Accelerate Diagnostics, Inc – ‘10KSB/A’ for 7/31/97

As of:  Friday, 10/31/97   ·   For:  7/31/97   ·   Accession #:  1000096-97-788   ·   File #:  0-11485

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Amendment to Annual Report — Small Business   —   Form 10-KSB
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Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB/A     Amendment to Annual Report -- Small Business          48    245K 
 2: EX-27       Financial Data Schedule                                1      8K 

10KSB/A   —   Amendment to Annual Report — Small Business
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 FORM 10-KSB/A
 U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 
OF 1934                                                       

For the fiscal year ended:  July 31, 1997                     

[ ]      TRANSITION  REPORT  UNDER  SECTION  13 OR  15(d)  OF THE  SECURITIES   
         EXCHANGE ACT OF 1934 For the transition period from  _______________ to
________________                                              

Commission file number 0-11485                              

ACCELR8 TECHNOLOGY CORPORATION
------------------------------
(Name of small business issuer in its charter)

Colorado                                        84-1072256    
--------                                        ----------    
(State or other jurisdiction                          (I.R.S. Employer          
of incorporation or organization)                   Identification No.)         

303 East Seventeenth Avenue, Suite 108, Denver, Colorado 80203
--------------------------------------------------------------
(Address of principal executive offices)

Issuer's telephone number:        (303) 863-8088                                
Securities registered under Section 12(b) of the Exchange Act:       None       
Securities registered under Section 12(g) of the Exchange Act:                  
Common Stock, no par value                                                  

(Title of class)                                          

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period  that the issuer was  required  to file such  reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes   X    No         
                                                            -----      -----

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of issuer's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ ]                                                           

State issuer's revenues for its most recent fiscal year:   $2,488,374           

As of September 30, 1997, the aggregate market value for the 5,237,407 shares of
the  Common  Stock,  no  par  value  per  share,  held  by  non-affiliates   was
approximately $89,035,919.                                                      

The number of shares of Common Stock of the  registrant  outstanding  as of July
31, 1997, were 6,692,507.                                                       

 Documents incorporated by reference
None

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                                TABLE OF CONTENTS                                      

PART I                                                                             PAGE
------                                                                             ----

                                                                                       
      Item 1.     Description of Business ........................................   1 
      Item 2.     Description of Property ........................................     
      Item 3.     Legal Proceedings ..............................................     
      Item 4.     Submission of Matters to a Vote of Security Holders ............     

PART II                                                                                
-------                                                                                

      Item 5.     Market for Common Equity and Related Stockholder Matters .......     
      Item 6.     Management's Discussion and Analysis or Results of Operations ..     
      Item 7.     Financial Statements ...........................................     
      Item 8.     Changes in and Disagreements With Accountants on Accounting          
                  and Financial Disclosure .......................................     

PART III                                                                               
--------                                                                               

      Item 9.     Directors, Executive Officers, Promoters and Control Persons;        
                  Compliance with Section 16(a) of the Exchange Act ..............     
      Item 10.    Executive Compensation .........................................     
      Item 11.    Security Ownership of Certain Beneficial Owners and Management .     
      Item 12.    Certain Relationships and Related Transactions .................     
      Item 13.    Exhibits and Reports on Form 8-K ...............................     

SIGNATURES .......................................................................     


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PART I

Item 1 - Description of Business                                                
--------------------------------                                                

     Except  for  historical   information   contained  herein,   the  following
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties.  Such forward-looking statements include, but are not limited to,
statements regarding future events and the Company's plans and expectations. The
Company's  actual results could differ  materially from those discussed  herein.
Factors that could cause or contribute to such differences  include, but are not
limited  to,  those  discussed  below  under  "Factors  That May  Affect  Future
Results," as well as those discussed elsewhere in this Form 10-KSB.             

     Certain  capitalized  terms  used in this Form  10-KSB  are  defined in the
Glossary beginning at the end of "Item  1-Description of Business"  beginning on
page 1.                                                                         

Introduction                                                                    

     Accelr8  Technology  Corporation  (the "Company") is a leading  provider of
software  tools  and  consulting  services  for  Year  2000  compliance  and for
conversion from Digital Equipment  Corporation's  ("DEC") VAX/VMS Legacy Systems
to UNIX  and NT open  client/server  environments.  The  Year  2000  Problem  is
expected  to  create  widespread  system  failures  due to the  use of  computer
programs  that rely on two-digit  date codes to perform  computations  and other
decision-making  functions.  The Company's "NAVIG8-2000" tools facilitate timely
and cost effective  Year 2000  assessment  and  remediation  across the multiple
language environment of DEC Legacy Systems and UNIX environments.  The Company's
other  focus - the  conversion  from DEC  VAX/VMS  Legacy  Systems  to UNIX open
client/server  environments  - is based on the fact that VAX/VMS  Legacy Systems
use a proprietary  computer  operating system which is not compatible with other
manufacturers'  hardware  and  software,   whereas  UNIX  is  a  powerful,  open
architecture  system which is compatible with a wide range of hardware platforms
and software applications, including commercial off-the-shelf software ("COTS").
The Company  believes  that UNIX has become the most  widely used  client/server
operating system, and that the trend to client/server open systems,  such as the
systems offered by UNIX and Microsoft  Corporation's Windows NT operating system
("NT"),  will continue for the foreseeable  future.  The Company's "MIGR8" tools
provide  dependable  solutions  for migration of DEC VAX  applications  from the
proprietary environment of VMS to the open systems environment of UNIX.         

     The Year 2000 Problem.  The Year 2000 Problem in computers  arises from the
common  practice of using two digits to  represent  a date in computer  software
code and databases to save both processing time and storage. Therefore, when the
year 2000 arrives and computer  programs  read the date "00," the computer  will
default to the year "1900" rather than the correct  "2000." This could result in
incorrect  calculations,   faulty  data  and  computer  shutdowns,   potentially
impairing the daily conduct of business.  Since the 1960's, computer programmers
have designed  systems  using a two-digit  date format in an effort to save what
has historically been costly storage space and processing time. Even as the cost
of disk  storage  fell  (from  $2,100  in 1963,  and $432 in 1972 to only $1 per
megabyte now), the two-digit format remained a de facto standard.  Additionally,
expectations were that computer systems built in the 1980's would be replaced by
the year 2000,  which is clearly not the case in many  business  and  government
computing  environments.  While  DEC  claims  that VAX  minicomputers  and other
computers  using the VMS  operating  system are  designed  to use four digits to
express dates, DEC customers may be using third party software  packages as well
as custom programming that do not use four digit dates.                         

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     While the actual fix to a single computer  program of converting  two-digit
dates to four-digit dates can be straightforward,  managing and coordinating the
process between numerous programs and systems can be very complicated and highly
labor-intensive.  Implementing  and testing the  changes has been  estimated  to
represent as much as 50% of the total cost.  Several date conversion  tools have
been developed to address the larger mainframe market; however, management knows
of only one other company whose  product  competes with the Company's  Year 2000
product, and that product only addresses Year 2000 issues for the DEC COBOL base
of DEC  VAX/VMS  Legacy  Systems  customers.  Because of the unique  development
languages proprietary to the DEC VMS platform, early attempts at using tools for
the mainframe  conversion  marketplace have not been successful in this specific
mid-range market.                                                               

     The Company  approaches its clients' needs  regarding the Year 2000 Problem
through its "NAVIG8-2000" suite of tools, methodologies and services designed to
assist with the identification, evaluation and conversion of date-related fields
to become Year 2000 compliant.  The  "NAVIG8-2000"  software product is a set of
expert system tools for Open VMS and UNIX applications  that identify  variables
in code that are most likely to hold date information. Used in the delivery of a
Year  2000  Impact  Analysis  service,  NAVIG8-2000  is  the  foundation  of the
Company's  solution to the  millennium  problem  faced by DEC and UNIX users and
application developers.  This combination of software tools and services enables
clients to complete  Year 2000  compliance  requirements  in a  predictable  and
cost-effective  manner.  The Company  believes  the Year 2000 Problem is endemic
throughout  DEC VMS and UNIX  systems  in use  today and is  expected  to create
widespread  system  failures  due to the use of computer  programs  that rely on
two-digit date codes to perform computations and decision-making  functions. The
Company is  developing  software to address the Year 2000 Problem on NT systems.
Management  expects this product to be available by the end of the 1997 calendar
year.                                                                           

     Migration to Open Systems.  In the 1970's many businesses and  governmental
organizations  relied on  mainframe  and  minicomputers  for  critical  business
functions.   Each  hardware  manufacturer  sought  to  establish  a  competitive
advantage by developing  "closed"  environments  which were compatible only with
the  manufacturer's  proprietary  equipment  and software  applications.  Thus a
customer was locked into a mission-critical  application environment which would
only operate on a closed  proprietary  system,  which ultimately became known as
"Legacy Systems."                                                               

     Management believes that there has been a trend away from purchasing all of
a company's  hardware and software  from one vendor.  This trend was  originally
started by the federal government as a means to ensure competitive pricing among
vendors, and is now being followed by most  commercial/private  sector entities.
Under this  approach,  bids are obtained  from many  suppliers,  and one company
generally acts as the primary contractor.                                       

     Management  believes that large hardware  manufacturers,  like IBM and DEC,
can no  longer  control  the  entire  purchasing  decision  for  large  computer
enterprises  without  including  an element of  competitive  price and  offering
access to open architecture  systems such as UNIX or NT. Further, end users have
realized  that  dependence  on a single  supplier  is  non-economic  in terms of
performance increases at reasonable prices. In more recent years, the trend away
from a single vendor has been accelerated by  technological  advances which make
possible widely distributed client/server environments.                         

     Mid-range computers are either older Legacy Systems or newer "Open Systems"
servers.  Legacy  Systems  are almost  always  provided  by a single  vendor and
feature a proprietary operating system, while the newer, Open System servers are
supplied by  numerous  vendors  and  usually  specify  one of several  different
versions of the UNIX operating system.  One of the most popular legacy computers

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has been  manufactured  by DEC and is called the VAX  hardware  system.  The VAX
proprietary  operating  system is called  VMS.  While  many  different  hardware
manufacturers  have licensed the right to resell the UNIX operating  system from
AT&T,  the major  suppliers of hardware  that  feature  UNIX as their  operating
system are HP, SUN, SGI, IBM and DEC.                                           

     Management  believes that within the computer user  community  Open Systems
are considered more desirable than  proprietary  systems such as VAX/VMS systems
for the following reasons:  (i) UNIX systems offer significant upgraded power at
lower cost (price/performance) than older VAX/VMS systems; (ii) UNIX systems are
viewed as being  "open"  since they are  compatible  with a variety of  hardware
types  (interoperability);  (iii)  industry-wide  standards allow UNIX supported
software  applications  to run  unchanged  across  a wide  variety  of  hardware
platforms; (iv) UNIX has become the new de-facto development environment for new
applications;   and  (v)  significant  savings  can  be  realized  from  reduced
maintenance overhead.                                                           

     As  a  result  of  these  UNIX  characteristics,  VAX/VMS  users  requiring
increased  performance  from  their  older,  existing  proprietary  system,  may
consider  the  Company's  conversion  services to UNIX for: (i)  preserving  the
already  sizable  investment  in  existing  VAX/VMS  applications;  (ii)  a cost
effective  approach to maintaining user  productivity;  (iii) avoiding expensive
user re-training on a new operating system; (iv) allowing competitive bidding of
hardware and software for best price and service from several  vendors;  and (v)
extending the usable life of older systems.                                     

     The Company believes that the primary deterrent to switching from a VAX/VMS
Legacy  System to a newer UNIX system is the  cost/risk of rewriting a critical,
dependable legacy application program to run in a new and different environment.
Uncertainty as to outcome, lack of available personnel to undertake the task and
the costly re-training  process associated with learning a new operating system,
have  contributed  to users and  information  technology  managers  delaying the
decision to make the transition to faster, less expensive, Open Systems hardware
platforms.  Adding to the crisis, in many cases, the original  developers of the
code  are no  longer  available  for  consultation  as to  design  goals  and/or
specifications. It therefore becomes necessary to evaluate, condense and convert
old code to new  operating  system  environments.  While most  users,  given the
option, would elect to re-host their familiar software application to the faster
environment  of UNIX,  the  uncertainty  of a  conversion  causes slow  decision
making.                                                                         

     The Company has sought to address  VAX/VMS  users'  conversion  concerns by
offering a service  called  "Situational  Analysis"  that  provides  the user an
accurate  assessment of code (line count, system calls, etc.) and gives the user
a rating of  "Portability"  as to the degree of  difficulty  in moving  critical
legacy  applications  in advance of doing the  conversion.  This service assists
customers  with the  conversion  decision,  and  allows  the  Company  to become
sufficiently familiar with the customer's application to offer a fixed price bid
for the conversion.                                                             

     In general, the limited functionality of many existing tools, together with
the inability of some organizations to fully utilize available  technology,  has
created  increasing  demand  for  integrated  software   development  tools  and
professional  services to help organizations fully utilize available  technology
and improve  their own  maintenance  and  redevelopment  processes.  The Company
believes that the developing  client/server market will create additional demand
for software tools and professional services that enable organizations to reduce
the cost of maintenance and redevelopment of existing systems and redeploy these
resources for client/server  implementation.  In addition,  management  believes
that  organizations  will seek to reuse  existing  DEC VAX/VMS  applications  in
client/server environments to leverage their existing systems investment.       

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     In order to attain the advantages of open client/server  environments while
preserving  their  investment in existing  software  applications,  many VAX/VMS
users must undertake complex  conversions to NT or UNIX operating  systems.  The
Company's consulting services and software conversion tools enable the Company's
clients to analyze and implement  their UNIX  conversions  in a predictable  and
cost-effective  manner.  The Company's  clients include a number of Fortune 1000
companies  and  government  agencies,  including  Electronic  Data Systems Corp.
("EDS"), Proctor & Gamble, Kellogg Co., McDonnell Douglas Corp., Delta Air Lines
Corp., Daimler Benz AG, the United States Army and the United States Navy.      

     The Company is currently engaged in the development of additional  software
tools which will complement its existing suite of conversion tools and services,
including the  development  of software  tools that are to be used in converting
VAX/VMS  Legacy  Systems  to NT,  running  on  Intel-based  and DEC  Alpha-based
systems.  Management  expects to release a product for  converting  from VAX/VMS
systems to the NT system running on DEC Alpha servers by the end of 1997.       

     The  Company  was  incorporated  in 1982  under  the  laws of the  State of
Colorado.  The Company's  executive offices are located at 303 East 17th Avenue,
Suite 108, Denver, Colorado 80203, and its telephone number is (303) 863-8088.  

Market Opportunity                                                              

     The Year 2000 Problem is expected to create  widespread system failures due
to the use of computer  programs  that rely on  two-digit  date codes to perform
computations  and  other  decision-making  functions.  The  Company's  suite  of
software  tools  which  address  the Year  2000  Problem  includes  a  "language
independent"  scanner,  a diagnostic utility which assesses the magnitude of the
exposure from  two-digit date fields;  an inventory  report of the date problem;
specific language  analyzers which parse code written in BASIC,  FORTRAN,  COBOL
and C languages,  as well as utilities specific to DEC VAX/VMS environments such
as DCL, RMS, FMS AND SMG; a full repository  enabling  detailed planning project
scoping  and a  renovation  module that  guides the  programmer  through the fix
phase. The Company's NAVIG8-2000 tool set is the only multiple language software
available  which is optimized for  assessment,  planning and  remediation of the
Year 2000 Problem in DEC VAX/VMS systems.                                       

     Management of the Company intends to take advantage of the immediate market
need for Year 2000 compliance,  and anticipates that the Company's primary focus
over the next few years  will be its Year 2000  solutions.  Management  believes
that the Year 2000 Problem  presents a substantial  market  opportunity  for the
Company.  In addition,  it is anticipated  that the Company's suite of Year 2000
Problem  analysis and  remediation  tools and  services  will  establish  client
relationships for later DEC VAX/VMS migration services.                         

     Based on published data from DEC and related industry analysts, the Company
estimates that there were in excess of 600,000 VAX/VMS systems installed at over
60,000 sites.  Recent figures from DEC suggest that over 450,000 VAX/VMS systems
remain in operation  today.  Most computer  manufacturers,  employing the latest
advances in "reduced  instruction  set computing"  ("RISC") chip  technology are
selling UNIX Operating Systems. UNIX systems are less costly and provide greater
interoperability  than DEC's  VAX/VMS  Legacy  Systems.  For this  reason,  UNIX
platforms are gaining  substantial  market share in DEC's  traditional  markets,
including  the  engineering  and  scientific  industry  segments.  The Company's
software  products  are  designed to meet the needs of those  industry  segments
wishing to convert their existing software and data from VAX/VMS systems to UNIX
systems. Computer industry analyst Dataquest estimates that by the year 2000, NT
will rival the UNIX operating system, with each owning  approximately 40% of the
worldwide  DEC operating  system  market.  Other  systems,  including  incumbent

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proprietary  systems,  will make up the remaining  20% market share.  Management
expects  that  development  of a  conversion  tool set  that  will  provide  for
conversion  from VAX/VMS  systems to the NT system  running on DEC Alpha servers
will be completed by the Company by the end of 1997.                            

     Additionally,  many third-party  software  application  solution providers,
driven by market demand to offer their solutions on UNIX operating systems, have
utilized the Company's tools to convert their old VAX/VMS software  applications
to the UNIX environment.                                                        

     The Company has targeted several segments of the engineering and commercial
sectors.  These  include  aerospace,  telecommunications,  banking and financial
services,  defense  and  government  contractors,  pharmaceutical  firms,  large
manufacturers,  oil and gas  producers  and  distribution  and  warehousing  for
consumer  goods.  Major UNIX hardware  vendors,  including DEC,  Hewlett Packard
("HP"),  IBM, SUN Micro  Systems  ("SUN") and Silicon  Graphics,  Inc.  ("SGI"),
include the Company's  products in their  materials for UNIX systems.  DEC lists
the  Company's  products  in its price book as well as in the  General  Services
Administration  ("GSA") and Software  Enterprise  Workstation  Program  ("SEWP")
schedules.                                                                      

     In February 1992, DEC introduced a new generation of computers named Alpha.
Alpha runs DEC's proprietary operating system VMS as well as an industry version
of UNIX called DEC UNIX and Microsoft Corporation's Windows NT operating system.
While this  system  provides  VMS on a RISC  platform,  many  industry  analysts
believe that current DEC  customers  will want to move to DEC UNIX or NT running
on Alpha. In order to preserve their VAX/VMS applications, these users will need
to convert  VAX/VMS  applications to either DEC UNIX or NT. DEC is not currently
providing  products  to convert  from  VAX/VMS  systems  to Alpha.  Accordingly,
management believes that Alpha presents a significant market opportunity for the
Company.                                                                        

Business Strategy                                                               

     The Company's objective is to enhance its position as a leading provider of
integrated  solutions  which  will  solve  the Year  2000  Problem  and meet the
conversion  needs of VAX/VMS  users.  Key  elements  of the  Company's  strategy
include:                                                                        

     Near-term  Focus on the Year 2000 Market.  The Company  intends to continue
focusing on its suite of Year 2000 Problem  analysis and  remediation  tools and
services  to  take  advantage  of  the  immediate  market  need  for  compliance
requirements and to establish client  relationships  for later DEC VMS migration
services.                                                                       

     Commercialization  of the Company's  Windows NT  conversion  tool set . The
Company  intends to complete  development of and to market  software tools which
will allow  existing  and new  customers  to migrate  existing  code into the NT
operating environment.                                                          

     Continue Emphasis on Consulting Services and Establishment of Year 2000 and
UNIX/NT  Conversion Teams. The Company intends to continue to emphasize the sale
of its integrated  consulting services in conjunction with its suite of software
tools. The Company has established five three-man conversion teams, comprised of
software engineers,  to perform UNIX and NT conversion projects,  and intends to
establish   additional   such  teams  to  perform  its  Year  2000  Problem  and
conversion/migration  projects.  The  conversion  teams  allow  the  Company  to
effectively  staff projects as the Company  achieves its anticipated  growth (of
which there can be no assurance).                                               

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     Develop New  Products  and  Services.  The  Company  intends to continue to
develop  software  tools and  consulting  services  which  address the needs and
problems  encountered  in conversion of VAX/VMS  Legacy Systems as well as other
information  technology  environments.  Management  believes that the successful
development  of  complementary  products and services  will allow the Company to
leverage its products and services into new and significantly larger markets.   

     Outsourcing. The Company intends to position its software so that it may be
licensed by large outsourcing providers such as EDS, Lockheed Martin Corp., ISSC
and others,  thereby  increasing its license fees and  consulting  service fees.
Outsourcing offers organizations a complete  information  technology system on a
contract basis. Many larger  corporations have undertaken this approach in order
to reduce personnel costs and operating  overhead.  The outsourcing  provider is
generally able to provide the services on a more cost effective basis because of
economies of scale and volume  purchases  that are not  available to the typical
user. The Company assists the outsourcing provider (EDS and others) in obtaining
such cost savings by providing a quick and efficient  assessment of the presence
of proprietary  systems, and the opportunity for efficient conversion from those
systems.The  Company can enable the rapid  transition  to Open  Systems  thereby
reducing hardware and software maintenance costs for the outsourcing provider.  

     Expand International  Marketing Activities.  In fiscal 1995, 1996 and 1997,
revenues  derived from  international  clients  totaled  approximately  $96,547,
$318,393 and $539,635,  respectively.  The Company's  international clients have
included  Daimler Benz,  Renault V.I. and Alcatel.  The Company will continue to
expand its international marketing activities to increase its market penetration
in Europe and Asia.                                                             

     Secure  Additional  Consulting  Projects.  In the course of performing UNIX
conversion  services,  the Company's  software  engineers and technical  support
staff establish close relationships with the information technology personnel of
client organizations.  Through these relationships,  the Company will attempt to
secure  additional  consulting  projects  which are within the  expertise of the
Company's  staff.  Such  projects  may, but need not, be related to the client's
UNIX  conversion  needs.  The Company  believes  that this strategy will enhance
client relationships while generating profitable consulting fees.               

     Target Large  Corporations  and Government  Agencies.  The Company believes
that there are in excess of 450,000  VAX/VMS  systems  currently  in  operation.
These  systems are  generally  operated  by large  corporations  and  government
agencies. The Company will continue to identify and direct its marketing efforts
to  organizations  which  have  extensive  information  technology  environments
supported by substantial budgets.                                               

     Investment in or Acquisition of Complementary  Businesses,  Technologies or
Product  Lines.  The  Company  intends to evaluate  opportunities  for growth or
expansion of its business through  investment in or acquisition of complementary
businesses,   technologies   or  product   lines.   Management   believes   that
opportunities  to  expand  will be  available  to the  Company  and  intends  to
investigate  opportunities  that are consistent with the Company's core business
and its  expertise.  As of the  date  of  this  Report,  no  target  businesses,
technologies or product lines have been identified.                             

Services and Products                                                           

Services.                                                                       

     The Company historically focused its marketing and sales efforts on selling
its various  software  conversion tools on a "stand-alone"  basis.  Since fiscal
1995,  the Company has  focused  its  efforts on selling an  integrated  package
consisting  of both  software  tools and the  consulting  services of its highly

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trained  and  experienced  personnel.  Management  believes  that this change in
strategy  better  addressed  clients needs for conversion  services.  Management
believes that the dramatic  increase in revenues in fiscal 1995,  1996 and 1997,
as compared to fiscal 1994, is directly  attributable to this change in strategy
and the Company intends to continue this strategy in the future.                

     The Company now offers a full  spectrum of services that are carried out by
the  Company's  personnel,  who  are  experts  in  both  the  VAX/VMS  and  UNIX
environments. The Company's personnel use the Company's tools that automatically
identify and diagnose  difficult areas in porting an  application.  This enables
them to implement conversion  techniques that ensure successful  conversions and
porting. The Company offers the following services:                             

1)   Year 2000 Impact  Analysis  Services:  The Company  offers a combination of
     automation   tools  and   engineering   services   designed  to  assist  in
     identifying,   documenting  and  quantifying  Year  2000  date  remediation
     requirements. Using the NAVIG8-2000 tool, Company engineers provide DEC VAX
     or Alpha  users and UNIX  users an  automated  and  comprehensive  means of
     scanning,  parsing and  documenting  millennium  date change  requirements.
     These services are designed to document the conversion requirements,  costs
     and  levels of effort  that will be  required  to address  millennium  date
changes.                                                              

2)   Situational Analysis: The Company's personnel use automated tools and their
     expertise  to scan the  customer's  code while  on-site  at the  customer's
     facility.  Within four weeks,  a written report is provided to the customer
     identifying  the porting  issues and their  solution  options.  The code is
     rated on a scale of one to five as to its Portability.  If requested by the
     customer,  a bid to conduct the  conversion on a fixed-price  basis is also
provided.                                                             

3)   Implementation  Planning:  The Company's analysts work with the customer to
     select the appropriate solutions for their conversion issues. These answers
     are  assembled  into a project plan that is used by the project  manager to
    control and synchronize the conversion effort as well as measure progress.

4)   Application Port: The Company's analysts perform the code conversion. Where
     suitable,  the Company  performs  automatic  conversion using the Company's
     tools,  as well as  engineering of modules which must be redesigned to work
     on UNIX.  This is  followed  by complete  testing  and  certification.  The
     Company's  service  can be  contracted  as a  turnkey  port or as part of a
cooperative team effort with the customer's personnel.                

5)   Implementation  Assistance:  In addition to industry  standard  support and
     update  contracts,  the Company  offers both on-site and  off-site  porting
     assistance  agreements.  A  foreign  customer  may  contract  for  off-site
telephone support.                                                    

6)   Custom Programming: Programming is done on either a fixed price or time and
     materials  basis for the  purpose of  re-engineering  and  modernizing  old
     Legacy  Code or for  porting  custom  applications  that run in front of or
after COTS applications.                                              

7)   Training:  Including VMS Users Introduction to UNIX, Application Conversion
using Tools and existing systems investments.                         

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8)   Code Audit  Measurement  and Analysis:  The Company  measures  adherence to
     external and internal  coding  standards as a means to prevent  significant
deviation from standard coding practices.                             

     The Company  provides its services to each client over any of the following
three  methods,  designed  to meet  the  specific  project  requirements  of the
customer.                                                                       

     On-site Services. Inventory,  analysis, repository and remediation services
are performed by Company technicians at the client's facilities.      

     Factory  Services.  High  volumes  of  code  can be  processed  by  Company
technicians at the Company's facilities in Denver, Colorado.          

     Corporate Licenses. In the case of large organizations that have decided to
     complete a portion  of the work  internally,  a  corporate  license  may be
     purchased.  Pricing is determined after an assessment of the amount of code
     that  will be  processed  over the  course  of the  conversion.  Management
     expects  this  segment  to grow  significantly  as the  amount of  internal
conversion work increases.                                            

Products.                                                                       

     Year 2000 Tools. The Company provides assessment and remediation  solutions
which satisfy its clients' needs for Year 2000 compliance through the use of its
proprietary  tool set. Its software  tools are either  licensed  directly to the
client,  are licensed to third party  information  technology  service providers
contracted to service the end-user or are used  directly by the Company  through
service contracts with the customer.                                            

     Based  on  language   parsers  and  compiler   technology,   the  Company's
NAVIG8-2000 tool set uses heuristic  methods to identify  variables in code that
are most  likely to hold  date  information.  The  scanner  diagnostic  software
utility is  designed to uncover  obvious  date  usages  found  through a textual
search,  assessing  the  magnitude  of  exposure  from  two-digit  year  fields.
Language-specific  parsers break the program down into its smallest  syntactical
units and then a name  recognition  and  reporting  program  generates  a report
detailing the usage of date variables. An external table defines the patterns of
variable names which  potentially  contain date  information;  pattern  matching
using this table provides the first level of date variable  identification.  The
tool set  further  tracks  date  information  across  subroutines  and  function
invocations,  finding variables not implicated by name but which are potentially
receiving date information. Following remediation, the tool set provides for the
creation of the quality  assurance  model for the  enforcement  of external  and
internal  standards.  NAVIG8-2000 can be used on one program at a time or can be
configured to scan multiple programs or several directories.                    

     NAVIG8-2000  is a tool set that  provides  users of DEC VAX and  Alpha/VMS,
Windows NT and UNIX  systems an  automated  and  comprehensive  means of quickly
scanning and accurately  identifying  millennium  date change  requirements.  It
locates  computational date occurrences and filters the findings,  making review
and remediation  more  manageable.  The NAVIG8-2000 tool set includes a combined
set of seven functional elements as described below.                            

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                                                        [Enlarge/Download Table]


                                                                                                                       
Tier I:    Inventory            -  locate and validate all software modules and metrics (language, lines of code, etc.)
Tier II:   Scanner              -  language independent, conducts rules filtering by lexical name and pattern matching 
Tier III:  Analyzer             -  language specific, performs an iterative refinement and recognizes dependencies;    
                                   available in BASIC, C, COBOL, FORTRAN, UNIX C and UNIX FORTRAN, VB and utilities    
                                   DCL, RMS, FMS and SMG                                                               
Tier IV:   Repository/Planning  -  documents entities and relationships and identifies sub-system dependencies         
Tier V:    Remediation          -  data file translation and date routines fix                                         
Tier VI:   Testing              -  performs system run scenarios to assess conversion quality                          


     The Company's  NAVIG8-2000 product has additional,  ancillary  capabilities
which provide extended  functionality to the DEC VAX/VMS  community,  including:
(i) code auditing,  which after the  remediation  of a legacy  system,  offers a
means  of  maintaining  the  integrity  of  internal  and  external  development
standards  of an  application  environment  through  future code  additions  and
changes;  (ii) a search engine, which can be used against source code written in
nearly all major software  languages to search for any variable;  and (iii) date
field expansion, which expands the date field space in source code as a solution
to Year 2000 requirements.                                                      

     NAVIG8-2000  UNIX is a robust  assessment tool that rapidly  determines the
magnitude of Year 2000 issues in UNIX  applications.  Language  independent  and
driven by a powerful  inventory module,  the tool generates  extensive  software
metrics  for  streamlined  evaluation  and  efficient  planning  for  Year  2000
compliance.                                                                     

     DEC Legacy System Conversion. The Company's conversion products are part of
a sophisticated  tool set that assists in the following tasks: (i) comprehensive
analysis of Legacy Code to determine  Portability to Open Systems; (ii) thorough
analysis and planning for conversion; (iii) performance of actual conversion, if
required by the  customer;  (iv)  creation of quality  assurance  models for the
enforcement  of  external  and  internal  standards  applicable  to  new  target
environments;   and  (v)  planning  and  implementation  for  modernization  and
re-engineering databases and user interfaces.                                   

     The Company has developed a unique  analyzer tool called Open NAVIG8,  that
quickly and  accurately  examines  large  quantities of Legacy Code,  eventually
organizing and prioritizing the individual  modules that need to be moved.  This
porting  process is then performed  using the actual porting tools that automate
up to 95% of the conversions.                                                   

     The  Company's  conversion  process  relies on Company  owned and developed
tools to provide a level of  "transparency" to both VAX/VMS and UNIX users, thus
preserving  user  productivity  while accessing the higher  power/lower  cost of
UNIX.  Additionally,  the  conversion  tools support users as they learn UNIX at
their own pace and enable  large batch jobs to be moved to the new,  faster UNIX
platform, thereby freeing up the VAX to perform other tasks more efficiently.   

     Other Company software  features  include the ability to share  information
between  UNIX and  VAX/VMS  systems and to  transfer  files and  records  over a
network.  The  Company's  conversion  offerings are available on a wide range of
UNIX  systems,  including  SGI, HP, Sun, DEC and IBM.  Features are discussed in
greater  detail  below  as  each  of the  Company's  products  and  services  is
individually described.                                                         

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     While Open NAVIG8 tools introduce the client to the Company's competencies,
the  rendering  of  conversion  services  is the core  business  that  generates
revenues.  The Company believes that clients  experience  greater value from the
modernization  and  re-engineering  process if their  personnel  are involved in
understanding what has been done to change the computer environment.  Therefore,
various phases of the conversion  process are deployed at the customer site with
client  personnel as  observers.  Additionally,  the Company  conducts  training
classes for the client end user groups in the operation of the new  environment.
Ongoing  training and software  updates are a component of gross revenue in each
services contract.                                                              

     After delivery of a new environment,  the Company will offer a service that
measures,  on a regular  interval,  the adherence to either external or internal
coding  standards.  This "code  auditor"  service  has been driven by the United
States Defense  Department  objective of prevention of future Legacy Code chaos.
The Company believes that private industry will also move to this objective.    

     The  Company's  conversion   products-Open  NAVIG8,  Open  LIBR8  and  Open
ACCLIM8-embody  the Company's core  technological  advantages and  competencies;
however, the following groups of tools are integral to all conversion projects. 

User Productivity                                                               
Tools ............  are  designed  to  provide  the user  with  familiar  screen
                    formats and command scripts thereby preserving  productivity
                    while  learning  a  new  operating  system  (UNIX/NT).   The
  Company's User Productivity Tools include:

  Open DCL .....   VMS command line  interface  (recall/editing);  login shell
nu TPU .......   VAX-style  editor for UNIX (TPU,  EDT,  WPS modes)       
Open SUBMIT ..   VAX to UNIX batch submission utility                     

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

Porting Tools ...   are   designed   to  move  and   support   old  Legacy  Code
                    applications in UNIX or NT environments,  providing the same
                    original  functionality  on the  new  target  platform.  The
Company's Porting Tools include:        

Open COBOL ...   VAX COBOL source code converter and linker               
Open ACCLIM8 .   Pre-compiler for VAX FORTRAN; indexed file support       
 Open BASIC ...   Re-targetable BASIC to C Compiler; VAX BASIC compatibility
Open PASCAL ..   VAX Pascal to C Translator                               
 C/Fix ........   Translator for VMS specific C constructs (sold with LIBR8)
Ada Bindings .   Source code interface routines for all Ada Compilers     
and LIBR8                               
Open LIBR8 ...   VMS runtime library support (ast, qio, event flags,      
mailboxes, etc.)                        
Open RMS .....   UNIX equivalent of VMS I/O calls. (sold with LIBR8)      
 Open SMG .....   VAX compatible Screen Management facility for Open Systems
FMS/UNIX .....   FMS for UNIX; FMS Editor (100% compatibility) sold       
separately                              
Open DCL .....   Command language interpreter; VMS-style error handling   

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Analysis &                                                                      
Programming                                                                     
Standards Tools .   are designed to provide analysis and code auditing standards
                    and capabilities in a work bench environment, Legacy Code is
                    easily  examined and  reconstructed  to meet any user stated
                    rules. The Company's Analysis & Programming  Standards Tools
include:                                

Open NAVIG8 ...   Analyzer -  Documents  conversion  barriers               
           Auditor - Guidance and  standards  for  portability
                  2000 - Year 2000 impact  analysis  for VMS and UNIX users.

New Product Offerings                                                           

     In addition to VAX/VMS to UNIX conversions, the Company believes that there
is a large  opportunity in both the government and commercial  sector to provide
conversion  services/tools  for  VAX/VMS  to NT  conversions  running  on  Alpha
servers.                                                                        

     Microsoft Corporation's Windows NT operating system is the newest operating
system from  Microsoft  Corporation.  DEC has announced a strategic  partnership
with Microsoft to offer its VAX  minicomputer  customers a seamless  environment
where  Open VMS,  DEC UNIX and NT will be  supported  on DEC's  Alpha  platform.
Management  believes  that DEC has no plans to  assist  users of its  older  VAX
minicomputers  in  moving  their  VAX  applications  to  the  new  NT  operating
environment.  The Company plans to port all of its UNIX conversion  tools to the
NT  environment,  thus  enabling  VAX/VMS  users to operate  their  existing VAX
applications on an NT operating  system.  The Company is developing the software
tools  for the NT  conversion  opportunity,  and  management  expects  that this
product will be available by the end of calendar year 1997.                     

Customers                                                                       

     The  Company's  software  tools  have  been  sold  to over  800  customers,
including installation in over 100 US Department of Defense sites. The Company's
customers  are  principally  users of  VAX/VMS  Legacy  Systems  that are either
commercial enterprises or government or quasi-government agencies. During fiscal
1997, one customer  accounted for approximately  13% of the Company's  revenues.
Set forth below is a partial list of the Company's customers.                   

                                                                [Download Table]


US Commercial Clients         International Commercial Clients     US Gov't. Clients
---------------------         --------------------------------     -----------------

                                                                                    
BDM International             Alcatel Alsthom Cie Generale Europe  Commerce Dept.   
Chrysler Corp.                Daimler Benz AG                      EPA              
Delta Air Lines Inc.          Ericson                              NASA             
Electronic Data Systems Corp. Renault V.I.                         NSA              
General Instrument Corp.                                           US Air Force     
Kellogg Co.                                                        US Army          
Kroger Co.                                                         US Navy          
Lockheed Martin Corp.                                                               
McDonnell Douglas Corp.                                                             
Proctor and Gamble                                                                  
TRW                                                                                 
Union Carbide Corp.                                                                 

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     Union Carbide Corp., BDM  International,  General  Instrument Corp. and TRW
have  embedded  the  Company's  software in their UNIX  solutions,  yielding the
potential for substantial run-time license fees for the Company.                

     In  the  second  half  of  1996,  the  Company   commenced   releasing  its
"NAVIG8-2000"  services which address the Year 2000 Problem. To date,  customers
of the Company's Year 2000 products and services include AMC Theaters,  The City
of Fort Collins, Colorado, Eli Lilly, RJR Reynolds Company, Societe Generale and
Washington Dental.                                                              

Marketing and Distribution                                                      

     The Company utilizes  several  marketing  approaches  including direct mail
advertising,  advertising in trade  publications,  press releases,  trade shows,
Company sponsored seminars, speaking engagements and independent software vendor
catalog  listings.  The Company's sales personnel contact the leads generated by
these  activities.  The  Company's  services  and  products  are  electronically
advertised on the Company's web page at  www.accelr8.com,  a cost  effective and
efficient  method of reaching  the  Company's  target  market.  The Company will
continue to emphasize  attendance at trade shows,  Company and vendor  sponsored
seminars,  press releases,  speaking engagements and independent software vendor
catalog listings in its marketing  efforts.  The Company's  international  sales
represented  22% of the Company's  total revenues in fiscal 1997, as compared to
15% of 1996 and 7% of  fiscal  1995  revenues.  Management  intends  to direct a
significant  portion of its marketing efforts toward further market  penetration
in international markets, with its primary emphasis upon Europe and Asia.       

         The Company's  on-site  personnel  often have the opportunity to market
additional  Company  services to existing  customers.  The Company's  conversion
teams have and will  continue to focus upon  educating  customers as to the full
range of the Company's products and services,  and to providing solutions to the
customers' problems.                                                            

         The Company also attends  hardware  vendor sales events,  such as those
sponsored  by  HP  and  DEC,  for  industry  group  segments,  including  TELCOS
(telecommunication companies), government entities and pharmaceutical companies.
Company  representatives  follow-up on contacts made at these events and,  where
appropriate,  schedule  on-site visits with potential  customers.  While on-site
with customers and potential  customers Accelr8's  representatives  work closely
with technical personnel in Denver for instant and direct help in addressing the
customers'  problems  and  needs.  Management  believes  that  this  coordinated
approach  between the field sales persons and the technical  personnel in Denver
has led to greater sales, and the Company intends to continue this practice.    

Research and Development                                                        

     The Company  conducts its research and  development at its  headquarters in
Denver,  Colorado.  The Company  believes that the continued  development of new
products and  enhancement  of existing  products is essential to  maintaining  a
competitive position in the marketplace. The Company expended $61,324 on Company
sponsored research and development during fiscal 1997, and $33,038 during fiscal
1996.  Technical  personnel  normally  involved in research and development also
provide a substantial  amount of technical  assistance  in  connection  with the
Company's consulting services,  so that the actual amount classified as research
and  development  is less  than  would  be the  case if such  expenses  were not
allocable to specific  contracts.  Management is committed to a strong  research
and development  program,  and intends to continue these  expenditures at levels
necessary to allow the Company to maintain a strong competitive position.       

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Production                                                                      

     The Company's  production  facilities  are located at its  headquarters  in
Denver,  Colorado, and are primarily used for software development and extensive
testing  and  quality  control of software  products.  The Company is  currently
negotiating  for expansion of its facilities and anticipates  hiring  additional
technical, marketing, sales and managerial personnel.                           

     The  Company  does  not  believe  that,  for the  foreseeable  future,  the
Company's  products will be subject to any  significant  fluctuations  in supply
costs.  Componentry  and systems  used to develop  products  and the actual tape
cassettes on which software is placed can be obtained from a variety of vendors,
none of which  holds a  controlling  position  within the  market.  The  Company
believes  that it has the ability to fill any  anticipated  future  sales orders
received.                                                                       

Competition                                                                     

     Digital Equipment  Corporation  recently signed a marketing  agreement with
PierCom,  of Ireland,  to address  Year 2000 issues for the DEC COBOL  language.
Management  believes that the largest segment of the DEC VAX/VMS  installed base
requires a Year 2000 solution for the DEC FORTRAN language.  Management does not
believe  that  Digital  Equipment  currently  has a software  tool  commercially
available to provide Year 2000  services for DEC FORTRAN,  DEC BASIC,  DEC C and
the utilities RMS, FMS and DCL.                                                 

     Management is aware of two companies that compete directly with the Company
with respect to its conversion/migration products. BBC of Boston, Massachusetts,
has a product  available  that directly  competes  with the  Company's  Open DCL
product.  Sector 7, formerly known as Software  Translations,  of Austin, Texas,
offers  a  software  conversion  service  for  moving  from  VMS to UNIX and NT.
Management  believes  that the Company  offers a broader  range of products  and
services  than either of these  competitors,  and is  therefore  able to compete
successfully  against  them.  Although  DEC does not offer its own  products for
conversion from its VAX/VMS Legacy Systems to UNIX,  should DEC choose to do so,
the Company could be materially and adversely affected.                         

Intellectual Property                                                           

     The Company  relies on a  combination  of  copyright,  trademark  and trade
secret laws, employee and third party disclosure agreements,  license agreements
and other  intellectual  property  protection methods to protect its proprietary
rights.  The Company protects the source code version of its products as a trade
secret  and  as an  unpublished  copyrighted  work.  The  Company's  proprietary
software products are generally  licensed to customers on a "right to use" basis
pursuant to a perpetual, nontransferable license that generally restricts use to
the customer's  internal  purposes and to a specific  computer platform that has
been assigned a "key code." However, it may be possible for unauthorized parties
to copy or reverse engineer certain portions of the Company's products or obtain
and use information the Company  regards as proprietary.  The Company  currently
has no patents and existing  copyright  and trade secret laws offer only limited
protection.  Further,  the laws of some  foreign  countries  do not  protect the
Company's  proprietary  rights to the same  extent as do the laws of the  United
States. The Company has been and may be required from time to time to enter into
source code escrow agreements with certain  customers,  providing for release of
source  code in the event the  Company  files  bankruptcy  or ceases to continue
doing  business.  Although the Company's  competitive  position may be adversely
affected by unauthorized use of its proprietary information, management believes
that the ability to fully protect its intellectual  property is less significant
to the Company's success than are other factors, such as the knowledge,  ability

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and experience of its employees and its ongoing product development and customer
support  activities.  There can be no assurance that the protections in place by
the Company will be adequate.                                                   

     There can be no assurance  that third parties will not assert  infringement
or other  claims  against the  Company  with  respect to any  existing or future
products,  or that licenses  would be available if any Company  technology  were
successfully  challenged by a third party, or if it became  desirable to use any
third-party technology to enhance the Company's products.  Litigation to protect
the  Company's  proprietary  information  or to  determine  the  validity of any
third-party claims could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel,  whether or not
such litigation is determined in favor of the Company.                          

     While  the  Company  has  no  knowledge  that  it is  infringing  upon  the
proprietary  rights of any third  party,  there  can be no  assurance  that such
claims will not be  asserted  in the future  with  respect to existing or future
products.  Any such  assertion by a third party could require the Company to pay
royalties,  to participate in costly litigation and defend licensees in any such
suit  pursuant to  indemnification  agreements,  or to refrain  from  selling an
alleged infringing product or service.                                          

Employees                                                                       

     The  Company  has 30  employees  at its  facilities  in  Denver,  Colorado,
including  eight employees in sales and marketing and  administrative  positions
with the balance in engineering and development.  The Company anticipates hiring
up to 30  additional  employees to staff its Year 2000 teams and for  additional
sales and  marketing.  There are no collective  bargaining  agreements,  and the
Company considers its relations with its employees to be good.                  

Factors That May Affect Future Results                                          

     Dependence on Key Employees. The Company's success depends to a significant
extent upon a number of key management and technical personnel,  the loss of one
or more of whom could have a material adverse effect on the Company's results of
operations.  The  Company  carries  key man life  insurance  in the amount of $5
million  on  Thomas V.  Geimer,  as well as life  insurance  on seven of its key
employees,  including Thomas V. Geimer, Harry J. Fleury, Franz Huber and Timothy
Fitzpatrick,  in the  amount  of  $250,000  for each  individual.  The  Board of
Directors has adopted  resolutions  under which  one-half of the proceeds of any
such  insurance  will be dedicated to a  beneficiary  designated by the insured.
There can be no assurance  that the proceeds from such life  insurance  policies
would be  sufficient  to  compensate  the  Company  for the loss of any of these
employees,  and these  policies do not  provide  any  benefits to the Company if
these employees  become  disabled or are otherwise  unable to render services to
the Company.  Further, the Company does not currently have employment agreements
with any of its officers or key employees, and does not currently intend to have
such  employment  agreements  in the  future.  The  Company  believes  that  its
continued  success  will  depend in large part upon its  ability to attract  and
retain highly  skilled  technical,  managerial,  sales and marketing  personnel.
There can be no assurance  that the Company will be successful in attracting and
retaining  the  personnel  it requires  to develop  and market new and  enhanced
products and to conduct its operations successfully.                            

     Management  of Growth.  The  Company's  rapid  growth in business in recent
quarters  has  placed  and may  continue  to place a  significant  strain on the
Company, particularly on its customer services organization.  Any failure by the
Company to respond quickly to the service needs of its customers could cause the
loss of customers and have a material adverse effect on the Company's results of
operations. The Company's future operating results will depend on its ability to
expand  its  services  organization  and  infrastructure  commensurate  with its
expanding  base of  customers  and on its  ability to  attract,  hire and retain
skilled  employees.  There can be no assurance  that the Company will be able to
effectively manage any future growth.                                           

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     Dependence  on Year  2000  Market  and  Conversion  of DEC  VAX/VMS  Legacy
Systems. The growth in the Company's  professional  services fees in fiscal 1997
resulted  primarily from demand for its Year 2000 Problem  services as awareness
of the Year 2000 Problem has grown. In addition,  this demand has also accounted
for a  significant  portion of software  license  revenue for the same period as
customers  have acquired the Company's  software  products to help address their
Year 2000 concerns.  Should the demand for the Company's Year 2000 solutions and
products decline  significantly as a result of new technologies,  competition or
other  factors,  the Company's  professional  service fees and license  revenues
would be materially and adversely  affected.  The Company  anticipates  the Year
2000 market will decline,  perhaps  rapidly,  following the year 2000. It is the
Company's strategy to leverage customer  relationships and knowledge of customer
application  systems  derived  from its Year  2000  solutions  to  market  other
products and  services  beyond the Year 2000  market.  However,  there can be no
assurance  that this  strategy  will be  successful,  and should the  Company be
unable to market  other  products and services as demand in the Year 2000 market
declines,  whether as a result of  technological  change,  competition  or other
factors,  the Company's business,  results of operations and financial condition
will be materially and adversely affected.                                      

     The Company's  only other  software  products and services are designed for
conversion  from  VAX/VMS  Legacy  Systems  to UNIX  and NT  open  client/server
environments.  Future  revenues from this line of business are dependent on upon
users of VAX/VMS Legacy Systems  electing to convert their data and applications
to UNIX and NT environments.  To the extent that users of VAX/VMS Legacy Systems
elect to abandon  their  VAX/VMS  applications  and data and to  re-write  their
information  technology  systems  entirely  in UNIX or NT  environments  without
conversion,  the Company's revenues and future prospects could be materially and
adversely affected.                                                             

     Concentration of Revenues.  A significant portion of the Company's revenues
have been derived from substantial orders placed by a small number of customers.
As a result,  the Company's  revenues have been concentrated  among a relatively
small number of customers. In fiscal 1997, one customer accounted for 13% of the
Company's revenues, and in fiscal 1996 revenues from the Company's three largest
customers  amounted to 42% of the Company's total revenues.  The Company expects
that it will  continue to be dependent  upon a limited  number of customers  for
significant portions of its revenues in future periods.  Generally,  the Company
is hired for a specific  project that will be completed within a fixed period of
time.  Once a project has been completed,  customers  generally will not require
significant services in the future. However, during particular periods,  certain
customers  may be  significant.  There can be no assurance  that  revenues  from
customers that accounted for significant revenues in past periods,  individually
or as a group,  will continue or, if continued,  will reach or exceed historical
levels in any future period.  The Company's  operating results may in the future
be subject to substantial period-to-period fluctuations as a consequence of such
customer concentration.                                                         

     Ability to Respond to  Technological  Change.  The Company's future success
will depend  significantly  on its ability to enhance its current  products  and
develop or acquire and market new  products  which keep pace with  technological
developments  and evolving  industry  standards as well as respond to changes in
customer needs. There can be no assurance that the Company will be successful in
developing or acquiring product enhancements or new products to address changing
technologies and customer  requirements  adequately,  that it can introduce such
products on a timely  basis or that any such  products or  enhancements  will be
successful  in the  marketplace.  The  Company's  delay or failure to develop or
acquire  technological  improvements  or to adapt its products to  technological
change would have a material adverse effect on the Company's  business,  results
of operations and financial condition.                                          

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     Dependence Upon Proprietary  Technology;  Intellectual Property Rights. The
Company  relies  primarily on a combination  of  copyright,  trademark and trade
secret laws, employee and third party disclosure agreements,  license agreements
and other  intellectual  property  protection methods to protect its proprietary
rights.  The Company's  proprietary  software products are generally licensed to
customers  on a "right to use" basis  pursuant to a  perpetual,  nontransferable
license that generally  restricts use to the customer's internal purposes and to
a specific  computer  platform that has been assigned a "key code." However,  it
may be  possible  for  unauthorized  third  parties to copy or reverse  engineer
certain  portions of the Company's  products or obtain and use  information  the
Company  regards as  proprietary.  The  Company  currently  has no  patents  and
existing  trade secret and copyright laws provide only limited  protection.  The
Company's  competitive  position and  operations  may be  adversely  affected by
unauthorized use of its proprietary  information,  and there can be no assurance
that the protections put in place by the Company will be adequate.              

     There can be no assurance  that third parties will not assert  infringement
or other  claims  against the  Company  with  respect to any  existing or future
products,  or that licenses  would be available if any Company  technology  were
successfully  challenged by a third party, or if it became  desirable to use any
third-party technology to enhance the Company's products.  Litigation to protect
the  Company's  proprietary  information  or to  determine  the  validity of any
third-party claims could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel,  whether or not
such litigation is determined in favor of the Company.                          

     Competition.  The  market  for  the  Company's  products  and  services  is
competitive  and  subject  to  rapid  change.  There  can be no  assurance  that
competitors will not develop products or alternative  technologies that: (i) are
superior to the Company's products;  (ii) achieve greater market acceptance;  or
(iii) make the Company's products obsolete.  Further,  there can be no assurance
that the  Company  will be able to  compete  successfully  with its  present  or
potential  competition,  or that  competition  will not have a material  adverse
effect on the Company's results of operations and financial condition.          

     Possible  Volatility of Stock Price;  Dividend Policy.  The market price of
the  Company's  Common  Stock could be subject to  significant  fluctuations  in
response to variations in actual and anticipated  quarterly  operating  results,
changes in earnings  estimates  by  analysts,  announcements  of new products or
technological innovations by the Company or its competitors, and other events or
factors. In addition,  the stocks of many technology  companies have experienced
extreme  price and volume  fluctuations  that have often been  unrelated  to the
companies'  operating  performance.  The Company does not intend to pay any cash
dividends on its Common Stock in the foreseeable future.                        

     Control by  Management.  The  officers,  directors and key employees of the
Company own approximately  21.7% of the outstanding  shares of Common Stock and,
if they exercise all of the options and warrants that they currently  hold, they
will own  approximately  43.9% of the  Company's  outstanding  shares  of Common
Stock. Due to their stock ownership,  the officers,  directors and key employees
may be in a position to elect the Board of Directors and, therefore,  to control
the business and affairs of the Company, including certain significant corporate
actions  such as  acquisitions,  the sale or purchase of assets and the issuance
and sale of the Company's securities.                                           

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     Shares  Eligible  for Future  Sale.  As of July 31,  1997,  the Company had
reserved  1,335,000 shares of Common Stock for issuance upon exercise of options
which have been or may be granted  pursuant to its stock option plans,  of which
options to purchase  385,000 shares were  outstanding as of July 31, 1997 ("Plan
Options").  Warrants and options to purchase an additional 1,140,000 shares also
were  outstanding  at July 31, 1997  ("Geimer  Warrants"),  as were  warrants to
purchase  34,500 shares which were issued to the  underwriter  of a prior public
offering of the Company's securities ("Underwriter's Warrants"). An aggregate of
335,000  of the Plan  Options  are  exercisable  at  $0.36  per  share,  and the
remaining 50,000 Plan Options which are currently outstanding are exercisable at
$7.25 per share.  The Geimer Warrants were  exercisable at $0.24 per share,  and
were recently exercised and contributed to a Rabbi Trust. Under the terms of the
Rabbi Trust the shares will be held in the trust,  and carried as treasury stock
by the  Company.  The  Rabbi  Trust  provides  that  upon  Mr.  Geimer's  death,
disability, or termination of his employment the shares will be released ratably
over the  subsequent  ten (10) years,  unless the Board of Directors  determines
otherwise.  See Note 8 to the Financial Statement for further  information.  The
Underwriter's Warrants are exercisable at $8.40 per share. Sales of Common Stock
underlying Plan Options or Underwriter's Warrants may adversely affect the price
of the Common Stock.                                                            

     Important  Factors  related to  Forward-Looking  Statements  and Associated
Risks.  This  Report  contains  certain  forward-looking  statements  within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities   Exchange   Act  of  1934,   and  the  Company   intends  that  such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking  statements  include the plans and  objectives of management for
future operations,  including plans and objectives  relating to the products and
future  economic  performance  of the Company.  The  forward-looking  statements
included herein are based on current expectations that involve a number of risks
and  uncertainties.  These  forward-looking  statements are based on assumptions
that the Company will continue to provide services and develop,  market and ship
products on a timely  basis,  that  competitive  conditions  within the software
industry will not change materially or adversely,  that demand for the Company's
products and services will remain strong,  that the Company will retain existing
independent  sales  representatives  and  key  management  personnel,  that  the
Company's forecasts will accurately anticipate market demand and that there will
be  no  material  adverse  change  in  the  Company's  operations  or  business.
Assumptions  relating to the foregoing  involve judgments with respect to, among
other things,  future  economic,  competitive  and market  conditions and future
business  decisions,  all of  which  are  difficult  or  impossible  to  predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking  statements
are reasonable,  any of the assumptions  could prove inaccurate and,  therefore,
there can be no  assurance  that the  results  contemplated  in  forward-looking
information will be realized.  In addition,  as disclosed  elsewhere under other
risk  factors,  the  business  and  operation  of the  Company  are  subject  to
substantial   risks   which   increase   the   uncertainty   inherent   in  such
forward-looking  statements.  In light of the significant uncertainties inherent
in the  forward-looking  information  included  herein,  the  inclusion  of such
information  should not be  regarded as a  representation  by the Company or any
other person that the objectives or plans of the Company will be achieved.      

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 GLOSSARY OF TERMS

Client/Server       The model of interaction in distributed  data  processing in
                    which a program  at one site sends a request to a program at
                    another site and awaits a response.  The requesting  program
                    is called a client,  and the  answering  program is called a
server.                                 

COTS                Acronym for  "Commercial Off The Shelf" which means hardware
               and/or software that is readily available for purchase.

Compiler                                                                        

                    A program  that  converts  another  program from some source
                    language  (or  programming  language)  to  machine  language
(object code).                          

DEC                 Acronym for "Digital Equipment Corporation."                

Interoperability    The ability of software and hardware,  on multiple machines,
from multiple vendors to communicate.   

Legacy Code         Existing  software,   including  proprietary   applications,
                    out-dated  commercial  vendor  applications,  data bases and
                    element relationships, that have been in use for an extended
                    period of time, thus  accumulating the "legacy" of corporate
                    memory,  files and information system functionality that may
no longer adequately satisfy the owner. 

Legacy System       Existing   hardware   and   network   systems,    especially
                    proprietary,  closed  mainframe  environments  or  out-dated
                    architectures  that have been in use for an extended  period
                    of time, typically with limited functionality and limited or
                    no  compatibility  with  more  modern  systems.   DEC's  VMS
          operating system is an example of a Legacy System.

Network             Hardware and software data communication systems.           

NT                  Refers  to the  Windows  NT  operating  system  which is the
                    latest open system  architecture  for Windows  developed  by
Microsoft Corporation.                  

Open Systems        Computer and communications environments based on formal and
                    de facto interface standards.  Such interfaces should not be
                    controlled by a single vendor and must be freely  available.
                    Systems  built  using  these  standard   interfaces  provide
                    portability of software across standard computer  platforms,
                    Interoperability between systems and much greater choice and
flexibility in systems procurement.     

Operating System    The  software  which  schedules  tasks,  allocates  storage,
                    handles the  interface  to hardware  and  presents a default
                    interface  to  the  user  when  no  application  program  is
running.                                

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Portability         The ease with  which a software  application  can be made to
run in a new environment.               

Porting             The  process  or ability  to  electronically  "port" or move
                    data,  files  and  software  from one  computer  or  Network
               environment to another computer or Network environment.

Proprietary         A product not conforming to open system standards,  that was
                    typically  developed by a particular  hardware  manufacturer
for its own computers.                  

Re-engineering      The examination and modification of a system to reconstitute
                    it in a new form and the  subsequent  implementation  of the
new form.                               

RISC               Acronym for reduced instruction set computing.               

UNIX                A widely used multi-user,  general purpose operating system.
                    A trademark  of X/Open  Company  Limited,  for an  operating
                    system originally developed at the Bell Laboratories of AT&T
                    in  the  late  1960's  and  early  1970's  and  subsequently
                    enhanced by the University of California at Berkeley,  AT&T,
      the Open Software Foundation (OSF) and others.

VAX                 Virtual Address eXtension.  Digital Equipment  Corporation's
                    proprietary 32-bit minicomputer,  considered one of the most
successful designs in industry history. 

VAX/VMS             As used in this  annual  report  shall  refer to  DEC's  VAX
                minicomputers, which utilize DEC's VMS operating system.

VMS                 The brand name of the proprietary multi-user, multi-tasking,
                    virtual memory operating system provided by DEC with its VAX
minicomputers.                          

Workstation         A general purpose computer designed to be used by one person
                    at a time and which offers higher  performance than normally
                    found in a personal  computer,  especially  with  respect to
                    graphics,  processing  power  and the  ability  to carry out
several tasks at the same time.         

Year 2000 Problem   The Year 2000  Problem  arises  from the  widespread  use of
                    computer  programs  that  rely on  two-digit  date  codes to
                    perform computations and decision making functions.  Many of
                    these  computer  programs  may fail due to an  inability  to
                    properly  interpret date codes.  For example,  such programs
                may misinterpret "00" as the year 1900 rather than 2000.

Item 2 - Description of Property                                                
--------------------------------                                                

     The Company currently leases  approximately 6,196 square feet of office and
research  facility  space at 303 E. 17th  Avenue,  Suite 108,  Denver,  Colorado
80203,  at a monthly  rental of  approximately  $4,900.  The  lease  expires  on
December 31, 1999.  Additional  space will be needed to provide office space for
the additional technical and sales personnel that the Company anticipates hiring
throughout 1997.  Although the Company's  existing  facility is adequate for the
present number of employees,  management of the Company is currently negotiating
to add an additional 7,300 square feet of space which is expected to be adequate
to accommodate the Company's projected increase in personnel.                   

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Item 3 - Legal Proceedings                                                      
--------------------------                                                      

     The Company is not a party to any legal  proceedings,  nor does  management
believe that any such proceedings are contemplated.                             

Item 4 - Submission of Matters To a Vote of Security Holders                    
------------------------------------------------------------                    

     No  matters  were  submitted  by the  Company  to a vote  of the  Company's
shareholders through the solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year covered by this report.                              

 PART II
 -------

Item 5 - Market For Common Equity and Related Stockholder Matters               
-----------------------------------------------------------------               

     Since  November  19,  1996,  the  Company's  Common Stock has traded on the
Nasdaq  National  Market under the symbol "ACLY." Prior to that date, the Common
Stock  was  traded  in the  over-the-counter  market  on the  Nasdaq  Electronic
Bulletin Board.                                                                 

     The table set forth below presents the range, on a quarterly basis, of high
and low bid  prices  per  share of  Common  Stock as  reported  by the  National
Quotation  Bureau,  Inc. The quotations  represent prices between dealers and do
not include  retail  markup,  markdown or  commissions  and may not  necessarily
represent actual  transactions.  The prices for the quarters ended after October
31, 1996 present high and low sale prices as reported by Nasdaq.                

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

Fiscal 1996                                               
October 31, 1995(1)                         .56               .48 
January 31, 1996(1)                         .64               .44 
April 30, 1996(1)                          1.50               .80 
July 31, 1996(1)                           4.00              1.40 

Fiscal 1997                                             
October 31, 1996(1)                      10.125              3.75 
January 31, 1997                         30-5/8              7-1/4
April 30, 1997                           17-3/8             11-1/4
July 31, 1997                            18                 12-1/4

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

(1)  These prices have been adjusted to reflect the  one-for-four  reverse stock
split that was effected at the close of business on November 18, 1996.

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     The Company had  approximately  108  shareholders  of record as of July 31,
1997,  which does not include  shareholders  whose  shares are held in street or
nominee  names.  Management  of the  Company  believes  that  there are over 600
beneficial owners of its Common Stock.                                          

     Holders  of Common  Stock  are  entitled  to  receive  dividends  as may be
declared by the Board of Directors out of funds legally available  therefor.  No
dividends  have  been  declared  to date by the  Company,  nor does the  Company
anticipate declaring and paying cash dividends in the foreseeable future.       

Item 6 - Management's Discussion and Analysis or Plan of Operation              
------------------------------------------------------------------              

Overview                                                                        

     The Company began to develop software conversion tools for VAX/VMS users to
convert  to UNIX  environments  in  1987.  The  Company's  total  revenues  have
increased  from  $1,382,536  in fiscal  1995 to  $2,097,011  in fiscal  1996 and
$2,488,374 in fiscal 1997.  Income before income tax increased  from $382,394 in
fiscal 1995 to  $1,157,280 in fiscal 1996 and  $1,166,218 in fiscal 1997,  while
net income  increased from $382,394 in fiscal 1995 to $1,192,780 in fiscal 1996,
then  decreased to $965,218 in fiscal 1997 after a provision for income taxes of
$201,000.  The growth in revenues reflects the Company's decision in fiscal 1994
to develop  specialized  consulting  services  which can be  delivered  with the
Company's software tools as an integrated solution to clients' conversion needs.
The Company's consulting services accounted for approximately $294,130 (21.2% of
total  revenues)  in 1995,  $1,074,744  (51.2%  of total  revenues)  in 1996 and
$1,090,473  (43.8% of total  revenues)  in 1997.  The growth in revenues and net
income also reflects the Company's success in establishing  international sales,
which  accounted  for  approximately  22% of total  revenues  in fiscal  1997 as
compared to 15% of total  revenues  in fiscal  1996 and 7% of total  revenues in
fiscal 1995.  Future revenues from sales of the Company's  products and services
are  dependent  upon sales of the  Company's  Year 2000  product and services to
users of VAX/VMS  Legacy Systems and UNIX systems,  while  continuing to provide
conversion services for access to UNIX or NT environments.                      

     The Company  derives its revenue  primarily  from  software  license  fees,
software  maintenance fees and professional service fees. The Company's software
is licensed to primarily Fortune 1,000 companies and governmental  organizations
worldwide.  Professional  services are  provided in  conjunction  with  software
products and also are sold separately if required by the customer.  In addition,
the Company  realizes  license  revenue from sales of software by licensees  who
have  embedded the  Company's  software in their  software  pursuant to run time
licenses.  The  Company's  products and services are marketed  through its sales
force, both domestically and internationally.                                   

     Revenue is recognized  for  consulting  services as services are performed.
Revenue  is  recognized  on  product  licensing   agreements  when  the  Company
substantially completes its obligations under the agreement and the customer has
accepted the product.  Revenue is recognized  for customer  support  services on
maintenance  agreements  using  the  straight-line  method  over the term of the
agreement.  In connection with its software business, the Company functions as a
value-added reseller of computer software,  in that it licenses certain software
from unaffiliated  third parties that is included within certain of its software
products.   The  Company  recognizes  revenue  when  the  computer  software  is
delivered.                                                                      

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Selected Financial Data                                                         

     The following  selected  financial data should be read in conjunction  with
the financial  statements and related notes thereto appearing  elsewhere in this
Form 10-KSB.  The selected  financial  data as of July 31, 1996 and 1997 and for
each of the three years in the period ended July 31, 1997 have been derived from
the financial statements of the Company which have been audited by the Company's
independent  auditors  and are  included  elsewhere  in this  Form  10-KSB.  The
selected  financial  data for each of the two years in the period ended July 31,
1994 have been derived from the audited financial  statements of the Company not
included herein.  The selected  financial data provided below is not necessarily
indicative of the future  results of operations or financial  performance of the
Company.                                                                        

                                                        [Enlarge/Download Table]


                                                                           Year Ended July 31,                            
                                              ----------------------------------------------------------------------------
Statement of Operations Data:                 1993              1994               1995              1996             1997
                                              ----              ----               ----              ----             ----

                                                                 (in thousands except per share data)                     

                                                                                                                          
  Revenue:                                                                                                                
    Product license and                       $ 769             $ 415              $ 751             $ 684          $1,055
      customer support fees                                                                                               
    Resale of purchased software                 37               150                338               338             343
    Consulting fees                              71                41                294             1,075           1,090
    Other revenues                               --                83                 --                --              --
  Total revenue                                 877               689              1,383             2,097           2,488
  Income (loss) from operations                 (20)             (269)               370             1,114             864
  Net income (loss)                             (10)             (262)               382             1,193             965
  Net income (loss) per share                 (.002)             (.05)               .06               .18             .12
  Weighted average common and                                                                                             
    common equivalent shares outstanding  5,492,500(1)      5,492,500(1)       6,591,000(1)      6,733,877(1)    7,848,364

                        July 31,
                       -----------------------------
                        1996                    1997
                        ----                    ----
Balance Sheet Data:                                                             
Working capital                    $1,704                  $8,645           
Current assets                      2,011                   8,996           
Current liabilities                   307                     351           
Total assets                        2,317                   9,849           
Total liabilities                     377                     696           
Shareholders' equity                1,940                   9,153           

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

(1)  Adjusted to reflect the  one-for-four  reverse stock split  effected by the
Company in November 1996.                                             

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Results of Operations                                                           

     The following table sets forth, for the periods  indicated,  the percentage
of net sales  represented by certain items included in the Company's  Statements
of Operations:                                                                  

                                                        [Enlarge/Download Table]


                                                 Fiscal year ended July 31,                 
                                       ---------------------------------------------------- 
                                        1995                   1996                   1997  
                                        ----                   ----                   ----  
                                                                                            
Total revenues                         100.00%                100.00%                100.00%
Cost of services                        10.69                  14.86                  15.98 
Cost of software purchased for resale    7.32                   5.61                   4.13 
General and administrative              19.12                   9.34                  19.37 
Marketing and advertising               26.70                  15.50                  23.31 
Research and development                 9.40                   1.57                   2.46 
                                       ------                 ------                 ------ 
Income from operations                  26.77                  53.12                  34.75 
Interest income                          0.89                   2.07                  12.13 
Income tax benefit (provision)           0.00                   1.69                  (8.08)
                                       ------                 ------                 ------ 
Net income                             27.66%                 56.88%                  38.80%
                                       ======                 ======                 ====== 


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

     Total  revenues  for the year  ended  July 31,  1997,  were  $2,488,374  an
increase of  $391,363,  or 18.7%,  as compared to the year ended July 31,  1996.
Consulting fees for the year ended July 31, 1997, were  $1,090,473,  an increase
of $15,729, or 1.5% as compared to the year ended July 31, 1996, and represented
43.8% of total revenues.  This increase was primarily due to an increase in Year
2000 licensing  fees which require an annual 20% of purchase  price  maintenance
fee. Product license and customer support fees for the year ended July 31, 1997,
were  $1,055,026,  an increase of  $371,029,  or 54.2%,  as compared to the year
ended July 31, 1996.  This  increase is  primarily  due to the sale of Year 2000
factory licenses and tools.  Revenues from the resale of purchased  software for
the year ended July 31, 1997, were $342,875,  an increase of $4,605, or 1.4%, as
compared to the year ended July 31, 1996.                                       

     During the year ended July 31, 1997,  revenues from a single  customer were
$317,800, representing 12.8% of total revenues. In comparison, revenues from the
Company's  three  largest  customers  were  $239,025,   $282,100  and  $353,075,
representing 11.4%, 13.5% and 16.8%, respectively, of the Company's revenues for
the  year  ended  July  31,  1996.  The loss of a major  customer  could  have a
significant impact on the Company's financial performance in any given year.    

     Cost of  services  for the year  ended  July 31,  1997,  was  $397,741,  an
increase of $86,207, or 27.7%, as compared to the year ended July 31, 1996. Cost
of services as a percentage  of revenues from both  consulting  fees and product
license and customer  support fees  increased from 17.7% for the year ended July
31, 1996,  to 18.5% for the year ended July 31,  1997.  This  increase  occurred
principally  because of the  increased  concentration  of Company  resources and
personnel in delivery of consulting services.                                   

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     Cost of software purchased for resale for the year ended July 31, 1997, was
$102,783, a decrease of $14,954 or 12.7%, as compared to the year ended July 31,
1996.                                                                           

     General and administrative  expenses for the year ended July 31, 1997, were
$481,952, an increase of $286,150, or 146.1%, as compared to the year ended July
31,  1996.  This  increase was  principally  due to an increase in the number of
employees and related costs.                                                    

     Marketing  and  advertising  expenses  for the year ended July 31, 1997 was
$580,143,  an increase of $255,181, or 78.5%, as compared to the year ended July
31,  1996.  This  increase was  principally  due to  increased  employee  costs,
attendance  at several  major Year 2000 trade  shows,  production  of  marketing
materials and direct mailing costs.                                             

     Research and  development  expenses for the year ended July 31, 1997,  were
$61,324,  an increase of $28,286,  or 85.6%,  as compared to the year ended July
31, 1996. Technical personnel normally involved in research and development also
provided a substantial  amount of technical  assistance  in connection  with the
Company's consulting services,  so that the actual amount classified as research
and  development  is less  than  would  be the  case if such  expenses  were not
allocable to specific contracts.                                                

     As a result of these factors,  operating income for the year ended July 31,
1997, was $864,431,  a decrease of $249,507,  or 22.4%,  as compared to the year
ended July 31, 1996. However,  interest income for the year ended July 31, 1997,
was $301,787,  an increase of 596%, as compared to the year ended July 31, 1996.
This increase  resulted from the investment in interest  bearing  instruments of
net  proceeds  from the  Company's  public  securities  offering  that closed on
November 22, 1996.                                                              

     Income  taxes  increased  form a benefit  of  $35,500  in fiscal  1996 to a
provision  of  $201,000  in fiscal  1997,  primarily  due to a  decrease  in net
operating loss carryforwards available in fiscal 1997.                          

     Net income for the year ended July 31, 1997,  was  $965,218,  a decrease of
$227,562,  or 19.1%,  as compared to the year ended July 31, 1996. This decrease
was due to a provision for income taxes of $201,000.                            

Year Ended July 31, 1996 Compared to Year Ended July 31, 1995                   

     Total  revenues  for the year  ended  July 31,  1996,  were  $2,097,011  an
increase of  $714,475,  or 51.68%,  as compared to the year ended July 31, 1995.
Consulting fees for the year ended July 31, 1996, were  $1,074,744,  an increase
of  $780,614,  or 265.40% as  compared  to the year  ended  July 31,  1995,  and
represented  51.25% of total  revenues.  This increase  primarily  resulted from
management's  continued  emphasis  in fiscal  1996 on  marketing  of  consulting
services with less emphasis on marketing of products alone.  Management  expects
this trend to continue in the future.  Product license and customer support fees
for the year ended July 31, 1996, were $683,997, a decline of $66,587, or 8.87%,
as compared to the year ended July 31, 1995. This decline is consistent with the
emphasis  on  consulting  noted  above.  Revenues  from the resale of  purchased
software for the year ended July 31, 1996,  were $338,270,  an increase of $448,
or 0.13%, as compared to the year ended July 31, 1995.                          

     During the year ended July 31, 1996,  sales to the Company's  three largest
customers were $239,025, $282,100 and $353,075,  representing 11.40%, 13.45% and
16.84% of the Company's revenues, respectively. In comparison, sales to a single
customer  represented 10.88% of total revenues for the year ended July 31, 1995.
The loss of a major  customer  could have a significant  impact on the Company's
financial performance in any given year.                                        

     Cost of  services  for the year  ended  July 31,  1996,  was  $311,534,  an
increase of $163,791,  or 110.86%,  as compared to the year ended July 31, 1995.
Cost of  services as a  percentage  of revenues  from both  consulting  fees and

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product  license and customer  support fees  increased  from 14.14% for the year
ended July 31, 1995 to 17.71% for the year ended July 31,  1996.  This  increase
occurred principally because of the increased concentration of Company resources
and personnel in delivery of consulting services.                               

     Cost of software purchased for resale for the year ended July 31, 1996, was
$117,737,  an increase of $16,471 or 16.27%,  as compared to the year ended July
31, 1995. This increase was directly  related to the increased sales of products
and related consulting services.                                                

     General and  administrative  expenses for the year ended July 31, 1996 were
$195,802,  a decrease of $68,563,  or 25.93%, as compared to the year ended July
31, 1995. This decrease was principally due to reduced salary cost that resulted
from the departure of a senior executive who was not replaced.                  

     Marketing  and  advertising  expenses for the year ended July 31, 1996 were
$324,962,  a decrease of $44,203,  or 11.97%, as compared to the year ended July
31, 1995. This decrease was  principally  due to decreased  advertising in trade
publications  and termination of direct mail  advertising.  Management  believes
that  advertising  the  Company's  services and products  electronically  on the
Company's web page is a more cost  efficient  and effective  method to reach the
Company's target markets.                                                       

     Research  and  development  expenses  for the year ended July 31, 1996 were
$33,038,  a decrease of $96,921,  or 74.58%,  as compared to the year ended July
31, 1995. This decrease resulted because technical  personnel  normally involved
in  research  and  development   provided  a  substantial  amount  of  technical
assistance in connection with the Company's  consulting  services.  For the year
ended July 31, 1996,  $193,621 of cost of service  represented  assistance  from
these technical personnel with consulting projects.                             

     Interest income for the year ended July 31, 1996, was $43,342,  an increase
of 250.78%,  as compared to the year ended July 31, 1995. This increase resulted
from  increased cash flows from  operations,  that could be invested in interest
bearing instruments.                                                            

     As a result of these factors,  operating income for the year ended July 31,
1996, was $1,113,938,  an increase of $743,900,  or 201.03%,  as compared to the
year ended July 31,  1995.  Net  income  for the year ended July 31,  1996,  was
$1,192,780,  an increase of $810,386,  or 211.92%, as compared to the year ended
July 31, 1995.                                                                  

Liquidity and Capital Resources                                                 

     Although the Company  traditionally has relied  principally upon internally
generated funds to finance its operations and growth, during the year ended July
31,  1997,  the Company  derived  $6,247,707  from the net  proceeds of a public
offering of its Common Stock.  Thus,  during the year ended July 31, 1997,  cash
and cash equivalents increased 460% from $1,407,026 to $7,877,932. Shareholders'
equity  increased  371% from  $1,939,716 at July 31, 1996, to $9,152,641 at July
31, 1997.  However,  the Company generated  $907,642 cash from operations during
the year  ended July 31,  1997,  compared  to  $1,150,515  cash from  operations
generated during the year ended July 31, 1996. At July 31, 1997, the Company had
working capital of $8,645,083 and cash equivalents of $7,877,932.               

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Item 7 - Financial Statements                                                   
-----------------------------                                                   

     The response to this item is submitted as a separate section of this report
beginning on page F-1.                                                          

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

     The Company has not had any  reported  or  material  disagreement  with its
accountants  on any matter of  accounting  principles,  practices  or  financial
statement disclosure.                                                           

PART III

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

     Set forth below is certain information concerning the directors,  executive
officers and key employees of the Company as of the date hereof.                

                                                                [Download Table]


          Name                    Age   Position                          
          ----                    ---   --------                          

Directors and Executive Officers                                          

                                                                          
Thomas V. Geimer                  50   Chairman of the Board of Directors,
                                       Secretary, Chief Financial Officer,
                                       Chief Executive Officer            
Harry J. Fleury                   50   President                          
David C. Wilhelm(1)               78   Director                           
A. Alexander Arnold III(1)        56   Director                           
Key Employees                                                             

Timothy Fitzpatrick               42   Vice President Sales and Marketing 
Dr. Franz Huber                   52   Chief Scientist                    

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

(1)  Members of the Audit and Compensation Committees                           

     Officers  are  appointed  by and  serve at the  discretion  of the Board of
Directors.  Each  director  holds  office  until  the  next  annual  meeting  of
shareholders  or until a successor has been duly elected and  qualified.  All of
the Company's  officers  devote their  full-time to the  Company's  business and
affairs.  There are no family  relationships  between any  directors,  executive
officers or key employees.                                                      

     Thomas V.  Geimer has been the  Chairman  of the Board of  Directors  and a
director of the Company since 1984. He currently  serves as the Chief  Executive
Officer,  Chief  Financial  Officer and Secretary of the Company.  Mr. Geimer is
responsible  for  development  of the Company's  business  strategy,  day to day
operations,  accounting  and  finance  functions  and federal  government  sales
relationships.  Before assuming full-time  responsibilities at the Company,  Mr.
Geimer founded and operated an investment banking firm.                         

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     Harry J. Fleury has served as President of the Company since June 1995. Mr.
Fleury is responsible for engineering  activities and strategies of the Company,
and for  international  sales.  From March 1993 until June 1995,  Mr. Fleury was
Vice President of  International  Sales of the Company with  responsibility  for
developing and directing  international  sales.  Prior to joining the Company in
1993,  Mr.  Fleury was employed by Digital  Equipment  Corporation  serving in a
variety of engineering  and management  positions for over 26 years.  Mr. Fleury
managed DEC's European, Asian and Pacific corporate engineering groups that were
responsible for service capability worldwide, for internal and external products
and for strategic,  operational and tactical  direction.  Mr. Fleury received an
electrical  engineering  degree  in  1967  from  Vermont  Technical  Engineering
College.                                                                        

     David C.  Wilhelm has been a director of the Company  since June 1988.  For
the  past  30  years,  Mr.  Wilhelm  has  been  President  of  Wilhelm  Co.,  an
agribusiness company located in Denver,  Colorado,  which is principally engaged
in the cattle feeding and commodity business. Since 1972, Mr. Wilhelm has been a
director of Colorado National Bank located in Denver, Colorado. Mr. Wilhelm is a
member of the  International  Executive  Service  Corp.,  and was  formerly  the
Director  of the  Colorado  Cattlemen's  Association.  Mr.  Wilhelm  received  a
Bachelor of Arts in American History from Yale University in 1942.              

     A.  Alexander  Arnold  III has served as a director  of the  Company  since
September  1992.  For the past 25 years,  Mr.  Arnold  has  served as a Managing
Director of  Trainer,  Wortham & Co.,  Inc.,  a New York  City-based  investment
counselor firm, which Mr. Arnold  co-founded.  Mr. Arnold received a Bachelor of
Arts   degree  from   Rollins   College  in  1964  and  a  Masters  of  Business
Administration from Boston University in 1966.                                  

     Timothy  Fitzpatrick has served as Vice President of Sales and Marketing of
the Company since 1992. Mr.  Fitzpatrick is responsible  for domestic  marketing
and  sales of the  Company's  products  and  services.  From  1989 to 1992,  Mr.
Fitzpatrick was employed as Vice President of Software Translations, Inc. He was
General  Manager of  Datavision  (UK) Ltd.  from 1987 to 1989.  Mr.  Fitzpatrick
received  a  Bachelor  of Arts  Degree  in City  Planning  from  Michigan  State
University.                                                                     

     Dr. Franz Huber has served as Chief  Scientist  of the Company  since 1988.
Dr.  Huber is  responsible  for the  design  and  development  of the  Company's
software products.  Prior to joining the Company,  Dr. Huber (i) taught Computer
Science at the  University of Colorado;  (ii) taught  Computer  Applications  in
Biomedical  Research at the  University of Colorado  Medical  Center;  and (iii)
worked for several  technology  companies in various  research and  development,
scientific and technical positions. Dr. Huber received his Ph.D. in Physics from
the University of Vienna, Austria in 1968.                                      

Board Committees                                                                

     The Board of  Directors  maintains a  Compensation  Committee  and an Audit
Committee. The Compensation Committee is composed of Messrs. Arnold and Wilhelm,
the Company's non-management directors. The primary function of the Compensation
Committee is to review and make recommendations to the Board with respect to the
compensation, including bonuses, of the Company's officers and to administer the
Company's stock option plan. The Audit Committee is comprised of Messrs.  Arnold
and Wilhelm.  The  function of the Audit  Committee is to review and approve the
scope of audit procedures  employed by the Company's  independent  auditors,  to
review and  approve the audit  reports  rendered  by the  Company's  independent
auditors and to approve the audit fee charged by the independent  auditors.  The
Audit  Committee  reports to the Board of Directors with respect to such matters
and recommends the selection of independent auditors.                           

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Compliance with Section 16(a) of the Exchange Act                               

     Section  16(a) of the  Securities  and  Exchange  Act of 1934,  as amended,
generally  requires the Company's  directors and executive  officers and persons
who own more than 10% of a registered class of the Company's  equity  securities
("10%  owners") to file with the  Securities  and  Exchange  Commission  initial
reports of  ownership  and reports of changes in  ownership  of Common Stock and
other equity  securities of the Company.  directors  executive  officers and 10%
owners are required by Securities and Exchange Commission  regulation to furnish
the Company with copies of all Section  16(a) forms they file.  To the Company's
knowledge,  based  solely on review of copies of such  reports  furnished to the
Company and verbal  representations  that no other  reports were  required to be
filed  during the fiscal  year ended July 31,  1997,  all Section  16(a)  filing
requirements applicable to its directors, executive officers and 10% owners were
met,  except that: (i) Mr.  Wilhelm,  a director of the Company,  failed to file
Forms 4 for the months of July and August 1997 to report  sales of an  aggregate
of 87,400  shares in the open market,  which will be reported in an  appropriate
filing with the Securities and Exchange Commission;  (ii) Mr. Arnold, a director
of the  Company,  failed to file Forms 4 for the months of  February,  March and
June 1997 to report sales of an  aggregate of 150,000  shares in the open market
by  certain  trusts  for which he is a trustee,  which  will be  reported  in an
appropriate  filing with the Securities and Exchange  Commission;  and (iii) Mr.
Geimer, an executive officer and director of the Company failed to file a Form 4
for the  month of  December  1996 to  report  the sale of  60,000  shares to the
Underwriter  of the  Company's  second public  offering in  connection  with the
Underwriter's  exercise of its over-allotment  option, which will be reported in
an appropriate filing with the Securities and Exchange Commission.              

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Item 10 - Executive Compensation                                                

     Summary  Compensation  Table. The following table sets forth the annual and
long-term  compensation  for  services in all  capacities  to the Company in the
three fiscal years ended July 31, 1997, of Thomas V. Geimer and Harry J. Fleury,
who are the Company's most highly compensated  executive  officers,  and Timothy
Fitzpatrick, a key employee of the Company.                                     

                                                        [Enlarge/Download Table]


                                                                                         Long Term    
                                       Annual Compensation                              Compensation  
                           ---------------------------------------------------------    ------------- 
                                                                       Other            Securities    
Name and                   Fiscal                                      Annual           Underlying    
Principal Position         Year          Salary         Bonus          Compensation     Options       
------------------         ----          ------         -----          ------------     -----------   

                                                                                                      
Thomas V.  Geimer          1997          $89,423          $75,000(1)        $ 3,000(2)       --       
  Chief Executive Officer  1996          $70,458          $37,500(1)        $   --       1,200,000(3) 
  and Chief Financial      1995          $64,250          $   --            $   --           --       
  Officer                                                                                             

Harry J. Fleury            1997          $69,076          $  6,025(4)       $   --           --       
  President                1996          $61,000          $10,331(4)        $   --           --       
                           1995          $50,000          $  6,685(4)       $   --          100,000(5)

Timothy Fitzpatrick        1997          $62,885          $40,443(6)        $   --           --       
  Vice President           1996          $57,885          $44,030(6)        $   --           --       
  Sales and Marketing      1995          $55,000          $23,657(6)        $   --           --       


----------------------------                                                    
(1)  Represents  deferred  compensation for Mr. Geimer pursuant to the Company's
     deferred  compensation plan, $37,500 of which vested during the fiscal year
     ended July 31,  1996,  and $75,000 of which  vested  during the fiscal year
ended July 31, 1997.                                                  
(2)  Represents reimbursement of premium on life insurance.                     
(3)  Represents stock options and warrants to purchase an aggregate of 1,200,000
     shares at an  exercise  price of $0.24 per share that were  extended  until
     December  31, 1997.  As of the date of this Report,  all of the options and
     warrants  have  been  exercised.  See Note 8 to  Financial  Statements  for
further information.                                                  
(4)  Includes  sales  commissions  earned by Mr. Fleury on revenues from certain
international sales.                                                  
(5)  Represents stock options to purchase 100,000 shares at an exercise price of
$0.36 per share .                                                     
(6)  Represents  sales  commissions  earned by Mr.  Fitzpatrick on revenues from
certain domestic sales.                                               

     Option/Warrant  Values.  The following table provides  certain  information
concerning the fiscal year end value of unexercised  options or warrants held by
Mr. Fleury and Mr. Geimer,  each of whom served as the Company's chief executive
officer during a portion of 1996, and for Mr. Fitzpatrick.                      

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                                                        [Enlarge/Download Table]


                            Aggregated Option Exercises in 1997 Fiscal Year                            
                                   and Fiscal Year End Option Values                                   

                     Shares                           Number of Unexercised      Value of Unexercised  
                     Acquired on      Value           Options at Fiscal Year     In-the-Money Options  
Name                 Exercise         Realized        End                        at Fiscal Year End(1) 
----                 --------         --------        ------------------------   ----------------------
                                                      Exer-           Unexer-    Exer-          Unexer-
                                                      cisable         cisable    cisable        cisable
                                                      -------         -------    -------        -------

                                                                                                       
Harry J. Fleury           0                 0        100,000            0       $ 1,346,000        0   

Thomas V.  Geimer    60,000          $369,900      1,140,000            0       $15,461,250        0   

Timothy Fitzpatrick  30,000          $181,350         95,000            0       $ 1,277,987        0   

------------------------------------                                            
(1)  Value  calculated by determining  the difference  between the closing sales
     price on July 31, 1997, of $13.8125 per share and the exercise price of the
     options or warrants.  Fair market value was not  discounted  for restricted
 nature of any stock purchased on exercise of these options or warrants.

Compensation Pursuant to Plans                                                  

     Employee  Retirement Plan. During fiscal year 1996, the Company established
a SARSEP-IRA  employee  pension  plan that covers  substantially  all  full-time
employees.  Under the plan,  employees  have the option to  contribute up to the
lesser  of  15%  of  their   compensation  or  $9,240.   The  Company  may  make
discretionary  contributions to the plan based on recommendations from the Board
of  Directors.  For the year ended July 31,  1997,  the Company  contributed  an
aggregate of $15,360 to the plan.                                               

     Deferred  Compensation  Plan.  In January 1996,  the Company  established a
deferred  compensation  plan for the Company's  employees.  The Company may make
discretionary  contributions  to the plan  based upon  recommendations  from the
Board of  Directors.  For each of the fiscal years ended July 31, 1996 and 1997,
the Company contributed $75,000 to the plan.                                    

     Options and Warrants. The Company currently has outstanding an aggregate of
335,000  options  issued to employees of the Company  pursuant to the  Company's
1987 non-qualified  stock option plan (the "1987 Plan"). The 335,000 options are
exercisable  at a price of $0.36 per share.  The  Company's  Board of  Directors
during the 1994 fiscal year adopted a resolution providing that for so long as a
recipient of an option grant  remains in the employ of the Company,  the options
held will not expire and if the recipient's employment is terminated, the holder
will have up to 90 days after  termination to exercise any vested but previously
unexercised options. In 1997, the Board of Directors passed a further resolution
clarifying that upon the death of an optionee, an unexercised option will remain
exercisable  for a period of one year by,  and only by,  the  person to whom the
optionee's   rights  have  passed  by  will  or  by  the  laws  of  descent  and
distribution.  All options  previously granted are administered by the Company's
Board of Directors.  The options  provide for adjustment of the number of shares
issuable in the case of stock  dividends  or stock  splits or  combinations  and
adjustments in the case of recapitalization, merger or sale of assets.          

     On October 14, 1997,  Thomas V. Geimer  exercised an aggregate of 1,140,000
warrants and options (the "Geimer  Warrants") to acquire 1,140,000 shares of the
Company's common stock at an exercise price of $0.24 per share.  Under the terms
of the Rabbi Trust the shares will be held in the trust, and carried as treasury
stock by the Company.  The Rabbi Trust  provides that upon Mr.  Geimer's  death,

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disability, or termination of his employment the shares will be released ratably
over the  subsequent  ten (10) years,  unless the Board of Directors  determines
otherwise. See Note 8 to the Financial Statement for further information.       

     The Board of Directors of the Company has adopted an incentive stock option
plan (the "Qualified  Plan") which provides for the grant of options to purchase
an aggregate of not more than 700,000 shares of the Company's  Common Stock. The
purpose of the Qualified  Plan is to make options  available to  management  and
employees  of the Company in order to provide  them with a more direct  stake in
the future of the Company and to encourage them to remain with the Company.  The
Qualified  Plan  provides  for the  granting  to  management  and  employees  of
"incentive  stock  options"  within the meaning of Section  422 of the  Internal
Revenue Code of 1986 (the "Code").                                              

     The Board of  Directors  of the Company has adopted a  non-qualified  stock
option plan (the  "Non-Qualified  Plan") which provides for the grant of options
to purchase an aggregate of not more than 300,000 shares of the Company's Common
Stock.  The  purpose  of  the  Non-Qualified  Plan  is to  provide  certain  key
employees,  independent  contractors,  technical  advisors and  directors of the
Company with options in order to provide  additional  rewards and incentives for
contributing  to the success of the  Company.  These  options are not  incentive
stock options within the meaning of Section 422 of the Code.                    

     The Qualified  Plan and the  Non-Qualified  Plan (the "Stock Option Plans")
will be administered by a committee (the "Committee")  appointed by the Board of
Directors  which  determines  the persons to be granted  options under the Stock
Option Plans and the number of shares subject to each option. No options granted
under the Stock Option Plans will be  transferable by the optionee other than by
will  or  the  laws  of  descent  and  distribution  and  each  option  will  be
exercisable,  during the lifetime of the optionee,  only by such  optionee.  Any
options  granted  to an  employee  will  terminate  upon  his  ceasing  to be an
employee, except in limited circumstances,  including death of the employee, and
where  the  Committee  deems it to be in the  Company's  best  interests  not to
terminate the options.                                                          

     The  exercise  price of all  incentive  stock  options  granted  under  the
Qualified Plan must be equal to the fair market value of such shares on the date
of grant as determined by the  Committee,  based on guidelines  set forth in the
Qualified Plan. The exercise price may be paid in cash or (if the Qualified Plan
shall meet the  requirements of rules adopted under the Securities  Exchange Act
of 1934) in Common Stock or a combination of cash and Common Stock.  The term of
each option and the manner in which it may be exercised  will be  determined  by
the Committee, subject to the requirement that no option may be exercisable more
than 10 years after the date of grant. With respect to an incentive stock option
granted  to a  participant  who owns more than 10% of the  voting  rights of the
Company's  outstanding capital stock on the date of grant, the exercise price of
the option must be at least  equal to 110% of the fair market  value on the date
of grant and the option may not be  exercisable  more than five years  after the
date of grant.                                                                  

     The Stock Option Plans were  approved by the  Company's  shareholders  at a
Special  Shareholders  Meeting  held on November 8, 1996.  As of July 31,  1997,
25,000 options,  exercisable at $7.25 per share of Common Stock, had been issued
to each of Messrs. Wilhelm and Arnold pursuant to the Non-Qualified Plan.       

Item 11 - Security Ownership of Certain Beneficial Owners and Management        

     The following  table sets forth certain  information  regarding  beneficial
ownership of the  Company's  Common Stock as of July 31, 1997 by (i) each person
who is known by the Company to own  beneficially  more than 5% of the  Company's
outstanding  Common  Stock;  (ii)  each  of the  Company's  executive  officers,

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directors and key employees; and (iii) all executive officers and directors as a
group.  Common Stock not outstanding but deemed  beneficially owned by virtue of
the right of an  individual  to  acquire  shares  within 60 days is  treated  as
outstanding  only when  determining  the amount and  percentage  of Common Stock
owned by such individual. Except as noted, each person or entity has sole voting
and sole investment power with respect to the shares shown.                     

                                         Shares Beneficially Owned
Name and Address                                -------------------------       
of Beneficial Owner                            Number               Percent     
-------------------                            ------               -------     

Thomas V. Geimer(1), (2)                     1,190,000               15.2%      

Harry J. Fleury(1), (3)                        193,750                2.8%      

Timothy Fitzpatrick(1),(4)                      95,000                1.4%      

Dr. Franz Huber(1),(4)                          95,000                1.4%      

A. Alexander Arnold III(5)                   1,100,000               16.4%      
845 Third Ave., 6th Flr                                                         
New York, NY  10021                                                             

David C. Wilhelm(6)                            261,350               3.9%       
3130 E. Exposition Street                                                       
Denver, CO 80209                                                                

Solar Satellite (7)                            527,650                7.9%      
Communication, Inc.                                                             
5650 Greenwood Plaza  Blvd.                                                     
#107                                                                            
Englewood, CO 80111                                                             

Executive Officers and Directors            2,745,100                34.4%      
as a Group (4 persons)                                                          

---------------------------------                                               
(1)  The address for Messrs.  Geimer,  Fleury,  Fitzpatrick  and Huber is 303 E.
17th Ave., #108, Denver, CO 80203.                                    
(2)  Includes  1,140,000  shares  which  may be  purchased  by Mr.  Geimer  upon
     exercise of his warrants and options.  Mr. Geimer  exercised  these options
     and warrants on October 14, 1997, and simultaneously contributed the shares
     acquired to a Rabbi Trust.  See Note 8 to Financial  Statements for further
information.                                                          
(3)  Includes  100,000 shares which may be purchased by Mr. Fleury upon exercise
of options.                                                           
(4)  Represents  shares which may be acquired by Messrs.  Fitzpatrick  and Huber
upon exercise of their options.                                       
(5)  Represents  1,075,000 shares held by four trusts.  Mr. Arnold merely serves
     as trustee for each of those trusts but is not a beneficiary  of and has no
     pecuniary  interest in any of those  trusts.  Also  includes  25,000 shares
which may be purchased by Mr. Arnold upon the exercise of options.    
(6)  Includes  236,350  shares held by the Jean C. Wilhelm  Trust,  of which Mr.
     Wilhelm is the lifetime  beneficiary  and trustee,  and 25,000 shares which
may be purchased by Mr. Wilhelm upon exercise of options.             
(7)  Solar  Satellite  Communication,  Inc.  is not  affiliated  with any of the
     Company's   officers,   directors,   key   employees  or  other   principal
     shareholders.  Based  upon its  review of  certain  reports  filed with the
     Securities and Exchange Commission and certain other inquiries,  management
     believes that Solar Satellite is an inactive  company that is controlled by
certain Japanese Nationals and a company controlled by those persons. 

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Item 12 - Certain Relationships and Related Transactions                        
--------------------------------------------------------                        

     During fiscal year 1996,  the Company  established a deferred  compensation
plan  for  the  Company's   employees.   The  Company  may  make   discretionary
contributions to the plan based on recommendations  from the Board of Directors.
As of July 31,  1997,  the  deferred  compensation  agreement  was funded in the
amount of $150,000 for Thomas V. Geimer,  and Mr.  Geimer was vested in $112,500
of this amount. The balance of $37,500 will vest by January 31, 1998.           

     There were no other  transactions or series of transactions  for the fiscal
year ended July 31, 1997 nor are there any currently proposed  transactions,  or
series of the same to which the Company is a party, in which the amount involved
exceeds  $60,000 and in which,  to the  knowledge of the Company,  any director,
executive  officer,  nominee,  five  percent  shareholder  or any  member of the
immediate  family  of the  foregoing  persons,  have or will  have a  direct  or
indirect material interest.                                                     

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

(a)      Exhibits                                                               

There are no exhibits filed with this Annual Report                   

(b)      Reports on Form 8-K                                                    

     The Company  has not filed a report on Form 8-K during the last  quarter of
the fiscal year ended July 31, 1997.                                            

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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.                       

                                  ACCELR8 TECHNOLOGY CORPORATION

Date:  October 30, 1997                   By:  /s/  HARRY J. FLEURY             
     -------------------------               ---------------------------------
                                        Harry J. Fleury, President

     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.                    

Date:  October 30, 1997                         /s/  THOMAS V. GEIMER           
       ------------------------                 --------------------------------
                                            Thomas V. Geimer, Secretary,
                                           Chief Executive Officer and
                                      Chief Financial Office

Date:  October 30, 1997                         /s/  A. ALEXANDER ARNOLD III    
       -------------------------                --------------------------------
                                       A. Alexander Arnold III

Date:  October 30, 1997                         /s/  DAVID C. WILHELM           
       -------------------------                --------------------------------
                                David C. Wilhelm

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INDEPENDENT AUDITORS' REPORT                                                    

To the Board of Directors and Shareholders of                                   
Accelr8 Technology Corporation                                                  
Denver, Colorado                                                                

We  have  audited  the  accompanying   balance  sheets  of  Accelr8   Technology
Corporation  (the  "Company")  as of July 31,  1997 and  1996,  and the  related
statements of operations,  shareholders'  equity, and cash flows for each of the
three years in the period ended July 31, 1997.  These  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.                   

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the  financial  position of the Company as of July 31, 1997 and 1996,
and the results of its operations and its cash flows for each of the three years
in the  period  ended  July  31,  1997 in  conformity  with  generally  accepted
accounting principles.                                                          

DELOITTE & TOUCHE LLP                                                           

Denver, Colorado                                                                
October 24, 1997                                                                

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ACCELR8 TECHNOLOGY CORPORATION                                                  

BALANCE SHEETS                                                                  
JULY 31, 1997 AND 1996                                                          
--------------------------------------------------------------------------------

ASSETS                                                   1997           1996    
CURRENT ASSETS:                                                                 
 Cash and cash equivalents                          $ 7,877,932    $ 1,407,026
 Accounts receivable                                    910,334        431,252
 Prepaid expenses and other                              26,800         49,695
 Deferred tax assets (Note 5)                           181,400        123,223
                                                    -----------    -----------
   Total current assets                               8,996,466      2,011,196
                                                    -----------    -----------
PROPERTY AND EQUIPMENT:                                                         
 Computer equipment                                     231,254        209,735
 Furniture and fixtures                                  32,476         11,231
                                                    -----------    -----------
   Total property and equipment                         263,730        220,966
  Less accumulated depreciation                          (96,594)      (150,453)
                                                    -----------    -----------
   Net property and equipment                           167,136         70,513
                                                    -----------    -----------
SOFTWARE DEVELOPMENT COSTS, less accumulated                                    
 amortization: 1997, $875,046; 1996, $746,260           506,322        160,321
INVESTMENTS (Note 6)                                     179,020         75,000 
                                                    -----------    -----------
TOTAL                                                $ 9,848,944    $ 2,317,030 
                                                    ===========    ===========

LIABILITIES AND SHAREHOLDERS' EQUITY                                            
CURRENT LIABILTIES:                                                             
 Accounts payable                                   $    97,499    $    52,091
 Income taxes payable                                    47,394         18,000
 Accrued liabilities                                     56,360         20,316
 Product development advance payable (Note 2)                 0         50,000
 Deferred consulting revenue                             46,252         91,724
 Deferred maintenance revenue                           103,878         75,460
                                                    -----------    -----------
   Total current liabilities                            351,383        307,591
                                                    -----------    -----------
DEFERRED TAX LIABILITIES (Note 5)                        203,400         69,723 
                                                    -----------    -----------
OTHER LONG-TERM LIABILITIES (Note 6)                     141,520              0 
                                                    -----------    -----------
COMMITMENTS (Note 6)                                                            
SHAREHOLDERS' EQUITY (Notes 3 and 6):                                           
Common stock, no par value; 11,000,000 shares                               
authorized: 6,692,500 and 5,492,500 shares                                
  issued and outstanding                              8,218,677      1,970,970
 Contributed capital                                     41,449         41,449
  Retained earnings (deficit)                            892,515        (72,703)
                                                    -----------    -----------
   Shareholders' equity                               9,152,641      1,939,716
                                                    -----------    -----------
TOTAL                                                $ 9,848,944    $ 2,317,030 
                                                    ===========    ===========

See notes to financial statements.                                              

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ACCELR8 TECHNOLOGY CORPORATION                                                                              

STATEMENTS OF OPERATIONS                                                                                    
YEARS ENDED JULY 31, 1997, 1996 AND 1995                                                                    
------------------------------------------------------------------------------------------------------------

                                                    1997                     1996                    1995   

REVENUES:                                                                                                   
                                                                                                            
  Consulting fees                                $ 1,090,473             $ 1,074,744             $   294,130
  Product license and customer                                                                              
   support fees (Note 2)                           1,055,026                 683,997                 750,584
  Resale of purchased software                       342,875                 338,270                 337,822
                                                 -----------             -----------             -----------

    Total revenues                                 2,488,374               2,097,011               1,382,536
                                                 -----------             -----------             -----------

COSTS AND EXPENSES:                                                                                         
  Cost of services                                   397,741                 311,534                 147,743
  Cost of software purchased for resale              102,783                 117,737                 101,266
  General and administrative                         481,952                 195,802                 264,365
  Marketing and advertising                          580,143                 324,962                 369,165
  Research and development                            61,324                  33,038                 129,959
                                                 -----------             -----------             -----------
    Total expenses                                 1,623,943                 983,073               1,012,498
                                                 -----------             -----------             -----------
INCOME FROM OPERATIONS                               864,431               1,113,938                 370,038

INTEREST INCOME                                      301,787                  43,342                  12,356
                                                 -----------             -----------             -----------

INCOME BEFORE INCOME TAXES                         1,166,218               1,157,280                 382,394
                                                 -----------             -----------             -----------
INCOME TAX (PROVISION) BENEFIT                                                                              
 (Note 5):                                                                                                  
  Current                                           (125,500)                (18,000)                      0
  Deferred                                           (75,500)                 53,500                       0
                                                 -----------             -----------             -----------
    Total (provision) benefit                       (201,000)                 35,500                       0
                                                 -----------             -----------             -----------

NET INCOME                                       $   965,218             $ 1,192,780             $   382,394
                                                 ===========             ===========             ===========

WEIGHTED AVERAGE COMMON AND                                                                                 
  COMMON EQUIVALENT SHARES                                                                                  
  OUTSTANDING (Note 8)                             7,848,364               6,733,877               6,591,000
                                                 ===========             ===========             ===========

NET INCOME PER SHARE                             $      0.12             $      0.18             $      0.06
                                                 ===========             ===========             ===========

See notes to financial statements.                                                                          

                                              F-3                                                           


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ACCELR8 TECHNOLOGY CORPORATION                                                                                             

STATEMENTS OF SHAREHOLDERS' EQUITY                                                                                         
YEARS ENDED JULY 31, 1997, 1996 AND 1995                                                                                   
---------------------------------------------------------------------------------------------------------------------------

                                              Common Stock                                   Retained            Total     
                                      -----------------------------       Contributed        Earnings         Shareholders'
                                         Shares           Amount            Capital          (Deficit)           Equity    

                                                                                                                           
BALANCE, JULY 31, 1994                  5,492,500       $ 1,970,970       $    41,449       $(1,647,877)       $   364,542 

  Net income                                    0                 0                 0           382,394            382,394 
                                      -----------       -----------       -----------       -----------        ----------- 

BALANCE, JULY 31, 1995                  5,492,500         1,970,970            41,449        (1,265,483)           746,936 

  Net income                                    0                 0                 0         1,192,780          1,192,780 
                                      -----------       -----------       -----------       -----------        ----------- 

BALANCE, JULY 31, 1996                  5,492,500         1,970,970            41,449           (72,703)         1,939,716 

  Proceeds from issuance of                                                                                                
   common stock, net of                                                                                                    
   offering costs of $817,093           1,000,000         6,182,907                 0                 0          6,182,907 

  Proceeds from exercise of                                                                                                
   stock optons                           200,000            64,800                 0                 0             64,800 

  Net income                                    0                 0                 0           965,218            965,218 
                                      -----------       -----------       -----------       -----------        ----------- 

BALANCE, JULY 31, 1997                  6,692,500       $ 8,218,677       $    41,449       $   892,515        $ 9,152,641 
                                      ===========       ===========       ===========       ===========        =========== 

See notes to financial statements.                                                                                         

                                                                F-4                                                        

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ACCELR8 TECHNOLOGY CORPORATION                                                                               

STATEMENTS OF CASH FLOWS                                                                                     
YEARS ENDED JULY 31, 1997, 1996 AND 1995                                                                     
------------------------------------------------------------------------------------------------------------ 

                                                         1997                  1996                 1995     

CASH FLOWS FROM OPERATING ACTIVITIES:                                                                        
                                                                                                             
  Net income                                         $   965,218           $ 1,192,780           $   382,394 
  Adjustments to reconcile net income                                                                        
   to net cash provided by operating                                                                         
   activities:                                                                                               
   Depreciation and amortization                         166,819               121,600               139,072 
   Write-off of product development                                                                          
    advance payable                                      (50,000)                    0                     0 
   Deferred income tax provision (benefit)                75,500               (53,500)                    0 
   Net change in assets and liabilities:                                                                     
    Accounts receivable                                 (479,082)             (138,716)             (108,984)
    Prepaid expenses                                      22,895               (48,525)                6,705 
    Accounts payable                                      45,408                (8,050)               30,599 
    Income taxes payable                                  29,394                18,000                     0 
    Accrued liabilities                                   36,044               (10,457)                8,001 
    Deferred consulting revenue                          (45,472)               91,724                     0 
    Deferred maintenance revenue                          28,418               (14,341)                2,823 
    Other long-term liabilities                          141,520                     0                     0 
                                                     -----------           -----------           ----------- 

      Net cash provided by operating activities          936,662             1,150,515               460,610 
                                                     -----------           -----------           ----------- 
CASH FLOWS FROM INVESTING ACTIVITIES:                                                                        
  Software development costs                            (474,788)              (80,543)             (108,510)
  Purchase of computer equipment                        (113,410)              (25,371)                    0 
  Purchase of furniture and fixtures                     (21,246)                    0                     0 
  Increase in investments                               (104,020)              (75,000)                    0 
                                                     -----------           -----------           ----------- 

      Net cash used in investing activities             (713,463)             (180,914)             (108,510)
                                                     -----------           -----------           ----------- 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                        
  Proceeds from issuance of common stock, less                                                               
   offering costs                                      6,247,707                     0                     0 
                                                     -----------           -----------           ----------- 

NET INCREASE IN CASH                                                                                         
  AND CASH EQUIVALENTS                                 6,470,906               969,601               352,100 

CASH AND CASH EQUIVALENTS,                                                                                   
  BEGINNING OF YEAR                                    1,407,026               437,425                85,325 
                                                     -----------           -----------           ----------- 

CASH AND CASH EQUIVALENTS,                                                                                   
  END OF YEAR                                        $ 7,877,932           $ 1,407,026           $   437,425 
                                                     ===========           ===========           =========== 

See notes to financial statements                                                                            

                                                         F-5                                                 


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ACCELR8 TECHNOLOGY CORPORATION                                                  

NOTES TO FINANCIAL STATEMENTS                                                   
YEARS ENDED JULY 31, 1997, 1996 AND 1995                                        
--------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                   

     Business - Accelr8 Technology  Corporation ("Accelr8" or the "Company) is a
     provider of software  tools and  consulting  services for the conversion of
     Digital  Equipment   Corporation   ("DEC")  legacy  systems  to  UNIX  open
     client/server environments.  The Company's consulting services and software
     conversion  tools enable the  Company's  customers to analyze and implement
     their UNIX  conversions in a predictable  and  cost-effective  manner.  The
     Company's clients include a number of Fortune 1000 companies and government
agencies.                                                             

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

     Cash and Cash Equivalents - All highly liquid  investments with an original
     maturity of three months or less at time of purchase are  considered  to be
equivalent to cash.                                                   

     Concentration  of Credit  Risk -  Financial  instruments  that  potentially
     subject the Company to  concentrations  of credit risk consist primarily of
     cash  equivalents  and  accounts  receivable.  The Company  places its cash
     equivalents with a high credit quality financial  institution.  The Company
     grants credit to domestic and international  clients in various industries.
     Exposure to losses on accounts receivable is principally  dependent on each
     client's   financial   position.   The  Company   performs  ongoing  credit
evaluations of its clients' financial condition.                      

     Property  and  Equipment - Property  and  equipment  are  recorded at cost.
     Maintenance and repairs are charged to expense as incurred and expenditures
     for major improvements are capitalized. Gains and losses from retirement or
     replacement  are  included in  operations.  Depreciation  of  property  and
     equipment is computed  using the  straight-line  method over the  estimated
useful life of the assets, ranging from five to seven years.          

     Software  Development Costs - Costs incurred internally to develop computer
     software products and the costs to acquire  externally  developed  software
     products  (which  have no  alternative  future  use) to be sold,  leased or
     otherwise   marketed  are  charged  to  expense  until  the   technological
     feasibility  of the  product  has  been  established.  After  technological
     feasibility  has been  established  and until the product is available  for
     general release, software development, product enhancements and acquisition
     costs are capitalized.  Amortization of capitalized  costs is computed on a
     product-by-product  basis over (a) the period  equal to the future  revenue
     stream of the product  using the ratio that current  revenues  bears to the
     total of current and future anticipated revenues of the product, or (b) the
     remaining  estimated  economic life of the product  (three years) using the
     straight-line  method,  whichever  method  results in the  greater  amount.
     Amortization  expense relating to software  development costs for the years
     ended July 31, 1997,  1996, and 1995 was $128,787,  $96,237,  and $113,396,
respectively.                                                         

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     Revenue  Recognition - Revenue is  recognized  for  consulting  services as
     services  are  performed.   Revenue  is  recognized  on  product  licensing
     agreements when the Company  substantially  completes its obligations under
     the  agreement  and the  customer  has  accepted  the  product.  Revenue is
     recognized for customer  support  services on maintenance  agreements using
the straight-line method over the term of the agreement.              

     In  connection  with its  software  business,  the Company  functions  as a
     value-added  reseller of computer software.  The Company recognizes revenue
when the computer software is delivered.                              

     Deferred Revenue - Deferred  consulting revenues represent amounts received
     but not earned under consulting  agreements.  Deferred  maintenance revenue
  represents amounts received but not earned under maintenance agreements.

     Income Taxes - The Company  accounts for income  taxes in  accordance  with
     Statement of Financial  Accounting  Standards ("SFAS") No. 109, "Accounting
     for Income  Taxes,"  which  requires  an asset and  liability  approach  to
     financial  accounting and reporting for income taxes.  Deferred  income tax
     assets and  liabilities are computed  annually for differences  between the
     financial   statement  basis  and  the  income  tax  basis  of  assets  and
     liabilities  that will  result in  taxable  or  deductible  amounts  in the
     future. Such deferred income tax computations are based on enacted tax laws
     and rates  applicable to the years in which the differences are expected to
     affect taxable income. A valuation  allowance is established when necessary
     to  reduce  deferred  income  tax  assets  to the  amounts  expected  to be
realized.                                                             

     Net Income Per Share - Net income per share is computed  using the weighted
     average number of common and common  equivalent shares  outstanding  during
     the period.  Common stock  equivalents  include stock options and warrants.
     Note 8 discusses  options  exercised  after July 31, 1997 and the impact on
the calculation of per share data.                                    

     Stock  Based   Compensation   -  The  Company   accounts  for  stock  based
     compensation to employees and directors using the intrinsic value method in
     accordance  with  Accounting  Principles  Board  ("APB")  Opinion  No.  25,
     "Accounting for Stock Issued to Employees." The Company  accounts for stock
     based  compensation  to  non-employees  in  accordance  with  Statement  of
     Financial  Accounting  Standards SFAS No. 123,  "Accounting for Stock Based
Compensation."                                                        

     New  Accounting  Pronouncements  -  During  February  1997,  the  Financial
     Accounting  Standards  Board  ("FASB")  issued SFAS No. 128,  "Earnings Per
     Share."  SFAS  No.  128,  which  supersedes  APB No.  15,  establishes  new
     standards for computing and presenting  earnings per share.  The Company is
     required to adopt this  Statement  in fiscal year 1998,  including  interim
     periods  ending  after  December  15, 1997.  When  adopted,  all prior year
     earnings per share data are  required to be restated.  The Company does not
     expect that the adoption of this Statement  will have a material  effect on
the Company's reported earnings per share amounts.                    

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
     Income."  SFAS No. 130  establishes  standards for reporting and display of
     comprehensive  income and its  components  (revenues,  expenses,  gains and
     losses) in a full set of general purpose financial statements.  The Company
     is  required  to adopt SFAS No.  130 in fiscal  1999.  Reclassification  of
     financial  statements for earlier periods provided for comparative purposes
     is required. The Company has not yet determined the impact of adopting this
statement on its financial statements.                                

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2. PRODUCT DEVELOPMENT ADVANCE PAYABLE                                          

     On September 4, 1991, the Company entered into an assistance agreement with
     a third party, wherein the Company received an advance of $50,000 to assist
     in the development of a specific  software product which the Company was to
     own exclusively.  Development of the software product was completed and the
     advance of $50,000  became  payable to the third party as of July 31, 1995.
     As of July 31, 1996 the amount remained outstanding and the third party had
     the option of  converting  the  outstanding  balance to a interest  bearing
     note. As of July 31, 1997, the Company has determined  that the third party
     has no  intention  of  collecting  the  amount;  therefore,  the amount was
     recorded as product  license and custom  support fees during the year ended
July 31, 1997.                                                        

3. SHAREHOLDERS' EQUITY                                                         

     Authorized  Shares  and  Reverse  Stock  Split  -  On  November  18,  1996,
     shareholders approved a reduction in the number of authorized shares of the
     Company's common stock from 55,000,000 to 11,000,000.  Simultaneously,  the
     Company  effected a  one-for-four  reverse  stock split.  All share and per
share amounts have been restated to reflect the reverse stock split.  

     Stock Option Plans - The Company has three stock-based  compensation  plans
and options issued to key executives which are discussed below:       

Options and Warrant Agreements with Key Executives                    
--------------------------------------------------                    
     The  Chairman of the Board has options and  warrants to purchase  1,140,000
     shares of the  Company's  stock at $.24 per share which  expire on December
     31, 1997. A former  President of the Company held other options to purchase
     250,000  shares  of the  Company's  common  stock at $.28 per  share  which
expired unexercised in December 1995.                                 

Employee Stock Option Plan                                            
--------------------------                                            
     The Employee Stock Option Plan (the  "Employee  Plan") permits the granting
     of non-qualified stock options to employees,  officers and directors of the
     Company.  The exercise price of each option, which do not expire as long as
     the  recipient  remains an employee of the Company,  is equal to the market
     price of the  Company's  common  stock on the date of  grant.  The  Company
     reserved  475,000 of its  authorized  but  unissued  common stock for stock
     options to be granted under the Employee Plan. During 1997, 140,000 options
     were exercised,  resulting in 335,000 options outstanding at July 31, 1997.
     Under the terms of the Employee Plan,  options vest at 25% annually.  There
     are no shares which  remain  available  under the Employee  Plan for future
grants.                                                               

Incentive Stock Option Plan                                           
---------------------------                                           
     The Company has reserved  700,000 of its  authorized  but  unissued  common
     stock for stock  options to be granted to  officers  and  employees  of the
     Company under its Incentive Stock Option Plan (the "Incentive  Plan").  The
     exercise price of each option, which have a maximum ten-year life, is equal
     to the market price of the Company's  common stock on the date of grant. As
  of July 31, 1997, no options have been granted under the incentive plan.

Non-Qualified Stock Option Plan                                       
-------------------------------                                       

     The Company has reserved  300,000 of its  authorized  but  unissued  common
     stock  for  stock   options  to  be  granted  to   employees,   independent
     contractors,  technical  advisors and  directors  of the Company  under its
     Non-Qualified  Stock Option Plan (the  "Non-Qualified  Plan"). The exercise
     price of each option,  which have a maximum  ten-year life is issued by the
     Company's compensation committee on the date of grant. As of July 31, 1997,
     50,000  options  have  been  granted  under  the  Non-Qualified  Plan at an
     exercise  price of $7.25 per  share.  Under the terms of the  Non-Qualified
Plan, options vest 100% upon grant.                                   

     The Company accounts for the executive  options and warrants,  the Employee
     Plan and the  Non-Qualified  Plan  using  the  intrinsic  value  method  in
     accordance with APB No. 25 and has adopted the  disclosure-only  provisions
     of SFAS No. 123. The  Incentive  Plan is excluded as there has not been any
     activity  to the  Plan.  Accordingly,  no  compensation  expense  has  been
     recognized for the executive options and warrants, the Employee Plan or the
     Non-Qualified  Plan.  Had  compensation  cost for the  Employee  Plan  been
     determined based upon the fair value at the grant dates of awards under the

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     Employee Plan consistent with SFAS No. 123, the Company's 1997 and 1996 net
     income  and  income per share  amounts  would have been  reduced to the pro
forma amounts indicated below:                                        

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

     Net income - as reported                     $965,218      $1,192,780
                                                  ========      ==========

     Net income - pro forma                       $635,594      $1,060,456
                                                  ========      ==========

     Income per share - as reported               $   0.12      $     0.18
                                                  ========      ==========

     Income per share - pro forma                 $   0.08      $     0.16
                                                  ========      ==========

     The fair value of options granted under the Executive  Options and Employee
     Plan is  estimated  on the date of grant  using  the  Black-Scholes  option
     pricing  model with the  following  weighted-average  assumptions  used for
     grants  in 1997:  no  dividend  yield,  risk-free  interest  rate of 6.50%,
     expected  life  of 10  years;  and  expected  volatility  of  95.61%  . The
     following  weighted  average  assumptions  were used for grants in 1996: no
     dividend  yield,  risk-free  interest  rate of 6.00%;  expected  life of 10
     years;  and  expected  volatility  of 92.93%.  There were no stock  options
granted in 1997.                                                      

     The following table summarizes information on stock option activity for the
executive options and warrants and the Employee Plan.                 

                                                        [Enlarge/Download Table]

                                                                                 Weighted    
                                                                                  Average    
                                                  Number of      Exercise      Exercise Price
                                                   Shares     Price Per Share    Per Share   

                                                                                             
Options and warrants outstanding, July 31, 1994   2,446,875   $0.02 - $0.04       $ 0.07     
Options and warrants granted                        100,000    0.02                 0.02     
Options and warrants expired or cancelled          (134,375)   0.02 -  0.04         0.03     
                                                  ---------                                  

Options and warrants outstanding, July 31, 1995   2,412,500   $0.24 - $0.36       $ 0.28     
Options and warrants granted                      1,212,500    0.24 -  0.36         0.25     
Options and warrants expired or cancelled        (1,950,000)   0.24 -  0.36         0.24     
                                                  ---------                                  

Options and warrants outstanding, July 31, 1996   1,675,000   $0.24 - $0.36       $ 0.27     
Options and warrants exercised                     (200,000)   0.36                 0.36     
                                                  ---------                                  

Options and warrants outstanding, July 31, 1997   1,475,000   $0.24 - $0.36       $ 0.27     
                                                  =========                                  

     As  of  July  31,  1997  all  of  the  options  outstanding  are  currently
exercisable.                                                          

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     Warrants to Purchase  Common Stock - In  conjunction  with the common stock
     issued during the secondary  public  offering in November 1996, the Company
     issued   warrants  to  purchase  34,500  shares  of  Common  Stock  to  the
     Underwriter. Each warrant entitles the Underwriter to purchase one share of
     no par value common stock of the Company at an exercise price equal to 120%
     of the initial  price to the public  ($8.40 per share).  The  warrants  are
     exercisable at any time during the period November 18, 1997 to November 18,
1999.                                                                 

4. MAJOR CUSTOMERS AND FOREIGN REVENUE                                          

     In fiscal year 1997,  revenue of $317,800  (13%) was derived  from a single
     customer.  In 1996, revenue of $239,025 (11%), $282,100 (13%), and $353,075
     (17%) was derived from sales to three separate customers.  In 1995, revenue
     of  $150,381  (11%)  was  derived  from a single  customer.  The  Company's
     operations are located entirely within the United States.  However, in 1997
     and 1996, $539,635 (22%) and $318,393 (15%), respectively, of the Company's
revenues were to foreign customers.                                   

5. INCOME TAXES                                                                 

     The  following  items  comprise the Company's net deferred tax assets as of
July 31:                                                              

                                                                [Download Table]


                                            1997       1996       1995   

Deferred tax assets:                                                     
                                                                         
  Deferred income                         $ 55,999   $ 63,530   $ 57,848 
  Net operating loss (NOL) carryforwards               41,693    491,197 
  Alternative minimum (AMT) tax credit                                   
    carryforwards                           15,301     18,000            
  General business credit                  110,100                       
                                          --------   --------   -------- 

       Total                               181,400    123,223    549,045 
  Valuation allowance                                           (472,889)
                                          --------   --------   -------- 
       Total                               181,400    123,223     76,156 

  Deferred tax liabilities -                                             
    depreciation and amortization         (203,400)   (69,723)   (76,156)
                                          --------   --------   -------- 

  Net deferred tax assets (liabilities)   $(22,000)  $ 53,500   $   --   
                                          ========   ========   ======== 

     As of July  31,  1995,  the  Company  concluded  that  based  on  available
     evidence,  realization  of existing net operating  loss  carryforwards  was
     uncertain  and,  accordingly,  a valuation  allowance was recorded.  During
     fiscal 1996, the Company's  valuation  allowance  decreased $472,889 as the
result of utilization of NOL carryforwards.                           

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     A  reconciliation  of the  expected  income  tax  expense  at  the  federal
     statutory income tax rate to the Company's actual income tax expense at its
effective income tax rate for the years ended July 31 is as follows:  

                                                                [Download Table]


                                        1997         1996        1995   

                                                                        
Federal statutory income tax rate            34%         34%         34%

Computed "expected" income taxes      $ 396,514   $ 393,475   $ 130,014 
Change in taxes resulting from:                                         
  State income taxes, net of federal                                    
   tax benefit                           37,945      38,190      12,237 
  Change in valuation allowance                    (472,889)   (142,251)
  General business credit              (236,473)                        
  Other                                   3,014       5,724        --   
                                      ---------   ---------   --------- 

Income tax provision (benefit)        $ 201,000   $ (35,500)  $    --   
                                      =========   =========   ========= 


     As of July 31, 1997, the Company has general business credit  carryforwards
     of $110,100  available to offset future taxable income  expiring in varying
     amounts  through  2112.  The Company also has AMT credit  carryforwards  of
     $15,301  available  to offset  future  regular  taxable  income that may be
carried forward indefinitely.                                         

6. COMMITMENTS                                                                  

     Operating  Leases - The Company has an operating lease agreement for office
     space through  December 31, 1999.  Future  minimum  lease  payments for the
     years  ending  July 31,  1998,  1999 and 2000  are  $61,227,  $758,890  and
     $31,710, respectively.  Total rent expense was $52,781, $42,989 and $40,141
in 1997, 1996 and 1995, respectively.                                 

     Employee Retirement Plan - During the year ended July 31, 1996, the Company
     established a SARSEP-IRA  employee  pension plan that covers  substantially
     all  full-time  employees.  Under the plan,  employees  have the  option to
     contribute up to 15% of their compensation subject to dollar limitations of
     the Internal Revenue Code. The Company may make discretionary contributions
     to the Plan based on recommendations  from the Board of Directors.  For the
     years  ended July 31,  1997 and 1996,  the Board  authorized  contributions
totalling $15,360 and $0, respectively.                               

     Deferred  Compensation  Arrangement  - During the year ended July 31, 1996,
     the Company  established a deferred  compensation plan for key employees of
     the Company  using a "Rabbi"  Trust.  The  Company  may make  discretionary
     contributions  to the plan  based  on  recommendations  from  the  Board of
     Directors.  During fiscal 1996, the Company funded deferred compensation of
     $75,000 awarded to the Chairman of the Board with a deposit of $75,000 with
     the  "Rabbi"  Trust.  An  additional  $75,000  award was granted and funded
     during  fiscal  1997.  The  funds  are  subject  to the  general  claims of
     creditors and are included in investments as of July 31, 1997 and 1996. The
     following  information  is  provided  related  to the  trust  assets  which
primarily consist of equity securities as of July 31, 1997 and 1996.  

                                                     1997         1996

   Amortized cost basis                              $150,000     $ 75,000
Gross unrealized holding gains                      29,020          
                                                     --------     --------
   Aggregate fair value                              $179,020     $ 75,000
                                                     ========     ========

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     During the years ended July 31, 1997,  1996, and 1995,  there were no sales
of available-for-sale securities.                                     

7. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS                                

     The carrying  amounts and estimated fair values of the Company's  financial
instruments as of July 31, 1997 and 1996 are as follows:              

                                                                [Download Table]

                                1997         1997       1996         1996    
                              Carrying    Estimated   Carrying     Estimated 
                               Amount     Fair Value   Amount      Fair Value

                                                                             
Cash and cash equivalents    $7,877,932  $7,877,932   $1,407,026  $1,407,026 
Investments                     179,020     179,020       75,000      75,000 
Other long-term liabilities     141,520     141,520                          


     The following  methods and assumptions were used to estimate the fair value
of financial instruments:                                             

      Cash and Cash Equivalents - The carrying amount  approximates  fair value.
      Investments - The carrying amount is based on quoted market prices.  Other
Long-Term Liabilities - The carrying amount approximates fair value.

8.  SUBSEQUENT EVENT                                                            

     Subsequent  to July 31, 1997 the options and warrants  held by the Chairman
     of the Board were exercised and placed into the "Rabbi" Trust  discussed in
     Note 6. Such shares are issuable upon the occurrence of  retirement,  death
     or  termination  of  the  Chairman  over  a  ten  year  period  after  such
     occurrence.  Because the Company  owns the assets of the Rabbi  Trust,  the
     shares of Company  stock in the  "Rabbi"  Trust will be treated as treasury
     stock for financial  reporting  purposes;  however, as were the options and
     warrants,  the shares of Company stock in the "Rabbi" Trust will be treated
     as common  stock  equivalents,  which will be  dilutive,  for  purposes  of
calculating per share data.                                           

F-12

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10KSB/A’ Filing		Date		First		Last			Other Filings
		7/31/00		47					10KSB,  DEF 14A,  NT 10-K
		12/31/99		21		47
		11/18/99		46
		7/31/99		47					10KSB,  NT 10-K
		7/31/98		47					10KSB,  10KSB/A
		1/31/98		35					10QSB
		12/31/97		31		44
		12/15/97		43
		11/18/97		46
		11/5/97
Filed on:		10/31/97							10QSB
		10/30/97		36
		10/24/97		37
		10/14/97		32		34
		9/30/97		1
For Period End:		7/31/97		1		48			10KSB
		11/22/96		26					424B3
		11/19/96		22					8-K
		11/18/96		22		44			8-K
		11/8/96		33
		10/31/96		22					10QSB
		7/31/96		22		48
		4/30/96		22					10-Q
		1/31/96		22					10-Q
		10/31/95		22					10-Q
		7/31/95		26		48
		7/31/94		24
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