<PAGE>
                                       
                                 EXHIBIT 13.1

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

Certain information contained herein may include forward-looking statements 
that involve risks and uncertainties.  The Company's actual results may 
differ materially from those discussed in the forward-looking statements.  
Potential risks and uncertainties include, but are not limited to, 
integration of Image Sciences and FormMaker and their respective products, 
reliance on a major client relationship, dependence upon the insurance 
industry, fluctuations in operating results, and the timely development and 
acceptance of new products and services.  Consequently, the actual results 
realized by the Company could differ materially from the statements made 
herein.  Readers of this report are cautioned not to place undue reliance on 
the forward-looking statements made herein.

OVERVIEW

The Company provides software, technologies, services, and outsourcing to 
insurance, financial services, utilities, telecommunications, transportation, 
government, education, and other enterprises and industries.  The Company was 
incorporated in Delaware in January 1997 in connection with the Merger of 
Image Sciences and FormMaker.  The Merger was treated as an acquisition of 
FormMaker by Image Sciences; accordingly the Merger transaction was recorded 
under the purchase method of accounting.

The accompanying consolidated financial statements include the accounts of 
the Company and its wholly-owned subsidiaries, Image Sciences, FormMaker, and 
Micro Dynamics, Ltd.  Results of FormMaker and Micro Dynamics, Ltd. are 
included from the effective date of the Merger, May 15, 1997. As described in 
the footnotes to the consolidated financial statements, the Company incurred 
one-time charges aggregating $21,377,855 in connection with the Merger, 
primarily related to acquired in-process technology and compensation charges 
related to the repurchase and remeasurement of certain employee stock options.

RESULTS OF OPERATIONS

The following table sets forth selected data of the Company expressed as a 
percentage of total revenues for the periods indicated:

                                              1997      1996     1995
                                              ----      ----     ----
REVENUES
Professional services                          35%        7%       5%
License                                        23        42       45
Maintenance & other recurring                  42        51       50
                                              ----      ----     ----
  Total revenues                              100       100      100
                                              ----      ----     ----
EXPENSES
Professional services                          23         6        4
Product development & support                  28        38       37
Selling & marketing                            13        14       18
General & administrative                       14        12       12
Merger related charges                        122         0        0
                                              ----      ----     ----
  Total expenses                              200        70       71
                                              ----      ----     ----
  Operating income (loss)                    (100)       30       29
Other income                                    1         2        0
                                              ----      ----     ----
  Income (loss) before taxes                  (99)       32       29
Provision for income taxes (benefit)           (7)       12       11
                                              ----      ----     ----
  Net income (loss)                           (92%)      20%      18%
                                              ----      ----     ----
                                              ----      ----     ----


FISCAL YEAR ENDED JULY 31, 1997 COMPARED TO FISCAL YEAR ENDED JULY 31, 1996 

REVENUES

The Company derives its revenues from license fees, recurring maintenance 
fees, and professional services related to its software products. License 
revenues are derived from perpetual and term licenses of software products.  
Maintenance and other recurring revenues consist primarily of recurring 
license fees and annual maintenance contracts.  Professional services 
revenues include fees for consulting, implementation, contract programming 
projects, and education services.

Total revenues increased 53% due primarily to the inclusion of FormMaker's 
results since the Merger date, May 15, 1997.  Professional services increased 
651% which is largely due to a significant amount of implementation and 
processing services revenues generated since the Merger date.  During the 
fourth quarter license revenues significantly declined which caused an 
overall 15% decrease in annual license revenues as compared to the previous 
year.  This decline is attributable to the impact of the Merger on customer 
buying decisions which may have been delayed pending the integration of Image 
Sciences and FormMaker operations. Maintenance and other recurring revenues 
increased 24% due to the inclusion of FormMaker's recurring maintenance 
revenue since the Merger date and an increased customer base.  Inclusion of 
FormMaker's results for the full period should significantly increase fiscal 
1998 revenues.

<PAGE>

Backlog for the Company's products and services is primarily comprised of 
recurring software license and maintenance revenues for ongoing maintenance 
and support,  software implementation and consulting services, and processing 
services. Recurring license and maintenance revenue backlog, which consists 
of recurring software license fees and annual maintenance contracts, was 
approximately $14,000,000 at July 31, 1997. Software agreements for recurring 
license fees generally have non-cancelable terms of up to five years.  In the 
event of PMSC's termination of the marketing agreement between FormMaker and 
PMSC, recurring software license fees related to PMSC sub-license agreements 
would be eliminated over a two year period.  Annual maintenance contracts may 
generally be terminated upon a 30 day notice period; however, the Company has 
not historically experienced material cancellations of such contracts. 
Software implementation and consulting services backlog, which is principally 
performed under time and material agreements of which some have cancellation 
provisions, was approximately $3,700,000 at July 31, 1997.  In the event of 
cancellation of any of the agreements, there would be no impact on revenue 
recognition because revenue is recognized as services are performed. 
Processing services agreements generally provide that fees are charged on a 
per transaction basis.  The  processing services backlog totaled 
approximately $9,100,000 at July 31, 1997.  The estimated future revenue with 
respect to software implementation and processing services are based on 
management's estimate of revenues over the remaining life of the respective 
contracts.

PROFESSIONAL SERVICES EXPENSE

Professional services expense is composed primarily of personnel expenses 
related to professional services and processing services.  The majority of 
the increase is due to inclusion of FormMaker personnel associated with both 
the professional and processing services areas since the date of the Merger. 
Processing services incurred approximately $1,000,000 in direct postage and 
supplies expense which further attributed to the increase.  Costs for 
professional services expense, represented 65% and 80% of professional 
services revenue for fiscal 1997 and 1996, respectively.  The decrease in 
cost as a percentage of professional services revenue is primarily due to 
economies of scale of the significantly expanded services operations.

PRODUCT DEVELOPMENT AND SUPPORT EXPENSE

The Company continues to commit significant resources to development and 
support activities.  Product development and support expense consists 
primarily of research and development efforts, amortization of capitalized 
software development costs, customer support, and other product support 
costs.  An increase of 12% in product development and support expense was 
incurred in fiscal 1997. Before capitalization and amortization, product 
development and support expense increased 22%, primarily as a result of the 
inclusion of FormMaker's operations since the date of the Merger and 
significant resources focused on research activities to expand the Company's 
product offerings.

SELLING AND MARKETING EXPENSE

Selling and marketing expense increased 35% primarily as a result of 
inclusion of FormMaker's operations since the date of the Merger and 
increased commissions.  Sales commissions increased principally as a result 
of commissions on professional services contracts executed subsequent to the 
date of the Merger.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative expense increased 80% due primarily to inclusion 
of FormMaker's operations since the date of the Merger, profit-based 
performance bonuses, and costs associated with the Merger.  Profit-based 
performance bonuses increased due to achievement of management performance 
and financial goals.  Goodwill amortization of $160,522 was recorded in 
fiscal 1997 related to the Merger.

MERGER RELATED CHARGES

One-time Merger related charges consist of acquired in-process technology, 
compensation charges, and other Merger related charges.  Acquired in-process 
technology of $13,500,000 represents the present value of the estimated cash 
flows expected to be generated by FormMaker's in-process technology which was 
charged to expense on the closing date of the Merger.  Compensation and other 
merger related charges of approximately $7,900,000 relate to the repurchase 
of options to purchase common stock and the creation of a new measurement 
date for outstanding options to purchase common stock converted to options to 
purchase Class B redeemable common stock.  These non-recurring charges are 
solely related to the Merger and the $8,000,000 cash 

<PAGE>

distribution to stockholders and option holders in May 1997.

OTHER INCOME, NET

Other income, net decreased 11% due to increased interest expense charges. 
Interest income increased 15% due to significant cash, cash equivalents, and 
short-term investments held by the Company until  $8,000,000 was distributed 
in cash to stockholders and option holders in May 1997.  Interest expense 
increased 82% because of debt assumed in the Merger.

PROVISION FOR INCOME TAXES (BENEFIT)

The income tax provision (benefit) was calculated utilizing the Federal 
income tax rates for corporations.  The Company's effective tax rates for the 
years ended July 31, 1997 and 1996 were approximately 7% and 37%, 
respectively.  The decrease in the Company's effective tax rate in 1997 was 
due primarily to the in-process technology charge which was not deductible 
for tax purposes.

NET INCOME (LOSS)

The 794% decrease in profitability is the result of approximately $21,400,000 
in non-recurring Merger related charges.  Excluding Merger related charges, 
income before taxes increased 13% primarily as a result of increased revenues.

FISCAL YEAR ENDED JULY 31, 1996 COMPARED TO FISCAL YEAR ENDED JULY 31, 1995 
REVENUES

Total revenues increased 6% primarily as a result of increased maintenance 
revenues and professional services revenues.  Maintenance revenues increased 
8% in fiscal 1996 due to an expanding customer base and retention of existing 
customers.  Professional services revenues increased 40% as a result of a 
significant increase in consulting revenues and revenue generated from the 
Company's biennial user group conference.  License revenues decreased 
slightly due to a decrease in international software license revenues, 
partially offset by an 8% increase in North American license revenues. The 
Company terminated its most significant European distributor agreement in 
fiscal 1995, and did not replace the European distributor until fiscal 1996. 
The new distribution agreement with The Continuum Company did not generate 
material revenues during fiscal 1996.

PROFESSIONAL SERVICES EXPENSE

Professional services expense increased 39% which was primarily attributable 
to the cost associated with the Company's biennial user group conference and 
costs associated with expanding the Company's consulting services.  Costs for 
professional services expense, before the effect of the biennial user group 
conference held in fiscal 1996, represented 75% and 80% of professional 
services revenue for fiscal 1996 and 1995, respectively.  The decrease in 
cost as a percentage of professional services revenue is primarily due to 
more efficient management of the Company's consulting resources.

PRODUCT DEVELOPMENT AND SUPPORT EXPENSE

The 11% increase in product development and support expense was a result of 
increased staffing, a decrease in capitalizable development efforts, an 
increase in software amortization, and costs related to a continued focus on 
customer support of the Company's expanding customer base. Product 
development and support expense before capitalization and amortization 
increased 6% as a result of increased staffing to sustain new product 
development and to enhance and maintain existing products. Software 
capitalization decreased due to increased research of new technologies, and 
focusing development efforts on more efficient methods of maintaining 
existing products. These efforts are not eligible for capitalization. 
Amortization of capitalized software  increased due to the release of several 
new client/server products at the end of fiscal 1995.

SELLING AND MARKETING EXPENSE

Selling and marketing expense decreased 15% primarily as a result of 
decreased staffing and related travel costs. The decreased staffing relates 
to several unfilled sales and sales management positions. These decreases 
were partially offset by an increase in international expatriate expenses. In 
September 1995, the Company transferred one employee to the United Kingdom to 
assume a sales support function.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative expense increased 3% as a result of increases in 
corporate office rent and profit sharing bonuses, partially offset by 
decreased legal costs. Rent expense increased due to the renegotiation of the 
Company's corporate office lease, which included an approximate 3,000 square 
feet expansion. Profit based bonuses increased due to a 15% increase in net 
income before taxes.  Legal costs associated with two outstanding lawsuits 
decreased significantly.

OTHER INCOME, NET

Other income, net increased $211,757 as a result of a 60% increase in 
interest income due to a significant 

<PAGE>

increase in cash, cash equivalents, and short-term investments.  
Additionally, interest expense decreased 48% because of the scheduled January 
1996 principal installment payment and the March 1996 retirement of all 
outstanding subordinated debentures.

PROVISION FOR INCOME TAXES

The income tax provisions were calculated utilizing Federal income tax rates 
for corporations. Effective tax rates for the years ended July 31, 1996 and 
1995 were approximately 37% each year.  These rates differ from the Federal 
statutory rate due primarily to state income taxes. The Company used a 
portion of its outstanding tax credits to offset its current tax liability in 
fiscal 1996. The remaining net operating loss carryforward was also used in 
fiscal 1995.

NET INCOME

Profitability increased 16% due to the 6% increase in revenues and an 
approximate $200,000 increase in other income, while expenses only increased 
5%.

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 1997, the Company's principal sources of liquidity consisted of 
cash and cash equivalents of $2,869,458.  $4,528,366 was available under the 
Company's $10,000,000 revolving credit facility at July 31, 1997.

Cash and cash equivalents increased $960,442 due to various operating, 
investing, and financing activities.  Cash flows from operating activities 
were $6,042,010 primarily as the result of profitable operations before the 
one-time Merger related charges for acquired in-process technology of 
$13,500,000 and stock option compensation expense of $7,698,143.  Cash flows 
from investing activities generated $5,478,658 in cash principally from the 
sale of short-term investments of $5,308,806 and net cash acquired in the 
Merger of $1,714,416. Cash flows from financing activities used $10,560,226 
of cash primarily for the purchase of stock and options for $5,192,293, 
payment of a preferred stock dividend of  $2,807,709,  and repayment of 
$2,448,011 of debt.

Working capital was $1,644,458 at July 31, 1997, compared with $5,639,840 at 
July 31, 1996.  The decrease in working capital is primarily the result of 
the preferred stock dividend and purchase of stock and options.

In connection with the Merger, the Company assumed a $10,000,000 revolving 
credit facility from FormMaker.  At July 31, 1997, borrowings under this 
credit facility totaled $5,471,634 bearing interest at a weighted average 
rate of 8.02%.  The credit facility was renegotiated in September 1997.  
Under the new agreement, $3,500,000 bears interest at the bank's prime rate 
less .25%, or 8.25% as of July 31, 1997, and is guaranteed by Safeguard.  The 
remaining $6,500,000 bears interest at the bank's prime rate of 8.50% as of 
July 31, 1997 and is collateralized by substantially all of the Company's 
assets.  Borrowings under the credit facility are utilized primarily for 
working capital.

In addition, stockholders loaned the Company $3,000,000 in the form of 
subordinated notes concurrent with the Merger.  The notes bear interest at 
prime plus 1%, or 9.50% as of July 31, 1997, and are due in full at the 
earlier of the closing of a public offering yielding net proceeds to the 
Company in excess of $13,000,000 or May 15, 2000.  The notes are unsecured 
obligations of the Company and are subordinated to all senior debt.

The Company's liquidity needs will arise primarily from funding the continued 
enhancement, development and support of its software offerings and the 
selling and marketing costs associated principally with continued entry into 
new vertical and international markets.

Capital expenditures are generally not material.  Management believes that 
the Company's cash and availability under its credit facility will be 
sufficient to meet cash flow requirements for fiscal 1998.

Historically, a significant portion of FormMaker's revenues have been derived 
from FormMaker's marketing agreement with PMSC.  There can be no assurances 
that such revenues will continue at historical levels.  In the event that 
PMSC generated  revenues decrease or the PMSC marketing agreement is 
otherwise terminated as provided by its terms; then the Company's liquidity 
requirements would be increased accordingly.  Although management believes 
that any such additional liquidity requirements would be short-term in 
nature, there can be no assurance that additional capital would not be 
required.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS
------------------------------------------------------------------------------

                     2001 Ross Avenue, Suite 1800       Telephone 214 754 7900
                     Dallas, Texas 75201

                                                                  [LOGO]

PRICE WATERHOUSE LLP



To the Board of Directors and Stockholders
  of DOCUCORP INC.

In our opinion, the accompanying consolidated balance sheets and the related 
consolidated statements of operations, cash flows and stockholders' equity 
present fairly, in all material respects, the financial position of DOCUCORP, 
INC. and its subsidiaries at July 31, 1997 and 1996, and the results of their 
operations and their cash flows for each of the three years in the period 
ended July 31, 1997, in conformity with generally accepted accounting 
principles. These financial statements are the responsibility of the 
Company's management; our responsibility is to express an opinion on these 
financial statements based on our audits. We conducted our audits of these 
statements in accordance with generally accepted auditing standards which 
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, assessing the accounting 
principles used and significant estimates made by management, and evaluating 
the overall financial statement presentation. We believe that our audits 
provide a reasonable basis for the opinion expressed above.

Price Waterhouse LLP
Dallas, Texas

September 26, 1997

<PAGE>

CONSOLIDATED BALANCE SHEETS
<TABLE>
----------------------------------------------------------------------------------------- 
                                        Years ended July 31       1997           1996
-----------------------------------------------------------   ------------    ----------- 
<S>                                                           <C>             <C>
ASSETS
  Current assets
  Cash and cash equivalents                                   $  2,869,458    $ 1,909,016
  Short-term investments                                                 0      5,308,806
    Accounts receivable, net of allowance
     of $525,000 and $350,000, respectively                      9,010,784      4,105,652
    Current portion of deferred taxes                              380,925        399,468
    Income tax refund receivable                                   503,888              0
    Other current assets                                           553,977        187,193
                                                              ------------    ----------- 
          Total current assets                                  13,319,032     11,910,135
  Fixed assets, net of accumulated depreciation
    of $1,983,864 and $1,419,206, respectively                   3,087,578        783,328
  Software, net of accumulated amortization of $5,397,344
    and $4,466,514, respectively                                 7,408,113      1,941,679
  Deferred taxes                                                 1,029,473              0
  Goodwill, net of accumulated amortization                      7,544,535              0
  Other assets                                                     309,434         55,586
                                                              ------------    ----------- 
                                                              $ 32,698,165    $14,690,728 
                                                              ------------    ----------- 
                                                              ------------    ----------- 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
  Current liabilities
    Accounts payable                                          $  1,164,012    $   323,044
    Accrued liabilities:
      Accrued compensation                                       1,142,199        700,050
      Other                                                      1,532,300        278,857
    Income taxes payable                                           412,000        655,264
    Current portion of long-term debt                              191,652              0
    Current portion of obligations under capital leases            454,199         45,967
    Deferred revenue                                             6,778,212      4,267,113
                                                              ------------    ----------- 
          Total current liabilities                             11,674,574      6,270,295

  Obligations under capital leases                                  33,993              0
  Deferred taxes                                                         0        383,070
  Long-term debt                                                 8,759,156              0
  Other long-term liabilities                                      631,748              0
  Redeemable Class B common stock, 7,000,000 shares authorized
    at $.01 par value, 4,686,024 shares issued and outstanding
    at redemption value                                         19,118,978              0
  Stockholders' equity (deficit):
    Preferred stock, 3,000,000 shares authorized at $.10 par
      value, $1.00 liquidation value, 2,020,373 shares issued
      and outstanding at July 31, 1996                                   0        202,037
    Class A common stock, 20,000,000 shares authorized at
      $.01 par value, 4,277,794 and 3,373,333 shares issued
      and outstanding, respectively                                 42,778         33,733
    Additional paid-in capital                                   4,921,205      1,305,189
    Retained earnings (deficit)                                (12,413,092)     6,496,404
    Notes receivable from stockholders                             (71,175)             0
                                                              ------------    ----------- 
          Total stockholders' equity (deficit)                  (7,520,284)     8,037,363
                                                              ------------    ----------- 
                                                              $ 32,698,165    $14,690,728
                                                              ------------    ----------- 
                                                              ------------    ----------- 
</TABLE>

                  See accompanying notes to consolidated financial statements.

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
-------------------------------------------------------------------------------------- 
                         Years ended July 31       1997          1996         1995
--------------------------------------------  ------------   -----------   ----------- 
<S>                                           <C>            <C>           <C>
REVENUES
  Professional services                       $  6,150,625   $   819,034   $   587,118
  License                                        4,092,491     4,793,031     4,806,888
  Maintenance and other recurring                7,259,702     5,858,256     5,419,945
                                              ------------   -----------   ----------- 
          Total revenues                        17,502,818    11,470,321    10,813,951
                                              ------------   -----------   ----------- 
EXPENSES
  Professional services                          3,999,504       655,911       471,783
  Product development and support                4,955,617     4,405,932     3,952,066
  Selling and marketing                          2,246,270     1,665,961     1,950,588
  General and administrative                     2,383,233     1,326,141     1,281,742
  Merger related charges                        21,377,855             0             0
                                              ------------   -----------   ----------- 
          Total expenses                        34,962,479     8,053,945     7,656,179
                                              ------------   -----------   ----------- 
          Operating income (loss)              (17,459,661)    3,416,376     3,157,772
  Other income                                     213,874       239,904        28,148
                                              ------------   -----------   ----------- 
          Income (loss) before income taxes    (17,245,787)    3,656,280     3,185,920
  Provision for income taxes (benefit)          (1,144,000)    1,335,000     1,183,000
                                              ------------   -----------   ----------- 
          Net income (loss)                   $(16,101,787)  $ 2,321,280   $ 2,002,920
                                              ------------   -----------   ----------- 
                                              ------------   -----------   ----------- 
  Net income (loss) per share of common stock $      (3.19)  $      0.33   $      0.27
                                              ------------   -----------   ----------- 
                                              ------------   -----------   ----------- 
  Weighted average number of shares of
    common stock and common stock
    equivalents outstanding                      5,041,689     7,084,429     7,478,272
                                              ------------   -----------   ----------- 
                                              ------------   -----------   ----------- 
</TABLE>


                  See accompanying notes to consolidated financial statements.

<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------

<TABLE>
                                    Years ended July 31      1997           1996            1995
-------------------------------------------------------  ------------    -----------     ----------
<S>                                                      <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                      ($16,101,787)    $2,321,280     $2,002,920
  Adjustments to reconcile net income to
    net cash provided by operating activities:
      Charge for acquired in-process technology            13,500,000              0              0
      Stock option compensation expense                     7,698,143         49,988         53,271
      Depreciation                                            573,645        363,931        324,699
      Amortization of capitalized software                    930,829        813,832        736,224
      Amortization of goodwill                                160,522              0              0
      Increase (decrease) in allowance for doubtful
        accounts                                              (63,363)        25,000              0
      Changes in assets and liabilities, net of effects
        from acquisition:
        (Increase) decrease in accounts receivable            (76,411)       (22,131)        52,304
        (Increase) decrease in income tax refund
          receivable                                         (503,888)       222,033        174,467
        (Increase) decrease in deferred tax assets         (1,010,930)       (56,113)       121,390
        Increase in other assets                              (23,340)       (74,642)        (1,615)
        Decrease in accounts payable                         (174,940)       (96,939)       (91,648)
        Increase (decrease) in accrued liabilities            432,989         71,701       (370,201)
        Increase (decrease) in income taxes payable          (243,264)        65,033        440,231
        Increase (decrease) in deferred revenue             1,326,875        438,841       (272,983)
        Increase (decrease) in deferred tax liabilities      (383,070)       226,158        156,912
                                                           -----------    ----------     ----------
          Total adjustments                                22,143,797      2,026,692      1,323,051
                                                           -----------    ----------     ----------
          Net cash provided by operating activities         6,042,010      4,347,972      3,325,971
                                                           -----------    ----------     ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  (Purchase) sale of short-term investments, net            5,308,806     (2,308,806)    (1,500,000)
  Purchase of fixed assets                                   (547,301)      (356,017)      (333,073)
  Development of software                                    (997,263)      (533,649)      (667,924)
  Net cash acquired in business combination                 1,714,416              0              0
                                                           -----------    ----------     ----------
          Net cash (used in) provided by investing
            activities                                      5,478,658     (3,198,472)    (2,500,997)
                                                           -----------    ----------     ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Repayment of debt                                        (2,448,011)    (1,534,430)      (258,801)
  Principal payments under capital lease obligations         (148,361)       (56,388)       (91,128)
  Purchase of tendered stock, and options                  (5,192,293)             0        (84,375)
  Preferred stock dividend                                 (2,807,709)             0              0
  Proceeds from exercise of warrants and options               15,644         45,432         89,369
  Proceeds from sale of warrants                                6,100              0              0
  Tax benefit related to non-qualified stock option 
    activity                                                   14,404         14,922              0
                                                           -----------    ----------     ----------
          Net cash used in financing activities           (10,560,226)    (1,530,464)      (344,935)
                                                           -----------    ----------     ----------
Net increase (decrease) in cash and cash equivalents          960,442       (380,964)       480,039
Cash and cash equivalents at beginning of year              1,909,016      2,289,980      1,809,941
                                                           -----------    ----------     ----------
Cash and cash equivalents at end of year                   $2,869,458     $1,909,016     $2,289,980
                                                           -----------    ----------     ----------
                                                           -----------    ----------     ----------
</TABLE>
                                       
                 See non-cash activities disclosed in Note 3.

        See accompanying notes to consolidated financial statements.
<PAGE>

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------

<TABLE>
                                                        Class A               Additional    Retained
                                           Preferred    Common   Treasury      Paid-in       Earnings     Notes 
                                             Stock       Stock     Stock       Capital      (Deficit)   Receivable      Total
                                           ---------   --------  ---------    ----------    ---------   ----------      -----
<S>                                        <C>         <C>       <C>         <C>           <C>          <C>          <C>
Balance at July 31, 1994                   $ 202,037   $ 31,768  $(281,602)  $ 1,420,149   $ 2,172,204    $      0   $ 3,544,556
Exercise of warrants to purchase
 20,081 shares of common stock                              201                      (62)                                    139
Exercise of stock options to purchase
 393,654 shares of common stock                           3,937                   85,293                                  89,230
Purchase and retirement of 97,511
 shares of common stock                                    (975)                 (83,400)                                (84,375)
Retirement of 581,145 shares
 of treasury stock                                       (5,811)   281,602      (275,791)                                      0
Compensation expense related to
 non-qualified stock options                                                      53,271                                  53,271
Net income                                                                                   2,002,920                 2,002,920
                                            --------   --------   --------   -----------  -------------   ---------  ------------
Balance at July 31, 1995                     202,037     29,120          0     1,199,460     4,175,124           0     5,605,741
Exercise of warrants to purchase
 274,779 shares of common stock                           2,748                     (846)                                  1,902
Exercise of stock options to purchase                                                                                 
 186,498 shares of common stock                           1,865                   41,665                                  43,530
Compensation expense related to                                                                                       
 non-qualified stock options                                                      49,988                                  49,988
Tax benefit related to exercise of                                                                                    
 non-qualified stock options                                                      14,922                                  14,922
Net income                                                                                   2,321,280                 2,321,280
                                            --------   --------   --------   -----------  -------------   ---------  ------------
Balance at July 31, 1996                     202,037     33,733          0     1,305,189     6,496,404           0     8,037,363
Exercise of stock options to purchase
  28,616 and 433 shares of Class A and
  Class B common stock, respectively                        286                   13,595                                  13,881
Payment of preferred stock dividend                                                         (2,807,709)               (2,807,709)
Purchase of 721,261 shares of tendered
 common stock                                            (7,213)              (2,489,192)                             (2,496,405)
Conversion of Image Sciences common
 stock and preferred stock to 4,685,591
 shares of Class B common stock             (202,037)   (26,651)             (18,888,523)                            (19,117,211)
Conversion of FormMaker common                                                                                
 stock to 4,262,324 shares of Class
 A common stock                                          42,623               19,957,377                              20,000,000
Assumption of notes receivable from                                                                           
 stockholders                                                                                              (71,175)      (71,175)
Sale of warrants to purchase Class A                                                                          
 common stock                                                                      6,100                                   6,100
Compensation expense related to                                                                               
 non-qualified stock options                                                   5,002,255                               5,002,255
Tax benefit related to exercise of
 non-qualified stock options                                                      14,404                                  14,404
Net loss                                                                                   (16,101,787)              (16,101,787)
                                            --------   --------   --------   -----------  -------------   ---------  ------------
Balance at July 31, 1997                    $      0   $ 42,778   $      0   $ 4,921,205  $(12,413,092)   $(71,175)  $(7,520,284)
                                            --------   --------   --------   -----------  -------------   ---------  ------------
                                            --------   --------   --------   -----------  -------------   ---------  ------------

</TABLE>

         See accompanying notes to consolidated financial statements.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DocuCorp, Inc. (doing business as DocuCorp International, the "Company"), a
Delaware corporation was organized on January 13, 1997 in connection with the
acquisition of FormMaker Software, Inc. ("FormMaker") by Image Sciences, Inc.
("Image Sciences") (the "Merger"). The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, Image Sciences, FormMaker, and Micro Dynamics, Ltd.  Results of
FormMaker and Micro Dynamics, Ltd. are included from the effective date of the
Merger, May 15, 1997. As described in Note 3, the Company incurred one-time
charges aggregating $21,377,855 in connection with the Merger, primarily
related to acquired in-process technology and compensation charges.  All
significant intercompany accounts and transactions have been eliminated in
consolidation.

The Company's business includes developing, marketing, and supporting computer
software designed to automate the process of storing, managing, and printing
business forms and documents.  The Company also provides professional services
and outsourcing of processing and printing.  The majority of the Company's
business is currently derived from companies in the insurance industry.

REVENUE RECOGNITION

Revenue from licensing of standard software is recognized upon shipment of the
software. Revenue from software licenses which include a cancellation clause is
recognized upon expiration of the cancellation period. Revenue derived from the
development and installation of software packages under long-term contracts is
recognized on a percentage-of-completion basis. Revenue related to products
still in the testing phase is deferred until formal acceptance of the product
by the purchaser. Anticipated losses, if any, on uncompleted contracts are
recognized in the period in which such losses are determined.

Revenue from maintenance contracts, and maintenance revenue that is packaged
with license fees, is recognized ratably over the term of the agreements. The
Company records deferred revenue for maintenance amounts invoiced prior to
revenue recognition. Revenue related to outsourcing and professional services,
such as training and consulting, is recognized as the services are performed.

CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents, including certificates
of deposit, repurchase agreements and treasury bills. Cash equivalents are
stated at cost, which approximates fair market value.

SHORT-TERM INVESTMENTS

The Company has the intent and ability to hold short-term investments to
maturity; consequently, such investments are carried at cost which approximates
fair market value as determined by the stated interest rates. As of July 31,
1996, the Company's short-term investments consisted of commercial paper
investments and treasury bills with original terms of 180 days. Interest income
from such investments was $172,572, $227,113, and $134,510 in 1997, 1996, and
1995, respectively.

ACCOUNTS RECEIVABLE

Included in accounts receivable at July 31, 1997 and 1996 are unbilled amounts
of $1,776,322 and $1,833,640, respectively. Such amounts have been recognized
as revenue under the percentage of completion method or upon execution of the
contract and shipment of the software, but prior to required payment terms.

FIXED ASSETS, DEPRECIATION, AND AMORTIZATION

Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed over the estimated
service lives using the straight line method for all assets.

<PAGE>

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

Amortization of assets recorded under capital leases is included in
depreciation expense. Estimated service lives are as follows:

Computer equipment                                                4-5 years
Furniture and fixtures                                              5 years
Leasehold improvements                                        life of lease
Leased equipment under capital leases                             3-5 years

Repairs and maintenance are expensed as incurred. Major renewals and
betterments are capitalized and depreciated over the assets remaining estimated
service life. Upon retirement or sale of an asset, the cost and accumulated
depreciation are removed from the accounts with any resulting gain or loss
included in income.

SOFTWARE

Costs of internally developed software are capitalized after the technological
feasibility of the software has been established.  Research and development
costs incurred prior to the establishment of the technological feasibility of a
product are expensed as incurred. The cost of capitalized software is amortized
on a straight-line basis over its estimated useful life, generally four to six
years or the ratio of current revenues to current and anticipated revenues from
the software, whichever provides the greater amortization. During 1997, 1996,
and 1995, the Company charged to expense $2,155,435, $1,851,516, and
$1,426,391, respectively, for research and development costs.  Such expense is
included in product development and support on the Consolidated Statements of
Operations.

GOODWILL

Goodwill is amortized on a straight-line basis over ten years.  The carrying
value of goodwill is evaluated periodically in relation to the operating
performance and anticipated future undiscounted net cash flows of the related
business.  In the event that assets are found to be carried at amounts which
are in excess of estimated gross future cash flows, then the intangible assets
are adjusted for impairment to a level commensurate with a discounted cash flow
analysis of the underlying assets.

INCOME TAXES

Income taxes are presented pursuant to Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" (see also Note 8).

EARNINGS PER SHARE

Earnings per share are computed using the weighted average number of shares of
common stock and common stock equivalents outstanding during the period. The
earnings per share computation is based on the assumption that outstanding
options and warrants to purchase common stock with exercise prices below fair
market value were exercised, unless antidilutive, and the proceeds were used to
repurchase outstanding common stock.

STOCK-BASED COMPENSATION

During 1997, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for Stock-
Based Compensation."  In accordance with the provisions of SFAS 123, the
Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its employee stock option plans.  Note 7
contains a summary of the pro forma effects on reported net income and earnings
per share for fiscal 1997 and 1996 based on the fair value of options and
shares as prescribed by SFAS 123.

CONVERSION OF IMAGE SCIENCES STOCK, OPTIONS, AND WARRANTS

All references in the consolidated financial statements to shares, share
prices, per share amounts and stock plans have been adjusted retroactively for
the conversion of Image Sciences common stock, preferred stock, and options or
warrants to purchase common stock based on the Merger exchange ratios set forth
in Note 3.

MANAGEMENT ESTIMATES

The preparation of the Company's financial statements, in accordance with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at July 31, 1997


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------

and 1996, and the reported amounts of revenues and expenses for the periods
then ended. Actual results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share",
which is required to be adopted for fiscal years ending after December 15,
1997.  At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options and warrants will be excluded.

If the Company had computed net earnings per share in accordance with the
provisions of SFAS 128, basic earnings per share would have been $.45 and $.42
for the years ended July 31, 1996 and 1995, respectively.  Weighted average
shares outstanding under the basic earnings per share computation would have
been 5,168,070 and 4,727,925 for the years ended July 31, 1996 and 1995,
respectively.  Diluted earnings per share for the years ended July 31, 1996 and
1995 would not have been significantly different from the earnings per share
presented on the Consolidated Statements of Operations.  For the year ended
July 31, 1997, the basic and diluted earnings per share amounts would be the
same as earnings per share presented on the Consolidated Statements of
Operations.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform to the current
year's financial statement presentation.

NOTE 2 - FIXED ASSETS

Fixed asset balances at July 31, 1997 and 1996 are as follows:

                                                         1997           1996
                                                     -----------    -----------
Computer equipment                                   $ 3,753,129    $ 1,948,066
Furniture and fixtures                                 1,120,771        179,619
Leasehold improvements                                   197,542         74,849
                                                     -----------    -----------
                                                       5,071,442      2,202,534
Less accumulated depreciation                         (1,983,864)    (1,419,206)
                                                     -----------    -----------
                                                     $ 3,087,578    $   783,328
                                                     -----------    -----------
                                                     -----------    -----------

NOTE 3 - MERGER OF IMAGE SCIENCES AND FORMMAKER

On January 15, 1997, Image Sciences entered into an Agreement and Plan of
Merger with FormMaker, pursuant to which the stockholders of Image Sciences and
FormMaker agreed to exchange their shares for common stock of the Company. The
Merger was completed on May 15, 1997.

Each issued and outstanding share of FormMaker common stock, and each option or
warrant to purchase common stock was exchanged for .6818 shares of Company
Class A common stock and options or warrants to purchase Company Class A common
stock. Each issued and outstanding share of Image Sciences common stock and
each option to purchase common stock that was vested as of July 31, 1997, was
exchanged for 1.4446 shares of Company Class B common stock and options to
purchase Class B common stock. Each issued and outstanding Image Sciences
option to purchase common stock that was unvested as of July 31, 1997 was
exchanged for options to purchase 1.4446 shares of Company Class A common
stock. Each issued and outstanding share of Image Sciences preferred stock was
exchanged for 1.029 shares of Company Class B common stock.

Concurrent with the closing of the Merger, Image Sciences (i) repurchased
common stock and options to purchase common stock from certain stockholders for
an aggregate purchase price of $5,192,293 and (ii) paid its preferred
stockholder a cash dividend of $2,807,709. The Company recognized compensation
expense related to the repurchase of options to purchase common stock discussed
above, and related to the creation of a new measurement date for outstanding
options to purchase Image Sciences common stock deemed to be converted to
options to purchase Company Class B common stock upon consummation of the
Merger.

The Merger was treated as an acquisition of FormMaker by Image Sciences;
accordingly, the Merger transaction was recorded under the purchase method of
accounting.  For historical accounting purposes, Image Sciences is considered
to be the acquirer in the Merger and purchase accounting is not required
related to the conversion of Image Sciences common stock and preferred stock
into Company 


<PAGE>

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

common stock.  The financial statements of Image Sciences are presented as 
historical statements of the Company for periods prior to the Merger.

The following unaudited pro forma information for fiscal 1997 and 1996 presents
a summary of consolidated results of operations of Image Sciences and FormMaker
as if the acquisition had occurred at the beginning of fiscal 1996.  Such pro
forma amounts are not necessarily indicative of what the actual results might
have been had the Merger occurred at the beginning of fiscal 1996.  The
unaudited pro forma amounts exclude non-recurring charges recorded in the year
ended July 31, 1997 for acquired in-process technology, compensation charges,
and other Merger related costs of $13,500,000, $7,649,740, and $228,115,
respectively.
                                                          1997           1996
                                                      -----------    -----------
Revenues                                              $38,416,000    $27,327,000
Net income                                            $ 1,714,000    $    82,000
Net income per share                                  $       .16    $       .01


The aggregate purchase price, including direct acquisition costs, was
$20,374,630 which has been allocated to the fair value of the net identifiable
assets acquired, including in-process technology. Acquired in-process
technology represents the present value of the estimated cash flows expected to
be generated by FormMaker in-process technology.  The value of the in-process
technology was charged to operations on the closing date of the Merger.  The
purchase price was allocated as follows:

Fixed assets                                           $2,330,594
Capitalized software                                    5,400,000
Goodwill and other intangible assets                    7,705,057
In-process technology                                  13,500,000
Net liabilities acquired                               (8,632,196)
Notes receivables from stockholders                        71,175
                                                      -----------
                                                      $20,374,630
                                                      -----------
                                                      -----------

NOTE 4 - LEASE COMMITMENTS

The Company leases computer equipment under noncancelable leases which are
classified as capital leases and included in fixed assets at July 31, 1997 and
1996 as follows:
                                                           1997          1996
                                                         --------     ---------
Computer equipment                                       $468,551     $ 214,852
Office equipment                                          326,042             0
                                                         --------     ---------
                                                          794,593       214,852
Less accumulated depreciation                             (95,820)     (190,249)
                                                         --------     ---------
                                                         $698,773       $24,603
                                                         --------     ---------
                                                         --------     ---------

Certain other equipment leases and the Company's obligation under leases for
office space are treated as operating leases and the rentals are expensed as
incurred. Rent expense on these operating leases for the years ended July 31,
1997, 1996, and 1995 totaled $926,344, $383,438, and $343,010, respectively.
Generally, the Company's leases provide for renewals for various periods at
stipulated rates.

Future minimum lease obligations on leases in effect at July 31, 1997 are as
follows:

                                                        Capital      Operating
                                                        Leases        Leases
                                                       ---------    -----------
1998                                                   $ 472,959    $ 2,636,088
1999                                                      34,525      2,750,467
2000                                                                  2,816,022
2001                                                                  1,941,970
2002                                                                  1,737,236
Thereafter                                                            1,343,205
                                                       ---------    -----------
Minimum lease payments                                   507,484    $13,224,988
                                                                    -----------
                                                                    -----------
Less amount representing interest                        (19,292)
                                                       ---------
Present value of minimum lease
 payments                                                488,192
Less current portion                                    (454,199)
                                                       ---------
Obligations under capital leases                       $  33,993
                                                       ---------
                                                       ---------

The future minimum lease obligations for operating leases assumes that the
Company does not exercise its option to terminate its office lease for its
corporate headquarters in 2000. If the office lease is terminated in 2000, a
penalty is due at that time and no further obligations would exist after the
year ended July 31, 2000 under this office lease.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------

NOTE 5 - LONG-TERM DEBT

Long-term debt consists of the following at July 31:

                                             1997           1996
                                          ----------     ----------
Revolving credit facility with bank       $5,471,634             $0
Notes payable to Safeguard                   479,174              0
Subordinated notes payable to
  Safeguard, Technology
  Leaders II, L.P., and TL
  Ventures Third Corp.                     3,000,000              0
                                          ----------     ----------
                                           8,950,808              0
Less current portion of debt                (191,652)             0
                                          ----------     ----------
                                          $8,759,156             $0
                                          ----------     ----------
                                          ----------     ----------

In connection with the Merger, the Company assumed a $10,000,000 revolving 
credit facility with a bank which was guaranteed by Safeguard Scientifics, 
Inc. ("Safeguard"), FormMaker's largest stockholder. Effective September 
1997, the revolving credit facility was renegotiated. The maximum amount 
available under this credit arrangement is $10,000,000, and repayment of 
$3,500,000 is guaranteed by Safeguard. Under the credit arrangement, the 
Company is required to maintain certain financial covenants. Amounts 
outstanding under this credit arrangement bear interest at variable rates 
determined by various provisions of the credit arrangement. These rates 
generally approximate or equal the bank's prime rate or the London Interbank 
Rate ("LIBOR").  At July 31, 1997, the outstanding balance under the credit 
arrangement consisted of $2,471,634 drawn under a line of credit bearing 
interest at 8.50% and LIBOR notes aggregating $3,000,000, bearing interest at 
7.68%.  The weighted average interest rate on the revolving credit facility 
was 8.02% at July 31, 1997. Upon renegotiation in September 1997, the portion 
of the credit arrangement guaranteed by Safeguard bears interest at the 
bank's prime rate less .25%, or 8.25%.  The remaining balance of the credit 
arrangement bears interest at prime, or 8.50%. Amounts outstanding under this 
credit arrangement are collateralized by substantially all of the Company's 
assets.

Interest is payable monthly under this credit arrangement. $6,500,000 of the 
credit arrangement may be converted in September 1998 into a term loan 
provided that the Company has given the bank thirty days written notice and 
is not in default.

The principal balance of the term loan shall be repaid in twenty-four 
consecutive installments due the first day of each month.  The $3,500,000 
portion of the credit arrangement guaranteed by Safeguard is due and payable 
in March 1999.

In connection with the Merger, the Company assumed two notes payable to 
Safeguard, in the original amounts of $350,000 and $275,000. Monthly 
principal payments aggregating approximately $16,000 plus accrued interest 
are due for thirty-six months commencing February 1, 1997.  These notes bear 
interest at prime plus 1%, or 9.50% as of July 31, 1997.

Concurrent with the Merger, stockholders loaned the Company $3,000,000 in the 
form of subordinated notes.  The notes bear interest at prime plus 1%, or 
9.50% as of July 31, 1997, and are due in full at the earlier of the closing 
of a public offering yielding net proceeds to the Company in excess of 
$13,000,000 or May 15, 2000.  The notes are unsecured obligations of the 
Company and are subordinated to all senior debt.

The Company made interest payments, principally related to long-term debt, 
totaling $175,339, $183,508, and $235,407 for the years ended July 31, 1997, 
1996, and 1995, respectively.

NOTE 6 - REDEEMABLE CLASS B COMMON STOCK

Class B common stock of the Company may be redeemed, at the option of the 
holder, if the Company does not consummate by January 31, 1998 an 
underwritten public offering of securities in which the managing underwriter 
values the equity of the Company at $62,100,000 or more.  This redemption 
option is exercisable from February 1, 1998 through February 1, 1999 at $4.08 
per share. Safeguard, Technology Leaders II, L.P., and Technology Leaders II 
Offshore C.V. have agreed, under the terms of a liquidity agreement (the 
"Liquidity Agreement"), to fund the redemption of the Class B common stock by 
subscribing for a number of shares of Class A common stock, at a price of 
$4.08 per share, equal to the number of shares of Class B common stock 
redeemed.  Each issued and outstanding share of the Company's Class B common 
stock will automatically be converted into a share of the Company's Class A 
common 

<PAGE>

stock at the earlier of a public offering as described above or February 1, 
1999.

NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT)

PREFERRED STOCK

All outstanding Image Sciences preferred stock was exchanged for the 
Company's Class B common stock pursuant to the Merger. Concurrent with the 
Merger, the Company authorized 1,000,000 shares of preferred stock which the 
board of directors of the Company may issue with such preferences and rights 
as it may designate. As of July 31, 1997, there were no issued or outstanding 
shares of preferred stock.

STOCK OPTIONS

The Company provides equity incentives to employees and directors by means of 
incentive stock options and non-qualified stock options which historically 
have been provided under various stock option plans.  The Company now issues 
options from the 1997 Equity Compensation Plan.  Stock options generally vest 
over a period of three to five years. The Company may grant non-qualified 
stock options at an option price per share determined by the board of 
directors. Under this plan, the Company has reserved 400,000 shares for 
issuance as of July 31, 1997.  Options generally expire ten years from the 
date of grant.

Activity under all plans is summarized as follows:

                                                    Shares Under
                                                 Outstanding Options
                                            ------------------------------
                                                                 Weighted-
                                                                  Average
                                            Outstanding           Exercise
                                              Options              Price
                                             ---------           ---------
Balances at July 31, 1994                    3,084,702                $.18
Granted                                        416,767                 .69
Exercised                                    (393,654)                 .23
Expired                                      (354,216)                 .17
                                             ---------           ---------
Balances at July 31, 1995                    2,753,599                 .25
Granted                                        280,252                 .87
Exercised                                    (186,498)                 .23
Expired                                      (333,125)                 .09
                                             ---------           ---------
Balances at July 31, 1996                    2,514,228                 .35
Exercised                                     (29,049)                 .54
Expired                                       (39,871)                 .71
Purchase of options                          (781,131)                 .01
FormMaker options assumed                     810,930                 4.11
                                             ---------           ---------
Balances at July 31, 1997                    2,475,107               $1.68
                                             ---------           ---------
                                             ---------           ---------

Outstanding options at July 31, 1997 include options to purchase 1,356,343 
shares of Class B common stock which, upon exercise, may be redeemed in 
accordance with the terms of the Class B common stock.  Such options are 
fully vested at July 31, 1997.  All remaining outstanding options at July 31, 
1997 are options to purchase shares of Class A common stock. Options to 
purchase 357,280 shares of Class A common stock are vested at July 31, 1997.

STOCK-BASED COMPENSATION

Pursuant to SFAS 123, the Company is required to report pro forma information 
regarding net income (loss) and net income (loss) per share for awards 
granted or modified in fiscal years 1996 and thereafter as if the Company had 
accounted for its stock-based awards to employees under the fair value method 
of SFAS 123.  The weighted average fair value of options granted during 
fiscal 1997 and 1996 was $4.08 and $.87, respectively.  The fair value of the 
Company's stock-based awards 

<PAGE>

to employees was estimated using the Black-Scholes option pricing model. The 
Black-Scholes model requires the input of various assumptions. The fair value 
of the Company's stock-based awards to employees was estimated assuming no 
expected dividends or volatility and the following weighted-average 
assumptions:

                                                   1997             1996
                                                  ------           ------
Expected life (years)                              1.75             3.25
Risk-free interest rate                            5.75%            5.90%

For pro forma purposes, the estimated fair value of the Company's stock-based 
awards to employees is amortized over the options' vesting period.  The 
Company's pro forma information for the years ended July 31 is as follows:

                                                   1997            1996
                                              -------------     ----------
Net income (loss): 
  As reported                                 ($16,101,787)     $2,321,280
  Pro forma                                    (16,119,086)      2,143,767

Net income (loss) per share:
  As reported                                       ($3.19)           $.33
  Pro forma                                          (3.20)            .30

WARRANTS

During 1996, warrants to purchase 274,779 shares of common stock were 
exercised and warrants to purchase 2,173 shares of common stock expired.

In connection with the Merger, the Company assumed warrants with a seven year 
term held by stockholders and a director of FormMaker to purchase common 
stock. Additional warrants with a three year term were issued by FormMaker to 
stockholders immediately prior to the Merger in connection with $3,000,000 of 
subordinated notes (see also Note 5).  All of the above warrants were 
converted into warrants to purchase 522,085 shares of Class A common stock 
based on FormMaker's exchange ratio.

Warrants to purchase 610,000 shares of Class A common stock were sold to 
stockholders for $6,100 in connection with the stockholders obligations under 
the Liquidity Agreement. These warrants have a three year term.

The following warrants are outstanding as of July 31, 1997:

                                                                 Exercise Price
                                                  Warrants          Per Share
                                                  --------       --------------
Warrants to Safeguard,
  Technology Leaders II, L.P.,
  and Technology Leaders II
  Offshore C.V.                                     215,275            $.03
Warrants to a director of the
  Company                                           102,270           $4.08
Warrants to Safeguard,
  Technology Leaders II, L.P.,
  and TL Venture Third Corp.                        204,540           $5.10
Warrants to Safeguard,
  Technology Leaders II, L.P.,
  and Technology Leaders II
  Offshore C.V.                                     610,000           $5.00
                                                  ---------
Total                                             1,132,085
                                                  ---------
                                                  ---------

NOTE 8 - INCOME TAXES

Deferred tax assets (liabilities) are comprised of the following at July 31:

                                           1997          1996         1995
                                        ----------    ----------   ----------
Gross deferred tax assets:
  Deferred revenue                        $128,156     $261,500     $387,222
  Loss carryforwards                     2,491,006            0            0
  Tax credit carryforwards                 426,484      247,531      419,129
  Accounts receivable allowance            178,500      119,000      110,500
  Deferred lease costs                     204,594            0            0
  Compensation expense related
   to stock options                      1,751,614       58,323            0
  Other                                    290,794       77,993       82,484
                                        ----------     --------     --------
                                         5,471,148      764,347      999,335
                                        ----------     --------     --------
Gross deferred tax liabilities:
   Capitalized software                 (2,518,759)    (660,171)    (755,433)
   Other                                  (149,174)     (87,778)     (57,459)
                                        ----------     --------     --------
                                        (2,667,933)    (747,949)    (812,892)
                                        ----------     --------     --------
   Net                                   2,803,215       16,398      186,443
                                        ----------     --------     --------
   Less valuation allowance             (1,392,817)           0            0
                                        ----------     --------     --------
   Net deferred tax asset               $1,410,398      $16,398     $186,443
                                        ----------     --------     --------
                                        ----------     --------     --------

<PAGE>

The provision (benefit) for income taxes charged to operations was as follows:

                                          1997           1996           1995
                                     -----------      ----------     ----------
Current tax expense:
  U.S. federal                          $185,000      $1,048,000       $778,000
  State, local & foreign                  65,000         125,000         75,000
                                     -----------      ----------     ----------
Total current                            250,000       1,173,000        853,000
                                     -----------      ----------     ----------
Deferred tax expense:
  U.S. federal                        (1,394,000)        162,000        330,000
  State, local & foreign                       0               0              0
                                     -----------      ----------     ----------
Total deferred                        (1,394,000)        162,000        330,000
                                     -----------      ----------     ----------
Total provision
 (benefit)                           ($1,144,000)     $1,335,000     $1,183,000
                                     -----------      ----------     ----------
                                     -----------      ----------     ----------

The provision (benefit) for income taxes differs from the amount of income 
taxes determined by applying the applicable U.S. statutory federal income tax 
rate to pre-tax income as a result of the following differences:

                                         1997            1996           1995
                                     -----------      ----------     ----------

Statutory U.S. tax rates             ($5,863,568)     $1,243,135     $1,083,213
Increase (decrease)
 in rates resulting from:
Nondeductible items:
   In-process technology               4,590,000               0              0
   Other                                  41,375          16,173         34,550
State, local and foreign taxes (net)      42,900          82,500         49,500
Other                                     45,293          (6,808)        15,737
                                     -----------      ----------     ----------
Effective tax rates                  ($1,144,000)     $1,335,000     $1,183,000
                                     -----------      ----------     ----------
                                     -----------      ----------     ----------

Income taxes currently payable for the years ended July 31, 1997, 1996, and 
1995 were reduced by approximately $160,000, $170,000, and $170,000, 
respectively through the utilization of net operating loss and tax credit 
carryforwards.

At July 31, 1997, the Company had net operating loss carryforwards for 
federal income tax purposes of approximately $7,300,000 that generally expire 
in the years ending 2000 through 2012.

The Company has approximately $426,000 of research and development tax 
credit, investment tax credit, and alternative minimum tax credit 
carryforwards. The tax credit carryforwards generally expire in the years 
ending 2006 through 2012.

Due to ownership changes, a portion of the Company's net operating loss and 
tax credit carryforwards is subject to an annual cumulative limitation with 
respect to the amounts which may be utilized in any one year.  The Company 
believes realization of the net deferred tax asset, net of valuation 
allowance, to be more likely than not.

The Company made estimated and regular income tax payments of $640,000, 
$700,000 and  $290,000 during the years ended July 31, 1997, 1996, and 1995, 
respectively.

NOTE 9 - MAJOR CUSTOMERS AND RELATED PARTY TRANSACTIONS

Safeguard and, in the aggregate, Technology Leaders II, L.P., Technology 
Leaders II Offshore C.V., and TL Ventures Third Corp., own approximately 20% 
and 10%, respectively, of the Company's fully diluted outstanding common 
stock at July 31, 1997. Interest expense related to notes payable to these 
parties totaled $69,917 in 1997. The balance of this debt and other related 
party transactions are also described elsewhere in the notes to consolidated 
financial statements.

FormMaker has entered into various agreements with a major customer (Policy 
Management Systems or "PMSC") to provide certain processing services and to 
grant PMSC certain marketing and licensing rights to FormMaker's software. 
Revenues of $2,998,813 from PMSC were recognized by the Company from the date 
of the Merger through July 31, 1997 under the terms of these agreements. 
Effective May 1997, PMSC provided 12 months termination notice of its 
agreement with FormMaker regarding processing services.  The marketing 
agreement expires on December 31, 1999; however, PMSC can unilaterally 
terminate the marketing agreement with FormMaker beginning January 1, 1998 by 
providing 90 days' prior written notice.