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

FORM 10-K

(Mark One)

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

For the fiscal year ended March 28, 1997
OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________________ to ___________________

Commission file number 0-28352

TECHNOLOGY SERVICE GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware 59-1637426
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

20 Mansell Court East - Suite 200 30076
Roswell, Georgia (Zip Code)
(Address of principal executive offices)

(770) 587-0208
(Registrant's telephone number,
including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, Par Value, $.01 Per Share
(Title of Class)
Redeemable Warrants
(Title of Class)

Indicate by check mark whether (1) Registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting Common Stock held by non-affiliates of
the Registrant at May 30, 1997, based on the closing price on such date
($5 3/4), was approximately $6,891,157.

At May 30, 1997, there were 4,701,760 shares of the Registrant's Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None

TECHNOLOGY SERVICE GROUP, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

Page
Number

PART I
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings and Disputes 19
Item 4. Submission of Matters to a Vote of Security Holders 19

PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 39

PART III
Item 10. Directors and Executive Officers of the Registrant 68
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners
and Management 80
Item 13. Certain Relationships and Related Transactions 82

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 83

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

PART I

Item 1. BUSINESS

General

The Company designs, develops, manufactures and markets public
communication products including wireline and wireless pay telephone
("payphone") systems, electronic wireline payphone products and payphone
components. The Company's payphone systems are based upon microprocessor
technology and perform a variety of functions, including calling card, debit
("prepay") card and credit card operations, data storage, call progress
detection, call rating and maintenance, diagnostic and coin administration
functions. The Company's payphone software management system, CoinNet(TM), is an
integral component of the Company's microprocessor-based payphone systems. The
Company also provides payphone and payphone component repair, refurbishment and
upgrade conversion services to the regulated telephone operating companies in
the United States, which consist of the seven Regional Bell Operating Companies
("RBOCs") and other local exchange carriers. See "Products and Services," below.

The Company operates in one business segment as a provider of public
communication systems, products and services to communications providers in the
United States and foreign markets. The Company presently markets its products
and services primarily to the seven RBOCs in the United States and to cellular
service providers in certain international markets. The Company has derived
substantially all of its revenues from sales to four RBOCs. See "Sales and
Markets," below. The Company is presently developing a new microprocessor-based
wireline payphone processor for international markets and for the RBOC and
independent markets in the United States.

Unless the context requires otherwise, Technology Service Group, Inc. and
its subsidiary, International Service Technologies, Inc., are referred to herein
collectively as the "Company" or "TSG". The term "Predecessor" refers to the
Company for all periods prior to October 31, 1994, the date TSG Acquisition
Corp., a wholly-owned subsidiary of Wexford Partners Fund, L.P., acquired all of
the outstanding capital stock of the Company (see "History -- Acquisition,"
below; Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations;" and Item 8 -- "Financial Statements and
Supplementary Data"). The Company's principal executive offices are located at
20 Mansell Court East, Suite 200, Roswell, Georgia 30076, and its telephone
number at that address is (770) 587-0208.

Forward Looking Statements

This report contains certain forward looking statements concerning the
Company's operations, economic performance and financial condition. Such
statements are subject to various risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those identified under this Item 1 -- "Business;" Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations;" and elsewhere herein.

Developments During Fiscal 1997

Initial Public Offering. In May 1996, the Company completed an initial
public offering (the "Offering") of 1,150,000 units (the "Units"), each Unit
consisting of one share of common stock, $.01 par value per share (the "Common
Stock") and one redeemable warrant ("Redeemable Warrant") at a price of $9.00
per Unit for gross proceeds of $10,350,000. In connection with the Offering, the
Company issued warrants to the underwriter of the offering to purchase 100,000
shares of Common Stock (the "Underwriter Warrants") for gross proceeds of $10.
Net proceeds from the offering, after underwriting discounts and expenses of
$1,231,897 and other expenses of $824,953, amounted to $8,293,169. The net
proceeds of the Offering were used to repay the Company's then outstanding
indebtedness of $2,509,524 under bank term and installment notes; to repay
$3,808,589 of indebtedness outstanding under a bank revolving credit agreement;
and to repay $2.8 million of

outstanding indebtedness under 10% interest bearing subordinated promissory
notes payable to stockholders. See "History -- Acquisition," below; Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations;" and Item 8 -"Financial Statements and Supplementary Data."

Stock Purchase Agreement. The Company and Wexford Partners Fund, L.P.
("Wexford"), Acor S.A. ("Acor") and Firlane Business Corp. ("Firlane"), and
A.T.T. IV, N.V. ("ATTI") entered into a Stock Purchase and Option Agreement on
May 3, 1996 (the "Stock Purchase Agreement"). Wexford, Acor and Firlane,
concurrently with the Offering, sold to ATTI an aggregate of 366,300 shares of
Common Stock at a price of $8.14 per share and options to purchase an additional
183,150 shares of Common Stock at an exercise price of $11.00 per share (the
"Options") at a price of $.10 per Option. Wexford sold 285,714 shares and
Options to purchase 142,857 shares. Acor sold 53,114 shares and Options to
purchase 26,557 shares. Firlane sold 27,472 shares and Options to purchase
13,736 shares. The consideration received by Wexford, Acor and Firlane was
$2,339,998, $435,004 and $224,995, respectively. No consideration was received
by the Company.

Fiscal 1997 Facilities Consolidation. During the year ended March 28, 1997,
the Company closed its Kentucky facility and consolidated service operations
into its Virginia manufacturing facility. Also, during the year ended March
28,1997, the Company assigned the capital lease obligation related to the closed
facility to an unaffiliated third party, and recorded the retirement of the
outstanding capital lease obligation and the disposition of the property. See
Item 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8 -- "Financial Statements and Supplementary
Data."

In November 1996, the Company executed a lease agreement with respect to a
39,200 square foot facility located in Georgia that commenced on April 1, 1997.
The Company intends to close its present corporate office facility and to
consolidate its product assembly operations and corporate activities into this
new facility.

Sales Agreements. In November 1996, TSG entered into a new non-exclusive
supply agreement, effective July 1, 1996, to provide its Gemini(TM) smart
payphones and processors, CoinNet payphone management system and other payphone
components to Telesector Resources Group, Inc. ("NYNEX") for a period of five
years. See "Sales and Markets -- Domestic," below.

In June 1997, the Company entered into an agreement with Southwestern Bell
Telephone Company ("SWB") that supersedes and terminates a December 1994
agreement between the parties. Under the new agreement, the Company agreed (i)
to reduce SWB's remaining purchase commitment of GemStar(TM) processors and
electronic locks to approximately $3 million from approximately $8 million under
the former agreement and, (ii) among other things, to upgrade SWB's payphone
management system. In return, SWB made a $250,000 cash payment to the Company,
terminated the Company's obligation to pay royalties on sales of GemStar
processors to other customers and terminated the Company's obligation to repay
$375,000 received from the sale of product software under the December 1994
agreement. SWB also agreed to make additional cash payments to the Company
aggregating up to $750,000 between July 2, 1997 and March 31, 1998 subject to
the Company's compliance with the terms and conditions contained in the
agreement. See "Sales and Markets -- Domestic," below; Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations;" and
Item 8 -- "Financial Statements and Supplementary Data."

History

General. The Company was incorporated in the State of Delaware in 1975.
Between 1975 and 1986, the Company was engaged in the high-speed dot matrix
printer business. In 1986, the Company acquired International Teleservice
Corporation, Inc., a company engaged in the repair and refurbishment of
telecommunication products consisting of residential telephones and payphones.
During 1987 and 1988, the Company discontinued its high-speed dot-matrix printer
business, sold the assets of its residential telephone repair and refurbishment
business, and began to focus its business on the public communications industry.
The Company established International Service Technologies, Inc. ("IST"), which
established a foreign division in

Taiwan, and Technology Service Enterprises, Inc., and expanded its public
communications business to include the manufacture and marketing of payphones
and payphone components and the provision of services to convert and upgrade
payphones with components designed and manufactured by the Company and its
subsidiaries. In 1991, Technology Service Enterprises, Inc. acquired the assets
of the Public Communication Systems Division of Executone Information Systems,
Inc. ("PCS"), including its microprocessor-based technology. In fiscal 1993, the
Company established Wireless Technologies, Inc. and began to develop
microprocessor-based wireless payphone products for international applications.
In April 1993, International Teleservice Corporation, Inc., Technology Service
Enterprises, Inc. and Wireless Technologies, Inc. were merged into the Company.

Acquisition. On October 31, 1994, TSG Acquisition Corp., a wholly-owned
subsidiary of Wexford, acquired all of the outstanding capital stock of the
Company. The consideration paid by TSG Acquisition Corp. aggregated $3.5
million. In connection with this transaction, the Company entered into an
Investment Agreement with Wexford, Acor and Firlane. The Company issued an
aggregate of 3.5 million shares of Common Stock at a price of $1.00 per share to
Wexford. Wexford, in turn, sold to Acor and Firlane 507,500 and 262,500 shares,
respectively, of Common Stock. The consideration paid by Wexford, Acor and
Firlane for their shares of Common Stock was $2,730,000, $507,500 and $262,500,
respectively. Also, the Company borrowed $2.8 million from Wexford and Acor and
issued subordinated promissory notes due November 1, 1999 that bear interest at
a rate of 10% per annum (the "Affiliate Notes"). The Affiliate Notes were repaid
during the year ended March 28, 1997 with a portion of the proceeds from
Company's initial public offering.

Fiscal 1994 Restructuring. During the three years ended April 1, 1994, the
Company generated net losses due to poor operating performance caused in large
part by the termination of a sales agreement with respect to a first generation
microprocessor-based payphone product between the Company and one of its then
significant RBOC customers as a result of technical and delivery problems (which
were subsequently remedied) and the non-renewal of a refurbishment sales
agreement with that RBOC. In the fourth quarter of fiscal 1994, the Company
initiated a plan (the "fiscal 1994 Restructuring") to change certain senior
management, restructure its operations, refocus its development activities,
increase sales and attain profitable operations. Although the Company reduced
its operating costs and expenses, the Company continued to operate at a loss
during the seven months ended October 31, 1994 and five months ended March 31,
1995. However, during fiscal 1996 and fiscal 1997, the Company's sales
performance improved and the Company returned to profitability.

The Public Payphone Industry

Domestic Market. Public telecommunication services, including "coin" or
"pay" telephone service, in the United States are provided by regulated
telephone operating companies, including those owned by the RBOCs, referred to
as local exchange carriers ("LECs"), AT&T and other long distance (or
"inter-exchange") carriers ("IXCs") and independent payphone providers. The
operations of long distance and local exchange carriers are subject to extensive
regulation by the Federal Communications Commission ("FCC") and state regulatory
agencies (see "Government Regulation," below). Virtually all services offered by
LECs and IXCs, including payphone services, are provided in accordance with
tariffs filed with appropriate regulatory agencies, including the FCC.
Independent payphone providers are subject to regulations of state regulatory
agencies.

The Company believes that the RBOCs control approximately 1.4 million of an
estimated 2 million payphones in service in the United States. The remaining
installed base of payphones are owned and operated by the large independent
telephone operating companies (such as GTE), other local exchange carriers and
independent payphone providers.

The majority of payphones deployed by the RBOCs are essentially mechanical
devices that perform the functions of normal residential telephones, with the
additional ability to hold and collect or refund coins. In these conventional
payphone systems, all of the intelligence required to provide service is located
at central offices or other network locations of long distance or local exchange
carriers and is supplied to the payphone via a "coin line." In June 1984, the
FCC approved the operation of independently owned payphones, which permitted
independent payphone providers to enter the industry. However, barriers to entry
into the industry by

independent payphone providers were substantial. The RBOCs had in place and
available the services of the central offices to provide payphone service,
including call rating and routing information, the "bong" tone that signals
callers to input calling card numbers, and collection/return signaling for the
payphone to collect or return coins. These services were not required to be made
available to independent payphone providers and placed them at a disadvantage.
Regulatory actions, together with the development of technologically advanced
microprocessor-based payphones that perform the functions of the central office
within the telephone (referred to in the industry as "smart payphones"), have
enabled independent payphone operators to enter the industry and compete
effectively with the regulated telephone operating companies.
Microprocessor-based technology provided independent payphone providers with the
capability to route and determine the proper charges ("rate") for calls and to
deploy payphones containing maintenance diagnostics and reporting features, coin
administration and credit card features, and station message detail recording
and reporting features. These features enable independent payphone providers to
either route calls to Alternate Operator Services ("AOS") or to store and
retrieve call data and billing information, thereby allowing the owner to share
in the long-distance revenues generated by the phone, reduce the cost of
maintenance and collection, and to monitor coin pilferage, among other things.

On February 8, 1996, the President signed into law the Telecommunications
Act of 1996 (the "Telecommunications Act"), the most comprehensive reform of
communications law since the enactment of the Communications Act of 1934. The
Telecommunications Act eliminates long-standing legal barriers separating LECs,
long distance carriers, and cable television companies and preempts conflicting
state laws in an effort to foster greater competition in all telecommunications
market sectors, improve the quality of services and lower prices.

The Telecommunications Act expressly supersedes the consent decree which
led to the break-up of AT&T, the formation of the RBOCs, and the
line-of-business restrictions that prohibited the RBOCs from providing long
distance services and from manufacturing telecommunications equipment. The RBOCs
are now permitted to provide long distance service outside their local service
areas and to seek approval from the FCC to provide long-distance service within
their local service areas based upon a showing that they have opened their local
exchange markets to competition. After the FCC has given its approval to a
request to provide in-region long distance service, an RBOC may also engage in
the manufacture and provision of telecommunications equipment and the
manufacture of customer premises equipment, including pay telephones. Such
manufacturing enterprises must be conducted through separate affiliates for at
least three years after the date of enactment of the Telecommunications Act. In
addition, an RBOC may not discriminate in favor of equipment produced or
supplied by an affiliate, but rather must make procurement decisions based on an
objective assessment of price, quality, delivery and other commercial factors.

The Company believes that as a result of the reform legislation, the public
communications industry will undergo fundamental changes, many of which may
affect the Company's business. The legislation is likely to increase the number
of providers of telecommunications services, including perhaps providers of
payphone services. This increase in the number of providers is likely to
stimulate demand for new payphone equipment. In that event, the Company believes
that existing payphone providers, including the RBOCs, could seek to enhance
their technology base in order to compete more effectively with each other and
with new entrants. In addition, as the local exchange and intrastate long
distance markets are opened to competition, inter-exchange carriers seeking to
serve these markets may deploy greater numbers of payphones to capture local and
intrastate traffic. There can be no assurance, however, that these trends will
develop, or that if they do develop, they will have a beneficial impact on the
payphone market generally or on the Company's business in particular. See
"Government Regulation," below.

Over the past couple of years, in response to the competitive pressures
from independent payphone providers and in anticipation of passage of the
Telecommunications Act, several of the RBOCs and other local exchange carriers
began to upgrade their payphone base with microprocessor-based "smart" payphone
technology. The Company believes that approximately 15% to 20% of the installed
based of payphones

operated by the RBOCs have been upgraded with smart payphone systems, including
those provided by the Company. The Company's prospects for future and continued
profitability are largely dependent on such trend continuing. See "Sales and
Markets --Domestic," below.

International Market. Internationally, it is estimated that there are
several million payphones in the installed base. Public communication services
in foreign countries are provided by large government controlled postal,
telephone and telegraph companies ("PTTs"), former PTTs that have been
privatized for the purpose of investing in and expanding telecommunication
networks and services, and cellular carriers. The Company believes that a trend
toward privatization and liberalization of the international telecommunication
industry is opening the international markets, previously dominated by monopoly
and government infrastructure, to increased competition. In addition, many
countries are allowing private firms to construct cellular networks and compete
with national telecommunication authorities. It is believed that some of the
large United States based telecommunications companies, including certain RBOCs,
have invested in telecommunication opportunities abroad including the
acquisition of interests in the privatized PTTs and consortiums for the
acquisition of licenses and construction of cellular networks to provide
cellular communication services. On February 15, 1997, over 60 countries signed
a World Trade Organization pact aimed at opening the global telecommunication
industry to competition. This agreement provides for most of the countries to
end their telephone monopolies by the year 2000. However, the agreement, which
must be ratified by the individual countries, will likely encounter substantial
opposition. Accordingly, there is no assurance that the agreement will be
ratified or facilitate free market conditions within the global
telecommunications market.

Presently, the density of payphone installations in many foreign countries
on a per capita basis is far less than that in the United States. The Company
believes that many of these countries are seeking to expand and upgrade their
telecommunications systems and are funding programs to provide communication
services to the public. The expansion programs include the construction of
wireless networks, and the Company believes that wireless payphone service will
become one of the primary avenues of providing communication services to the
public in certain foreign markets. The Company believes that large scale
payphone deployment programs are underway in several foreign markets, and that
the international public communications industry will continue to evolve and be
a significant growth industry over the next several decades to the extent that
privatization and the investment in and expansion of both wireline and wireless
networks progresses.

Although foreign markets are believed to be a potential source of
significant demand for the Company's products, there are impediments to the
Company's ability to penetrate such markets, including resource limitations,
regulations and the normal difficulties attendant on conducting international
business.

Products and Services

The Company manufactures and markets "coin" and "coinless" pay telephone
("payphone") systems and products that connect to and operate as integral parts
of domestic and foreign telecommunication networks. The Company also markets
payphone and payphone component repair, refurbishment and conversion upgrade
services to local exchange carriers in the United States. The Company's products
include payphones equipped with non-smart payphone electronics (for coin line
installations) and payphones equipped with microprocessor-based smart payphone
processors (for coin line and/or non-coin line installations) that connect to
wireline telecommunication networks ("wireline payphones") and payphones
equipped with a specially designed smart cellular processor that connect to
cellular telecommunication networks ("wireless payphones"). Smart payphone
processors (and non-smart electronics) are the primary electronic assemblies or
"engines" of payphones. The Company also supplies smart payphone retrofit kits
and a wide-range of payphone components (including, among other things, dials,
handsets, chrome doors, credit card readers and volume amplification modules)
required to manufacture payphones and to repair and/or upgrade deployed
payphones with enhanced technology. The Company's smart payphone systems are
provided with CoinNet payphone management software. This management system is
used by customers to remotely manage networks of the Company's smart payphone
products interactively. A significant portion of the Company's revenues is
derived from the sale of smart

payphone processors and payphone retrofit kits to certain RBOCs that are
upgrading their installed base of payphones with technologically advanced
processors.

The Company's wireline payphone products were developed specifically for
the regulated telephone operating companies in the United States. The design of
the Company's wireline coin payphones is based upon the Western Electric
configuration developed for use in the Bell system versus the GTE configuration
developed for the independent telephone companies and also used by most of the
independent payphone providers. The Company's coinless wireless ("cellular")
payphone products were developed for use in foreign markets, and are
manufactured in several different configurations, including the Western Electric
configuration, depending on the application.

The majority of foreign countries follow the network standards of the
Consultative Committee for International Telephone and Telegraph ("CCITT"). One
of the primary technical network differences in the payphone industry between
the countries following the CCITT network standards and those following the U.S.
network standards relates to call rating. The Company has not to date offered a
wireline product that operates with networks following the CCITT standards. The
Company is presently developing a new smart payphone processor that it believes
will be capable of operating with networks following either standard. The
Company believes that this technology will enable the Company to compete in the
independent market in the United States and in foreign countries that follow the
CCITT standard. The Company's new smart payphone processor is currently
undergoing limited field trial testing and evaluation in coin line and in
non-coin line installations domestically. The Company believes that its new
smart payphone processor will be available to market during the next year. See
"Design and Product Development," below.

The following table outlines products currently offered by the Company:

PRODUCT DESCRIPTION

GEMINI SYSTEM II(R) The Gemini System II(R)("Gemini") product is a
sophisticated microprocessor-based smart payphone
processor which is programmable to operate in either a
coin line mode or a non-coin line mode. The coin line mode
uses the rating and answer supervision services provided
by the central office ("CO") and associated network. In
contrast, rating and answer supervision services are
performed within the processor when programmed to operate
in the non-coin line mode. Programmable billing, reporting
and operating cost reduction features offered with the
Gemini product include: (i) station message detail
recording, which provides for the storage of all call data
within the phone; (ii) maintenance reporting and
diagnostics, which provides for remote diagnosis of
payphone and component operating status via telemetry;
(iii) coin administration, which provides coin accounting
capability and reporting of coin box status; (iv) call
routing, which provides for the routing of calls to the
programmed carrier; and (v) credit card billing and
auditing, which provides the ability to bill credit card
calls and to identify invalid cards or card numbers. The
Gemini product is also designed to interface with an
electronic lock to control and to permit remote monitoring
of collection activities. Programmable revenue enhancement
features offered with the Gemini product include: (i)
voice messaging, which enables the user to record a
message to the called party rather than allow the call to
go uncompleted; and (ii) usage based pricing, which
administrates local call costing on the basis of time. The
features available with the Gemini product are designed to
enable customers to enhance revenues and to reduce costs
of operation and maintenance through accurate scheduling
of maintenance and collection activities. All programming,
retrieval, reporting and telemetry features are performed
remotely using the Company's payphone software management
system.

GEMSTAR(TM) The GemStar product is a microprocessor-based smart
payphone processor designed for coin line applications
which require the rating and answer supervision functions
performed by the CO network. The GemStar product offers
the primary cost reduction and reporting features of the
Gemini product, including maintenance reporting and
diagnostics and coin administration. With added memory,
the GemStar product also provides station message detail
recording. The GemStar product is also designed to
interface with an electronic lock to control and to permit
remote monitoring of collection activities.

INMATE(TM) The InMate product is a microprocessor-based smart
payphone processor designed for prisons where cost
reduction and revenue enhancement features as well as
other specialized features are required. The InMate
product offers station message detail recording,
maintenance reporting and diagnostics, voice messaging,
usage based pricing and call routing. In addition,
specialized features include: (i) outgoing call
restriction, which can restrict calls to specified
numbers; (ii) call duration, which limits the time
duration of calls; and (iii) personal identification
numbers, which permit valid user access only. Coin
administration features are not provided in this coinless
environment.

GEMCELL(TM) The GemCell product is a microprocessor-based cellular
payphone processor that interfaces to a cellular
transceiver for use in domestic and international wireless
networks. The GemCell product was designed to have the
primary features available with the Gemini product except
coin administration. Instead, the GemCell product was
designed to accept debit ("prepay") cards, smart ("chip")
cards or credit cards as the form of payment. The GemCell
product is not currently marketed in the U.S.

COINNET(TM) The CoinNet product is a remote payphone software
management system which operates on personal computers in
a multi-tasking environment. This proprietary software
product provides the Company's customers with the ability
to manage networks of installed payphones interactively.
Downloading software changes, retrieving station message
detail recording data, maintenance and diagnostics data
and coin box data are a few of the functions of this Unix
or MSDOS-based software system.

PAYPHONES The Company offers its payphones in a wide range of
electronic and smart configurations depending upon the
application requirements of its customers. The Company's
wireline payphones include coin (or token) payphones
and/or coinless payphones, including credit card
applications. The Company's wireless, coinless payphones
include debit ("prepay") and smart (chip") card payphones
which are offered in fixed configurations as well as
configurations for mobile deployment, such as taxis,
trains and buses. The Company's smart wireline payphone
technology derives power from the telephone line,
eliminating the need for external power sources. The
Company's wireless payphones are powered by commercial
electric line power or by a solar powered platform so that
they can be deployed without network wiring and cabling.

CELLULAR
ASSISTANCE PHONE The Company also offers a specialized Cellular Assistance
Phone designed to provide emergency phone service in
specific applications, such as along highways and in
remote areas. The Cellular Assistance Phone is provided
with a cellular transceiver and is powered by commercial
electric line power or by a solar powered platform so that
it can be deployed without network wiring and cabling. The

features of the Cellular Assistance Phone are limited to
those required for emergency situations and permit the
user to automatically dial a preset emergency assistance
number. The Cellular Assistance Phone is not currently
marketed in the United States.

PAYPHONE
COMPONENTS Payphone components supplied by the Company include, among
others, non-smart payphone electronics, touchtone dials,
handsets, coin relays, and volume amplification
assemblies. These components are manufactured at the
Company's facilities to Bellcore specifications.

SERVICES The Company provides payphone and payphone component
repair, refurbishment and upgrade conversion services for
its customers. Refurbishment services involve the
rebuilding of payphone components and sets to "like new"
condition. Upgrade conversion services include the
modification of payphone components and sets to an updated
or enhanced technology.

Sales and Markets

Domestic. The Company markets its payphone products and services
predominately to the RBOCs. In fiscal years 1995, 1996 and 1997, sales to RBOCs
accounting for greater than 10% of the Company's sales aggregated 72%, 88% and
90%, respectively, of the Company's sales revenues. During fiscal 1995,
Ameritech Services, Inc. ("Ameritech"), Bell Atlantic Corp. ("Bell Atlantic"),
Southwestern Bell Telephone Company ("SWB") and NYNEX accounted for
approximately $2.8 million, $5.8 million, $3.8 million and $2.2 million,
respectively, of the Company's sales. During fiscal 1996, Bell Atlantic, NYNEX
and SWB accounted for approximately $5.6 million, $7.9 million and $15.5
million, respectively, of the Company's sales. During fiscal 1997, Ameritech,
Bell Atlantic and NYNEX accounted for approximately $4.6 million, $5.2 million
and $20.2 million, respectively, of the Company's sales. The Company anticipates
that it will continue to derive most of its revenues from these customers, and
other regional telephone companies, for the foreseeable future. During the last
year, mergers between Pacific Telesis Inc. and SBC Communications, Inc. (the
parent of SWB), and between Bell Atlantic and NYNEX were announced. The Company
cannot predict the impact that these mergers will or may have on the Company's
business.

The Company competes for and enters into non-exclusive supply contracts to
provide products, components and services to the RBOCs. The Company has entered
into sales agreements to provide payphone components to Bell Atlantic, NYNEX and
SWB. The Company has entered into sales agreements to provide repair,
refurbishment and conversion services to Ameritech Services, Inc., Bell
Atlantic, NYNEX and SWB. These agreements have terms ranging from two to three
years, are renewable at the option of and subject to the procurement process of
the particular RBOC, contain fixed sales prices for the Company's products and
services with limited provisions for price increases and expire at various dates
from June 1997 to March 1999. These sales agreements are frameworks for dealing
on open account and do not specify or commit the Company's customers to purchase
a specific volume of products or services. If orders are made, however, the
Company has agreed to fill such orders in accordance with the contract
specifications. The agreements are generally subject to termination at the
option of the customer upon 30 days notice to the Company, or if the Company
defaults under any material provision of the agreement, including provisions
with respect to performance.

In November 1996, the Company entered into a non-exclusive sales agreement,
effective July 1, 1996, to provide its Gemini smart payphones and processors,
CoinNet payphone management system and other payphone components to NYNEX for a
period of five years. This agreement superseded a December 1995 smart product
sales agreement between the Company and NYNEX. The November 1996 agreement sets
forth the terms and conditions relating to the sale of products to NYNEX, and
does not specify or commit NYNEX to purchase a specific volume of products from
the Company. If orders are made, however, the Company has agreed to fill such
orders in accordance with NYNEX's specifications and at fixed prices set forth
in the

agreement. The Company has agreed not to increase its prices during the term of
the agreement and has agreed to implement a continuous improvement program to
improve productivity and quality and to reduce product costs during the term of
the agreement. The agreement includes provisions for reductions in sales prices
to NYNEX based on product cost reductions achieved from the continuous
improvement program and based on NYNEX's purchase volume. The agreement contains
a "most favored customer" clause pursuant to which the Company has agreed to
provide price and other terms at least as favorable as those extended by the
Company to other customers for similar purchase volumes of products covered by
the agreement. The Company has agreed to indemnify NYNEX against expenses,
liabilities, claims and demands resulting from products covered by the
agreement, including those related to patent infringement and performance
specifications. The agreement may be terminated by either party upon default by
the other party upon thirty days' written notice, provided the default is not
cured within thirty days from the receipt of notice of default. Further, NYNEX
may terminate the agreement upon 120 days' written notice to the Company.
However, upon such a termination, NYNEX has agreed to purchase the Company's
inventories related to the products covered by agreement, provided that such
obligation shall not exceed the value of NYNEX's purchases for a 120-day period,
determined based upon the average monthly volume for the previous six-month
period, less the value of outstanding orders to be shipped, the value of
products which may be sold to other customers and the value of inventory that
may be returned to the Company's suppliers. The agreement expires on July 1,
2001.

In June 1997, the Company entered into an agreement with SWB that
supersedes and terminates a December 1994 agreement between the parties. Under
the new agreement, the Company agreed to reduce SWB's remaining purchase
commitment of GemStar processors and electronic locks to approximately $3
million from approximately $8 million under the former agreement and, among
other things, upgrade SWB's payphone management system. In return, SWB made a
cash payment of $250,000 to the Company, terminated the Company's obligation to
pay royalties on sales of GemStar processors to other customers and terminated
the Company's obligation to repay $375,000 received from the sale of product
software under the December 1994 agreement. SWB also agreed to make additional
cash payments of $250,000 on July 2, 1997, $100,000 on September 1, 1997,
$150,000 on December 31, 1997 and $250,000 on March 31, 1998 to the Company
subject to the Company's compliance with the terms and conditions of the
agreement, including conditions with respect to product quality and performance,
service and repair. SWB has the right to cancel the agreement without further
obligation to TSG, including any obligation to make additional payments or to
purchase additional products, upon a default by TSG of any of the terms and
conditions contained in the agreement. SWB also has the right to cancel the
agreement without notice and without further obligation to TSG, including any
obligation to make additional payments or to purchase additional products, in
the event TSG defaults on its obligation to upgrade SWB's payphone management
system by July 2, 1997. Further, SWB may terminate the agreement by giving the
Company thirty days prior written notice, in which case, SWB is obligated to
purchase the products and make the payments sets forth in the agreement. See
Item 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8 -- "Financial Statements and Supplementary
Data."

The Company sells its products and services directly to its customers. The
Company involves a wide-range of personnel in its sales and marketing activities
including its Vice President of Sales and Marketing, two experienced sales
directors, three service technicians, its engineering staff, its quality
managers and its President and CEO. The Company's engineering staff and service
technicians provide support and technical services via telephone without charge,
and the Company provides field engineering support services during the initial
deployment of products and when customers encounter unusual or technical
problems. The Company's commitment to service and support throughout its
organization is directed at maintaining strong relationships with customers'
operating, technical and administrative personnel. The Company also conducts
training seminars and provides assistance to customers in the installation and
set-up of the Company's payphone software management system.

International. The Company markets its smart wireless payphones in Korea,
Mexico, Ecuador, Venezuela and other South American countries, primarily under
distributor and reseller relationships. The Company presently has distributor
relationships in Venezuela, for the South American markets, and in Korea. The
Company also markets its products in Central American markets directly and
through an independent sales representative.

The Company's export sales during fiscal 1995, 1996 and 1997 approximated
$1.4 million, $856,000 and $461,000, respectively. The Company believes that the
international public communications market represents a growth opportunity. The
Company, however, has limited experience exporting products and operating
outside the United States and there can be no assurance that the Company will be
able to generate significant revenues from international business. Conducting
business internationally is subject to a number of risks, including political
instability, foreign currency fluctuations, adverse movements in exchange rates,
economic instability, the imposition of tariffs and import and export controls,
changes in governmental policies (including U.S. policy toward foreign
countries), general credit and business risks and other factors, one or more of
which, if they occur, could have an adverse effect on the Company's ability to
generate international sales or operations. The Company's sales to date have
been denominated in U.S. dollars and as a result, no losses related to currency
fluctuations have been incurred. For the same reason, the Company has not
engaged in currency hedging activities. There is no assurance, however, that the
Company will be able to continue to export its products in U.S. dollar
denominations or that its business will not become subject to significant
exposure to foreign currency risks. In addition, the Company intends to complete
the development and begin marketing wireline payphone products for international
CCITT applications during fiscal 1998, and there is no assurance that the
Company will be able to successfully complete the development of such products
or that it will be able to successfully market such products. Finally, many of
the Company's known and potential international competitors have substantially
greater financial and other resources than the Company and, therefore, are
formidable competitors. See "Competition," below."

The Company believes that wireless payphone services will become one of the
primary avenues of providing communication services to the public in many of the
developing nations in South America and Central America and that these markets
represent a significant growth opportunity. Many of the cellular licenses
awarded to companies in foreign markets to provide services in competition with
national communication authorities have been awarded to consortiums and
companies in which the RBOCs have invested. The Company believes that an
opportunity exists to expand its market channel within the RBOC arena by
deployment of its wireless payphone technology to international wireless
concerns affiliated with the RBOCs. The Company intends to continue to invest in
the development of wireless products and hardware for non-coin technologies
including prepay and debit cards, including smart ("chip") cards.

Competition

The Company believes that it is a significant provider of payphone products
and payphone repair services to the RBOCs. The Company operates in a highly
competitive environment and competes against numerous domestic and foreign
providers of payphones and payphone repair services that have financial,
management and technical resources substantially greater than those of the
Company. In addition, there are many other firms which have the resources and
ability to develop and market products which could compete with the Company's
products. The Company believes its ability to compete depends upon many factors
within and outside its control, including the timing and market acceptance of
new products developed by the Company and its competitors, performance, price,
reliability and customer service and support.

The Telecommunications Act lifts the restriction on the manufacturing of
telecommunications equipment by the RBOCs. After the FCC finds that an RBOC has
opened its local exchange market to competition, the RBOC, through a separate
affiliate, may manufacture and provide telecommunications equipment and may
manufacture customer premises equipment, such as payphones. As a result of the
legislation, the Company could face new competitors in the manufacture of
payphones and payphone components from one or more of the

RBOCs or their affiliates. The RBOCs have financial, management and technical
resources substantially greater than the Company. However, the legislation does
not permit RBOCs to create joint manufacturing operations with each other. In
addition, the legislation provides that as long as Bellcore is an affiliate of
more than one RBOC, Bellcore may not engage in manufacturing telecommunications
equipment or customer premises equipment. The Telecommunications Act also
incorporates numerous safeguards to ensure that standards setting organizations
conduct themselves fairly and requires the FCC to establish a dispute resolution
process for equipment manufacturers involved in conflicts over standards
setting.

The Company believes that the primary competitive factors affecting its
business with the RBOCs are quality, price, service and delivery performance.
The Company competes aggressively with respect to the pricing of its products
and services, and since the Company's contractual agreements with the RBOCs
generally provide the Company with limited ability to increase prices if
manufacturing costs increase, the Company attempts to reduce its manufacturing
costs rather than increase its prices. The Company also attempts to maintain
inventory at levels which enable the Company to provide immediate service and to
fulfill the delivery requirements of its customers.

The Company believes that its principal competitors in the United States
include Protel Inc., Elcotel, Inc., Intellicall, Inc., Lucent Technologies and
International Totalizing Systems, Inc., and with respect to repair and
refurbishment services, Restor Industries, Inc. The Company also competes with
numerous foreign companies marketing products in the United States, including
Northern Telecom, Inc. However, the Company does not believe that foreign
competitors have yet been able to successfully penetrate the payphone industry
in the United States. Some of the Company's competitors, including Protel Inc.,
Intellicall, Inc. and Elcotel, Inc. supply payphone products to independent
payphone providers which compete with the RBOCs. During fiscal 1997, the Company
did not actively market its products to independent payphone providers.

Many of the Company's competitors are substantially larger than the Company
and have significantly greater financial, technical and marketing resources. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company. It is also possible that new competitors may emerge and acquire
significant market share. Possible new competitors include large foreign
corporations, the Company's RBOC customers and other entities with substantial
resources. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which would have a
material adverse effect on the Company's business, results of operations and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures will not have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, it is unlikely that
the Company will become a significant supplier of smart payphone products to all
of the RBOCs since competition for business with the RBOCs is intense.

Internationally, the Company competes with numerous foreign competitors,
all of which have financial, management and technical resources substantially
greater than the Company. These foreign competitors market payphone products
predominately to the PTT's and thereby dominate the international payphone
market. The Company believes that the primary competitive factors affecting its
international business are the ability to provide products that meet the
specific application requirements of the customers, quality and price.

The Company expects that a number of personal communications technologies
will become increasingly competitive with payphone services provided by the
telephone companies and independent payphone providers. Such technologies
include radio-based paging services, cellular mobile telephone services and
personal communication services. However, the Company believes that the payphone
industry will continue to be a major provider of telecommunications access.

Prior to 1984, the regulated telephone companies held a monopoly in the
United States payphone market, and they continue to have a dominant share of the
payphone market. The regulated telephone companies have financial, marketing,
management and technical resources substantially greater than those of private
payphone providers. The Company believes that the regulated telephone companies
will continue to experience increasing competition from independent payphone
providers. Accordingly, the Company believes, but cannot ensure, that the
telephone operating companies can be expected to upgrade their technology base
and protect their market share.

Manufacturing, Assembly and Sources of Supply

The Company performs repair, refurbishment and conversion services and most
of its product assembly operations at its facilities. In addition, certain
components including low-density electronic circuit board assemblies, dials and
handsets, are assembled at the Company's facilities. Other components are
purchased from various distributors and manufacturers, including contract
manufacturers engaged by the Company. The Company generally assembles its smart
payphone products from assemblies produced by manufacturers under contractual
arrangements.

On October 21, 1994, the Company entered into a manufacturing agreement
with Avex Electronics, Inc. ("Avex"), a large contract manufacturer, that
provided for the production of the Company's GemStar circuit board assemblies
and payphone processor. The Company committed to purchase $12.2 million of
GemStar assemblies. At March 28, 1997, the Company had purchased the majority of
its initial commitment. The Company has also engaged Avex to manufacture the
printed circuit board assemblies for its Gemini processors, its new smart
payphone processor presently under development and other products, and has
committed to purchase approximately $5.5 million of assemblies for its new smart
payphone processor during the first year of production. The manufacturing
agreement may be terminated by either party for default upon a material breach
of the terms of the agreement by the other party, provided such breach is not
cured within a 30-day notice period. Further, the Company may terminate the
agreement at any time. However, upon a termination of the agreement by the
Company, the Company is obligated to purchase inventories held by the
manufacturer and pay vendor cancellation and restocking charges, and a
reasonable profit thereon. In addition, upon a cancellation by the Company of
its purchase obligation, or a substantial portion thereof, related to its new
smart payphone processor, the Company is obligated to pay a cancellation penalty
of up to $500,000. This cancellation obligation varies depending upon quantities
purchased by the Company and expires when the Company has substantially met its
purchase commitment. The Company is dependent upon Avex to manufacture and
supply products required to meet sales commitments under the terms of its smart
product sales agreements.

On November 18, 1994, the Company entered into an exclusive dealer
agreement with Control Module, Inc. that provided the Company with the rights to
purchase and supply electronic lock devices to SWB in accordance with the terms
of a December 1994 sales agreement between the Company and SWB. The Company
committed to purchase approximately $3.5 million of the electronic lock devices
at specified prices over a two-year period. At March 28, 1997, the Company had
satisfied its purchase commitment, and has an adequate inventory of electronic
lock devices to meet its remaining sales commitment to SWB. The dealer agreement
expired upon the Company's purchase of the committed volume.

On September 16, 1991, the Company entered into a Manufacturing Rights
Agreement (the "Manufacturing Agreement") with Commtek Industries, Inc., an
unaffiliated Taiwan corporation. The Company granted Commtek the exclusive right
to utilize the assets owned by the Company's foreign division for a period of
five years to manufacture many of the non-electronic components and assemblies
for the Company's products. The Company agreed to purchase a minimum aggregate
annual volume of $2.5 million during the first year of the agreement and $3
million for each year thereafter. The Manufacturing Agreement expired on
September 15, 1996. However, the parties have continued the supply relationship
under standard purchase arrangements. The Company believes that there are
alternative sources of supply for the components and assemblies currently

purchased from Commtek. However, if a shortage or termination of the supply of
any one or more of such components or assemblies were to occur, the Company's
business could be materially and adversely affected.

Warranty and Service

The Company provides warranties of 90 days with respect to repair,
refurbishment and conversion services and from one to three years on its
products. Under the Company's warranty program, the Company repairs or replaces
defective parts and components at no charge to its customers. The Company's
contract manufacturers provide warranties on the electronic circuit board
assemblies ranging from 90 days to 120 days. Under warranties provided by
contract manufacturers, defective electronic circuit board assemblies are
replaced or repaired at no charge to the Company.

The Company generally enters into repair agreements with respect to its
smart products under which the Company agrees to perform non-warranty repair
services at specified prices. The Company also provides repair, refurbishment
and conversion services under agreements with its customers. See "Sales and
Markets," above.

Licenses, Patents and Trademarks

The engineering designs on which the Company's electronic products and
components are based were internally developed by the Company's engineering
staff. The Company owns eight United States patents relating to payphone
components, its smart payphone platform and other technology which expire
between April 2010 and May 2014. The Company has one patent application
outstanding. Although the Company believes that its patents and trademarks are
important to its business, it does not believe that patent protection or
trademarks are critical to the operation or success of its business. The Company
does not believe that it is infringing on the patents of others and would defend
itself against any allegations to that effect. There can be no assurance,
however, that infringement claims will not be asserted in the future or that the
results of any patent related litigation would not have a material adverse
affect on the Company's business.

The Company regards its manufacturing processes and circuit designs as
proprietary trade secrets and confidential information. To protect this
information, the Company relies largely upon a combination of agreements with
its contract manufacturers, confidentiality procedures, and employee agreements.
However, there can be no assurance that the Company's trade secrets will not be
disclosed or misappropriated.

The Company licenses certain technologies from third parties under
agreements providing for the payment of royalties. Royalty expense during the
year ended March 28, 1997 approximated $196,100. See Item 8 -- "Financial
Statements and Supplementary Data".

Design and Product Development

The Company's engineering department is staffed with software, electrical
and mechanical engineering professionals. Their activities are dedicated to the
development of new products, enhancements of the Company's deployed product
line, including the CoinNet management system, and enhancements to improve
product reliability. Their efforts are also directed to reducing product costs
through new manufacturing methods. During fiscal 1995 and 1996, the Company
expended approximately $938,000 and $1.2 million, respectively, on engineering,
research and development activities consisting primarily of the design and
development of GemStar, Gemini and GemCell products. During fiscal 1997, the
Company expanded its research and development activities for the purpose of
designing and developing a new smart payphone processor capable of operating in
domestic coin line installations, domestic non-coin line installations and in
foreign CCITT network installations. During the year ended March 28, 1997, the
Company expended approximately $1.8 million on engineering, research and
development activities, and in addition thereto, capitalized software
development expenses of $421,693.

The Company believes that new products and product enhancements have the
potential to increase its market opportunities and are essential to its
long-term growth, particularly in international wireline markets, and the
Company's ability to fund future research and development activities, in turn,
will be dependent upon its ability to generate cash in excess of its operating
needs. See Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Employees

At March 28, 1997, the Company had 149 full-time employees, 3 part-time
employees and 22 temporary contract employees consisting of 112 persons engaged
in direct labor activities, 22 persons engaged in manufacturing support
activities, 20 persons engaged in administrative, sales and finance activities
and 20 persons engaged in engineering and engineering support activities. In
addition, the Company has three independent contractors engaged in product
development activities. The Company considers its relations with its employees
to be satisfactory.

At March 28, 1997, none of the Company's employees were represented by a
collective bargaining unit.

Backlog

The amount of the Company's backlog is subject to large fluctuations
because the Company's business depends upon a small number of customers and
large orders. The Company calculates its backlog by including only items for
which there are purchase orders with firm delivery schedules. Contractual
commitments are not included in backlog until purchase orders are received by
the Company. At March 28, 1997, the backlog of all products and services was
approximately $2.6 million as compared to approximately $3.8 million at March
29, 1996. The Company's objective is to ship orders within 30 days of receipt
and, therefore, the Company does not expect its backlog, other than orders with
scheduled deliveries under contractual commitments, to exceed monthly sales
levels. Accordingly, the Company's backlog at any given date is not indicative
of future revenues. Seasonality

The Company's sales are generally stronger during periods when weather does
not interfere with the maintenance and installation of payphone equipment by the
Company's customers. Accordingly, the Company's sales could be adversely
affected during certain periods of the year. The Company's sales may also be
adversely impacted near the end of the calendar year by the budget short falls
of customers. As a result, the Company's sales during its third quarter may
decline significantly in relation to other quarters. Potential Environmental
Liabilities

During the year ended March 28, 1997, the Company completed the evaluation,
assessment and monitoring of soil and groundwater contamination at one of the
Company's former facilities in Florida in accordance with requirements
stipulated by the Florida Department of Environmental Protection (the "FDEP"),
and in April 1997 received a formal "no further action status" notification for
the site from the FDEP. Accordingly, the Company has not accrued any additional
costs with respect to this site. It is possible, however, that the FDEP could
reopen the investigation in the future and require the Company to take further
actions at the site. The Company cannot estimate a range of costs, if any, that
it could incur in the future since such costs would be dependent upon the scope
of additional actions, if any, that may be required by the State of Florida.

During the year ended March 28, 1997, the Company was a Potentially
Responsible Party ("PRP") for undertaking response actions at a facility for the
treatment, storage, and disposal of hazardous substances operated by Seaboard
Chemical Corporation from 1975 to 1989 at Jamestown, North Carolina. However,
the Company, as a small generator "De Minimis" party, executed a buy-out
agreement with respect to the remediation activities at a cost of approximately
$8,200 during the year ended March 28, 1997. The Company believes, based on
information presently available to the Company, that it has no further
obligations with respect to the site. However, if additional waste is attributed
to the Company, it is possible that the Company could be liable for additional
costs. The Company cannot estimate a range of costs, if any, that it could incur
in the future

since such costs would be dependent upon the amount of additional waste, if any,
that could be attributed to the Company.

The Company has also been notified that it is a PRP with respect to
response actions at the Galaxy/Spectron Superfund Site in Elkton, Maryland. The
Company, however, is also a De Minimis party with respect to this site, and its
proportionate share of costs to undertake response actions, the Company
believes, will likely be insignificant. The Company has received notification
that the De Minimis parties will be able to buy out and obtain a release from
any further clean-up liability at the site at a cost presently estimated at
$3.70 per gallon of contributed waste, which would amount to $2,849 with respect
to the Company's contribution. The Company has not incurred any costs with
respect to this site and believes that its ultimate costs will not be material.

Government Regulation

The Company's operations are subject to certain Federal, state and local
regulatory requirements relating to environmental, health and safety matters.
Management believes that the Company's business is operated in compliance with
applicable regulations promulgated by the Occupational Safety and Health
Administration and the Environmental Protection Agency and corresponding state
agencies which pertain to health and safety in the work place and the use,
discharge and storage of chemicals employed in its operations, respectively.
Current costs of compliance with such regulations are not material to the
Company. However, the adoption of new or modified requirements not presently
anticipated could create additional expense for the Company.

The Federal Communications Commission ("FCC") regulates under Part 15 of
its rules the operation and marketing of devices which emit radio-frequency
energy, whether intentionally or unintentionally, and which do not require an
individual license. The marketing of such devices is also regulated under Part 2
of the FCC's rules. The FCC regulates the direct connection of terminal
equipment to the public switched telephone network and the marketing of such
equipment under Part 68 of its rules. Parts 15 and 68 establish technical
standards and procedural and labeling requirements for equipment subject to
these rules. Certain modifications to equipment subject to these rules must also
comply with these technical standards and procedural and labeling requirements.
Manufacturers of products subject to Part 68 also must implement a continuing
compliance program under which products currently in production must be tested
every six months to ensure continued compliance with the applicable technical
standards. Certain types of devices sold as components or subassemblies are
exempt from the technical standards and procedural and labeling requirements of
Parts 15 and 68. If such components or subassemblies are incorporated into and
marketed as part of systems or sets subject to Part 15 or Part 68, however, such
systems or sets must comply with the applicable rules. The Company believes that
it is in compliance with Parts 15 and 68 of the FCC's rules and regulations at
March 28, 1997.

The Company believes that the regulatory climate in the United States over
recent years has begun to influence the RBOCs deployment of public communication
products. The Company also believes that the RBOCs have begun to upgrade their
payphone base with smart products that reduce their cost of management,
maintenance and coin administration and that include revenue enhancement
features. The deployment and business strategies of the public communication
divisions of the RBOCs have affected and will continue to affect the Company's
business. To the extent that these business strategies were to change, for
regulatory reasons or otherwise, the Company's prospects would be materially and
adversely affected.

On September 20, 1996, the FCC released its order adopting regulations to
implement the section of the Telecommunications Act which mandated fair
compensation for all payphone providers. Among other matters, the order
addressed compensation for non-coin calls; local coin calling rates; removal of
subsidies and discrimination favoring payphones operated by local exchange
carriers ("LECs") and authorized RBOCs and other providers to select service
providers.

The order prescribed interim dial-around compensation for independent
payphone providers for both access code and subscriber 800 dial-around calls on
a flat-rate basis of $45.85 per phone per month, as compared to the previous
compensation of $6.00 per month. This new interim rate will expire on September
1, 1997, and replaces all other dial around compensation prescribed at the state
or federal level. This compensation will be paid by the major inter-exchange
carriers based on their share of toll revenues in the long distance market.
Payphones owned by the RBOCs and other LECs will be eligible for interim
compensation when they have removed their payphones from their regulated
accounts, which was to be completed by April 15, 1997. By October 1, 1997, the
inter-exchange carriers ("IXCs") are required to have per-call tracking
instituted. At that point, all payphones will switch to a per-call compensation
rate set at $.35 per call. Under this system, compensation will be paid on every
completed 800-subscriber and access code call. The carrier which is the primary
beneficiary of the call will pay the per-call compensation. After one year of
deregulation of coin rates (October 1, 1998), the compensation rate would be
adjusted to equal the local coin rate charge in a particular payphone.

The order required LEC payphones to be removed from regulation, separating
payphone costs from regulated accounts by April 15, 1997. This requirement is
intended to eliminate all subsidies that favor LEC payphones. LECs were also
required to reduce interstate access charges to reflect separation of payphones
from regulated accounts. In order to eliminate discrimination, LECs are also
required to offer coin line services to independent providers if LECs continue
to connect their payphones to central office driven coin line services. The FCC
did not mandate unbundling of specific coin line related services, but did make
provisions to allow states to impose further payphone services requirements that
are consistent with the order.

The order authorizes RBOCs to select the operator service provider serving
their payphones and for independent payphone providers to select the operator
service provider serving theirs. This provision preempts state regulations that
require independent providers to route intralata calls to the LECs. The FCC,
however, did not establish conditions that require operator service providers to
pay independent payphone providers the same commission levels as the RBOCs
demand.

Although dramatic regulatory changes, particularly those created by recent
legislative actions have occurred and may continue to occur, the Company
believes that the telecommunications industry will continue to be regulated in
some form by Federal and/or state authorities. There can be no assurance that
changes in regulations affecting the telecommunications industry would not have
an adverse impact on the operations of the Company's customers and, therefore,
on the operations of the Company.

Item 2. PROPERTIES

The Company's administration, sales, marketing and engineering activities
are located at its headquarters in approximately 11,800 square feet of leased
office space. The lease expires on December 31, 1997.

The Company performs payphone assembly operations and repair, refurbishment
and conversion service operations in a 53,400 square-foot leased facility
located in Orange, Virginia. The Orange, Virginia facility is leased pursuant to
the terms of an operating lease agreement dated August 1, 1986. The lease had an
initial term of five years and was renewed for an additional five-year term on
August 1, 1991. During fiscal 1997, the Company and the lessor entered into a
lease extension agreement that extended the term of the lease to July 31, 1997
and provided the Company with the right to renew the lease for five additional
terms of one year each.

During the third quarter of fiscal 1997, the Company closed a one hundred
thousand square-foot facility located in Paducah, Kentucky and consolidated
service operations into its Orange, Virginia facility.

The Company believes its facilities are adequate for its business.

Item 3. LEGAL PROCEEDINGS

None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of fiscal 1997.

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

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock was listed on the Nasdaq Small Cap Market tier
of The Nasdaq Market under the symbol "TSGI" from May 10, 1996 to October 7,
1996. On October 7, 1996, the Company's Common Stock was listed on the Nasdaq
National Market tier of The Nasdaq Market under the symbol "TSGI". Prior to May
10, 1996, there was no public trading market for the Company's Common Stock.

The high and low sales prices of the Company's Common Stock for the
quarterly periods during the period May 10, 1996 to March 28, 1997 were as
follows:

High Low
------ -----
Fiscal 1997
First Quarter (May 10, 1996 through June 28, 1996) 12 3/4 9 3/8
Second Quarter (ended September 27, 1996) 11 1/2 8 1/4
Third Quarter (ended December 27, 1996) 11 6 7/8
Fourth Quarter (ended March 28, 1997) 7 7/8 4 1/4

At March 28, 1997, the Company had 15 common stockholders of record.
However, the Company believes that there were over 400 beneficial owners of its
Common Stock at March 28, 1997.

The Company has never paid any cash dividends on its Common Stock and does
not currently intend to pay cash dividends in the foreseeable future. The
Company currently intends to retain its earnings, if any, for the continued
growth of its business. Under the terms of a Loan and Security Agreement between
the Company and its bank, the Company is prohibited from paying cash dividends
or other distributions on capital stock, except stock distributions.

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

Item 6. SELECTED FINANCIAL DATA

Predecessor Company
-------------------------------------------- --------------------------------------------
Seven Months Five Months
Year Ended Year Ended Ended Ended Year Ended Year Ended
April 2, April 1, October 30, March 31, March 29, March 28,
1993 1994 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------ ------------

Results of Operations
Net sales $ 30,535,968 $ 31,048,706 $ 11,108,653 $ 9,161,359 $ 33,201,686 $ 33,471,918
Cost of goods sold 24,083,319 25,761,831 9,176,134 8,226,245 26,082,055 26,638,622
General and administrative 3,333,996 3,476,932 1,742,324 850,069 2,204,915 2,391,164
expenses
Marketing and selling expenses 1,865,134 1,748,814 366,464 371,757 1,290,349 881,324
Engineering, research and
development expenses 2,241,552 2,009,524 457,553 480,495 1,197,183 1,776,611
Restructuring charges (credits) -- 2,570,652 (534,092) -- -- 62,500
Litigation settlement -- -- (261,022) -- -- (105,146)
Interest expense 809,589 911,821 599,276 356,624 941,261 399,469
Other (income) expense 200,875 54,557 (14,618) (58,250) (17,763) (116,664)
Income (loss) before taxes (1,998,497) (5,485,425) (423,366) (1,065,581) 1,503,686 1,544,038
Income tax provision -- -- -- -- (326,315) (533,379)
Net income (loss) $ (1,998,497) $ (5,485,425) $ (423,366) $ (1,065,581) $ 1,177,371 $ 1,010,659
Income (loss) per common and
common equivalent share (1)(2)
Primary $ (0.30) $ 0.30 $ 0.22
Assuming full dilution $ (0.30) $ 0.30 $ 0.22
Weighted average number of
common and common equivalent
shares outstanding
Primary 3,541,778 3,870,889 4,780,263
Assuming full dilution 3,541,778 3,870,889 4,780,263
Financial Position
Current assets $ 14,213,270 $ 9,742,477 $ 7,579,857 $ 8,551,369 $ 12,741,489 $ 14,865,472
Total assets 18,868,906 13,421,291 10,397,376 15,669,648 19,633,764 19,772,382
Borrowings under revolving
credit agreement 6,727,726 5,352,040 1,660,965 970,197 -- 3,810,961
Current maturities under
long-term debt and capital
lease obligations (3) 827,198 1,283,792 877,557 813,917 118,444 --
Current liabilities 12,942,935 13,006,714 8,190,910 6,856,802 8,347,509 6,644,652
Working capital (deficit) 1,270,335 (3,264,237) (611,053) 1,694,567 4,393,980 8,220,820
Long-term debt and capital
lease obligations (4) 2,068,287 957,104 3,627,596 3,532,867 3,414,586 --
Long-term borrowings under
revolving credit agreement (5) -- -- -- -- 1,093,735 --
Notes payable to stockholders (3)(4) -- -- 400,000 2,800,000 2,800,000 --
Other liabilities -- 862,517 -- 375,000 378,198 --
Total liabilities 15,011,222 14,826,335 12,218,506 13,564,669 16,034,028 6,644,652
Retained earnings (deficit) (18,964,484) (24,449,909) (24,873,275) (1,065,581) 111,790 1,122,449
Stockholders' equity (deficit) $ 3,857,684 $ (1,405,044) $ (1,821,130) $ 2,104,979 $ 3,599,736 $ 13,127,730

(1) Assuming the Acquisition had occurred on April 2, 1994, the Company's and
the Predecessor's net loss for the year ended March 31, 1995 would have
approximated $1,599,000 and the net loss per common and common equivalent
share outstanding (primary and assuming full dilution) would have been
($.45).

(2) Income (loss) per common and common equivalent share and the weighted
average number of common and common equivalent shares outstanding are not
presented for periods prior to the five months ended March 31, 1995 since
such data is not meaningful for periods prior to the Acquisition on October
31, 1994.

(3) Subordinated notes payable to stockholders of $400,000 were retired in
connection with the Acquisition. These notes were classified as current
maturities under long-term debt and capital lease obligations at April 1,
1994.

(4) Indebtedness under a bank term note in the amount of $2,200,000, a bank
term note in the amount of $309,524 and notes payable to stockholders of
$2,800,000 were repaid from the proceeds from the Company's initial public
offering of securities in May 1996.

(5) Indebtedness under the revolving credit agreement was repaid from the
proceeds from the Company's initial public offering of securities in May
1996. Accordingly, such indebtedness is classified as a long-term
obligation at March 29, 1996.

The selected financial data and related footnotes set forth above should be
read in connection with Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 8 -- "Financial
Statements and Supplementary Data."

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

Overview

Fiscal 1997 and fiscal 1996 operating performance reflects the successful
outcome of initiatives and plans set in motion during the later part of fiscal
1994 and throughout fiscal 1995 to turn around the business, to return to
profitability, and to improve the Company's financial condition and liquidity.
These initiatives included a change in senior management, a restructuring of the
organization, and raising additional capital and financing. The restructuring
was also directed at reducing operating costs and expenses and increasing sales
and gross profit margins. In addition, the Company refocused its engineering and
product development activities to resolve certain technical product problems
experienced prior to the restructuring and to develop new smart payphone
products that would position the Company to capture a significant share of the
market for the technological upgrade of the installed base of payphones owned by
the RBOCs.

This discussion contains certain forward looking statements concerning the
Company's operations, economic performance and financial condition. Such
statements are subject to various risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those identified herein.

Background - The Acquisition

On October 31, 1994, TSG Acquisition Corp., a wholly-owned subsidiary of
Wexford Partners Fund, L.P. ("Wexford"), acquired all of the outstanding capital
stock of the Company pursuant to an Agreement and Plan of Merger dated October
11, 1994 between Wexford, TSG Acquisition Corp., the Company and the majority
holders of the Company's capital stock (the "Acquisition"). The consideration
paid by TSG Acquisition Corp. aggregated $3,500,000 including contingent
consideration of $329,709, consisting of cash of $230,117 and a subordinated
note of the Company in the principal amount of $99,592, placed in escrow and
distributed to former stockholders in September 1995. The aggregate
consideration consisted of $3,004,000 to acquire the outstanding capital stock
of the Company and $496,000 to retire a $400,000 subordinated master promissory
note payable to former stockholders and related accrued interest and preference
fees of $96,000. Aggregate cash payments to former stockholders, including the
contingent consideration and the retirement of the subordinated master
promissory note, accrued interest and preference fees of $496,000, amounted to
$3,222,090. Consideration of $277,910 was withheld from amounts paid to former
stockholders to pay certain liabilities of the Company.

The Acquisition was accounted for using the purchase method of accounting.
Accordingly, the aggregate purchase price of $3,170,291, exclusive of contingent
consideration, was pushed down and allocated to the net assets acquired based
upon their fair values. The excess of the purchase price over the estimated fair
value of the net assets acquired of $3,853,877 was recorded as goodwill. Upon
distribution of the escrow consideration in September 1995, the aggregate
purchase price was increased to $3,500,000, which increased the excess purchase
price over the estimated fair value of net assets acquired and recorded as
goodwill by $329,709. Prior to the Acquisition, the Company is sometimes
referred to as the "Predecessor."

In conjunction with the Acquisition, TSG Acquisition Corp. was merged into
the Company. The outstanding shares of the Company's capital stock were
cancelled and the outstanding shares of capital stock of TSG Acquisition Corp.
were exchanged for one share of the Company's common stock, $.05 par value (the
"merger share"). In addition, on October 31, 1994, the Company amended its
Certificate of Incorporation to reflect authorized capital consisting of 10
million shares of common stock, $.01 par value (the `Common Stock), and 100,000
shares of preferred stock, $100 par value. Further, the Company entered into an
investment agreement with Wexford, Acor S.A. ("Acor") and Firlane Business Corp.
("Firlane"), referred to herein collectively as the "investors." Pursuant to
that investment agreement, the Company issued 3.5 million shares of Common Stock
in exchange for the merger share. Also, the Company borrowed $2.8 million from
Wexford and

Acor and issued 10% interest bearing subordinated promissory notes in respect
thereof due November 1, 1999 (the "Affiliate Notes") to such persons.

The accompanying analysis compares the combined results of operations of
the Company and the Predecessor for the fiscal year ended March 31, 1995 and the
Predecessor for the fiscal year ended April 1, 1994, the results of operations
of the Company for the fiscal year ended March 29, 1996 and the combined results
of operations of the Predecessor and the Company for the fiscal year ended March
31, 1995 and the results of the Company for the fiscal years ended March 28,
1997 and March 29, 1996.

Because of the Acquisition, certain financial information described below
is not comparable in all respects. In addition, comparability is affected
because of the following purchase accounting adjustments made by the Company on
October 31, 1994: (i) a net decrease in inventories of $44,734 consisting of a
reduction of $491,397 attributable to a change in the method used to estimate
the amount of manufacturing overhead included in inventories to a method based
on labor factors, not on a combination of labor and material factors, offset by
an increase in the basis of inventories of $446,664 to reflect their estimated
net realizable value; (ii) an increase in the basis of property and equipment of
$382,733 to reflect their estimated fair value; (iii) an increase in debt
obligations of $106,275 to reflect present values of amounts to be paid
determined at current interest rates; (iv) a net increase in accrued liabilities
of $124,859 to reflect the acquisition expenses of TSG Acquisition Corp. to be
paid by the Company, offset by a reduction of accrued interest and preference
fees of $96,000 retired in connection with the Acquisition; (v) a reduction in
accrued restructuring charges of $202,910 retired in connection with the
Acquisition; (vi) a reduction of notes payable to stockholders of $400,000
retired in connection with the Acquisition; (vii) a net increase in other assets
of $429,728 consisting of an increase in identifiable intangible assets
(consisting of product software, patents, customer contracts, and unpatented
technology) of $584,095 to reflect their estimated fair values, offset by a
reduction in goodwill and deferred debt issuance expenses of $154,367 recorded
by the Predecessor; and (viii) an increase in goodwill related to the
Acquisition of $3,853,877. The principal impacts of the purchase accounting
adjustments on the Company's results of operations for the five months ended
March 31, 1995 consisted of a slight increase in depreciation due to the
increase in the basis of property and equipment and their estimated useful
lives, an increase in amortization expense of approximately $100,000 due to the
net increase in the basis of intangible assets, including goodwill, and their
estimated useful lives, and an increase in cost of goods sold of approximately
$235,000 due to the revaluation of inventories. The change in the method used to
estimate the amount of manufacturing overhead included in inventories did not
have a significant effect on the Company's results of operations for the five
months ended March 31, 1995.

During the fiscal years ended March 29, 1996 and March 28, 1997, the
Company has reduced goodwill by approximately $653,000 in the aggregate with
respect to the realization of acquired deferred tax assets.

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

Results of Operations

Year Ended March 28, 1997 Compared to the Year Ended March 29, 1996

The following table shows certain line items in the Company's consolidated
statements of operations for the years ended March 28, 1997 and March 29, 1996
that are discussed below together with the change expressed as a percentage.

Year Ended Year Ended Percentage
March 28, March 29, Increase
1997 1996 (Decrease)
------------ ------------ -----------
Sales $ 33,471,918 $ 33,201,686 1%
Cost of goods sold 26,638,622 26,082,055 2%
General and
administrative expenses 2,391,164 2,204,915 8%
Marketing and selling expenses 881,324 1,290,349 -32%
Engineering, research and
development expenses 1,776,611 1,197,183 48%
Restructuring charges 62,500 -- --
Litigation settlement (105,146) -- --
Interest expense 399,469 941,261 -58%
Other income 116,664 17,763 557%
Income tax expense 553,379 326,315 70%

Overview. The Company's operations for the year ended March 28, 1997
reflect a slow down in sales during the last six months of the year which the
Company attributes to several factors as explained below, an increase in
engineering, research and development spending of $579,428 directed at the
development of a new wireline smart payphone product for the RBOC, independent
and international markets, a gain on the settlement of litigation of $105,146,
restructuring charges of $62,500, lower interest expense as a result of debt
repayments from proceeds of an initial public offering and higher income taxes
due to limitations on utilization of net operating loss carryforwards.

Sales. The increase in sales during fiscal 1997 as compared to fiscal 1996
is primarily related to volume fluctuations. Sales of smart payphone products
and components decreased by approximately $.6 million (3%) to $21.2 million in
fiscal 1997 as compared to $21.8 million in fiscal 1996, and accounted for
approximately 63% of sales during fiscal 1997 as compared to 66% of sales during
fiscal 1996. Sales related to refurbishment, repair and conversion services and
related products during fiscal 1997 increased by approximately $1.2 million
(11%) to $11.8 million as compared to $10.6 million in fiscal 1996, and
accounted for 35% of sales as compared to 32% in fiscal 1996. Export sales
consisting primarily of wireless products during fiscal 1997 approximated
$461,000 as compared to approximately $856,000 during fiscal 1996.

The Company believes that the reduction in smart product sales volume was
attributable to several key factors, including the uncertainties created by
merger activities among the Company's RBOC customers, the efforts of the RBOCs
to comply with the requirements of the Telecommunications Act of 1996 during the
last six months of the Company's fiscal year, and related budget implications.
Notwithstanding, sales from refurbishment, repair and conversion services and
related products increased as a result of additional volume from one of the
Company's customers that has not begun a smart product upgrade conversion
program. Export sales activities during fiscal 1997 did not generate volume
comparable to fiscal 1996, a trend the Company expects to reverse during the
coming year.

The Company believes, but cannot assure, that the decline in smart product
sales volume during the last six months of fiscal 1997, which is believed to be
attributable to efforts of the RBOCs to comply with the

Telecommunications Act of 1996, represents a short term trend, and that its
sales will be favorably affected by the implications of the new law during
fiscal 1998 and beyond.

During fiscal 1997, the Company entered into a non-exclusive sales
agreement, effective July 1, 1996, to provide its Gemini smart payphones and
processors, CoinNet payphone management system and other payphone components to
NYNEX for a period of five years. Sales of smart payphone products during the
year ended March 28, 1997 were primarily attributable to shipments under a
former sales agreement between the Company and NYNEX executed in December 1995.
This sales agreement expired during the third quarter of fiscal 1997, and
although the Company entered into the new contract, no significant orders were
received until February 1997, which the Company believes was due to the factors
enumerated above. During the year ended March 29, 1996, a significant portion of
the Company's sales were attributable to shipments under the former NYNEX
agreement as well as a sales agreement between the Company and Southwestern Bell
Telephone Company ("SWB") executed in December 1994. SWB had purchased
approximately 65% of the committed volume under the agreement as of March 29,
1996. However, sales to SWB under the 1994 contract were not significant during
the Company's 1997 fiscal year, a condition the Company believes is attributable
to a change in deployment strategies of SWB. In June 1997, the Company entered
into an agreement with SWB that supersedes and terminates the December 1994
agreement. Under the new agreement, the Company agreed to reduce SWB's remaining
purchase commitment to approximately $3 million from approximately $8 million
under the former agreement and, among other things, upgrade SWB's payphone
management system. In return, SWB made a $250,000 cash payment to the Company,
terminated the Company's obligation to pay royalties on sales of GemStar
processors to other customers and terminated the Company's obligation to repay
$375,000 received from the sale of product software under the December 1994
agreement. SWB also agreed to make additional cash payments of $250,000 on July
2, 1997, $100,000 on September 1, 1997, $150,000 on December 31, 1997 and
$250,000 on March 31, 1998 to the Company subject to the Company's compliance
with the terms and conditions of the agreement, including conditions with
respect to performance, service and repair. See Item 1 -- "Business -- Sales and
Markets" for a discussion of the Company's dependence on significant customers
and contractual relationships. Also, see "Liquidity and Capital Resources --
Operating Trends and Uncertainties," below.

Cost of Goods Sold. The increase in cost of products sold is primarily
attributable to the increase in sales, the increase in the percentage of sales
related to refurbishment, repair and conversion services and related products
and certain sales price reductions. Incremental costs of approximately $350,000
incurred in connection with the closure of one of the Company's manufacturing
facilities and the consolidation of service operations were offset substantially
by gains of approximately $273,000 from changes in estimates of contingent
liability obligations recorded in connection with the Acquisition. Production
costs as a percentage of sales increased to approximately 80% during the year
ended March 28, 1997 as compared to 79% during the year ended March 29, 1996 due
to these factors.

General and Administrative Expenses. The increase in general and
administrative expenses is primarily related to incremental costs and expenses
incurred as a public reporting entity after the consummation of the Company's
initial public offering in May 1996.

Marketing and Selling Expenses. The decrease in marketing and selling is
primarily attributable to the expiration of a smart product royalty agreement on
June 30, 1996 and the related decrease in royalty expense.

Engineering, Research and Development Expenses. Engineering, research and
development expenses increased primarily due to an expansion of engineering
resources and product development activities. The Company began to expand its
engineering resources during the first quarter of fiscal 1997 in order to
facilitate smart product development activities and the implementation of
lower-cost manufacturing methodologies. During the year ended March 28, 1997,
the Company capitalized approximately $422,000 of software development costs in
connection with the development of its new smart payphone processor.

Litigation Settlement. Pursuant to the terms of a settlement agreement
dated July 3, 1996, a suit filed against the Company by a former supplier to
collect approximately $400,000 of unpaid obligations was dismissed with
prejudice. As a result of the settlement agreement, the Company realized a gain
of $105,146 representing the difference between the unpaid obligations recorded
in the Company's accounts and the aggregate settlement payments.

Interest Expense. The decrease in interest expense is primarily due to the
repayment of outstanding bank and stockholder debt obligations during May 1996
from proceeds of the Company's initial public offering. See "Liquidity and
Capital Resources -- Cash Flows From Financing Activities," below.

Restructuring Charges. During August 1996, the Company initiated a
facilities consolidation plan intended to augment its on-going productivity and
quality improvement programs. The consolidation plan provided for the closure of
the Company's Kentucky manufacturing facility, the closure of the Company's
Georgia corporate office facility, the consolidation of repair, refurbishment
and conversion service operations into the Company's Virginia facility and the
consolidation of corporate activities and product assembly operations into a new
Georgia facility. In connection with this plan, the Company recorded
restructuring charges of $62,500 during the year ended March 28, 1997. These
restructuring charges consisted of severance obligations and estimated losses
related to the abandonment of assets in connection with the closure of
facilities.

Other Income. The Company assigned the capital lease obligation related to
its former Kentucky facility to an unaffiliated third party, and recorded the
retirement of the outstanding capital lease obligation and the disposition of
the property during the fiscal year ended March 28, 1997. In connection with
this transaction, the Company realized a gain of $44,169 representing the
difference between the outstanding lease obligation ($933,510) plus the proceeds
received ($50,000) and the net book value of the property ($939,341). The
increase in other income during the year ended March 28, 1997 as compared to the
year ended March 29, 1996 is primarily attributable to the gain from the
disposition of the facility and an increase in income related to the sublease of
a portion of property leased by the Company.

Income Tax Expense. The increase in income tax expense is primarily due to
a reduction in tax benefits from utilization of net operating loss
carryforwards. Benefits of net operating loss carryforwards used to offset
current tax expense amounted to $71,995 during fiscal 1997 as compared to
$334,985 during fiscal 1996. Deferred tax benefits of $492,110 were recognized
during the year ended March 28, 1997 as compared to $50,544 during the year
ended March 29, 1996. However, deferred tax benefits related to acquired
deferred tax assets aggregating $442,070 were applied to goodwill during fiscal
1997 as compared to $211,193 during fiscal 1996.

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

Year Ended March 29, 1996 Compared to the Year Ended March 31, 1995

The following table shows certain line items in the Company's consolidated
statement of operations for the year ended March 29, 1996 and in the Company's
and Predecessor's consolidated statement of operations for the year ended March
31, 1995 that are discussed below and that changed significantly between the two
periods indicated together with the change expressed as a percentage.

Year Ended Year Ended Percentage
March 29, March 31, Increase
1996 1995 (Decrease)
------------ ------------ ----------

Sales $ 33,201,686 $ 20,270,012 64%
Cost of goods sold 26,082,055 17,402,379 50%
General and administrative expenses 2,204,915 2,592,393 -15%
Marketing and selling expenses 1,290,349 738,221 75%
Engineering, research and development
expenses 1,197,183 938,048 28%
Restructuring credits -- 534,092 -100%
Litigation settlement -- 261,022 -100%
Income tax expense 326,315 -- --

Overview. The Company's results for the year ended March 29, 1996 reflect a
significant increase in sales volume, an increase in operating expenses and an
income tax provision of $326,315 on pre-tax profits of $1.5 million as compared
to the previous year during which the Company reported a loss of $1.5 million.
The results of the Predecessor during the seven months ended October 30, 1994
includes a gain from the recognition of a litigation settlement of $261,022,
restructuring credits of $534,092 and acquisition expenses of $166,000. The
results of operations of the Company for the five months ended March 31, 1995
include the effects of the Acquisition consisting primarily of amortization of
intangible assets of approximately $100,000 and an increase in cost of goods
sold of approximately $226,000. The results of the Company during fiscal 1996
include the effects of the Acquisition consisting primarily of amortization of
intangible assets, including goodwill, of $253,000 and an increase in cost of
goods sold of approximately $221,000.

Sales. Sales of smart payphone products and components during fiscal 1996
approximated $21.8 million as compared to approximately $6.6 million during
fiscal 1995. Sales attributable to refurbishment and conversion services and
related payphone components approximated $10.6 million during fiscal 1996 as
compared to approximately $12.3 million during fiscal 1995. Sales of wireless
payphone products and components consisting primarily of export sales
approximated $856,000 during fiscal 1996 as compared to approximately $1.4
million during fiscal 1995. The $15.2 million increase in sales of smart
payphone products and components during fiscal 1996 as compared to fiscal 1995
was primarily attributable to an increase in sales volume of GemStar products,
Gemini products and electronic locks under sales agreements entered into in
December 1994 and December 1995. Sales increases attributable to GemStar, Gemini
and electronic lock products were offset by a reduction in sales volume of
Inmate products, which the Company believes is primarily attributable to the
saturation of the inmate institution market. The 14% decline in sales from
repair, refurbishment and conversion services and related payphone components
during fiscal 1996 as compared to fiscal 1995 was primarily due to a reduction
in volume that the Company believes was attributable to implementation of smart
product conversion programs by certain customers, as well as competition. The
decline in the Company's wireless product sales during fiscal 1996 as compared
to fiscal 1995 was primarily due to a decrease in export volume to Mexico, which
the Company believes was attributable to the devaluation of the Mexican peso
during fiscal 1995.

Cost of Products Sold. The increase in cost of products sold is primarily
attributable to the 64% increase in sales during fiscal 1996 as compared to
fiscal 1995. Production costs as a percentage of sales

declined to 79% during fiscal 1996 as compared to 86% during fiscal 1995 as a
result of the increase in volume. In addition, during the five months ended
March 31, 1995, the Company accrued damages of $200,000 attributable to a
product recall initiated in April 1995 (see "Operating Trends and
Uncertainties," below). Purchase adjustments from the revaluation of inventories
in connection with the Acquisition had the impact of increasing cost of goods
sold by $226,000 and $221,000 during the five months ended March 31, 1995 and
year ended March 29, 1996, respectively.

General and Administrative Expenses. The decline in general and
administrative expenses is primarily related to cost reductions associated with
a restructuring initiated during the latter part of fiscal 1994 and expenses of
$166,000 incurred by the Predecessor during the seven months ended October 30,
1994 in connection with the Acquisition. Amortization of goodwill and other
intangible assets recorded in connection with the Acquisition approximated
$253,000 during fiscal 1996 as compared to approximately $100,000 during the
five months ended March 31, 1995.

Marketing and Selling Expenses. The increase in marketing and selling
expenses is primarily due to royalties on sales of GemStar and Gemini products
incurred under an asset purchase agreement dated January 11, 1991, and an
elimination of royalties during the first six months of fiscal 1995 pursuant to
a November 9, 1994 amendment to the royalty provisions of that agreement.

Engineering, Research and Development Expenses. Engineering, research and
development expenses increased primarily due to an expansion of engineering
resources and product development activities, which had been reduced during
fiscal 1995 as a result of the restructuring initiated during the later part of
fiscal 1994.

Restructuring Credits. During the five months ended March 31, 1995, the
Company settled severance obligations under employment contracts terminated in
fiscal 1994 and negotiated the termination of certain non-cancelable lease
obligations with respect to facilities closed in connection with the
restructuring initiated at the end of fiscal 1994. The severance and lease
obligations were settled on terms more favorable than estimated during the year
ended April 1, 1994, which resulted in the recognition of restructuring credits
of $248,684 and $274,659, respectively, during the seven months ended October
30, 1994. Restructuring credits recognized during the seven months ended October
30, 1994 aggregated $534,092.

Litigation Settlement. During the seven months ended October 30, 1994, the
Company settled litigation against a supplier to recover costs and damages
attributable to defective components supplied to the Company, and realized a
gain of approximately $261,000, net of legal fees of $56,000.

Income Tax Expense. During the year ended March 29, 1996, the Company
generated a taxable profit as compared to a net loss during the year ended March
31, 1995. Benefits of net operating loss carryforwards used to offset current
tax expense during fiscal 1996 aggregated $334,985. Deferred tax benefits
recognized during fiscal 1996 of $50,544 were offset by benefits of acquired
deferred tax assets aggregating $211,193 that were used to reduce goodwill.
There was no tax provision during fiscal 1995 as a result of the reported net
loss.

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

Year Ended March 31, 1995 Compared to the Year Ended April 1, 1994

The following table shows certain line items in the Company's and the
Predecessor's consolidated statement of operations for the year ended March 31,
1995 and in the Predecessor's consolidated statement of operations for the year
ended April 1, 1994 that are discussed below and that changed significantly
between the two periods indicated together with the change expressed as a
percentage.

Year Ended Year Ended Percentage
March 31, April 1, Increase
1995 1994 (Decrease)
------------ ------------ ----------

Sales $ 20,270,012 $ 31,048,706 -35%
Cost of goods sold 17,402,379 25,761,831 -32%
General and administrative expenses 2,592,393 3,476,932 -25%
Marketing and selling expenses 738,221 1,748,814 -58%
Engineering, research and development
expenses 938,048 2,009,524 -53%
Restructuring charges (credits) (534,092) 2,570,652 121%
Litigation settlement 261,022 -- --

Overview. The results of the Company and Predecessor for the year ended
March 31, 1995 reflect a significant decrease in sales and a significant
decrease in operating expenses from restructuring activities at the end of
fiscal 1994. The results of the Predecessor for the year ended April 1, 1994
reflect restructuring charges of $2,570,652. The results of the Predecessor
during the seven months ended October 30, 1994 include the recognition of
restructuring credits and the gain from recognition of a litigation settlement
of $534,092 and $261,022, respectively, and expenses of approximately $166,000
incurred in connection with the Acquisition. The results of the Company during
the five months ended March 31, 1995 included the recognition of product recall
damages of $200,000 and the effects of the Acquisition consisting primarily of
an increase in cost of goods sold of approximately $235,000 and amortization of
intangible assets, including goodwill, of approximately $100,000.

Sales. Sales of smart payphone products and components during fiscal 1995
approximated $6.6 million as compared to $9.0 million during fiscal 1994. Sales
from refurbishment and conversion services and related payphone components
approximated $12.3 million during fiscal 1995 versus $21.2 million during fiscal
1994. Sales of wireless payphone products and components consisting primarily of
export sales approximated $1.4 million in fiscal 1995 versus $833,000 in fiscal
1994. The 27% decline in sales of smart payphone products and components and the
42% decline in sales from refurbishment and conversion services and related
payphone components resulted primarily from a decrease in the volume of business
due to the termination of a sales agreement for a first generation smart product
and the non-renewal of a refurbishment sales agreement between the Company and
one of the RBOCs during the latter part of fiscal 1994. The volume reductions in
fiscal 1995 resulting from the termination and non-renewal of these agreements
were offset somewhat by sales under the terms of a sales agreement between the
Company and SWB executed in December 1994. Sales under this agreement during the
five months ended March 31, 1995 approximated $2.6 million. The increase in the
Company's wireless product sales in fiscal 1995 as compared to fiscal 1994 is
attributable to an increase in export volume. However, during the third quarter
of fiscal 1995, the devaluation of the Mexican peso had an adverse impact on
export sales to one of the Company's primary foreign customers.

Cost of Products Sold. The decrease in cost of products sold is primarily
attributable to a 35% decrease in sales, which was offset by a net increase in
production costs during fiscal 1995. Higher production costs as a percentage of
sales, damages of $200,000 attributable to a product recall initiated in April
1995 (see "Operating Trends and Uncertainties," below) and the effects of the
Acquisition consisting primarily of an increase in cost

of goods sold of approximately $235,000 for the five months ended March 31, 1995
offset decreases in provisions for obsolete and excess inventory of
approximately $758,000 and warranty expense of approximately $347,000 related to
reserves established in fiscal 1994.

General and Administrative Expenses. In connection with a restructuring
initiated at the end of fiscal 1994, the Company closed one of its manufacturing
facilities and three satellite office locations and relocated its corporate
headquarters from Pennsylvania to Georgia. The decrease in general and
administrative expenses is primarily attributable the restructuring. Cost
reductions attributable to the fiscal 1994 restructuring were offset somewhat by
Acquisition expenses of approximately $166,000 during the seven months ended
October 30, 1994 and amortization expense of approximately $100,000 during the
five months ended March 31, 1995.

Marketing and Selling Expenses. The reduction in marketing and selling
expenses is attributable to personnel and other operating expense reductions
resulting from the fiscal 1994 restructuring and the curtailment of
participation at trade shows during fiscal 1995. In addition, royalty expense
during fiscal 1995 declined by approximately $188,000 as a result of an
amendment to the royalty provisions of an asset purchase agreement dated January
11, 1991 that eliminated royalty obligations for the six months ended September
30, 1994.

Engineering, Research and Development Expenses. The reduction in
engineering, research and development expenses is attributable to personnel and
other operating expense reductions resulting from the fiscal 1994 restructuring
and the refocus of research and development activities towards development of
smart payphone products.

Liquidity and Capital Resources

Initial Public Offering

During May 1996, the Company completed an initial public offering of
1,150,000 Units, each Unit consisting of one share of Common Stock and a
redeemable warrant, at a price of $9.00 per Unit for gross proceeds of
$10,350,000. In connection with the offering, the Company issued warrants to the
underwriter to purchase 100,000 shares of Common Stock (the "Underwriter
Warrants") for gross proceeds of $10. Net proceeds received by the Company as of
March 28, 1997, after underwriting discounts and expenses of $1,231,897 and
other expenses of $824,953, aggregated $8,293,160. At March 29, 1996, the
Company had incurred and deferred offering expenses of $338,372. Accordingly,
net proceeds from the Company's initial public offering during the year ended
March 28, 1997 aggregated $8,631,532.

The proceeds of the offering, net of underwriting discounts and expenses,
were initially used to repay then outstanding indebtedness consisting of
subordinated notes payable to stockholders of $2.8 million and bank indebtedness
aggregating $6,318,113 (see "Cash Flows From Financing Activities," below).
Indebtedness under a loan agreement between the Company and its bank repaid with
the net proceeds consisted of a $2.2 million term note due November 30, 1997,
$309,524 outstanding under a $650,000 term note due November 30, 1997 and
indebtedness under a revolving credit agreement of $3,808,589.

The Loan Agreement

At March 29, 1996, the Company was able to borrow up to a maximum of $9
million under term and installment notes and a revolving credit agreement under
the terms of a Loan and Security Agreement (the "Loan Agreement") between the
Company and its bank. Indebtedness under the Loan Agreement at March 29, 1996
included $2,525,000 outstanding under term and installment notes, including a
$2.2 million term note due November 30, 1997, and $1,093,735 outstanding under
the revolving credit agreement.

At March 28, 1997, the Company was able to borrow up to a maximum of $9
million under the revolving credit agreement of which $3,810,961 had been drawn
down on that date.

At March 29, 1996 and March 28, 1997, outstanding indebtedness under the
Loan Agreement bore interest at a variable rate per annum equal to 1.5% above a
base rate quoted by Citibank, N.A. The interest rate was reduced from 2% above a
base rate quoted by Citibank, N.A. on March 1, 1996. The base rate at March 28,
1997 and March 29, 1996 was 8.5% and 8.25% per annum, respectively. Amounts
borrowed under the Loan Agreement are secured by substantially all assets of the
Company, including accounts receivable, inventories and property and equipment.
The Loan Agreement expires on November 30, 1997, and is renewable annually for
one-year periods unless terminated by the bank upon an occurrence of an event of
default or by the Company upon at least 90 days notice.

The Loan Agreement contains conditions and covenants that prohibit or
restrict the Company from engaging in certain transactions without the consent
of the bank, including merging or consolidating, payment of subordinated
stockholder debt obligations, declaration or payment of dividends, and
disposition of assets, among others. Additionally, the Loan Agreement requires
the Company to comply with specific financial covenants, including covenants
with respect to cash flow, working capital and net worth. Noncompliance with any
of these conditions and covenants or the occurrence of an event of default, if
not waived or corrected, could accelerate the maturity of the indebtedness
outstanding under the Loan Agreement. Although the Company was in compliance
with the covenants set forth in the Loan Agreement at March 28, 1997, there is
no assurance that the Company will be able to remain in compliance with such
covenants in the future.

The Company used the net proceeds of its initial public offering to repay
outstanding indebtedness under the Loan Agreement in order to reduce its
interest expense. The Company intends to use the financing available under the
Loan Agreement to finance its on-going working capital needs. If an event of
default under the existing working capital facility were to occur, however, the
Company's ability in this regard could be curtailed. In such event, the Company
would seek alternative financing sources, but there is no assurance that
alternative financing sources would be available on commercially reasonable
terms, or at all. Further, the Loan Agreement expires on November 30, 1997
unless it is renewed in accordance with its terms. The Company is presently
discussing renewal options with its bank and is seeking other refinancing
sources. Although the Company believes that it will either negotiate an
acceptable renewal or refinancing agreement, there is no assurance that its
efforts will be successful. The Company's liquidity would be materially and
adversely affected if it is unable to renew or refinance is present credit
facility.

The Company borrows funds to finance increases in accounts receivable and
inventories and decreases in bank overdrafts, accounts payable and accrued
liability obligations to the extent that such requirements exceed cash provided
by operations, if any. The Company also uses the financing available under the
revolving credit agreement to fund operations, investing activities and payments
on long-term debt when necessary. The Company measures its liquidity based upon
the amount of funds that the Company is able to borrow under the Loan Agreement,
which varies based upon operating performance and the value of current assets
and liabilities.

Cash Flows From Financing Activities

During the seven months prior to the Acquisition ended October 30, 1994,
the Company generally maintained its outstanding borrowings under the revolving
credit agreement at the maximum amount permitted. Financing available to the
Company during this period was not sufficient to fund the working capital,
capital expenditure and debt service requirements of the Company, and the
Company was unable to meet its accrued liability and supplier obligations as
they became due. In April 1994, amounts borrowed under the revolving credit
agreement between the Company and its bank exceeded the maximum amount
permitted. However, the Company and its bank entered into an amendment that
provided for an over-advance of $300,000 that was repaid by May 31, 1994 in
accordance with the terms of the amendment.

During the seven months ended October 30, 1994, the Company was in default
of the terms of unsecured promissory notes, with outstanding balances
aggregating $425,536 at April 1, 1994, as a result of its failure to make
certain royalty payments. However, on November 9, 1994, the Company entered into
an amendment agreement which brought the Company into compliance with the terms
of the note agreements. The Company executed a non-interest bearing promissory
note payable in nineteen equal monthly installments in the principal amount of
$206,595 representing unpaid royalties as of October 30, 1994. This note was
repaid during the year ended March 28, 1997.

In June 1994, the Company borrowed $400,000 from its preferred stockholders
and issued a master subordinated promissory note payable on demand bearing
interest at a rate of 10% per annum. Under the terms of the master subordinated
promissory note, a loan preference fee in an escalating amount which, when added
to accruing interest, would equal 5% of the outstanding principal for each month
the note was outstanding became immediately due and payable upon a change in
ownership of the Company. In connection with the Acquisition, the subordinated
master promissory note together with accrued interest and preference fees in the
amount of $96,000 were retired.

Concurrently with the issuance of the subordinated master promissory note,
the Company and its bank entered into an amendment to the Loan Agreement and a
$500,000 installment note obligation with a then outstanding balance of $62,500.
The Company borrowed $402,500 and executed an amended installment note in the
amount of $465,000 payable in eighteen monthly installments of $25,000 and one
final installment of $15,000. This note was repaid during the year ended March
29, 1996.

Pursuant to the October 31, 1994 Investment Agreement entered into in
connection with the Acquisition, the Company borrowed $2.8 million from Wexford
and Acor and issued 10% interest bearing subordinated promissory notes due
November 1, 1999. The Company issued a 10% interest bearing subordinated note to
Wexford in the principal amount of $2,361,082 dated October 31, 1994. The
Company issued 10% interest bearing subordinated promissory notes to Acor in the
principal amount of $208,216.73 dated October 31, 1994, $99,591.93 dated October
31, 1994, $83,497.82 dated November 10, 1994 and $47,611.52 dated December 23,
1994.

Concurrently with the Acquisition, the Loan Agreement was amended, and $2.2
million of debt outstanding under the revolving credit agreement was converted
into a term note payable on November 30, 1997. However, proceeds of $2,569,298
from the subordinated promissory notes dated October 31, 1994 issued to Wexford
and Acor were used to retire debt outstanding under the revolving credit
agreement, and after such repayment, the initial principal balance outstanding
under the $2.2 million term note on October 31, 1994 amounted to $1,291,667.
Between October 31, 1994 and March 31, 1995, the Company borrowed the balance
available under the $2.2 million term note of $908,333, and also re-borrowed
$970,196 under its revolving credit agreement.

Net payments of indebtedness under the Company's revolving credit agreement
during the seven months ended October 31, 1994 and five months ended March 31,
1995 amounted to $1,491,074 and $1,599,102, respectively. Net proceeds under the
revolving credit agreement during the year ended March 29, 1996 amounted to
$123,538. Net proceeds under the Company's revolving credit agreement during the
year ended March 28, 1997 amounted to $2,717,226. Net proceeds under the
revolving credit agreement during the year ended March 28, 1997 reflect the
repayment of $3,808,589 of indebtedness from the proceeds of the Company's
initial pubic offering.

During the year ended March 28, 1997, the Company repaid, from the proceeds
of the Company's initial public offering, $2.8 million of outstanding
indebtedness under the 10% interest bearing subordinated promissory notes issued
to Wexford and Acor.

Principal payments on other long-term debt and capital lease obligations
during the seven months ended October 30, 1994, five months ended March 31, 1995
and year ended March 29, 1996 amounted to $459,084, $482,307 and $813,754,
respectively. Principal payments on other long-term debt and capital lease
obligations during the year ended March 28, 1997 aggregated $2,599,521,
including repayment of the $2.2 million term note due November 30, 1997 and
repayment of $309,524 outstanding under a $650,000 term note due November 30,
1997 from the proceeds of the Company's initial public offering. Principal
payments on other long-term debt and capital lease obligations during the year
ended March 28, 1997, excluding the repayments of term note indebtedness from
the proceeds of the offering, amounted to $89,997. The decrease in principal
payments (exclusive of repayments made from proceeds of the offering) for the
year ended March 28, 1997 as compared to the year ended March 29, 1996 is
attributable to debt maturing during fiscal 1997, the repayments made from the
proceeds of the offering and the assignment of the capital lease obligation
related to the Company's Kentucky facility to an unrelated third party in
November 1996.

The Company has also established a cash management program with its bank
under which the Company funds drafts as they clear the bank. Accordingly, the
Company maintains bank overdrafts representing outstanding drafts and utilizes
the cash management account as a source of funding. Bank overdrafts vary
according to many factors, including the volume of business, and the timing of
purchases and disbursements. During the seven months ended October 30, 1994,
five months ended March 31, 1995 and year ended March 29, 1996, the Company's
bank overdrafts increased by $323,633, $120,714 and $501,761, respectively.
During the year ended March 28, 1997, the Company's bank overdrafts decreased by
$759,751.

In June 1996, the Company issued 40,000 shares of common stock for
aggregate proceeds of $160,000 upon the exercise of outstanding common stock
purchase warrants issued in May 1995. See "Capital Commitments and Liquidity,"
below. During the year ended March 28, 1997, the Company issued 5,000 shares of
common stock upon the exercise of incentive stock options at an aggregate
exercise price of $5,000, and issued 6,760 shares of common stock upon the
exercise of rights granted under the Company's 1995 Employee Stock Purchase Plan
for an aggregate purchase price of $51,714.

Cash Flows From Operating Activities

During the seven months ended October 30, 1994, the Company generated
$914,820 of cash from operating activities. The Company used $99,688 of cash,
net of non-cash charges and credits of $323,678, to fund operating losses during
the seven months ended October 30, 1994. Because of recurring losses, the
Company's cash resources during the seven months ended October 30, 1994 were not
sufficient to fund working capital, capital expenditure and debt service
requirements, and the Company was unable to meet all of its accrued liability
and supplier obligations as they became due. However, the Company was able to
generate cash from reductions in accounts receivable and inventories of $577,671
and $1,387,946, respectively, and prepaid expenses of $66,940 during the seven
months ended October 30, 1994. The cash provided from these asset reductions
enabled the Company to begin efforts to decrease its past due obligations, and
during the seven months ended October 30, 1994, $965,672 of cash was used to
reduce accounts payable, accrued liabilities and accrued restructuring charges.

During the five months ended March 31, 1995, the Company used $1,597,674 of
cash to fund operating activities. Cash used to fund operating losses during the
five months ended March 31, 1995 amounted to $358,182, net of non-cash charges
and credits of $707,399. Also, because of an increase in the volume of business,
the Company used $329,469 and $764,211 of cash to fund increases in accounts
receivable and inventories, respectively, during the five months ended March 31,
1995. As a result of the investor financing received in connection the
Acquisition and an increase in deferred revenue which provided $375,000 in cash
(see "Capital Commitments and Liquidity," below), the Company was able to
further pay down its past due liability obligations, and used $618,352 of cash
to reduce its accounts payable, accrued liabilities and accrued restructuring
charges during the five months ended March 31, 1995.

During the year ended March 29, 1996, the Company generated cash of
$194,390 from operating activities. Cash provided by operations, after
adjustments related to non-cash charges of $1,583,659, during the year ended
March 29, 1996, amounted to $2,761,030. Also, although the Company paid
remaining undisputed past due liability obligations, a net increase in the
Company's supplier and accrued liability obligations, income taxes payable,
deferred revenue and accrued restructuring charges provided cash of $2,600,034
during fiscal 1996. The Company used $4,634,615 in cash used to fund increases
in accounts receivable and inventories of $1,206,385 and $3,428,230,
respectively. In addition, the Company expended $474,095 of cash to fund
increases in other assets including the acquisition of a patent license and the
expenses of the Company's initial public offering during the year ended March
29, 1996. The increases in accounts receivable, inventories and current
liability obligations during the year ended March 29, 1996 were primarily
related to the increase in the volume of business as compared to fiscal 1995.

Cash used to fund operating activities during the year ended March 28, 1997
amounted to $4,995,192. During the year ended March 28, 1997, the Company's
operations generated $2,613,011 in cash, after adjustments related to non-cash
charges and credits of $1,602,352. In addition, a decrease in accounts
receivable caused by sales fluctuations provided cash of $631,595 during the
year ended March 28, 1997. The Company used $2,484,664 in cash to fund an
increase in inventories during the year ended March 28, 1997. This inventory
increase was related to the production of electronic locks and GemStar products
under contractual agreements (see "Capital Commitments and Liquidity," below),
the final production run of Gemini printed circuit board assemblies to meet
anticipated sales requirements until the planned release of the Company's new
smart payphone processor and a slow-down of orders during the latter part of the
year (see "Results of Operations," above). The Company used $418,404 of cash to
fund changes in prepaid expenses and other assets consisting primarily of
capitalized software development expenses. In addition, cash used for decreases
in accounts payable of $3,983,739, income taxes payable of $39,659, deferred
revenue of $541,245 and accrued liabilities, including accrued restructuring
charges, of $771,399 aggregated $5,336,042 during the year ended March 28, 1997.
The decrease in accounts payable is related to the slow-down in sales and the
Company's efforts to reduce contracted manufacturing volume and inventory
balances during the latter part of fiscal 1997. During fiscal 1997, the Company
satisfied its delivery requirements with respect to revenues deferred at March
29, 1996 and deferred revenue decreased accordingly. The decrease in accrued
liability obligations is primarily attributable to the expiration of a smart
product royalty agreement and the payment of remaining royalty obligations
during fiscal 1997 and a decrease in accrued interest due to the repayment of
debt obligations.

Capital Commitments and Liquidity

The Company has not entered into any significant commitments for the
purchase of capital assets. However, the Company intends to purchase and install
information systems and capital equipment, including printed circuit board
assembly equipment and other manufacturing equipment, to advance its prototype
manufacturing and product testing capabilities during the next year at a cost of
approximately $800,000. The Company believes, based on its current plans and
assumptions relating to its operations, that its sources of capital, including
capital available under its revolving credit line and cash flow from operations
will be adequate to satisfy its anticipated cash needs, including anticipated
capital expenditures, for at least the next year. However, in the event that the
Company's plans or the basis for its assumptions change or prove to be
inaccurate, or cash flow and sources of capital prove to be insufficient to
provide for the Company's cash requirements (due to unanticipated expenses, loss
of sales revenues, operating difficulties or otherwise), the Company would be
required to seek additional financing. In such an event, there can be no
assurance that additional financing will be available to the Company on
commercially reasonable terms, or at all.

Extension of credit to customers and inventory purchases represent the
principal working capital requirements of the Company. Significant increases in
accounts receivable and inventory balances could have an adverse effect on the
Company's liquidity. The level of inventory maintained by the Company is
dependent on a number of factors, including delivery requirements of customers,
availability and lead-time of components and the ability of the Company to
estimate and plan the volume of its business. The Company markets a wide

range of services and products and the requirements of its customers vary
significantly from period to period. Accordingly, inventory balances may vary
significantly.

In October 1994, the Company entered into a contract manufacturing
agreement that provides for the production of its GemStar smart payphone
processors. The Company committed to purchase $12.2 million of product over an
eighteen-month period beginning in December 1994. In addition, in November 1994,
the Company entered into a dealer agreement that committed the Company to
purchase approximately $3.5 million of electronic lock devices over a two-year
period. The Company initially scheduled purchases under these agreements based
on anticipated quantities required to meet its sales commitments. At March 28,
1997, the Company had acquired the majority of committed purchase volume under
these purchase agreements. However, as a result of a decline in sales to SWB,
the Company's inventories related to these agreements increased by approximately
$2 million during the year ended March 28, 1997.

The revolving credit agreement between the Company and its bank limits the
outstanding indebtedness secured by eligible inventory to $3.1 million.
Accordingly, the increase in inventory together with a decrease in sales during
the last six months of fiscal 1997 has adversely affected the Company's
liquidity under the revolving credit agreement. The ability of the Company to
improve its liquidity during the next year is dependent on the level of smart
payphone product orders and the extent of the related inventory reduction, if
any.

In December 1994, the Company entered into a sales agreement with SWB under
which SWB committed to purchase $21.3 million of GemStar smart processors,
electronic locks and other components over a three-year period. In connection
with this agreement, the Company sold the rights to certain product software for
an aggregate purchase price of $500,000. The Company received back an exclusive
irrevocable perpetual right to sub-license the software in connection with the
sale of related products. In return, the Company agreed to pay royalties on
sales of licensed products to other customers. At March 28, 1997, the Company
was not obligated and had not paid any royalties under the agreement. The
Company was obligated to repay, three years from the date of sale, a portion of
the purchase price up to a maximum amount of $375,000, which is reflected as
deferred revenue in the Company's consolidated financial statements at March 29,
1996 and March 28, 1997. However, in June 1997, the Company entered into an
agreement with SWB that superseded and terminated the December 1994 agreement.
Under the new agreement, the Company agreed to reduce SWB's remaining purchase
commitment to approximately $3 million from approximately $8 million under the
former agreement and, among other things, upgrade SWB's payphone management
system. In return, SWB made a $250,000 cash payment to the Company, terminated
the Company's obligation to pay royalties on sales of licensed products to other
customers and terminated the Company's obligation to repay $375,000 received
from the sale of product software under the December 1994 agreement. SWB also
agreed to make additional cash payments of $250,000 on July 2, 1997, $100,000 on
September 1, 1997, $150,000 on December 31, 1997 and $250,000 on March 31, 1998
to the Company subject to the Company's compliance with the terms and conditions
of the agreement, including conditions with respect to performance, service and
repair. SWB has the right to cancel the agreement upon default by the Company.
Therefore, there is no assurance that the Company will receive the additional
payments or that its will ship the products set forth in the agreement. The
Company believes that it will be able to market inventory quantities of products
manufactured for supply under the former agreement, and presently estimates that
the value of these inventories at March 28, 1997 is not impaired in an amount
that exceeds amounts received under the new agreement.

During October 1994, the Company, its bank and a contract manufacturer
entered into an escrow agreement as security for the payment of the Company's
obligations to the contract manufacturer. In May 1995, the Company issued common
stock purchase warrants that provided the contract manufacturer with the right
to purchase 40,000 shares of the Common Stock at a price of $4.00 per share for
a period of five years in return for extension of credit of $1.5 million and
45-day payment terms to the Company. This agreement had a significant favorable
impact on the Company's liquidity. However, if the Company defaults with respect
to the payment terms, the Company will be required to utilize the escrow account
previously established, which could have a significant adverse effect on the
Company's liquidity.

Operating Trends and Uncertainties

Dependence on Customers and Contractual Relationships. During the past
three years, four of the RBOCs have accounted for the majority of the Company's
sales. The Company anticipates that it will continue to derive most of its
revenues from such customers, and other regional telephone companies, for the
foreseeable future. The loss of any one RBOC customer or a significant reduction
in sales volume from these customers would have a material adverse effect on the
Company's business. The Company's prospects for continued profitability are
largely dependent upon the RBOCs upgrading the technological capabilities of
their installed base of payphones, and utilizing the Company's products and
services for such upgrade conversion programs. Also, the Company's prospects and
the ability of the Company to maintain a profitable level of operations are
dependent upon its ability to secure contract awards from the RBOCs. In
addition, the Company's prospects for growth are dependent upon the market
acceptance and success of its smart payphone products, as well as development of
smart products containing additional advanced features. If the Company is unable
to attract the interest of the RBOCs to deploy the Company's smart payphone
products, the Company's sales revenues, business and prospects for growth would
be adversely affected. Further, the Company's ability to maintain and/or
increase its sales is dependent upon its ability to compete for and maintain
satisfactory relationships with the RBOCs, particularly those RBOCs that are
presently significant customers of the Company. Prior to a restructuring
instituted in 1994, the Company experienced difficulties with a first generation
smart payphone product, which difficulties subsequently were remedied. Such
difficulties, however, resulted in the termination of a contract for such
product with one of the Company's then significant RBOC customers. There can be
no assurances that similar difficulties will not occur in the future.

In June 1997, a December 1994 sales agreement between the Company and SWB
was terminated and superseded by a new agreement (see Item 1 -- "Business --
Sales and Markets"). Under the new agreement, SWB's purchase commitment was
reduced from approximately $8 million to $3 million. However, SWB has the right
to cancel the agreement upon a default by the Company of any of the terms and
conditions contained in the new agreement.

The assessment of penalties and/or damages under the Company's sales
contracts could have a material adverse effect on the Company's operating
results and liquidity. In April 1995, the Company initiated a recall of products
due to contamination introduced into the manufacturing process by the Company's
contract manufacturer. Although the Company's contract manufacturer was
responsible for the repair or replacement of the recalled product, the Company
incurred liquidated damages under the terms of the sales agreement with its
customer in the amount of $200,000.

Sales Prices. The Company's agreements with its contract manufacturers
generally provide that the Company will bear certain cost increases incurred by
the manufacturer. Accordingly, the Company's manufacturing costs may fluctuate
based on costs incurred by its contract manufacturers and such fluctuations
could have a material and adverse impact on earnings. The Company's sales
agreements with customers generally have fixed product prices with limited price
escalation provisions. Consequently, there is a risk that the Company may not be
able to increase sales prices when product costs increase. In the event the
Company's costs increase without a corresponding price increase or orders are
lost due to price increases, the Company's profitability would be adversely
affected. The Company encounters substantial competition with respect to smart
payphone contract awards by the RBOCs and this competition is beginning to
result in price reductions. The Company reduced its prices to NYNEX upon the
execution of a November 1996 sales agreement based on the planned release of its
new lower cost smart processor during the fourth quarter of fiscal 1997. Until
the Company releases its new smart processor and depletes present inventories,
the Company will experience a reduction in gross profit margins with respect to
smart product sales to NYNEX, and such reduction will be material. Any other
price reductions in response to competition will also result in reduced gross
profit margins unless the Company is able to achieve reductions in product
costs.

Seasonality. The Company's sales are generally stronger during periods when
weather does not interfere with the maintenance and installation of payphone
equipment by the Company's customers, and may be adversely impacted near the end
of the calendar year by the budget short falls of customers. However, the
Company may also receive large year-end orders from its customers for shipment
in December depending upon their budget positions. In the event the Company does
not receive any significant end of year orders for its smart payphone products,
its third quarter sales may decline significantly in relation to other quarters.

Sources of Supply and Dependence on Contract Manufacturers. The Company
generally assembles its smart payphone products from assemblies produced by
certain manufacturers under contractual arrangements. To the extent that such
manufacturers encounter difficulties in their production processes that delay
shipment to the Company or that affect the quality of items supplied to the
Company, the Company's ability to perform its sales agreements or otherwise to
meet supply schedules with its customers can be adversely affected. In the event
that contract manufacturers delay shipments or supply defective materials to the
Company, and such delays or defects are material, the Company's customer
relations could deteriorate and its sales and operating results could be
materially and adversely affected.

As a percentage of revenues, the majority of the Company's products contain
components or assemblies that are purchased from single sources. The Company
believes that there are alternative sources of supply for most of the components
and assemblies currently purchased from those sources. Most of the components
and assemblies used by the Company for which there are not immediately available
alternative sources of supply are provided to the Company under standard
purchase arrangements. In addition, suppliers of certain electronic parts and
components to the Company and its contract manufacturers occasionally place
their customers on allocation for those parts. If a shortage or termination of
the supply of any one or more of such components or assemblies were to occur,
the Company's business could be materially and adversely affected. In such
event, the Company would have to incur the costs associated with redesigning its
products to include available components or assemblies or otherwise obtain
adequate substitutes, and those costs could be material. Also, any delays in
redesigning products or obtaining substitute components could adversely affect
the Company's business.

Telecommunication Act. On February 8, 1996, the President signed into law
the Telecommunications Act of 1996 (the "Telecommunications Act"), the most
comprehensive reform of communications law since the enactment of the
Communications Act of 1934. As a result of the Telecommunications Act of 1996,
the RBOCs will be permitted to manufacture and provide telecommunications
equipment and to manufacture customer premises equipment when certain
competitive conditions have been met. It is possible that one or more RBOCs will
decide to manufacture payphone products, which would increase the competition
faced by the Company and could decrease demand for the Company's products by
such RBOCs. Notwithstanding, the Company believes that deregulation generally
will benefit the Company. However, there can be no assurance that the Company
will benefit from deregulation or that it will not be adversely affected by
deregulation.

Net Operating Loss Carryforwards. As of March 28, 1997, the Company had net
operating loss carryforwards for income tax purposes of approximately $14
million to offset future taxable income. Under Section 382 of the Internal
Revenue Code of 1986, as amended, the utilization of net operating loss
carryforwards is limited after an ownership change, as defined in such Section
382, to an annual amount equal to the value of the loss corporation's
outstanding stock immediately before the date of the ownership change multiplied
by the federal long-term tax-exempt rate in effect during the month the
ownership change occurred. Such an ownership change occurred on October 31, 1994
and could occur in the future. As a result, the Company will be subject to an
annual limitation on the use of its net operating losses of approximately
$210,000. This limitation only affects net operating losses incurred up to the
ownership change and does not reduce the total amount of net operating losses
which may be taken, but limits the amount which may be used in a particular
year. Therefore, in the event the Company maintains profitable operations, such
limitation would have the effect of increasing the Company's tax liability and
reducing net income and available cash resources if the taxable income during a
year exceeded the allowable loss carried forward to that year. In addition,
because

of such limitations, the Company will be unable to use a significant portion of
its net operating loss carryforwards.

Selected Quarterly Data

The following sets forth a summary of selected statements of operations
data (unaudited) for the quarters ended June 30, 1995, September 29, 1995,
December 29, 1995 and March 29, 1996:

Quarter Ended
--------------------------------------------------------
June 30, September 29, December 29, March 29,
1995 1995 1995 1996
----------- ----------- ----------- -----------
Net sales $ 6,354,145 $ 7,737,680 $ 9,585,664 $ 9,524,197
Net income (loss) $ (230,658) $ 236,104 $ 654,957 $ 516,968

The following sets forth a summary of selected statements of operations
data (unaudited) for the quarters ended June 28, 1996, September 27, 1996,
December 27, 1996 and March 28, 1997:

Quarter Ended
--------------------------------------------------------
June 28, September 27, December 27, March 28,
1996 1996 1996 1997
----------- ----------- ----------- -----------
Net sales $12,078,496 $10,061,718 $ 5,651,655 $ 5,680,049
Net income (loss) $ 585,080 $ 385,389 $ 27,145 $ 13,045

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

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Independent Auditors' Report 40

Consolidated Financial Statements:

Consolidated Balance Sheets as of March 29, 1996 and March 28, 1997 41

Consolidated Statements of Operations for the seven months ended
October 30, 1994, five months ended March 31, 1995
and years ended March 29, 1996 and March 28, 1997 42

Consolidated Statements of Cash Flows for the seven months ended
October 30, 1994, five months ended March 31, 1995
and years ended March 29, 1996 and March 28, 1997 43

Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the seven months ended October 30, 1994, five months ended
March 31, 1995 and years ended March 29, 1996 and March 28, 1997 44

Notes to Consolidated Financial Statements 45

Financial Statement Schedule:

Schedule II--Valuation and Qualifying Accounts 89

All other schedules are omitted because they are not required or are
not applicable, or the required information is shown in the financial
statements or notes thereto.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None

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

INDEPENDENT AUDITORS' REPORT

Stockholders
Technology Service Group, Inc.

We have audited the accompanying consolidated balance sheets of Technology
Service Group, Inc. and subsidiary as of March 28, 1997 and March 29, 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years ended March 28, 1997 and March 29, 1996,
five months ended March 31, 1995, and the seven months ended October 30, 1994.
Our audits also included the financial statement schedule listed in the Index at
Item 8. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Technology Service Group, Inc.
and subsidiary at March 28, 1997 and March 29, 1996 and the results of their
operations and their cash flows for the years ended March 28, 1997 and March 29,
1996, the five months ended March 31, 1995, and the seven months ended October
30, 1994 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 23, 1997
(June 9, 1997 as to the last
paragraph of Note 14)

TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED BALANCE SHEETS

March 29, March 28,
1996 1997
------------ ------------
ASSETS
Current assets:
Cash $ 19,787 $ 67,880
Accounts receivable, less allowance for
doubtful accounts of $216,000 and $147,000 3,866,372 3,234,777
Inventories 8,658,669 10,879,180
Deferred income taxes 50,544 542,654
Prepaid expenses and other current assets 146,117 140,981
------------ ------------
Total current assets 12,741,489 14,865,472
Property and equipment, net 2,198,625 847,443
Other assets 4,693,650 4,059,467
============ ============
$ 19,633,764 $ 19,772,382
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 1,002,403 $ 242,652
Borrowings under revolving credit agreement -- 3,810,961
Current maturities under long-term debt and
capital lease obligations 118,444 --
Accounts payable 5,030,945 1,047,206
Income taxes payable 165,666 126,007
Deferred revenue 541,245 375,000
Accrued liabilities 1,472,379 1,015,032
Accrued restructuring charges 16,427 27,794
------------ ------------
Total current liabilities 8,347,509 6,644,652
Borrowings under revolving credit agreement 1,093,735 --
Long-term debt and capital lease obligations 3,414,586 --
Notes payable to stockholders 2,800,000 --
Deferred revenue 375,000 --
Other liabilities 3,198 --
------------ ------------
16,034,028 6,644,652
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $100 par value, 100,000
authorized, none issued or outstanding -- --
Common stock, $.01 par value, 10,000,000
shares authorized, 3,500,000 and
4,701,760 shares issued and outstanding 35,000 47,018
Capital in excess of par value 3,465,000 11,962,856
Retained earnings 111,790 1,122,449
Cumulative translation adjustment (12,054) (4,593)
------------ ------------
Total stockholders' equity 3,599,736 13,127,730
------------ ------------
$ 19,633,764 $ 19,772,382
============ ============

The accompanying notes are an integral part of
these consolidated financial statements.

TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Predecessor Company
------------ --------------------------------------------
Seven Months Five Months
Ended Ended Year Ended Year Ended
October 30, March 31, March 29, March 28,
1994 1995 1996 1997
------------ ------------ ------------ ------------

Net sales $ 11,108,653 $ 9,161,359 $ 33,201,686 $ 33,471,918
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 9,176,134 8,226,245 26,082,055 26,638,622
General and administrative expenses 1,742,324 850,069 2,204,915 2,391,164
Marketing and selling expenses 366,464 371,757 1,290,349 881,324
Engineering, research and
development expenses 457,553 480,495 1,197,183 1,776,611
Restructuring charges (credits) (534,092) -- -- 62,500
Litigation settlement (261,022) -- -- (105,146)
Interest expense 599,276 356,624 941,261 399,469
Other income (14,618) (58,250) (17,763) (116,664)
------------ ------------ ------------ ------------
11,532,019 10,226,940 31,698,000 31,927,880
------------ ------------ ------------ ------------
Income (loss) before income tax
expense (423,366) (1,065,581) 1,503,686 1,544,038
Income tax expense -- -- (326,315) (533,379)
------------ ------------ ------------ ------------
Net income (loss) $ (423,366) $ (1,065,581) $ 1,177,371 $ 1,010,659
============ ============ ============ ============
Income (loss) per common and
common equivalent share:
Primary $ (0.30) $ 0.30 $ 0.22
============ ============ ============
Assuming full dilution $ (0.30) $ 0.30 $ 0.22
============ ============ ============
Weighted average number of common and
common equivalent shares outstanding:
Primary 3,541,778 3,870,889 4,780,263
============ ============ ============
Assuming full dilution 3,541,778 3,870,889 4,780,263
============ ============ ============

The accompanying notes are an integral part of
these consolidated financial statements.

TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Predecessor Company
------------ -----------------------------------------
Seven Months Five Months
Ended Ended Year Ended Year Ended
October 30, March 31, March 29, March 28,
1994 1995 1996 1997
----------- ----------- ----------- -----------

Cash flows from operating activities
Net income (loss) $ (423,366) $(1,065,581) $ 1,177,371 $ 1,010,659
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities
Depreciation and amortization 647,717 407,892 1,060,655 1,072,210
Loss (gain) on sale of assets 18,397 4,936 -- (47,325)
Restructuring charges (credits) (534,092) -- -- 62,500
Provisions for inventory losses and
warranty expense 164,534 298,038 352,256 565,007
Provision for uncollectible accounts
receivable 27,122 (3,467) 10,099 --
Provision for deferred tax expense
(benefits) -- -- 160,649 (50,040)
Changes in certain assets and
liabilities, net of effects of
acquisition
(Increase) decrease in accounts
receivable 577,671 (329,469) (1,206,385) 631,595
(Increase) decrease in inventories 1,387,946 (764,211) (3,428,230) (2,484,664)
(Increase) decrease in prepaid
expenses and other current assets 66,940 90,778 (56,923) 5,136
(Increase) decrease in other assets 3,358 6,501 (474,095) (423,540)
(Decrease) increase in accounts
payable (981,786) (172,369) 2,071,856 (3,983,739)
(Decrease) increase in income taxes
payable -- -- 165,666 (39,659)
(Decrease) increase in deferred
revenue -- 375,000 541,245 (541,245)
(Decrease) increase in accrued
liabilities 458,058 (299,310) (104,843) (761,399)
(Decrease) in accrued restructuring
charges (441,944) (146,673) (73,890) (10,000)
Other (55,735) 261 (1,041) (688)
----------- ----------- ----------- -----------
Net cash provided by (used for)
operating activities 914,820 (1,597,674) 194,390 (4,995,192)
----------- ----------- ----------- -----------
Cash flows from investing activities
Capital expenditures (21,481) (59,956) (251,724) (421,965)
Proceeds from sale of assets 12,001 -- -- 59,050
----------- ----------- ----------- -----------
Net cash used for investing
activities (9,480) (59,956) (251,724) (362,915)
----------- ----------- ----------- -----------
Cash flows from financing activities
Net proceeds (payments) under
revolving credit agreement (1,491,074) (1,599,102) 123,538 2,717,226
Proceeds from initial public offering, net
of offering expenses -- -- -- 8,631,532
Proceeds from exercise of stock options
and warrants -- -- -- 216,714
Proceeds from notes payable to banks 402,500 908,333 -- --
Proceeds from notes payable
to stockholders 400,000 2,800,000 -- --
Payments on notes payable to stockholders -- -- -- (2,800,000)
Principal payments on long-term
debt and capital lease obligations (459,084) (482,307) (813,754) (2,599,521)
Increase (decrease) in bank overdraft 323,633 120,714 501,761 (759,751)
----------- ----------- ----------- -----------
Net cash provided by (used for)
financing activities (824,025) 1,747,638 (188,455) 5,406,200
----------- ----------- ----------- -----------
Increase (decrease) in cash 81,315 90,008 (245,789) 48,093
Cash, beginning of period 94,253 175,568 265,576 19,787
=========== =========== =========== ===========
Cash, end of period $ 175,568 $ 265,576 $ 19,787 $ 67,880
=========== =========== =========== ===========

The accompanying notes are an integral part of
these consolidated financial statements.

TECHNOLOGY SERVICE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

Series E Series C Series B Series A
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
------------ ------------ ------------ ------------

Predecessor
Balance at April 1, 1994 $ 30,000 $ 234,066 30,000 30,667
Net loss for the period
Foreign currency
translation adjustment
============ ============ ============ ============
Balance at October 30, 1994 30,000 $ 234,066 $ 30,000 $ 30,667
============ ============ ============ ============
Company
Balance at October 30, 1994 $ 30,000 $ 234,066 $ 30,000 $ 30,667
Business combination (30,000) (234,066) (30,000) (30,667)
Net loss for the period
Foreign currency
translation adjustment
------------ ------------ ------------ ------------
Balance at March 31, 1995 -- -- -- --
Business combination -
distribution of escrow
consideration
Net income for the year
Foreign currency
translation adjustment
------------ ------------ ------------ ------------
Balance at March 29, 1996 $ -- $ -- $ -- $ --
Net income for the year
Issuance of 1,150,000
shares in initial public
offering, net of offering
expenses
Issuance of 40,000 shares
upon exercise of common
stock purchase warrants
Issuance of 5,000 shares
upon exercise of common
stock options
Issuance of 6,760 shares
under 1995 Employee
Stock Purchase Plan
Foreign currency
translation adjustment
============ ============ ============ ============
Balance at March 28, 1997 $ -- $ -- $ -- $ --
============ ============ ============ ============

Common Common
Stock Stock Capital in Retained Cumulative
$.05 Par $.01 Par Excess of Earnings Translation
Value Value Par Value (Deficit) Adjustment Total
------------ ------------ ------------ ------------ ------------ ------------

Predecessor
Balance at April 1, 1994 21,882 -- 22,651,826 (24,449,909) 46,424 $ (1,405,044)
Net loss for the period (423,366) (423,366)
Foreign currency
translation adjustment 7,280 7,280
============ ============ ============ ============ ============ ============
Balance at October 30, 1994 $ 21,882 $ -- 22,651,826 (24,873,275) $ 53,704 (1,821,130)
============ ============ ============ ============ ============ ============
Company
Balance at October 30, 1994 $ 21,882 $ -- $ 22,651,826 (24,873,275) $ 53,704 $ (1,821,130)
Business combination (21,882) 35,000 (19,516,535) 24,873,275 (53,704) 4,991,421
Net loss for the period (1,065,581) (1,065,581)
Foreign currency
translation adjustment 269 269
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1995 -- 35,000 3,135,291 (1,065,581) 269 2,104,979
Business combination -
distribution of escrow
consideration 329,709 329,709
Net income for the year 1,177,371 1,177,371
Foreign currency
translation adjustment (12,323) (12,323)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 29, 1996 $ -- $ 35,000 $ 3,465,000 $ 111,790 $ (12,054) $ 3,599,736
Net income for the year 1,010,659 1,010,659
Issuance of 1,150,000
shares in initial public
offering, net of offering
expenses 11,500 8,281,660 8,293,160
Issuance of 40,000 shares
upon exercise of common
stock purchase warrants 400 159,600 160,000
Issuance of 5,000 shares
upon exercise of common
stock options 50 4,950 5,000
Issuance of 6,760 shares
under 1995 Employee
Stock Purchase Plan 68 51,646 51,714
Foreign currency
translation adjustment 7,461 7,461
============ ============ ============ ============ ============ ============
Balance at March 28, 1997 $ -- $ 47,018 $ 11,962,856 $ 1,122,449 $ (4,593) $ 13,127,730
============ ============ ============ ============ ============ ============

The accompanying notes are an integral part of
these consolidated financial statements.

TECHNOLOGY SERVICE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

Technology Service Group, Inc. (the "Company") was incorporated in the
State of Delaware in 1975. The Company designs, develops, manufactures and
markets public communication products including microprocessor-based ("smart")
wireline and wireless payphone systems, electronic wireline payphone products
and related payphone components. The Company also provides payphone and payphone
component repair, refurbishment and upgrade conversion services. The
accompanying financial statements include the accounts of the Company's
wholly-owned subsidiary, International Service Technologies, Inc. ("IST"), which
has a foreign division located in Taiwan.

2. ACQUISITION

On October 31, 1994, TSG Acquisition Corp. ("TSG Acquisition"), a
non-operating corporation wholly-owned by Wexford Partners Fund, L.P.
("Wexford"), acquired all of the outstanding capital stock of the Company
pursuant to an Agreement and Plan of Merger dated October 11, 1994 (the "Plan of
Merger") between Wexford, TSG Acquisition, the Company and the majority holders
of the Company's capital stock (the "Acquisition"). TSG Acquisition paid an
aggregate of $3.5 million in cash pursuant to the Plan of Merger, including
$329,709 of contingent consideration that was placed in escrow. The
consideration consisted of $3,004,000 to acquire the outstanding capital stock
of the Company and $496,000 to retire a subordinated master promissory note of
$400,000 payable to former stockholders and related accrued interest and
preference fees of $96,000. Cash payments to former stockholders on October 31,
1994 aggregated $2,991,973 after deducting $277,910 to retire certain
obligations of the Company and $230,117 placed in escrow. Consideration placed
in escrow of $329,709 consisting of cash of $230,117 and a subordinated note of
the Company payable to one of the former stockholders in the principal amount of
$99,592 was distributed to former stockholders in September 1995 upon compliance
with indemnification provisions set forth in the Plan of Merger.

In conjunction with the Acquisition, TSG Acquisition was merged into the
Company, which was then wholly-owned by Wexford. The outstanding shares of the
Company's capital stock and rights to purchase the Company's capital stock,
including preferred stock purchase warrants, at October 31, 1994 and the
Company's Incentive Stock Option Plan were cancelled and the outstanding shares
of capital stock of TSG Acquisition were exchanged for one share of the
Company's common stock, $.05 par value (the "merger share"). The Company is
sometimes referred to as the "Predecessor" for periods prior to the Acquisition.

In addition, the Company entered into an Investment Agreement (the
"Investment Agreement") with Wexford and certain former investors (collectively
the "investors"). The Company issued 3.5 million shares of common stock, $.01
par value, in exchange for the merger share held by Wexford. Also, the Company
borrowed $2.8 million from the investors and issued 10% interest bearing
subordinated promissory notes due November 1, 1999 (see Note 7).

The Acquisition has been accounted for using the purchase method of
accounting. Accordingly, the aggregate purchase price of $3,170,291 (excluding
contingent consideration) was pushed down and allocated to assets and
liabilities of the Company as of October 31, 1994 (the date of acquisition)
based upon their estimated fair values. The excess of the purchase price over
the fair value of the net assets acquired of $3,853,877 was recorded as goodwill
(see Note 6). The increase in the aggregate purchase price and goodwill upon the
distribution of escrow consideration of $329,709 was recognized in the Company's
financial statements during the year ended March 29, 1996.

A summary of the book value of the assets and liabilities of the Company as
compared to their estimated fair value reflected in the Company's financial
statements as of the date of acquisition is set forth below.

Book Estimated
Value Fair Value
----------- -----------

Cash $ 175,568 $ 175,568
Accounts receivable 2,337,150 2,337,150
Inventories 4,887,167 4,842,433
Prepaid expenses and other current assets 179,972 179,972
Property and equipment 2,601,801 2,984,574
Other assets 215,718 645,447
Bank overdraft (379,928) (379,928)
Borrowings under revolving credit agreement (1,660,965) (1,660,965)
Current maturities under long-term debt
and capital lease obligations (877,557) (888,392)
Accounts payable (3,133,058) (3,133,058)
Accrued expenses (1,624,180) (1,749,039)
Accrued restructuring charges (515,222) (312,312)
Notes payable to stockholders (400,000) --
Long-term debt and capital lease obligations (3,627,596) (3,725,036)
----------- -----------
Net assets acquired (1,821,130) (683,586)
Excess of purchase price over net
assets acquired -- 3,853,877
=========== ===========
$(1,821,130) $ 3,170,291
=========== ===========

The accompanying financial statements at March 29, 1996 and March 28, 1997
and for the five months ended March 31, 1995 and years ended March 29, 1996 and
March 28, 1997 reflect the effects of the Acquisition. Assuming the Acquisition
had occurred on April 2, 1994, the Company's and the Predecessor's net loss for
the year ended March 31, 1995 including proforma adjustments for depreciation,
interest and amortization of assets to give effect to the accounting bases
recognized in recording the Acquisition would have approximated $1,599,000
(unaudited), or a loss of $.45 per share (unaudited), as compared to the
reported loss of $1,488,947 ($423,366 for the seven months ended October 30,
1994 and $1,065,581 for the five months ended March 31, 1995). The proforma
adjustments include an increase in the amortization of goodwill and other
intangible assets of approximately $140,000 (unaudited) due to the increase in
the basis of intangible assets and their estimated useful lives, a decrease in
depreciation of approximately $24,000 (unaudited) due to an increase in the
basis of property and equipment and their estimated useful lives and a decrease
in interest expense of approximately $6,000 (unaudited) due to revaluation of
capital lease obligations, the financing received from the investors and the
repayment of indebtedness under the Company's revolving credit agreement.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies followed by the Company is
set forth below:

Fiscal Year

The Company operates on a fiscal year ending the Friday nearest March 31
resulting in a 52/53 week year. The accompanying consolidated financial
statements include the audited financial statements of the Predecessor for the
seven months (30 weeks) ended October 30, 1994 and the Company, subsequent to
the Acquisition, for the five months (22 weeks) ended March 31, 1995 and years
(52 weeks) ended March 29, 1996 and March 28, 1997.

Consolidation

All significant intercompany balances and transactions have been eliminated
in consolidation.

Translation of Foreign Currency

The financial position and results of operations of the Company's foreign
division are measured using local currency as the functional currency. Assets
and liabilities of the Company's foreign division are translated into United
States dollars at the applicable exchange rate in effect at the end of the
period. Income statement accounts are translated at the average rate in effect
over the period. Translation adjustments arising from the use of differing
exchange rates from period to period are accumulated in a separate component of
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in income in the period in which these transactions
occur. The effects of foreign currency translation on the Company's financial
position and results of operations are not significant. Also, the operations,
assets and liabilities of the Company's foreign division are not significant.

Cash

The Company's cash balances serve as collateral under a loan agreement (see
Note 7) and, accordingly, are restricted.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined
based upon the first-in, first-out ("FIFO") method or standard cost, which
approximates cost on a FIFO basis.

Reserves to provide for potential losses due to obsolescence and excess
quantities are established in the period in which such losses occur.

Property and Equipment

Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the established
useful lives of the assets as follows:

Predecessor Company
----------- ---------

Building and building improvements 30 years 30 years
Machinery and equipment 2-10 years 2-5 years
Furniture and fixtures 2-10 years 2-3 years
Leasehold improvements 5-15 years 5 years

Additions, improvements and expenditures that significantly extend the
useful life of an asset are capitalized. Expenditures for repairs and
maintenance are charged to operations as incurred. When assets are retired or
disposed of, the cost and accumulated depreciation thereon are eliminated from
the accounts, and any gains or losses are included in income.

Revenue Recognition

Sales and related costs are recorded by the Company upon shipment of
products. Deferred revenue consists of prepayments from customers and the
refundable portion of proceeds received from the sale of software (see Note 14)
which is classified according to the terms of the repayment obligation. Deferred
revenue is recognized as earned upon shipment of products or pursuant to the
terms of the sales contract.

Engineering, Research, and Development Costs

Costs and expenses incurred for the purpose of product research, design and
development are charged to operations as incurred. Engineering, research and
development costs consist primarily of costs associated with development of new
products and manufacturing processes. The Company capitalizes as other assets
certain product software development costs once technological feasibility has
been achieved. Commencing upon initial product release, these costs are
amortized based on the straight-line method over the estimated useful life of
the product, which is generally five years. Capitalized software development
costs are reported at the lower of cost, net of accumulated amortization, or net
realizable value (see Note 6). Software development costs incurred prior to
achieving technological feasibility are charged to research and development
expense as incurred.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123, which is effective for fiscal years
beginning after December 15, 1995, defines a fair value based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. This statement gives entities a choice of
recognizing related compensation costs by adopting the new fair value method or
to continue to measure compensation using the intrinsic value approach contained
in Accounting Principles Board Opinion 25 ("APB 25"), the former standard. If
the former standard for measurement is elected, SFAS 123 requires supplemental
disclosure to show the effects of using the new measurement criteria. The
Company has elected to continue to apply the former standards contained in APB
25, and as a result, the Company adopted the pro forma disclosure requirements
of SFAS 123 during the year ended March 28, 1997 (see Note 9). APB 25 requires
compensation expense for stock-based compensation plans to be recognized based
on the difference, if any, between the per-share market value of the stock and
the option exercise price on the measurement date, which is generally the grant
date. The Company has not recognized any compensation expense with respect to
stock options granted under the Company's plans in accordance with the
requirements of APB 25.

Fair Value of Financial Instruments and Concentration of Credit Risk

The estimated fair value of the Company's cash, accounts receivable,
accounts payable and outstanding indebtedness approximates the carrying amounts
due principally to their short maturities. Accounts receivable represent the
primary financial instrument which potentially subjects the Company to
concentrations of credit risk. The Company does not require its customers to
provide collateral with respect to amounts owed, but periodically evaluates the
credit of its customers (see Note 14). The allowance for non-collection of
accounts receivable is estimated based upon the expected collectibility of all
accounts receivable.

Goodwill

The excess of the purchase price over the fair value of the Company's
assets and liabilities at the date of the Acquisition is being amortized to
operations on a straight-line basis over a period of 35 years. At each balance
sheet date, the Company evaluates the realizability of goodwill based on its
expectations of future

nondiscounted cash flows. Based on the Company's most recent analysis, the
Company believes that no material impairment of goodwill exists at March 28,
1997.

Income Taxes

Income tax expense (benefit) is based upon income (loss) recognized for
financial statement purposes and includes the effects of temporary differences
between such income (loss) and that recognized for tax purposes in accordance
with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes." SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Using the enacted tax rate
in effect for the year in which the differences are expected to reverse,
deferred tax assets and liabilities are determined based upon the differences
between the financial reporting basis and income tax basis of the assets and
liabilities (see Note 10). A valuation allowance is established for deferred tax
assets to the extent realization thereof is not assured.

Income (Loss) Per Common and Common Equivalent Share

Income (loss) per common and common equivalent share for the five months
ended March 31, 1995 and years ended March 29, 1996 and March 28, 1997 is
computed on the basis of the weighted average number of common and dilutive
common equivalent shares outstanding during the period, except as required by
Accounting Principles Board Opinion No. 15, Earnings per Share, all outstanding
options and warrants during the year ended March 28, 1997 have been included in
the calculation in accordance with the modified treasury stock method, and
except as required by Securities and Exchange Commission Staff Accounting
Bulletin ("SECSAB") Topic 4:D, stock issued and stock options covering 89,000
shares of common stock granted during the 12 months prior to a May 10, 1996
initial public offering (see Note 9) at prices below the public offering price
have been included in the calculation of weighted average number of common and
common equivalent shares outstanding as if they were outstanding as of the
beginning of the period. Also, as a result of the Acquisition, income (loss) per
share is not presented for periods prior to the five months ended March 31, 1995
in accordance with SECSAB Topic 1:B2.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 requires disclosure of basic earnings per share based on income available to
common stockholders and the weighted average number of common shares outstanding
during the period, and diluted earnings per share based on income available to
common stockholders and the weighted average number of common and dilutive
potential common shares outstanding during the period. The adoption of SFAS 128
is required for fiscal years ending after December 15, 1997, and earlier
adoption is not permitted. Had the Company adopted SFAS 128 during the years
ended March 29, 1996 and March 28, 1997, basic earnings per share on a pro forma
basis would have been $.34 and $.22 per share, respectively, and diluted
earnings per share on a pro forma basis would have been $.30 and $.21 per share,
respectively.

Also, in February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"). SFAS 129 requires a Company to explain the
privileges and rights of its various outstanding securities, the number of
shares issued upon conversion, exercise or satisfaction of required conditions
during the most recent annual fiscal period, liquidation preferences of
preferred stock and other matters with respect to preferred stock. Although the
statement is effective for periods ending after December 15, 1997, the Company's
financial statement disclosures are in compliance with SFAS 129.

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

and disclosure of contingent assets and liabilities at 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.

4. INVENTORIES

Inventories at March 29, 1996 and March 28, 1997 consisted of the
following:

March 29, March 28,
1996 1997
------------ ------------

Raw materials $ 7,403,532 $ 6,153,808
Work-in-process 1,207,080 2,117,668
Finished goods 1,654,252 4,036,191
------------ ------------
10,264,864 12,307,667
Reserve for potential losses (1,606,195) (1,428,487)
------------ ------------
$ 8,658,669 $ 10,879,180
============ ============

Substantially all inventories are pledged to secure notes payable (see
Note 7).

5. PROPERTY AND EQUIPMENT

Property and equipment at March 29, 1996 and March 28, 1997 consisted of
the following:

March 29, March 28,
1996 1997
----------- -----------
Land $ 120,633 $ --
Building and building improvements 877,187 --
Machinery and equipment 2,009,159 2,287,656
Furniture and fixtures 119,879 111,057
Leasehold improvements 151,116 167,784
----------- -----------
3,277,974 2,566,497
Accumulated depreciation (1,079,349) (1,719,054)
----------- -----------
$ 2,198,625 $ 847,443
=========== ===========

Substantially all property and equipment is pledged to secure notes payable
(see Note 7).

Depreciation expense for the seven months ended October 30, 1994 and five
months ended March 31, 1995 aggregated $454,911 and $308,047, respectively.
Depreciation expense for the years ended March 29, 1996 and March 28, 1997
aggregated $784,039 and $794,928, respectively.

Assets under capital leases are capitalized using interest rates
appropriate at the date of purchase or at the inception of the lease, as
applicable. The following is a summary of the Company's assets under capital
leases which are included in property and equipment at March 29, 1996:

Land $ 120,633
Building and building improvements 877,187
Machinery and equipment 60,445
-----------
1,058,265
Accumulated depreciation (70,762)
-----------
$ 987,503
===========

During the year ended March 28, 1997, the Company closed a one hundred
thousand square foot manufacturing facility located in Paducah, Kentucky and
assigned its capital lease obligation to an unaffiliated third party.
Accordingly, the Company recorded the retirement of the outstanding capital
lease obligation and the disposition of the property during the year ended March
28, 1997. In connection with this transaction, the Company realized a gain of
$44,169 representing the difference between the outstanding lease obligation
($933,510) plus the proceeds received ($50,000) and the net book value of the
property ($939,341).

6. OTHER ASSETS

Other assets at March 29, 1996 and March 28, 1997, net of accumulated
amortization of $375,481 and $652,762, respectively, consisted of the following:

March 29, March 28,
1996 1997
---------- ----------
Excess of purchase price over fair value of net
assets acquired, net of accumulated
amortization of $169,336 and $278,247 $3,803,057 $3,252,076
Product software, net of accumulated
amortization of $66,300 and $113,100 167,700 542,593
Patents, net of accumulated amortization
of $46,453 and $79,243 117,499 84,709
Customer contracts, net of accumulated
amortization of $55,103 and $93,999 71,309 32,413
Unpatented technology, net of accumulated
amortization of $15,622 and $26,649 44,109 33,082
Patent license, net of accumulated
amortization of $22,667 and $61,524 110,333 71,476
Deferred initial public offering expenses 338,372
Deposits 40,500 40,342
Other 771 2,776
---------- ----------
$4,693,650 $4,059,467
========== ==========

The excess of the purchase price over the fair value of net assets acquired
in connection with the Acquisition, including the escrow consideration
distributed during the year ended March 29, 1996, aggregated $4,183,586. Tax
benefits of acquired deferred tax assets of $211,193 and $442,070 during the
years ended March 29, 1996 and March 28, 1997, respectively, were applied
against the excess purchase price (see Note 10).

Other intangible assets recorded in connection with the Acquisition
consisted of product software of $234,000, patents of $163,952, customer
contracts of $126,412 and unpatented technology of $59,731. These assets are
being amortized over estimated useful lives ranging from less than two years to
five years, and are reported at the lower of cost, net of accumulated
amortization, or net realizable value.

During the year ended March 28, 1997, the Company capitalized software
development costs of $421,693 in connection with the development of new
products. Software development costs during the five months ended March 31, 1995
and year ended March 29, 1996 were not significant.

Amortization expense for the seven months ended October 30, 1994, five
months ended March 31, 1995 and years ended March 29, 1996 and March 28, 1997
amounted to $192,806, $99,845, $276,616 and $277,282, respectively.

7. BORROWINGS UNDER REVOLVING CREDIT AGREEMENT, LONG-TERM DEBT, CAPITAL LEASE
OBLIGATIONS AND NOTES PAYABLE TO STOCKHOLDERS

Borrowings Under Revolving Credit Agreement

At March 29, 1996, the Company was able to borrow up to a maximum of $9
million under term and installment notes and a revolving credit agreement under
the terms of a Loan and Security Agreement (the "Loan Agreement") between the
Company and its bank. Indebtedness under the Loan Agreement at March 29, 1996
included $2,525,000 outstanding under term and installment notes and $1,093,735
outstanding under the revolving credit agreement.

At March 28, 1997, the Company was able to borrow up to a maximum of $9
million under the revolving credit agreement. At March 28, 1997, the Company had
outstanding debt of $3,810,961 under the revolving credit agreement.

Amounts borrowed under the Loan Agreement are secured by substantially all
assets of the Company including accounts receivable, inventories and property
and equipment. The borrowing limit under the revolving credit agreement is based
upon specified percentages applied to the value of collateral, consisting of
accounts receivable and inventories (less amounts outstanding under a $2.2
million term note at March 29, 1996), and varies based upon changes in the
collateral value. Interest is payable monthly based upon the greater of the
actual outstanding debt balances or $4 million at a variable rate per annum
equal to 1.5% above a base rate quoted by Citibank (8.25% March 29, 1996 and
8.50% at March 28, 1997). The Loan Agreement is renewable annually for one year
periods unless terminated by the bank upon an occurrence of an event of default
or by the Company upon at least 90 days notice. The Company has agreed to pay
termination fees of up to 2% of the average monthly borrowings or the minimum
loan amount ($4 million), whichever is greater, if the Loan Agreement is
terminated on the date other than an anniversary date.

The Loan Agreement contains conditions and covenants that prevent or
restrict the Company from engaging in certain transactions without the consent
of the bank, including merging or consolidating, payment of subordinated
stockholder debt obligations, declaration or payment of dividends and
disposition of assets, among others. Additionally, the Loan Agreement requires
the Company to comply with specific financial covenants, including covenants
with respect to cash flow, working capital and net worth. Noncompliance with any
of these conditions and covenants or the occurrence of any other event of
default, if not waived or corrected, could accelerate the maturity of the
borrowings outstanding under the Loan Agreement. The Company was in compliance
with the covenants and conditions contained in the Loan Agreement at March 29,
1996 and March 28, 1997.

Pursuant to an amendment to the Loan Agreement on October 31, 1994, $2.2
million of debt outstanding under the revolving credit agreement was converted
into a term note payable on November 30, 1997. In addition, the term of the Loan
Agreement was extended from May 31, 1995 to November 30, 1997, and the interest
rate on amounts borrowed under the terms of the Loan Agreement was reduced by
.75%. Proceeds of $2,569,298 pursuant to subordinated promissory notes dated
October 31, 1994 issued to stockholders were used to retire debt outstanding
under the revolving credit agreement. After such repayment, the initial
principal balance outstanding under the $2.2 million term note on October 31,
1994 amounted to $1,291,667. Between October 31, 1994 and March 31, 1995, the
Company borrowed the balance available under the $2.2 million term note of
$908,333.

Pursuant to a June 9, 1994 amendment to the Loan Agreement, the aggregate
principal obligation under an installment note was decreased from $500,000 to
$465,000, and the Company borrowed an additional $402,500. The expiration date
of the Loan Agreement and the due date of the term and installment notes were
extended from February 28, 1995 to May 31, 1995. The monthly principal payment
under the installment note was increased from $20,833 to $25,000. This note was
repaid during the year ended March 29, 1996.

In May 1996, the Company completed an initial public offering of equity
securities (see Note 9). A portion of the proceeds of the initial public
offering were used to repay the Company's then outstanding indebtedness under
the Loan Agreement. Accordingly, the Company classified $1,093,735 of
indebtedness outstanding under the revolving credit facility as a long-term
obligation at March 29, 1996.

Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations payable at March 29, 1996
consisted of the following:

Loan and Security Agreement
$2.2 million secured term note, principal
balance due November 30, 1997 $ 2,200,000
$650,000 secured term note, principal
payable in sixty equal monthly
installments of $7,738, with remaining
principal balance due November 30, 1997 325,000
Unsecured non-interest bearing promissory
note, payable in nineteen equal monthly
installments of $10,873 32,620
Obligations under capital leases 975,410
-----------
3,533,030
Less - current maturities (118,444)
-----------
$ 3,414,586
===========

At March 31, 1995, the Company had outstanding indebtedness of $203,077
pursuant to 10% interest bearing promissory notes payable to a company
affiliated with certain officers and employees of the Company. Outstanding
indebtedness under these promissory notes was paid in full during the year ended
March 29, 1996. Interest paid pursuant to these notes during the years ended
March 31, 1995 and March 29, 1996 aggregated $48,934 and $9,424, respectively.
On November 9, 1994, the Company executed a non-interest bearing promissory note
in the principal amount of $206,595 representing unpaid royalties at October 31,
1994 due to the company affiliated with certain of the Company's officers and
employees. The note, payable in nineteen equal monthly installments of $10,873
commencing on December 11, 1994, had an outstanding balance of $32,620 at March
29, 1996. This note was paid in full during the year ended March 28, 1997.

In May 1996, the Company completed an initial public offering of equity
securities (see Note 9). A portion of the proceeds of the initial public
offering were used to repay the Company's then outstanding indebtedness under
the Loan Agreement. Accordingly, the Company classified indebtedness outstanding
under the $2.2 million term note and $309,524 of indebtedness then outstanding
under the $650,000 term note as long-term obligations at March 29, 1996.

During the year ended March 28, 1997, the Company assigned its capital
lease obligation with respect to a one hundred thousand square foot
manufacturing facility located in Paducah, Kentucky to an unaffiliated third
party. Accordingly, the Company recorded the retirement of the capital lease
obligation with a then outstanding balance of $933,510 (see Note 5) during the
year ended March 28, 1997.

Notes Payable to Stockholders

On June 9, 1994, the Company borrowed $400,000 from its preferred
stockholders and issued a subordinated master promissory note payable on demand
bearing interest at a rate of 10% per annum. This note, accrued interest and
preference fees, which when added to accruing interest would equal 5% of the
outstanding principal amount for each month that the note was outstanding,
became due upon the Acquisition. Accordingly, the subordinated master promissory
note, together with accrued interest and preference fees from the date of
issuance aggregating $96,000, were retired on October 31, 1994.

On October 31, 1994, the Company entered into an Investment Agreement with
the investors. Under the terms of the Investment Agreement, the Company borrowed
$2.8 million from the investors and issued 10% interest bearing subordinated
promissory notes due November 1, 1999. During the year ended March 28, 1997, the
Company repaid the subordinated promissory notes with a portion of the proceeds
from its initial public offering (see Note 9). Interest accrued under the terms
of the subordinated promissory notes was payable semi-annually beginning May 1,
1995. During the years ended March 29, 1996 and March 28, 1997, the Company paid
interest with respect to the subordinated notes of $279,847 and $151,890,
respectively. At March 29, 1996, interest accrued under the terms of the
subordinated promissory notes aggregated $116,603.

8. ACCRUED LIABILITIES

Accrued liabilities at March 29, 1996 and March 28, 1997 consisted of the
following:

March 29, March 28,
1996 1997
---------- ----------
Workers' compensation and employee group
insurance $ 117,546 $ 103,830
Salaries, wages and related employee benefits
and taxes 339,481 255,410
Interest 149,674 31,792
Royalties 273,169 233
Warranty expense 209,500 366,916
Sales and use taxes 24,651 7,060
Professional fees 99,136 90,673
Environmental costs 12,948 625
Property taxes 20,840 29,674
Bonuses 74,790 62,104
Other 150,644 66,715
---------- ----------
$1,472,379 $1,015,032
========== ==========

9. STOCKHOLDERS' EQUITY

Preferred Stock

The Company is authorized, under its Certificate of Incorporation as
amended on October 31, 1994, to issue up to 100,000 shares of preferred stock,
$100 par value, in one or more series or other designations determined by the
Board of Directors ("Board") of the Company. The Board is authorized to
determine, as to any particular series of preferred stock: the dividend rights,
including annual dividend rates and whether the dividends shall be cumulative or
non-cumulative; redemption provisions; per-share liquidation preferences; voting
powers; conversion terms; and any other rights or preferences. No dividends may
be paid or declared on the Company's common stock or on any other class of stock
ranking junior to the preferred stock, nor shall any shares of common stock or
any other class of stock ranking junior to the preferred stock be purchased,
retired or otherwise acquired by the Company unless all dividends accrued and
payable on preferred shares and all amounts required to retire the preferred
shares have been paid out of assets legally available for the payment of such
obligations.

At March 28, 1997, no preferred stock had been issued, nor has the Board
designated any series of preferred stock for issuance or determined any related
rights or preferences.

In connection with the Acquisition, the then outstanding shares of the
Company's Series A, Series B, Series C and Series E preferred stock were
cancelled. The Series A, Series B, Series C and Series E preferred stock had
per-share liquidation preferences of $15, $5, $2.50 and $2.50, respectively,
plus declared and unpaid

dividends. The aggregate liquidation preference of the preferred stock in order
of priority were as follows: Series E - $750,000; Series C - $5,851,650; Series
B - $1,500,000; and Series A - $4,600,020. The shares of preferred stock were
convertible into an equal number of shares of common stock, subject to certain
anti-dilution provisions. Shares of Series A, Series B and Series C preferred
stock were convertible into voting common stock. Shares of Series E preferred
stock were convertible into non-voting common stock. Series A, Series B and
Series C preferred shares had voting rights equal to the number of shares of
common stock which would have been received upon conversion to common shares.
The Series E preferred stock had no voting rights.

The Company could not, without the consent of stipulated percentages of
holders of the applicable series of preferred stock, authorize or create any
class or series of capital stock ranking, either as to payment of dividends or
distribution of assets, prior to or on a parity with such series of convertible
preferred stock or alter or change the powers, preferences or rights of such
series of convertible preferred stock. Further, the Company could not sell
shares of capital stock ranking, either as to payment of dividends or
distribution of assets, prior to or on parity with those of convertible
preferred stock at prices less than the conversion prices or convertible into
common stock at prices less than the conversion prices of convertible preferred
stock without such consent(s).

Common Stock

The Company is authorized, under its Certificate of Incorporation as
amended on October 31, 1994, to issue up to 10,000,000 shares of common stock,
$.01 par value. As described in Note 1, the Company issued 3.5 million shares of
common stock on October 31, 1994 in accordance with the terms of an Investment
Agreement between the Company, Wexford and certain former investors.

Holders of voting common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. No dividends may be paid or declared
on the Company's common stock until all dividends accrued and payable on
preferred shares outstanding have been paid.

In connection with the Acquisition, the then outstanding shares of the
Company's common stock were cancelled. Prior to the Acquisition, the Company was
authorized to issue 11,100,000 shares of common stock, $.05 par value.

Initial Public Offering and Common Stock Purchase Warrants

In May 1996, the Company completed an initial public offering of 1,150,000
units (the "Units"), each Unit consisting of one share of common stock and one
redeemable warrant ("Redeemable Warrant") at a price of $9.00 per Unit for gross
proceeds of $10,350,000. In connection with the offering, the Company issued
warrants to the underwriters to purchase 100,000 shares of common stock (the
"Underwriter Warrants") for gross proceeds of $10. Net proceeds received by the
Company, after underwriting discounts and expenses of $1,231,897 and other
expenses of $824,953, amounted to $8,293,160. At March 29, 1996, the Company had
incurred, and deferred as other assets, offering expenses of $338,372.
Accordingly, net proceeds during the year ended March 28, 1997 amounted to
$8,631,532.

Two Redeemable Warrants entitle the holder thereof to purchase one share of
common stock at an exercise price of $11.00 per share. Unless the Redeemable
Warrants are redeemed, the Redeemable Warrants may be exercised at any time
beginning on May 10, 1996 and ending May 9, 1999, at which time the Redeemable
Warrants will expire. Beginning on February 10, 1997, the Redeemable Warrants
are redeemable by the Company at its option, as a whole and not in part, at $.05
per Redeemable Warrant on 30 days' prior written notice, provided that the
average closing price of the common stock equals or exceeds $12.00 per share for
20 consecutive trading days ending within five days prior to the date of the
notice of redemption. The Redeemable Warrants will be entitled to the benefit of
adjustments in the exercise price and in the number of shares of common stock
deliverable upon the exercise thereof upon the occurrence of certain events,
including a stock dividend, stock split or similar reorganization.

The Underwriter Warrants are initially exercisable at a price of $10.80 per
share of common stock. The Underwriter Warrants contain anti-dilution provisions
providing for adjustments of the number of warrants and exercise price under
certain circumstances. The Underwriter Warrants grant to the holders thereof
certain rights of registration of the securities issuable upon exercise of the
Underwriter Warrants. The Underwriter Warrants may be exercised at any time
beginning on May 10, 1997 and ending May 9, 2001, at which time the Underwriter
Warrants will expire.

As of October 31, 1994, the Company had outstanding warrants to purchase an
aggregate of 312,000 shares of Series C preferred stock at a price of $2.50 per
share. These warrants were cancelled upon consummation of the Acquisition.
Generally, the warrants were exercisable for five-year periods beginning either
on the issuance date or one year thereafter, and expired on various dates
through March 31, 1996.

On May 23, 1995, the Company issued a warrant to one of its contract
manufacturers to purchase 40,000 shares of common stock, $.01 par value, at a
price of $4.00 per share in return for the extension of credit under the terms
of a manufacturing agreement between the Company and the contract manufacturer.
On June 17, 1996, the warrant was exercised and the Company issued 40,000 shares
of common stock for aggregate proceeds of $160,000.

Stock Options

On November 1, 1994, the Company's Board of Directors adopted the 1994
Omnibus Stock Plan (the "Stock Plan"). The Stock Plan provides the Board or a
committee of the Board with the authority to grant to officers and employees of
the Company incentive stock options within the meaning of Section 422A of the
Internal Revenue Code and to grant to directors, officers, employees and
consultants of the Company non-qualified stock options and restricted stock
which do not qualify as incentive stock options. An aggregate of 635,000 shares
of the Company's common stock may be issued under the Stock Plan. The maximum
number of shares with respect to which options may be granted to any one
employee may not exceed 300,000 shares. The Board's authority to grant options
under the Stock Plan expires on November 1, 2004. The Stock Plan is administered
by a Stock Plans Committee consisting of members appointed by the Board.

The Board has the authority to determine option periods, the number of
shares of common stock subject to options granted and such other terms and
conditions under which options may be exercised. The Board also has the
authority to determine at which times options or restricted stock may be
granted, the purchase price of restricted stock, whether an option shall be an
incentive stock option or a non-qualified option, whether restrictions such as
repurchase rights are to be imposed on shares subject to options and restricted
stock, and the nature of such restrictions. The per-share option price of
incentive stock options granted under the Stock Plan shall not be less than the
per-share fair market value, as determined by the Board, of the Company's common
stock as of the date of grant, or 110% of the per-share market value with
respect to incentive stock options granted to employees owning 10% or more of
the total combined voting power of all classes of the Company's stock. Option
periods shall not exceed ten years from the date options are granted, or five
years with respect to incentive stock options to employees owning 10% or more of
the total voting power of all classes of the Company's stock. Options granted
under the Stock Plan generally expire 60 days after termination of employment or
at the end of the option period stipulated by the Board in the option agreement,
whichever is earlier.

The Board has the authority to accelerate the date of exercise of an option
or any installment thereof, unless, in the case of incentive stock options, such
acceleration would violate the annual vesting limitations contained in Section
422(d) of the Internal Revenue Code. The exercise prices of options granted
under the Stock Plan are subject to adjustment upon any subdivision,
combination, merger, splits, split-up, liquidation, or the like, to reflect such
subdivision, combination or exchange. The number of shares of common stock to be
received upon exercise of options granted under the Stock Plan are subject to
adjustment upon declarations of stock dividends between the date of grant and
the date of exercise of options. Also, the number of shares of

common stock reserved for issuance under the Stock Plan shall be adjusted upon
the occurrence of such events.

The Board may grant restricted stock under the Stock Plan pursuant to a
restricted stock agreement. The Board has the authority to determine the number
of shares of common stock to be issued and to the extent, if any, to which they
shall be issued in exchange for cash and/or other consideration. Shares issued
pursuant to restricted stock may not be sold, transferred, pledged, or otherwise
disposed of, except by the laws of descent and distribution, or as otherwise
determined by the Board for a period as determined by the Board from the date
the restricted stock is granted. The Company has the right to repurchase
restricted stock at such price as determined by the Board on the date of grant.
The repurchase rights are exercisable on such terms as determined by the Board
upon the termination of services of the grantee prior to expiration of the
restriction on transfer of the shares, failure of the grantee to pay the Company
income taxes required to be withheld in respect of the restricted stock or under
such other circumstances as the Board may determine.

The following table summarizes the status and changes in stock options
outstanding under the Stock Plan for the five months ended March 31, 1995 and
years ended March 29, 1996 and March 28, 1997:

Weighted
Incentive Option Average
Stock Price Exercise
Options Range Price
--------- --------------- --------

Outstanding at October 31, 1994 -- -- --
Options granted 357,000 $1.00 $1.00
-------
Outstanding at March 31, 1995 357,000 $1.00 $1.00
Options granted 89,000 $1.00 - $5.00 $4.78
Options cancelled (11,750) $1.00 $1.00
-------
Outstanding at March 29, 1996 434,250 $1.00 - $5.00 $1.77
Options granted 191,250 $8.00 - $10.781 $9.23
Options exercised (5,000) $1.00 $1.00
Options cancelled (78,500) $1.00 - $9.50 $7.74
-------
Outstanding at March 28, 1997 542,000 $1.00 - $10.781 $3.55
=======
Options Exercisable at March 31, 1995 89,250 $1.00 $1.00
=======
Options Exercisable at March 29, 1996 196,750 $1.00 - $5.00 $1.43
=======
Options Exercisable at March 28, 1997 327,563 $1.00 - $10.781 $2.35
=======

Options granted and outstanding under the Stock Plan are generally
exercisable in four equal annual installments beginning on the date of grant. At
March 28, 1997, outstanding options under the Stock Plan have a weighted average
remaining contractual life of 8.17 years. At March 29, 1996 and March 28, 1997,
635,000 and 630,000 shares, respectively, were reserved for issuance under the
Stock Plan.

On May 10, 1995, the Board of Directors approved the adoption of the 1995
Employee Stock Purchase Plan (the "Employee Plan"). The Employee Plan provides
the Board of Directors with the authority to grant to the Company's officers and
employees the right to purchase up to 100,000 shares of common stock at 85% of
the public market price. However, the Employee Plan did not become effective
until the Company's initial public offering. The rights granted under the
Employee Plan are exercisable for an offering period as determined by the Board
of Directors, which may not exceed 27 months. No employee may be granted an
option under which the employee's right to purchase shares under the Employee
Plan first become exercisable at a rate in excess of $25,000 in fair market
value (determined at the date of grant) in any calendar year. Also, an employee
may not allocate in excess of 10% of his or her compensation for purchase of
stock under the Employee Plan during any offering period. The Stock Plans
Committee of the Board of Directors administers the Employee Plan. The Employee
Plan was approved by the stockholders of the Company on December 26, 1995. At
March 29, 1996

and March 28, 1997, 100,000 and 93,240 shares of common stock, respectively,
were reserved for issuance under the Employee Plan.

During the first offering period ending November 15, 1996, 6,760 shares
were purchased by employees at a price of $7.65 per share. During the second
offering which commenced January 13, 1997 (and which will end on July 11, 1997),
5,930 shares are subject to purchase under the Employee Plan based on the base
compensation of participates and the per-share market price of the Company's
common stock on January 13, 1997. The actual number of shares that may be issued
will vary based upon compensation of the participants during the offering
period, the per-share market value of the Company's common stock on July 11,
1997, and the number of participates who have not withdrawn by the July 11, 1997
end date.

On May 10, 1995, the Board approved the adoption of the 1995 Non-Employee
Director Stock Option Plan (the "Director Plan"). The Director Plan provides for
the grant to directors who are not employees of the Company of options to
purchase up to 100,000 shares of common stock. The Director Plan is administered
by the Stock Plans Committee consisting of members appointed by the Board.
Pursuant to the Director Plan, each non-employee director was automatically
granted a non-qualified option to purchase 10,000 shares of common stock upon
the consummation of the Company's initial public offering on May 10, 1996.
Thereafter, on September 1 of each year, each non-employee director receives a
non-qualified option to purchase 3,000 shares of common stock. Any non-employee
director who is first appointed or elected after the Company's initial public
offering will receive a non-qualified stock option to purchase 3,000 shares of
common stock upon such appointment or election and an additional option to
purchase 3,000 shares of common stock on each anniversary of the date of his or
her election, provided that he or she is then serving as a non-employee
director. Options granted upon consummation of the Company's initial public
offering became exercisable six months from the date the offering. All other
options become exercisable on the anniversary of the date of grant. Option
periods shall not exceed ten years from the date options are granted. Options
granted under the Director Plan have an exercise price equal to the market value
per share of the common stock on the date of grant. Options granted expire 180
days after the date a director ceases to serve as a director or 10 years from
the grant date, whichever is earlier. Vesting is accelerated in the event of a
change of control of the Company.

On May 10, 1996, options to purchase 30,000 shares of common stock were
automatically granted to non-employee directors at an exercise price of $8.50
per share. On May 17, 1996, options to purchase 3,000 shares of common stock
were granted at an exercise price of $10.781 to a non-employee director elected
to the Board on that date. On September 1, 1996, options to purchase 9,000
shares of common stock were automatically granted to non-employee directors at
an exercise price of $10.812 per share. On March 14, 1997, options to purchase
3,000 shares of common stock were granted at an exercise price of $5.00 to a
non-employee director elected to the Board on that date. At March 28, 1997
options to purchase 45,000 shares of common stock at a weighted-average exercise
price of $8.88 per share were outstanding under the Director Plan. Options
granted under the Director Plan to purchase 30,000 shares of common stock at a
weighted-average exercise price of $8.50 per share were exercisable at March 28,
1997.

At March 28, 1997, outstanding options under the Director Plan have
exercise prices ranging between $5.00 and $10.812 per share and a weighted
average remaining contractual life of 9.23 years. The Company has reserved
100,000 shares of common stock for issuance under the Director Plan at March 29,
1996 and March 28, 1997.

The following table summarizes information about stock options outstanding
under the Stock Plan and Director Plan at March 28, 1997:

Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Number Contractual Exercise Number Exercise
or Range Outstanding Life (years) Price Exercisable Price
------------ ----------- ------------ --------- ----------- --------
$1.00 337,250 7.45 $1.00 254,500 $1.00
$5.00 83,000 8.89 $5.00 40,000 $5.00
$8.50 30,000 9.11 $8.50 30,000 $8.50
$9.50 123,500 9.31 $9.50 32,750 $9.50
$10.78-$10.81 13,250 9.33 $10.80 313 $10.78
Total 587,000 8.17 $3.96 357,563 $2.86

On October 31, 1994 upon consummation of the Acquisition, the Company's
Incentive Stock Option Plan (the "Plan") adopted by the Board of Directors
effective June 1, 1992 was cancelled. The Plan provided the Board with the
authority to grant to key employees of the Company incentive stock options to
purchase up to a maximum of 300,000 shares of the Company's common stock.
Options granted under the Plan were intended to constitute incentive stock
options within the meaning of Section 422A of the Internal Revenue Code. The
Board had the authority to determine option periods, the number of shares of
common stock subject to options granted and such other terms and conditions
under which options may be exercised. Options granted under the Plan were to
expire upon termination of employment or at the end of the option period
stipulated by the Board in the option agreement, whichever was earlier. The Plan
specifically limited the aggregate fair market value of options which could be
exercised by an employee in any one calendar year to $100,000. The Board's
authority to grant options under the Plan was to expire on May 31, 2002. On
August 4, 1994, the Board of Directors authorized management to grant options
covering 253,500 shares of common stock to employees. However, as of the date of
cancellation of the Plan, no options had been granted.

Stock Option Compensation

The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for stock options and
purchase rights granted under the Company's plans in accordance with the
requirements of APB 25. Had compensation cost related to stock options and
purchase rights granted under the Company's plans been recognized based on the
fair value of awards on the grant dates consistent with SFAS 123, the Company
would have recorded compensation expense of $54,972 and $613,447 during the
years ended March 29, 1996 and March 28, 1997.

The fair value of each option or right granted under the Company's stock
option and purchase plans is estimated on the date of grant using the
Black-Scholes option pricing model. The significant weighted-average assumptions
used during the years ended March 29, 1996 and March 28, 1997 to estimate the
fair values of options and rights granted under the Company's plans are
summarized in the following table.

Year Ended Year Ended
March 29, March 28,
1996 1997
---------- ----------
Stock Plan:
Expected volaltility 74.80% 72.30%
Expected life 3.5 years 3.5 years
Risk-free interest rate 5.22% 6.35%
Expected dividend yield None None
Director Plan:
Expected volaltility -- 76.00%
Expected life -- 2.67 years
Risk-free interest rate -- 6.30%
Expected dividend -- None
Employee Plan:
Expected volaltility -- 76.90%
Expected life -- .5 years
Risk-free interest rate -- 5.32%
Expected dividend -- None

Based on these assumptions, the weighted-average fair value of each option
and right granted under the Company's plans for the years ended March 29, 1996
and March 28, 1997 amounted to $2.63 and $4.70, respectively. The
weighted-average fair value of each option granted under the Stock Plan during
the years ended March 29, 1996 and March 28, 1997 was $2.63 and $5.04,
respectively. The weighted-average fair value of each option granted under the
Director Plan during the year ended March 28, 1997 was $4.53. The
weighted-average fair value of each purchase right granted under the Employee
Plan during the year ended March 28, 1997 was $1.91.

A comparison of the Company's net income and net income per share as
reported and on a pro forma basis had compensation cost been recorded based on
the fair value at the grant dates for options and rights granted under the
Company's plans in accordance with SFAS 123 for the years ended March 29, 1996
and March 28, 1997 is set forth below:

Year Ended Year Ended
March 29, March 28,
1996 1997
----------- ----------
Net income As reported $ 1,177,371 $1,010,659
Pro Forma $ 1,143,618 $ 634,924

Net income per share - primary As reported $ 0.30 $ 0.22
Pro Forma $ 0.30 $ 0.14

Net income per share - assuming
full dilution As reported $ 0.30 $ 0.22
Pro Forma $ 0.30 $ 0.14

Common Stock Reserved

Common stock reserved for issuance pursuant to the Company's stock option
and purchase plans and outstanding common stock warrants at March 29, 1996 and
March 28, 1997 is summarized as follows:

March 29, March 28,
1996 1997
--------- ---------
Stock Option and Purchase Plans 835,000 823,240
Redeemable Warrants -- 575,000
Underwriter Warrants -- 100,000
Common Stock Purchase Warrants 40,000 --
--------- ---------
875,000 1,498,240
========= =========

10. INCOME TAXES

There was no income tax expense (benefit) for the seven months ended
October 30, 1994 and five months ended March 31, 1995. Income tax expense for
the years ended March 29, 1996 and March 28, 1997 is summarized as follows:

Year Ended Year Ended
March 29, March 28,
1996 1997
--------- ---------
Current tax expense:
Federal $ 101,615 $ 564,265
State 64,051 19,154
--------- ---------
Total current 165,666 583,419
--------- ---------
Deferred tax (benefit) expense:
Federal 150,019 (52,969)
State 10,630 2,929
--------- ---------
Total deferred 160,649 (50,040)
--------- ---------
$ 326,315 $ 533,379
========= =========

Income tax expense differs from the amount of income taxes determined by
applying the applicable U.S. statutory federal income tax rate to income (loss)
before income taxes as a result of the following:

Seven Months Five Months Year Year
Ended Ended Ended Ended
October 30, March 31, March 29, March 28,
1994 1995 1996 1997
--------- --------- --------- ---------
Statutory U.S. tax rates $(143,944) $(362,298) $ 511,253 524,973
State taxes, net -- -- 47,181 12,642
Non-deductible expenses 15,479 41,177 102,866 58,375
Losses for which no tax
benefit was provided 128,465 321,121 --
Utilization of loss
carryforwards -- -- (334,985) (71,995)
Other -- -- -- 9,384
--------- --------- --------- ---------
Effective tax rates $ -- $ -- $ 326,315 $ 533,379
========= ========= ========= =========

Deferred tax assets and liabilities arising from temporary differences
at March 29, 1996 and March 28, 1997 are comprised of the following:

March 29, March 28,
1996 1997
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 6,596,897 $ 5,410,844
Inventories 900,258 907,415
Accrued liabilities 165,816 205,234
Accrued restructuring charges 6,365 10,770
Deferred revenue 145,313 145,313
Accounts receivable 83,528 56,947
Depreciation -- 51,345
Long-term debt 35,976 --
----------- -----------
Total deferred tax assets 7,934,153 6,787,868
----------- -----------
Deferred tax liabilities:
Other assets (72,128) (45,136)
Property and equipment (59,116) (65,125)
Depreciation (87,083) --
----------- -----------
Total deferred tax liabilities (218,327) (110,261)
----------- -----------
Excess of deferred tax assets over liabilities 7,715,826 6,677,607
Valuation allowance (7,665,282) (6,134,953)
=========== ===========
Net deferred tax assets $ 50,544 $ 542,654
=========== ===========

The valuation allowance for deferred tax assets during the seven months
ended October 30, 1994 and five months ended March 31, 1995 increased by
$1,388,060. The valuation allowance for deferred tax assets during the years
ended March 29, 1996 and March 28, 1997 decreased by $1,406,634 and $1,530,329,
respectively. A full valuation allowance was maintained through March 31, 1995
because of the uncertainty of realization of deferred tax assets.

Income taxes currently payable for the years ended March 29, 1996 and March
28, 1997 were reduced by $454,868 and $71,995, respectively, through the
utilization of net operating loss carryforwards. During the years ended March
29, 1996 and March 28, 1997, the Company reduced the valuation allowance and
recorded tax benefits of $50,544 and $492,110, respectively. Deferred tax
benefits from utilization of net operating loss carryforwards and reductions in
the valuation allowance of $211,193 and $442,070 were allocated to reduce
goodwill during the years ended March 29, 1996 and March 28, 1997, respectively.

As of March 28, 1997, the Company has tax net operating loss carryforwards
available to reduce future taxable income of approximately $14 million, which
expire from 1998 through 2010. The utilization of such net operating loss
carryforwards and realization of tax benefits in future years depends
predominantly upon the recognition of taxable income. Further, the utilization
of these carryforwards is subject to annual limitations as a result of the
change in ownership of the Company (as described in Note 2) as defined in the
Internal Revenue Code. The limitation approximates $210,000 annually and
represents the value of the Company's capital stock immediately before the date
of the ownership change multiplied by the federal long-term tax-exempt rate in
effect during the month the ownership change occurred. This limitation does not
reduce the total amount of net operating losses which may be taken, but rather
substantially limits the amount which may be used during a particular year. As a
result, the Company will be unable to use a significant portion of its net
operating loss carryforwards.

11. RESTRUCTURING CHARGES AND CREDITS

As a result of the Acquisition and additional financing described in Note
2, the Company was able to settle certain severance obligations under terminated
employment contracts and negotiate the termination of certain non-cancelable
lease obligations with respect to facilities closed in connection with a
restructuring initiated in fiscal 1994. The severance and lease obligations were
settled on terms more favorable than previously estimated, which resulted in the
recognition of restructuring credits of $248,684 and $274,659, respectively,
during the seven months ended October 30, 1994. In addition, the Company revised
its estimate of certain other severance obligations, and recorded additional
restructuring credits of $10,749. Accordingly, during the seven months ended
October 30, 1994, the Company realized net restructuring credits of $534,092.

During the year ended March 28, 1997, the Company initiated a consolidation
plan intended to augment its on-going productivity and quality improvement
programs. The consolidation plan provided for the closure of the Company's
Kentucky manufacturing facility, the closure of the Company's Georgia corporate
office facility, the consolidation of repair, refurbishment and conversion
service operations into the Company's Virginia facility and the consolidation of
corporate activities and product assembly operations into a new Georgia
facility. In connection with this plan, the Company recorded restructuring
charges of $62,500 during the year ended March 28, 1997. These restructuring
charges consist of severance obligations and losses related to abandonment of
assets. Relocation expenses and other incremental costs incurred in connection
with the consolidation and charged to operations during the year ended March 28,
1997 approximated $350,000.

12. PROFIT SHARING RETIREMENT PLAN

On January 1, 1995, the Company adopted a 401(k) retirement and profit
sharing plan. Eligible employees of the Company who are 21 years of age with one
or more years of service and who are not covered by collective bargaining
agreements may elect to participate in the plan. Employees who elect to become
participants in the plan may contribute up to 15% of their compensation to the
plan up to a maximum dollar limit established by law. The Company may also
contribute to the plan at the discretion of the Board of Directors.
Contributions by the Company may consist of matching contributions,
discretionary profit sharing contributions and other special contributions.
During the five months ended March 31, 1995 and years ended March 29, 1996 and
March 28, 1997, the Company accrued profit sharing and retirement expense of
$2,455, $15,650 and $26,808, respectively, pursuant to discretionary matching
contributions authorized by the Board of Directors. Contributions to the plan
funded by the Company during the years ended March 29, 1996 and March 28, 1997
amounted to $14,415 and $26,416, respectively. Participants are 100% vested with
respect to their compensation contributions to the plan. Vesting in Company
discretionary contributions begins at 20% after one year of service and
increases by 20% annually each year until full (100%) vesting upon five years of
service. The plan pays retirement benefits based on the participant's vested
account balance. Benefit distributions are generally available upon a
participant's death, disability or retirement. Participants generally qualify to
receive retirement benefits upon reaching the age of 65. Early retirees
generally qualify for benefits provided they have reached age 55 and have
completed 5 years of service with the Company. Benefits are payable in lump sums
equal to 100% of the participant's account balance.

13. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the seven months ended October 30,
1994, five months ended March 31, 1995, excluding the effects of the
Acquisition, and years ended March 29, 1996 and March 28, 1997 consists of the
following:

Seven
Months Five Months Year Year
Ended Ended Ended Ended
October 30, March 31, March 29, March 28,
1994 1995 1996 1997
---- ---- ---- ----
Interest paid $457,019 $225,860 $966,153 $516,489
Income taxes paid -- -- -- 624,644
Non-cash activities:
Deferred offering expenses
charged against proceeds of
initial public offering -- -- -- 338,372
Fixed assets acquired under
capital leases 33,753 9,069 -- --
Retirement of capital lease
obligation and write-off
of related property -- -- -- 933,510
Write-off of property and
equipment against accrued
restructuring charges 185,777 -- -- 41,133
Write-off of property and
equipment against
impairment reserve 117,807 -- -- --
Other current assets
acquired by assumption
of debt obligations 165,102 -- 131,594 --
Accrued liabilities converted
to notes payable -- 206,595 -- --
Write-off of inventory
against accrued
restructuring charges 70,229 -- -- --
Write-off of other
assets against accrued
restructuring charges -- 15,323 -- --
Write-off of property and
equipment against
accounts payable -- -- 1,600 --
Increase in goodwill
from distribution of
escrow consideration -- -- 329,709 --
Tax benefits applied to
goodwill -- -- 211,193 442,070

14. COMMITMENTS AND CONTINGENT LIABILITIES

Operating Leases

Minimum future rental payments at March 28, 1997 under non-cancellable
operating leases with an initial term of more than one year are summarized as
follows:

1998 $331,158
1999 220,902
2000 213,001
2001 210,079
2002 210,079
------------
1,185,219
Less sublease rentals (28,790)
------------
$ 1,156,429
============

Rental expense approximated $257,000 for the seven months ended October 30,
1994, $176,000 for the five months ended March 31, 1995, $376,000, net of
sublease income of approximately $18,000, for year ended March 29, 1996 and
$323,000, net of sublease income of approximately $45,000, for the year ended
March 28, 1997.

Litigation, Disputes and Environmental Matters

During the seven months ended October 30, 1994, the Company settled
litigation against a supplier to recover costs and damages attributable to
defective components supplied to the Company, and realized a gain of $261,000,
net of legal fees of $56,000.

Pursuant to the terms of a settlement agreement and mutual release dated
July 3, 1996, a suit filed against the Company by a former supplier to collect
approximately $400,000 of unpaid obligations was dismissed with prejudice. Under
the terms of the settlement agreement, the Company paid $180,000 and agreed to
pay an additional $112,500 in six equal monthly installments of $18,750
commencing on August 15, 1996. As a result of the settlement agreement, the
Company realized a gain of $105,146 representing the difference between unpaid
obligations recorded in the Company's accounts and aggregate settlement payments
set forth in the settlement agreement. The gain is reflected in the Company's
results of operations for the year ended March 28, 1997.

The Company has been involved in a dispute with a former contract
manufacturer since 1994 with respect to inventories acquired by the manufacturer
for the Company's programs, which approximate $l million, unpaid obligations of
the Company of approximately $265,000, and other matters including an alleged
claim of lost profits by the contract manufacturer of approximately $916,000
related to the Company's minimum contract purchase commitment. The Company has
alleged that the contract manufacturer breached the agreement, is obligated to
pay unpaid obligations to the Company of approximately $125,000 and is obligated
to the Company for lost business and expenses due to the delivery of defective
products and the termination of a significant sales agreement. Neither party is
presently pursuing the dispute. There is no assurance, however, that the dispute
will not be pursued or escalate into litigation. Should the dispute escalate
into litigation, the Company intends to defend and pursue its positions
vigorously. In the opinion of management, the ultimate outcome of this matter
will not have a material impact on the Company's financial position or its
results of operations.

The Company is a potentially responsible party with respect to undertaking
response actions at a facility for the treatment, storage and disposal of
hazardous substances operated by an unaffiliated party. In the opinion of
management, the ultimate outcome of this environmental action will not have a
material impact on the Company's financial position or its results of
operations.

Significant Customers

The Company's primary customers consist of the regional bell telephone
companies. During the seven months ended October 30, 1994, three of the regional
bell telephone companies accounted for 33%, 23% and 11% of the Company's
consolidated sales. During the five months ended March 31, 1995, four of the
regional bell telephone companies accounted for 34%, 23%, 11% and 10% of the
Company's consolidated sales. During the year ended March 29, 1996, three of the
regional bell telephone companies accounted for 47%, 17% and 24% of the
Company's consolidated sales. During the year ended March 28, 1997, three of the
regional bell telephone companies accounted for 14%, 16% and 60% of the
Company's consolidated sales. Accounts receivable at March 29, 1996 and March
28, 1997 consists primarily of amounts due from the regional bell telephone
companies.

Royalty and License Agreements

Pursuant to the terms of an asset purchase agreement entered into on
January 11, 1991, the Company agreed to pay royalties equal to 3.5% of sales of
microprocessor-based components to a company affiliated with certain officers
and employees of the Company. On November 9, 1994, the royalty provisions of the
purchase agreement were amended to eliminate royalties for the period April 2,
1994 to September 30, 1994. In return, the term of the royalty obligation was
extended from December 31, 1995 to June 30, 1996. Royalty expense under this
agreement amounted to $3,900 during the seven months ended October 30, 1994,
$93,578 during the five months ended March 31, 1995, $563,750 during the year
ended March 29, 1996 and $196,144 during the year ended March 28, 1997.

The Company has entered into a patent license agreement providing the
Company with the exclusive world-wide rights to certain algorithm software
covered by a patent application. The Company is obligated to pay license fees
aggregating $200,000 at a rate of $50,000 annually over a four year period
commencing on the date the patent is issued. Further, the agreement provides for
the payment of royalties on products incorporating the licensed software.
Minimum royalties payable upon issuance of the patent will range between
$125,000 and $500,000 annually during the life of the patent. The term of the
license agreement will correspond to the expiration date of the patent upon its
issuance. As of March 28, 1997, the patent has not been issued. Accordingly, the
Company has not recorded the contingent liability in the accompanying financial
statements. Further, as of March 28, 1997, the Company has not sold any products
incorporating the licensed software or incurred any royalty obligations under
the agreement.

In December 1994, the Company sold the rights to certain product software
for an aggregate purchase price of $500,000. The Company received an exclusive
irrevocable perpetual right to sublicense the software in connection with the
sale of products to other customers. In return, the Company agreed to pay
royalties equal to the greater of 4.44% of sales or $10 per unit sold. As of
March 28, 1997, the Company has not sold any products incorporating the licensed
software to other customers or incurred any royalty obligations under the
agreement The Company was obligated to repay, three years from the date of the
contract, a portion of the purchase price up to a maximum amount of $375,000
depending upon the amount of aggregate royalties paid pursuant to the agreement.
However, in May 1997, the Company entered into an agreement that terminated the
Company's royalty and repayment obligations.

Employment Contracts

On October 31, 1994, the Company entered into an employment contract with
one of its executives that provides for minimum annual compensation of $147,200
through December 31, 1996 and $160,000 from January 1, 1997 through December 31,
1997. The contract provides for compensation increases at the discretion of the
Board of Directors, additional compensation in the form of bonuses based on
performance, benefits equal to those provided to other executives of the
Company, reimbursement of business expenses, travel and temporary living
expenses and options to purchase shares of the Company's common stock. The
agreement provides for annual renewals subsequent to December 31, 1997 at the
option of the Company. Termination by the Company

without cause entitles the executive to receive his current salary and benefits
for the remaining term of the agreement or for a period of six months, whichever
is greater. The agreement may be terminated by the executive upon 120 days
notice effective on December 31, 1997 or thereafter.

On October 31, 1994, the Company entered into an agreement with the
Chairman of the Board of Directors that provides for minimum annual compensation
of $60,000 through December 31, 1997. The agreement provides for additional
compensation based on services performed not to exceed $2,500 per month,
benefits equal to those provided to other executives of the Company,
reimbursement of business expenses and options to purchase shares of the
Company's common stock. Termination by the Company without cause entitles the
Chairman to receive his current salary and benefits for the remaining term of
the agreement or for a period of six months, whichever is greater. The agreement
may be terminated by the Chairman upon 90 days written notice. Prior to
execution of the Chairman's Agreement, the Chairman provided consulting
services, as President of Atlantic Management Associates, Inc., to the Company
during the seven months ended October 30, 1994 similar to those provided under
the Chairman's Agreement. In addition, Atlantic Management Services, Inc.
assisted the Company and its stockholders in their efforts to attract a buyer
for the equity of the Company, and received a success fee in connection with the
Acquisition of $75,000 representing compensation for such services. During
fiscal 1995, the Company paid Atlantic Management Associates, Inc. $43,000 for
consulting services, excluding expenses of $7,386, rendered prior to the date of
the Chairman's Agreement. During fiscal 1995, the Company paid the Chairman and
Atlantic Management Associates, Inc. $30,231, excluding expenses of $9,419, for
services rendered under the terms of the Chairman's Agreement. During the year
ended March 29, 1996, the Company paid the Chairman and Atlantic Management
Associates, Inc. $66,000, excluding reimbursed expenses of $9,007, for services
rendered under the terms of the Chairman's Agreement. During the year ended
March 28, 1997, the Company paid the Chairman and Atlantic Management
Associates, Inc. $69,000, excluding reimbursed expenses of $11,003, for services
rendered under the terms of the Chairman's Agreement.

Purchase and Sales Commitments

At March 28, 1997, the Company has outstanding purchase order commitments
to purchase approximately $5.5 million of microprocessor-based products under
the terms of a manufacturing agreement entered into in October 1994. Upon a
termination of the agreement by the Company, the Company is obligated to
purchase inventories held by the manufacturer and pay vendor cancellation and
restocking charges, and a reasonable profit thereon. In addition, the Company is
obligated to pay a cancellation penalty of up to $500,000 if it cancels its
purchase obligation or a substantial portion thereof. The amount of the
cancellation penalty, if any, will vary depending upon quantities purchased by
the Company.

In June 1997, the Company entered into an agreement that supersedes and
terminates a December 1994 sales agreement. Under the new agreement, the Company
agreed to reduce the customers remaining purchase commitment of certain smart
processors and other components to approximately $3 million from approximately
$8 million under the former agreement and, among other things, upgrade the
customer's payphone management system. In return, the customer made a $250,000
cash payment to the Company, terminated the Company's obligation to pay
royalties on sales of certain products to other customers and terminated the
Company's obligation to repay $375,000 received from the sale of certain product
software under the December 1994 agreement. The customer also agreed to make
additional cash payments of $250,000 on July 2, 1997, $100,000 on September 1,
1997, $150,000 on December 31, 1997 and $250,000 on March 31, 1998 to the
Company subject to the Company's compliance with the terms and conditions of the
agreement, including conditions with respect to product performance, service and
repair. The customer has the right to cancel the agreement upon default by the
Company. Therefore, there is no assurance that the Company will receive the
additional payments or that its will ship the products set forth in the
agreement.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth the name and age of each director and executive
officer of the Company, his positions and offices with the Company, his period
of service with the Company and his business experience for at least the past
five years, and with respect to directors, their present principal occupation
and other directorships held in public companies.

Directors

Directors are elected to serve for a one-year term and until their
successors are elected and qualified. The Bylaws of the Company provide that the
number of directors shall be determined from time to time by the Board of
Directors or the stockholders of the Company, but that there shall be at least
one director. Directors of the Company who were serving as such at the end of
the 1997 fiscal year are as follows:

Name Age Director Since

David R. A. Steadman, Chairman 60 1994
D. Thomas Abbott 43 1996
Vincent C. Bisceglia 42 1994
Charles E. Davidson 44 1994
Mark L. Plaumann 41 1997
Olivier Roussel 50 1986

David R. A. Steadman. Mr. Steadman has been President of Atlantic
Management Associates, Inc., a management services firm, since 1988. From 1990
to 1994, Mr. Steadman served as President and Chief Executive Officer of Integra
- -- A Hotel and Restaurant Company, and from 1987 to 1988, as Chairman and Chief
Executive Officer of GCA Corporation, a manufacturer of automated semiconductor
capital equipment. From 1980 to 1987, Mr. Steadman was a Vice President of
Raytheon Company, a defense electronics manufacturer, and served in various
management positions, most recently as President of its venture capital
division. Mr. Steadman is Chairman of the Board of Directors of Wahlco
Environmental Systems, Inc., a manufacturer of environmental conditioning
systems. He is also a director of Aavid Thermal Technologies, Inc., which
manufactures thermal management products and produces computational fluid
dynamics software; Kurzweil Applied Intelligence, Inc., a voice recognition
software company; and Vitronics Corporation, a manufacturer of reflow soldering
ovens. Mr. Steadman was elected Chairman of the Board of Directors pursuant to
an employment agreement described under the heading "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements" in Item 11 --
"Executive Compensation."

Thomas Abbott. Mr. Abbott has been Chairman of MeesPierson Holdings Inc.,
the United States operation of a Dutch merchant bank, since 1995. From 1993 to
1995, Mr. Abbott was Chairman and Chief Executive Officer of Savin Corporation,
an office products company, and from 1989 to 1993, he was President of Harvest
Group, Inc., a private investment firm. From 1976 to 1988, Mr. Abbott held
various executive positions with Bankers Trust Company. Mr. Abbott is a director
of International Mezzanine Investment N.V., Precise Holdings Inc., and Coffee
Tree Limited.

Vincent C. Bisceglia. Mr. Bisceglia has served as a director and as
President and Chief Executive Officer of the Company since February 1994. Prior
to that he served the Company as a consultant and in various management
positions. From 1982 to 1986, Mr. Bisceglia was Executive Vice President of
Transaction Management, Inc., a manufacturer of point-of-sale systems, and from
1978 to 1982, he held senior marketing positions with National Semiconductor-DTS
and Siemens-Nixdorf Computer Corporation.

Charles E. Davidson. Mr. Davidson has served as Chairman of the Board of
Wexford Capital Corporation, which served as the investment manager to several
private investment funds, including Wexford Partners Fund, L.P., the majority
stockholder of the Company. Since January 1, 1995, Mr. Davidson has been
Chairman of Wexford Management LLC, a private investment management company,
which now serves as the investment manager to Wexford Partners Fund, L.P. From
1984 to 1994, Mr. Davidson was a partner of Steinhardt Partners, L.P., a private
investment firm, and from 1977 to 1984, Mr. Davidson was employed by Goldman,
Sachs & Co., serving as Vice President of corporate bond trading. Mr. Davidson
is Chairman of the Board of DLB Oil & Gas, Resurgence Properties Inc. and
Presidio Capital Corp. and is a director of Wahlco Environmental Systems, Inc.,
a manufacturer of environmental conditioning systems.

Mark L. Plaumann. Mr. Plaumann has been a Senior Vice President of Wexford
Management LLC ("Wexford Management") since January 1996 and since March 1995 a
director and/or Vice President of the general partner of various public
partnerships managed by Wexford Management. Mr. Plaumann joined the predecessor
entities of Wexford Management in February 1995. Prior to joining Wexford
Management, Mr. Plaumann was a Managing Director of Alvarez & Marsal, Inc., a
crisis management consulting firm, from 1990 to 1995, and from 1985 to 1990 he
was with American Healthcare Management, Inc., an owner and operator of
hospitals, where he served in a variety of capacities, most recently as its
President. Prior to that he was with Ernst & Young LLP in its auditing and
consulting divisions for eleven years. Mr. Plaumann is a director of Wahlco
Environmental Systems, Inc., a manufacturer of environmental conditioning
systems.

Olivier Roussel. Mr. Roussel has been Chairman and President of Acor S.A.,
a private investment company, since 1975. From 1974 to 1977, he was a Vice
President of Nobel-Bozel and from 1977 to 1982 he was an Assistant General
Manager of Heli-Union. Mr. Roussel was a Director of Roussel-Uclaf from 1975 to
1982 and Chairman of Eminence S.A. from 1987 to 1990. He is Chief Operating
Officer and a Director of Vacsyn S.A., a biotechnology company, and a director
of Bollore Technologies, a public company listed on the Paris Stock Exchange.

Executive Officers

Executive Officers are elected by the Board of Directors and serve until
they resign or are removed by the Board. The Company's executive officers who
served as such during fiscal 1997 are as follows:

Name Age Positions and Offices

David R. A. Steadman 60 Chairman of the Board of Directors
Vincent C. Bisceglia 42 President and Chief Executive Officer,
Director
M. Winton Schriner 50 Executive Vice President, Operations
Darold R. Bartusek 50 Senior Vice President, Sales and Marketing
William H. Thompson 44 Vice President, Finance, Chief Financial
Officer and Secretary
Allen W. Vogl 49 Vice President, Engineering

The business experience of Messrs. Steadman and Bisceglia is set forth
above under the listing of directors of the Company.

M. Winton Schriner. Mr. Schriner has served as Executive Vice President of
Operations since July 1996. From August 1994 to April 1996, he served as
Director of Contract Manufacturing. From 1991 to 1993, Mr. Schriner served the
Company in various capacities including Vice President of Operations, Director
of Marketing and Director of Engineering. Prior to joining the Company in 1991,
he was at BellSouth Telecommunications Company for a period of 12 years in
various management capacities with duties ranging from public communications to
strategic planning and executive support. He holds a B.S. degree in Industrial
Education and an M.S. degree in Vocational Rehabilitation from the University of
Wisconsin.

Darold R. Bartusek. Mr. Bartusek has served as Senior Vice President of
Sales and Marketing since November 1996 and from February 1994 to April 1996 he
was Vice President of Sales and Marketing. From 1991 to February 1994, Mr.
Bartusek served the Company in various capacities including Vice President of
Worldwide Sales and Vice President and General Manager of the Company's Smart
Product Business. From August 1989 to January 1991, Mr. Bartusek served as Vice
President of Marketing of the Public Communication Systems Division of Executone
Information Systems, Inc., a supplier of smart payphone systems. From 1973 to
1988, Mr. Bartusek served GTE Communication Systems Corporation in various
capacities including Director of Public Communications and Director of
Advertising and Sales Promotion. Mr. Bartusek holds a B.B.A. degree from Mankato
State University.

William H. Thompson. Mr. Thompson has served as Vice President of Finance,
Chief Financial Officer and Secretary of the Company since February 1994. From
1990 to 1994, he was Vice President of Finance. Prior to joining the Company,
Mr. Thompson was Controller and Vice President of Finance of Cardiac Control
Systems, Inc., a publicly-held medical device manufacturer, from May 1983 to May
1988 and Executive Vice President of Operations and Finance from May 1988 to
June 1990. From June 1974 to May 1983, he held various positions, most recently
as Audit Manager, with Price Waterhouse LLP, certified public accountants. Mr.
Thompson is a certified public accountant in the State of Florida and holds a
B.S. degree in accountancy from Florida State University.

Allen W. Vogl. Mr. Vogl has served as Vice President of Engineering since
February 1994 and before that, he served the Company in various capacities since
1981, including Vice President of Engineering, Executive Vice President and
Chief Scientist. From 1972 to 1981, he was employed in various engineering and
research and development capacities by Harris Corporation and Storage Technology
Corporation.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities ("Insiders") to file reports of ownership and
certain changes in ownership with the Securities and Exchange Commission and to
furnish the Company with copies of those reports. Based solely on a review of
Forms 3 and 4 and amendments thereto during the most recent fiscal year ended
March 28, 1997 and Forms 5 and amendments thereto furnished to the Company with
respect to the fiscal year ended March 28, 1997 and any written representations
by Insiders that no Form 5 is required, Messrs. Abbott, Bartusek, Bisceglia,
Davidson, Roussel, Schriner, Steadman, Thompson and Vogl as well as Wexford
Partners Fund, L.P. each filed late his Form 3, "Initial Statement of Beneficial
Ownership of Securities" (required as a result of the Company's registration
statement relating to its initial public offering becoming effective on May 10,
1996.)

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

Item 11. EXECUTIVE COMPENSATION

This item contains information about compensation, stock options grants and
employment arrangements and other information concerning certain of the
executive officers of the Company.

Summary Compensation Table

The following table sets forth the compensation the Company paid for
services rendered during the fiscal years ended March 28, 1997, March 29, 1996
and March 31, 1995 by the Chief Executive Officer and the four other most highly
compensated executive officers of the Company whose compensation exceeded
$100,000 in fiscal 1997 and who were serving at the end of the 1997 fiscal year.

Long Term Compensation
Annual Compensation Awards
-------------------------------------------- ------------------------------
Other Annual Securities
Compen- Underlying All Other
Fiscal Salary* Bonus sation (1) Options Compensation
Name and Principal Position Year ($) ($) ($) (#) ($)

Vincent C. Bisceglia (1) 1997 150,055 71,438 30,729 -- 7,760 (2)
President & Chief Executive 1996 147,200 -- 26,915 -- 5,932
Officer 1995 121,970 52,500 37,405 150,000 4,088

M. Winton Schriner 1997 114,154 -- -- 25,000 6,794 (3)
Executive Vice President, 1996 80,000 -- -- 15,000 5,638
Operations 1995 32,000 -- -- 15,000 1,766

Darold R. Bartusek 1997 104,000 -- -- 25,000 7,390 (4)
Senior Vice President, Sales & 1996 104,000 -- -- 15,000 6,282
Marketing 1995 99,600 17,500 -- 15,000 5,754

William H. Thompson (1) 1997 114,567 -- -- 15,000 7,429 (5)
Vice President, Finance, Chief 1996 107,536 -- -- 10,000 6,063
Financial Officer, Secretary 1995 102,986 35,000 40,147 30,000 6,029

Allen W. Vogl (1) 1997 110,455 -- 28,492 -- 7,037 (6)
Vice President, Engineering 1996 108,400 -- 31,824 15,000 6,456
1995 103,814 35,000 38,269 15,000 6,110

- -------------
* Includes commissions.

(1) Other Compensation with respect to Mr. Bisceglia and Mr. Vogl represents
the estimated incremental costs to the Company of reimbursements and
payments of their travel expenses to and from the Company and their
respective residences and temporary living expenses, and with respect to
Mr. Thompson, represents reimbursement of relocation expenses.

(2) Of this amount, $198 represents the taxable portion of group term life
insurance provided by the Company; $3,279 represents premiums paid by the
Company for split-dollar universal life insurance; $2,284 represents
premiums paid by the Company for long-term disability insurance; and $1,999
represents contributions made by the Company to the 401(k) Profit Sharing
Retirement Plan for the account of the executive.

(3) Of this amount, $403 represents the taxable portion of group term life
insurance provided by the Company; $3,713 represents premiums paid by the
Company for split-dollar universal life insurance; $2,234 represents
premiums paid by the Company for long-term disability insurance; and $444
represents contributions made by the Company to the 401(k) Profit Sharing
Retirement Plan for the account of the executive.

(4) Of this amount, $311 represents the taxable portion of group term life
insurance provided by the Company; $3,494 represents premiums paid by the
Company for split-dollar universal life insurance; $2,503 represents
premiums paid by the Company for long-term disability insurance; and $1,082
represents contributions made by the Company to the 401(k) Profit Sharing
Retirement Plan for the account of the executive.

(5) Of this amount, $139 represents the taxable portion of group term life
insurance provided by the Company; $3,725 represents premiums paid by the
Company for split-dollar universal life insurance; $2,418 represents
premiums paid by the Company for long-term disability insurance; and $1,147
represents contributions made by the Company to the 401(k) Profit Sharing
Retirement Plan for the account of the executive.

(6) Of this amount, $214 represents the taxable portion of group term life
insurance provided by the Company; $3,581 represents premiums paid by the
Company for split-dollar universal life insurance; $2,773 represents
premiums paid by the Company for long-term disability insurance; and $469
represents contributions made by the Company to the 401(k) Profit Sharing
Retirement Plan for the account of the executive.

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

Option Grants in the Last Fiscal Year

The following table sets forth certain information with respect to
options to purchase shares of common stock of the Company ("Common Stock") that
were granted to each of the Company's executive officers named in the Summary
Compensation Table, above, during the fiscal year ended March 28, 1997.

Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for
Individual Grants Option Term (2)
------------------------------------------------------- ------------------------
Number of Percent of Total
Securities Options Granted to Exercise
Underlying Employees in Price Expiration 5% 10%
Name Options Fiscal Year 1997 ($) Date ($) ($)

Vincent C. Bisceglia None -- -- -- -- --
M. Winton Schriner (1) 25,000 13% 9.50 07/23/06 149,362 378,513
Darold R. Bartusek (1) 25,000 13% 9.50 07/23/06 149,362 378,513
William H. Thompson (1) 15,000 8% 9.50 07/23/06 89,617 227,108
Allen W. Vogl None -- -- -- -- --

- -------------
(1) These options were granted at an exercise price equal to the per share
market value of the Common Stock on the grant date and vest in four equal
annual installments on the grant date and the first three anniversaries of
the grant date. In the event of a change in control of the Company, 50% of
the shares not then exercisable will become fully exercisable.

(2) The potential realizable value is calculated based on the term of the
option (ten years) at its date of grant. It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option; however, the
optionee will not actually realize any benefit from the option unless the
market value of the Company's stock price in fact increases over the option
price.

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

Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year-End Option
Values

The following table sets forth for each of the Company's executive officers
named in the Summary Compensation Table, above, certain information regarding
exercises of stock options during the fiscal year ended March 28, 1997 and stock
options held at that date. The "Value of Unexercised In-the-Money Options at
Fiscal Year End" is based on the difference between the market price of the
Common Stock subject to the option on March 28, 1997 ($5.25 per share) and the
option exercise (purchase) price per share. During fiscal 1997, there were no
option exercises by any of the executive officers named in the Summary
Compensation Table, above.

Number of Securities Underlying Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year End Options at Fiscal Year End
(#) ($)
------------------------------------------------ ----------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable

Vincent C. Bisceglia 112,500 37,500 478,125 159,375
M. Winton Schriner 25,000 30,000 49,687 17,812
Darold R. Bartusek 25,000 30,000 49,687 17,812
William H. Thompson 31,250 23,750 96,875 33,125
Allen W. Vogl 18,750 11,250 49,687 17,812

Employment Contracts and Termination of Employment and Change-in-Control
Arrangements

Mr. Bisceglia. On October 31, 1994, the Company and Mr. Bisceglia entered
into an employment agreement that expires on December 31, 1997, subject to
certain early termination provisions and automatic renewal provisions. Pursuant
to the agreement, Mr. Bisceglia serves as the President and Chief Executive
Officer and as a director of the Company and is paid an annual salary of at
least $147,200. His base salary is subject to annual review for merit and other
increases at the discretion of the Board of Directors as of January 1, 1996 and
each year thereafter, and as a result of such reviews, Mr. Bisceglia's annual
salary was increased to $160,000 per year on January 1, 1997.

Pursuant to the terms of the agreement, Mr. Bisceglia is entitled to the
same benefits made available to the other senior executives of the Company on
the same terms and conditions as such executives. The agreement provides that
the Company will reimburse and/or pay on Mr. Bisceglia's behalf up to $4,000 per
month of temporary living expenses, including travel to and from the Company and
Mr. Bisceglia's residence, until the Company requires Mr. Bisceglia to relocate,
at the Company's expense. Mr. Bisceglia is also entitled to receive an incentive
bonus for each fiscal year during the term of the agreement equal to 2% of the
operating profits of the Company, defined as net income before taxes,
amortization and depreciation, interest, gains and losses arising from
revaluation of assets, and charges or allocations by a parent or affiliated
company except to the extent that such charges are for expenses that directly
relate to the operations of the Company.

Mr. Bisceglia was also granted pursuant to the agreement an option to
purchase 150,000 shares of Common Stock at an exercise price of $1.00 per share
under the Company's 1994 Omnibus Stock Plan. The shares subject to the option
become exercisable in four equal annual installments commencing on the date of
grant. In the event the Company's majority shareholder, Wexford Partners Fund,
L.P., ceases to own at least 51% of the Company's outstanding voting stock, the
option becomes exercisable in full. The option expires ten years from the date
of grant, unless earlier terminated upon termination of Mr. Bisceglia's
employment for cause or upon Mr. Bisceglia's resignation. The agreement contains
provisions that require the Company, at the option of Mr. Bisceglia, to purchase
unexercised option shares at market value if Mr. Bisceglia's employment is

terminated by the Company for reasons other than cause. Otherwise, the option
remains in effect until its expiration date.

If the agreement is terminated by the Company without cause, Mr. Bisceglia
is entitled to receive the amount of compensation and benefits he would
otherwise have received for the remaining term of the agreement or for six
months, whichever period is longer. The agreement is automatically renewed for
additional one-year periods unless the Company provides Mr. Bisceglia 180 days
notice of non-renewal or Mr. Bisceglia provides the Company with 120 days notice
of termination on December 31, 1997, or on any date thereafter.

Pursuant to the agreement, Mr. Bisceglia is indemnified by the Company with
respect to claims made against him as a director, officer, and/or employee of
the Company or any subsidiary of the Company to the fullest extent permitted by
the Company's Certificate of Incorporation, its by-laws and the General
Corporation Law of the State of Delaware.

Mr. Steadman. Mr. Steadman is employed by the Company pursuant to an
agreement dated October 31, 1994 at the rate of $5,000 per month plus $500 per
day for each day spent on Company business outside of the New England area (in
which Mr. Steadman's office is located), but not to exceed $7,500 in any one
month. Pursuant to the agreement, Mr. Steadman is elected Chairman of the Board
of Directors and in that capacity renders advice to the Board and management on
business, operational and financial matters. Mr. Steadman is entitled to
participate in employee benefit plans made available to other senior executives
of the Company. The agreement also provided for the grant to Mr. Steadman of an
option to purchase 50,000 shares of Common Stock at an exercise price of $1.00
per share. The option has substantially the same terms as those of Mr.
Bisceglia's option, described above.

Other Officers. Effective July 1, 1996, the Company adopted a policy
regarding all officers of the Company, which is described under the heading
"Report of the Compensation Committee on Executive Compensation -- Other
Executive Officers," below.

Notwithstanding anything to the contrary set forth in any of the Company's
filings under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate future filings, including this
Annual Report on Form 10-K in whole or in part, the following report of the
Compensation Committee, and the Performance Graph shall not be deemed to be
incorporated by reference into any such filings.

Report of the Compensation Committee on Executive Compensation

This report has been prepared by the Compensation Committee of the Board of
Directors of the Company and addresses the Company's compensation policies with
respect to the Chief Executive Officer and executive officers of the Company in
general for the fiscal year ended March 28, 1997. Except for Mr. Steadman, each
member of the Committee is a non-employee director. Mr. Steadman's compensation
is based on his employment agreement, described above, which was approved by the
Board of Directors in November 1994.

Compensation Policy

The overall intent of the Committee in respect of executive officers is to
establish levels of compensation that provide appropriate incentives in order to
command high levels of individual performance and thereby increase the value of
the Company to its stockholders, and that are sufficiently competitive to retain
and attract the skills required for the success and profitability of the
Company. The principal components of executive compensation are salary, bonus
and stock options.

Chief Executive Officer's Compensation

The Chief Executive Officer's compensation for fiscal 1997 is based on a
written employment agreement that was negotiated and entered into between him
and the Company in October 1994 and is described above under the heading
"Employment Contracts and Termination of Employment and Change-in-Control
Arrangements." The salary in the agreement was determined to be appropriate by
the members of the Committee at the time the agreement was entered into based on
the financial and legal difficulties that the Company had experienced; the
expertise and responsibility that the position requires; the Chief Executive
Officer's experience with the Company in other capacities; and the subjective
judgement of members of a reasonable compensation level. The increase in salary
granted by the Committee in January 1997 was based on Mr. Bisceglia's
performance during fiscal 1997 and that of the Company as a whole and the
subjective judgement of Committee members of a reasonable raise.

Other Executive Officers

Officers' Policy. Effective July 1, 1996, the Company adopted a policy
regarding all officers of the Company to acknowledge that they have extra duties
and responsibilities and that they are held to a higher standard of performance
than employees generally. The policy provides, among other things, for
Company-paid life insurance for each officer in the amount of two and one-half
times base salary; long term disability insurance coverage; the establishment of
an annual pool of funds from the Company's operating profits for the payment of
bonuses; severance benefits in the event the officer's employment is terminated
without cause consisting of a minimum of continued payment of two months' salary
and a maximum of four months' salary, plus the continuation of Company benefits
during the period of continued salary payment; and the acceleration of one-half
of the officer's unvested option shares in the event of a sale of substantially
all of the assets of the Company or a person or entity acquires more than 51% of
the outstanding voting stock of the Company. The policy also provides the same
level of indemnity as for Mr. Bisceglia, described above.

Salary. During fiscal 1997, the salary of each executive officer other than
the salary of the Chairman and the Chief Executive Officer (described above
under the heading "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements") was based on the level of his prior salary and
on the subjective judgement of members of the Committee as to what constitutes a
compensation level that is fair and calculated to retain the executive in the
Company's employ. In the case of one executive officer, his salary increase was
also based on a promotion to a new position with increased responsibilities.

Bonuses. In July 1996 pursuant to the Officers' Policy described above, the
Compensation Committee adopted a bonus plan for the 1997 fiscal year covering
officers which also covers key employees of the Company other than those covered
under a sales bonus plan of the Company. Bonuses under the plan are to be paid
out of a pool of funds equal to 15% of the net income of the Company (i) before
taxes and before the payment of any bonuses paid outside of the plan, (such as
to the Chief Executive Officer pursuant to his employment agreement) and (ii)
after deducting an amount equal to 15% of stockholders' equity. The allocation
of the fund to individual officers and key employees is based on the
recommendations to the Compensation Committee of the Chairman and Chief
Executive Officer. The decision of the Compensation Committee is final and is
based the recommendations it receives and the subjective judgement of members of
the Committee.

Mr. Bartusek's incentive bonus compensation as Senior Vice President of
Sales and Marketing is based on the difference between the Company's quarterly
revenues in fiscal 1996 and the corresponding quarterly revenues in fiscal 1997.
If 1997 quarterly revenues meet a minimum target established for each quarter,
he is paid a percentage of the difference. The plan was based on the budgeted
revenues for fiscal 1997 and the subjective judgement of the members of the
Committee as to the appropriate level of incentive payment if the budgeted
minimum quarterly revenues are achieved. Payment of the incentive compensation
is made only after the Company's year-end audit has been completed.

Stock Options. Stock options are granted by the Stock Plans Committee of
the Board of Directors. The Stock Plans Committee believes that stock ownership
by executive officers is important in aligning management's and stockholders'
interests in the enhancement of stockholder value over the long term. For
options granted during fiscal 1997, the exercise price was equal to the market
price of the Common Stock on the date of grant. The stock option grants made to
the executive officers in fiscal 1997 were made based on the subjective
judgement of the Committee members of the appropriate recognition for their
services to the Company during the 1997 fiscal year and prior years.

Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code (enacted in 1993) generally disallows a tax deduction to
public companies for compensation over $1 million paid to its chief executive
officer and its four other most highly compensated executives. The Company's
compensation payable to any one executive officer (including potential income
from outstanding stock options) is currently and for the foreseeable future
unlikely to reach that threshold. Qualifying, performance-based compensation
will not be subject to the deduction limit if certain requirements are met. The
Committee currently intends to structure stock option grants to executive
officers in a manner that complies with the performance-based requirements of
the statute.

The Compensation Committee: Charles E. Davidson
Mark L. Plaumann
David R. A. Steadman

Stock Plans Committee: Charles E. Davidson
Mark L. Plaumann

Directors' Compensation

Directors who are employees of the Company receive no compensation, as
such, for services as members of the Board. Directors who are not employees of
the Company receive no cash compensation for their services as directors. Mr.
Steadman, who is an employee of the Company receives compensation as such. See
"Compensation Committee Interlocks and Insider Participation," below. All
directors are reimbursed for their out-of-pocket business expenses incurred in
attending Board meetings and for performing any other services for the Company.

Non-employee directors of the Company receive "formula" stock option grants
under the Company's 1995 Non-Employee Director Stock Option Plan approved by
stockholders on May 10, 1995. Each non-employee director serving on the date
that the Company's initial registration statement became effective (May 10,
1996) was automatically granted an option to purchase 10,000 shares of Common
Stock (the "Initial Grants") that became fully exercisable six months after the
grant date. After the Initial Grants, each non-employee director is
automatically granted an additional option to purchase 3,000 shares on each
anniversary of September 1, 1996 so long as he is then serving as a non-employee
director. Each non-employee director first elected to the Board after May 10,
1996 automatically receives an option to purchase 3,000 shares of Common Stock
on the date of his or her election and, so long as he or she is then serving as
a non-employee director, an additional option to purchase 3,000 shares of Common
Stock on each anniversary of that date. All options under the Plan are granted
at an exercise price per share equal to the market value of a share of Common
Stock on the date of grant. Except for the Initial Grants, all options vest in
full on the first anniversary of the grant date.

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

Compensation Committee Interlocks and Insider Participation

Decisions concerning executive compensation (other than that of the
Chairman) are made by the Compensation Committee of the Board of Directors,
which currently consists of Messrs. Davidson, Plaumann and Steadman. Mr.
Steadman is Chairman of the Board of Directors and an employee of the Company;
Messrs. Davidson and Plaumann are neither officers nor employees of the Company
or any of its subsidiaries. During fiscal 1997, no executive officer of the
Company served as a director or member of a compensation committee of another
entity with which any director of the Company had any relationship as a director
or officer, except that Mr. Steadman is Chairman of the Board of Directors and a
member of the Compensation Committee of Wahlco Environmental Systems, Inc. of
which Mr. Plaumann is a director and former President.

Mr. Steadman was elected Chairman of the Board of Directors and is employed
by the Company pursuant to an employment agreement that is described under the
heading "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements," above. In fiscal 1997, Mr. Steadman received
compensation of $69,000, plus the reimbursement of $11,003 of out-of-pocket
expenses incurred in rendering services to the Company and was also granted a
stock option to purchase 15,000 shares of Common Stock at $5.00 per share.

Pursuant to an acquisition in January 1991 of the assets of the Public
Communication Systems Division of Executone Information Systems, Inc. ("PCS"),
the Company was obligated to pay OAB, Inc. royalties of 3.5% of the Company's
sales of microprocessor-based components through June 30, 1996. Mr. Bartusek and
certain other employees of the Company, who were employees of PCS, are
stockholders of OAB. Royalty payments under this agreement during fiscal 1997
through the June 30, 1996 expiration date were approximately $420,100 (including
payments of accrued royalties at March 29, 1996 and debt payments on notes
issued in respect of accrued royalties), of which Mr. Bartusek received
approximately $80,000.

Wexford Partners Fund, L.P. and Acor S.A. are parties to an Investment
Agreement pursuant to which they acquired $2,361,082 and $438,918, respectively,
of 10% subordinated notes of the Company in 1994. In May, 1996, the Company
repaid the principal balances of these notes in full -- $2,361,082 to Wexford
and $438,918, to Acor. Interest paid on the notes to Wexford and Acor during
fiscal 1997 was $128,081 and $23,810, respectively.

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

Performance Graph

The following graph assumes an investment of $100 on May 10, 1996 (the date
the Common Stock was first registered under Section 12 of the Exchange Act) and
compares yearly changes thereafter (through March 28, 1997) in the market price
of the Common Stock with (i) the Nasdaq Market Index for U.S. Companies (a broad
market index) and (ii) the Nasdaq Telecommunications Index, a published industry
index.

The performance of the indices is shown on a total return (dividend
reinvestment) basis; however, the Company paid no dividends during the period
shown. The graph lines merely connect the beginning and end of the measuring
periods and do not reflect fluctuations between those dates.

[The following table was represented by a line graph in the printed material]

May 10, March 28,
1996 1997

Technology Service Group, Inc. $ 100.00 $ 54.70
Nasdaq Market Index for U.S. Companies 100.00 98.20
Nasdaq Telecommunications Index 100.00 84.93

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

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT

The following tables sets forth certain information regarding beneficial
ownership of the outstanding common stock of the Company ("Common Stock") at
June 1, 1997 by (i) each person known by the Company to own beneficially more
than 5% of the Common Stock; (ii) each of the directors of the Company; (iii)
the executive officers named in the Summary Compensation Table, in Item 11 --
"Executive Compensation" and (iv) all directors and executive officers as a
group. The numbers and percentages assume for each person or group listed, the
exercise of all warrants and stock options held by such person or group that are
exercisable within 60 days of June 1, 1997, in accordance with Rule 13d-3(d)(1)
of the Securities Exchange Act of 1934, but not the exercise of such warrants
and stock options owned by any other person. Except as otherwise indicated in
the footnotes, the Company believes that the beneficial owners of the Common
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to the shares of Common Stock shown as
beneficially owned by them.

Security Ownership of Certain Beneficial Holders

Name and Address Number of Shares
of Beneficial Owner of Common Stock Percentage of Class

Wexford Partners Fund, L.P. 2,444,286 52.0%
411 West Putnam Avenue
Greenwich, CT 06830

Acor S.A. 454,386 9.7%
17 Rue du Colisee
Paris, France 75008

Firlane Business Corp. 235,028 5.0%
Box 202
1211 Geneva 12, Switzerland

A.T.T. IV, NV 549,450 (1) 11.6%
c/o Applied Communications
Technologies, Inc.
20 William Street
Wellesley, MA 02181

- -----------------
(1) Of these shares, 183,150 shares are subject to purchase at $11.00 per
share, (i) 142,857 shares from Wexford Partners Fund, L.P.; (ii) 26,557
shares from Acor S.A.; and (iii) 13,736 shares from Firlane Business Corp.
If the options were exercised in full, Wexford would beneficially own
2,301,429 shares (49%); Acor would beneficially own 427,829 shares (9.1%);
and Firlane would beneficially own 221,292 shares (4.7%) of the Common
Stock.

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

Security Ownership of Management
Shares
Name of Beneficial Owner Beneficially Owned Percentage of Class

D. Thomas Abbott 3,000 (1) *

Vincent C. Bisceglia 114,154 (2) 2.4%

Charles E. Davidson 2,454,286 (3) 52.0%

Mark L. Plaumann 2,444,286 (4) 52.0%

Olivier Roussel 464,386 (5) 9.9%

David R. A. Steadman 45,407 (6) *

Darold R. Bartusek 31,956 (7) *

M. Winton Schriner 31,250 (7) *

William H. Thompson 35,331 (8) *

Allen W. Vogl 19,000 (9) *

All Directors and Executive
Officers as a Group (10 Persons) 3,198,720 /10 64.0%

- --------------
* Represents holdings of less than one percent.

(1) These shares are purchasable within 60 days of June 1, 1997 under a stock
option at $10.71 per share.

(2) Of these shares, 112,500 shares are purchasable within 60 days of June 1,
1997 under a stock option at $1.00 per share.

(3) These shares include 10,000 shares that are purchasable within 60 days of
June 1, 1997 under a stock option at $8.50 per share and 2,444,286 shares
that are owned by Wexford Partners Fund, L.P., of which Mr. Davidson is an
affiliate. Mr. Davidson disclaims beneficial ownership of the shares owned
by Wexford Partners Fund, L.P.

(4) These shares are owned by Wexford Partners Fund, L.P., of which Mr.
Plaumann is an affiliate. Mr. Plaumann disclaims beneficial ownership of
these shares.

(5) These shares include 10,000 shares that are purchasable within 60 days of
June 1, 1997 under a stock option at $8.50 per share and 454,386 shares
that are owned by Acor S.A., of which Mr. Roussel is Chairman and
President. Mr. Roussel disclaims beneficial ownership of the shares owned
by Acor S.A..

(6) These shares include 45,000 shares that are purchasable within 60 days of
June 1, 1997 under stock options at prices ranging from $1.00 to $5.00 per
share.

(7) These shares include 31,250 shares that are purchasable within 60 days of
June 1, 1997 under stock options at prices ranging from $1.00 to $9.50 per
share.

(8) These shares include 35,000 shares that are purchasable within 60 days of
June 1, 1997 under stock options at prices ranging from $1.00 to $9.50 per
share.

(9) These shares include 18,750 shares that are purchasable within 60 days of
June 1, 1997 under stock options at prices ranging from $1.00 to $5.00 per
share, and 50 shares that are purchasable within 60 days of June 1, 1997
under redeemable warrants at a price of $11.00 per share.

(10) These shares include 2,444,286 shares that are owned by Wexford Partners
Fund, L.P., (as to which Messrs. Davidson and Plaumann disclaim beneficial
ownership); 454,386 shares that are owned by Acor S.A. (as to which Mr.
Roussel disclaims beneficial ownership); and 296,750 shares that are
purchasable within 60 days of June 1, 1997 under stock options at prices
ranging from $1.00 to $10.71 per share.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reference is made to "Compensation of Directors" and "Compensation
Committee Interlocks and Insider Participation" in Item 11-- "Executive
Compensation," above.

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

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) List of Documents filed as part of this Report.

(1) Financial Statements -- See the index to the financial statements in
Item 8 at page 39.

(2) Financial Statement Schedules -- See the index to the financial
statement schedules in Item 8 at page 39.

(3) Exhibits --

Exhibit No. Description of Exhibit
- ----------- ----------------------
3 (i) Certificate of Incorporation (incorporated by reference to
Exhibit 3 (i) to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).

3 (ii) By-laws (incorporated by reference to Exhibit 3 (ii) to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on March 1, 1996).

4.1(a) Warrant Agreement (incorporated by reference to Exhibit 4.1
to Amendment No. 2 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 29,
1996).

4.1(b) Form of Redeemable Warrant (incorporated by reference to
Exhibit 4.1(a) to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
April 29, 1996).

4.2 Representative's Warrant Agreement including form of
Representative's Warrant (incorporated by reference to
Exhibit 4.2 to Amendment No. 2 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 29, 1996).

4.3 Form of Common Stock Certificate (incorporated by reference
to Exhibit 4.3 to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
April 29, 1996).

10.1 Loan and Security Agreement between Barclays Business Credit,
Inc. and International Teleservice Corporation dated February
23, 1990 (incorporated by reference to Exhibit 10.1 to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed
on March 1, 1996).

10.2 Continuing Guaranty Agreement between Barclays Business
Credit, Inc. and International Teleservice Corporation dated
February 23, 1990 (incorporated by reference to Exhibit 10.2
to Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1, 1996).

10.3 First Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and International Teleservice
Corporation dated January 11, 1991 (incorporated by reference
to Exhibit 10.3 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).

10.4 Second Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service Group,
Inc. dated June 9, 1994 (incorporated by reference to Exhibit
10.4 to Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1, 1996).

10.5 Third Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service Group,
Inc. dated July 8, 1994 (incorporated by reference to Exhibit
10.5 to Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1, 1996).

10.6 Fourth Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service Group,
Inc. dated October 31, 1994 (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).

10.7** Manufacturing Services Agreement TSG-1O94JLR dated October
21, 1994 by and between Technology Service Group, Inc. and
Avex Electronics Inc. (incorporated by reference to Exhibit
10.8 to Amendment No. 3 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on April 29,
1996).

10.8 Fifth Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service Group,
Inc. dated as of April 22, 1996 (incorporated by reference to
Exhibit 10.9 to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
April 29, 1996).

10.9** Amendment 002 to the Manufacturing Services Agreement
TSG-1O49JLR dated October 21, 1994 by and between Technology
Service Group, Inc. and Avex Electronics Inc. (incorporated
by reference to Exhibit 10.10 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on April 29, 1996).

10.10 Manufacturing Rights Agreement dated September 16, 1991
between Newco, Inc. (Commtek Industries, Inc.), Dynacom
Corporation and International Service Technologies, Inc.
(incorporated by reference to Exhibit 10.11 to Amendment No.
1 to the Registrant's Registration Statement, No. 33-80695,
on Form S-1 filed on March 1, 1996).

10.11 Lease Agreement between Telematics Products, Inc. and William
M. Johnson dated July 14, 1988 (incorporated by reference to
Exhibit 10.13 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).

10.12 Assignment of Lease between Executone Information Systems,
Inc. and Technology Service Enterprises, Inc. dated January
11, 1991 (incorporated by reference to Exhibit 10.14 to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on March 1, 1996).

10.13 First Amendment to Lease Agreement between Mansell 400
Associates, L.P. and Technology Service Group, Inc. dated
February 1993 (incorporated by reference to Exhibit 10.15 to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on March 1, 1996).

10.14 Lease between Steroben Associates and Comdial TeleServices
Corporation dated August 1, 1986 (incorporated by reference
to Exhibit 10.16 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).

10.15** Dealer Agreement between Control Module, Inc. and Technology
Service Group, Inc. dated November 18, 1994 (incorporated by
reference to Exhibit 10.17 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on April 29, 1996).

10.16* Employment Agreement between Technology Service Group, Inc.
and Vincent C. Bisceglia dated October 31, 1994 (incorporated
by reference to Exhibit 10.18 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on March 1, 1996).

10.17* Chairman's Agreement between Technology Service Group, Inc.
and David R.A. Steadman dated October 31, 1994 (incorporated
by reference to Exhibit 10.19 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on March 1, 1996).

10.18** Patent License Agreement (incorporated by reference to
Exhibit 10.21 to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
April 29, 1996).

10.19 Warrant Agreement between Technology Service Group, Inc. and
Avex Electronics Inc. dated May 23, 1995 (incorporated by
reference to Exhibit 10.22 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on March 1, 1996).

10.20* Employee Incentive Stock Option Agreement between Technology
Service Group, Inc. and Vincent C. Bisceglia dated November
1, 1994 (incorporated by reference to Exhibit 10.23 to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on March 1, 1996).

10.21* Incentive Stock Option Agreement between Technology Service
Group, Inc. and David R.A. Steadman dated November 1, 1994
(incorporated by reference to Exhibit 10.24 to Amendment No.
1 to the Registrant's Registration Statement, No. 33-80695,
on Form S-1 filed on March 1, 1996).

10.22* Form of Employee Incentive Stock Option Agreement under the
1994 Omnibus Stock Plan of Technology Service Group, Inc.
(incorporated by reference to Exhibit 10.25 to Amendment No.
1 to the Registrant's Registration Statement, No. 33-80695,
on Form S-1 filed on March 1, 1996).

10.23 Agreement and Plan of Merger among Wexford Capital
Corporation, TSG Acquisition Corporation, Technology Service
Group, Inc. and certain shareholders of Technology Service
Group, Inc. dated October 11, 1994 (incorporated by reference
to Exhibit 10.26 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).

10.24 Amendment dated October 31, 1994 to Agreement and Plan of
Merger among Wexford Capital Corporation, TSG Acquisition
Corporation, Technology Service Group, Inc. and certain
shareholders of Technology Service Group, Inc. dated October
11, 1994 (incorporated by reference to Exhibit 10.27 to
Amendment No. 1 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on March 1, 1996).

10.25 Subordination Agreement between Technology Service Group,
Inc., Wexford Partners Fund, L.P., Acor, S.A. and Barclays
Business Credit, Inc. dated October 31, 1994 (incorporated by
reference to Exhibit 10.29 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on March 1, 1996).

10.26 Investment Agreement between Technology Service Group, Inc.,
Wexford Partners Fund, L.P., Acor, S.A. and Firlane Business
Corp. dated October 31, 1994 (incorporated by reference to
Exhibit 10.30 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).

10.27 Amended and Restated Stockholders' Agreement among Technology
Service Group, Inc., Wexford Partners Fund, L.P., Acor, S.A.,
Firlane Business Corp. and A.T.T. IV, N.V. (incorporated by
reference to Exhibit 10.31(b) to the Registrant's Form 10-K
Annual Report for the year ended March 29, 1996).

10.28** Contract No. XO8895D between Technology Service Group, Inc.
and NYNEX (incorporated by reference to Exhibit 10.37 to
Amendment No. 3 to the Registrant's Registration Statement,
No. 33-80695, on Form S-1 filed on April 29, 1996).

10.29** Contract No. C5262CO between Technology Service Group, Inc.
and Southwestern Bell Telephone Company (incorporated by
reference to Exhibit 10.38 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on April 29, 1996).

10.30* 1994 Omnibus Stock Plan (incorporated by reference to Exhibit
10.45 to Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1, 1996).

10.31 1995 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.46 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed on
March 1, 1996).

10.32* 1995 Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 10.47 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on Form
S-1 filed on March 1, 1996).

10.33*** Lease Agreement between Technology Service Group, Inc. and
McDonald Windward Partners II, L.L.C. dated November 12,
1996.

10.34*** Letter Agreement between Technology Service Group, Inc. and
Mr. James Lacy dated September 18, 1996, amendment thereto
and Assignment and Assumption of Real Estate Lease between
Technology Service Group, Inc., Mr. James Lacy and G.P.E.D.C.
dated November 6, 1996.

10.35*** Lease Extension Agreement Between Steroben Associates and
Technology Service Group, Inc. dated August 1, 1996.

10.36*** Contract No. D08E20H44 between Southwestern Bell Telephone
Company and Technology Service Group, Inc. dated June 9,
1997.

11.*** Statement re computation of per share earnings.

21. Subsidiaries of Registrant: International Service
Technologies, Inc. (a Delaware corporation).

27. Financial Data Schedule (Edgar Filing only).

* Management compensation contracts and plans.

** Registrant has received confidential treatment of a portion of this
Exhibit, which portion has been separately filed with the Commission.

*** Filed herewith.

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the fiscal year ended March 28, 1997.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

Additions
----------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions- End
Description of Period Expenses Accounts-Describe Describe of Period
- ----------- --------- -------- ----------------- -------- ---------

Seven Months Ended October 30, 1994
Allowance for doubtful accounts $ 278,590 $ 27,122 $ 70,000 (3) $(102,494)(1) $ 273,218

Reserve for obsolete and slow moving
inventory 1,643,774 223,064 (19,275)(4) (10,653)(2) 1,836,910

Reserve for impairment of property
and equipment 253,084 (1,375)(6) (117,807)(5) 133,902

Five Months Ended March 31, 1995
Allowance for doubtful accounts 273,218 (3,467) (68,305)(1) 201,446

Reserve for obsolete and slow moving
inventory 1,836,910 80,130 (58,498)(4) (92,343)(2) 1,766,199

Reserve for impairment of property
and equipment 133,902 (133,902)(7) --

Year Ended March 29, 1996
Allowance for doubtful accounts 201,446 10,099 4,014 (1) 215,559

Reserve for obsolete and slow moving
inventory 1,766,199 408,694 (57,511)(4) (511,187)(2) 1,606,195

Year Ended March 28, 1997
Allowance for doubtful accounts 215,559 (70,000)(3) 1,401 (1) 146,960

Reserve for obsolete and slow moving
inventory $1,606,195 $264,151 ($441,859)(2) $1,428,487

- --------------------
(1) Write-off of uncollected accounts and recoveries.

(2) Write-off of obsolete inventory, net of recoveries.

(3) Charges and credits to cost of goods sold with respect to accounts
receivable and accounts payable offsets.

(4) Credits to cost of goods sold with respect to net realizable value
reserves.

(5) Write-off of assets included in reserve for impairment.

(6) Restructuring charges (credits).

(7) Purchase accounting adjustment.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized, on the 9th day of June
1997.

TECHNOLOGY SERVICE GROUP, INC.

By: /s/ Vincent C. Bisceglia
--------------------------
Vincent C. Bisceglia
President & Chief Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints each of Vincent C. Bisceglia, William H.
Thompson and Roger M. Barzun jointly and severally his true and lawful
attorneys-in-fact and agent with full powers of substitution for him and in his
name, place and stead in any and all capacities to sign on his behalf,
individually and in each capacity stated below and to file any and all
amendments to this Annual Report on Form 10-K with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents and each of them
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or substitutes
may lawfully do or cause to be done by virtue thereof.

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.

Signature Title Date
--------- ----- ----

By: /s/ Vincent C. Bisceglia President & Chief June 9,1997
--------------------------- Executive Officer, Director
Vincent C. Bisceglia

By: /s/ William H. Thompson Vice President, Finance June 9, 1997
--------------------------- Chief Financial Officer
William H. Thompson Secretary (principal financial
and accounting officer)

By: /s/ David R.A. Steadman Director and Chairman June 9, 1997
--------------------------- of the Board
David R.A. Steadman

By: /s/ Charles E. Davidson Director June 9, 1997
---------------------------
Charles E. Davidson

By: /s/ Mark L. Plaumann Director June 9, 1997
---------------------------
Mark L. Plaumann

By: /s/ Olivier Roussel Director June 4, 1997
---------------------------
Olivier Roussel

By: /s/ D. Thomas Abbott Director June 9, 1997
---------------------------
D. Thomas Abbott

EXHIBIT INDEX

Exhibit No. Description of Exhibit At Page
- ----------- ---------------------- -------
3(i) Certificate of Incorporation (incorporated by reference
to Exhibit 3 (i) to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).

3 (ii) By-laws (incorporated by reference to Exhibit 3 (ii) to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

4.1(a) Warrant Agreement (incorporated by reference to Exhibit
4.1 to Amendment No. 2 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 29,
1996).

4.1(b) Form of Redeemable Warrant (incorporated by reference
to Exhibit 4.1(a) to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on April 29, 1996).

4.3 Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.3 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on April 29, 1996).

10.1 Loan and Security Agreement between Barclays Business
Credit, Inc. and International Teleservice Corporation
dated February 23, 1990 (incorporated by reference to
Exhibit 10.1 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).

10.2 Continuing Guaranty Agreement between Barclays Business
Credit, Inc. and International Teleservice Corporation
dated February 23, 1990 (incorporated by reference to
Exhibit 10.2 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).

10.3 First Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and International
Teleservice Corporation dated January 11, 1991
(incorporated by reference to Exhibit 10.3 to Amendment
No. 1 to the Registrant's Registration Statement, No.
33-80695, on Form S-1 filed on March 1, 1996).

10.4 Second Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service
Group, Inc. dated June 9, 1994 (incorporated by
reference to Exhibit 10.4 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on March 1, 1996).

At Page
-------
10.5 Third Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service
Group, Inc. dated July 8, 1994 (incorporated by
reference to Exhibit 10.5 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on March 1, 1996).

10.6 Fourth Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service
Group, Inc. dated October 31, 1994 (incorporated by
reference to Exhibit 10.6 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on March 1, 1996).

10.7** Manufacturing Services Agreement TSG-1O94JLR dated
October 21, 1994 by and between Technology Service
Group, Inc. and Avex Electronics Inc. (incorporated by
reference to Exhibit 10.8 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on April 29, 1996).

10.8 Fifth Amendment to Loan and Security Agreement between
Barclays Business Credit, Inc. and Technology Service
Group, Inc. dated as of April 22, 1996 (incorporated by
reference to Exhibit 10.9 to Amendment No. 3 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on April 29, 1996).

10.9** Amendment 002 to the Manufacturing Services Agreement
TSG-1O49JLR dated October 21, 1994 by and between
Technology Service Group, Inc. and Avex Electronics
Inc. (incorporated by reference to Exhibit 10.10 to
Amendment No. 3 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on April 29,
1996).

10.10 Manufacturing Rights Agreement dated September 16, 1991
between Newco, Inc. (Commtek Industries, Inc.), Dynacom
Corporation and International Service Technologies,
Inc. (incorporated by reference to Exhibit 10.11 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

10.11 Lease Agreement between Telematics Products, Inc. and
William M. Johnson dated July 14, 1988 (incorporated by
reference to Exhibit 10.13 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on March 1, 1996).

10.12 Assignment of Lease between Executone Information
Systems, Inc. and Technology Service Enterprises, Inc.
dated January 11, 1991 (incorporated by reference to
Exhibit 10.14 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).

At Page
-------
10.13 First Amendment to Lease Agreement between Mansell 400
Associates, L.P. and Technology Service Group, Inc.
dated February 1993 (incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).

10.14 Lease between Steroben Associates and Comdial
TeleServices Corporation dated August 1, 1986
(incorporated by reference to Exhibit 10.16 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

10.15** Dealer Agreement between Control Module, Inc. and
Technology Service Group, Inc. dated November 18, 1994
(incorporated by reference to Exhibit 10.17 to
Amendment No. 3 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on April 29,
1996).

10.16* Employment Agreement between Technology Service Group,
Inc. and Vincent C. Bisceglia dated October 31, 1994
(incorporated by reference to Exhibit 10.18 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

10.17* Chairman's Agreement between Technology Service Group,
Inc. and David R.A. Steadman dated October 31, 1994
(incorporated by reference to Exhibit 10.19 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

10.18** Patent License Agreement (incorporated by reference to
Exhibit 10.21 to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695 on Form S-1, filed
on April 29, 1996).

10.19 Warrant Agreement between Technology Service Group,
Inc. and Avex Electronics Inc. dated May 23, 1995
(incorporated by reference to Exhibit 10.22 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

10.20* Employee Incentive Stock Option Agreement between
Technology Service Group, Inc. and Vincent C. Bisceglia
dated November 1, 1994 (incorporated by reference to
Exhibit 10.23 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).

10.21* Incentive Stock Option Agreement between Technology
Service Group, Inc. and David R.A. Steadman dated
November 1, 1994 (incorporated by reference to Exhibit
10.24 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).

At Page
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10.22* Form of Employee Incentive Stock Option Agreement under
the 1994 Omnibus Stock Plan of Technology Service
Group, Inc. (incorporated by reference to Exhibit 10.25
to Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

10.23 Agreement and Plan of Merger among Wexford Capital
Corporation, TSG Acquisition Corporation, Technology
Service Group, Inc. and certain shareholders of
Technology Service Group, Inc. dated October 11, 1994
(incorporated by reference to Exhibit 10.26 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

10.24 Amendment dated October 31, 1994 to Agreement and Plan
of Merger among Wexford Capital Corporation, TSG
Acquisition Corporation, Technology Service Group, Inc.
and certain shareholders of Technology Service Group,
Inc. dated October 11, 1994 (incorporated by reference
to Exhibit 10.27 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).

10.25 Subordination Agreement between Technology Service
Group, Inc., Wexford Partners Fund, L.P., Acor, S.A.
and Barclays Business Credit, Inc. dated October 31,
1994 (incorporated by reference to Exhibit 10.29 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

10.26 Investment Agreement between Technology Service Group,
Inc., Wexford Partners Fund, L.P., Acor, S.A. and
Firlane Business Corp. dated October 31, 1994
(incorporated by reference to Exhibit 10.30 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

10.27 Amended and Restated Stockholders' Agreement among
Technology Service Group, Inc., Wexford Partners Fund,
L.P., Acor, S.A., Firlane Business Corp. and A.T.T. IV,
N.V. (incorporated by reference to Exhibit 10.31 (b) of
Registrant's Form 10-K Annual Report for the year ended
March 29,1996).

10.28** Contract No. XO8895D between Technology Service Group,
Inc. and NYNEX (incorporated by reference to Exhibit
10.37 to Amendment No. 3 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on April 29, 1996).

10.29** Contract No. C5262CO between Technology Service Group,
Inc. and Southwestern Bell Telephone Company
(incorporated by reference to Exhibit 10.38 to
Amendment No. 3 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on April 29,
1996).

At Page
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10.30* 1994 Omnibus Stock Plan (incorporated by reference to
Exhibit 10.45 to Amendment No. 1 to the Registrant's
Registration Statement, No. 33-80695, on Form S-1 filed
on March 1, 1996).

10.31 1995 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.46 to Amendment No. 1 to the
Registrant's Registration Statement, No. 33-80695, on
Form S-1 filed on March 1, 1996).

10.32* 1995 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.47 to
Amendment No. 1 to the Registrant's Registration
Statement, No. 33-80695, on Form S-1 filed on March 1,
1996).

10.33*** Lease Agreement between Technology Service Group, Inc. 96
and McDonald Windward Partners II, L.L.C. dated
November 12, 1996.

10.34*** Letter Agreement between Technology Service Group, Inc. 109
and Mr. James Lacy dated September 18, 1996, amendment
thereto and Assignment and Assumption of Real Estate
Lease between Technology Service Group, Inc., Mr. James
Lacy and G.P.E.D.C. dated November 6, 1996.

10.35*** Lease Extension Agreement Between Steroben Associates 124
and Technology Service Group, Inc. dated August 1, 1996.

10.36*** Contract No. D08E20H44 between Southwestern Bell 126
Telephone Company and Technology Service Group, Inc.
dated June 9, 1997.

11.*** Statement re computation of per share earnings. 179

21. Subsidiaries of Registrant: International Service
Technologies, Inc. (a Delaware corporation).

27. Financial Data Schedule (Edgar Filing only). 180

* Management compensation contracts and plans.
** Registrant has received confidential treatment of a portion of this
Exhibit, which portion has been separately filed with the Commission.
*** Filed herewith.