UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
 
(MarkOne)
X    ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
-    ACT OF 1934

     For the fiscal year ended July 31, 1998 or

|_|  TRANSITIONAL  REPORT  PURSUANT  TO  SECTION  13 or 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934

     For the transitional period from ______ to ______

                        Commission File Number 00-1033864

                          DocuCorp International, Inc.
             (Exact name of registrant as specified in its charter)

             Delaware                                         74-2690838     
  (State or other jurisdiction of                          (I.R.S. Employer
  incorporation or organization)                          Identification No.)
                                             
      5910 North Central Expressway, Suite 800, Dallas, Texas     75206
            (Address of principal executive offices)            (Zip Code)

        Registrant's telephone number, including area code (214) 891-6500
        Securities registered pursuant to Section 12(b) of the Act: None

                  Securities registered under Section 12(g) of
                               the Exchange 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 (Section 229.405 of this chapter) is not contained herein,
and will not be contained,  to the best of registrant's knowledge, in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

     As of September  30, 1998,  there were  16,593,849  shares of Common Stock,
$.01 par value,  of the Registrant  outstanding.  The aggregate  market value on
such date of the voting stock of the Registrant  held by  non-affiliates  was an
estimated  $47,658,285  based  upon the  closing  price of  $4.25  per  share on
September 30, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the Registrant's  Annual Report to Stockholders for the
fiscal year ended July 31, 1998 are  incorporated  by reference in Items 7 and 8
of Part II of this report.

     Part III of this  Annual  Report on Form  10-K  incorporates  by  reference
portions of the Registrant's  definitive  proxy statement,  to be filed with the
Securities  and Exchange  Commission  not later than 120 days after the close of
its fiscal  year;  provided  that if such proxy  statement is not filed with the
Commission in such 120-day period, an amendment to this Form 10-K shall be filed
no later than the end of the 120-day period.


<PAGE>


<TABLE>
<CAPTION>

                          DocuCorp International, Inc.
                                Table of Contents
                                    Form 10-K
                                  July 31, 1998
Part I.
<S>         <C>                                                                                        <C> 

   Item 1.  Business................................................................................... 2

   Item 2.  Properties................................................................................. 15

   Item 3.  Legal Proceedings.......................................................................... 16

   Item 4.  Submission of Matters to a Vote of Security Holders........................................ 16

Part II.

   Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters...................... 17

   Item 6.  Selected Consolidated Financial Data....................................................... 18

   Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations...... 19

   Item 8.  Financial Statements and Supplementary Data................................................ 19

   Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 19

Part III.

   Item 10.  Directors and Executive Officers of the Registrant........................................ 20

   Item 11.  Executive Compensation.................................................................... 20

   Item 12.  Security Ownership of Certain Beneficial Owners and Management............................ 20

   Item 13.  Certain Relationships and Related Transactions............................................ 20

Part IV.

   Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 21

   Signatures ................................................... ..................................... 22 

   Index to Exhibits................................................................................... 26
</TABLE>


<PAGE>


                                     Part I

Item 1.  Business

General

     DocuCorp  International,  Inc.  ("DocuCorp"  or  the  "Company")  develops,
markets, and supports a portfolio of open-architecture, enterprise-wide document
automation  software  products  that enable its  customers  to produce  complex,
high-volume,   individualized  documents.  In  addition,  the  Company  provides
document automation consulting, systems integration, and document processing and
printing services through a 170-person service organization. Document processing
and printing  services utilize the Company's  software to provide  solutions for
handling  high-volume,  complex  print,  finish,  and mailing for  customers who
outsource this activity.

     DocuCorp  software products support leading hardware  platforms,  operating
systems,  printers,  and imaging systems. These products are designed to create,
publish,  and store documents such as insurance  policies,  utility  statements,
telephone  bills,  bank  and  mutual  fund  statements,  invoices,  direct  mail
correspondence,  bills of lading,  and other  customer-oriented  documents.  The
Company  currently has an installed base of  approximately  800  customers.  The
Company believes it is the leading provider of document  automation software and
services for the insurance industry to customers including  Prudential Insurance
Company  of  America,   Continental   National  Assurance  (CNA),  and  American
International Group (AIG). More than half of the 200 largest insurance companies
in North America use the  Company's  software  products and services,  including
seven of the ten largest life and health insurance companies and nine of the ten
largest property and casualty insurance  companies.  The Company believes it has
also become a leading provider of document  automation software and services for
companies in the utilities  industry,  and that most of the recent  adoptions of
automated customer billing software were licenses of the Company's products. Key
utilities  customers  include Southern Company  Services,  Inc. and Consolidated
Edison of New  York,  Inc.  The  Company  also has  customers  in the  financial
services, higher education,  telecommunications,  and transportation industries,
including Royal Bank Financial Group,  The University of Texas,  Polkomtel S.A.,
and Yellow Technology Services, Inc.

Document Automation Industry

     Document  automation  is  critical  to  corporations  as they  endeavor  to
increase  revenue,  improve customer  service,  and reduce costs.  Companies can
increase revenue by using document automation to produce high-volume, one-to-one
documents such as customer  statements that cross-sell  additional  products and
services.  Document  automation  enables  companies to provide  better  customer
service by:

o    creating more attractive, easier to read documents,
o    producing more accurate documents,
o    minimizing the time it takes to produce and deliver documents, and
o    providing   customer  service   personnel  with  immediate  access  to  the
     electronically archived documents.

At the same time, document  automation reduces the cost of personnel,  printing,
and storage.

     Certain  recent  trends  have   accelerated  the  growth  of  the  document
automation  industry.  Deregulation of industries such as insurance,  utilities,
and financial services has resulted in


                                       2
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increased  competition and caused  participants in such industries to focus more
closely on customer service.  This has increased the demand to create one-to-one
documents   personalized  to  each  customer  with  more  visual  appeal.  Rapid
technological  advances  such as  client/server  architecture  and the Internet,
emergence of the WindowsNT  operating  system,  and evolving  standards  such as
Microsoft's Active-X, Microsoft's ODBC, and Sun Microsystems' Java have expanded
the benefits that businesses can derive from document automation.  Additionally,
the  emergence  of call  centers  has  increased  the  demand  for access to and
automation of customer  communications.  As a result,  an  increasing  number of
companies are employing innovative comprehensive document automation processes.

     The same advances  that have enhanced the benefits of document  automation,
however, have rendered the development and implementation of document automation
products  increasingly  complex.  As a consequence,  businesses are increasingly
outsourcing  some of their  document  automation  requirements  to  skilled  and
experienced providers such as the Company.

The Document Life Cycle

     The  Company  believes  that the life cycle of a document  is divided  into
three general phases (creation,  publishing,  and archival),  linked together by
document  management  and  workflow  software.  The  Company  believes  that its
expertise  in all phases of the  document  life cycle  constitutes  an important
competitive advantage.

Creation

     In this phase of the life cycle,  documents are rendered in a digital form.
Documents  can be created by using word  processing  software  packages or tools
such as Microsoft Word, Elixir,  and Corel that have been designed  specifically
to facilitate  the  composition  of commonly used  documents such as letters and
forms. Today, documents are created by employees throughout an organization from
the central or home office, in branch offices, or in remote locations.

     Alternatively,  existing paper  documents that were created on a typewriter
or  other  non-electronic  source  or  that  came  into  the  organization  from
third-parties can be input into the organization's  computer network by means of
scanning  devices.  Scanning  devices  convert paper  documents into a digitized
format.  Scanned  documents are  generally  stored and managed  separately  from
documents created by word processors or other internal applications, principally
because their formats are different.  The Company's  products  create forms from
both of these sources.

     Once a document is in digital form, it is then readily available for common
applications  such as  transmission  over  E-mail,  storage on local  computers,
printing  on  desktop  printers,   and  distributing  via  other   communication
technologies,   including  the  Internet.   Documents  vary   significantly   in
complexity,  ranging from simple letters or forms to multi-page forms, brochures
or  booklets   containing  text,   charts,   and  statistical  tables  requiring
sophisticated pagination.  The digitized form can also be used for more complex,
high-volume  publishing  applications  such as  insurance  policies  and billing
statements.  The Company's  products create or prepare  digitized forms that can
accept variable data and output to high-speed printers and other output devices.

Publishing

     In this phase of the life  cycle,  appropriate  digital  data and forms are
selected from  multiple  sources and formats.  The  information  is  dynamically
assembled into complex  documents.  Variable data is integrated through software
to produce  individualized  documents which are then  simultaneously  printed or
digitally prepared for customer distribution and


                                       3
<PAGE>


archived as corporate  assets for future use. The Company focuses its publishing
software  products  and  services   exclusively  on  these   individualized  and
high-volume  publishing  activities.  While the basic logistical  procedures are
generally  similar  in  every  publishing   activity,   in  individualized   and
high-volume  publishing  activities,  software is required to  coordinate  large
amounts of variable information such as customer name,  transaction history, and
dynamically  generated  graphs.  The Company has developed  software  logic that
allows its  products to attain what it believes to be one of the highest  volume
capabilities available in the market today.

Archival

     In the archival phase of the life cycle, the document is stored in either a
digitized or electronic  print format for future use.  Documents and information
are presented most efficiently through software to storage devices that range in
their sophistication from local computer disk drives to complex computer storage
equipment having varying capacity and data accessing  capabilities.  The Company
has  developed  products  that enable an  organization  to  automatically  index
documents as they enter storage and place the documents in an archived format to
permit expedient  retrieval,  viewing, and reprint.  Furthermore,  the Company's
products  accept  data in both  digital  and print  stream  format,  and support
leading  imaging  systems such as FileNET and IBM's Visual Info.  The  Company's
products also enable accessing these archives from a browser over the Internet.

Management and Workflow Software

     Underlying  all three phases of the document life cycle is the  requirement
to manage the way in which documents and data move within the life cycle and the
corporation. This is currently accomplished within organizations through various
E-mail software products like Lotus cc:Mail,  groupware like Lotus Notes by IBM,
network  software  like  Novell  NetWare,   document  management  software  like
Documentum,  and workflow products like FileNET.  Externally,  organizations are
increasingly using the Internet to transmit such correspondence.  To date, these
systems are primarily departmental in nature and are an incomplete way to manage
enterprise-wide  documents  and  publications.  The Company  currently  provides
products  for  document  routing,  network and host  connectivity,  and Internet
access. With the purchase of EZPower Systems, Inc. and Maitland Software,  Inc.,
the Company has integrated their document  management and workflow products into
its  product  line  and  significantly   expanded  the  Company's  usability  in
developing them for the next generation.

Growth Strategy

The Company's strategy for growth consists of the following:

Leveraging Existing Customer Relationships

     The  Company  has  an  installed  base  of  approximately   800  customers.
Increasingly,  the Company's customers are expanding or upgrading their document
automation  solutions,  which  provides a market  for  additional  products  and
services  from the Company.  Most of the  Company's  large  insurance  customers
originally licensed software, but contracted for few services. Since the Company
has  substantially  expanded  its services  capacity,  it  anticipates  that the
existing customer base could be a significant  source of future services revenue
for the Company.  Recently introduced and planned products and services can also
be provided to the Company's current customers as follow-on sales.


                                       4
<PAGE>


Expanding Professional Services

     The  Company  is  expanding   its  document   automation   consulting   and
applications  integration  services  to assist  with new and  existing  document
automation applications.  The Company also is pursuing outsourcing of customers'
document  automation  operations  with  on-site  Company  personnel  or  through
processing of customers' documents at the Company's Atlanta processing and print
facility.

Entering New Vertical Markets

     The  Company  believes it is the  leading  provider of document  automation
software and services for the insurance  industry and has become a leader in the
utilities  industry.  The Company is targeting  vertical market expansion in the
financial  services,  higher education,  telecommunications,  and transportation
industries,  in each of which customers have previously  purchased and installed
the Company's software. These industries,  like insurance and utilities, have an
increasing  need for  individualized  documents  to be  produced  in very  large
volumes in order to communicate effectively with their customers.

Developing and Enhancing New Technologies

     The Company's  product  development  efforts are focused on developing  new
products  as well as  enhancing  and  broadening  its current  software  product
offerings.  New  DocuCorp  products  and  solutions  will  continue to emphasize
state-of-the-art  object-oriented technologies,  WindowsNT platform development,
and  intranet/Internet  capabilities  and  enablement.  During fiscal 1999,  the
Company  expects to introduce new software  products  utilizing  object-oriented
platform independent  technology,  with migration and upgrade paths for users of
existing products.

Expanding Internationally

     Approximately 4% of the Company's  revenues came from customers  outside of
North  America  in  fiscal  1998.  DocuCorp  plans to expand  its  international
customer base primarily by cultivating its international  distribution  alliance
and through  direct  sales.  The Company  also  intends to leverage its existing
international  customer base,  particularly by selling professional  services to
customers who previously have licensed  software from the Company.  In May 1998,
the Company opened a sales and services  office in London.  DocuCorp  intends to
continue  increasing  the number of sales and services  professionals  domiciled
internationally.

Pursuing Acquisitions and Strategic Alliances

     The  Company   intends  to  pursue   acquisitions  of  other  companies  or
technologies  further  expanding the  Company's  products,  services,  or market
penetration.  In  addition,  as the  Company  expands in its  targeted  vertical
markets,  the Company intends to enter into additional  strategic  alliances for
sales and  marketing in such  markets.  The Company  believes that new technical
skills,  expanded product functionality,  a broader client base, and an expanded
geographic presence may result from these activities.

Products and Services

     The  Company  offers a portfolio  of  scalable,  high-performance  document
automation  software  products.   The  Company  also  has  one  of  the  largest
professional  services  organizations  in the  industry,  and the  facilities to
outsource document production using the Company's technology and expertise.


                                       5
<PAGE>


Document Automation Software

     The  Company  offers  document  automation  software  products  that enable
customers  to  produce  high-volume,  individualized  documents.  The  Company's
software solutions include multi-platform,  enterprise-wide  processing products
addressing each phase of the life cycle of a document.  The Company's philosophy
of open architecture and support of industry  standards enables its customers to
select  software and hardware from other leading vendors and integrate them with
DocuCorp products.

     The Company's  product lines have been  organized  into the following  four
primary  categories.  During calendar 1998, the Company expects to introduce new
software products utilizing  object-oriented  platform  independent  technology,
with migration and upgrade paths for users of existing products.

DocuCorp Creation Solutions

     With DocuCorp  Creation  Solutions,  document  components  (forms,  graphs,
charts, text) can be created either entirely with the Company's products or more
typically by using other leading composition or word processing  software,  such
as Microsoft Word,  integrated with DocuCorp Creation  Solutions.  The Company's
open  architecture  supports  a broad  range  of  document  creation  solutions.
DocuCorp Creation  Solutions run primarily on personal computers under Microsoft
Windows.  License revenues from the Company's  software products in the Creation
Solutions  category accounted for approximately 9% and 8% of the Company's total
license revenues in fiscal 1998 and 1997 (on a pro forma basis), respectively.

DocuCorp Publishing Solutions

     DocuCorp  Publishing  Solutions are designed to handle  production of large
volumes  of  documents,  large  numbers  of  forms,  complex  document  assembly
requirements,  individualization  of each  document,  multiple  recipients  with
unique  requirements,  and interfacing  with existing  databases and application
programs.  DocuCorp  Publishing  Solutions  have the  flexibility to dynamically
compose highly-tailored documents, each based on custom publishing rules such as
unique pagination. Alternatively, the Company's products attain industry leading
throughput by utilizing the Company's  proprietary  software logic  encompassing
print-ready  images to be merged  with  variable  data for  high-volume  complex
documents  like  complete  insurance  policies.  DocuCorp  Publishing  Solutions
provide forms fill, data merge, document assembly,  dynamic formatting and graph
generation,  centralized  and  decentralized  printing  on  most  leading  laser
printers,  interactive and batch processing and electronic output, and a variety
of other features and functions. DocuCorp Publishing Solutions run on mainframes
primarily under MVS, and on client/server  platforms under Microsoft  WindowsNT,
Microsoft  Windows,  and UNIX.  License  revenues  from the  Company's  software
products in the Publishing  Solutions  category  accounted for approximately 62%
and 63% of the Company's  total  license  revenues in fiscal 1998 and 1997 (on a
pro forma basis), respectively.

DocuCorp Archival Solutions

     DocuCorp  Archival  Solutions store published  documents  electronically so
that they can be viewed, used, and reused throughout the organization. Retrieval
features enable immediate  access to documents for applications  like processing
claims,  referencing  enterprise-wide  legal  or  regulatory  documentation,  or
speeding  customer  service  operations  at  call  centers.   DocuCorp  Archival
Solutions can be implemented as stand-alone  systems or integrated  with leading
imaging systems such as FileNET.  DocuCorp  Archival viewing software runs under
Windows,


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and Archival server software runs on MVS, Microsoft WindowsNT, and UNIX. License
revenues from the Company's software products in the Archival Solutions category
accounted for  approximately 22% and 21% of the Company's total license revenues
in fiscal 1998 and 1997 (on a pro forma basis), respectively.

DocuCorp Management Solutions

     DocuCorp Management Solutions currently provide Internet document services,
network and host  connectivity,  and document  routing.  As enterprises  expand,
there is a greater  need for  control  over  documents  and the  ability to move
documents across the enterprise.  License  revenues from the Company's  software
products in the Management Solutions category accounted for approximately 7% and
8% of the  Company's  total  license  revenues in fiscal 1998 and 1997 (on a pro
forma basis), respectively.

     As an additional  service to its  customers,  the Company also provides the
tools and utility programs to interface, maintain, and develop DocuCorp document
automation implementations.  The latest object-oriented technologies,  including
use of Active-X,  Java, ODBC, and Visual Basic compatibility,  make it easier to
implement installations and interfaces.  The Company has not generated, nor does
it  anticipate  that it will  generate,  material  revenues from these tools and
utility programs.

Professional Services

     The Company offers both document  automation  consulting  and  applications
integration together with print outsourcing  services to its customers.  At July
31, 1998, the Company employed approximately 170 professional service personnel,
which  represents  one of the  largest  services  organization  in the  document
automation software industry. The Company's professional services personnel have
experience across many industries and document automation applications.

Consulting

     The Company offers a broad range of consulting services related to document
automation.  A  majority  of  the  Company's  professional  services  consulting
revenues  are derived  from  implementation  and  integration  of the  Company's
software products.  The Company also derives  professional  services  consulting
revenues from  education as well as training  services and  electronic  document
library  development.  The  Company's  professional  services  group  works with
clients to develop and define  document  automation  strategies and to provide a
complete  package of  software  implementation  services.  Training  classes are
available  to assist  clients with  implementing  technology  and  applications.
Educational  offerings are available in standardized and customized  formats.  A
substantial  majority  of the  Company's  consulting  services  are  related  to
DocuCorp Publishing  Solutions.  Consulting services accounted for approximately
38% and 36% of the  Company's  total  revenues in fiscal 1998 and 1997 (on a pro
forma basis), respectively.

Print Outsourcing Services

     The Company offers document processing and print outsourcing services which
utilize the Company's  software to provide  solutions for handling  high-volume,
complex print,  finish, and mailing  requirements.  The Company operates a print
production  center in Atlanta  which,  using data received  electronically  from
customers,  employs high-volume  printers and mail handling equipment to produce
insurance policies, billings and other customer mailings, and bundles the output
for bulk mailings.  Print  outsourcing  accounted for  approximately  18% of the
Company's  total  revenues in both fiscal 1998 and 1997 (on a pro forma  basis),
respectively.


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Product Development

     The  Company  has  made  and  expects  to  continue  to  make   substantial
investments in research and product  development.  Product  development  efforts
increased  substantially in fiscal 1998 as a result of the Merger. During fiscal
1999,  the  Company  expects  to  introduce  new  software  products   utilizing
object-oriented  technology,  with  migration  and  upgrade  paths  for users of
existing products. Other new product development efforts include the integration
of existing  products with the Internet to provide  access to documents  through
the Internet and further  development of systems for use in vertical  industries
such as utilities and financial services.

     The Company has  committed  substantial  resources to product  development.
Historically,   the  Company  has  made  new  releases  of  software   available
approximately  every  12  months.  As of July 31,  1998,  the  Company  employed
approximately 75 technical personnel engaged in product development. The product
development  process is a cooperative  effort between customers and the Company.
Early review of functionality  specifications,  prototypes,  and  demonstrations
allows for the  incorporation  of customer  suggestions and comments in parallel
with management review of the process internally. DocuCorp has a formal planning
process for new software  products as well as software  upgrades and maintenance
releases to ensure  product  quality,  timeliness  of  releases,  and meeting or
exceeding customer  expectations.  In fiscal 1998 and fiscal 1997, the Company's
software  development  expenditures were  approximately  $6.7 million,  and $3.2
million, respectively.

Sales and Marketing

General

     The Company  markets its products  through various  distribution  channels,
including  direct  sales,  marketing  alliances,  and  distributors.  Its  sales
resources are organized based upon vertical industry markets.  At July 31, 1998,
the Company employed  approximately 25 direct sales and support  representatives
who  operate  primarily  from  Dallas and  Atlanta.  Sales  representatives  are
compensated principally on a commission basis.

     In the United  States,  the  Company  markets  its  products  and  services
primarily  through a direct  sales  force.  Outside  of the United  States,  the
Company relies  primarily on distributor  relationships  to market its products.
Distributor  relationships are established in Canada,  Europe, South Africa, and
Asia. The Company's most significant international distributor relationships are
with  Continuum  (Europe)  Limited  and Policy  Management  Systems  Corporation
("PMSC").   DocuCorp  plans  to  expand  its  international   customer  base  by
cultivating  international  distribution  alliances and increasing the number of
its direct sales and services personnel domiciled internationally.

     In addition, the Company intends to increase both its product offerings and
vertical  markets  served  through  marketing,   sales  and  distribution,   and
development  relationships  with other companies.  Formal and informal marketing
and  sales  partnerships   currently  exist  with  Xerox,  Andersen  Consulting,
Continuum  (Europe) Limited,  PMSC,  FileNET  Corporation,  American  Management
Systems (AMS), SCT Utility  Systems,  UMS Inc., and  Crain-Drummond,  Inc. These
relationships  provide sales leads for the  Company's  products and services and
help extend the Company's sales coverage and networking capabilities.

     Currently,  the Company's DocuFlex product line is licensed to customers on
a product-by-product basis. In contrast, the entire DAP product line is licensed
by customers under one  comprehensive  software license.  Effective  November 1,
1998, the Company's current product


                                       8
<PAGE>


marketing  methodology  will change from these prior  practices.  The  Company's
customers  generally  license the  Company's  software  products  for an upfront
license fee. Initial license fees typically range from $75,000 to $250,000. Most
customers  also  enter  into  maintenance  agreements  with the  Company,  which
typically provide for annual maintenance fees ranging from 15% to 25% of current
license fees.  Customers who enter into  maintenance  agreements are entitled to
software  upgrades,  software  problem  resolutions,  and  use of the  Company's
"Hotline"  providing  technical  assistance  to the software  user.  The Company
generally  charges  customers  for  consulting  services on a time and materials
basis,  although  certain  service  assignments  are performed on a fixed charge
basis. Print outsourcing services are charged on a transaction fee basis.

Relationship with Third-Party Distributor

     FormMaker, which was acquired by the Company in connection with the Merger,
historically  distributed  its line of DAP  software  products to the  insurance
industry in North America through a marketing agreement with PMSC. A substantial
portion of the subsidiary's revenues has historically been generated pursuant to
this agreement. Additionally, the subsidiary granted PMSC the exclusive right to
market the DAP software in the  property/casualty and life insurance industries.
Revenues  from PMSC under this  agreement  for the year ended July 31,  1998 and
1997 (on a pro forma basis) were $5.5 million and $10.3  million,  respectively.
Subsequent to year end, both parties agreed to terminate the exclusive marketing
agreement  and  enter  into a new  non-exclusive  marketing  agreement.  The new
marketing  agreement  between DocuCorp and PMSC allows PMSC to market all of the
Company's  software  products to  insurance  and  financial  services  companies
worldwide.

     In addition,  PMSC terminated its print outsourcing agreement effective May
1998.  Revenues  from PMSC under the print  outsourcing  agreement  for the year
ended July 31, 1998 and 1997 (on a pro forma  basis) were $4.4  million and $5.3
million,  respectively.  Accordingly, print outsourcing revenues are expected to
decline  from fiscal year 1998 levels  until the Company is able to replace this
business with new business.

     PMSC also had a non-exclusive,  perpetual, royalty-free,  worldwide license
to use, execute,  copy, or license the DAP software (and derivatives thereof) to
third  parties.   This  license  was  terminated   upon  execution  of  the  new
non-exclusive marketing agreement.

Customers

     The Company generally markets to large and mid-size organizations that have
a need for integrated solutions for the high-volume production of individualized
documents.  Currently,  the majority of the Company's  revenue is generated from
the insurance  industry.  Approximately  73% of the Company's total revenues for
the year ended July 31, 1998 were derived from the insurance industry.  Of these
revenues,  13% of total  revenues  for the year ended July 31, 1998 were derived
from one customer,  Prudential  Insurance  Company of America.  Over half of the
largest 200 insurance  companies in North America use the Company's products and
services, including seven of the ten largest life and health insurance companies
and nine of the ten largest  property  and  casualty  insurance  companies.  The
Company believes it has the largest installed document  automation customer base
in the insurance  industry.  During  fiscal 1998, 15 utility  companies in North
America  licensed  the  Company's  products.  In addition to the  insurance  and
utilities  industries,  the Company is targeting  vertical markets including the
financial  services,  higher education,  telecommunications,  and transportation
markets,  in each of which  industry  customers have purchased and installed the
Company's software.  Unlike many other software vendors, the Company's principal
contact at customer organizations is generally not an MIS or


                                       9
<PAGE>


information  technology  officer,  but rather the customer  service or marketing
departments that will use the Company's products.  As a result, the Company does
not always compete with other  technological  priorities  being  considered by a
customer's MIS department.

Set forth  below is a  representative  list of  customers  of the Company in the
various industries in which the Company markets its products and services:

   Insurance

   Prudential Insurance Company of America
   American International Group (AIG)
   Continental National Assurance (CNA)

   Utilities

   Southern Company Services, Inc.
   Consolidated Edison of New York, Inc.

   Financial Services

   Royal Bank Financial Group
   ABN-AMRO Bank N.V.

   Higher Education

   The University of Texas
   San Francisco State University

   Telecommunications

   Polkomtel S.A.
   Airtel

   Transportation

   Yellow Technology Services, Inc.
   Wisconsin Department of Transportation

Competition

     The market for  document  automation  products  and  services is  intensely
competitive,  subject to rapid change, and significantly affected by new product
introductions and other market activities of industry participants.  The Company
faces direct and indirect competition from a broad range of competitors, many of
whom  have  greater  financial,  technical,  and  marketing  resources  than the
Company.  The Company's principal  competition  currently comes from (i) systems
developed  in-house by the internal MIS departments of large  organizations  and
(ii)  direct  competition  from  numerous  software  vendors,  including  Cincom
Systems,  Inc., Document Sciences  Corporation (which is majority owned by Xerox
Corporation ("Xerox")), Group 1 Software, Inc., Mobius Management Systems, Inc.,
and M&I Data  Services.  The Company  believes  that the  principal  competitive
factors in the document  automation  software market are product performance and
functionality,  ease of  use,  multi-platform  offerings,  product  and  company
reputation,  quality of customer  support and service,  and price. The degree of
competition varies significantly with the stage of the document life cycle being
addressed and by vertical market.

     The Company may also face  competition  from new entrants into the document
automation  software industry.  As the market for document  automation  software
continues to


                                       10
<PAGE>


develop,  current or potential  competitors with significantly greater resources
than the Company could attempt to enter or increase their presence in the market
either  independently  or by  acquiring  or  forming  strategic  alliances  with
competitors of the Company or otherwise increase their focus on the industry. In
addition,  current and potential  competitors  have established or may establish
cooperative relationships among themselves or with third-parties to increase the
ability of their  products  to address  the needs of the  Company's  current and
prospective customers.

Intellectual Property, Trademarks, and Proprietary Rights

     The Company relies  primarily on a combination  of copyright,  distribution
software  license  agreements,  trademark  and trade secret  laws,  employee and
third-party  nondisclosure  agreements,  and  other  methods  to  safeguard  its
software  products.   Despite  these   precautions,   it  may  be  possible  for
unauthorized third-parties to copy certain portions of the Company's products or
obtain  and use  information  the  Company  regards  as  proprietary.  While the
Company's  competitive  position  may be  affected by its ability to protect its
proprietary  information,  the Company  believes  that  trademark  and copyright
protections are not material to the Company's success.

     The  Company's  software  products are licensed to end-users on a "right to
use" basis pursuant to license agreements. Certain license provisions protecting
against  unauthorized  use,  copying,  transfer,  and disclosure of the licensed
program may be unenforceable under the laws of certain jurisdictions and foreign
countries.  In  addition,  the laws of some  foreign  countries  do not  protect
proprietary rights to the same extent as do the laws of the United States.

     As the  number of  software  products  in the  industry  increases  and the
functionality  of these products  further  overlaps,  the Company  believes that
software programs will increasingly become subject to infringement claims. Third
parties may assert  infringement  claims  against the Company in the future with
respect to current or future products,  which could require the Company to enter
into royalty arrangements or result in costly litigation.

     The  Company  also  relies  on  certain  software  that  it  licenses  from
third-parties,  including software that is integrated with internally  developed
software and used in its products to perform key  functions.  These  third-party
software   licenses  may  not  continue  to  be  available  to  the  Company  on
commercially  reasonable  terms and the related  software may not continue to be
appropriately  supported,  maintained or enhanced by the licensors.  The loss of
licenses  to use, or the  inability  of  licensors  to  support,  maintain,  and
enhance,  any of such  software  could  result  in  increased  costs,  delays or
reductions in product shipments until equivalent  software could be developed or
licensed and integrated.

Employees

     As of July 31, 1998, the Company had approximately 315 employees,  of which
approximately  170  were  engaged  in  professional   services,  90  in  product
development and customer support, 25 in sales and marketing,  and 30 in finance,
administration,  human  resources,  and internal  systems  support.  The Company
believes its future  success will depend,  in part, on its continued  ability to
attract  and retain  highly  qualified  personnel  in a  competitive  market for
experienced and talented software  engineers and sales and marketing  personnel.
None of the Company's employees are represented by a labor union or subject to a
collective  bargaining  agreement.   The  Company  believes  that  its  employee
relations are good.

Forward-Looking Statements


                                       11
<PAGE>


     This  Annual  Report  on Form  10-K may  include  certain  "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements,  other than  statements  of historical  facts  included in this Form
10-K, are  forward-looking  statements.  Such  statements are subject to certain
risks and uncertainties, which include but are not limited to those discussed in
the  section  entitled  "Risk  Factors."  Should  one or more of these  risks or
uncertainties,  among others as set forth in this Form 10-K, materialize, actual
results may vary materially  from those  estimated,  anticipated,  or projected.
Although  the  Company  believes  that  the   expectations   reflected  by  such
forward-looking   statements  are  reasonable  based  on  information  currently
available to the Company,  no assurance can be given that such  expectation will
prove to have been correct.  Cautionary statements identifying important factors
that  could  cause  actual  results  to  differ  materially  from the  Company's
expectations are set forth in this Form 10-K,  including  without  limitation in
conjunction with the forward-looking  statements included in this Form 10-K that
are referred to above. All forward-looking statements included in this Form 10-K
and all subsequent oral forward-looking  statements  attributable to the Company
or persons  acting on its behalf are  expressly  qualified in their  entirety by
these cautionary statements.

Risk Factors

Significant Revenues from Two Industries

     Approximately  73% of the Company's  total revenues for the year ended July
31, 1998 and 70% of the  Company's  pro forma total  revenues for the year ended
July 31, 1997 were derived from the insurance industry.  Of these revenues,  13%
and 21% of total  revenues  in  fiscal  1998 and  1997 (on a pro  forma  basis),
respectively,  were derived from one customer,  Prudential  Insurance Company of
America. Additionally,  approximately 20% and 9% of the Company's total revenues
for the year ended July 31, 1998 and 1997 (on a pro forma basis),  respectively,
were derived from the  utilities  industry.  The Company's  continued  financial
performance  and its future  growth  will depend upon its ability to continue to
market its products  successfully in the insurance and utilities  industries and
to enhance and market technologies for distribution in other markets.  This will
require the Company to make  substantial  product  development and  distribution
channel investments.  There can be no assurance that the Company will be able to
continue  marketing  its products  successfully  in the  insurance and utilities
industries or will be able to successfully introduce new or existing products in
markets other than the insurance and utilities  industries.  In addition,  there
can be no assurance that the Company will continue to sell products and services
to Prudential Insurance Company of America at historical levels. Any significant
decline in revenues derived from Prudential  Insurance  Company of America could
have a material adverse effect on the Company's results of operations.

Technological Advances

     The document  automation  industry  has  experienced  and will  continue to
experience rapid technological advances,  changes in customer requirements,  and
frequent  new  product  introductions  and  enhancements.  Development  in  both
software  technology  and hardware  capability  will require the Company to make
substantial  product  development  investments.  Any  failure by the  Company to
anticipate or respond  adequately  to  technological  developments  and customer
requirements,  or any significant delays in product development or introduction,
could have a material  adverse  effect on the Company's  results of  operations.
There  can  be  no  assurance   that  the  Company's  new  products  or  product
enhancements  intended to respond to technological  change or evolving  customer
requirements will achieve acceptance.

Significant Third-Party Distributor Relationship


                                       12
<PAGE>


     FormMaker, which was acquired by the Company in connection with the Merger,
historically  distributed  it line of DAP  software  products  to the  insurance
industry in North America through a marketing agreement with PMSC. A substantial
portion of the subsidiary's  revenues have historically been generated  pursuant
to this agreement. Additionally, the subsidiary granted PMSC the exclusive right
to  market  the  DAP  software  in  the  property/casualty  and  life  insurance
industries.  Revenues from PMSC under this agreement for the year ended July 31,
1998 and 1997 (on a pro forma  basis)  were  $5.5  million  and  $10.3  million,
respectively.  Subsequent  to year end,  both parties  agreed to  terminate  the
exclusive  marketing  agreement  and enter  into a new  non-exclusive  marketing
agreement.  The new marketing agreement between DocuCorp and PMSC allows PMSC to
market  all of the  Company's  software  products  to  insurance  and  financial
services companies worldwide.

     In addition, PMSC has provided notice of termination of a print outsourcing
agreement,  effective May 1998.  Revenues from PMSC under the print  outsourcing
agreement  for the year ended July 31, 1998 and 1997 (on a pro forma basis) were
$4.4 million and $5.3  million,  respectively.  Accordingly,  print  outsourcing
revenues  are expected to decline from fiscal year 1998 levels until the Company
is able to replace this business with new business.

     PMSC also had a non-exclusive,  perpetual, royalty-free,  worldwide license
to use, execute,  copy, or license the DAP software (and derivatives thereof) to
third  parties.   This  license  was  terminated   upon  execution  of  the  new
non-exclusive marketing agreement.

Attraction and Retention of Technical Employees

     The Company believes that its future success will depend in large part upon
its  ability  to  attract,   retain  and  motivate  highly  skilled   employees,
particularly  technical employees.  The employees that are in highest demand are
software   programmers,   software  developers,   application   integrators  and
information  technology  consultants.  These  employees  are  likely to remain a
limited resource for the foreseeable future.  There can be no assurance that the
Company will be able to attract and retain sufficient  numbers of highly skilled
technical employees. The loss of a significant number of the Company's technical
employees could have a material adverse effect on the Company.

Year 2000 Compliance

     The Company  recognizes the need to ensure that its operations  will not be
adversely impacted by Year 2000 software failures.  Accordingly, the Company has
been  evaluating  the impact of the Year 2000 on its product  line and  services
offerings, as well as its internal systems and hardware. Relative to its product
line,  all current  versions of the Company's  products are designed to be "Year
2000"  compliant.  Customers  using  pre-Year  2000  compliant  versions  of the
Company's software products are entitled to receive upgraded Year 2000 compliant
software as part of their software support agreements with the Company,  as long
as the  customer  support  agreements  remain in force.  The  Company  is in the
process of determining the extent to which its services implementations are Year
2000 compliant.  To the extent the Company is directly involved in resolving any
non-compliant   services   implementations,   generally  the  customer  will  be
responsible for the fees associated with such services. Accordingly, the Company
does not currently  believe that the effects of any Year 2000  non-compliance in
the Company's  installed  base of products or services  offerings will result in
any material adverse impact on the Company's business or financial condition. No
assurance can be given that the Company will not be exposed to potential  claims
resulting from system problems associated with the century change.


                                       13
<PAGE>


     As to its own  internal  software  systems  and  hardware,  the Company has
identified and is currently  reviewing all key areas. The Company believes there
is no  significant  exposure to the  Company  related to the Year 2000 issue and
that the majority of identified non-compliant systems are planned to be upgraded
as part of its normal  upgrade  process  within the next 12 months.  The cost of
upgrading or replacing other non-compliant hardware and software is not expected
to be material.

Competition

     The market for the  Company's  document  automation  products is  intensely
competitive.  The Company faces  competition  from a broad range of competitors,
many of whom have greater financial, technical, and marketing resources than the
Company.  The Company's principal  competition  currently comes from (i) systems
developed  in-house by the internal MIS departments of large  organizations  and
(ii)  direct  competition  from  numerous  software  vendors,  including  Cincom
Systems, Inc., Document Sciences Corporation (which is majority owned by Xerox),
Group 1 Software,  Inc., Mobius Management Systems, Inc., and M&I Data Services.
There can be no assurance  that the Company will be able to compete  effectively
with such entities.

Fluctuations in Operating Results

     The Company has experienced,  and may in the future continue to experience,
fluctuations  in its  quarterly  operating  results  due to the fact that  sales
cycles, from initial evaluation to purchase, vary substantially from customer to
customer. Delays in the sales cycle frequently occur as a result of competition,
changes in customer personnel,  and overall budget and spending priorities.  The
Company has typically  operated with little backlog for license revenues because
software  products  generally are shipped soon after orders are  received.  As a
result,  license revenues in any quarter are  substantially  dependent on orders
booked and shipped in that  quarter.  The delay of  customer  orders for a small
number of  licenses  could  adversely  affect the license  revenues  for a given
fiscal quarter. The Company has historically earned a substantial portion of its
license  revenues  in  the  last  weeks  of  any  particular  quarter,  and  has
historically  experienced its highest license  revenues in the fourth quarter of
its fiscal year.  The failure to achieve such revenues in  accordance  with such
trends could have a material adverse effect on the Company's  financial  results
for each such interim period.

Risk of Software Defects

     Complex software  products such as those offered by the Company can contain
undetected  errors or  performance  problems.  Such defects are most  frequently
found during the period  immediately  following  introduction of new products or
enhancements to existing products. The Company's products have from time to time
contained  software errors that were discovered after  commercial  introduction.
There can be no  assurance  that  performance  problems  or  errors  will not be
discovered in the Company's  products in the future. Any future software defects
discovered after shipment of the Company's products,  if material,  could result
in loss of  revenues,  delays  in  customer  acceptance,  or  potential  product
liability.

Limited Protection of Intellectual Property Rights

     The Company  relies on a  combination  of  copyright  and  trademark  laws,
employee and third-party nondisclosure agreements,  and other methods to protect
its  proprietary  rights.  Despite  these  precautions,  it may be possible  for
unauthorized third-parties to copy certain portions of its products or to obtain
and use information  that the Company  regards as  proprietary.  There can be no
assurance that the Company's efforts will provide meaningful  protection for its
proprietary


                                       14
<PAGE>


technology  against  others  who  independently  develop  or  otherwise  acquire
substantially  equivalent  techniques  or  gain  access  to,  misappropriate  or
disclose the Company's proprietary technology.

Dependence on Single Facility for Certain Services

     The Company's print outsourcing operations are performed at its facility in
Atlanta,  Georgia.  Since the Company  only has the  capability  to perform this
function at a single location, a fire, flood,  earthquake,  power loss, or other
event affecting the Company's Atlanta  processing and print facility could cause
a  significant  interruption  in  the  Company's  operations.  There  can  be no
assurance that the Company's contingency plans in the event of such interruption
will prove to be adequate.  Any  interruption in the operations at the Company's
Atlanta  processing and print  facility could have a material  adverse effect on
the Company's business, financial condition or results of operations.

Integration of Operating Subsidiaries

     The Company completed the Merger in fiscal 1997 and acquisitions of EZPower
and Maitland in March 1998 and  subsequently  commenced the  integration  of the
operations,   facilities,  and  management.  Substantial  integration  of  their
respective products and services is expected to continue throughout fiscal 1999.
The  Company  may  not  be  able  to  successfully  complete  this  integration.
Additionally,  the Merger and recent  acquisitions could have a material adverse
effect  on  the  Company's  relationships  with  customers,   distributors,   or
suppliers.  The operating  history of its  subsidiaries  on a stand-alone  basis
cannot  necessarily  be regarded as indicative  of the Company's  prospects on a
consolidated basis. Accordingly, there can be no assurance that the Company will
achieve growth in revenues,  or sustain  revenues at a level consistent with the
historical results of its subsidiaries on a stand-alone basis.

Dependence on Key Management Personnel

         The  Company   believes  that  its  continued   success  depends  to  a
significant extent upon the efforts and abilities of its senior  management.  In
particular,  the loss of Michael D. Andereck,  the Company's President and Chief
Executive  Officer,  or any of the Company's other executive  officers or senior
managers could have a material adverse effect on the Company.

ITEM 2. PROPERTIES

     The Company  leases  approximately  23,000  square feet of office  space in
Dallas, Texas for its corporate headquarters,  including administrative,  sales,
services,  and product  development  departments.  This lease  expires April 30,
2005, but may be terminated by the Company on May 31, 2000.

     The Company  leases  approximately  55,000  square feet of office  space in
Atlanta,  Georgia,  which is  utilized  for  administrative,  sales,  marketing,
services, and product development departments.  The lease for this space expires
on December 31, 2002.

     The  Company's  print  outsourcing  facility  is also  located in  Atlanta,
Georgia.  This facility occupies  approximately 19,000 square feet under a lease
which expires on October 31, 2002.

     The  Company's  staff in New  Hampshire  is located in a 4,500  square foot
facility in  Bedford,  New  Hampshire.  The lease for this  facility  expires on
December 31, 1999. The Company's  staff in Maryland is located in Silver Spring,
Maryland.  This facility occupies approximately 10,000 square feet under a lease
which expires December 31, 2001.


                                       15
<PAGE>


     The Company's facility in Philadelphia, Pennsylvania, which is utilized for
administrative and product development  departments occupies approximately 3,800
square feet of office space. This lease expires February 28, 2003.

     Office space is also leased in London,  England for its European  sales and
services  functions,  California  for a sales office,  and  Portland,  Maine for
product development activities.

     The Company  believes that its existing  office  facilities  and additional
space  available  to it are adequate to meet its  requirements,  and that in any
event,  suitable additional or alternative space adequate to serve the Company's
foreseeable needs will be available on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

     On March 4, 1998,  PMSC  brought a lawsuit in the  United  States  District
Court,  District  of South  Carolina,  against  the  Company  and its  FormMaker
subsidiary.  The lawsuit  alleged that  FormMaker  had  breached  the  marketing
agreement  pursuant to which PMSC distributes  FormMaker's  software products to
the insurance industry. The lawsuit further alleged that the Company had engaged
in unfair trade  practices  and tortuous  interference  with PMSC's  contractual
relations,  breach of contract and other forms of alleged misconduct relating to
PMSC's  contract with  FormMaker.  PMSC sought  unspecified  damages,  including
punitive  damages,  and to enjoin  certain  marketing  of the DAP product by the
Company and FormMaker. The Company believed PMSC's claims were without merit and
continued to vigorously  contest such claims. On April 14, 1998, the Company and
FormMaker  filed an answer and  counterclaim  which denied the  allegations  and
stated claims for breach of contract,  breach of implied  covenant of good faith
and  fair  dealing,  usurpation  and  misuse  of  trade  secrets,  and  tortuous
interference  with  contact  relations.  On  September  18,  1998,  the  parties
concluded settlement discussions and signed a Mutual Release of Claims and a new
ten (10) year OEM Agreement for the non-exclusive marketing of DocuCorp products
in the insurance and financial industries.

     The  Company  believes  that the  resolution  of such  claims has not had a
material adverse effect on its financial condition or results of operations.  At
this date, the Company is not a party to any other legal proceedings.

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

     No  matter  was  submitted  to a vote  of  security  holders,  through  the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 1998.


                                       16
<PAGE>


                                     Part II

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

     The Company's  Common Stock has traded on the Nasdaq  National Market under
the symbol  "DOCC"  since  April 6, 1998.  At  September  30,  1998,  there were
approximately  1,300 holders of record of the Company's  Common Stock,  although
the Company believes that the number of beneficial owners of its Common Stock is
substantially  greater.  The table  below  sets  forth for the  fiscal  quarters
indicated the high and low sales prices for the Company's Common Stock:

                                          High                           Low    
                                      -----------                   ------------
Fiscal 1998
Fourth quarter                          $  9.94                       $  5.00

Third quarter (from April 6, 1998)        10.75                          9.25


     The Company  intends to retain any future  earnings for use in its business
and does not intend to pay cash dividends in the foreseeable future. The payment
of future dividends, if any, will be at the discretion of the Company's Board of
Directors and will depend, among other things, upon future earnings, operations,
capital  requirements,  restrictions  in future  financing  agreements,  general
financial condition of the Company, and general business conditions.


                                       17
<PAGE>


Item 6. Selected Consolidated Financial Data

     The following selected consolidated financial data for the years ended July
31,  1998,  1997,  1996,  1995,  and 1994 have  been  derived  from the  audited
financial  statements  of the  Company.  The  following  data  should be read in
conjunction  with,  and are  qualified by,  reference to the  Company's  audited
financial  statements  and the notes  thereto,  included  elsewhere in this Form
10-K.

<TABLE>
<CAPTION>

                                                                                          Years ended July 31,
                                                                  ------------------------------------------------------------------
                                            
                                                                  1998           1997*           1996           1995           1994
                                                                  ----           -----           ----           ----           ----
Statements of Operations Data:                                                (in thousands, except per share amounts)

<S>                                                            <C>            <C>             <C>            <C>            <C>     
Total revenues                                                 $ 45,247       $ 17,503        $ 11,470       $ 10,814       $ 10,874

Operating income (loss)                                        $  5,602       $(17,460)       $  3,416       $  3,158       $  3,546

Net income (loss) before income taxes                          $  5,424       $(17,246)       $  3,656       $  3,186       $  3,399

Net income (loss)                                              $  3,184       $(16,102)       $  2,321       $  2,003       $  2,169

Cash dividend declared for preferred stock                          -0-       $  2,808             -0-            -0-            -0-

Net income (loss) per share:
   Basic                                                       $   0.25       $  (2.18)       $   0.37       $   0.35       $   0.41
   Diluted                                                     $   0.21       $  (2.18)       $   0.28       $   0.25       $   0.27

Weighted average number of shares outstanding:
   Basic                                                         12,587          7,377           6,202          5,674          5,301
   Diluted                                                       14,865          7,377           8,381          8,165          8,114
</TABLE>

*    After  Merger-related  charges of $21,378.  Without such charges  operating
     income,  net income before income taxes,  net income,  net income per share
     (diluted), and weighted average number of shares of common stock and common
     stock equivalents (diluted) would have been $3,918,  $4,132,  $2,598, $.34,
     and 7,607, respectively.

<TABLE>
<CAPTION>

                                                                                             July 31,
                                                              ----------------------------------------------------------------------

                                                              1998             1997            1996             1995            1994
                                                              ----             ----            ----             ----            ----
Balance Sheet Data:                                                                       (in thousands)

<S>                                                        <C>             <C>              <C>             <C>             <C>     
Working capital                                            $ 15,998        $  1,644         $  5,640        $  4,049        $  1,930

Total assets                                               $ 51,921        $ 32,698         $ 14,691        $ 13,145        $ 11,572

Total debt, including obligations
   under capital lease                                     $     87        $  9,439         $     46        $  1,637        $  1,987

Redeemable Class B common stock                                 -0-        $ 19,119              -0-             -0-             -0-

Stockholders' equity (deficit)                             $ 38,433        $ (7,520)        $  8,037        $  5,606        $  3,545
</TABLE>


                                       18
<PAGE>


Item 7.   Management's  Discussion  and  Analysis  of  Financial  Condition  and
          Results of Operations

     The  information  required by this item is set forth in the Company's  1998
Annual Report to  Stockholders,  which  information  is  incorporated  herein by
reference.

Item 8.   Financial Statements and Supplementary Data

     The  information  required by this item is set forth in the Company's  1998
Annual Report to  Stockholders,  which  information  is  incorporated  herein by
reference.

Item 9.   Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

     None.


                                       19
<PAGE>


                                    Part III

Part III of this Annual Report on Form 10-K  incorporates by reference  portions
of the Registrant's  definitive proxy statement, to be filed with the Securities
and  Exchange  Commission  not later than 120 days after the close of its fiscal
year;  provided that if such proxy statement is not filed with the Commission in
such 120-day period, an amendment to this Form 10-K shall be filed no later than
the end of the 120-day period.

Item 10.  Directors and Executive Officers of the Registrant

     Information  with  respect to Directors of the Company will be set forth in
the  forthcoming  Proxy  Statement  under the heading  "Directors  and Executive
Officers,"  which  information  is  incorporated  herein by  reference  or in an
amendment to this Form 10-K.  Information required by Item 405 of Regulation S-K
will be set forth in the forthcoming  Proxy Statement under the heading "Section
16(a)  Beneficial   Ownership   Reporting   Compliance,"  which  information  is
incorporated herein by reference.

Item 11.  Executive Compensation

     Information with respect to executive compensation will be set forth in the
Proxy Statement under the heading "Executive Compensation," which information is
incorporated herein by reference, or in an amendment to this Form 10-K.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     Information with respect to security ownership of certain beneficial owners
and management  will be set forth in the  forthcoming  Proxy Statement under the
heading   "Beneficial   Ownership  of  Common   Stock,"  which   information  is
incorporated herein by reference, or in an amendment to this Form 10-K.

Item 13.  Certain Relationships and Related Transactions

     Information with respect to certain  relationships and transactions will be
set forth in the forthcoming Proxy Statement,  which information is incorporated
herein by reference, or in an amendment to this Form 10-K.


                                       20
<PAGE>


                                     Part IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following is a list of the consolidated  financial  statements which are
included in this Form 10-K or which are incorporated herein by reference.

     1.   Financial Statements (incorporated herein by reference):

               Report of Independent Accountants

               As of July 31, 1998 and 1997:

                    o Consolidated Balance Sheets

                    For the Years Ended July 31, 1998, 1997, and 1996:

                    o Consolidated Statements of Operations
                    o Consolidated Statements of Cash Flows
                    o Consolidated Statements of Changes in Stockholders' Equity
                    o Notes to Consolidated Financial Statements

     2. Financial Statement Schedule:

          o Report of Independent Accountants on Financial Statement Schedule
          o Valuation and Qualifying Accounts

     3. Exhibits:

          See Exhibit Index beginning on page 26 of this Form 10-K.

(b) Reports on Form 8-K.

     No reports on Form 8-K were filed by the Company  during the quarter  ended
July 31, 1998.


                                       21
<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.


    DocuCorp International, Inc.
---------------------------------------
           (Registrant)

/s/ Michael D. Andereck                                  Date  October 29, 1998
---------------------------------------                        -----------------
Michael D. Andereck
President, Chief Executive Officer and
Director


                                       22
<PAGE>


                               SIGNATURES (cont.)

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.


/s/ Michael D. Andereck                                 Date  October 29, 1998
---------------------------------------                       ------------------
Michael D. Andereck
President, Chief Executive Officer and
Director
(Principal Executive Officer)


/s/ Todd A. Rognes                                      Date  October 29, 1998
---------------------------------------                       ------------------
Todd A. Rognes
Senior Vice President, Finance
(Principal Financial Officer)


/s/ Milledge A. Hart, III                               Date  October 29, 1998
---------------------------------------                       ------------------
Milledge A. Hart, III
Director and Chairman of the Board


/s/ Anshoo S. Gupta                                     Date  October 29, 1998
---------------------------------------                       ------------------
Anshoo S. Gupta
Director


/s/ John D. Loewenberg                                  Date  October 29, 1998
---------------------------------------                       ------------------
John D. Loewenberg
Director


/s/ Warren V. Musser                                    Date  October 29, 1998
---------------------------------------                       ------------------
Warren V. Musser
Director


/s/ George F. Raymond                                   Date  October 29, 1998
---------------------------------------                       ------------------
George F. Raymond
Director


/s/ Arthur R. Spector                                   Date  October 29, 1998
---------------------------------------                       ------------------
Arthur R. Spector
Director


                                       23
<PAGE>


        Report of Independent Accountants on Financial Statement Schedule




To the Board of Directors and Stockholders
     of DocuCorp International, Inc.

     Our  audit of the  consolidated  financial  statements  referred  to in our
report  dated  September  9,  1998  appearing  in  the  1998  Annual  Report  to
Stockholders  of DocuCorp  International,  Inc.  (which report and  consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also  included  an audit of the  Financial  Statement  Schedule  listed in
Schedule II of this Form 10-K. In our opinion, this Financial Statement Schedule
presents  fairly,  in all material  respects,  the information set forth therein
when read in conjunction with the related consolidated financial statements.




PricewaterhouseCoopers LLP

Dallas, Texas
September 9, 1998


                                       24
<PAGE>


                        Valuation and Qualifying Accounts
                    Years ended July 31, 1998, 1997, and 1996
                                   Schedule II

<TABLE>
<CAPTION>
                                                                                 Additions
                                                                                 ---------
                                                                      

                                                     Balance at     Charged to     Charged to                   Balance at
                                                     Beginning      Costs and        Other                        End of
              Description                            of Period      Expenses        Accounts     Deductions       Period
                                                                      (a)          (a)(b)(c)
--------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>              <C>                <C>      <C>         

1998                                              
   Allowance for doubtful accounts                $    525,000  $    734,550     $   (309,550)      $0       $    950,000
   Valuation allowance against deferred           
     tax assets                                   $  1,392,817  $  1,848,786     $   (892,819)      $0       $  2,348,784
                                                  
1997                                              
   Allowance for doubtful accounts                $    350,000  $    363,556     $   (188,556)      $0       $    525,000
   Valuation allowance against deferred           
     tax assets                                   $        -0-  $  1,392,817     $         -0-      $0       $  1,392,817
                                                  
1996                                              
   Allowance for doubtful accounts                $    325,000  $    350,131     $   (325,131)      $0       $    350,000
</TABLE>


(a)  Such amounts  include  balances  assumed in the  acquisition  of FormMaker,
     EZPower, and Maitland.  See Notes to Consolidated  Financial Statements for
     further discussion.

(b)  Such amounts  relate to the  utilization  of the valuation  and  qualifying
     accounts for specific items for which they were established in the accounts
     receivable accounts.

(c)  Such amounts  relate to the tax benefit from  utilization  of net operating
     loss  and  reduction  of the  valuation  allowance  based  on  management's
     assessment of the likelihood of realizability of the loss carry forwards.


                                       25
<PAGE>


                                INDEX TO EXHIBITS

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

     3.1    Certificate of Incorporation. (filed as exhibit 3.1 to the Company's
            Registration  Statement on Form S-4 No.  333-22225 and  incorporated
            herein by reference)

     3.2    Bylaws.  (filed  as  exhibit  3.2  to  the  Company's   Registration
            Statement  on Form S-4 No.  333-22225  and  incorporated  herein  by
            reference)

     10.1   Cooperative  Marketing  Agreement  between  Image  Sciences Inc. and
            Xerox  Corporation  August 16,  1994.  (filed as exhibit 10.1 to the
            Company's  Registration  Statement  on Form  S-4 No.  333-22225  and
            incorporated herein by reference)

     10.2   Employment  Agreement between Michael D. Andereck and the Registrant
            dated  January 15,  1997.  (filed as exhibit  10.2 to the  Company's
            Registration  Statement on Form S-4 No.  333-22225 and  incorporated
            herein by reference)

     10.3   1997  Equity  Compensation  Plan  (filed  as  exhibit  10.3  to  the
            Company's 1997 Annual Report on Form 10-K and incorporated herein by
            reference).

     11.1*  Statement regarding Computation of Per Share Earnings.

     13.1*  1998 Annual Report to Stockholders. (for EDGAR filing purposes only)

     21.1*  Subsidiaries of the Registrant.

     23.1*  Consent of PricewaterhouseCoopers LLP, Independent Accountants

     27.1*  Financial   Data   Schedule.   (for  EDGAR  filing   purposes  only)

----------
     *      Filed herewith.


                                       26
<PAGE>


                                  EXHIBIT 11.1

                          DocuCorp International, Inc.
                        Computation of Earnings per Share
                For the Years Ended July 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>

                                                                    1998                1997               1996
                                                               ----------------    ---------------    ----------------
NET INCOME (LOSS) PER SHARE:

BASIC

<S>                                                              <C>                 <C>               <C>           
Net income (loss)                                                $  3,184,327        $(16,101,787)     $    2,321,280
                                                               ================    ===============    ================

Weighted average shares outstanding used in the
  net income (loss) per share calculation                          12,587,473           7,377,271           6,201,684
                                                               ================    ===============    ================

Basic net income (loss) per share                                $       0.25        $      (2.18)    $          0.37
                                                               ================    ===============    ================

DILUTED

Net income (loss)                                                $  3,184,327        $(16,101,787)    $     2,321,280
                                                               ================    ===============    ================

Weighted average shares outstanding                                12,587,473           7,377,271           6,201,684

Additional  weighted  average  shares from  assumed  
 exercise of dilutive  stock options and warrants, net of
 shares to be repurchased with exercise
 proceeds                                                           2,277,098                  -0-          2,179,486
                                                               ----------------    ---------------    ----------------

Weighted average shares outstanding used in the
   net income (loss) per share calculation                         14,864,571           7,377,271           8,381,170
                                                               ================    ===============    ================

Diluted net income (loss) per share                              $       0.21               (2.18)    $          0.28
                                                               ================    ===============    ================
</TABLE>


Due to the  adoption  of SFAS 128 and the  conversion  feature of Class B common
stock into  Common  Stock,  which  conversion  occurred  on April 9,  1998,  the
historical  basic and diluted  calculations  include the effect of conversion of
Class B common stock as of the date of original issuance,  which were previously
reported in pro forma computations prior to conversion.


                                       27
<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"  within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements,  other than  statements of historical  facts  included  herein,  are
forward-looking  statements.  Such  statements  are subject to certain risks and
uncertainties,  which include,  but are not limited to, timely  development  and
acceptance of new products and services, dependence upon the insurance industry,
integration of operating subsidiaries,  reliance on a major client relationship,
and  fluctuations  in  operating  results.  Should one or more of these risks or
uncertainties, among others as set forth herein, materialize, actual results may
vary materially from those estimated,  anticipated,  or projected.  Although the
Company  believes  that  the  expectations  reflected  by  such  forward-looking
statements  are  reasonable  based on  information  currently  available  to the
Company,  no assurance  can be given that such  expectations  will prove to have
been correct.  Cautionary  statements  identifying  important factors that could
cause actual results to differ  materially from the Company's  expectations  are
set  forth  herein.  All  forward-looking  statements  included  herein  and all
subsequent  oral  forward-looking  statements  attributable  to the  Company  or
persons acting on its behalf are expressly  qualified in their entirety by these
cautionary statements.

Overview

     DocuCorp develops,  markets, and supports a portfolio of open-architecture,
enterprise-wide  document automation software products that enable its customers
to produce complex,  high-volume,  individualized  documents.  In addition,  the
Company  provides  document  automation  consulting,  systems  integration,  and
document   processing  and  printing  services  through  a  170-person   service
organization.  Document  processing and printing  services utilize the Company's
software to provide solutions for handling  high-volume,  complex print, finish,
and mailing for customers who outsource this activity.

     DocuCorp  was  formed  in  connection  with the  acquisition  of  FormMaker
Software,  Inc.  ("FormMaker") by Image Sciences,  Inc. ("Image  Sciences") (the
"Merger").  The  Merger was  treated as an  acquisition  of  FormMaker  by Image
Sciences,  and  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   subsidiaries.
Consolidated  results of FormMaker  and its  subsidiary  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  $21.4 million  during  fiscal 1997 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.
Due to the lack of  comparability of the results of operations for periods prior
to and  subsequent to the Merger,  supplemental  analysis of unaudited pro forma
combined  statements of operations  information of the Company has been included
in the accompanying analysis.

     In March 1998,  the Company  acquired  all of the capital  stock of EZPower
Systems,  Inc.  ("EZPower") and Maitland Software,  Inc.  ("Maitland").  EZPower
develops,  markets, and supports document management software products. Maitland
has developed a data acquisition and  transformation  program which allows users
the ability to more easily  interface  existing  applications and databases with
document printing and publishing software. Both of these


                                       28
<PAGE>


acquisitions  were  recorded  under  the  purchase  method  of  accounting,  and
accordingly,  the results of  operations of EZPower and Maitland for all periods
subsequent to the acquisition date are included in the accompanying consolidated
financial  statements.  The  inclusion of the  operating  results of EZPower and
Maitland from the acquisition date is not material to the overall  operations of
the Company;  therefore,  the  historical  results have been  excluded  from the
supplemental  analysis of unaudited pro forma combined  statements of operations
information of the Company in the accompanying analysis.

     The Company derives its revenues from license fees,  recurring  maintenance
fees, and professional  services fees related to its software products.  License
revenues are  generally  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,  print  outsourcing,
contract programming, and education services.

Results of Operations

Historical Operating Results of the Company

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

                                                 Years ended July 31,
                                               ----------------------
                                                  1998       1997
                                               ---------  -----------
Revenues
     Professional services                          56%         35%
     License                                        20          23
     Maintenance and other recurring                24          42
                                               ---------  -----------
       Total revenues                              100         100
                                               ---------  -----------
Expenses
     Professional services                          42          23
     Product development and support                18          28
     Selling and marketing                          14          13
     General and administrative                     14          14
     Merger-related charges                          0         122
                                               ---------  -----------
       Total expenses                               88         200
                                               ---------  -----------
       Operating income (loss)                      12        (100)
     Other income (expense), net                     0           1
                                               ---------  -----------
       Income (loss) before income taxes            12         (99)
     Provision (benefit) for income taxes            5          (7)
                                               =========  ===========
       Net income (loss)                             7%        (92)%
                                               =========  ===========

Fiscal Year Ended July 31, 1998 Compared to Fiscal Year Ended July 31, 1997

Revenues

         The inclusion of a full year of FormMaker's results for the fiscal year
ended July 31, 1998 was  primarily  responsible  for the 159%  increase in total
revenues.  Professional  services revenues  increased  significantly and license
revenues  increased 117% due to inclusion of  FormMaker's  results in the fiscal
year ended July 31, 1998. Maintenance and other recurring revenues 


                                       29
<PAGE>


increased 49% as a result of inclusion of FormMaker's  maintenance  revenues and
an increased customer base.

     Backlog for the  Company's  products  and services of  approximately  $28.5
million as of July 31, 1998, of which  approximately  $16.2 million is scheduled
to be satisfied  within one year, is primarily  comprised of recurring  software
license and maintenance  revenues for ongoing maintenance and support,  software
implementation and consulting services, and print outsourcing services. Software
agreements for recurring license fees generally have non-cancelable  terms of up
to five years. Annual maintenance  contracts may generally be terminated upon 30
days' notice;  however,  the Company has not historically  experienced  material
cancellations of such contracts. Software implementation and consulting services
backlog is  principally  performed  under time and material  agreements of which
some  have  cancellation  provisions.   Print  outsourcing  services  agreements
generally  provide  that  fees  are  charged  on a per  transaction  basis.  The
estimated  future  revenues  with respect to software  implementation  and print
outsourcing  services are based on  management's  estimate of revenues  over the
remaining life of the respective contracts.

     FormMaker, which was acquired by the Company in connection with the Merger,
historically  distributed  its line of DAP  software  products to the  insurance
industry in North America through an exclusive  marketing  agreement with Policy
Management Systems Corporation ("PMSC"). Revenues from PMSC under this agreement
for the  year  ended  July  31,  1998  and  1997  (on a pro  forma  basis)  were
approximately $5.5 million and $10.3 million,  respectively.  Subsequent to year
end, both parties  agreed to terminate the marketing  agreement and enter into a
new  non-exclusive  marketing  agreement.  The new marketing  agreement  between
DocuCorp and PMSC allows PMSC to market all of the Company's  software  products
to insurance and financial services companies worldwide

     In addition,  PMSC terminated its print outsourcing agreement effective May
1998.  Revenues from PMSC under this  agreement for the year ended July 31, 1998
and 1997  (on a pro  forma  basis)  were  approximately  $4.4  million  and $5.3
million,  respectively.  Accordingly, print outsourcing revenues are expected to
decline  from fiscal year 1998 levels  until the Company is able to replace this
business with new business.

     Although  the Company is not aware of any material  adverse  effects on its
business,  the Company is unable to predict the impact,  if any, on its revenues
as a result of its customers  being  distracted  from their document  automation
needs as their attention is redirected,  or customer resources are diverted,  to
becoming Year 2000 compliant.

Professional services expense

     Professional  services expense is composed  primarily of personnel expenses
related to both consulting and print outsourcing  services.  The majority of the
$15.0  million  increase is due to the  inclusion  of  FormMaker  personnel  and
related expenses during the entire fiscal year ended July 31, 1998.  Postage and
supplies expense of approximately  $4.0 million for print outsourcing  services,
compared with $1.0 million in the prior year, also  contributed to the increase.
For the fiscal years ended July 31, 1998 and 1997, professional services expense
represented 75% and 65% of professional  services  revenues,  respectively.  The
increase in cost as a percentage of professional services revenues is mainly due
to higher profit margins earned under a short-term print  outsourcing  agreement
in fiscal 1997. The Company expects  professional  services expenses to increase
in order to meet  additional  resource  requirements  as  professional  services
activities increase domestically and internationally.


                                       30
<PAGE>


Product development and support expense

     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.  For the fiscal year ended
July 31, 1998, product development and support expense increased 68% compared to
the corresponding prior year period,  largely due to development efforts related
to the Company's DAP product line, which was acquired in the Merger. The Company
anticipates  continued  acceleration  of  development  efforts,   including  the
integration of existing products with the Internet to provide an enterprise-wide
Internet  solution,  integration of its newly acquired  document  management and
workflow solutions with its existing  offerings,  further development of systems
for use in industries such as utilities and financial  services,  development of
new  software  products  utilizing  object-oriented  technology,  and  continued
support of its existing  product lines.  Accordingly,  expenditures in this area
are expected to increase in relation to the anticipated growth in revenues.

     The Company  recognizes the need to ensure that its operations  will not be
adversely impacted by Year 2000 software failures.  Accordingly, the Company has
been  evaluating  the impact of the Year 2000 on its product  line and  services
offerings, as well as its internal systems and hardware. Relative to its product
line,  all current  versions of the Company's  products are designed to be "Year
2000"  compliant.  Customers  using  pre-Year  2000  compliant  versions  of the
Company's software products are entitled to receive upgraded Year 2000 compliant
software as part of their software support agreements with the Company,  as long
as the  customer  support  agreements  remain in force.  The  Company  is in the
process of determining the extent to which its services implementations are Year
2000 compliant.  To the extent the Company is directly involved in resolving any
non-compliant   services   implementations,   generally  the  customer  will  be
responsible for the fees associated with such services. Accordingly, the Company
does not currently  believe that the effects of any Year 2000  non-compliance in
the Company's  installed  base of products or services  offerings will result in
any material adverse impact on the Company's business or financial condition. No
assurance can be given that the Company will not be exposed to potential  claims
resulting from system problems associated with the century change.

     As to its own  internal  software  systems  and  hardware,  the Company has
identified and is currently  reviewing all key areas. The Company believes there
is no  significant  exposure to the  Company  related to the Year 2000 issue and
that the majority of identified non-compliant systems are planned to be upgraded
as part of its normal  upgrade  process  within the next 12 months.  The cost of
upgrading or replacing other non-compliant hardware and software is not expected
to be material.

Selling and marketing expense

     Selling and marketing  expense  increased  165%  primarily as the result of
inclusion of operations acquired in the Merger and increased commissions.  Sales
commissions  increased  due to  increased  revenues  and a new fiscal 1998 sales
compensation  plan that was  expanded  to provide  compensation  on all  revenue
types. The Company also focused on advertising,  marketing, and participating in
trade  shows to  increase  market  awareness,  which  increased  these  types of
expenditures.

General and administrative expense

     In fiscal 1998,  general and  administrative  expense  increased  166%. The
increased expense resulted from inclusion of operations  acquired in the Merger,
goodwill amortization as a


                                       31
<PAGE>


result of the Merger and recent  acquisitions,  and legal defense and settlement
costs related to the resolution of two outstanding litigation matters.

Other income (expense), net

     The 183% decrease in other income  (expense),  net was due to a decrease in
interest income and a significant increase in interest expense.  Interest income
decreased due to an $8.0 million distribution to stockholders and option holders
concurrent  with the  Merger in May 1997.  Interest  expense  was  significantly
higher in fiscal 1998 due to the  assumption of debt and  capitalized  leases in
connection  with the  Merger  and  acquisitions.  As a result of the  receipt of
approximately $18.5 million of Initial Public Offering ("IPO") proceeds in April
1998,  interest  income  increased  in the fourth  quarter of fiscal 1998 and is
expected to continue to increase  due to  significant  cash and cash  equivalent
balances.  Interest  expense is expected to  significantly  decrease  due to the
repayment of the Company's debt in April 1998.

Provision for income taxes

     The effective  tax rate for the year ended July 31, 1998 was  approximately
41%.  The  majority  of goodwill  amortization  related to the Merger and recent
acquisitions  is  non-deductible,  which  increased  the  effective tax rate for
fiscal 1998.  The tax benefit  related to the net loss for the fiscal year ended
July  31,  1997  was  approximately  7% due to the  non-deductibility,  for  tax
purposes,  of the in-process  technology charge associated with the Merger.  The
Company used a portion of its net operating loss  carryforwards  and outstanding
tax credits to offset its current tax  liability  for the fiscal year ended July
31, 1998.

Net income

     Net income increased  significantly due to increased revenue,  inclusion of
FormMaker's  results for a full year,  and economies of scale  achieved with the
combined companies.  During fiscal year 1997, the Company incurred non-recurring
Merger-related charges of $21.4 million.

Fiscal Year Ended July 31, 1997 Compared to Fiscal Year Ended July 31, 1996

Revenues

     Total revenues  increased 53% due primarily to the inclusion of FormMaker's
results subsequent to the Merger.  Professional services revenues increased 651%
principally due to the implementation of print outsourcing  operations  acquired
in the  Merger.  During  the  fourth  quarter,  license  revenues  significantly
declined  which  caused an overall 15%  decrease in annual  license  revenues as
compared to the previous year. The Company believes 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's  product
strategies.  Maintenance and other recurring  revenues  increased 24% due to the
inclusion of FormMaker's  recurring maintenance revenues since the Merger and an
increased customer base.

Professional services expense

     The majority of the increase in professional services expense is due to the
inclusion of FormMaker personnel associated with both the professional and print
outsourcing  services  areas  subsequent  to  the  date  of  the  Merger.  Print
outsourcing  services incurred  approximately $1.0 million in direct postage and
supplies  expense  which  further   contributed  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 the inclusion of
costs related to the Company's biennial user group


                                       32
<PAGE>


conference  in 1996,  higher  profit  margins  earned under a  short-term  print
outsourcing  agreement  in 1997,  and  economies  of scale of the  significantly
expanded services operations.


                                       33
<PAGE>


Product development and support expense

     Product  development and support expense consists primarily of research and
development  efforts,  amortization  of  capitalized  software  costs,  customer
support,  and other  product  support  costs.  Product  development  and support
expense increased by 12% in fiscal 1997. Before capitalization and amortization,
product  development and support expense  increased 22% primarily as a result of
the  development  efforts  related to operations  acquired in the Merger and the
addition of 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 operations acquired in the Merger and increased commissions.  Sales
commissions associated with increased sales 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 operations  acquired in the Merger,  profit-based  performance  bonuses,  and
costs associated with the Merger. Profit-based performance bonuses increased due
to achievement of performance and financial goals.

Merger-related charges

     Non-recurring  Merger-related  charges aggregating $21.4 million consist of
acquired in-process  technology,  compensation charges, and other Merger-related
charges.  Acquired in-process technology of $13.5 million was charged to expense
on the closing date of the Merger. Merger-related compensation and other related
charges of approximately  $7.9 million relate to the repurchase of stock options
and the creation of a new measurement date for outstanding  options converted to
options to purchase Class B common stock.

Other income (expense), net

     Other  income  (expense),  net  decreased  11% due  primarily  to increased
interest expense charges. Interest income increased 15% due to significant cash,
cash  equivalents,  and  short-term  investments  held by the Company until $8.0
million was  distributed in cash to stockholders  and option holders  concurrent
with the Merger.  Interest expense  increased 82% because of debt assumed in the
Merger.

Provision for income taxes (benefit)

     The  Company  recorded a tax  benefit of 7% related to its net loss for the
year ended July 31, 1997.  The  Company's  effective tax rate for the year ended
July 31, 1996 was  approximately  37%. The 1997  effective tax rate differs from
the 1996  effective tax rate due primarily to the in-process  technology  charge
which was not deductible for tax purposes.

Net income (loss)

     Non-recurring   Merger-related   charges  of  approximately  $21.4  million
resulted  in a net  loss of $16.1  million  in  1997.  Excluding  Merger-related
charges,  income before taxes  increased 13% from 1996  primarily as a result of
increased revenues.

Unaudited Pro Forma Combined Operating Results of the Company


                                       34
<PAGE>

     The  following is a  supplemental  comparison  of the  unaudited  pro forma
combined  operating results of the Company assuming the acquisition of FormMaker
occurred  on August 1,  1996.  The  supplemental  information  presented  below,
expressed  in dollars  and as a  percentage  of total  revenues  for the periods
indicated,  has been derived from the consolidated  financial  statements of the
Company and the  consolidated  financial  statements of  FormMaker.  For periods
prior to May 15, 1997 the Company,  Image Sciences, and FormMaker were not under
common control or management and, as a result,  the selected unaudited pro forma
combined financial information is not necessarily indicative of or comparable to
the operating  results that would have occurred had the Merger occurred as of or
at the beginning of the period presented or that will occur in the future.

<TABLE>
<CAPTION>

                                                                 Years ended July 31,
                                                           -------------------------------
                                                                1998              1997
                                                               Actual          Pro Forma
                                                           --------------    -------------
Revenues                                                            (In thousands)
<S>                                                              <C>              <C>     
     Professional services                                       $ 25,533         $ 20,828
     License                                                        8,885            8,153
     Maintenance and other recurring                               10,829            9,435
                                                           --------------    -------------
       Total revenues                                              45,247           38,416
                                                           --------------    -------------
Expenses
     Professional services                                         19,033           16,547
     Product development and support                                8,318            6,836
     Selling, general and administrative                           12,294           11,450
                                                           --------------    -------------
       Total expenses                                              39,645           34,833
                                                           --------------    -------------
       Operating income                                             5,602            3,583
     Other income (expense), net                                     (178)            (690)
                                                           --------------    -------------
       Income before income taxes                                   5,424            2,893
     Provision for income taxes                                     2,240            1,179
                                                           --------------    -------------
       Net income                                                $  3,184         $  1,714
                                                           ==============    =============
</TABLE>


<TABLE>
<CAPTION>

                                                                Years ended July 31,
                                                           -----------------------------
                                                                 1998            1997
                                                                Actual        Pro Forma
                                                           --------------  -------------
Revenues
                                                           (As a percent of total revenues)
<S>                                                                   <C>              <C>  
     Professional services                                             56%            54%
     License                                                           20             21
     Maintenance and other recurring                                   24             25
                                                           --------------  -------------
       Total revenues                                                 100            100
                                                           --------------  -------------
Expenses
     Professional services                                             42             43
     Product development and support                                   18             18
     Selling, general and administrative                               28             30
                                                           --------------  -------------
       Total expenses                                                  88             91
                                                           --------------  -------------
       Operating income                                                12              9
     Other income (expense), net                                        0             (2)
                                                           --------------  -------------
       Income before income taxes                                      12              7
     Provision for income taxes                                         5              3
                                                           --------------  -------------
       Net income                                                       7%             4%
                                                           ==============  =============
</TABLE>


                                       35
<PAGE>


Fiscal Year Ended July 31, 1998  Compared to Fiscal Year Ended July 31, 1997 (on
a Pro Forma Basis)


Revenues

     Revenues for the fiscal year ended July 31, 1998  increased 18% compared to
pro forma  total  revenues  for the prior  year  period due  primarily  to a 23%
increase in  professional  services  revenues.  Professional  services  revenues
increased due to significant increases in consulting and implementation services
to the insurance and utilities industries and increases in the print outsourcing
business during fiscal 1998. In May 1998, PMSC terminated its print  outsourcing
agreement;  accordingly, print outsourcing revenues are expected to decline from
fiscal year 1998 levels until the Company is able to replace this  business with
new business.  License  revenues  increased 9% in the fiscal year ended July 31,
1998 due primarily to increases in license  revenues to the utilities  industry.
Maintenance and other recurring  revenues increased 15% in the fiscal year ended
July 31, 1998 due to an expanded  number of  customers  utilizing  the  combined
companies' product offerings.

Professional services expense

     Professional  services expense increased 15% for the fiscal year ended July
31, 1998  compared to pro forma  expense for the prior year period due primarily
to  increased   staffing  and  related  costs  as  the   professional   services
organizations were expanded.  Professional  services expense represented 75% and
79% of professional services revenues for the years ended July 31, 1998 and 1997
(on a pro forma  basis),  respectively.  The decrease in cost as a percentage of
professional  services  revenues is due primarily to replacement of lower margin
third-party  revenues  with more  profitable  direct  business and  efficiencies
achieved from the Merger.

Product development and support expense

     Product  development and support expense  increased 22% for the fiscal year
ended July 31, 1998 as  compared to pro forma  expense for the prior year period
as the Company continued to develop new technologies,  including  integration of
the EZPower and Maitland products with its existing product  offerings,  as well
as enhance and update its existing product  offerings.  As a percentage of total
revenues,  product  development  and support  expense was 18% for both the years
ended July 31, 1998 and 1997 (on a pro forma basis).

Selling, general and administrative expense

     Selling,  general and  administrative  expense  increased 7% for the fiscal
year ended July 31,  1998 as  compared  to pro forma  expense for the prior year
period. As a percentage of total revenues,  these expenses  decreased to 28% for
the year ended July 31, 1998 from 30% for the year ended July 31, 1997 (on a pro
forma  basis) as a result of increased  economies of scale from higher  revenues
and the impact of combined  operations.  The Company  attributes  the  aggregate
increase primarily to selling costs related to the increase in revenues, as well
as legal defense and settlement costs incurred in fiscal 1998.

Other income (expense), net

     Other income  (expense),  net  decreased 74% for the fiscal year ended July
31, 1998  compared to pro forma other income  (expense),  net for the prior year
period due primarily to the repayment of the Company's outstanding dept in April
1998 with the receipt of IPO  proceeds.  Interest  income  increased  during the
fourth  quarter  of  fiscal  1998 as a result of the  significant  cash and cash
equivalent balances.


                                       36
<PAGE>


Provision for income taxes

     The effective tax rates for both the years ended July 31, 1998 and 1997 (on
a pro forma basis) were  approximately  41%. These rates differ from the federal
statutory rate due primarily to non-deductible  goodwill amortization related to
the Merger and recent acquisitions.

Net income

     Net income  increased  by  approximately  $1.5  million for the fiscal year
ended  July 31,  1998 as  compared  to pro forma net  income  for the prior year
period due primarily to an 18% increase in revenues,  partially  offset by a 14%
increase in operating expenses.

Liquidity and Capital Resources

     At July 31, 1998, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $14.4 million.  The Company completed an IPO in the
form  of  a  rights  offering  to  Safeguard  Scientifics,   Inc.  ("Safeguard")
stockholders  in April 1998.  Net  proceeds to the Company  from this  offering,
after   deduction  of  the   underwriting   discount  and  IPO  expenses,   were
approximately $18.5 million.

     Cash and cash equivalents for the fiscal year ended July 31, 1998 increased
$11.6 million due  primarily to the receipt of IPO proceeds  offset by repayment
of  outstanding  debt.  Cash flows  provided by operating  activities  were $5.9
million  as the  result of  profitable  operations  and  various  other cash and
non-cash operating  activities.  Cash flows from investing  activities used $2.5
million in cash primarily for  development of capitalized  software and purchase
of fixed assets.  Cash flows from financing  activities provided $8.2 million as
the  result of the  receipt  of IPO  proceeds  which  were  partially  offset by
repayment of $11.9 million of debt.

     Working  capital was $16.0  million at July 31,  1998,  compared  with $1.6
million at July 31, 1997.  The increase in working  capital is primarily  due to
the receipt of IPO proceeds in April 1998.

     In  connection  with  the  Merger,  the  Company  assumed  a $10.0  million
revolving credit facility from FormMaker.  This credit facility was renegotiated
in September 1997.  Under the new agreement,  $3.5 million bears interest at the
bank's prime rate less 0.25%,  or 8.25% as of July 31, 1998.  The remaining $6.5
million  bears  interest at the bank's prime rate, or 8.50% as of July 31, 1998,
and  is   collateralized   by  substantially   all  of  the  Company's   assets.
Approximately  $6.5 million of the credit facility may be converted in September
1998 into a term loan  provided  the  Company  has given the bank  thirty  days'
written notice and is not in default.  The principal balance of the term loan is
payable in  twenty-four  monthly  installments.  The Company does not anticipate
converting the $6.5 million portion of the credit facility into a term loan. The
$3.5  million  portion of the credit  facility is due and payable in March 1999.
Under the credit facility, the Company is required to maintain certain financial
covenants.  As of July 31,  1998 there  were no  borrowings  under  this  credit
facility.

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


                                       37
<PAGE>


markets.   The  Company's   business  is  not   capital-intensive   and  capital
expenditures in any given year are ordinarily not significant.

     The Company  currently  anticipates  that  amounts  available  from the IPO
proceeds,  its existing credit facility, and cash generated from operations will
be sufficient to satisfy its operating cash needs for the foreseeable future.


                                       38
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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










                        Report of Independent Accountants




To the Board of Directors and Stockholders
   of DOCUCORP INTERNATIONAL, INC.

     In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related consolidated  statements of operations,  of cash flows and of changes in
stockholders'  equity present fairly,  in all material  respects,  the financial
position of DocuCorp  International,  Inc. and its subsidiaries at July 31, 1998
and 1997,  and the results of their  operations and their cash flows for each of
the three years in the period ended July 31, 1998, 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 our audits
provide a reasonable basis for the opinion expressed above.



PricewaterhouseCoopers LLP

Dallas, Texas
September 9, 1998


                                       39
<PAGE>


                          DocuCorp International, Inc.
                           Consolidated Balance Sheets
                             July 31, 1998 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                        1998                1997
                                                                                                   ------------        ------------
Assets
  Current assets
<S>                                                                                                <C>                 <C>         
    Cash and cash equivalents                                                                      $ 14,439,807        $  2,869,458
    Accounts receivable, net of allowance of $950,000 and $525,000,
       respectively                                                                                  11,926,007           9,010,784
    Current portion of deferred taxes                                                                   469,086             380,925
    Income tax refund receivable                                                                        706,049             503,888
    Other current assets                                                                              1,244,684             553,977
                                                                                                   ------------        ------------
          Total current assets                                                                       28,785,633          13,319,032

  Fixed assets, net of accumulated depreciation of $3,257,705 and $1,983,864,
       respectively                                                                                   2,979,648           3,087,578
  Software, net of accumulated amortization of $7,047,098 and $5,397,344,
       respectively                                                                                   8,136,574           7,408,113
  Deferred taxes                                                                                        670,719           1,029,473
  Goodwill, net of accumulated amortization of $1,126,924 and $160,522,
       respectively                                                                                  11,021,993           7,544,535
  Other assets                                                                                          325,934             309,434
                                                                                                   ------------        ------------
                                                                                                   $ 51,920,501        $ 32,698,165
                                                                                                   ============        ============

Liabilities and stockholders' equity (deficit)
  Current liabilities
         Accounts payable                                                                          $  1,750,098        $  1,164,012
         Accrued liabilities:
             Accrued compensation                                                                     1,207,166           1,142,199
             Other                                                                                    1,077,359           1,532,300
         Income taxes payable                                                                           223,589             412,000
         Current portion of long-term debt                                                                    0             191,652
         Current portion of obligations under capital leases                                             63,429             454,199
         Deferred revenue                                                                             8,476,022           6,778,212
                                                                                                   ------------        ------------
          Total current liabilities                                                                  12,797,663          11,674,574
   Obligations under capital leases                                                                      23,909              33,993
   Long-term debt                                                                                             0           8,759,156
   Other long-term liabilities                                                                          666,149             631,748
   Redeemable Class B common stock, 7,000,000 shares authorized, $.01 
     par value, 5,623,229 shares issued and outstanding at redemption
     value at July 31, 1997                                                                                   0          19,118,978
   Stockholders' equity (deficit):
     Common stock, 50,000,000 shares authorized, $.01 par value,
        16,525,561 and 5,133,353 shares issued and outstanding,
        respectively                                                                                    165,256              51,334
   Additional paid-in capital                                                                        47,561,714           4,912,649
   Retained deficit                                                                                  (9,228,765)        (12,413,092)
   Notes receivable from stockholders                                                                   (65,425)            (71,175)
                                                                                                   ------------        ------------
          Total stockholders' equity (deficit)                                                       38,432,780          (7,520,284)
                                                                                                   ------------        ------------
                                                                                                   $ 51,920,501        $ 32,698,165
                                                                                                   ============        ============
</TABLE>

                                       40

          See accompanying notes to consolidated financial statements
<PAGE>


                          DocuCorp International, Inc.
                      Consolidated Statements of Operations
                For the Years Ended July 31, 1998, 1997, and 1996
================================================================================
<TABLE>
<CAPTION>

                                                                               1998            1997            1996
                                                                            -----------    ------------     ----------
Revenues
<S>                                                                         <C>             <C>             <C>      
     Professional services                                                  $25,532,869     $ 6,150,625     $  819,034
     License                                                                  8,885,308       4,092,491      4,793,031
     Maintenance and other recurring                                         10,828,671       7,259,702      5,858,256
                                                                            -----------    ------------     ----------
                Total revenues                                               45,246,848      17,502,818     11,470,321
                                                                            -----------    ------------     ----------
Expenses
     Professional services                                                   19,032,419       3,999,504        655,911
     Product development and support                                          8,318,307       4,955,617      4,405,932
     Selling and marketing                                                    5,954,162       2,246,270      1,665,961
     General and administrative                                               6,340,207       2,383,233      1,326,141
     Merger-related charges                                                           0      21,377,855              0
                                                                            -----------    ------------     ----------
                Total expenses                                               39,645,095      34,962,479      8,053,945
                                                                            -----------    ------------     ----------
                Operating income (loss)                                       5,601,753     (17,459,661)     3,416,376
     Other income (expense), net                                               (177,426)        213,874        239,904
                                                                            -----------    ------------     ----------
                Income (loss) before income taxes                             5,424,327     (17,245,787)     3,656,280
     Provision (benefit) for income taxes                                     2,240,000      (1,144,000)     1,335,000
                                                                            -----------    ------------     ----------
                Net income (loss)                                            $3,184,327    $(16,101,787)    $2,321,280
                                                                            ===========    ============     ==========

Net income (loss) per share:
     Basic                                                                  $      0.25    $      (2.18)    $     0.37
                                                                            -----------    ------------     ----------
     Diluted                                                                $      0.21    $      (2.18)    $     0.28
                                                                            -----------    ------------     ----------
Weighted average shares outstanding used in the 
 net income (loss) per share calculation:
     Basic                                                                   12,587,473       7,377,271      6,201,684
                                                                            -----------    ------------     ----------
     Diluted                                                                 14,864,571       7,377,271      8,381,170
                                                                            ===========    ============     ==========
</TABLE>


                                       41

<PAGE>


                          DocuCorp International, Inc.
                      Consolidated Statements of Cash Flows
                For the Years Ended July 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                                                               1998            1997             1996
                                                                            -----------    ------------     ----------
<S>                                                                         <C>             <C>             <C>       
Cash flows from operating activities
    Net income (loss)                                                       $ 3,184,327    $(16,101,787)    $2,321,280
    Adjustments to reconcile net income (loss) to
      net cash provided by operating activities:
          Charge for acquired in-process technology                                   0      13,500,000              0
          Stock option compensation expense                                      20,119       7,698,143         49,988
          Depreciation                                                        1,273,905         573,645        363,931
          Amortization of capitalized software                                1,786,653         930,829        813,832
          Amortization of goodwill                                              966,402         160,522              0
          Tax benefit from utilization of net operating loss                    350,434               0              0
          Increase (decrease) in allowance for doubtful
              accounts                                                          403,806         (63,363)        25,000
          Changes in assets and liabilities, net of effects
              from acquisitions:
              Increase in accounts receivable                                (3,234,250)        (76,411)       (22,131)
              (Increase) decrease in income tax refund receivable              (202,161)       (503,888)       222,033
              (Increase) decrease in deferred tax assets                          1,711      (1,010,930)       (56,113)
              Increase in other assets                                          (44,512)        (23,340)       (74,642)
              Increase (decrease) in accounts payable                           507,778        (174,940)       (96,939)
              Increase (decrease) in accrued liabilities                       (615,231)        432,989         71,701
              Increase (decrease) in income taxes payable                      (188,413)       (243,264)        65,033
              Increase in deferred revenue                                    1,667,146       1,326,875        438,841
              Increase (decrease) in deferred tax liabilities                         0        (383,070)       226,158
                                                                            -----------    ------------     ----------
                   Total adjustments                                          2,693,387      22,143,797      2,026,692
                                                                            -----------    ------------     ----------
                   Net cash provided by operating activities                  5,877,714       6,042,010      4,347,972
                                                                            -----------    ------------     ----------
 
Cash flows from investing activities
    (Purchase) sale of short-term investments, net                                    0       5,308,806     (2,308,806)
    Purchase of fixed assets                                                   (994,707)       (547,301)      (356,017)
    Capitalized software development costs                                   (1,515,114)       (997,263)      (533,649)
    Net cash acquired in business combinations                                   30,803       1,714,416              0
                                                                            -----------    ------------     ----------
                  Net cash provided by (used in) investing activities        (2,479,018)      5,478,658     (3,198,472)
                                                                            -----------    ------------     ----------
Cash flows from financing activities
    Repayment of debt                                                       (11,877,132)     (2,448,011)    (1,534,430)
    Principal payments under capital lease obligations                         (400,855)       (148,361)       (56,388)
    Purchase of tendered stock and options                                            0      (5,192,293)             0
    Preferred stock dividend                                                          0      (2,807,709)             0
    Proceeds from exercise of warrants and options                            1,056,013          15,644         45,432
    Proceeds from sale of warrants                                                    0           6,100              0
    Tax benefit related to stock option exercises                               531,050          14,404         14,922
    Net proceeds from issuance of stock                                      18,589,153               0              0
    Proceeds from repayment of note receivable from stockholder                   5,750               0              0
    Proceeds from stock issued to employees under Employee
       Stock Purchase Plan                                                      267,674               0              0
                                                                            -----------    ------------     ----------
                  Net cash provided by (used in) financing activities         8,171,653     (10,560,226)    (1,530,464)
                                                                            -----------    ------------     ----------
Net increase (decrease) in cash and cash equivalents                         11,570,349         960,442       (380,964)
Cash and cash equivalents at beginning of year                                2,869,458       1,909,016      2,289,980
                                                                            -----------    ------------     ----------
Cash and cash equivalents at end of year                                    $14,439,807    $  2,869,458     $1,909,016
                                                                            ===========    ============     ==========
</TABLE>

            See non-cash activities disclosed in Notes 3, 5, and 10.


                                       42

          See accompanying notes to consolidated financial statements.

<PAGE>


                          DocuCorp International, Inc.
           Consolidated Statements of Changes in Stockholders' Equity
                For the Years Ended July 31, 1998, 1997 and 1996
================================================================================

<TABLE>
<CAPTION>

                                                                       Additional    Retained
                                          Preferred         Common       Paid-in     Earnings       Notes
                                            Stock           Stock        Capital     (Deficit)    Receivable      Total
                                         ------------ ------------- ------------- ------------- ------------ -------------
<S>             <C> <C>                   <C>           <C>         <C>            <C>          <C>          <C>        
Balance at July 31, 1995                  $ 202,037     $  34,944   $ 1,193,636    $ 4,175,124  $         0  $ 5,605,741
Exercise of warrants  to purchase
        329,735 shares of Common Stock                      3,298        (1,396)                                   1,902
Exercise of stock options to purchase
        223,798 shares of Common Stock                      2,238        41,292                                   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        40,480     1,298,442      6,496,404            0    8,037,363
Exercise of stock options to purchase
     34,339 and 520 shares of Common
     Stock and Class B common stock,
     respectively                                             343        13,538                                   13,881
Payment of preferred stock dividend                                                 (2,807,709)               (2,807,709)
Purchase of 865,513 shares of tendered
     Common Stock                                          (8,656)   (2,487,749)                              (2,496,405)
Conversion of Image Sciences common
     stock and preferred stock to
     5,622,709
     shares of Class B common stock        (202,037)      (31,981)  (18,883,193)                             (19,117,211)
Conversion of FormMaker common stock to
     5,114,789 shares of Common Stock                      51,148    19,948,852                               20,000,000
Assumption of notes receivable from
     stockholders                                                                                   (71,175)     (71,175)
Sale of warrants to purchase 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        51,334     4,912,649    (12,413,092)     (71,175)  (7,520,284)
Exercise of stock options to purchase
     885,993 shares of Common Stock                         8,860     1,047,153                                1,056,013
Conversion of 5,623,229 shares of Class B
     common stock to Common Stock                          56,232    19,062,746                               19,118,978
Issuance of 4,000,000 shares of Common
     Stock in initial public offering                      40,000    18,549,153                               18,589,153
Repayment of note receivable from                                                                     5,750        5,750
stockholder
Acquisition of EZPower Systems, Inc.                        6,500     2,593,500                                2,600,000
Acquisition of Maitland Software, Inc.                      1,700       578,300                                  580,000
Issuance of 62,982 shares of Common
     Stock to employees under Employee
     Stock Purchase Plan                                      630       267,044                                  267,674
Compensation expense related to
     non-qualified stock options                                         20,119                                   20,119
Tax benefit related to exercise of
     non-qualified stock options                                        531,050                                  531,050

</TABLE>

                                       43

          See accompanying notes to consolidated financial statements.

<PAGE>

                          DocuCorp International, Inc.
           Consolidated Statements of Changes in Stockholders' Equity
                For the Years Ended July 31, 1998, 1997 and 1996
================================================================================

<TABLE>
<S>                                      <C>            <C>         <C>            <C>            <C>        <C>        
Net income                                                                           3,184,327                 3,184,327
                                         ------------ ------------- ------------- ------------- ------------ -------------
Balance at July 31, 1998                 $        0     $ 165,256   $47,561,714    $(9,228,765)   $ (65,425) $38,432,780
                                         ------------ ------------- ------------- ------------- ------------ -------------

</TABLE>

                                       44

          See accompanying notes to consolidated financial statements.

<PAGE>

Note 1 -  Organization and Summary of Significant Accounting Policies

DocuCorp  International,   Inc.  ("DocuCorp"  or  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, EZPower Systems, Inc. ("EZPower"), and
Maitland Software,  Inc.  ("Maitland").  Results of FormMaker and its subsidiary
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.  Results of EZPower and Maitland are included from the
effective date of the acquisitions, March 31, 1998. 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 distributing
business  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  bankers
acceptance and repurchase agreements. Cash equivalents are stated at cost, which
approximates  fair market value.  Included in cash and cash  equivalents at July
31, 1998 is a $3,000,000 note  receivable  from a stockholder  which is due upon
demand (see also Note 11).

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. At July 31, 1998
and 1997,  the  Company  did not have any  short-term  investments  outstanding.
Interest income from such  investments was $0,  $172,572,  and $227,113 in 1998,
1997, and 1996, respectively.

Accounts receivable

Included in accounts  receivable at July 31, 1998 and 1997 are unbilled  amounts
of $1,381,174 and $1,776,322, respectively. Such amounts have been recognized as
revenue under the


                                       45
<PAGE>


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.

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 1998, 1997,
and 1996, the Company charged to expense $5,203,612, $2,155,435, and $1,851,516,
respectively,   for  research  and  development  costs  incurred  prior  to  the
establishment  of the  technological  feasibility  of products.  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 eight to 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, the intangible  assets
are adjusted for impairment to a level  commensurate with a discounted cash flow
analysis of the underlying assets.

Stock split

In December  1997, the Company  declared a six-for-five  stock split effected in
the form of a stock dividend to  stockholders of record on December 9, 1997. All
references in the consolidated financial statements to shares, share prices, per
share  amounts,  and  stock  plans  have  been  retroactively  adjusted  for the
six-for-five stock split.

Income taxes

Income  taxes are  presented  pursuant  to  Statement  of  Financial  Accounting
Standards No. 109, "Accounting for Income Taxes" (see also Note 10).

Net income (loss) per share


                                       46
<PAGE>


The  Company's  basic and  diluted net income  (loss) per share are  computed in
accordance with Statement of Financial  Accounting  Standards No. 128, "Earnings
Per Share" ("SFAS 128"). Concurrent with the completion of the Company's Initial
Public Offering  ("IPO"),  all  outstanding  shares of Class B common stock were
converted  into shares of Common Stock on a  one-for-one  basis.  Both basic and
diluted net income (loss) per share have been computed  assuming the  conversion
of Class B common stock occurred as of the date of original issuance. Due to the
adoption  of SFAS 128 and the  conversion  feature of Class B common  stock into
Common Stock,  which conversion  occurred on April 9, 1998, the historical basic
and  diluted  calculations  include the effect of  conversion  of Class B common
stock as of the date of original issuance, which were previously reported in pro
forma computations prior to conversion.

Basic net income (loss) per share is computed using the weighted  average number
of common  shares  outstanding.  Diluted net income (loss) per share is computed
using the weighted  average number of common shares  outstanding and the assumed
exercise of stock  options  and  warrants  (using the  treasury  stock  method).
Following is a reconciliation  of the shares used in computing basic and diluted
net income (loss) per share for the fiscal years indicated:

<TABLE>
<CAPTION>

                                                    1998             1997             1996
                                               -------------    -------------    -------------
<S>                                              <C>               <C>              <C>
Shares used in computing basic net
   income (loss) per share                       12,587,473        7,377,271        6,201,684

Dilutive effect of stock options and warrants     2,277,098                0        2,179,486
                                               -------------    -------------    -------------

Shares used in computing diluted net
   income (loss) per share                       14,864,571        7,377,271        8,381,170
                                               =============    =============    =============
</TABLE>


Options to purchase  69,289 shares of Common Stock at an average  exercise price
of $5.82 per option and expiration dates ranging from 2000-2007 at July 31, 1998
were anti-dilutive and are not included in the computation of diluted net income
per share  because the  options'  exercise  price was  greater  than the average
market price of the Common Stock for the period.

Stock-based compensation

During fiscal 1997, the Company  adopted the disclosure  provisions of Statement
of  Financial   Accounting   Standards  No.  123,  "Accounting  for  Stock-Based
Compensation"  ("SFAS 123").  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 9
contains  a summary  of the pro forma  effects  on  reported  net income and net
income  per share for  fiscal  1998,  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, 1998 and 1997, and
the reported amounts of revenues and expenses for the periods then ended.
Actual results could differ from those estimates.

Advertising costs


                                       47
<PAGE>


The Company's policy for advertising costs is to expense such costs as incurred.
Advertising  expenses  for 1998,  1997,  and 1996 were  $324,207,  $59,098,  and
$57,471, respectively.


                                       48
<PAGE>


Recently issued accounting pronouncements

During  1997,  the  Financial   Accounting   Standards   Board  ("FASB")  issued
pronouncements  relating  to the  presentation  and  disclosure  of  information
related to the Company's  capital  structure  (SFAS 129),  comprehensive  income
(SFAS  130),  and  segment  data (SFAS  131).  During  1998,  the FASB  issued a
pronouncement  relating to derivative  instruments and hedging  activities (SFAS
133). The Company adopted the provisions  relating to capital  structure for the
year ended July 31,  1998,  the effect of which was not  significant.  The other
pronouncements,  if  applicable,  are required to be adopted for the year ending
July 31, 1999. The adoption of these  pronouncements  is not expected to have an
impact on the Company's  financial  position and results of  operations  but may
change the  presentation  of certain of the Company's  financial  statements and
related notes and data thereto.

In October 1997, the Accounting  Standards  Executive Committee issued Statement
of  Position  No.  97-2,   "Software  Revenue  Recognition"  ("SOP  97-2")  that
supersedes Statement of Position No. 91-1, "Software Revenue  Recognition".  SOP
97-2 is effective for transactions  entered into in fiscal years beginning after
December 15, 1997. The Company  believes the adoption of this statement will not
have a  material  effect on the  Company's  financial  position  or  results  of
operations.


In March 1998, the Accounting  Standards Executive Committee issued Statement of
Position  No.  98-1,  "Accounting  for Costs of Computer  Software  Developed or
Obtained for Internal Use" ("SOP 98-1").  SOP 98-1  requires  computer  software
costs  related to internal  use software  that are  incurred in the  preliminary
project  stage to be expensed as incurred.  SOP 98-1 is effective  for financial
statements for fiscal years beginning after December 15, 1998. Accordingly,  the
Company will adopt SOP 98-1 for the year ended July 31,  1999.  The Company does
not  believe  the  adoption  of SOP 98-1  will  have a  material  effect  on the
Company's financial position or results of operations.


Note 2 -  Fixed assets

Fixed asset balances at July 31, 1998 and 1997 are as follows:

                                                     1998                1997
                                                 -----------        -----------
Computer equipment                               $ 4,767,030        $ 3,753,129
Furniture and fixtures                             1,257,839          1,120,771
Leasehold improvements                               212,484            197,542
                                                 -----------        -----------
                                                   6,237,353          5,071,442
Less accumulated depreciation                     (3,257,705)        (1,983,864)
                                                 -----------        -----------
                                                 $ 2,979,648        $ 3,087,578
                                                 ===========        ===========

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 0.6818 shares of Company
Common  Stock and options or warrants to purchase  Company  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


                                       49
<PAGE>


to purchase common stock that was unvested as of July 31, 1997 was exchanged for
options to  purchase  1.4446  shares of Company  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
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 Merger 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
Basic net income per share                      $      0.16      $      0.01
Diluted net income per share                    $      0.14      $      0.01

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 receivable from stockholders                            71,175
                                                      ----------------
                                                        $ 20,374,630
                                                      ================

Note 4 -  Initial Public Offering

The  Company  completed  an IPO in the form of a rights  offering  to  Safeguard
Scientifics,  Inc.  ("Safeguard")  stockholders  in April  1998.  The  Company's
Registration  Statement on Form S-1 (File No. 333-44427) with respect to the IPO
was declared effective on February 24, 1998. The Company's Common Stock


                                       50
<PAGE>


began  trading on the Nasdaq  National  Market under the symbol DOCC on April 6,
1998. The Company sold 4,000,000  shares of Common Stock at a per share price of
$5.00. Net proceeds to the Company, after deduction of the underwriting discount
and IPO expenses,  were approximately $18.5 million.  Selling  stockholders sold
3,460,000  shares at a per share price of $5.00. The Company did not receive any
proceeds from the sale of shares by the selling  stockholders.  Concurrent  with
the  completion of the IPO, the Company used  approximately  $6.4 million of the
net proceeds to repay (i)  approximately  $3.0  million due under the  Company's
line of credit with  NationsBank,  N.A.,  (ii)  approximately  $3.1  million due
pursuant to three subordinated notes to Safeguard, Technology Leaders II, and TL
Ventures  Third Corp.  which were due in full at the earlier of the closing of a
public offering  yielding net proceeds to the Company in excess of $13.0 million
or May 15, 2000, and (iii)  approximately  $336,000 due to Safeguard pursuant to
two notes assumed by the Company in connection with the Merger.

Note 5 -  Acquisitions

On March 31,  1998,  the  Company  completed  the  acquisitions  of EZPower  and
Maitland.  EZPower  develops,   markets,  and  supports  flexible  Internet  and
client/server  solutions  for  document  management,  workflow,  and web content
management  software  products.  The  Company  acquired  all of the  outstanding
capital stock of EZPower in exchange for 650,000 shares of the Company's  Common
Stock,  repayment of approximately $2.5 million of EZPower's  indebtedness,  and
payment of certain  contingent cash consideration  based on future  performance.
Maitland has developed and recently  commenced  marketing a data acquisition and
transformation  program which allows users the ability to more easily  interface
existing  applications  and  databases  with  document  printing and  publishing
software. The Company issued 170,000 shares of its Common Stock as consideration
for the  Maitland  acquisition.  The Company has the right to  repurchase  up to
100,000 of those shares based upon  cumulative  licensing and maintenance of the
Maitland  software  product  through  the  period  ending  July 31,  2001.  Both
acquisitions  were  recorded  under  the  purchase  method  of  accounting,  and
accordingly,  the results of  operations of EZPower and Maitland for all periods
subsequent to the acquisition  date are included in the  consolidated  financial
statements.  The aggregate purchase prices,  including direct acquisition costs,
were  $5,933,375 and $605,419 which have been allocated to the fair value of net
identifiable  assets in the acquisitions of EZPower and Maitland,  respectively.
The excess of the  purchase  price  over the fair value of the net  identifiable
assets  acquired of  $4,753,306  and  $583,373  related to the  acquisitions  of
EZPower and Maitland,  respectively,  has been recorded as goodwill and is being
amortized on a straight-line basis over eight years.

Note 6 -  Lease Commitments

The Company  leases  computer  equipment  under  noncancelable  leases which are
classified  as capital  leases and included in fixed assets at July 31, 1998 and
1997 as follows:


                                                   1998             1997
                                                ---------       ----------
Computer equipment                              $ 498,142       $  468,551
Office equipment                                  326,042          326,042
                                                ---------       ----------
                                                  824,184          794,593
Less accumulated depreciation                    (323,269)         (95,820)
                                                ---------       ----------
                                                $ 500,915       $  698,773
                                                =========       ==========

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,
1998, 1997, and 1996 totaled $2,637,820,  $926,344, and $383,438,  respectively.
Generally,  the  Company's  leases  provide for renewals for various  periods at
stipulated rates.


                                       51
<PAGE>


Future  minimum  lease  obligations  on leases in effect at July 31, 1998 are as
follows:

                                                   Capital       Operating
                                                   Leases         Leases
                                                 ---------      -----------
 1999                                            $  65,979      $ 2,932,350
 2000                                               24,853        2,944,547
 2001                                                    0        1,969,799
 2002                                                    0        1,737,236
 2003                                                    0          762,301
 Thereafter                                              0          580,904
                                                 ---------      -----------  
 Minimum lease payments                             90,832      $10,927,137
 Less amount representing  interest                 (3,494)     ===========
                                                 ---------     
 Present value of minimum lease payments            87,338
 Less current portion                              (63,429)
                                                 ---------     
Obligations under capital leases                 $  23,909
                                                 =========

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.


Note 7 - Long-Term Debt

At July 31, 1998, the Company did not have any long-term debt  outstanding.  All
long-term debt of the Company was repaid in full with proceeds from the IPO.

Long-term debt consisted of the following at July 31, 1997:

Revolving credit facility with bank                $ 5,471,634
Notes payable to Safeguard                             479,174
Subordinated notes payable to                  
   Safeguard, Technology                       
   Leaders II, L.P., and TL                    
   Ventures Third Corp.                              3,000,000
                                                  -------------
                                                     8,950,808
Less current portion of debt                          (191,652)
                                                  -------------
                                                   $ 8,759,156
                                                  =============
                                      
In  connection  with the Merger,  the Company  assumed a  $10,000,000  revolving
credit  facility  from  FormMaker.  This credit  facility  was  renegotiated  in
September 1997. Under the new agreement, $3,500,000 bears interest at the bank's
prime rate less 0.25%,  or 8.25% as of July 31, 1998.  The remaining  $6,500,000
bears  interest at the bank's prime rate,  or 8.50% as of July 31, 1998,  and is
collateralized  by  substantially  all of the  Company's  assets.  Approximately
$6,500,000 of the credit facility may be converted in September 1998 into a term
loan provided the Company has given the bank thirty days' written  notice and is
not in default. The principal balance of the term loan is payable in twenty-four
monthly  installments.  The Company  does not expect to convert  the  $6,500,000
portion of the credit  facility into a term loan. The $3,500,000  portion of the
credit facility is due and payable in March 1999. Under the credit facility, the
Company is required  to maintain  certain  financial  covenants.  As of July 31,
1998, there were no borrowings under this credit facility.


                                       52
<PAGE>


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 were due for
thirty-six  months  commencing  February 1, 1997.  The notes were repaid in full
with proceeds from the IPO.

Concurrent with the Merger,  stockholders  loaned the Company  $3,000,000 in the
form of  subordinated  notes.  The notes bore interest at prime plus 1% and were
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 were
unsecured  obligations of the Company and were  subordinated to all senior debt.
The notes were repaid in full with proceeds from the IPO.

The Company made  interest  payments,  principally  related to  long-term  debt,
totaling  $406,045,  $175,339,  and  $183,508 for the years ended July 31, 1998,
1997, and 1996, respectively.

Note 8 -  Redeemable Class B Common Stock

If the Company did not  consummate  by January 31, 1998 an  underwritten  public
offering of  securities in which the managing  underwriter  valued the equity of
the  Company at  $62,100,000  or more,  holders  of Class B common  stock of the
Company  had the  option to redeem  such  shares.  This  redemption  option  was
exercisable  from February 1, 1998 through  February 1, 1999 at $3.40 per share;
however,  no shares of Class B common stock were presented for redemption.  Upon
consummation of the IPO in April 1998, each issued and outstanding  share of the
Company's Class B common stock automatically converted into Company Common Stock
on a one-for-one basis.

Note 9 -  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, 1998,  there were no issued or outstanding  shares of
preferred stock.

Employee benefit plans

The  Company's  401(k) plan, as defined by the United  States  Internal  Revenue
Code, allows participants to contribute a percentage of their compensation.  The
plan also allows for a  discretionary  matching  contribution  by the Company as
determined by the Company's board of directors.

During the year ended July 31,  1998,  the  Company  adopted an  employee  stock
purchase plan which allows eligible  employees to purchase  Company Common Stock
at a 15% discount of market  value.  An  aggregate  of 600,000  shares of Common
Stock have been  reserved  for  issuance  upon  purchases  pursuant to the stock
purchase  plan. At July 31, 1998, the Company has issued 62,982 shares under the
plan.

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


                                       53
<PAGE>


stock options at an option price per share determined by the board of directors.
Under this plan, the Company has reserved 980,000 shares for issuance as of July
31, 1998.  Options  generally expire ten years from the date of grant.  Activity
under all plans is summarized as follows:

                                                       Shares Under
                                                    Outstanding Options
                                            ------------------------------------
                                                                     Weighted
                                              Outstanding            Average
                                               Options            Exercise Price
                                            -------------         --------------
Balances at July 31, 1995                     3,304,319               $ .21
   Granted                                      336,302                 .73
   Exercised                                   (223,798)                .19
   Expired                                     (399,750)                .08
                                            -----------               -----
Balances at July 31, 1996                     3,017,073                 .29
   Exercised                                    (34,859)                .45
   Expired                                      (47,845)                .59
   Purchase of options                         (937,357)                .01
   FormMaker options assumed                    973,116                3.43
                                            -----------               -----
Balances at July 31, 1997                     2,970,128                1.40
   Granted                                      767,000                3.72
   Exercised                                   (885,993)               1.19
   Expired                                     (286,540)               3.34
                                            -----------               -----
Balances at July 31, 1998                     2,564,595               $1.91
                                            ===========               =====

Of the  outstanding  options at July 31, 1998,  the weighted  average  remaining
contractual life is 6.75 years.  Options to purchase 1,727,64 9 shares of Common
Stock at a weighted average exercise price of $1.42 are vested at July 31, 1998.

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 1998, 1997, and
1996 was $0.59, $3.40, and $0.73 per option, respectively. The fair value of the
Company's  stock-based awards to employees was estimated using the Black-Scholes
option pricing model with the following  weighted  average  assumptions used for
grants in 1998, 1997 and 1996,  respectively:  risk-free interest rates of 5.76,
5.75, and 5.90 percent; no expected dividend yields; and expected lives of 3.00,
1.75, and 3.25 years. As no grants were made subsequent to the Company's IPO, no
volatility was considered in the calculation for 1998, 1997, or 1996.

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:


                                       54
<PAGE>



                                    1998              1997                1996
                                    ----              ----                ----
Net income (loss):
     As reported                 $3,184,327       $(16,101,787)       $2,321,280
     As adjusted                 $2,872,170       $(16,119,086)       $2,143,767
                                                                     
Net income (loss) per share:                                         
     As reported                                                     
        Basic                    $     0.25       $      (2.69)       $     0.37
        Diluted                  $     0.21       $      (2.69)       $     0.28
                                                                     
     As adjusted                                                     
        Basic                    $     0.23       $      (2.70)       $     0.35
        Diluted                  $     0.19       $      (2.70)       $     0.26
                                                                               
                                                                               
Warrants 

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 7). All of the above  warrants were converted
into  warrants to purchase  626,502  shares of Common  Stock based on the Merger
exchange ratios.

Warrants  to purchase  732,000  shares of Common  Stock at an exercise  price of
$4.17 per share were sold to stockholders  for $6,100 in connection with certain
stockholders'  obligations  under a  liquidity  agreement.  These  warrants  are
currently exercisable and expire May 15, 2000.


The following warrants are outstanding as of July 31, 1998:

<TABLE>
<CAPTION>

                                                                                     Exercise Price
                                                                     Warrants           Per Share
                                                                     ------------------------------
<S>                                                                  <C>                 <C>  
Warrants to Safeguard,
   Technology Leaders II, L.P., And Technology
   Leaders II Offshore C.V                                           258,330             $0.03
Warrants to a director of the Company                                122,724             $3.40
Warrants to Safeguard, Technology
   Leaders II, L.P., and TL Venture Third Corp.                      245,448             $4.25
Warrants to Safeguard, Technology
   Leaders II, L.P., and Technology Leaders II
   Offshore C.V                                                      732,000             $4.17
                                                                   ---------                  
Total                                                              1,358,502
                                                                   =========
</TABLE>


                                       55
<PAGE>


Note 10 - Income Taxes

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

<TABLE>
<CAPTION>
                                                                1998              1997               1996
                                                           -----------       -----------       -----------     
Gross deferred tax assets:
<S>                                                        <C>               <C>               <C>        
   Deferred revenue                                        $     7,090       $   128,156       $   261,500
   Loss carryforwards                                        4,209,031         2,491,006                 0
   Tax credit carryforwards                                    330,659           426,484           247,531
   Accounts receivable allowance                               346,750           178,500           119,000
   Deferred lease costs                                        232,195           204,594                 0
   Compensation expense related to stock
     options                                                 1,155,300         1,751,614            58,323
   Other                                                       302,778           290,794            77,993
                                                           -----------       -----------       -----------
                                                             6,583,803         5,471,148           764,347
                                                           -----------       -----------       -----------
Gross deferred tax liabilities:
   Capitalized software                                     (2,965,128)       (2,518,759)         (660,171)
   Other                                                      (130,086)         (149,174)          (87,778)
                                                           -----------       -----------       -----------
                                                            (3,095,214)       (2,667,933)         (747,949)
                                                           -----------       -----------       -----------
   Net                                                       3,488,589         2,803,215            16,398
                                                           -----------       -----------       -----------
   Less valuation allowance                                 (2,348,784)       (1,392,817)                0
                                                           -----------       -----------       -----------
   Net deferred tax asset                                  $ 1,139,805       $ 1,410,398       $    16,398
                                                           ===========       ===========       ===========
</TABLE>


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

<TABLE>
<CAPTION>

                                                          1998              1997                   1996
                                                     
Current tax expense:
<S>                                                        <C>               <C>               <C>        
  U.S. federal                                             $ 1,004,000       $   185,000       $ 1,048,000
  State, local, and foreign                                    264,000            65,000           125,000
                                                           -----------       -----------       -----------                 
Total current                                                1,268,000           250,000         1,173,000
                                                           -----------       -----------       -----------                 
Deferred tax expense:                                 
  U.S. federal                                               1,056,000        (1,394,000)          162,000
  State, local, and foreign                                    (84,000)                0                 0
                                                           -----------       -----------       -----------                 
Total deferred                                                 972,000        (1,394,000)          162,000
                                                           -----------       -----------       -----------                 
 Total provision (benefit)                                 $ 2,240,000      $ (1,144,000)      $ 1,335,000
                                                           ===========      ============       ===========
</TABLE>

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:

<TABLE>
<CAPTION>
                                                         1998              1997              1996
                                                     ------------      ------------       -----------

<S>                                                   <C>              <C>                <C>        
Statutory U.S. tax rates                              $ 1,898,514      $ (5,863,568)      $ 1,243,135
Increase (decrease) in rates resulting from:
   Nondeductible items:
     In-process technology                                      0         4,590,000                 0
     Goodwill                                             203,670            22,199                 0
     Other                                                 70,350            19,176            16,173
   State, local, and foreign taxes (net)                   58,291            42,900            82,500
   Other                                                    9,175            45,293            (6,808)
                                                     ------------      ------------       -----------
Effective tax rates                                   $ 2,240,000      $ (1,144,000)      $ 1,335,000
                                                     ============      ============       ===========
</TABLE>



                                       56
<PAGE>


Income taxes currently payable for the years ended July 31, 1998, 1997, and 1996
were reduced by approximately  $400,000,  $160,000,  and $170,000,  respectively
through the utilization of net operating loss and tax credit carryforwards.

At July 31, 1998, the Company had net operating loss  carryforwards  for federal
income tax purposes of  approximately  $11,500,000  that generally expire in the
years ending 2001 through 2012.

During  1998,  the Company  released  the  valuation  allowance in the amount of
$892,819 based on management's  assessment of the likelihood of realizability of
the Company's loss  carryforwards.  The reduction of the valuation allowance was
recorded as a decrease in goodwill related to the Merger.

The Company has  approximately  $331,000 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  $525,000,
$640,000,  and $700,000  during the years ended July 31, 1998,  1997,  and 1996,
respectively.

Note 11 - 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  10% and 6%,
respectively,  of the Company's fully diluted  outstanding  Common Stock at July
31, 1998. In May 1998,  the Company  executed a revolving note  receivable,  due
upon demand,  with Safeguard in the amount of $3,000,000  bearing interest equal
to Safeguard's  effective cost of borrowing under its credit  agreement with its
senior bank lender less 0.75%,  or 6.19% at July 31,  1998.  This rate is higher
than the Company is currently earning on its money market  investments.  Monthly
interest payments are due from Safeguard.

FormMaker  entered  into  various  agreements  with  a  major  customer  (Policy
Management Systems Corporation or "PMSC") to provide certain processing services
and to  grant  PMSC  certain  marketing  and  licensing  rights  to  FormMaker's
software.  Revenues from PMSC under the terms of these agreements for the fiscal
years ended July 31, 1998 and 1997 (from the date of the Merger through July 31,
1997) were  $9,938,762 and $2,998,813,  respectively.  PMSC terminated its print
outsourcing  agreement effective May 1998.  Subsequent to year end, both parties
agreed to terminate the marketing  agreement and enter into a new  non-exclusive
marketing  agreement.  The new  marketing  agreement  between  DocuCorp and PMSC
allows PMSC to market all of the  Company's  software  products to the insurance
and financial services industries  worldwide.  Other related-party  transactions
are described elsewhere in the notes to consolidated financial statements.

For the year ended July 31, 1998, one customer  accounted for  approximately 13%
of the Company's total revenues.


                                       57
<PAGE>


Note 12 - Quarterly Financial Information (Unaudited)

<TABLE>
<CAPTION>
                                       First               Second               Third               Fourth
                                      Quarter              Quarter             Quarter              Quarter
                                   ------------         ------------         ------------         ------------
<S>                                <C>                  <C>                  <C>                  <C>         
1998:

Total revenues                     $ 10,846,273         $ 11,203,476         $ 11,305,341         $ 11,891,758

Total expenses                        9,487,156            9,819,704            9,873,033           10,465,202

Operating income                      1,359,117            1,383,772            1,432,308            1,426,556

Net income                              719,205              767,903              811,112              886,107

Net income per share:
    Basic                          $       0.07         $       0.07         $       0.07         $        .05
    Diluted                        $       0.06         $       0.06         $       0.05         $       0.05


1997:

Total revenues                     $  2,823,537         $  2,604,081         $  2,834,077         $  9,241,123

Total expenses                        2,011,911            1,975,532            2,002,759           28,972,277

Operating income                        811,626              628,549              831,318          (19,731,154)

Net income (loss)                       576,940              467,973              607,693          (17,754,393)

Net income (loss) per share:
    Basic                          $       0.09         $       0.07         $       0.09         $      (1.76)
    Diluted                        $       0.07         $       0.05         $       0.07         $      (1.76)
</TABLE>


Net  income  (loss)  per share  calculations  for each  period  are based on the
weighted average number of shares outstanding in each period; therefore, the sum
of the net income (loss) per share amounts for the quarters does not necessarily
equal the year-to-date net income (loss) per share amounts.

Due to the  adoption  of SFAS 128 and the  conversion  feature of Class B common
stock into  Common  Stock,  which  conversion  occurred  on April 9,  1998,  the
historical  basic and diluted  calculations  include the effect of conversion of
Class B common stock as of the date of original issuance,  which were previously
reported in pro forma computations prior to conversion.


                                       58
<PAGE>


                                  EXHIBIT 21.1


                         Subsidiaries of the Registrant


          -    Image Sciences, Inc.
               Texas
               100% owned


          -    FormMaker Software, Inc.
               Georgia
               100% owned


          -    EZPower Systems, Inc.
               Delaware
               100% owned


          -    Maitland Software, Inc.
               Maine
               100% owned


                                       59
<PAGE>


                                                                    EXHIBIT 23.1


                       Consent of Independent Accountants


We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statement on Form S-8 (No.  333-57985)  of DocuCorp  International,  Inc. of our
report  dated  September  9,  1998,  appearing  in the  1998  Annual  Report  to
Stockholders of DocuCorp International,  Inc. which is incorporated by reference
in this Annual  Report on Form 10-K.  We also  consent to the  incorporation  by
reference of our report on the Financial  Statement  Schedule,  which appears on
page 24 of this Form 10-K.




PricewaterhouseCoopers LLP

Dallas, TX
October 29, 1998