 
development expenses increased to 23% for 1996 from 20% for 1995. The 
increase as a percentage of revenues was primarily attributable to 
development efforts at Inso Providence. The Company's total product 
development costs, including capitalized costs, were $19,084,000, or 27% of 
revenues, for 1996, compared to $10,170,000, or 23% of revenues, for 1995.
 
    General and administrative expenses in 1996 increased 46% to $9,459,000 from
$6,458,000 in 1995. The increase in general and administrative expenses was
primarily attributable to increases in personnel and general corporate expenses
required to support the growth of the Company's operations. General and
administrative expenses decreased as a percentage of revenues to 13% for 1996
compared to 15% for 1995.
 
    The acquisition of Inso Kansas City and Inso Providence included the
purchase of certain technology under research and development, which resulted in
charges to the Company's 1996 consolidated results of $4,400,000, or $0.34 per
share, and $34,300,000, or $2.62 per share, respectively.
 
    The Company's effective tax rates for 1996 and 1995 were influenced by the
$38,700,000 Inso Kansas City and Inso Providence charges, and $5,500,000 Inso
Chicago charges, respectively, for purchased technology under research and
development at the time of the acquisitions. The charges were not deductible for
tax purposes. Excluding the charges, the Company's effective tax rate in 1996
declined to 37% compared to 38% in 1995 as a result of tax planning initiatives
undertaken by the Company in late 1995 and 1996.
 
    Excluding the Inso Kansas City, Inso Providence, and Inso Chicago research
and development charges noted above, net income and earnings per share for the
years ended December 31, 1996 and 1995 would have been $17,420,000 and $1.24 per
share and $11,494,000 and $0.94 per share, respectively.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    The Company's operating activities provided cash of $19,413,000,
$17,452,000, and $19,720,00 for 1997, 1996, and 1995, respectively. The
increased contribution from operating activities of $1,961,000 from 1996 to 1997
was primarily due to a smaller increase in accounts receivable in 1997 as
compared to 1996.
 
    The Company's investing activities used cash of $36,886,000, $70,265,000,
and $36,611,000 in 1997, 1996, and 1995, respectively. The decrease of
$33,379,000 from 1996 to 1997 was due to payments for the 1996 acquisitions of
Electronic Book Technologies, Inc. and ImageMark Software Labs, Inc. for a net
of $42,448,000; and a decrease in investment activity for marketable securities
of $6,550,000, offset by the 1997 acquisitions of Mastersoft, Level Five
Research, Inc., and Henderson Software, Inc. for a net of $8,914,000; the 1997
increased investment in capitalized product development costs of $3,490,000; an
increase of $1,794,000 in property and equipment expenditures in 1997; and the
1997 payment of $950,000 to the former stockholders of ImageMark Software Labs,
Inc. for exceeding certain performance measures as set forth in the stock
purchase agreement.
 
    In connection with the Inso Providence acquisition, the Company was
obligated to pay an additional $1,467,000 to the former principal stockholder of
Inso Providence in 1998. The payment to the former stockholder was made in
January 1998 using available cash. In addition, the Company was required to make
contingent payments in the event that certain Inso Providence financial and
operating goals were met. As of December 31, 1997, the Company's total remaining
potential liability pertaining to the Inso Providence financial and operating
goals was approximately $500,000.
 
    The acquisition of Inso Providence also included estimated costs for direct
transaction costs and costs relating to the elimination of excess and
duplicative activities as a result of the merger. During 1997, all material
payments relating to these costs have been paid by the Company using available
cash.
 
    In connection with the acquisitions of Mastersoft, Level Five Research,
Inc., and Henderson Software, Inc. during 1997, the Company purchased certain
technology under research and development valued at $6,100,000. All significant
expenditures necessary to develop the research and development into commercially
viable products have been incurred by the Company as of December 31, 1997.

    The Company's financing activities provided cash of $1,705,000, $49,858,000,
and $40,268,000 in 1997, 1996, and 1995, respectively. In November 1996, the
Company completed a public offering of 1,200,000 shares of the Company's common
stock, which provided net proceeds of approximately $56,444,000. Additionally,
on February 1, 1996, the Company repaid the outstanding promissory notes of
$6,037,000 issued in connection with the acquisition of Inso Chicago. The
Company also repaid $2,222,000 of existing indebtedness of Inso Providence
assumed in the acquisition. The Company had no long-term debt as of December 31,
1997.
 
    In June 1997, the Company adopted a plan of restructuring aimed at a
continuing focus on strategic products while reducing costs and streamlining the
organization. The plan primarily affected certain Lexical and Linguistic
products of the Company. As a result of the restructuring plan, the Company
recorded $5,848,000 of expenses. As of December 31, 1997, the total remaining
actual cash outlays to be made by the Company relating to these charges
approximated $360,000. The Company believes a substantial portion of these
payments will be made in 1998.

<PAGE>

    The Company had available to it a deferred income tax benefit in the amount
of $10,311,000 as of December 31, 1997, which is recorded at the net amount of
$5,807,000 after deduction of a valuation allowance in the amount of $4,504,000.
This benefit primarily relates to a basis difference between assets reported in
the Company's financial statements and for income tax purposes, primarily tax
basis intangible assets arising in connection with the formation of the Company
and completion of the initial public offering discussed in Note 1 of "Notes to
Consolidated Financial Statements." The tax benefit is subject to statutory
realization ratably over a remaining 11-year period and, as a result, the
Company's prospective cash requirement for income taxes may be reduced by
approximately $700,000 per year. The amount of the tax benefit ultimately
recovered is dependent upon the amount of taxable income earned by the Company
both annually and over the 15-year period following the initial public offering
of the Company's common stock. Therefore, there can be no assurance that all or
some portion of the annual cash requirement reduction, or the full amount of the
tax benefit relative to the asset basis differential, will be realized.
 
    The American Institute of Certified Public Accountants issued Statement of
Position 97-2 "Software Revenue Recognition" (SOP 97-2) in October 1997. SOP
97-2 will be effective for the Company beginning with transactions entered into
on or after January 1, 1998. The Company believes SOP 97-2 will not have a
material impact on the Company's financial position or results of operations.
 
    The Company has performed an initial assessment of the Year 2000 issues
utilizing internal resources to identify potential Year 2000 issues for both its
internal systems as well as the products it sells. The Company has formalized a
plan and will complete appropriate corrective actions by early 1999. Based on
this initial assessment, the Company believes that the Year 2000 issues should
not have a material impact on its financial position or results of operations.
 
    As of December 31, 1997, the Company had working capital of $85,558,000.
Cash, cash equivalents, and marketable securities as of December 31, 1997
totaled $80,457,000. The Company believes that current funds and funds expected
to be generated from operations will be sufficient to finance the Company's
operations through the foreseeable future.
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
 
    This report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. There are a number of factors
of which the Company is aware that may cause the Company's actual results to
vary materially from those forecasted or projected in any such forward-looking
statement. The following are certain, but not necessarily all, of the factors
that the management of the Company currently believes could cause the Company's
actual operating results to be materially less than forecasted or projected in
any forward-looking statement.
 
    The Company received 28% of its revenues in 1997 from Microsoft. The 
Company's agreement with Microsoft with respect to the licensing of the 
Company's Proofing Tools products expired at the end of 1997, and has not 
been renewed. As a result of the termination of its most significant license 
with Microsoft, the Company expects that revenues from Microsoft will decline 
substantially in 1998.
 
    The Company anticipates that in 1998 it will receive the majority of its
revenues from direct and indirect sales efforts aimed at corporations and
government agencies. The marketing and distribution of products to these
markets, either by the Company or by value-added resellers or distributors,
requires higher sales and marketing expenditures as a percentage of revenues
than the OEM distribution channel, which is likely to have a negative impact on
the Company's operating margins. The Company intends to expand this activity
through greater sales efforts and the introduction of new solutions for
enterprise use, which could increase the level of sales and marketing
expenditures relative to revenues. The Company anticipates that a substantial
and increasing portion of its future revenue will come from corporate and
government sales, which is likely to result in lower operating margins in future
periods.
 
    The Company's ability to remain competitive in the computer software
industry is dependent on the services of a number of key management and
technical personnel, principally software engineers. Personnel costs for
technical staff represent a significant portion of the Company's operating
expenses, and increased competition and related personnel cost increases for
such staff could have a material adverse impact on the Company's operating
results. Additionally, a shortage of engineering resources with SGML and XML
talent could have a material adverse impact on the Company's operating results.
During 1997, costs for software developers and personnel experienced in the
software industry increased significantly, a trend which is likely to continue
in 1998. This could result in reduced operating margins as a result of higher
personnel costs.
 
    The Company has historically operated in narrow market segments that have
attracted fewer substantial participants than the general market for software
applications. As the Company develops solutions for license on an enterprise
basis, the Company anticipates that it will experience increased competition,
both as to quality and price, from substantial entities with greater resources
than those of the Company.
 
    The Company has invested significant development resources in products
utilizing standards-based publishing formats, such as HTML and XML. Should any
such standard not ultimately be adopted by large numbers of customers and
potential customers, it is possible that there may be a limited market for the
products currently under development by the Company, which could have an adverse
impact on future revenues and operating results.
 
    The Company has historically received a significant portion of its revenues
from OEMs that integrate the Company's products with their own products and
market them to end-users as a single unit. The business of the Company's OEM
customers is intensely competitive, while the computer software industry has
continued to consolidate. As a result, the number of potentially significant OEM
customers for the Company's products has declined and there is increasing
competitive pressure for the Company's existing and potential customers to
reduce costs. Also, certain markets for the Company's products were particularly
adversely affected by competitive pressures during 1997, a trend that is likely
to continue in 1998. At the same time, the Company has achieved a high degree of
market penetration in certain OEM markets for its products, making it more
difficult for the Company to make new sales to OEM customers. These factors
could result in decreased revenues from OEMs in future periods.
 
    It is possible that certain of the major operating system developers,
including Microsoft, may add features and functionality to such operating
systems, including future versions of Windows-Registered Trademark- 95 and
Windows NT-Registered Trademark-, that may compete with the Company's products
or with those of its other OEM customers. The concentration of the market for
operating systems makes it difficult or impossible for the Company or its other
OEM customers to compete on a price basis because purchasers of operating
systems would be required to purchase products as part of the operating system
that compete with those of the Company. In addition, certain OEM customers, such
as Microsoft, may choose to internally develop products that compete with those
of the Company in order to reduce their costs.

<PAGE>

    The Company has experienced growth that could place a significant strain 
on its resources. The Company's historical and projected growth has come from 
a combination of growth from internally developed products and the successful 
acquisition and integration of businesses and assets. Changes in the market 
for mergers and acquisitions of software companies and information databases 
could make it more difficult for the Company to achieve projected or 
forecasted revenue or net income growth in future periods. The Company's 
ability to manage any future growth and integrate any newly acquired business 
will require it to continue to improve its operations and its financial and 
management information systems, and to motivate and effectively manage its 
employees. There is no assurance that the Company will be able to integrate 
and manage successfully businesses or assets that it has acquired or may 
acquire in the future. If the Company's management is unable to manage such 
growth effectively, the quality of the Company's products; its ability to 
identify, hire, and retain key personnel; and its results of operations could 
be materially adversely affected.
 
    The Company has increased the marketing of its products directly to
customers outside the United States and has experienced an increase in revenues
from foreign sources in 1997. The majority of this growth is attributable to
increased sales of products to corporate and consumer customers in foreign
markets. The marketing of products directly to customers outside the United
States increases the risk to the Company's revenues associated with fluctuations
of the U.S. dollar in relation to foreign currencies. Such fluctuations could
also result in increased operating expenses associated with foreign operations.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
    Not Applicable.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
    The Company's consolidated financial statements and supplementary data are
included under Item 14 of this Annual Report and incorporated herein by
reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE
 
    None.
 
PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    The information required to be furnished pursuant to this item is set forth
under the caption "Executive Officers of the Company" in Part I hereof and under
the captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's proxy statement ("Proxy Statement"), to
be furnished to stockholders in connection with the solicitation of proxies for
use at the 1998 Annual Meeting of Stockholders and is incorporated herein by
reference.
 
ITEM 11. EXECUTIVE COMPENSATION
 
    The information required to be furnished pursuant to this item is set forth
under the captions "Director's Compensation," "Compensation Committee Interlocks
and Insider Participation," "Summary Compensation Table," "Stock Option Grants,"
"Aggregated Option Exercises and Year-End Option Table," "Option Repricing," and
"Severance Agreements" in the Proxy Statement and is incorporated herein by
reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    The information required to be furnished pursuant to this item is set forth
under the caption "Security Ownership" in the Proxy Statement and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    The information required to be furnished pursuant to this item is set forth
under the caption "Certain Transactions" in the Proxy Statement and is
incorporated herein by reference.

<PAGE>
 
PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
    The consolidated financial statements listed in the accompanying index to 
    Consolidated Financial Statements and Financial Statement Schedule are 
    filed as part of this Annual Report.

    2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
    The consolidated financial statement schedule listed in the accompanying
    Index to Consolidated Financial Statements and Financial Statement Schedule
    is filed as part of this Annual Report.

    3. EXHIBITS
    The exhibits listed in the accompanying Exhibit Index are filed as part of 
    this Annual Report. 

(b) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1997
 
    None.

<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.
 
<TABLE>
<S>        <C>                   <C>

                                 INSO CORPORATION
                                 ----------------
                                 REGISTRANT 


Date:      March 19, 1998        /s/ STEVEN R. VANA-PAXHIA 
                                 -------------------------
                                 STEVEN R. VANA-PAXHIA
                                 PRESIDENT AND CHIEF 
                                 EXECUTIVE OFFICER

</TABLE>

    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.

<TABLE>
<S>       <C>                  <C>

Date:     March 19, 1998       /s/ STEVEN R. VANA-PAXHIA
                               -------------------------
                               STEVEN R. VANA-PAXHIA
                               PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR
                               
Date:     March 19, 1998       /s/ BETTY J. SAVAGE
                               -------------------
                               BETTY J. SAVAGE
                               VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
                               
Date:     March 19, 1998       /s/ PATRICIA A. MICHAELS
                               ------------------------
                               PATRICIA A. MICHAELS
                               ASSISTANT VICE PRESIDENT AND CORPORATE CONTROLLER
                               (CHIEF ACCOUNTING OFFICER)
                               
Date:     March 19, 1998       /s/ JOSEPH A. BAUTE
                               -------------------
                               JOSEPH A. BAUTE, DIRECTOR
                               
Date:     March 19, 1998       /s/ J. P. BARGER
                               ----------------
                               J. P. BARGER, DIRECTOR
                               
Date:     March 19, 1998       /s/ SAMUEL H. FULLER
                               --------------------
                               SAMUEL H. FULLER, DIRECTOR
                               
Date:     March 19, 1998       /s/ JOHN GUTTAG
                               ---------------
                               JOHN GUTTAG, DIRECTOR
                               
Date:     March 19, 1998       /s/ STEPHEN O. JAEGER
                               ---------------------
                               STEPHEN O. JAEGER, DIRECTOR
                               
Date:     March 19, 1998       /s/ JOANNA T. LAU
                               -----------------
                               JOANNA T. LAU, DIRECTOR
                               
Date:     March 19, 1998       /s/ RAY SHEPARD
                               ---------------
                               RAY SHEPARD, DIRECTOR
                               
Date:     March 19, 1998       /s/ RAY STATA
                               -------------
                               RAY STATA, DIRECTOR
                               
Date:     March 19, 1998       /s/ WILLIAM J. WISNESKI
                               -----------------------
                               WILLIAM J. WISNESKI, DIRECTOR

</TABLE>

<PAGE>

ITEM 14(a). INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT 
            SCHEDULE
 
<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                            -----------
<S>                                                                                                         <C>
Report of Independent Auditors............................................................................          
Consolidated Balance Sheets at December 31, 1997 and 1996.................................................          
Consolidated Statements of Operations for the years ended December 31, 1997, 1996, and 1995...............          
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995...............          
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995.....          
Notes to Consolidated Financial Statements................................................................          
Supplementary information:
        Unaudited Quarterly Operating Results.............................................................          
Schedule for the years ended December 31, 1997, 1996, and 1995:
        Schedule II--Valuation and Qualifying Accounts....................................................          
</TABLE>
 
    All other schedules have been omitted since the required information is not
present, or the amounts are not sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements. 
 
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Inso Corporation
 
    We have audited the accompanying consolidated balance sheets of Inso
Corporation as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Inso Corporation at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.


                                                      /s/ ERNST & YOUNG LLP
                                                      ---------------------
                                                          ERNST & YOUNG LLP



Boston, Massachusetts
January 30, 1998, except for Note 13, as to
    which the date is March 12, 1998

<PAGE>

Inso Corporation CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                                       DECEMBER 31
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
                                                                                               1997        1996
                                                                                            ----------  ----------
<S>                                                                                         <C>         <C>
ASSETS
Current assets:
    Cash and cash equivalents.............................................................  $   18,512  $   34,280
    Marketable securities.................................................................      61,945      46,946
    Accounts receivable, net of allowances of $2,111 in 1997 and $1,352 in 1996...........      25,889      21,144
    Income taxes receivable...............................................................          --       1,970
    Other current assets..................................................................       1,817       1,313
                                                                                            ----------  ----------
    Total current assets..................................................................     108,163     105,653

Property and equipment, net...............................................................       7,073       5,303
Product development costs, net of accumulated amortization of $14,651 in 1997 and $9,418
in 1996...................................................................................       9,015       7,168
Intangible assets, net of accumulated amortization of $6,236 in 1997 and $3,246 in 1996...       4,714       9,654
Other assets, net.........................................................................       3,201       3,564
Deferred income tax benefit, net..........................................................       5,917       4,930
                                                                                            ----------  ----------
Total Assets..............................................................................  $  138,083  $  136,272
                                                                                            ----------  ----------
                                                                                            ----------  ----------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable......................................................................  $      924  $    1,877
    Accrued liabilities...................................................................       2,975       2,379
    Accrued salaries, commissions, and bonuses............................................       5,478       4,085
    Acquisition related liabilities.......................................................       1,482       1,995
    Unearned revenue......................................................................       3,522       2,431
    Royalties payable.....................................................................       1,266       1,916
    Due to Houghton Mifflin Company.......................................................         396         749
    Current income taxes payable..........................................................         575          --
    Deferred income taxes.................................................................       5,987       5,960
                                                                                            ----------  ----------
    Total current liabilities.............................................................      22,605      21,392

Long-term acquisition related liabilities.................................................          --       1,467

Commitments and contingencies

Stockholders' equity:
    Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued 
    Common stock, $.01 par value; 50,000,000 shares authorized; 14,645,611 and 
     14,293,249 shares issued in 1997 and 1996, respectively..............................         146         143
    Capital in excess of par value........................................................     128,187     123,472
    Accumulated deficit...................................................................     (10,063)     (9,623)
                                                                                            ----------  ----------
                                                                                               118,270     113,992
    Unamortized value of restricted shares................................................        (240)       (521)
    Notes Receivable from Stock Purchase Agreements.......................................      (2,494)         --
    Treasury stock, at cost, 5,075 shares in 1997 and 1996................................         (58)        (58)
                                                                                            ----------  ----------
    Total stockholders' equity............................................................     115,478     113,413
                                                                                            ----------  ----------
Total Liabilities and Stockholders' Equity................................................  $  138,083  $  136,272
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
 
    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 

<PAGE>

Inso Corporation CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended 
December 31, 1997, 1996, and 1995 

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                    1997        1996       1995
                                                                                  ---------  ----------  ---------
<S>                                                                               <C>        <C>         <C>
Net revenues....................................................................  $  81,869  $   70,534  $  43,387
Cost of revenues................................................................      7,950       8,309      5,792
                                                                                  ---------  ----------  ---------
    Gross profit................................................................     73,919      62,225     37,595
Operating expenses:
    Sales and marketing.........................................................     25,409      11,924      5,253
    Product development.........................................................     22,660      16,219      8,806
    General and administrative..................................................     15,774       9,459      6,458
    Restructuring expenses......................................................      5,848          --         --
    Purchased in-process research and development...............................      6,100      38,700      5,500
                                                                                  ---------  ----------  ---------
    Total operating expenses....................................................     75,791      76,302     26,017
                                                                                  ---------  ----------  ---------
Operating (loss) income.........................................................     (1,872)    (14,077)    11,578
Net investment income...........................................................      4,376       3,004      1,468
                                                                                  ---------  ----------  ---------
Income (loss) before provision for income taxes.................................      2,504     (11,073)    13,046
Provision for income taxes......................................................      2,944      10,207      7,052
                                                                                  ---------  ----------  ---------
Net (loss) income...............................................................  ($    440) ($  21,280) $   5,994
                                                                                  ---------  ----------  ---------
                                                                                  ---------  ----------  ---------
(Loss) earnings per common share................................................  ($   0.03) ($    1.61) $    0.49
                                                                                  ---------  ----------  ---------
                                                                                  ---------  ----------  ---------
(Loss) earnings per common share--assuming dilution.............................  ($   0.03) ($    1.61) $    0.49
                                                                                  ---------  ----------  ---------
                                                                                  ---------  ----------  ---------
</TABLE>
 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

Inso Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 
1997, 1996, and 1995 

<TABLE>
<CAPTION>
(In thousands of dollars)                                                            1997        1996       1995
 
---------------------------------------------------------------------------------  ---------  ----------  ---------
<S>                                                                                <C>        <C>         <C>
Cash flows from (used in) operating activities:
    Net (loss) income............................................................  ($    440) ($  21,280) $   5,994
    Adjustments to reconcile net (loss) income to net cash provided by operating
      activities:
        Depreciation.............................................................      3,664       2,064      1,059
        Amortization.............................................................      4,851       4,768      2,980
        Deferred income taxes....................................................        108       4,547      1,473
        Restructuring expenses...................................................      5,045          --         --
        Purchased in-process research and development............................      6,100      38,700      5,500
                                                                                   ---------  ----------  ---------
                                                                                      19,328      28,799     17,006
    Changes in operating assets and liabilities:
        Accounts receivable......................................................     (2,796)    (12,566)       189
        Accounts payable and accrued liabilities.................................      1,071         (42)     1,861
        Current income taxes.....................................................      2,945       1,739        695
        Royalties payable........................................................       (595)        463        266
        Due to Houghton Mifflin Company..........................................       (283)        435       (589)
        Other assets and liabilities.............................................       (257)     (1,376)       292
                                                                                   ---------  ----------  ---------
        Net cash provided by operating activities................................     19,413      17,452     19,720
Cash flows from (used in) investing activities:
    Property and equipment expenditures..........................................     (5,187)     (3,393)    (2,211)
    Capitalized product development costs........................................     (6,355)     (2,865)    (1,364)
    Acquisitions, net of cash acquired and issuance of promissory notes..........    (10,345)    (42,448)    (4,184)
    Purchase of rights of Information Please-Registered Trademark- Almanacs......         --         (10)    (3,455)
    Net change in marketable securities..........................................    (14,999)    (21,549)   (25,397)
                                                                                   ---------  ----------  ---------
    Net cash used in investing activities........................................    (36,886)    (70,265)   (36,611)
Cash flows from (used in) financing activities:
    Net proceeds from issuance of common stock...................................      1,705      58,124     40,628
    Purchases of treasury stock..................................................         --          (7)       (30)
    Repayment of promissory notes................................................         --      (6,037)      (330)
    Repayment of Electronic Book Technologies debt...............................         --      (2,222)        --
                                                                                   ---------  ----------  ---------
        Net cash provided by financing activities................................      1,705      49,858     40,268
                                                                                   ---------  ----------  ---------
Net increase (decrease) in cash and cash equivalents.............................    (15,768)     (2,955)    23,377
Cash and cash equivalents at beginning of the period.............................     34,280      37,235     13,858
                                                                                   ---------  ----------  ---------
Cash and cash equivalents at end of the period...................................  $  18,512  $   34,280  $  37,235
                                                                                   ---------  ----------  ---------
                                                                                   ---------  ----------  ---------
Supplementary information:
    Issuance of Notes Receivable from Stock Purchase Agreements..................  $   2,494          --         --
                                                                                   ---------  ----------  ---------
                                                                                   ---------  ----------  ---------
    Investment in Information Please LLC.........................................  $   2,620          --         --
                                                                                   ---------  ----------  ---------
                                                                                   ---------  ----------  ---------
    Income taxes paid............................................................  $   3,290  $    4,081  $   5,017
                                                                                   ---------  ----------  ---------
                                                                                   ---------  ----------  ---------
</TABLE>


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

Inso Corporation CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended
December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
                                                     COMMON STOCK                                                      NOTES
                                                 ---------------------                 (ACCUMULATED   UNAMORTIZED    RECEIVABLE
                                                                AMOUNT     CAPITAL IN     DEFICIT)      VALUE OF     FROM STOCK
                                                                 $.01      EXCESS OF      RETAINED     RESTRICTED     PURCHASE 
                                                  SHARES      PAR VALUE    PAR VALUE      EARNINGS       SHARES      AGREEMENTS
                                                 ---------    ---------    ----------  ------------   -----------    ----------
-----------------------------------
<S>                                              <C>           <C>         <C>         <C>            <C>            <C>    
(IN THOUSANDS EXCEPT SHARE AMOUNTS)

Balance at December 31, 1994................     5,814,211    $      58     $ 22,420   $    5,663      ($   506)    $      0
Issuance of shares pursuant to Employee                                                                                     
  Stock Purchase Plan and Benefit Plan......        18,414                       501                                        
Net proceeds from public offering...........       600,000            6       39,286                                        
Stock options exercised.....................        45,875            1        1,011                                        
Issuance of restricted shares...............        10,500                       336                       (336)            
Other issuances and repurchases.............         3,500                       119                                        
Two-for-one stock split.....................     6,473,200           65          (65)     
Amortization of restricted shares...........                                                                173         
Tax benefit of stock option exercises.......                                     488
Net income..................................                                                5,994       
                                                ----------    ---------     --------    -----------    ---------    --------

Balance at December 31, 1995................    12,965,700    $     130     $ 64,096     $ 11,657       ($  669)     $     0

Issuance of shares pursuant to Employee
  Stock Purchase Plan.......................        21,399                       658        
Net proceeds from public offering...........     1,200,000           12       56,432                   
Stock options exercised.....................        98,950            1        1,021
Issuance of restricted shares...............         1,200                        48                        (48)
Other issuances and repurchases.............         6,000                       223                            
Amortization of restricted shares...........                                                                196
Tax benefit of stock option exercises.......                                     994
Net loss....................................                                               (21,280)
                                                ----------    ---------     --------    -----------    ---------    --------
Balance at December 31, 1996................    14,293,249    $     143     $123,472    ($   9,623)    ($    521)   $      0
Issuance of shares pursuant to Employee
  Stock Purchase Plan.......................        43,912                       998
Notes Receivable from Stock Purchase 
  Agreements................................       243,291            2        2,492                                  (2,494)
Stock options exercised.....................        62,500            1          713
Cancellation of restricted shares...........        (5,341)                      (87)                         87
Other issuances and repurchases.............        8,000                        199
Amortization of restricted shares...........                                                                 194
Tax benefit of stock option exercises.......                                     400
Net loss....................................                                                  (440)
                                                ----------    ---------     --------    -----------    ---------    --------
Balance at December 31, 1997................    14,645,611    $     146   $  128,187    ($  10,063)    ($    240)  ($  2,494)
                                                ----------    ---------     --------    -----------    ---------    --------
                                                ----------    ---------     --------    -----------    ---------    --------



<CAPTION>
                                                        TREASURY STOCK           
                                                 ------------------------------  
                                                  SHARES      AMOUNT     TOTAL   
                                                 ----------  ---------  -------
--------------------------------------------
<S>                                              <C>          <C>       <C>   

(IN THOUSANDS EXCEPT SHARE AMOUNTS)                                              
Balance at December 31, 1994................        850       ($   21)  $ 27,614 
Issuance of shares pursuant to Employee                                          
  Stock Purchase Plan and Benefit Plan......                                 501 
Net proceeds from public offering...........                              39,292 
Stock options exercised.....................                               1,012 
Issuance of restricted shares...............                                   0 
Other issuances and repurchases.............      4,125           (30)        89 
Two-for-one stock split.....................                                   0
Amortization of restricted shares...........                                 173
Tax benefit of stock option exercises.......                                 488
Net income..................................                               5,994
                                               --------       --------   --------
Balance at December 31, 1995................      4,975       ($   51)  $ 75,163

Issuance of shares pursuant to Employee
  Stock Purchase Plan.......................                                 658
Net proceeds from public offering...........                              56,444
Stock options exercised.....................                               1,022
Issuance of restricted shares...............                                   0
Other issuances and repurchases.............        100            (7)       216
Amortization of restricted shares...........                                 196
Tax benefit of stock option exercises.......                                 994
Net loss....................................                             (21,280)
                                               --------       --------   --------
Balance at December 31, 1996................      5,075      ($    58)  $113,413
Issuance of shares pursuant to Employee
  Stock Purchase Plan.......................                                 998
Notes Receivable from Stock Purchase        
  Agreements................................                                   0
Stock options exercised.....................                                 714
Cancellation of restricted shares...........                                   0
Other issuances and repurchases.............                                 199
Amortization of restricted shares...........                                 194
Tax benefit of stock option exercises.......                                 400
Net loss....................................                                (440)
                                               --------       --------   --------
Balance at December 31, 1997................      5,075      ($    58)  $115,478
                                               --------       --------   --------
                                               --------       --------   --------
</TABLE>
-------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.


<PAGE>


Inso Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


BASIS OF PRESENTATION

    Inso Corporation (the "Company") was formed on November 10, 1993, as the
successor Company to the Software Division of Houghton Mifflin Company
("Houghton Mifflin"). At the time of incorporation in Delaware, the Board of
Directors established a class of Series A Convertible Preferred Stock with
priority dividend rights (the "Series A Preferred"). The Company and Houghton
Mifflin entered into a Formation Agreement on January 10, 1994, in which
Houghton Mifflin agreed to purchase all of the Company's authorized Series A
Preferred and transfer to the Company the net assets and business of the
Software Division. The transactions provided for in the Formation Agreement were
consummated concurrent with the Company's completion of an initial public
offering of its common stock on March 8, 1994. The shares of Series A Preferred
issued to Houghton Mifflin were entitled to a preferential dividend equal to 80%
of the net proceeds received by the Company in connection with the sale of the
common stock in such public offering. Simultaneously with the payment of the
dividend, the Series A Preferred was converted into 4,660,000 shares of common
stock, equivalent to approximately a 40% equity interest in the Company.


NATURE OF OPERATIONS

    The Company is a supplier of software solutions for sharing and publishing
electronic information. The Company provides software solutions for the
distribution of all forms of electronic information, from simple memos to
complex technical manuals, in environments ranging from desktop computers to the
Internet. Through enterprise license agreements, integration in popular software
products, and bundling agreements, the Company's products enable corporate and
commercial publishers to effectively convert, manage, and distribute electronic
content; enable users to filter, view, copy, print, and publish electronic
information; and help people enhance the quality of their written
communications. The Company markets certain of its products worldwide to
original equipment manufacturers (OEMs) of computer hardware, software, and
consumer electronics products. The Company also markets software applications
and systems to major corporations, government agencies, and other end-users.
These operations are reported as one business segment.


PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in less than 20% owned affiliates
are accounted for on the cost method.


REVENUE RECOGNITION

    The Company derives its revenues from royalties, including initial
nonrefundable royalties from license arrangements with OEMs, one-time and annual
licenses, software maintenance fees from site-license agreements with corporate
and government customers, and from one-time fees for direct licenses to
consumers. Royalty revenues are earned in one of the following ways: as a
percentage of net revenues from product unit sales by licensees that incorporate
the Company's products, as a fixed per-unit royalty, or as a regular periodic
fee based on estimated shipments or usage over time.

    The Company accounts for revenues in accordance with Statement of Position
91-1, "Software Revenue Recognition," issued by the American Institute of
Certified Public Accountants. Specifically, royalty revenues are generally
recognized in the Company's financial statements in the quarter in which amounts
due to the Company have been determined. In the event that further substantial
support or performance obligations exist, revenues are recognized when such
obligations are met. Revenues from initial nonrefundable royalty arrangements
are recognized at the time of product acceptance by the licensee if no
significant obligation relating to the underlying contract remains to be
completed. Nonrefundable royalty amounts payable to the Company according to
specified payment dates are recorded as receivables. Revenues from corporate and
government site-licenses and annual distribution licenses are recognized at the
time of the delivery to the customer. Revenues from product sales are recognized
upon shipment. Revenues for maintenance agreements are recognized as income over
the term of the agreement using the straight-line method.

    The American Institute of Certified Public Accountants issued Statement of
Position 97-2 "Software Revenue Recognition" (SOP 97-2) in October 1997. SOP
97-2 will be effective for the Company beginning with transactions entered into
on or after January 1, 1998. The Company believes SOP 97-2 will not have a
material impact on the Company's financial position or results of operations.


CASH AND CASH EQUIVALENTS

    The Company considers highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.


INVESTMENTS

    The Company accounts for its investments in securities, including certain
cash equivalents and marketable securities, in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The appropriate classification of debt securities
is determined at the time of purchase and is reevaluated at each balance sheet
date. (See Note 2.)


FAIR VALUE OF FINANCIAL INSTRUMENTS

    The Company's cash equivalents, marketable securities, and accounts
receivables are carried at cost, which approximates fair value.

<PAGE>


PRODUCT DEVELOPMENT COSTS

    Software and other costs incurred in connection with product development 
are charged to expense until such time as specific product technological 
feasibility has been established. Thereafter, product development costs 
specific to the product are capitalized and reported at the lower of 
unamortized cost or net realizable value.
 
    Amortization of capitalized product development costs begins when the
related product is available for general release to customers. These costs are
amortized using the shorter of the estimated future product revenue streams or
the straight-line method over a period not exceeding three years.
 
    Amortization of $5,259,000, $2,643,000, and $1,308,000 for the years ended
1997, 1996, and 1995, respectively, is included as a component of cost of
revenues.


ROYALTY ADVANCES
 
    Royalty advances, included in other assets, which pertain to payments by the
Company for the license of technology and/or content used in its products, are
stated at cost less royalty amounts expensed based on revenues recognized over
the life of the related agreement.


PROPERTY AND EQUIPMENT
 
    Property and equipment are stated at cost. Depreciation is provided using an
accelerated method over the estimated economic life of the assets, generally
three to five years. Depreciation is provided on leasehold improvements using
the straight-line method over the economic life of the asset or the lease term,
whichever is shorter.


INTANGIBLE ASSETS
 
    Intangible assets are being amortized over their estimated economic lives.
If facts and circumstances suggest that an impairment may have occurred, the
unamortized balances of these assets are reviewed under the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." If
this review indicates that the remaining balance is not recoverable, as
determined based upon the estimated undiscounted cash flows of the asset during
its remaining economic life, the value assigned to the asset would be reduced to
its fair value.


CONCENTRATION OF CREDIT RISK
 
    In 1997, 1996, and 1995, Microsoft Corporation accounted for 28%, 35%, and
52% of revenues, respectively. The Company's 1995 revenues from Microsoft
include $1,500,000 of revenue earned from royalty audits. The economic terms of
the Company's agreement with Microsoft, which was amended in 1995, with respect
to the Company's Proofing Tools products expired at the end of 1997. The Company
anticipates that the revenues received from Microsoft will decline substantially
in 1998.
 
    The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses; to date, losses have not been
material to the Company's financial position or results of operations.
 
    The Company licenses its products primarily to customers in North America.
Sales to foreign customers accounted for $17,079,000, $15,315,000, and
$5,673,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
International sales to Canada were 3%, 11%, and 4% in 1997, 1996, and 1995,
respectively. No other foreign country accounted for more than 10% of total
sales in any period. Substantially all export sales have been consummated by the
Company's United States operation.


STOCK-BASED COMPENSATION
 
    The Company has elected to account for its stock-based compensation plans
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations rather than the
alternative fair value accounting provided under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Accordingly, no compensation expense has been recognized by the Company
for its stock option plans and its stock purchase plan.


EARNINGS PER SHARE
 
    In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS
128). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS 128 requirements. (See Note 9.)


RECENT ACCOUNTING PRONOUNCEMENTS
 
    In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" (SFAS
129). SFAS 129 consolidates the existing guidance relating to an entity's
capital structure. The Company will make all disclosures required by SFAS 129
beginning in fiscal year 1998.
 
    In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. The Company will make all
disclosures required by SFAS 130 beginning in fiscal year 1998.
 
    In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 changes the current practice under Statement of Financial
Accounting Standards No. 14 by establishing a new frame work on which to base
segment reporting. SFAS 131 is effective for the Company beginning in fiscal
year 1998. The Company is assessing the disclosure impact of SFAS 131.

<PAGE>


USE OF ESTIMATES

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.


RECLASSIFICATIONS
 
    Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1997 presentation.


NOTE 2. INVESTMENTS
 
    The Company's available-for-sale investments are carried at cost, which
approximates fair value, and included in cash equivalents and marketable
securities are as follows:

<TABLE>
<CAPTION>
                                                             DECEMBER 31
(IN THOUSANDS OF DOLLARS)
                                                   1997             1996
----------------------------------------------  --------          -------
<S>                                             <C>               <C>
Commercial paper..............................   $11,877          $20,000
Corporate notes...............................    36,906           37,273
Money market funds............................       432            4,855
United States agency bonds....................     9,727            6,989
Asset-backed securities.......................    16,951            9,957
                                                --------          -------
Total.........................................   $75,893          $79,074
                                                --------          -------
                                                --------          -------
</TABLE>
-------------------------------------------------------------------------------
    Interest on securities classified as available-for-sale of $4,280,000, 
$2,887,000, and $1,208,000 is included in net investment income in 1997, 
1996, and 1995, respectively. Dividend income, included in net investment 
income, for securities classified as available-for-sale was $22,000 and 
$269,000 in 1996 and 1995, respectively.

    During the years ended December 31, 1997 and 1996, available-for-sale 
securities with values of $34,343,000 and $48,813,000, respectively, were 
sold. The gross realized gains and losses on those sales were immaterial to 
the Company's financial statements. During the years ended December 31, 1997 
and 1996, purchases of available-for-sale securities were $313,661,000 and 
$249,221,000, respectively. Maturities of available-for-sale securities were 
$277,725,000 and $186,525,000 for the years ended December 31, 1997 and 1996, 
respectively.

    The Company's available-for-sale securities have the following maturities:

<TABLE>
<CAPTION>
                                                             DECEMBER 31
(IN THOUSANDS OF DOLLARS)
                                                   1997             1996
----------------------------------------------  --------         --------
<S>                                             <C>              <C>
Due in one year or less.......................  $ 60,279         $ 55,461
Due within two years..........................    15,614           23,613
                                                --------          -------
Total.........................................  $ 75,893         $ 79,074
                                                --------          -------
                                                --------          -------
</TABLE>
-------------------------------------------------------------------------------

NOTE 3. PROPERTY AND EQUIPMENT
 
        Property and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
                                                             
(IN THOUSANDS OF DOLLARS)
                                                   1997             1996
----------------------------------------------  --------         --------
<S>                                             <C>              <C>
Leasehold improvements........................  $     950        $    767
Computer equipment and software...............     14,030          10,294
Furniture and fixtures........................      2,722           1,153
                                                ---------       ---------
                                                   17,702          12,214

Less accumulated amortization and 
   depreciation...............................    (10,629)         (6,911)
                                                ---------       ---------
                                                $   7,073       $   5,303
                                                ---------       ---------
                                                ---------       ---------
</TABLE>
-------------------------------------------------------------------------------

<PAGE>

NOTE 4. ACQUISITIONS


HENDERSON SOFTWARE, INC.
 
    On November 24, 1997, the Company acquired all of the outstanding stock of
privately held Henderson Software, Inc. for $750,000 using available cash.
Henderson Software is a provider of Computer Graphics Metafile viewing and
filtering solutions. The transaction was accounted for as a purchase and has
been included in the consolidated financial statements since the date of
acquisition. The purchase price has been allocated on the basis of the estimated
fair market value of the assets acquired and liabilities assumed. The
acquisition included the purchase of certain technology under research and
development, which resulted in a charge to the Company's consolidated results
for the quarter ended December 31, 1997 of $700,000, or $0.05 per share.


INFORMATION PLEASE LLC
 
    On July 5, 1995, the Company acquired all rights to the Information Please
names, trademarks, copyrights, and related assets from Houghton Mifflin Company
for approximately $3,600,000. Approximately $3,300,000 of the total acquisition
price was allocated to the aforementioned publishing rights and are being
amortized on a straight-line basis over an estimated useful life of 15 years as
determined by the revenue history of the Information Please Almanacs.
 
    On April 23, 1997, the Company entered into an agreement for the further 
development and marketing of the Information Please Almanac Product line, 
with Information Please LLC (the "Partnership"). The Company transferred 
ownership of the Information Please brand and the intellectual properties 
that compose the almanac product line to the Partnership. In addition, some 
of the Company's technical and editorial staff members became employees of 
the Partnership. The Company retained a 19.8% ownership position in the new 
venture. The Company accounts for its investment in Information Please LLC 
under the cost method. There was no gain or loss recognized by the Company on 
the transfer of the assets to the Partnership. As of December 31, 1997, the 
Company's investment in Information Please LLC approximated $2,600,000 and is 
included in other assets on the accompanying balance sheet.


ACQUISITION OF LEVEL FIVE RESEARCH, INC.
 
    On April 22, 1997, the Company acquired all of the outstanding capital stock
of privately held Level Five Research, Inc. from Information Builders, Inc. for
$5,000,000 using available cash. The Company also caused, at the time of
acquisition, Level Five Research, Inc. to enter into noncompetition agreements
with key executives and made aggregate payments of $300,000 in cash under those
agreements. Level Five Research, Inc., now Inso Florida Corporation, is a
developer of software and systems that apply intelligent technologies to data
access management. The transaction was accounted for as a purchase and has been
included in the consolidated financial statements since the date of acquisition.
The purchase price has been allocated on the basis of the estimated fair market
value of the assets acquired and liabilities assumed. The acquisition included
the purchase of certain technology under research and development, which
resulted in a charge to the Company's consolidated results for the quarter ended
June 30, 1997 of $3,600,000, or $0.25 per share. Intangible assets of
approximately $825,000 were recorded at the time of the acquisition and are
being amortized on a straight-line basis over their estimated useful lives of
five years. Amounts capitalized in connection with the noncompetition agreements
are being amortized on a straight-line basis over three years.


ACQUISITION OF MASTERSOFT
 
    On February 6, 1997, the Company acquired the intellectual property and
certain other assets of Adobe Systems, Inc.'s document access and conversion
business, formerly known as Mastersoft, for $2,965,000 using available cash. The
transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The purchase
price has been allocated on the basis of the estimated fair market value of the
assets acquired and liabilities assumed. The acquisition included the purchase
of certain technology under research and development, which resulted in a charge
to the Company's consolidated results for the quarter ended March 31, 1997, of
$1,800,000, or $0.13 per share. Intangible assets of approximately $258,000 were
recorded at the time of the acquisition and are being amortized on a
straight-line basis over their estimated useful lives of five years.


ELECTRONIC BOOK TECHNOLOGIES, INC.
 
    On July 16, 1996, the Company acquired all of the outstanding capital stock
of privately held Electronic Book Technologies, Inc. ("EBT"), now Inso
Providence Corporation ("Inso Providence"). In connection with the acquisition,
the Company paid approximately $27,800,000 in July 1996. In addition,
$10,600,000 was paid in October 1996 in connection with the purchase of shares
of EBT stock issued upon the exercise of EBT stock options that survived the
closing. All payments related to the EBT acquisition were made from the
Company's available cash.
 
    The transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The purchase
price has been allocated on the basis of the estimated fair market value of the
assets acquired and liabilities assumed. The acquisition included the purchase
of certain technology under research and development, which resulted in a charge
to the Company's consolidated earnings for the quarter ended September 30, 1996,
of $34,300,000, or $2.62 per share.

    In connection with the Inso Providence acquisition, the Company is obligated
to pay an additional $1,467,000 to the former principal stockholder of EBT in
January, 1998. The acquisition also required, in the event that certain Inso
Providence financial and operating goals were met, the Company to make
contingent payments up to an additional $5,300,000. As of December 31, 1997, the
Company's total remaining potential liability with respect to the contingent
payments for Inso Providence financial and operating goals approximated
$500,000.
 
    The Inso Providence acquisition also included estimated costs of
approximately $2,200,000 for direct transaction costs and costs relating to the
elimination of excess and duplicative activities. Charges against the accrual in
1997 and 1996 were $1,200,000 and $600,000, respectively, and consisted of the
following: $573,000 of professional fees consisting principally of appraisal,
legal, and accounting fees; $637,000 of employee severance for elimination of
duplicate functions and closure of duplicate and excess operations; $505,000 of
lease and other facility costs for closed operations; and $85,000 of other
out-of-pocket expenses related to the acquisition. Employee terminations were
essentially in the areas of sales, marketing, and product development. During
1997, the Company reevaluated the estimate of costs relating to the elimination
of excess and duplicative activities and reduced the related accrual and
goodwill by approximately $400,000. As of December 31, 1997, all payments
relating to the exit costs had been made by the Company.

<PAGE>


IMAGEMARK SOFTWARE LABS, INC.
 
    On January 9, 1996, the Company acquired all of the outstanding stock of
privately held ImageMark Software Labs, Inc., now Inso Kansas City Corporation
("Inso Kansas City"), for a purchase price of $5,500,000. The purchase price was
paid from available cash. The Company also caused, at the time of acquisition,
Inso Kansas City to enter into employment and noncompetition agreements with two
key executives and made aggregate payments of $1,000,000 under those agreements.
The transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The purchase
price has been allocated on the basis of the estimated fair market value of the
assets acquired and liabilities assumed. The acquisition included the purchase
of certain technology under research and development, which resulted in a charge
to the Company's consolidated results for the quarter ended March 31, 1996, of
$4,400,000, or $0.34 per share. Intangible assets of approximately $351,000 were
recorded at the time of the acquisition and are being amortized on a
straight-line basis over their estimated useful lives of seven years. Amounts
capitalized in connection with the employment and noncompetition agreements are
being amortized on a straight-line basis over three years.
 
    In August, 1996, Inso Kansas City exceeded certain performance measures as
set forth in the stock purchase agreement. As a result, during 1997 the Company
paid an additional $950,000 to the former stockholders of Inso Kansas City. The
additional consideration is being amortized on a straight-line basis over the
remaining useful life of intangible assets.
 
    Unaudited pro forma revenue, net loss, and loss per share shown below for
the years ended December 31, 1997 assumes the acquisition of Henderson Software,
Inc., Level Five Research, Inc., and Mastersoft occurred on January 1, 1997.
Unaudited pro forma revenue, net loss, and loss per share for the year ended
December 31, 1996 assumes the acquisitions of Electronic Book Technologies,
Inc., Henderson Software, Inc., Level Five Research, Inc., and Mastersoft
occurred on January 1, 1996. Therefore, the 1996 amounts presented below include
the write-off of certain purchased technology under research and development of
$700,000 relating to Henderson Software, Inc., $3,600,000 relating to Level Five
Research, Inc., and $1,800,000 relating to Mastersoft.


<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)                 (UNAUDITED)
                                                         1997           1996
-------------------------------------------------    ----------    -----------
<S>                                                  <C>           <C>
Revenue......................................        $  82,769     $   80,558
Net loss.....................................        ($    786)    ($  31,667)
Loss per share...............................        ($   0.05)    ($    2.40)
</TABLE>
-------------------------------------------------------------------------------


SYSTEMS COMPATIBILITY CORPORATION
 
    On April 1, 1995, the Company acquired all of the outstanding capital stock
of privately held Systems Compatibility Corporation ("SCC"), now Inso Chicago,
for a purchase price of $12,367,500. The purchase was paid in the form of
$6,000,000 in cash and $6,367,500 in promissory notes with a final payment due
on February 1, 1996. The notes were supported by outstanding letters of credit.
The transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The acquisition
included the purchase of certain technology under research and development,
which resulted in a charge to the Company's consolidated results for the quarter
ended June 30, 1995, of $5,500,000, or $0.47 per share. The purchase price has
been allocated on the basis of the estimated fair market value of the assets
acquired and liabilities assumed. Intangible assets of $3,842,000 were recorded
as part of the acquisition and are being amortized on a straight-line basis over
their estimated useful lives of seven years.
 
    In connection with the acquisitions, the Company engaged an independent
appraiser to estimate the fair market value of the assets acquired, to serve as
a basis for the allocation of the purchase price.
 
NOTE 5. INCOME TAXES


        The provision for income taxes comprised the following:
 
<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31
(IN THOUSANDS OF DOLLARS)
                                                  1997      1996       1995
-------------------------------------------------------------------------------
<S>                                           <C>       <C>        <C>
Current:
   Federal................................... $  1,206  $   4,918  $   4,239
   Foreign...................................      263        165        230
   State.....................................      274        540      1,108
                                              --------  ---------  ---------
   Total current.............................    1,743      5,623      5,577

Deferred:
   Federal...................................    1,167      4,360      1,320
   State.....................................       34        224        155
                                              --------  ---------  ---------
   Total deferred............................    1,201      4,584      1,475
                                              --------  ---------  ---------
                                              $  2,944  $  10,207  $   7,052
                                              --------  ---------  ---------
                                              --------  ---------  ---------
</TABLE>
-------------------------------------------------------------------------------


<PAGE>

    A reconciliation of income tax expense to the statutory federal income tax
rate was as follows:
 
<TABLE>
<CAPTION>
                                                                                          YEARS ENDED DECEMBER 31
                                                                                      -------------------------------
(IN THOUSANDS OF DOLLARS)                                                               1997       1996       1995
------------------------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                                   <C>        <C>        <C>
Federal statutory rate..............................................................  $     851  ($  3,876) $   4,566
State income taxes, net of federal effect...........................................        103        497        775
Change in valuation allowance.......................................................       (340)      (340)      (328)
Purchased in-process research and development.......................................                13,545      1,925
Income tax accruals.................................................................      1,575                   240
Amortization of acquired intangible assets..........................................        696        564        264
Research and development credit.....................................................                  (187)      (294)
Other...............................................................................         59          4        (96)
                                                                                      ---------  ---------  ---------
Total...............................................................................  $   2,944  $  10,207  $   7,052
                                                                                      ---------  ---------  ---------
                                                                                      ---------  ---------  ---------
---------------------------------------------------------------------------------------------------------------------
</TABLE>
 
    Significant components of the Company's net deferred income tax
assets/(liabilities) were as follows:
 
<TABLE>
<CAPTION>
                                                                                           YEARS ENDED DECEMBER 31
                                                                                       -------------------------------
(IN THOUSANDS OF DOLLARS)                                                                1997       1996       1995
-----------------------------------------------------------------------------------    ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
Net deferred tax assets:
  Intangible assets..................................................................  $  10,311  $   8,746  $   9,456
  Valuation allowance................................................................     (4,504)    (4,866)    (4,808)
  Capitalized development costs......................................................     (1,965)      (907)      (860)
  Deferred state taxes...............................................................      1,171      1,310
  Compensation expense...............................................................        767        361
  Other..............................................................................        137        286         59
                                                                                       ---------  ---------  ---------
                                                                                           5,917      4,930      3,847
Net deferred tax liabilities:
  Deferred income....................................................................      7,389      8,371      2,883
  Compensation expense...............................................................     (1,248)    (1,339)
  Accrued liabilities not currently deductible for tax...............................         15       (927)
  Other..............................................................................       (169)      (145)      (466)
                                                                                       ---------  ---------  ---------
                                                                                           5,987      5,960      2,417
                                                                                       ---------  ---------  ---------
Net deferred income tax assets/(liabilities).......................................    ($     70) ($  1,030) $   1,430
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
----------------------------------------------------------------------------------------------------------------------

</TABLE>
 
    The deferred income tax asset included on the accompanying consolidated
balance sheet relates to a tax basis difference between assets for financial
reporting and for income tax purposes. The deferred tax asset primarily includes
the tax basis intangible assets arising in connection with the formation of the
Company, the completion of the initial public offering, and certain of the
Company's acquisitions. The valuation allowance of $4,504,000 (which includes
net operating losses and other deductions subject to limitations in future
years) and $4,866,000 at December 31, 1997 and 1996, respectively, was
determined after evaluating the Company's historical operating results and
anticipated performance over its normal planning horizon. The Company
periodically evaluates the valuation allowance and makes adjustments to the
extent that actual and anticipated operating results vary from those initially
estimated at the time the valuation allowance was established. The tax benefit
associated with the intangible assets is subject to statutory realization
ratably over a 15-year period in total if the Company achieves certain levels of
taxable income.
 
    The Company has available net operating loss carryforwards and other tax
credits totaling approximately $5,700,000, which expire in the years 2008 to
2012.
 
NOTE 6. TRANSACTIONS WITH HOUGHTON MIFFLIN
 
    The Company and Houghton Mifflin have various license agreements (the
"License Agreements") for the purpose of licensing certain database content from
published reference products of Houghton Mifflin's Trade and Reference Division
for use in certain of the Company's products. Included in the Company's cost of
revenues for the years ended December 31, 1997, 1996, and 1995, were royalties
to Houghton Mifflin for the licensing of this database content amounting to
$1,234,000, $1,189,000, and $700,000, respectively. The terms of the License
Agreements are substantially the same as those in effect while the Company
operated 

                                       
<PAGE>

as a division of Houghton Mifflin, except that the minimum royalty for 
certain licenses of reference work content has been increased to 15% from 10% 
only with respect to new OEM licenses entered into after January 1, 1994.
 
    During 1996 and 1995, the book rights for the series of Information Please
Almanacs were licensed back to Houghton Mifflin. (See Note 4.) In connection
with the book right licensing arrangement, the Company recognized approximately
$700,000 and $1,000,000 in 1996 and 1995, respectively, for initial guaranteed
royalties. At December 31, 1996, $575,000 was included in accounts receivable on
the accompanying balance sheet for unpaid amounts in connection with the book
right licensing arrangement.
 
    Prior to the completion of the initial public offering described in Note 1,
Houghton Mifflin provided various administrative services to the Company,
including, but not limited to, payroll, data processing, tax, legal, treasury,
human resources, employee benefits administration, financial and accounting,
executive services, and insurance administration. Effective upon the completion
of the initial public offering described in Note 1, the Company and Houghton
Mifflin entered into an Administration and Services Agreement ("Services
Agreement") under which Houghton Mifflin provided directly some of the general
services discussed above to the Company. The term of the Services Agreement
extended through December 31, 1995. The fees charged for general services under
the Services Agreement, which are believed by the Company to approximate amounts
between unrelated parties, totaled $131,000 for 1995.
 
    Until May 1995, the Company's corporate offices occupied approximately
27,000 square feet in the Houghton Mifflin headquarters location in Boston,
Massachusetts. The Company and Houghton Mifflin entered into a Use and Occupancy
Agreement, which provided that the Company had the right to occupy that space
through December 31, 1995. The Company's rent and related costs under the
agreement were consistent with past practice in that the Company's costs were
based upon a pro-rata share of the total Houghton Mifflin headquarters space
occupied and related services used by the Company. The amounts incurred under
this agreement for 1995 totaled $219,000.
 
NOTE 7. RESTRUCTURING EXPENSES
 
    In June 1997, the Company adopted a plan of restructuring aimed at a 
continuing focus on strategic products while reducing costs and streamlining 
the organization. The plan primarily affected certain Lexical and Linguistic 
products of the Company. As a result of the restructuring plan, the Company 
recorded $5,848,000 of expenses. The charge included $320,000 of severance 
for 17 employees in development; $315,000 of estimated lease obligations, net 
of estimated sublease income, for the impact of affected leases; $3,353,000 
for the write-off of capitalized software and other assets; and $1,860,000 
for the write-off of prepaid royalties. As of December 31, 1997, the 
Company's remaining liabilities with respect to the restructuring charges 
approximated $360,000. The Company expects a substantial portion of these 
amounts will be paid in 1998.
 
NOTE 8. COMMON STOCK
 
    On July 11, 1997, the Board of Directors adopted a Shareholders' Rights Plan
and declared a dividend distribution of one preferred stock purchase right (a
"Right") for each outstanding share of the Company's Common Stock to
stockholders of record at the close of business on July 24, 1997 (the "Record
Date"). Each Right entitles the registered holder to purchase from the Company a
unit consisting of one one-thousandth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, $0.01 par value per share (the "Preferred
Stock"), at a purchase price of $145 in cash per Unit (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement dated as of July 11, 1997 (the "Rights Agreement") between
the Company and State Street Bank & Trust Company, as Rights Agent. The Rights
will become exercisable after a person or group has acquired or obtained the
right to acquire beneficial ownership of 20% or more of the outstanding common
stock, or following the commencement of a tender or exchange offer that would
result in a person or group owning 30% or more of the shares of common stock
(except for Houghton Mifflin Company's common stock ownership as of the Record
Date). Generally, if any person becomes the beneficial owner of 20% or more of
the shares of Common Stock of the Company, except pursuant to a tender or
exchange offer for all shares at a fair price as determined by the outside Board
members, each Right not owned by the 20% or more stockholder will enable its
holder to purchase that number of shares of the Company's Common Stock, in lieu
of preferred stock, which equals the exercise price of the Right divided by
one-half of the current market price of such Common Stock at the date of the
occurrence of the event. In addition, if the Company is involved in a merger or
other business combination transaction with another person or group in which it
is not the surviving corporation or in connection with which its Common Stock is
changed or converted, or it sells or transfers 50% or more of it assets or
earning power to another person, each Right that has not previously been
exercised will entitle its holder to purchase that number of shares of Common
Stock of such other person which equals the exercise price of the Right divided
by one-half of the current market price of such Common Stock at the date of the
occurrence of the event. In general, the Company may redeem the Rights in whole
at a price of $0.01 per Right at any time prior to the tenth day after a person
or group acquires 20% or more of the outstanding common stock. The Rights will
expire in July, 2007.
 
    On November 5, 1996, the Company completed a public offering of 1,200,000
shares of the Company's common stock, which provided the Company with net
proceeds of approximately $56,444,000.
 
    On August 2, 1995, the Company completed a public offering of 1,200,000
shares of the Company's common stock, which provided the Company with net
proceeds of approximately $39,300,000.
 
    In September 1995, the Company effected a two-for-one stock split in the
form of a stock dividend of one share of common stock for each outstanding share
of common stock. All references in the financial statements to the average
number of shares outstanding and related prices, per share amounts, stock plan
data, and benefit plan data have been retroactively restated to reflect this
transaction.


<PAGE>

NOTE 9. EARNINGS PER SHARE
 
    The following table sets forth the computation of basic and diluted earnings
per share.
 
<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31
                                                                                     --------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)                                                1997        1996       1995
-----------------------------------------------------------------------------------  ---------  ----------  ---------
<S>                                                                                  <C>        <C>         <C>
Numerator:
  Numerator for basic and diluted earnings per share:
  Net (loss) income................................................................  ($    440) ($  21,280) $   5,994

Denominator:
  Denominator for basic earnings per share-weighted average shares.................     14,362      13,214     12,161
  Effect of dilutive securities:
  Employee stock options...........................................................                                67
                                                                                     ---------  ----------  ---------
  Denominator for diluted earnings per share-adjusted weighted-average shares......     14,362      13,214     12,228

Basic (loss) earnings per share....................................................  ($   0.03) ($    1.61) $    0.49
                                                                                     ---------  ----------  ---------
                                                                                     ---------  ----------  ---------
(Loss) earnings per share--assuming dilution.......................................  ($   0.03) ($    1.61) $    0.49
                                                                                     ---------  ----------  ---------
                                                                                     ---------  ----------  ---------
---------------------------------------------------------------------------------------------------------------------

</TABLE>
 
    Options to purchase 3,873,666 and 4,025,964 shares of common stock were
outstanding during 1997 and 1996, respectively, but were not included in the
computation of diluted earnings per share because the effect would be
antidilutive. Options to purchase 90,000 shares of common stock were outstanding
during 1995 but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the shares of common stock and therefore the effect would be
antidilutive.
 
NOTE 10. STOCK COMPENSATION PLANS
 
STOCK INCENTIVE PLANS
 
    The Company has reserved 3,000,000 shares for issuance under the 1993 Stock
Incentive Plan ("1993 Plan") and 2,000,000 shares for issuance under the 1996
Stock Incentive Plan ("1996 Plan"). The 1993 Plan and the 1996 Plan ("the
Plans") provide for the issuance of incentive stock options, non-qualified stock
options, unrestricted stock, restricted stock, and performance share awards.
Under the Plans, both incentive options and non-qualified options may be granted
to employees and consultants. The option exercise price shall not be less than
100% of the fair market value of the shares on date of grant in the case of
incentive options and not less than 85% of the fair market value of the shares
on the date of grant in the case of non-qualified options. The Plans also
provide for the grant of performance share awards to employees entitling the
recipient to receive shares of common stock based upon achievement of individual
or Company performance goals. The term of each option and the vesting periods
for options and stock awards is fixed by the Compensation Committee of the
Company's Board of Directors. The term for incentive stock option grants may not
exceed 10 years from the date of grant. Options granted to purchase common stock
and restricted stock awarded under the Plans become fully vested and exercisable
in full upon a change in control, whether or not vested or exercisable in
accordance with their terms.
 
    The Company's 1996 Non-employee Director Plan ("Director Plan") provides 
for the automatic grant of non-qualified stock options and unrestricted stock 
to members of the Board of Directors who are not employees of the Company. 
The Company has reserved 250,000 shares for issuance under the Director Plan. 
The Director Plan provides for an initial grant of options to each 
Non-employee Director to purchase 20,000 shares of Common Stock at the fair 
market value on the date that such Non-employee Director first becomes a 
director of the Company; an annual grant of a non-qualified stock option to 
purchase 5,000 shares of Common Stock at the fair market value on the date of 
the Corporation's annual meeting; and an award of 1,000 shares of the 
Company's unrestricted stock on January 27 of each year. The term for the 
option grants may not exceed 10 years from the date of grant. Options granted 
to purchase common stock and restricted stock awarded under the Director Plan 
become fully vested and exercisable in full upon a change in control, whether 
or not vested or exercisable in accordance with their terms.
 
    On August 6, 1997, the Board of Directors approved a stock option exchange
program (the "Exchange Program") pursuant to which full-time permanent employees
holding stock options under the Plans were given the opportunity to exchange the
unexercised portion of such options (the "Existing Options") under the Plans for
new options (the "New Options") on a basis of four shares of common stock for
every five shares covered by the Existing Options. As a result of the Exchange
Program, options for approximately 528,000 shares were surrendered by eligible
employees. The exercise price of the New Options was equal to the market value
of the Company's common stock on the date of grant, or $12.00. Additionally,
certain officers were eligible to participate in the Exchange Program for an
exercise price of $18.00. The New Options have the same contractual life,
vesting schedule, and other terms as the Existing Options canceled in exchange
therefore. Additionally, during the exchange program, certain employees
exchanged non-qualified options for incentive stock options covering 835,000
shares. Directors were excluded from the Exchange Program.
 


<PAGE>

NOTES RECEIVABLE FROM STOCK PURCHASE AGREEMENTS
 
    The Company presently holds notes receivable for a total of $2,493,733 from
certain of its corporate officers. The Company provided financing to effect the
purchase of an aggregate 243,291 shares of the Company's common stock pursuant
to the 1996 Stock Incentive Plan at the fair market value on December 16, 1997,
of $10.25 per share. Interest on such loans accrue at 6.0% per annum until
maturity. The principal and interest amounts of such loans is repayable in full
upon the earlier of (i) the fifth anniversary of the loan (ii) the date the
officer leaves the Company or (iii) if and to the extent that the officer sells
the stock. These loans, which are shown as a reduction to stockholders' equity
on the balance sheet, are secured by the common stock purchased.
 
    The following table summarizes the stock option activity under the 1993
Plan, the 1996 Plan, and the Director Plan:
 
<TABLE>
<CAPTION>
                                                                   AVAILABLE       OPTIONS          WEIGHTED
                                                                   FOR GRANT     OUTSTANDING      AVERAGE PRICE
----------------------------------------------------------------  -----------   -------------    --------------
<S>                                                               <C>          <C>              <C>
At December 31, 1994............................................      149,000        794,964        $    9.56

1995
Additional authorized...........................................    2,000,000
Granted.........................................................   (1,494,250)     1,494,250        $   24.27
Exercised.......................................................                     (77,000)       $   11.84
Forfeited.......................................................       53,000        (53,000)       $   17.05
Restricted stock grant..........................................      (14,000)                      $   24.00
                                                                  -----------  ---------------         ------
At December 31, 1995............................................      693,750      2,159,214        $   19.48

1996
Additional authorized...........................................    2,250,000
Granted.........................................................   (2,262,800)     2,262,800        $   41.97
Exercised.......................................................                     (98,950)       $    9.64
Forfeited.......................................................      297,100       (297,100)       $   33.92
Restricted stock grant..........................................       (1,200)                      $   39.75
Unrestricted stock grant........................................       (6,000)                      $   37.50
                                                                  -----------  ---------------         ------
At December 31, 1996............................................      970,850      4,025,964        $   31.30

1997
Granted.........................................................   (1,030,100)     1,030,100        $   12.56
Exercised.......................................................                     (62,500)       $   10.27
Forfeited.......................................................      592,098       (592,098)       $   31.56
Shares issued in connection with Notes Receivable from Stock
  Purchase Agreements...........................................     (243,291)                      $   10.25
Shares forfeited from Exchange Program..........................      527,800       (527,800)       $   35.11
Unrestricted stock grant........................................       (8,000)                      $   39.63
                                                                  -----------  ---------------         ------
At December 31, 1997............................................      809,357      3,873,666        $   15.20
                                                                  -----------  ---------------         ------
                                                                  -----------  ---------------         ------
----------------------------------------------------------------------------------------------------------------
</TABLE>
 
    At December 31, 1997, 1996, and 1995, options to purchase 978,408, 459,023,
and 331,482, shares, respectively, were exercisable. The weighted average
exercise price for options exercisable at December 31, 1997, 1996, and 1995 were
$16.24, $11.87, and $9.77, respectively.


<PAGE>

 
    Related information for options outstanding and exercisable as of December
31, 1997, under the Plans is as follows:
 
<TABLE>
<CAPTION>
                                           OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                               --------------------------------------------  ------------------------
                                                 WEIGHTED
                                                  AVERAGE         WEIGHTED                  WEIGHTED
                                                REMAINING          AVERAGE                   AVERAGE
                                              CONTRACTUAL         EXERCISE                  EXERCISE
RANGES OF EXERCISE PRICES        SHARES              LIFE            PRICE     SHARES          PRICE
-----------------------------  ----------  -----------------  -------------  ---------  -------------
<S>                              <C>         <C>                <C>            <C>        <C>
      $ 7.50 -- $11.75           590,964            7.2        $    8.84      454,464    $    8.56
      $12.00 -- $13.50         1,999,102            8.8            12.14      228,324        12.36
      $16.81 -- $28.00         1,060,000            8.1            18.49      165,000        21.35
      $31.00 -- $54.25           223,600            8.5            43.74      130,620        43.34
                               ---------                                     --------
                 Total         3,873,666            8.3        $   15.20      978,408    $   16.24
                               ---------           ----        ---------     --------    ---------
                               ---------           ----        ---------     --------    ---------
</TABLE>
 
    The market value of the restricted shares awarded has been recorded as
unearned compensation and is shown as a separate component of stockholders'
equity. Unearned compensation is being amortized to expense over the vesting
periods, which range from three to five years. Amortization totaled $194,000,
$196,000, and $173,000, for the years ending December 31, 1997, 1996, and 1995,
respectively.
 
STOCK PURCHASE PLAN
 
    Under the Company's 1993 Stock Purchase Plan, employees have the 
opportunity to purchase the Company's common stock. Offerings begin on 
January 1 and July 1 of each year and conclude on June 30 and December 31, 
respectively. The price at which the employee may purchase the common stock 
is 85% of the last reported sale price of the Company's common stock on the 
Nasdaq National Market on the date the offering period commences or 
concludes, whichever is lower when rounded to the next highest quarter 
percentage. A total of 200,000 shares of common stock have been reserved 
under this plan.
 
    Activity in the plan was as follows:
 
<TABLE>
<CAPTION>
                                                                                                     WEIGHTED
                                                                                    SHARES         AVERAGE PRICE
                                                                                ---------------  -----------------
<S>                                                                             <C>              <C>
Shares Available for issuance at December 31, 1994............................          187,614

1995
Purchased during 1995.........................................................           26,492   $      12.26
                                                                                ---------------
Available for issuance at December 31, 1995...................................          161,122

1996 
Purchased during 1996.........................................................           21,399   $      30.74
                                                                                ---------------
Available for issuance at December 31, 1996...................................          139,723

1997
Purchased during 1997.........................................................           43,912   $      22.75
                                                                                ---------------
Available for issuance at December 31, 1997...................................           95,811
                                                                                ---------------
                                                                                ---------------
</TABLE>
 
    In January 1998, for the six-month period ended December 31, 1997, 43,226
shares were issued at $10.00 per share.

<PAGE>
 
FAIR VALUE
 
    Pro forma information regarding net (loss) income and (loss) earnings per
share is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock plans based on the fair value method provided
under SFAS 123. The fair value for the options described below was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for awards in 1997, 1996, and 1995:
 
<TABLE>
<CAPTION>
                                                                                  1997        1996        1995
-----------------------------------------------------------------------------------------------------------------
                                                                               ----------  ----------  ----------
<S>                                                                            <C>         <C>         <C>
Risk-free interest rate......................................................      5.95%       6.43%       6.39%
Expected life................................................................  4.3 years   4.3 years   4.6 years
Expected volatility..........................................................        66%         45%         38%
Expected dividends...........................................................       0.0%        0.0%        0.0%
-----------------------------------------------------------------------------------------------------------------
</TABLE>
 
    The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
    The total value of the awards granted during the years ended December 31,
1997, 1996, and 1995 were computed as approximately $6,780,000, $23,600,000, and
$8,260,000, respectively, which would be amortized over the vesting period of
the options. As a result of the phase-in period allowed under SFAS 123, the
effects on reported net income for 1997, 1996, and 1995 will not likely be
representative of the effects in future years. The weighted average fair value
of awards granted in 1997, 1996, and 1995 was estimated to be $6.58, $18.56, and
$10.26, respectively. If the Company had accounted for these awards in
accordance with fair value accounting proscribed under SFAS 123, the Company's
pro forma net (loss) income and (loss) earnings per share would have been as
follows:
 
<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31
                                                                                    --------------------------------
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)                                    1997        1996       1995
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>        <C>         <C>
Pro forma net (loss) income.......................................................  ($  5,598) ($  25,549) $   5,217
Pro forma (loss) earnings per common share........................................  ($   0.39) ($    1.93) $    0.43
Pro forma (loss) earnings per common share--assuming dilution.....................  ($   0.39) ($    1.93) $    0.41
--------------------------------------------------------------------------------------------------------------------
</TABLE>
 
NOTE 11. BENEFIT PLAN
 
    The Company has a 401(k) retirement savings plan ("401(k) Plan"), covering
substantially all of the Company's domestic employees. The Company has
authorized 100,000 shares for issuance under the Plan. Eligible employees are
permitted to make pre-tax contributions, up to 15% of their compensation subject
to an annual limit. Under the 401(k) Plan, the Company may make contributions
either in cash or common stock of the Company at the discretion of the Company's
Board of Directors. The contribution may match in whole or in part the salary
deferral contributions of the participants and/or represent additional profit-
sharing contributions tied to the Company's net income performance. During 1997,
1996, and 1995, the Company's total contribution amounted to approximately
$824,000, $472,000, and $197,000, respectively.
 
NOTE 12. LEASE COMMITMENTS
 
    The Company has various lease agreements for office space under operating
leases that expire in 2007. The Company's leases include certain renewal and
expansion options, escalation clauses for the Company's proportionate share of
increases in building maintenance costs, and periods of free rent. At December
31, 1997, future minimum lease commitments for noncancelable leases are as
follows:
 
<TABLE>
<S>              <C>                        <C>               <C>
1998             3,096,000                  2001              2,887,000
1999             2,986,000                  2002              2,897,000
2000             2,900,000                  Thereafter        10,326,000
</TABLE>
 
    Rent expense, including the amounts under the Use and Occupancy Agreement
with Houghton Mifflin described in Note 6, was approximately $2,732,000,
$1,448,000, and $836,000 in 1997, 1996, and 1995, respectively.
 
NOTE 13. SUBSEQUENT EVENTS
 
    On March 12, 1998, the Company acquired all of the outstanding stock of 
privately held ViewPort Development AB for $2,500,000 using available cash. 
ViewPort, through its wholly owned subsidiary Synex Information AB, is a 
developer of browser engines and application development toolkits for viewing 
SGML (Standard Generalized Markup Language) information. The transaction will 
be accounted for as a purchase. The acquisition includes certain technology 
under research and development, which will be written off with a one-time 
charge, estimated to be between $1,800,000 and $2,200,000, to the Company's 
consolidated 1998 first quarter earnings.

<PAGE>
 
INSO CORPORATION UNAUDITED QUARTERLY OPERATING RESULTS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                       MARCH      JUNE       SEPTEMBER      DECEMBER
                                                        31         30           30             31         TOTAL
-----------------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>        <C>            <C>           <C>
1997
Revenues...........................................  $  19,062  $  20,058    $  20,462     $   22,287   $  81,869
Gross profit.......................................     17,487     17,634       18,536         20,262      73,919
Net income (loss)..................................      2,508     (6,773)       1,989          1,836        (440)
Earnings (loss) per common share...................  $    0.18  ($   0.47)   $    0.14     $     0.13   ($   0.03)
Earnings (loss) per common share--assuming
  dilution.........................................  $    0.17  ($   0.47)   $    0.14     $     0.13   ($   0.03)

1996
Revenues...........................................  $  12,461  $  15,144    $  19,257     $   23,672   $  70,534
Gross profit.......................................     10,818     12,944       16,938         21,525      62,225
Net income (loss)..................................     (1,279)     4,001      (29,950)         5,948     (21,280)
Earnings (loss) per common share...................  ($   0.10) $    0.31    ($   2.29)    $     0.43   ($   1.61)
Earnings (loss) per common share--assuming
  dilution.........................................  ($   0.10) $    0.29    ($   2.29)    $     0.40   ($   1.61)
-----------------------------------------------------------------------------------------------------------------
</TABLE>
 
    Earnings per share amounts for all quarters of 1996 and the first three
quarters of 1997 have been restated to comply with Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE. See Note 9 to the
"Consolidated Financial Statements."
 
    As a result of the shares of common stock issued during 1997 and 1996, the
sum of the earnings per share for the four quarters of 1997 and 1996, which are
based on the weighted average shares outstanding during each quarter, does not
equal earnings per share for the respective year, which is based on the weighted
average shares outstanding during the year. See Note 9 to the "Consolidated
Financial Statements."
 
    The first quarter of 1997 includes an acquisition charge of $1,800,000, or
$0.13 per share, for certain purchased technology under research and development
by Adobe Systems, Inc.'s document access and conversion business formerly known
as Mastersoft, at the time of the February 6, 1997, acquisition. See Note 4 to
the "Consolidated Financial Statements" for a description of the transaction.
 
    The second quarter of 1997 includes an acquisition charge of $3,600,000, or
$0.25 per share, for certain purchased technology under research and development
by Level Five Research, Inc. at the time of the April 22, 1997, acquisition. See
Note 4 to the "Consolidated Financial Statements" for a description of the
transaction.
 
    The second quarter of 1997 includes a charge of $3,684,000, net of income
taxes, or $0.26 per share, for a restructuring plan aimed at continuing to focus
on strategic products while reducing costs and streamlining the organization.
See Note 7 to the "Consolidated Financial Statements" for a description of the
transaction.
 
    The fourth quarter of 1997 includes an acquisition charge of $700,000, or
$0.05 per share, for certain purchased technology under research and development
by Henderson Software, Inc. at the time of the November 24, 1997, acquisition.
See Note 4 to the "Consolidated Financial Statements" for a description of the
transaction.
 
    The first quarter of 1996 includes an acquisition charge of $4,400,000, or
$0.34 per share, for certain purchased technology under research and development
by ImageMark Software Labs, Inc. at the time of the January 9, 1996,
acquisition. See Note 4 to the "Consolidated Financial Statements" for a
description of the transaction.
 
    The third quarter of 1996 includes an acquisition charge of $34,300,000, or
$2.62 per share, for certain purchased technology under research and development
by Electronic Book Technologies, Inc. at the time of the July 16, 1996,
acquisition. See Note 4 to the "Consolidated Financial Statements" for a
description of the transaction.
 
Inso Corporation SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS Years ended
December 31, 1997, 1996, and 1995
 
<TABLE>
<CAPTION>
                                               BALANCE AT          ADDITIONS                           BALANCE
                                                BEGINNING      CHARGED TO COSTS         AMOUNTS         AT END
                                                 OF YEAR         AND EXPENSES         WRITTEN OFF      OF YEAR
                                              -------------  ---------------------  ---------------  ------------
<S>                                           <C>            <C>                    <C>              <C>
1997
Allowance for accounts receivable...........   $ 1,794,000       $   1,250,000       ($    634,000)  $  2,410,000

1996
Allowance for accounts receivable...........   $ 1,137,000       $     780,000       ($    123,000)  $  1,794,000

1995
Allowance for accounts receivable...........   $   636,000       $     775,000       ($    274,000)  $  1,137,000
                                              -------------        -----------      ---------------  ------------

<PAGE>


ITEM 14(A)3. EXHIBIT INDEX
</TABLE>
 
<TABLE>
<CAPTION>
EXHIBIT                      DESCRIPTION                           PAGE
-------  ----------------------------------------------------     ------
<S>      <C>                                                   <C>
3.1    Certificate of Incorporation of the Company, as
       amended, incorporated by reference to Exhibit 3.1 to
       the Company's Annual Report on Form 10-K for the
       twelve-month period ended December 31, 1995.                    *
3.2    By-laws of the Company, incorporated by reference to
       Exhibit 3.2 to the Company's Annual Report on Form
       10-K for the twelve-month period ended December 31,
       1995.                                                           *
4.1    Proof of Common Stock Certificate of the Company,
       incorporated by reference to Exhibit 4 to the
       Registration Statement No. 33-73996 on Form S-1
       filed with the Commission on January 12, 1994 (the
       "Form S-1").                                                    *
4.2    Rights Agreement, dated July 11, 1997, by and
       between the Company and State Street Bank & Trust
       Company, as Rights Agent, incorporated by reference
       to Exhibit 4.1 to the Company's Current Report on
       Form 8-K filed with the Commission on July 16, 1997.            *
10.1   Microsoft Software Publishing Agreement, dated April
       25, 1990, as amended, by and between Houghton
       Mifflin Company (as predecessor to the Company) and
       Microsoft Corporation, incorporated by reference to
       Exhibit 10.4 to the Form S-1.**                                 *
+10.2  Inso Corporation 1993 Stock Purchase Plan,
       incorporated by reference to Exhibit 10.2 to the
       Form S-1.                                                       *
+10.3  Inso Corporation 1993 Stock Incentive Plan, as
       amended, incorporated by reference to Exhibit 10.4
       to the Company's Annual Report on Form 10-K for the
       twelve-month period ended December 31, 1995.                    *
+10.4  Inso Corporation 1996 Stock Incentive Plan,
       incorporated by reference to Exhibit 10.4 to the
       Company's Annual Report on Form 10-K for the
       twelve-month period ended December 31, 1996.                    *
+10.5  Inso Corporation 401(k) Plan, incorporated by
       reference to Exhibit 4.4 to the Registration
       Statement No. 33-77304 on Form S-8 filed with the
       Commission on April 4, 1994.                                    *
10.6   Office Lease, dated November 30, 1994, by and
       between the Company and MBL Life Assurance
       Corporation as incorporated by reference to Exhibit
       10.6 to the Company's Annual Report on Form 10-K for
       the twelve-month period ended December 31, 1995.                *
10.7   Lease to Premises, dated December 27, 1995, by and
       between Inso Chicago Corporation and International
       Business Machines Corporation, as incorporated by
       reference to Exhibit 10.7 to the Company's Annual
       Report on Form 10-K for the twelve-month period
       ended December 31, 1995.                                        *
10.8   Pledge Agreements, each dated December 16, 1997, by
       and between the Company and certain of its corporate
       officers.
21.    List of Subsidiaries.
23.    Consent of Ernst & Young LLP.
27.1   Financial Data Schedule.
27.2   Restated Financial Data Schedule to the Company's
       Quarterly Report on Form 10-Q for the three month
       period ended March 31, 1997.
27.3   Restated Financial Data Schedule to the Company's
       Quarterly Report on Form 10-Q for the six month
       period ended June 30, 1996.
</TABLE>
 
------------------------
 
*   INCORPORATED HEREIN BY REFERENCE.
 
**  CONFIDENTIAL TREATMENT HAS BEEN GRANTED AS TO THIS DOCUMENT THROUGH
    AMENDMENT IX. 

+   MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT
    FILED HEREWITH, OR INCORPORATED BY REFERENCE, IN RESPONSE TO ITEM 14(A)3 OF
    THE INSTRUCTIONS TO FORM 10-K.