ITEM 1. DESCRIPTION OF BUSINESS

Norris Communications, Inc., a Delaware corporation (the "Company") is a holding
company which, through its wholly owned California subsidiary, Norris
Communications, Inc. ("NCI"), is an innovator in developing and marketing
advanced electronic product designs and technologies employing a rapidly growing
non-volatile storage media (flash memory) for the portable computing, digital
recording, mobile office and telecommunication markets. The Company is engaged
in a single industry segment: the development, manufacture and marketing of
electronic products and technologies.

2

    3
The Company is involved in (i) researching, developing and manufacturing
products sold to major OEM (Original Equipment Manufacturer) customers of
digital voice recording and processing technology using flash storage media and


(ii) marketing its MicroOS(TM) operating system technology, a proprietary method
for information storage, manipulation and retrieval.

The address of the Company's principal executive office is 12725 Stowe Drive,
Poway, California 92064 and its telephone number is (619) 679-1504. The
Company's primary operating facilities are located at that address. Its Internet
site is located at WWW.NORRISCOMM.COM. The Company presents its consolidated
financial statements in United States dollars.

HISTORY



The Company was started in 1988 based on technology that its founder, Elwood G.
Norris, developed while researching and developing headset/microphone
alternatives for NASA. The successful combination of a speaker and microphone
was developed into the EarPHONE(TM) product line, now owned by JABRA Corporation
("JABRA") in which the Company holds an equity investment. The Company was
incorporated under the Company Act (British Columbia), Canada on February 11,
1988 under the name 340520 B.C. Ltd. The Company changed its name to Norris
Communications Corp. on April 7, 1988 and on November 22, 1994 the Company
continued its jurisdiction of incorporation from British Columbia to the Yukon
Territory. The Company further continued its jurisdiction of incorporation to
Wyoming on August 30, 1996 and on September 4, 1996 reincorporated into Delaware
under the name Norris Communications, Inc.

In August 1989, the Company acquired ASMD, subsequently merged into NCI,
establishing the Company as a regional full-service independent supplier of
turnkey manufacturing of circuit board assemblies, systems and subsystems, to
OEM's in the computer, defense, telecommunications and medical industries. The
Company invested over $2.5 million in equipping a 31,000 square foot
manufacturing and administrative facility. Prior to the late fiscal 1995 launch
of the Company's first information storage and retrieval technology product, a
personal digital recorder, ASMD's contract manufacturing services accounted for
substantially all of the Company's revenues. In January 1996, due to the startup
of the manufacturing of the Company's proprietary Flashback recorder in the
facility, the Company scaled back outside contract manufacturing services.
During fiscal 1997 the Company substantially reduced Flashback production and
terminated contract manufacturing taking a $2.2 million restructuring charge.
The Company during the same period also discontinued retail marketing of
Flashback products in favor of private labeling for OEM customers to sell.

As of the date of this report the Company has substantially completed its
restructuring by selling most of its contract manufacturing equipment, moving to
a smaller facility more suited for its operations and disposing of or making
allowances for excess and obsolete inventory. The Company has dramatically
reduced its monthly operating expenditures from an average of $540,000 during
fiscal 1997 to approximately $120,000 currently. In November 1996, the Company
entered into an OEM contract with Sanyo Information Systems U.K. Ltd. (extended
into the rest of Europe with Sanyo Bro-Electronic Europa) (collectively "Sanyo")
and in January 1997 entered into an OEM and development contract with Lanier
Worldwide, Inc. ("Lanier"). Management believes its has substantially completed
the transition from a manufacturing and sales organization to an OEM provider of
technology, product development services, and technology licensing. The Company,
as a consequence, anticipates that the majority of its future revenues will be
from license and royalty fees, private label agreements for the Company's
Flashback family of products and from contract development services for custom
digital products.

The Company also holds as an investment 940,734 common shares (approximately
12.1%) of JABRA. JABRA is a former wholly-owned subsidiary of which control was
sold in 1993. JABRA is a developer and manufacturer of communication products
for desktop, mobile and wireless applications.

FLASH MEMORY INDUSTRY



The Company's technology employs flash ("Flash") memory as the storage media.
The traditional data storage market encompasses several types of memory and
storage devices designed primarily for specific components of computer systems.
Dynamic random access memory ("DRAM") provides main system memory; static random
access memory ("SRAM") provides specialized and high speed memory; hard disk
drives provide high capacity data storage; and floppy disk drives permit low
capacity removable data storage.

In recent years, digital computing and processing have expanded beyond the
boundaries of desktop computer systems to include an array of electronic
systems. These new devices include handheld data collection terminals, medical
monitors, mobile communication systems, highly portable computers, digital
cameras, cellular telephones, communications switches, wireless base stations,
network computers, pay telephones, digital audio recorders and other electronic
systems. These emerging applications have storage requirements that are not well
addressed by traditional storage solutions. Important

3

    4
requirements include small form factor, high reliability, low power consumption
and the capability to withstand high levels of shock and vibration and extreme
temperature fluctuations. In the late 1980s, a new memory technology, known as
Flash memory, was developed as an extension of ultraviolet erasable programmable
read-only memory ("EPROM"). Flash memory is non-volatile, unlike DRAM and SRAM,
requiring no power to retain data and is electrically reprogrammable, unlike
EPROM.

Flash memory-based products are solid-state devices, making them very reliable.
Flash products are non-volatile, meaning that no on-going source of power is
required in order for the products to retain data, images or audio indefinitely.
Flash is noiseless, considerably lighter, more rugged and consumes less than 10
percent of the power required by a rotating disk drive. The use of Flash memory
is seen by the Company as the most practical solution for storing data on
removable and interchangeable modules, given that other memory technologies
either require battery back-up, draw too much power, are physically too large,
or are mechanically or magnetically sensitive.

Flash products are produced by a large number of firms including Intel Corp.,
SanDisk Corporation, AMD, M-Systems, Samsung, TDK, Toshiba and others. Industry
estimates indicate Flash cartridge shipments exceeded 859,000 units in 1995 and
are projected to exceed 10.7 million units in 1999 according to Disk/Trend, Inc.
Recent product applications by the Company have focused on CompactFlash a
product of SanDisk Corporation. CompactFlash products provide full PC Card ATA
functionality but are only one-fourth the size of a standard Type II PCMCIA card
(a CompactFlash cartridge is approximately 1.7" x 1.4" x 0.13"). CompactFlash is
compact, rugged and has low-power requirements. CompactFlash is available in
capacities ranging from 2 megabyte to 24 megabyte with higher capacities
expected to be available during calendar 1997 and at reduced unit costs over
time.

CompactFlash is being promoted as a standard form factor by the 70+
corporations, including the Company, who are members of the CompactFlash
Association ("CFA"). The CFA is actively promoting the development of products
using CompactFlash. Founding members of the CFA were SanDisk Corporation, Apple
Computer, Inc., Canon Inc., Eastman Kodak Co., Hewlett-Packard Company, LG
Semicon, Matsushita Electric Industrial Co. (Panasonic), Motorola, NEC
Corporation ("NEC"), Polaroid Corp., Seagate Technology, Inc. ("Seagate") and
Seiko Epson Corp.

The Company's technology also supports the Intel Miniature Card format offering
customers design flexibility and choices among Flash memory.

As a developer of advanced electronic products and technologies employing Flash
memory the Company's success is in part dependent upon the continued growth and
use of various forms of Flash memory. New product applications are also premised
on continued reductions in the per-megabyte cost of Flash memory of which there
can be no assurance.

EXISTING OEM CONSUMER PRODUCTS



The Company has developed a line of consumer products, including the
Flashback(R), the Flashback VoiceLink(TM), SoundClips(R), and bundles of these
products as the Flashback Mobile Office(TM) family all based on the Company's
proprietary Flashback technology. The technology developed for the Flashback
product line integrates a sophisticated micro-processor based control system,
digital signal processing ("DSP"), sophisticated digital/analog and
analog/digital conversion along with advanced data compression and non-volatile
storage media (Flash memory) to produce a no-moving-parts recording scheme with
advanced features and capabilities. The Company's unique patent-pending approach
eliminates the need for a high powered CPU thereby reducing cost and improving
efficiency of Flash memory utilization.

The Company was unsuccessful in its efforts to directly distribute the products
and incurred significant expenditures and operating losses. In late 1996 the
Company, as a part of its restructuring, discontinued direct sales and elected
to private label the products. In November 1996, under the terms of the Sanyo
agreement, Sanyo commenced private labeling the products under an exclusive
arrangement in the United Kingdom. In March 1997, the Sanyo agreement was
expanded to provide for sales to the rest of Europe. The agreement, which
terminates in October 1999, provides that Sanyo must purchase at least 500
product units per month (plus or minus 20%) in order to maintain exclusivity. As
of June 1997, the Company had received approximately $500,000 in orders from
Sanyo, of which approximately $225,000 had been shipped. Management believes
Sanyo has the established infrastructure, brand recognition, and marketing
expertise required to be successful in retail channels. The product is currently
shipping in the U.K., Germany, France, with the rest of Europe scheduled for
calendar 1997. There can be no assurance that Sanyo will be successful in
distributing Flashback products in Europe or continue to order from the Company.

The Company is seeking additional OEM private label relationships for existing
Flashback products in other markets.

4

    5
A description of each of the Company's proprietary products follows:

FLASHBACK: The Flashback digital hand-held voice recorder is a 3 ounce,
palm-sized unit that is used to record ideas, conversations, and voice
memos. The Company believes it is the first and leading digital
recorder to feature removable, reusable Flash memory cartridges for
long recording times. The Company holds the US patent #5,491,774 for
the product. A two-button control pad lets users record, playback, fast
forward, and reverse as well as rapid search, instant rewind and
variable speed playback without altering pitch. On-board editing
functions include insert and delete of words, sentences or even whole
paragraphs.

FLASHBACK VOICELINK: The Flashback VoiceLink not only turns a PC
(personal computer) into a long-length audio recorder, it also allows
users to download voice messages from SoundClip cartridges directly
onto a computer hard drive. The VoiceLink plugs directly into the PC
card slot of a notebook or a desktop computer and permits connection of
either a wired or wireless microphone for recording directly to the
hard disk at a compressed rate of 18 minutes per megabyte of storage.
Users can send compressed files over the Internet saving time and
money. With a headset, keyboard and the VoiceLink software, users can
manipulate sound files for controlled record, play, fast forward,
reverse and edit functions. The VoiceLink product was selected as an
Innovations '97 award winner at the 1997 International Winter Consumer
Electronics Show.

SOUNDCLIP: Interchangeable SoundClip Flash cartridges are compatible
with both the Flashback and the VoiceLink. Users can remove SoundClips
and add new ones thereby extending recording time. SoundClips store
digitally recorded Flashback voice messages and transfer them to the
VoiceLink for downloading into a computer. Available in 18- or
36-minute capacities or longer capacities on special order, they
feature a write-protect switch to protect important recordings. Users
can store SoundClip cartridges indefinitely, and use them repeatedly.
They're not affected by magnets, X-rays, heat or cold.

FLASHBACK MOBILE OFFICE: The Flashback Mobile Office includes a
Flashback, SoundClip cartridge, VoiceLink and Software. The Flashback
Mobile Office Professional includes two VoiceLink cards for sending
compressed e-mail messages back and forth.

The technology developed for the Flashback products provide an alternative to
cassette sound recorders. VoiceLink also permits users to interface with
notebook and PC computers to record, edit and transmit highly compressed sound
files over networks and the Internet. The Company's voice recording technology
enables business travelers to carry a voice recorder and use it anywhere to
create voice memos or E-Mail. The digital recorder or a notebook or portable
computer become the transport and storage mediums for sound files which are
transmitted over existing networks to remote users. The direct benefits of the
Company's voice recording approach include:

o  Digital recorders can be smaller, more compact and have no
moving parts as compared to cassette recorders.

o  Digital voice recording technology permits users to compose
messages with editing, insertion and deletion capabilities.
Analog tape can only be appended and has no editing
capabilities

o  Unlike analog tape digital voice recording technology
interfaces directly with computers, networks and the Internet.

o  Digital voice recording provides the convenience of voice
communication instead of keyboard entry for messages.

The Company and its OEM customers are seeking additional markets to benefit from
the advantages of digital recording.

OEM TECHNOLOGY COMPONENTS



The Company owns intellectual property and expertise in the use of Flash media
for storing data, such as sound, pictures, and video. The development of the
proprietary MicroOS(TM) for both of the industry standard Flash memory
formats---Intel's Miniature Card and CompactFlash---establishes the Company with
experience developing for both. The Norris Flash File System 8:1 compression
technology---which allows 18 minutes of voice recordings in 1 megabyte of
memory---is efficient when compared to competing compression algorithms. In
addition, the Company holds a patent on the use of removable Flash media as
storage for a hand-held digital voice recording device.

A key feature of the Company's Flashback technology is the ease of computer
compatibility. The Company's approach to managing digital sound information
allows information to be manipulated, saved and transferred over any number of
digital

5

    6
communication paths including the Internet and corporate Intranets. Information
may also be compressed or saved in traditional sound formats on hard drives or
other media. Management believes the rapid growth of the Internet and corporate
Intranets and the growing use of electronic mail will provide a growing market
for an efficient method to transmit voice messages, sound and other data over
these networks. Management believes the Company's technology provides an
efficient method to link this information between networks, personal, portable
and network computers and an array of miniature electronic devices.

The Company believes its expertise and technology offers OEMs a rapid path to
develop digital recording products using Flash memory. These products may
integrate the Company's technology as a primary or secondary feature set. In
most cases, the Company believes it offers less costly development and a faster
time to market for companies who would otherwise have to develop expertise in
the following technology areas available for licensing:

MICRO OS: The MicroOScf is a compact operating system with logic
specifically designed to interface with CompactFlash, a Flash memory
card about the size of a matchbook that was originally developed by
SanDisk and is now supported by a number of manufacturers. MicroOSi was
designed with logic specifically for the Intel Miniature Card, a
competing Flash technology to the CompactFlash. Management believes
MicroOS is the only operating system for Flash memory that has a data
transfer rate limited only by the Flash memory write speed. The
operating system therefore supports the recording speeds required to
write directly to primary memory without intermediary memory. This
reduces overall hardware costs, especially for imaging applications.
Written in highly compact and optimized C computer language code, the
MicroOS operates in 14K of ROM and requires only 300 bytes of RAM.

NORRIS FLASH FILE SYSTEM: The Norris Flash File System (.nfs) is a
software module that speeds up and simplifies the integration of Flash
memory into embedded systems by transparently managing the
peculiarities of different types of Flash memory and by offering a
sophisticated and feature rich API (Advanced Protocol Interface, a file
protocol) and advanced fault tolerance.

MULTICHIP MODULE (MCM): The MCM is a single, highly compact chip that
contains a DSP and micro controller. With the MicroOS operating system
and the Norris Flash File System, the unit is designed to reduce the
hardware and software development time for products such as digital
voice recorders, telephone answering devices, and cellular phone
answering machines. It can also be integrated as a voice processing
feature into products such as digital cameras.

OEM STRATEGY AND CURRENT CUSTOMERS



The Company's recent restructuring focuses the Company as a leading provider to
OEM customers of digital sound recording and processing technology for Flash
memory and related media. The Company's strategy is to:

1. Private label the Company's existing consumer products (Flashback, VoiceLink
and Mobile Office System).
The Sanyo private label relationship described above is the Company's first
contract for in-house developed consumer products. The Company will similarly
private label its consumer products and proprietary technology to selected
name-brand companies in the dictation, personal computer, consumer electronics,
telecommunications, paging, and other industries.

2. Develop products for OEMs under contract.
In January 1997 the Company entered into an OEM and development contract with
Lanier. Under the terms of the agreement, the Company is receiving non-recurring
engineering expenses ("NRE"), upon the satisfaction of certain milestones, to
develop a new portable digital voice recorder and related accessory products.
The Lanier agreement contemplates that the product to be developed will be
completed in early 1998, with the Company to provide Lanier with manufactured
product thereafter to be sold by Lanier's sales force worldwide. The Company, as
of March 31, 1997, in connection therewith, recognized NRE revenue of
approximately $40,000. The agreement is for an initial term of three years,
terminating January 6, 2000. The agreement provides for NCI to manufacture or
arrange for manufacture of the product. The Company's strategy is to arrange for
outside custom manufacturing of this product on a turnkey basis. There can be no
assurance a successful product can be produced or that Lanier will elect to
distribute the product or can distribute the product such that sufficient
margins can inure to NCI.

In June, 1997 the Company announced that it was working to integrate elements of
its Flashback recorder into a handheld tactical signal homing system being
developed by VisiCom Laboratories, Inc. for evaluation by the United States
Marine

6

    7
Corps. Management believes this is an example of the diverse applications of the
Company's core technology. The Company is seeking to develop other products to
meet other OEM customer needs.

3. Develop products for licensing to or private labeling by OEM customers.
The Company is continuing to develop in-house proprietary products that may be
private labeled or licensed to one or more OEMs. The Company is currently
developing a new generation digital recorder, the PVP-2000. In addition to the
digital recording features showcased in the original Flashback, the PVP-2000
intends to incorporate a liquid crystal display (LCD) screen to display
functions such as the number and length of messages and a calendar/clock
function to set alarms and reminders. The PVP-2000 will also link with PCs and
allow downloading of recorded and received material, along with the transmission
and receipt of voice memos in compressed form without the use of a VoiceLink.
The Company has devoted significant effort to design and develop the PVP-2000.
There can be no assurance the Company will successfully complete development,
that OEMs will be attracted to the product or that a commercial product can be
produced by any such OEMs.

4. Expand the technology base through continued enhancements of the Flashback
technology and new inventions.
The Company's engineering team continues to enhance and update the Flashback
technology, specifically the OEM technology components described above. The
Company also devotes resources to expanding the technology to new applications.
In addition to improved voice recorders, management believes the Company's
proprietary technology may have applications in a wide range of products
including voice pagers, answering machines, cellular phones, computers, compact
disc quality sound devices and for the storage of pictures and video images.

NEW TECHNOLOGY IN DEVELOPMENT



In June 1997 the Company prepared additional patent applications on its
technology as applied to high-bandwidth music fidelity applications. The Company
has developed a prototype device (the Flashback Audio(TM) player) capable of
replaying music stored on CompactFlash and other Flash media. This technology is
in the early stage of development and the Company intends to continue product
development and thereafter produce designs and products for OEMs. There can be
no assurance this technology can be successfully commercialized or marketed.

MANUFACTURING, PRODUCTION AND DISTRIBUTION



During fiscal 1997 the Company ceased contract manufacturing services and also
substantially reduced in-house manufacturing of Flashback products. Flashback
products accounted for 47% of consolidated revenues during fiscal 1997.
Current product sales are being made from inventory.

The Company is reviewing alternatives for contracting with other manufacturing
facilities to produce products for its OEM customers (including the existing
consumer products and newly developed products) and will select, when warranted,
organizations who will provide a secondary source of supply, and/or additional
capacity. The Company's strategy is to arrange for the production of products
for its OEM customers on a turn-key basis, when possible. In other instances the
Company may enter into licensing and royalty agreements with OEM customers who
have existing manufacturing abilities or arrangements.

The Company believes, but there is no assurance, that it can provide
manufacturing for its customers through contract manufacturing relationships on
terms that will not require substantial financial risk or the provision of
working capital by the Company.

MAJOR CUSTOMERS AND EXPORT SALES



For the fiscal year ended March 31, 1996, two customers The Sharper Image and
The Good Guys accounted for 10% each of total revenues. During the fiscal year
ended March 31, 1997 three customers, Martin Decker, Sanyo and Alan Marketing
accounted for 31%, 17% and 12%, respectively each of total revenues. No other
customer accounted for more than 10% of revenues. For the fiscal year ended
March 31, 1997 export sales aggregated $155,000. There were no material export
sales in the prior fiscal year. At March 31, 1997 the Company had no material
backlog.

7

    8

COMPETITION



Management believes there is no direct competition with regard to a hand held
digital voice recorder that offers the ability to download recorded sound and
data information to a computer in compressed format. However, without the
VoiceLink device, the Flashback recorder is frequently compared to the "note
taker" type of products which offer limited recording capabilities and feature
sets. The Mobile Office package competes with companies that sell traditional
dictation/transcription devices. The success of Flashback products will depend
greatly on how the end user plans to utilize the product or technology and the
distribution strengths of the Company's OEM customers. The Company believes it
has a technical advantage in its solid state removable recording technology.
Management is not aware of any competing portable product that can be utilized
for sending sound messages across the Internet or corporate Intranets.

The primary competition, in general, for the Company's current products are
analog tape products and traditional dictation equipment. The Company and its
OEM customers therefore will compete with a wide range of consumer and business
product suppliers producing a wide variety of products and solutions. The
electronics product market is highly competitive with many large international
companies competing for the consumer and business market.

The Company further believes its existing know-how, contracts, pending patent
applications, customized components, existing copyrights, trade secrets and
potential future patents and copyrights, will be significant in enabling it to
compete successfully in the field of digital sound recording and processing
technology for Flash memory and related media. There are other methods of
managing Flash memory in digital sound applications, and although management
believes they are less efficient, there is no assurance the Company can compete
against other providers of digital recording solutions many of which have
substantially greater resources than that of the Company.

Barriers to entry by new competitors are not significant and new competitors in
consumer electronics are continually commencing operations. The technology of
electronics and electronic components, features and capabilities is also rapidly
changing, in many cases causing rapid obsolescence of existing products and
technologies. Although the Company believes it has a technological advantage at
the present time, there can be no assurance that it can successfully exploit or
maintain this technological advantage in the future.

PATENTS, TRADENAMES AND COPYRIGHTS



The Company owns one patent protecting its products. The Company has made
multiple additional patent applications with multiple claims which are pending
on innovations in audio and other forms of recording. The Company's software is
subject to copyrights and pending patent applications. The patent position of
any item for which the Company has filed a patent application is uncertain and
may involve complex legal and factual issues. Although the Company is currently
prosecuting multiple patent and trademark applications with the U.S. Patent and
Trademark Office and also has filed certain international patent applications
corresponding to its U.S. patent applications, the Company does not know whether
any of its applications will result in the issuance of patents, or, for any
patents issued, whether they will provide significant proprietary protection or
will be circumvented or invalidated. Additionally, since an issued patent does
not guarantee the right to practice the claimed invention, there can be no
assurance others will not obtain patents that the Company would need to license
or design around in order to practice its patented technologies, or that
licenses that might be required would be available on reasonable terms. Further
there can be no assurance that any unpatented manufacture, use, or sale of the
Company's technology or products will not infringe on patents or proprietary
rights of others. The Company however has made reasonable efforts in the design
and development of its products not to infringe on other known patents.

The Company also relies on trade secret laws for protection of its intellectual
property, but there can be no assurance others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can protect its rights to unpatented trade secrets.

The Company also has filed a number of trademark applications with the U.S.
Patent and Trademark Office. The Company has received notification of allowance
from the United States Patent Office for use of Flashback as a registered trade
name. The Company believes the trademark on Flashback to be significant to its
operations and the loss or infringement of the name could have an adverse impact
on operations.

The Company intends to make every reasonable effort to protect its proprietary
rights to make it difficult for competitors to market equivalent competing
products without being required to conduct the same lengthy testing and
development conducted by the Company and not use any of the Company's innovative
and novel solutions to the many technical obstacles involved in portable
recording using Flash memory.

8

    9

EMPLOYEES



As of June 15, 1997, the Company, employed approximately 20 employees of which 5
were production, 3 were sales/customer service, 5 were research and development,
4 were accounting/administrative and 3 were executive officers. None of the
Company's employees are represented by a labor union, and the Company is not
aware of any current efforts to unionize the employees. Management of the
Company considers the relationship between the Company and its employees to be
good.

GOVERNMENT REGULATION



The Company's manufacturing operations are subject to certain federal, state and
local regulatory requirements relating to environmental, waste management,
health and safety matters and there can be no assurance that material costs and
liabilities will not be incurred or that past or future operations will not
result in exposure or injury or claims of injury by employees or the public.
Some risk of costs and liabilities related to these matters are inherent in the
Company's business, as with many similar businesses. Management believes its
business is operated in substantial compliance with applicable environmental,
waste management, health and safety regulations, the violation of which could
have a material adverse effect on the Company. In the event of violation, these
requirements provide for civil and criminal fines, injunctions and other
sanctions and, in certain instances, allow third parties to sue to enforce
compliance. In addition, new, modified or more stringent requirements or
enforcement policies could be adopted which could adversely affect the Company.

RESEARCH AND DEVELOPMENT COSTS



For the years ended March 31, 1997 and 1996, the Company spent $991,487 and
$1,048,500, respectively, on research and development. The Company anticipates
it will continue to devote substantial resources to research and development
activities. During fiscal 1997 approximately $40,000 of research and development
was borne by a contract development customer.

INVESTMENT IN JABRA



Between January 15, 1993 and March 31, 1996 the Company sold an aggregate of
800,000 common shares of JABRA stock for $2,375,000 and owned 1,800,000 JABRA
shares with a zero cost basis. On or about December 31, 1996 and January 2,
1997, the Company sold an additional 859,266 common shares of JABRA stock for
$276,300. As a result of these transactions, the Company's ownership in JABRA at
March 31, 1997, represented by 940,734 common shares was 12.1%. Accordingly, the
Company exercises no control over the shares of JABRA. JABRA is a private
company engaged in developing, manufacturing and marketing cellular, desktop,
mobile and wireless communications products. JABRA's principal technology is the
patented "all-in-the-ear" EarPHONE technology originally conceived and developed
by the Company when JABRA was a wholly owned subsidiary. As a minority
shareholder in JABRA, which has reported operating losses since its inception,
there can be no assurance as to when or if the Company's remaining shares can
produce any financial return to the Company. The Company's investment in JABRA
shares is carried on its balance sheet at a cost of nil. CVD Financial
Corporation has an option (until July 31, 1997) to purchase 300,000 of the
Company's JABRA shares at a price of $1.50 per share granted in connection with
a prior loan financing.

MISCELLANEOUS



No material portion of the Company's business is subject, at the election of the
United States government, to renegotiation or termination of contracts or
subcontracts.

Compliance with federal, state and local provisions enacted or adopted
regulating the discharge of materials into the environment, or otherwise related
to the protection of the environment, has not had and is not expected to have
material effect on the Company's capital expenditures, earnings and competitive
position.