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

                                   -----------

                                   FORM 10-KSB
                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

FOR THE YEAR ENDED DECEMBER 31, 1997                 Commission File No. 0-23723


                                   -----------

                               Ambient Corporation
             (Exact name of registrant as specified in its charter)

          Delaware                                         98-0166007
(STATE OR OTHER JURISDICTION OF                         (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)                         IDENTIFICATION NO.)

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             270 Madison Avenue
             New York, New York                              (888) 861-0205                        10016
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)          (REGISTRANT'S TELEPHONE NUMBER,              (ZIP CODE)
                                                          INCLUDING AREA CODE)

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          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          Common Stock, $.001 par value
                                (Title of Class)

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

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

         The issuer's revenues for the year ended December 31, 1997 were $0.

         The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the registrant on May 21, 1998 was $19,349,594 based on the
average bid and asked price of the Common Stock of $8.31 on such date, as
reported by the OTC Bulletin Board.

         The number of outstanding shares of the issuer's Common Stock as of May
27, 1998 was 2,984,333.

         Transitional Small Business Disclosure Format.   Yes  [ ]      No  [X]

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                               AMBIENT CORPORATION
                          ANNUAL REPORT ON FORM 10-KSB
                      FOR THE YEAR ENDED DECEMBER 31, 1997

                                TABLE OF CONTENTS

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PART I............................................................................................................1

Item  1. Description of Business..................................................................................1
Item  2. Description of Property.................................................................................13
Item  3. Legal Proceedings.......................................................................................14
Item  4. Submission of Matters to a Vote of Security Holders.....................................................14

PART II..........................................................................................................15

Item  5. Market For Common Equity and Related Stockholder Matters................................................15
Item  6. Plan of Operation.......................................................................................17
Item  7. Financial Statements....................................................................................21
Item  8. Changes in and Disagreements with Accountants
         on Accounting and Financial Disclosure..................................................................21

PART III.........................................................................................................22

Item  9. Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act ......................................................22
Item 10. Executive Compensation..................................................................................24
Item 11. Security Ownership of Certain Beneficial Owners and Management..........................................25
Item 12. Certain Relationships and Related Transactions..........................................................26
Item 13. Exhibits and Reports on Form 8-K........................................................................27

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FORWARD LOOKING STATEMENTS

         Certain statements contained in this Annual Report on Form 10-KSB,
including without limitation, statements containing the words "believes",
"anticipates", "may", "intends", "expects" and words of similar import
constitute "forward-looking" statements within the meaning of the Private
Litigation Reform Act of 1995. Such statements involve known and unknown risks,
uncertainties and other factors which may cause actual Company results to differ
materially from expectations. Such factors include the following: (1)
circumstances which could affect the writing of workers' compensation, liability
and property insurance, (2) economic, business and competitive conditions in the
insurance industry and innovations of new insurance products, (3) the enactment
of new regulations and laws, and the amendment of existing regulations and laws
which could affect the Company's business, (4) changes in business strategy or
development plans, and (5) the Company's ability to obtain sufficient financing.
Certain of these factors are discussed in more detail elsewhere in this Annual
Report on Form 10-KSB.






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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

         Ambient Corporation ("Ambient" or the "Company"), a development stage
company, was founded in June 1996 to design and develop advanced smart card
interface technology. A smart card is a credit card-sized, plastic card equipped
with an integrated circuit ("IC") that contains a memory and, in its more
evolved form, a microprocessor, or a "mini-computer," that stores and transfers
information in electronic form. Smart cards are used in a variety of
applications including (i) access to restricted areas (replacing keys and
identification cards), (ii) public transportation fare collection (replacing
tokens and tickets), (iii) point of sale purchases (replacing cash or credit
cards at cafeterias, newsstands and related point of sale locations where speed
of purchase is important), (iv) vending machines, (v) public telephones, (vi)
industrial applications such as quality control, warehousing, inventory control,
distribution and warranty, and (vii) health care (replacing patients' paper
files in hospitals and HMOs). The Company's subsidiary, Ambient Ltd. ("Ambient
Israel"), has two patent applications pending in Israel, a corresponding
application for one of which was filed in the United States, and one patent
application pending in the United States, for which a corresponding application
was filed under the Patent Cooperation Treaty ("PCT"). The applications cover
various aspects of the Company's smart card interface design and terminal
architecture. Ambient has not generated any revenues from operations. The
Company presently intends to commence commercialization of its technology in the
fourth quarter of 1998.

         The Company is developing contactless interface technology for
multi-purpose smart cards that will be capable of storing and transferring large
amounts of data in a secure environment at costs similar to typical
contact-based systems. Existing smart cards depend largely on "contact"
technology, requiring the card to be inserted into a terminal where a receptor
clamps down on the card making precise contact with an exposed metal plate on
the card's surface creating a metal-to-metal electrical connection. The Company
believes that due to the disadvantages inherent in requiring contact for the
transfer of information in many applications, such as slow transaction time and
high terminal and card maintenance costs, the industry has produced
"contactless" smart card technology, where information is transferred
electronically without the need for metal-to-metal contact. Contactless smart
cards currently on the market utilize inductive coupling (commonly known as
"radio frequency" radiation) to transfer information. The Company believes that
this technology, as currently used in "proximity" and "vicinity" cards, creates
several disadvantages, such as the potential security hazard of data
interception by scanners, malicious jamming by nearby hackers, the lack of ease
of use, since the card often must be positioned over a terminal antenna within a
certain range of angles, power limitations and environmental emissions.
Proximity and vicinity cards may also embody as a security feature a permanent
disabling device which is triggered after several erroneous attempts at access,
thereby allowing hackers to disable such cards from a distance by repeatedly
broadcasting unsuccessful access attempts. The Company's technology is not based
on "radio frequency" radiation operating at a distance; rather, it relies on
capacitive close coupling. Capacitive close coupling allows for a
closed-circuit, high energy, rapid data rate connection between the card and the
terminal within a relatively short range. Ambient's technology enables the
transmission of both data and energy over the same capacitive pads (one pad is
located in each of the card and the terminal) at high rates of speed and
accuracy. The Company believes that its technology will provide the following
advantages over existing contact-based and contactless smart card systems: high
security, quicker transaction time, low terminal maintenance due to the absence
of moving parts, long




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card life due to rugged construction and low wear-and-tear, significantly higher
levels of power, and significant memory capability allowing for multi-purpose
applications.

         The Company's goal is to become a licensor of smart card technology and
a vendor of smart card systems. The Company's business strategy is to: (i)
implement pilot projects that exhibit the benefits of the Ambient systems; (ii)
form strategic alliances with system integrators, as well as individual IC,
smart card and terminal manufacturers and (iii) integrate its own smart card
systems that utilize Ambient's contactless interface technology that it can
market directly to end-users.

         Ambient Corporation, a Delaware company, was organized in June 1996. In
August 1996, Ambient Corporation purchased substantially all of the assets,
properties, business and goodwill, and assumed substantially all of the
liabilities, of Gen Technologies, Inc., a Delaware company organized in
September 1995 ("GTI"), including the capital stock of GTI's subsidiary, GenTec,
Ltd., a corporation organized under the laws of the State of Israel in November
1995. In November 1996, the Company changed the name of its subsidiary from
GenTec, Ltd. to Ambient, Ltd. ("Ambient Israel"). The Company owns 95% of
Ambient Israel's outstanding capital stock. All of the Company's activities to
date, which have primarily consisted of research and development, have been
performed by Ambient Israel in Jerusalem, Israel. Ambient Israel's corporate
headquarters and executive offices are located at Jerusalem Technological Park,
Building 9, Malha, Jerusalem, Israel and its telephone number is 972-2649-1250.
Ambient Corporation's offices in the United States are located at 270 Madison
Avenue, 11th Fl., New York, New York 10016 and its telephone number is (888)
861-0205.

         Unless the context otherwise requires, the term "Company" as used
herein means Ambient Corporation, together with its subsidiary, Ambient Ltd.

INDUSTRY BACKGROUND

         There are two basic types of smart cards, memory cards and
microprocessor cards, each of which can interface between the smart card and a
terminal on a contact or contactless basis. Memory cards are typically used to
store and retrieve information only and do not have the capability of performing
complex processing of information. A microprocessor card is truly a "smart" card
in that it contains a central processing unit within a chip which can perform a
number of functions, including complex arithmetic operations required for
security. Current smart card technology is based largely on contact cards and,
to a lesser extent, contactless cards that utilize radio frequencies to transfer
data. The Company is developing what it believes to be next generation, close
coupled contactless interface technology for microprocessor cards.

         The Company estimates that in excess of 90% of all smart cards sold in
1995 were memory cards with contact interfaces used as disposable phone cards.
Contact technology requires the card to be inserted into a terminal where a
receptor clamps down on the card making precise contact with an exposed metal
plate on the card's surface. Contact cards present several inherent
disadvantages including long transaction times, relatively short card life due
to corrosion of exposed metal and damage to the metal from physical abuse, such
as being sat upon or housed in an over-stuffed wallet. There is also the
potential for expensive terminal maintenance due to moving clamps and other
parts. While contact smart cards have found broad use in high volume, cost
sensitive applications such as public telephones, these cards are, in general,
cumbersome and not user-friendly and systems using contact smart cards are
expensive to maintain, less reliable and are too slow for many applications such
as transportation. In the



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early 1990s, several companies developed various "contactless" smart cards,
where information is transferred electronically without the need for
metal-to-metal contact. Contactless smart cards currently on the market utilize
radio frequencies to transfer information, creating the potential security
hazard of data interception. Other disadvantages include the lack of ease of
use, since the card often must be carefully positioned over a terminal antenna
at a certain angle, power limitations and environmental emissions. In response
to these limitations, the Company is developing its close coupled, contactless
interface technology for smart cards that will be capable of storing and
transferring large amounts of data in a secure environment at costs similar to
typical contact-based systems. The Company believes that its technology will
provide the following advantages over existing smart card systems: high
security, significant memory capability, long card life due to rugged
construction and low wear-and-tear, significantly higher levels of power,
quicker transaction time and low terminal maintenance due to the absence of
moving parts. See "--Proprietary Information."

         There are several levels of smart cards utilized for different
applications. The "dumb" smart card is simply a memory card with some hard wired
logic, and can only be loaded with information one time. The next level is a
memory card with a simple controller upon which information can be recorded and
erased many times. This memory is usually in the form of EEPROM, which can be
written on and erased many times, or the more advanced flash memory products
being developed by companies such as Sandisk Israel Ltd., Intel Corporation,
M-Systems Ltd., and others. The heart of the truly smart card is a
microprocessor with EEPROM memory that is contained within the IC. Such a smart
card acts as a mini-computer, without a monitor or keyboard. This type of IC is
produced by a relatively small number of chip makers. The Company has engaged a
subcontractor, Melexis, N.V., to produce initially an ASIC of its contactless
interface technology which the Company intends to then integrate in a multi-
chip solution with various microprocessor and memory modules. The following
stage of the company's development will be to create a product line of one-chip
solutions, combining on one piece of silicon the analog interface of Ambient,
along with various levels of memory and microprocessors.

BUSINESS STRATEGY

         Initially, the Company plans to target its marketing efforts on "niche"
markets that require the storage and transfer of large quantities of
information, as well as security protocols and have a preference for contactless
solutions, but cannot, for various reasons, use radio frequency cards. The
Company has identified the health care, vending systems and high security access
control markets for initial entry. The Company intends to target users of
existing contact-based smart cards that it believes could benefit from switching
to Ambient's contactless system. Using its technology, the Company has developed
a "transparent interface" with the ability to provide a contactless interface
for substantially all existing contact-based smart card chips. This technology
is designed to allow the existing contact-based smart card industry to convert
to contactless smart cards while maintaining the existing card software, readers
and system host computers, as well as the existing security software of their
contact-based systems. The Company has engaged a subcontractor, Melexis, N.V.,
which manufacturer is scheduled to produce chips by October 1998 containing
Ambient's contactless interface technology that will be capable of such
conversion. The Company and Melexis, N.V. intend to perform testing on initial
samples in July 1998.

         In order to gain access to its targeted markets, the Company intends to
enter into strategic relationships with system integrators, as well as
individual IC, terminal and card manufacturers for joint marketing and
distribution of smart card systems that use Ambient technology. The Company has
commenced initial discussions with various chip, smart card and smart card
connector manufacturers in


                                       -3-




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an effort to develop distribution channels for its technology. The Company has
not entered into any definitive arrangements for distribution and there can be
no assurance that any such discussions will lead to successful strategic
relationships.

         To assist in creating a market presence, the Company intends to
implement pilot projects in Israel and elsewhere that will exhibit to the public
the benefits of the Ambient systems. The Company has not yet successfully
implemented any pilot projects and there can be no assurance as to when, if at
all, the Company will carry out a pilot project. In addition to serving as a
vehicle to demonstrate its technology, the Company believes that pilot projects
will serve to provide it with valuable feedback on its technology, enabling the
Company to fine-tune its systems prior to commercial marketing and application.
See "Plan of Operation."

THE AMBIENT SYSTEM

         Ambient's principal product under development is a smart card interface
for transmitting energy and data between the terminal and the smart card. The
energy and data transmission is galvanically contactless utilizing capacitive
technology. Capacitive transfer technology is the result of placing plates of
conductive material both on the card, which are covered in plastic, and in the
terminal that act as a virtual capacitor when coming in relatively close range
of each other. The Company believes that the Ambient technology will provide a
reliable close coupled solution for contactless cards, combining the best
attributes of both traditional contact cards and radio frequency contactless
cards. The Ambient technology is designed to enable the construction of a
rugged, high energy, high memory, true multi- application smart card.

         Smart cards utilizing the Ambient technology are being designed by the
Company to have robust functionality without the security handicaps of radio
frequency cards and the mechanical liabilities of contact cards. The Ambient
system is being designed to be easily integrated with existing technology and
easily adapted to current IC smart cards. The Company has engaged a
subcontractor, Melexis, N.V., which manufacturer is scheduled to produce chips
by October 1998 containing Ambient's contactless interface technology that will
be capable of converting existing contact-based systems for use by Ambient's
contactless close coupled smart cards, while maintaining the use of existing
card software, readers, system host computers and security software relating to
the contact-based system. The Company and Melexis, N.V. intend to perform
testing on initial samples in July 1998. The Company believes that Ambient's
platform, as it is being designed, will handle the energy requirements of future
generations of smart card microprocessors and memory chips.

         The Ambient smart card system consists of smart cards and terminals
that can be configured utilizing three different transaction methods:

                  Insertion -- this method, much like traditional contact cards
                  and ATM terminals, allows Ambient's smart cards to be inserted
                  into a terminal, while maintaining the advantage of
                  significantly lower terminal maintenance due to the absence of
                  electrical contact and moving parts within the terminal.

                  Flat Reading -- this design allows the card to simply be
                  placed on a reader/writer terminal.


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                  Swiping -- this method contains a swiping terminal allowing
                  the Ambient smart card to be swiped in substantially the same
                  manner as the standard magnetic credit card reader, except
                  that the Ambient card can be swiped through the terminal in
                  any manner at any speed, still creating a capacitive
                  connection. The Company believes that this method will allow
                  Ambient to enter the market without substantial consumer
                  education since the swiping mechanism is already commonly used
                  for various day-to-day transactions.

         The Company believes that the following features of the Ambient system
will provide it with significant advantages over existing smart cards:

                  Security. As a result of the low amounts of energy capable of
                  being transmitted through the radio waves, existing radio
                  frequency contactless cards have limited memory capacity and
                  sufficient power to run only the slower microcomputers. As a
                  consequence, many of these cards are not capable of offering
                  high level security protocols. The transmission of sensitive
                  financial and personal information via radio frequency is
                  therefore subject to security leaks since the transmitted
                  information can be intercepted or forged by a simple scanner.
                  Ambient's capacitive information transfer method is designed
                  with very low levels of external radiation which provides
                  substantial physical security, prohibiting data from being
                  "leaked" or "listened to," which is a critical function for
                  certain applications, such as health care and electronic
                  commerce.

                  Memory capabilities. Ambient's capacitive power transfer
                  method allows for significant memory expansion possibilities.
                  Existing radio frequency cards supply up to several kilobytes
                  of EEPROM memory; Ambient technology can supply up to 20
                  megabytes of on board EEPROM memory. Ambient is currently
                  developing flash memory products of up to two megabytes that
                  can fit into an ISO 7816 smart card (the international
                  standard for a smart card's physical dimensions). Memory
                  capacity is a critical element in enabling smart cards to
                  store large amounts of various data for utilization as a
                  multi-application tool.

                  Rugged Construction. Existing microprocessor cards utilize
                  standard "8-pin" contact technology, meaning that with every
                  transaction, an electrical connection must be made between the
                  card and the terminal. This requirement for a metal-to-metal
                  connection is the basis for the substantial disadvantages in
                  the standard contact smart card technology. Industry estimates
                  view the life span of a standard contact card at 10,000
                  insertions, not including damage from regular wear and tear,
                  corrosion from contact with moisture and physical damage from
                  being sat on, played with or otherwise physically abused.
                  Ambient cards will be encased in plastic without exposed
                  parts, thereby substantially reducing exposure to the wear and
                  tear of everyday life. The Ambient smart card's rugged
                  construction guarantees a longer card life, which lowers
                  overall costs. This feature is especially significant because
                  the Company believes that the introduction of multi-
                  application cards will yield higher frequencies of card
                  utilization therefore exposing cards to significantly more
                  damage-inducing elements.

                  Low terminal maintenance. Unlike standard contact terminals,
                  Ambient's reader/writer terminals will not contain any moving
                  parts or exposed electrical connections, which, it is
                  expected, will result in lower maintenance costs, virtually
                  trouble and vandalism free terminals, as well as the system's
                  ability to withstand exposure from the environmental


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                  elements. The ability to leave the smart card terminal exposed
                  to the elements is especially critical for vending, access
                  control, public telephones and other outdoor applications.

                  Faster throughput. The Company anticipates that Ambient's
                  terminals will be available in a variety of configurations
                  including swiping and flat reading. These configurations
                  reduce transaction times (compared to contact systems where
                  the card has to be inserted into the terminal and direct
                  contact achieved), allowing each terminal to be used by a
                  larger number of people per hour. The time factor is critical
                  for many applications that require rapid execution, such as
                  public transportation and toll roads. Prototype Ambient cards
                  and readers have attained a data rate that is four times
                  faster than the highest rates specified for either contact
                  cards or existing radio frequency cards. At the
                  CardTech/SecureTech Exhibition in Washington, D.C., in April,
                  1998, the Company demonstrated this technology in a prototype
                  memory card comprised of discrete components.

                  Environmental considerations. Little or no harmful radiation
                  is emitted into the environment during transactions using the
                  Ambient system. Radio frequency systems depend on spread
                  spectrums that emanate from the terminals at all times, which
                  means that radio waves are being continuously emitted from the
                  device. This emission can lead to harmful radiation effects to
                  the environment, as well as interference with surrounding
                  devices that are sensitive to radio frequency waves.

PROPOSED AMBIENT SMART CARDS

         The Company intends to produce and market, along with strategic
partners, three types of contactless smart cards: the Standard Card, the Secure
Card and the Mega Card. As currently planned, each card will have two capacitive
plates embedded on both sides to act as receivers and transmitters of energy and
data between the card and reader/writer terminal, which terminal will be
equipped with similar plates. These plates will be completely covered and sealed
in plastic, resulting in a card without any exposed metal or galvanic electrical
contact points. This configuration will enable the card to be utilized in a
high-speed swiping mechanism, as well as flat reading and insertion. The cards
will be hermetically sealed with durable plastic lamination. The Company is
seeking to engage one or more smart card vendors to produce these cards, as well
as technologists experienced at packaging large memory chips and multiple chips
inside a smart card format. The Company intends to enter into a definitive
arrangement with a smart card vendor by July 1998 when it anticipates commencing
testing on chips utilizing its transparent interface technology. Even if testing
is successful and the Company proceeds to full-scale production of the chips by
October 1998, as currently planned, there can be no assurance that a
satisfactory vendor or chip packaging mechanism will be selected by July 1998 or
in time for anticipated production. A delay in completing one or more components
of the smart card will delay commercialization of the Company's technology,
which could adversely affect the Company's business prospects and financial
condition.

         The Ambient Standard Card -- The Ambient Standard Card will target all
         existing smart card applications with a special emphasis on access
         control, mass transit and vending applications. Mass transit and access
         control system managers are frequently required to choose between the
         slower throughput of traditional contact cards, or the lower security
         and unreliability of radio



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         frequency contactless cards. The Ambient smart card is designed to
         offer quick throughput, high reliability and security. The Ambient
         contactless interface operates with swiping technology which has been
         proven by credit card and metro users to be a reliable and rapid means
         of executing a transaction. The standard card will contain limited
         memory and processing power and will be marketed as a low cost card
         that is easy to use.

         The Ambient Secure Card -- The Ambient Secure Card will incorporate all
         the features of the Ambient Standard Card with additional security
         provided by an on board crypto to controller responsible for the
         encryption of data. The combination of an on board central processing
         unit ("CPU"), which allows for high-level security programs to be run
         directly on the card, a crypto controller and the absence of radiation
         and data leakage produces what the Company believes will be the most
         secure contactless smart card available. This card will be targeted for
         high security applications such as access to sensitive installations,
         electronic banking, high value monetary transactions and confidential
         data storage.

         The Ambient Mega Card -- The Ambient Mega Card will combine the
         security of the Ambient Secure Card with memory capacity of at least
         0.5 megabytes of flash memory. This combination will offer currently
         unavailable options for secure data storage applications. The Mega Card
         will be targeted for applications such as the health care industry. The
         Company anticipates that a holder of this card will be able to carry
         around in a wallet all of his medical insurance information combined
         with his full medical history, including, depending on the card's
         memory capacity, x-rays, lab results, allergies, medicine
         sensitivities, previous illnesses and operations, E.K.G. results and
         other vital information. The card's significant memory capacity
         (dependent upon memory chip size) will provide adequate storage for
         each application, from transportation, to electronic commerce, to
         health care, to achieve what the Company plans to market as a true
         multi-purpose card.

         The Ambient card will be designed to conform to the relevant mechanical
criteria laid out in ISO 7816-1 and ISO 10536, which are international standards
regarding physical dimensions and flexibility of the card itself. An executive
employee of the Company is participating in a committee of the ISO that is
completing a standard for close coupled contactless smart cards.

RESEARCH AND DEVELOPMENT

         The Company's research and development activities are conducted
primarily in Israel through its subsidiary, Ambient Israel. The Company
currently has 12 full-time employees engaged in research and development.

         The Company's research and development operations are conducted through
three main departments:

                  Electrical engineering -- The electrical engineering
                  department is led by Dr. George Kaplun and is responsible for
                  designing and developing Ambient's interface technology.

                  Mechanical Engineering -- Ambient's mechanical engineers have
                  created prototypes of the Ambient cards and terminals, and are
                  laying the groundwork for full volume production of the
                  Ambient system.


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                  Software development -- At present, Ambient's software
                  programmers are devoted to creating the basic communication
                  drivers that allow communication through the Ambient interface
                  between the card and the terminal. In addition, this
                  department is responsible for creating development tools that
                  will allow future partners to integrate existing applications
                  with the Ambient protocols.

         The Company is in the process of selecting outside developers to assist
in the design and production of the proposed Ambient ASIC. The Company has
engaged a subcontractor, Melexis, N.V. which manufacturer is scheduled to
produce chips by October 1998 containing Ambient's contactless interface
technology that will be capable of converting existing contact-based systems for
use by Ambient's close coupled contactless smart cards while maintaining the use
of existing card software, readers, system host computers and security software
relating to the contact-based system. The Company and Melexis, N.V. intend to
perform testing on initial samples in July 1998. The Company is also seeking to
engage one or more smart card vendors to produce hermetically sealed, durable
cards, as well as technologists experienced at packaging large memory chips and
multiple chips inside a smart card format. See "--Proposed Ambient Smart Cards."

         The Company believes that there are several advantages to centering its
development efforts in Israel, including the potential for substantial
government assistance from one or more of Israel's numerous incentive programs,
the availability of skilled labor and significant potential tax relief. The OCS
has granted Ambient Israel $95,976 for research and development as of December
31, 1998. The Ambient Israel grant from OCS is for up to 60% of certain research
and development expenses for the development of products intended for export.
Under the Law for the Encouragement of Industrial Research and Development, 1984
(the "Research Law"), research and development programs approved by a research
committee in the OCS are eligible for grants or loans upon meeting certain
criteria against payment of royalties from all revenues derived from the product
developed in accordance with the program. Regulations promulgated under the
Research Law generally provide for the payment of royalties ranging from 3% to
5% of all revenues derived from the products developed as a result of the
research project so funded, or based on technology funded by the OCS, until 100%
of the dollar-linked participation is repaid. The royalty regulations provides
that royalty payments are payable as follows: 3% of revenues during the first
three years, 4% during the following three years and 5% in the seventh year and
thereafter. The repaid royalties may not exceed the principal dollar value of
the total grant received. The Research Law requires that the manufacture of any
product developed as a result of research and development funded by the OCS be
forever performed in Israel, even after all required royalty payments are made,
unless special approval has been granted. It also provides that know-how from
the research and development that is used to produce the product may not be
transferred without the approval of the OCS. The Company believes that these
restrictions and obligations will not have a material adverse effect on the
operations of the Company. Further, such restrictions do not apply to exports
from Israel of products developed with such technologies. From time to time the
government of Israel has revised its policies regarding the availability of
grants and participations and there can be no assurance that the government's
support of research and development will continue.

         As of December 31, 1997, the Company's aggregate expenditures for
research and development before amounts received from OCS, were $655,072.
Ambient Israel filed a request with the OCS for an additional research grant,
which the OCS denied. The Company has filed an appeal with the OCS in response
to such denial, which is currently pending. There can be no assurance that the
Company will be successful in such appeal. If the Company is unsuccessful, it
may need to seek additional financing for research and development. The Company
does not presently have any commitments for any


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additional financing and the inability to obtain financing when needed could
have a material adverse effect on the Company's prospects, results of operations
and financial condition.

SALES AND MARKETING; DISTRIBUTION

         The Company intends to center its marketing and sales operations in
Jerusalem, and focus on those geographic areas where smart card acceptance is
already at a high level, such as Europe, Asia, and the Middle East. The Company
intends to focus initial marketing efforts on building recognition of the
Ambient system. Towards that end, the Company intends to engage, at the
Company's cost, in pilot projects in Israel and other locations to demonstrate
its technology and participate in trade show exhibitions. The Company intends to
enter the commercial market by bidding on smart card system projects. The
Company also intends to market itself to systems integrators active in smart
card projects, as well as individual IC, smart card and terminal manufacturers.

         The Company has a sales and marketing director and one sales and
marketing employee. The Company intends to hire up to three additional full-time
sales and marketing associates during the next 12 months. See "Plan of
Operation."

         The Company plans to focus sales efforts initially on the following
industries:

                  Access control: The access control market consists of systems
                  integrators who provide security control systems for large
                  buildings and other enclosures. Within the access control
                  market, there is a wide spectrum of potential users, ranging
                  from those entities requiring only limited security levels to
                  those who require high security. Ambient intends to cover this
                  spectrum by offering simple memory cards to the low end of the
                  market and secure cards to the high end of the market. Secure
                  cards will require large amounts of memory to handle biometric
                  security and sophisticated microprocessors for encryption.

                  Hotel services: Hotel service is an example of a niche market
                  that the Company believes can benefit from a multi-application
                  card that can serve, for example, as a room key, a stored
                  value card for phones, vending machines and pay TV, an access
                  control card for entry into hotel buildings and other
                  potential applications.

                  Amusement parks: Ambient management believes there is a large
                  volume potential in stored value/access control cards for the
                  amusement park industry. This industry is currently largely
                  dependent on paper and coin money. Management believes that
                  large amusement and theme parks have already begun and will
                  continue to incorporate smart cards as "passports" to the
                  parks, capable of payment, allowing access into and out of the
                  park for one-day or multi-day passes, and allowing parents to
                  grant freedom to their children by purchasing cards for their
                  use with cash limits loaded directly onto the smart card.

                  Health care: There are two separate markets within health care
                  for smart cards: state and private health management
                  organizations ("HMOs"), and individual hospitals. Within each
                  of these markets, the patient paper trail is costly, time
                  consuming, and can even lead to life threatening delays when
                  an emergency situation arises and the patient's


                                       -9-




<PAGE>
 
<PAGE>



                  basic medical data is needed immediately. The Company intends
                  to offer this industry Ambient system solutions, wherein, for
                  example, an HMO context, each member could be issued an
                  Ambient Standard Card containing all basic information such as
                  blood type, allergies, and other most recent vital statistics,
                  and in a hospital context, each admitted patient's paper
                  records could be replaced by an Ambient Mega Card, containing
                  all patient care notes, test results, recent EKGs and the
                  like.

         The Company also intends to focus sales and marketing efforts on the
transportation industry, as well as campus cards and multi-application cards
suitable for city services and government benefit programs. There can be no
assurance that the Company will be successful in these efforts. The Company's
failure to successfully market its products in one or more of these industries
could have a material adverse effect on the business, financial condition or
results of operations of the Company.

SUPPLIERS; MANUFACTURING AND ASSEMBLY

         A smart card system consists essentially of the plastic card, within
which is embedded one or more silicon ICs, and the corresponding terminal. The
Company currently purchases ICs for its smart card systems in development from
Motorola Corporation Inc., National Semiconductor, Inc. and other manufacturers,
and purchases other components used in the assembly of its smart card systems,
such as the cards and the terminal components, from other key suppliers. While
the Company does not intend to produce ICs or cards itself (it intends to rely
on subcontractors for such manufacture), it does plan to establish one or more
factories in Jerusalem and other locations to produce Ambient sub-assemblies
and, to a limited extent, smart card terminals. The commencement of any such
operations depends on several factors, including the availability of funds,
either from revenues or additional financing, of which there can be no
assurance. It is currently anticipated that Ambient's subassembly will include
the IC, which will incorporate ROM, RAM and EEPROM or flash memories, plus
Ambient's proprietary capacitative data and energy transmitter/receiver. At the
proposed factories, the chip will be connected to the capacitive plates to form
self-contained micro modules. As completed, these subassemblies will be sold to
smart card manufacturers for incorporation into their cards. In the event that
the Company builds up large card volume, of which there can be no assurance,
Ambient plans to complete the card package itself.

COMPETITION AND RAPIDLY CHANGING TECHNOLOGY

         The market for smart card products is developing, intensely
competitive, quickly evolving and subject to rapid technological change.
Competitors may develop superior technology and products or products of similar
quality for sale at lower prices. Moreover, there can be no assurance that the
Company's smart card technology will not be rendered obsolete by changing
technology or new industry standards. The Company expects competition to persist
and increase in the future. The Company's currently anticipated and potential
competitors are primarily subsidiaries of multinational companies with
established contact card and contactless smart card businesses who have longer
operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than the
Company. This intense level of competition could materially adversely affect the
Company's business, operating results and financial condition.


                                      -10-




<PAGE>
 
<PAGE>



         Competitive factors in the industry include transaction speed, the
extent and flexibility of smart card memory, security, reliability, transaction
accuracy and cost. There can be no assurance that the Company will be able to
compete successfully against currently anticipated or future competitors or that
competitive pressures will not materially adversely affect its business,
operating results and financial condition. Many of the Company's anticipated
competitors have the financial resources necessary to enable them to withstand
substantial price and product competition, which are expected to increase, and
to implement extensive advertising and promotional programs, both generally and
in response to efforts by other competitors to enter into existing markets or
introduce new products. The industry is also characterized by frequent
introductions of new products. The Company's ability to compete successfully
will be largely dependent on its ability to anticipate and respond to various
competitive factors affecting the smart card industry, including new products
which may be introduced, changes in customer preferences, demographic trends,
pricing strategies by competitors and consolidation in the industry where
smaller companies with leading edge technologies may be acquired by larger
multinational companies.

         Radio frequency contactless cards and standard contact cards represent
the Company's primary competition. The Company believes that it will be able to
compete favorably with contact cards because the Company's contactless smart
cards (i) will operate at higher speeds, (ii) will not require the time and
effort involved in inserting the smart card into a terminal, (iii) will use
reliable electronics without moving parts, exposed contact points or magnetic
stripes that can be erased by a magnetic field, and (iv) are lower in cost over
the product life. The Company believes it will be able to compete favorably with
current radio frequency contactless smart cards because Ambient contactless
cards (i) will provide for the secure transfer of information that cannot be
achieved when data is transferred over radio frequencies which are not powerful
enough to sustain high level security protocols and can be intercepted with
scanners, (ii) will provide significant memory expansion capabilities, enabling
the Company to offer a true multi-purpose card, while radio frequency cards, by
their nature, can only supply a limited EEPROM memory, and (iii) will be
environmentally sound since, unlike radio frequency smart cards, radiation is
not emitted during a transaction or between transactions.

         The Company believes that its main competitors over the next one to
three years will be primarily companies developing and marketing contactless
smart cards that depend on radio frequency radiation, such as Mikron GmbH, On
Track Innovations, Ltd., Motorola, and others. In addition, the Company expects
to compete with those contact card vendors who have vested interests in
continuing to produce and sell contact card systems by virtue of the fact that
these entities have invested large sums of money in contact card production
machinery.

PROPRIETARY INFORMATION

         The Company relies on patents, trade secrets, trademarks, and
proprietary information and non- disclosure agreements to establish and protect
its proprietary rights in its technologies and planned products. Despite these
precautions, it may be possible for unauthorized third parties to utilize the
Company's technology or to obtain and use information that the Company regards
as proprietary. The laws of some foreign countries do not protect the Company's
proprietary rights in its processes and products to the same extent as the laws
of the United States.

         The Company is seeking patent protection in the United States and
Israel relating to various aspects of the electrical design of the card and the
terminal. As of December 31, 1997, Ambient Israel has two patent applications
pending in Israel which were filed in 1996 and for one of which a


                                      -11-




<PAGE>
 
<PAGE>



corresponding application was filed in the United States in 1997, and one patent
application pending in the United States which was filed in 1996, for which a
corresponding application was filed under the PCT in 1997.

         Under a certain agreement, the former chief scientist of Ambient
Israel, Alexander Rozin, is entitled to receive 15% of the net profits (as
defined in such agreement) from sales of products and technology by Ambient
Israel for an indefinite period of time. In addition, Mr. Rozin is entitled to
receive, until December 2015, royalties of 20% of the Company's net profits from
sales or licenses of products predominantly utilizing an electronic data
communication system as described in a certain 1994 patent application which
application has been abandoned by the Company; if the Company sells or licenses
products wherein such electronic data-communication technology is not the
predominant technology, Mr. Rozin is entitled to receive royalties at a reduced
rate to be agreed upon. In addition, the agreement provides that Mr. Rozin shall
be paid royalties of 20% of consideration from any sale or assignment of such
technology (excluding sales and assignments to affiliate companies) for an
indefinite period of time. The Company has not to date utilized this technology
described in the abandoned patent application in the development of Ambient
systems and does not presently intend to do so.

         In addition, the Company has a pending application on file with the
Patent and Trademark Office to register Ambient as a trademark in the United
States.

         The Company's competitive position will be dependent upon protecting
its trade secrets. The Company has developed and is continuing to develop a
substantial database of information concerning its research and development and
has taken security measures to protect its data. However, trade secrets are
difficult to protect. In an effort to protect its trade secrets, the Company has
a policy of requiring its employees, consultants, and advisors to execute
non-disclosure agreements. These agreements provide that all confidential
information developed or made known to an individual during the course of his
relationship with the Company must be kept confidential, except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets, know-how or other
proprietary information in the event of unauthorized use or disclosure of
confidential information.

         The Company may be required to take legal action in order to defend
against or assert claims of patent or trademark infringement, to enforce patents
or licenses issued to the Company, to protect trade secrets or know-how owned by
the Company, or to determine the scope and validity of the proprietary rights of
others, and could result in substantial costs to and diversion of effort by, and
may have a material adverse impact on, the Company's financial condition or
results of operations. There can be no assurance that any legal action by the
Company will be successful. In addition, while the Company believes that its
planned products and technology do not infringe any valid patents of others,
there can be no assurance that third parties will not commence legal action
against the Company to enforce their alleged patent rights.

CONDITIONS IN ISRAEL

         The Company conducts significant operations in Israel through its
subsidiary, Ambient Israel, and therefore is affected by the political, economic
and military conditions to which that country is subject.


                                      -12-




<PAGE>
 
<PAGE>



EMPLOYEES

         The Company presently has 17 full-time employees, of whom 12 are
employed in research and development, two in sales and marketing, one in
administration, and two in management, plus the Company's secretary, which is
not a full-time position, and a part-time bookkeeper.

YEAR 2000

         Many currently installed computer systems and software products are
coded to accept only two-digit entries, as opposed to a four digit year. Thus,
the year 2000 could be interpreted by such systems and products as the year
1900, resulting in the inaccurate processing of data. By the year 2000, these
systems and products must be modified to accept four-digit entries or otherwise
distinguish 21st century dates from 20th century dates. Computer systems and/or
software may need to be upgraded to comply with such "year 2000" requirements.
The Company's technical personnel have taken the year 2000 issue into
consideration in designing its software for future use in Ambient products to
minimize the risk of material disruption in its systems. In addition, the
Company believes that its own computer system is in compliance and does not
currently anticipate any material disruption in its operations. However, the
Company does not have any information concerning the compliance status of its
future suppliers and customers. In the event that any of the Company's
significant suppliers or customers do not successfully achieve year 2000
compliance, the Company's business, financial condition or results of operations
could be adversely affected.

ITEM 2. DESCRIPTION OF PROPERTY

         As of March 1998, Ambient Israel sub-leases from Delta Three Inc., an
affiliate of the Company ("Delta Three"), approximately 3,228 square feet in the
Jerusalem Technological Park for use as its executive offices and research and
development facilities. The Company's initial lease term expires in 1999, and is
thereafter automatically renewable for additional one-year terms unless
terminated by either party.

         Prior to March 1998, Ambient Israel leased approximately 2,690 square
feet in the Jerusalem Technological Park. The Company terminated this lease
prior to its expiration without incurring penalty payments.

         Since October 1, 1997, the Company has rented from Wolf Haldenstein
Adler Freeman & Herz, on a month-to-month basis, a small office in New York City
for $700 per month. Jacob Davidson's father-in-law is a partner at Wolf
Haldenstein Adler Freeman & Herz. Prior thereto, the Company subleased such
space from Pioneer Management Corporation ("Pioneer"), the rent for which has
been forgiven by Pioneer. Mr. Wurtman and Mr. Davidson own all of the
outstanding equity and are directors and officers of Pioneer. See "Security
Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions."

         The Company believes that its present facilities are suitable for its
needs for the foreseeable future.



                                      -13-




<PAGE>
 
<PAGE>



ITEM 3. LEGAL PROCEEDINGS

         On November 12, 1997, the former chief scientist of the Company,
Alexander Rozin, filed suit against Ambient Israel in the Regional Labor Court
for the Jerusalem Region asserting a claim for severance and vacation pay and
certain other benefits aggregating approximately NIS 70,000 (approximately
$19,500), not including interest, penalties and attorneys' fees. The Company and
Mr. Rozin entered into a court approved settlement pursuant to which the Company
paid Mr. Rozin approximately NIS 70,000, subject to Israeli CPI linkage
differentials, over a two month period commencing January 1, 1998. In addition,
while not sought in such claim, Mr. Rozin stated in documents filed with the
labor court that he believed certain officers of Ambient Israel agreed to issue
to him an additional 15% of the shares of Ambient Israel in exchange for Mr.
Rozin's waiver of certain royalty rights from the Company and Ambient Israel. It
is unclear whether Mr. Rozin plans to assert this claim in a separate litigation
in an Israeli court of proper jurisdiction. Management believes that these
allegations are without merit and intends, should it become necessary, to
vigorously defend against these claims.

         The Company is not a party to any other material litigation that would
have a material adverse effect on the Company or its business.

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

         During the fourth quarter of the year ended December 31, 1997, no
matters were submitted by the Company to a vote of its stockholders.





                                      -14-




<PAGE>
 
<PAGE>



                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Market Information. The Company's common stock, $.001 par value per
share (the "Common Stock"), is currently quoted on the OTC Electronic Bulletin
Board under the trading symbol "ABTG." The following table sets forth the range
of high and low bid prices for the Common Stock as reported on the OTC
Electronic Bulletin Board for the calendar quarter ending March 31, 1998. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.

<TABLE>
<CAPTION>

                                                                                                Bid Information
                                                                                                ---------------
      Year       Period                                                                        High          Low
      ----       ------                                                                        ----          ---
      <C>        <S>                                                                           <C>           <C>
      1998       First Quarter (quotation commenced
                 March 1998).............................................................     $9.25         $2.50

</TABLE>

         As of May 26, 1998, there were approximately 96 stockholders of record.
A significant percentage of the unrestricted shares of Common Stock held of
record are registered in the names of brokerage firms or depository trusts.

         The Company has neither declared nor paid any dividends on its Common
Stock and does not anticipate paying dividends in respect of its Common Stock in
the foreseeable future. Any payment of future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, the Company's earnings, financial condition, cash flows, capital
requirements and other relevant considerations, including the extent of its
indebtedness and any contractual restrictions with respect to the payment of
dividends.

         Use of Proceeds. The Company's Registration Statement on Form SB-2,
file no. 333-40045, was declared effective by the Securities and Exchange
Commission on February 12, 1998. The initial public offering of the Company's
Common Stock covered by such Registration Statement commenced on February 13,
1998. Roan Capital Partners, L.P. acted as the managing underwriter (the
"Representative") for the offering. A total of 656,250 shares of Common Stock
were registered, including 78,750 shares issuable upon exercise of the
Representative's 45-day over-allotment option and 52,500 shares issuable upon
exercise of warrants issued to the Representative (the "Representative's
Warrants"). The Representative's Warrants to purchase 52,500 shares of Common
Stock issued to the Representative were also registered. The aggregate offering
price of the registered Common Stock (including the over-allotment option), the
Representative's Warrants and the shares issuable upon exercise of
Representative's Warrants, was $5,523,052.50. Of this amount, $4,200,000
representing 525,000 shares of Common Stock have been sold (and the
Representative's Warrants were sold for $52.50). The Representative's Warrants
have not yet been exercised and consequently the offering has not yet
terminated.



                                      -15-





<PAGE>
 
<PAGE>



         The amount of expenses incurred for the Company's account in connection
with the issuance and distribution of the securities registered are as follows:

<TABLE>
<S>                                                                              <C>
Underwriting discounts and commissions..........................                 $420,000
Finder's fees...................................................                        0
Expenses paid to or for the underwriters........................                  126,000
Other expenses..................................................                  397,710
                                                                                  -------
                  Total expenses................................                 $943,710

</TABLE>


         All such expenses were paid directly or indirectly to others.

         The net offering proceeds to the Company after deducting the above
expenses were $3,256,290.

         As of March 31, 1998, the amount of net offering proceeds to the
Company has been used for the following purposes as follows:

<TABLE>
<S>                                                                             <C>
Marketing.......................................................                 $ 43,711
Additional Facilities...........................................                        0
Research and Product Development................................                  162,788
Repayment of indebtedness.......................................                1,828,261
Capital Equipment...............................................                        0
Working Capital and General Corporate...........................                  225,064
Temporary Investments...........................................                 $996,466

</TABLE>

         All such payments were made directly or indirectly to others.

         The use of proceeds contained herein does not represent a material
change in the use of proceeds described in the prospectus, except that repayment
of indebtedness increased by $178,261 from the estimated $1,650,000 stated in
the prospectus to $1,828,261 due to adjustments in the calculations of interest
on the indebtedness through the date of payment and the repayment of accrued
interest on certain indebtedness in the principal amount of $968,000.

Recent Sales of Unregistered Securities. The following securities were sold by
the Company without registration under the Securities Act of 1933, as amended
(the "Act"), during the fiscal year ended December 31, 1997.

         (a) In September and October 1997, the Company sold in a private
offering (the "1997 Private Placement") 13.3 units ("Units"), each Unit
consisting of a 7% promissory note in the principal amount of $30,000 and 6,000
shares of Common Stock, at a purchase price of $30,000 per Unit, to 13
purchasers, all of whom have represented to the Company that they are accredited
investors. An aggregate of 80,000 shares of Common Stock and promissory notes in
the aggregate principal amount of $400,000 were issued to the investors in the
1997 Private Placement. The Company paid commissions (10%) and a non-accountable
expense allowance (3%) in the aggregate amount of approximately $52,000


                                      -16-





<PAGE>
 
<PAGE>



to Roan Capital Partners L.P. The gross proceeds from the 1997 Private Placement
was $400,000 (without ascribing any value to the shares). The Company believes
that the Units, promissory notes and shares of Common Stock were issued in
transactions not involving a public offering in reliance upon an exemption from
registration provided by Sections 4(2) and 4(6) of the Act and Rule 505 of
Regulation D promulgated thereunder.

         (b) In August 1997, the Company issued to Yehuda Cern, an officer of
the Company, 84,167 shares of Common Stock. The shares were issued in
consideration of services performed and there were no underwriters with respect
to this issuance. The Company believes that the shares of Common Stock were
issued in a transaction not involving a public offering in reliance upon an
exemption from registration provided by Section 4(2) of the Act.

         (c) In March 1997, the Company issued to Aryeh Weinberg, chief
financial officer of the Company, 20,000 shares of Common Stock. The shares were
issued in consideration of services performed and there were no underwriters
with respect to this issuance. The Company believes that the shares of Common
Stock were issued in a transaction not involving a public offering in reliance
upon an exemption from registration provided by Section 4(2) of the Act.

         (d) In October 1997, the Company issued to Camden Management Holdings,
an advisor to the Company, 6,000 shares of Common Stock. The shares were issued
in consideration of services performed and there were no underwriters with
respect to this issuance. The Company believes that the shares of Common Stock
were issued in a transaction not involving a public offering in reliance upon an
exemption from registration provided by Section 4(2) of the Act.

         (e) In January 1998, the Company issued to Malki Neuberg, a consultant
to the Company, 40,000 shares of Common Stock. The shares were issued in
consideration of services performed and there were no underwriters with respect
to this issuance. The Company believes that the shares of Common Stock were
issued in a transaction not involving a public offering in reliance upon an
exemption from registration provided by Section 4(2) of the Act.

ITEM 6. PLAN OF OPERATION

         The following discussion and analysis should be read in conjunction
with the financial statements and notes related thereto contained elsewhere in
this Form 10-KSB.

         The Company was organized in June 1996 and is a development stage
company. Since GTI's inception in September 1995, the Company's activities have
been principally limited to organizational and initial capitalization
activities, designing and developing smart card technology and recruitment of
executive personnel. As a development stage company, the Company has a limited
relevant operating history upon which an evaluation of the Company's prospects
can be made. The Company's prospects must therefore be evaluated in light of the
problems, expenses, delays and complications associated with a new business.

         The Company has not generated any revenues from operations since its
inception. For the fiscal years ended December 31, 1996 and 1997, and the three
months ended March 31, 1998, the Company has incurred net losses aggregating
$2,875,651, reflecting principally research and development expenses and general
and administrative expenses. The Company expects to incur significant up-front
expenditures


                                      -17-





<PAGE>
 
<PAGE>



in connection with the planned expansion of its operations, including the
implementation of marketing and sales efforts and the commercialization of the
Company's technology, and operating losses are expected to continue for the
foreseeable future. There can be no assurance that the Company can be operated
profitably in the future. The Company's independent auditors included an
explanatory paragraph in their report dated May 19, 1998 relating to the
Company's financial statements for the year ended December 31, 1997, indicating
that there is substantial doubt regarding the Company's ability to continue as a
going concern. The Company's continuation as a going-concern is dependent upon,
among other things, its ability to obtain additional financing when and as
needed, and to generate sufficient cash flow to meet its obligations on a timely
basis. The Company may also explore other business options including strategic
joint ventures, business combinations, including investments in other companies,
or mergers.

         In February 1998, the Company completed an initial public offering of
525,000 shares of Common Stock (the "IPO"). The Company received net proceeds
from the IPO in the amount of $3,256,290. The Company is dependent upon the
proceeds of the IPO to implement its anticipated business plans. The Company
anticipates that the proceeds of the IPO will be sufficient to satisfy the
Company's contemplated cash requirements for approximately 12 months from the
IPO, based upon the Company's present plans and certain assumptions relating to
general economic and industry conditions, market factors, and the Company's
future revenues and expenditures. If any of these factors change or the
Company's assumptions change or prove to be incorrect, the Company will be
required to raise additional funds during such period. Any inability to obtain
additional financing when needed would have a material adverse effect on the
Company, requiring it to curtail or possibly cease operations.

         As of March 31, 1998, the Company has expended $825,793 on its research
and development activities (including $95,976 received from the Office of Chief
Scientist of the Israeli Ministry of Industry and Trade ("OCS"). During the next
12 months, the Company's research and development plans include, although there
can be no assurance, filing one or more patent applications in the United States
and Israel, developing a reader based on certain chip technology, implementing
pilot production of smart cards and demonstrating compatibility for the use of
Ambient technology in large memory data storage media such as cameras,
telephones and computers. The Company may need to raise additional funding to
carry out all or a portion of its research and development plans. The Company
does not have any commitments for any future financings and there can be no
assurance such financing will be available to the Company when needed. Any
inability to obtain such additional financing when needed would have a material
adverse effect on the Company, requiring it to curtail or possibly cease its
research and development operations. The Company anticipates that its first
Ambient product will be completed and ready for introduction into the market by
the fourth quarter of 1998. Product introduction will depend on several factors,
including research and development and marketing efforts, and there can be no
assurance that the Company will be successful in introducing a product by the
end of 1998.

         The Company's marketing activity to date has consisted of formulating a
marketing strategy. The Company's strategy focuses initially on approaching and
establishing relationships with large and mid-sized system integrators already
established in the smart card market, as well as those integrators involved in
ancillary markets such as health care, access control, and transport ticketing.
The Company also intends to target potential volume customers. The Company has a
marketing and sales director and plans to hire two to three additional full-time
marketing and sales personnel. As of the date hereof, the Company has not
identified individuals to fill these positions. In an effort to promote
recognition of the Ambient name within the industry, the Company plans to
exhibit its technology at selected industry trade shows, and design and
distribute marketing materials. The Company also plans to implement and
publicize pilot projects to demonstrate the benefits of the Ambient system. In
March 1998, the Company


                                      -18-





<PAGE>
 
<PAGE>



completed the installation of two readers in two classrooms at a public school
in the City of Ashdod, Israel and distributed approximately 50 cards to students
and teachers in an effort to carry out a pilot program (the "Ashdod Project").
The program was designed to demonstrate Ambient's technology for tracking
attendance in those classrooms in which readers were installed. Although the
Company demonstrated that the technology worked for the purposes for which it
was designed, the school has not implemented the use of the technology.
Depending on the outcome of further discussions with school officials, the
Company may discontinue efforts for a pilot project at the school. The Company
incurred substantially all of the costs associated with the Ashdod Project,
which were approximately $13,000 as of March 31, 1998. The Company has not
entered into any arrangements to design additional pilot projects. Over the next
12 months, the Company presently plans to spend approximately $350,000 of the
proceeds from the IPO on marketing related activities.

         Depending on several factors, including the success of the Company's
marketing efforts, market acceptance of the Ambient technology, competition and
the Company's progress in its research and development efforts and developing
relationships with systems integrators, the Company believes it will begin to
generate sales and revenues during the fourth quarter of 1998. There can be no
assurance, however, that the Company will generate significant revenues by this
date, or at all.

         The Company currently has 17 full-time employees (including those hired
from the College) and two part-time employees, and depending on its level of
business activity, expects to hire up to approximately six additional employees
in the next 12 months, including marketing and sales, research and development,
customer support, and administrative personnel. The Company has allocated
approximately $400,000 of the net proceeds of the IPO for the recruitment and
related payroll expenses for additional employees over the 12-month period after
the IPO.

         The Company's product development is carried out at Ambient Israel's
facilities in Israel. During the next 12 months, the Company plans to utilize
approximately $100,000 of the net proceeds from the IPO for capital expenditures
to purchase additional equipment for the planned small scale production of
Ambient smart card terminals. In May 1998, the Company purchased from the
Jerusalem College of Technology (the "College") certain equipment for a purchase
price of $40,000, which is payable in installments over three years. In
connection with such purchase, the Company agreed to hire three full-time
employees from the College, assumed certain liabilities in the aggregate amount
of approximately $15,000 and certain other contractual obligations, and entered
into a sublease agreement with the College with respect to the facilities
housing the purchased equipment. The lease is for approximately 2,000 square
feet at $20,400 per year. As of May 1998, the Company has paid to the College
$10,000 in purchase price installments and rent. These facilities, which have
replaced the Company's in-house mechanical design and prototyping shop, provide
mechanical design and prototyping services to high-tech companies, including the
Company. The Company anticipates that revenues from these operations will offset
all or a portion of the expenses associated with purchasing the equipment and
leasing and operating the facility. This transaction is subject to cancellation
by the Company if, by July 10, 1998, the employees and the College have not
entered into a satisfactory agreement with respect to a present dispute between
the employees and the College regarding the employees' severance packages. In
the event the dispute is not settled and the transaction is cancelled, the
Company will seek to locate alternative facilities for mechanical design and
prototyping services.

         In March 1998, Ambient Israel moved its offices to new facilities
within the Jerusalem Technology Park, which it shares with Delta Three Inc.
("Delta Three"), an affiliate of the Company. Ambient Israel's portion of the
new facilities is approximately 3,228 square feet. As of January 1, 1998,


                                      -19-





<PAGE>
 
<PAGE>



Ambient Israel and Delta Three entered into a cooperation agreement (the
"Cooperation Agreement") pursuant to which the entities have agreed to share the
expenses of resources, rent and shared employees based on their proportionate
uses of the shared facilities. Under the Cooperation Agreement, the new office
space is leased by Delta Three, which in turn is subleasing a portion of such
space to Ambient Israel for an initial term of one year at a monthly rental rate
of $7,800 (including rent, utilities, computer network, security and cleaning
service), linked to Israeli Consumer Price Index, plus reimbursement for certain
office expenses and professional services. The Company believes that these
facilities are sufficient to meet the Company's needs in Israel for the
foreseeable future. The Cooperation Agreement has a term of one year and is
automatically renewable for additional one-year periods, provided that the
amounts of reimbursements and the services to be provided thereunder are subject
to negotiation by the parties, in general, every six months or at otherwise
specified dates provided therein. The Company believes that the terms of the
Cooperation Agreement are no less favorable to the Company than the Company
could obtain from non-affiliated third parties.

         Since inception, the Company has relied for its capital requirements on
certain debt financings, government funding from the OCS, bank financing, a loan
from a third party during the second quarter of 1997 in the principal amount of
$120,000 bearing interest at 8% per annum, stockholder loans in the aggregate
principal amount of $25,781 (all of which was repaid), a $400,000 private
placement of promissory notes and Common Stock of the Company in 1997, a third
party loan from Mylock Holdings Inc. in the principal amount of $150,000,
bearing interest at 22% per annum, and the IPO. The Company used $1,828,261 of
the net proceeds from the IPO to satisfy the principal and accrued interest due
on the loans (excluding the stockholder loans) and the promissory notes.

         On August 14, 1997, Ambient Israel applied to the Israeli Investment
Center pursuant to The Law for the Encouragement of Capital Investments, 1959
(the "Investment Law") to have certain of its facilities and/or assets
designated as an "Approved Enterprise." The Investment Law provides that certain
capital investments may, upon application to the Israeli Investment Center, be
designated as an Approved Enterprise. On March 25, 1998, Ambient Israel was
granted Approved Enterprise status under the Investment Law with respect to its
planned investment in certain fixed assets for establishing a smart card
production facility. Ambient Israel participates under the "Alternative Benefits
Program" under the Investment Law. Accordingly, taxable profits attributable to
the approved enterprise will be exempt from tax for a period of 10 years,
commencing in the first year in which the Approved Enterprise first generates
taxable income. However, such benefits period will terminate upon the earlier of
(i) 12 years from the commencement of production or (ii) 14 years from the date
of approval of the Approved Enterprise. Under the Alternative Benefits Program,
dividend distributions from Ambient Israel during the benefits period will be
subject to reduced withholding tax of 15%, but will render Ambient Israel liable
for corporate tax (generally 25%, subject to reduction depending upon the
percentage of foreign investment in Ambient Israel) on the amount distributed
and the corporate tax thereon.

         The benefits available as an Approved Enterprise are conditioned upon
the fulfillment of certain conditions stipulated in the Investment Law, and the
regulation thereunder, and the criteria set forth in the certificate of
approval. In the event any of these conditions are not fulfilled, in whole or in
part, the benefits could be canceled and the Company could be required to refund
the amount of the canceled benefits, plus interest and inflation adjustments.
There can be no assurance that the Company will be able to continue to comply
with such requirements in the future.


                                      -20-





<PAGE>
 
<PAGE>



ITEM 7. FINANCIAL STATEMENTS

         The Company's audited consolidated financial statements for the years
ended December 31, 1997 and 1996, respectively, are set forth at the end of this
Annual Report on Form 10-KSB and begin on page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         None







                                      -21-





<PAGE>
 
<PAGE>



                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
        REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         The names, ages and positions of the directors, executive officers and
key employees of the Company are as follows:

<TABLE>
<CAPTION>

Name                                 Age            Position
----                                 ---            --------
<S>                                 <C>             <C>
Jacob Davidson                        28            Chairman of the Board, President, and
                                                    Chief Executive Officer

Dr. Yehuda Cern                       54            Chief Technical Officer

Aryeh Weinberg                        40            Chief Financial Officer

Elie Wurtman                          28            Director and Secretary

Dr. George Kaplun                     56            Senior Electrical Engineer

</TABLE>

         The business experience, principal occupations and employment, as well
as the periods of service, of each of the directors and executive officers of
the Company during at least the last five years are set forth below.

         Jacob Davidson is a co-founder of Ambient Corporation and has been
Chairman of the Board, President and Chief Executive Officer of Ambient
Corporation and Ambient Israel since the Company's inception in June 1996. From
1991 to 1996, Mr. Davidson managed several high-tech start-up companies in
Israel, as a venture capitalist and as a management consultant. In May 1995, Mr.
Davidson co-founded Pioneer Management Corporation ("Pioneer") and has served as
an officer and director thereof since such date. In May 1996, Mr. Davidson
became a director of Delta Three Inc., an Internet communications company
("Delta Three"). From 1988 through 1991, Mr. Davidson was employed by the law
firm of Wolf Haldenstein Adler Freeman & Herz in the securities litigation
division. Mr. Davidson received a J.D. from Georgetown University Law Center in
May 1994 and received both a B.A. and a B.S. from the City College of New York.

         Dr. Yehuda Cern has been Chief Technical Officer of Ambient Israel
since August 1997. Dr. Cern worked at AirOptics, Inc., an infrared
communications company located in Lancaster, Pennsylvania and a subsidiary of
JOLT, Ltd. in Jerusalem, as Chief Operating Officer and Senior Vice President
from 1996 to 1997 and as Chief Technical Officer from 1993 to 1996. From 1991 to
1993, Dr. Cern served as R&D Manager and then Jerusalem general site manager for
News Datacom Research Ltd., a subsidiary of News Corp. located in Israel. Dr.
Cern received a B.S. degree and an M.Sc. degree in electrical engineering from
Wayne State University in Detroit and a Ph.D. in medical electronics from the
Weizmann Institute in Israel.

         Aryeh Weinberg has been Chief Financial Officer of Ambient Corporation
and Ambient Israel since January 1997. Since February 1997, Mr. Weinberg has
served as Chief Financial Officer of Delta Three. From 1980 to 1996, Mr.
Weinberg, a certified public accountant, worked at Schiller Holinsky & Garolyn
P.A., a public accounting firm in the United States, becoming the audit and
accounting partner



                                      -22-





<PAGE>
 
<PAGE>



there in 1991. Mr. Weinberg earned a Bachelor's degree in business
administration from Towson State University in Baltimore, Maryland.

         Elie Wurtman is a co-founder of Ambient Corporation and has been
Secretary and a Director of Ambient Corporation and Ambient Israel since the
Company's inception in June 1996. From April 1995 to December 1996, Mr. Wurtman
served as the Director of Marketing for TTR Technologies Ltd., an Israel-based
software security company and wholly-owned subsidiary of the publicly owned TTR
Inc. Mr. Wurtman has served as chief executive officer and a director of Delta
Three since May 1, 1996. In May 1995, Mr. Wurtman co-founded Pioneer and has
served as an officer and a director thereof since such date. Since 1994, Mr.
Wurtman has been a managing director of a small equities trading fund in Israel
and has been retained as a consultant in financial consulting and strategic
marketing planning by several technology companies in Israel. Mr. Wurtman served
as a commander in the Israel Defense Forces, including two years as the
Commander of the Allenby Bridge tourist border crossing between Israel and
Jordan. Mr. Wurtman sits on the central committee of Yisrael B'ALIYA, a new
Israeli political party, and often serves as a political advisor. Mr. Wurtman
holds a B.A. in political science from Columbia University and a B.A. in Talmud
from the Jewish Theological Seminary.

         Dr. George Kaplun has been Senior Electrical Engineer of Ambient Israel
since the Company's inception in June 1996. Dr. Kaplun is a veteran electrical
engineer, with many years of experience in both the academic and development
sectors. His experience includes: designing an infrared (communications) system
for telecommunications at OPLINK Communication Ltd., in Jerusalem; developing an
automatic projection interface program at RADA Ltd., in Beit Shean; and 15 years
as a Docent and Senior Lecturer, Chief Engineer and Team Manager in the computer
science division for hardware development at the Polytechnic Institute in the
former Soviet Union. Dr. Kaplun has received numerous patents in various
electrical engineering fields and holds a Ph.D. in electronics, as well as a
masters of science degree in electronic engineering from the Tel Aviv
University.

         Mr. Davidson devotes approximately 75% of his time to the business of
the Company. As a director and the Secretary, Mr. Wurtman does not devote a
substantial amount of time to the daily business operations of the Company.

         All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Directors currently do
not receive cash compensation for serving on the Board of Directors. Officers
are elected annually by the Board of Directors and serve at the discretion of
the Board. Roan Capital Partners, L.P., the underwriter of the Company's initial
public offering, is entitled to designate one director to the Board during the
three (3) year period ending February 12, 2001. Roan Capital Partners, L.P. has
not identified any director designee and has indicated to the Company that it
does not intend to exercise this right in the immediate future.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers, directors and persons
who beneficially own more than 10% of a registered class of the Company's equity
securities to file certain reports regarding ownership of, and transactions in,
the Company's securities with the Securities and Exchange Commission (the
"SEC"). These officers, directors and stockholders are also required by SEC
rules to furnish the Company with copies of all Section 16(a) reports that they
file with the SEC. During the year ended December 31,



                                      -23-




<PAGE>
 
<PAGE>



1997, the Company's executive officers and directors and beneficial owners of
more than 10% of the Company's Common Stock were not subject to the reporting
requirements under the Exchange Act.

ITEM 10. EXECUTIVE COMPENSATION

         The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to the Company during the Company's fiscal
years ended December 31, 1996 and 1997 by the Company's Chief Executive Officer.
No other executive officers received compensation in excess of $100,000 during
such period.

                           SUMMARY COMPENSATION TABLE

                               Annual Compensation

<TABLE>
<CAPTION>

============================================================================================
                                                              Annual Compensation
                                                  ------------------------------------------
                                                                                    Other
                                                                                    Annual
                                                                                   Compen-
                                                                                    sation
               Name and                                Salary        Bonus           ($)
        Principal Position (1)                          ($)           ($)            (e)
                 (a)                                    (c)           (d)
                                      Year (b)
--------------------------------------------------------------------------------------------

<S>                                     <C>          <C>              <C>            <C>
Jacob Davidson
Chairman of the Board, President and     1996        $40,000(2)        --            (1)    
Chief Executive Officer
--------------------------------------------------------------------------------------------
                                         1997        $61,085(3)        --            (1)    
============================================================================================

<CAPTION>

========================================================================================================
                                                                    Long Term Compensation
                                                    ----------------------------------------------------
                                                            Awards                     Payouts
                                                    ----------------------------------------------------
                                                                   Securities
                                                    Restricted       Under-                  All Other
                                                      Stock          lying         LTIP        Compen-
               Name and                              Award(s)       Options/      Pay-outs      sation
        Principal Position (1)                         ($)            SARs          ($)          ($)
                 (a)                   Year(b)         (f)             (#)          (h)          (i)
                                                                       (g)
--------------------------------------------------------------------------------------------------------
<S>                                      <C>         <C>           <C>             <C>        <C>
Jacob Davidson
Chairman of the Board, President and      1996          --              --           --          --
Chief Executive Officer
--------------------------------------------------------------------------------------------------------
                                          1997          --              --           --          --
========================================================================================================

</TABLE>

(1)      The above compensation figures do not include the cost to the Company
         of the use of an automobile leased by the Company, the cost to the
         Company of benefits, including premiums for life and health insurance
         and any other personal benefits provided by the Company to such persons
         in connection with the Company's business.

(2)      Consists of $40,000 paid to Mr. Davidson pursuant to a consulting
         agreement with Ambient. See "Employment Agreement" for a description of
         the compensation arrangement between the Company and Mr. Davidson. See
         "Certain Relationships and Related Transactions."

(3)      Consists of (i) $50,000 paid to Mr. Davidson pursuant to a consulting
         agreement with Ambient; and (ii) $11,085 in salary payments from
         Ambient Israel as converted from NIS into United States dollars based
         on the estimated average rate of exchange in effect during the period
         in 1997 that such salary was earned (approximately NIS 3.5 for every
         $1.00). See "Employment Agreement" for a description of the
         compensation arrangement between the Company and Mr. Davidson. See
         "Certain Relationships and Related Transactions."



                                      -24-


<PAGE>
 
<PAGE>



         The Company did not grant any options or warrants during 1996 or 1997
to any of its executive officers. The Company does not have any long-term
incentive plans for compensating its executive officers.

EMPLOYMENT AGREEMENT

         On May 1, 1996, Messrs. Wurtman and Davidson entered into a management
consulting agreement with GTI, which agreement Ambient assumed in August 1996 in
connection with the acquisition of substantially all of GTI's assets. Pursuant
to such agreement, each of Messrs. Wurtman and Davidson earned $90,000 through
October 1997, of which an aggregate of $5,000 has been paid. Effective as of
November 1, 1997, such consulting agreements were terminated by the mutual
consent of Messrs. Davidson and Wurtman and the Company. See "Certain
Relationships and Related Transactions."

         As of February 12, 1998, the Company entered into a two-year employment
agreement with Mr. Davidson as President and Chief Executive Officer of Ambient
Corporation and Ambient Israel, with automatic one-year renewal periods, unless
otherwise terminated in accordance with the terms of the agreement. The
agreement provides for an annual salary of $60,000 and requires Mr. Davidson to
devote at least 75% of his business time to the affairs of the Company. The
agreement may be terminated by the Company for cause, as defined therein. Upon
Mr. Davidson's termination for any reason, other than death, disability, for
cause or as a result of his voluntary resignation, he is entitled to receive an
amount equal to his annual base salary during the year of termination. The
agreement also prohibits Mr. Davidson from disclosing confidential information
and restricts Mr. Davidson during the term of his employment and for a period of
two years after termination, from engaging in a business in competition with the
Company's business and from soliciting employees of the Company.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth, as of December 31, 1997 and as adjusted
to reflect the sale of 525,000 shares of Common Stock sold by the Company in
February in the Company's initial public offering, certain information with
respect to the beneficial ownership of Common Stock by (i) each person known by
the Company to be the owner of more than 5% of the outstanding Common Stock,
(ii) each director, (iii) each executive officer named in the Summary
Compensation Table and (iv) all directors and executive officers as a group:

<TABLE>
<CAPTION>

                                                                                      Percentage of Outstanding
                                                       Amount and                           Shares Owned
                                                        Nature of              --------------------------------------
Name and Address                                       Beneficial                 Before                     After
of Beneficial Owner(1)                                Ownership(2)             Offering (3)              Offering (4)
----------------------                                ------------             ------------              ------------

<S>                                                   <C>                      <C>                       <C>
Jacob Davidson(5).............................           233,049                   9.5%                      7.8%
Elie Wurtman(6) ..............................           235,646                   9.6%                      7.9%
Directors and executive officers
as a group (5 persons)........................           599,795                  24.4%                     20.1%
</TABLE>




                                      -25-


<PAGE>
 
<PAGE>



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

(1)      Except as otherwise indicated, the address of each beneficial owner is
         c/o Ambient Israel, Jerusalem Technological Park, Building Nine, Malha,
         Jerusalem, Israel.

(2)      Unless otherwise noted, the Company believes that all persons named in
         the table have sole voting and investment power with respect to all
         shares of Common Stock beneficially owned by them. A person is deemed
         to be the beneficial owner of securities that can be acquired by such
         person within 60 days from the date hereof upon the exercise of
         warrants or options. Each beneficial owner's percentage ownership is
         determined by assuming that options or warrants that are held by such
         person (but not those held by any other person) and which are
         exercisable within 60 days from the date hereof have been exercised.

(3)      Based on 2,459,333 shares outstanding (including 40,000 shares issued
         in January 1998 to a consultant).

(4)      Based on 2,984,333 shares outstanding.

(5)      Does not include 235,646 shares of Common Stock owned of record by
         Pioneer Management Corporation ("Pioneer"), of which Mr. Jacobson is a
         principal, of which shares Mr. Davidson disclaims beneficial ownership.

(6)      Includes 235,646 shares of Common Stock owned of record by Pioneer. Mr.
         Davidson and Mr. Wurtman each own 50% of the outstanding equity and are
         directors and officers of Pioneer. Pursuant to an agreement between Mr.
         Davidson and Mr. Wurtman, Mr. Wurtman has sole voting and investment
         control over the 235,646 shares of Common Stock owned of record by
         Pioneer and may, therefore, be deemed to be the beneficial owner of
         such 235,646 shares of Common Stock.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On May 1, 1996, Messrs. Wurtman and Davidson entered into a management
consulting agreement with GTI, which Ambient assumed in August 1996 in
connection with the acquisition of substantially all of GTI's assets and
liabilities. Pursuant to such agreement, each of Jacob Davidson, chairman of the
board, president and chief executive officer, and Elie Wurtman, a director and
secretary, earned $5,000 per month, or $90,000 through October 1997. These fees
have been accruing since January 1997, except for an aggregate of $5,000 which
has been paid. Effective as of November 1, 1997, such consulting agreements were
terminated by the mutual consent of Messrs. Davidson and Wurtman and the
Company, provided that the Company remains obligated for the accrued consulting
fees to date.

         In August 1996, the Company purchased from GTI substantially all of the
liabilities and assets, properties, business and goodwill of GTI, including the
capital stock of GTI's subsidiary, GenTec Ltd., a corporation organized under
the laws of the State of Israel, for an aggregate purchase price of $1.00. The
negative book value of GTI and Gentec Ltd. at the time of the acquisition was
$83,674. After the acquisition, the Company changed the name of its subsidiary
from GenTec, Ltd to Ambient, Ltd. Mr. Davidson is chief executive officer and a
principal stockholder of GTI. GTI has not conducted any substantial business
operations since its sale to the Company of substantially all of its assets in
August 1996.


                                      -26-




<PAGE>
 
<PAGE>



         In November 1996, the Company entered into a six-month consulting
agreement with Tekol, Ltd. ("Tekol"). Pursuant to this consulting agreement,
Tekol managed the Company's research and development operations and oversaw the
Company's government funding applications in return for $1,000 per month. Tekol
also received 42,083 shares of Common Stock and a $6,000 fee for meeting certain
designated funding targets set forth in the agreement. All of the outstanding
capital stock of Tekol is owned by Yuli Kasharovsky who, from time to time, acts
as a special advisor to the Company.

         Since October 1, 1997, the Company has rented from Wolf Haldenstein
Adler Freeman & Herz, on a month-to-month basis, a small office in New York City
for $700 per month. Jacob Davidson's father-in-law is a partner at Wolf
Haldenstein Adler Freeman & Herz. Prior thereto, the Company subleased such
space from Pioneer, the rent for which has been forgiven by Pioneer. Mr. Wurtman
and Mr. Davidson own all of the outstanding equity and are directors and
officers of Pioneer.

         In September 1997, Mr. Davidson and Mr. Wurtman loaned the Company an
aggregate of $25,781, at no interest, all of which has been repaid. The Company
used the proceeds from such loans for general working capital purposes.

         In March 1998, Ambient Israel moved its offices to new facilities
within the Jerusalem Technology Park, which it shares with Delta Three Inc.
("Delta Three"), an affiliate of the Company. Ambient Israel's portion of the
new facilities is approximately 3,228 square feet. As of January 1, 1998,
Ambient Israel and Delta Three entered into a cooperation agreement (the
"Cooperation Agreement") pursuant to which the entities have agreed to share the
expenses of resources, rent and shared employees based on their proportionate
uses of the shared facilities. Under the Cooperation Agreement, the new office
space is leased by Delta Three, which in turn is subleasing a portion of such
space to Ambient Israel for an initial term of two years at a monthly rental
rate of $7,800 (including rent, utilities, computer network, security and
cleaning service), linked to Israeli Consumer Price Index, plus reimbursement
for certain office expenses and professional services. The Company believes that
these facilities are sufficient to meet the Company's needs in Israel for the
foreseeable future. The Cooperation Agreement has a term of one year and is
automatically renewable for additional one-year periods, provided that the
amounts of reimbursements and the services to be provided thereunder are subject
to negotiation by the parties, in general, every six months or at otherwise
specified dates provided therein. The Company believes that the terms of the
Cooperation Agreement are no less favorable to the Company than the Company
could obtain from non-affiliated third parties.

         All future transactions between the Company and its affiliates will be
on terms no less favorable to the Company than the Company could obtain from
non-affiliated third parties.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a) Exhibits. The following exhibits are included herewith unless
otherwise indicated:

<TABLE>
<C>                        <S>
                *3.1       Certificate of Incorporation of the Company, as amended.
                *3.2       By-Laws of the Company, as amended.
                *3.3       Memorandum of Association of Ambient Israel.
                *3.4       Articles of Association of Ambient Israel.
                *4.1       Specimen Stock Certificate
               *10.1       Form of the Company's 1998 Stock Option Plan.

</TABLE>

                                      -27-


<PAGE>
 
<PAGE>


<TABLE>
<C>                        <S>

               *10.2       Form of Employment Agreement between the Company and Jacob Davidson.
               *10.3       Employment Agreement between Ambient Israel and Dr. Yehuda Cern.
               *10.4       Employment Agreement between Ambient Israel and Dr. George Kaplun.
               *10.5       Summary (translated into English) of principal terms of Lease between Ambient
                           Israel and Jerusalem Technological Park.
               *10.6       Agreement dated August 1, 1996, between GenTechnologies, Inc. and Ambient
                           Corporation.
               *10.7       Agreement between GenTechnologies, Inc. and Alexander Rozin dated
                           December 5, 1995.
               *10.8       Consulting Agreement with Tekol, Ltd.
               *10.9       Form of Cooperation Agreement dated January 1, 1998, between Delta Three
                           Inc. and Ambient Israel.
               *21.1       Subsidiaries of the Company.
                27         Financial Data Schedule.

</TABLE>
-------------
*        Incorporated by reference to the Company's Registration Statement on
         Form SB-2 (File No. 333-40045) filed with the Securities and Exchange
         Commission on November 12, 1997, as amended January 23, 1998.

(b)      Current Reports on Form 8-K.

                  None.


                                      -28-





<PAGE>
 
<PAGE>




                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                                      <C>
Independent Auditors' Report............................................................................ F-2

Consolidated Balance Sheet as of December 31, 1997 and 1996............................................. F-3

Consolidated Statements of Operations for the years ended
  December 31, 1997 and 1996............................................................................ F-4

Consolidated Statements of Shareholders' Equity for the years ended
  December 31, 1997 and 1996............................................................................ F-5

Consolidated Statements of Cash Flows for the years ended
  December 31, 1997 and 1996............................................................................ F-6

Notes to Consolidated Financial Statements.............................................................. F-7


</TABLE>




                                       F-1



<PAGE>
 
<PAGE>




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE SHAREHOLDERS OF
AMBIENT CORPORATION

We have audited the accompanying consolidated balance sheets of Ambient
Corporation (a development stage company) and subsidiary as of December 31, 1996
and 1997, and the related consolidated statements of operations, changes in
shareholders' deficiency and cash flows for the two years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards
in the United States. 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 audit provides a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ambient
Corporation and subsidiary as of December 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1997, in conformity with accounting principles generally
accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, the Company is
in the development stage and its continued existence is dependent on obtaining
additional financing for product development and commercialization. The Company
incurred a net loss in 1996 and 1997 and anticipates that it will continue to
incur losses for some time. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.

                                                 LUBOSHITZ, KASIERER & CO.

                                                 MEMBER FIRM OF ARTHUR ANDERSEN

Tel-Aviv, May 19, 1998



                                      F-2



<PAGE>
 
<PAGE>


                               AMBIENT CORPORATION
                          (A Development Stage Company)

                           CONSOLIDATED BALANCE SHEETS

                                 In U.S. dollars




<TABLE>
<CAPTION>
                                                                                                             December 31
                                                                                                   -------------------------------
                                                                                  Note                1997                1996
                                                                                  ----                ----                ----
<S>                                                                             <C>              <C>                 <C>
ASSETS
    CURRENT ASSETS
        Cash and cash equivalents                                                                    $      -            $104,322
        Restricted cash                                                           (3)                  30,000              30,000
        Receivables and prepaid expenses                                                               39,922              36,232
        Due from shareholders                                                                               -               2,229
                                                                                                       ------             -------
               Total current assets                                                                    69,922             172,783
                                                                                                       ------             -------
PROPERTY AND EQUIPMENT                                                            (4)
    Cost                                                                                              248,421             193,590
    Less - accumulated depreciation                                                                    51,478              19,166
                                                                                                      -------             -------
                                                                                                      196,943             174,424
                                                                                                      -------             -------
DEBT ISSUANCE COSTS                                                               (5)                 231,936                   -
                                                                                                      -------             -------
DEPOSITS FOR SEVERANCE PAY                                                        (7)                   7,725               8,927
                                                                                                     --------            --------
           Total assets                                                                              $506,526            $356,134
                                                                                                     ========            ========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
    CURRENT LIABILITIES
        Short-term credits                                                        (6)               1,602,265              12,565
        Accounts payable                                                                              246,762              20,324
        Other current liabilities                                                                     239,955              59,354
                                                                                                    ---------              ------
           Total current liabilities                                                                2,088,982              92,243
                                                                                                    ---------              ------
LONG-TERM LIABILITIES
    Loans from shareholders                                                                                 -             936,041
    Loan from bank                                                                (6)                  24,740               6,283
    Accrued severance pay                                                         (7)                  27,725              13,333
                                                                                                    ---------           ---------
           Total long-term liabilities                                                                 52,465             955,657
                                                                                                    ---------           ---------
           Total liabilities                                                                        2,141,447           1,047,900
                                                                                                    ---------           ---------
SHAREHOLDERS' DEFICIENCY
    Common stock of $0.001 par value; authorized -
        20,000,000 shares; issued and outstanding - 2,419,333
        shares as of December 31, 1997, and 2,229,166 shares
        as of December 31, 1996                                                   (9)                   2,419               2,229
    Additional paid in capital                                                                        730,582                   -
    Deferred compensation                                                                            (241,112)                  -
    Deficit accumulated during the development stage                                               (2,126,810)           (693,995)
                                                                                                   ----------           ---------
           Total shareholders' deficiency                                                          (1,634,921)           (691,766)
                                                                                                   ----------           ---------
           Total liabilities and shareholders' deficiency                                            $506,526            $356,134
                                                                                                   ==========           =========
</TABLE>



    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.



                                       F-3


<PAGE>
 
<PAGE>



                               AMBIENT CORPORATION
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                 In U.S. dollars


<TABLE>
<CAPTION>


                                                                                                            Cumulative
                                                                                                               from
                                                                                                            inception
                                                                       For the year ended                       to
                                                                           December 31                     December 31
                                                                  ---------------------------              -----------
                                                                      1997               1996                  1997
                                                                      ----               ----                  ----
<S>                                                                 <C>                <C>                    <C>
Research and development expenses                                   $410,605           $244,466               $655,071

Less - participation by the Chief Scientist
    of the State of Israel (Note 8)                                        -             95,976                 95,976
                                                                    --------          ---------               --------

                                                                     410,605            148,490                559,095

Operating, general and administrative expenses                       612,383            434,735              1,047,118
                                                                    --------          ---------              ---------

        Operating loss                                             1,022,988            583,225              1,606,213

Financing expenses, net (Note 12 )                                   409,827            110,770                520,597
                                                                     -------            -------                -------

        Net loss                                                 $(1,432,815)         $(693,995)           $(2,126,810)
                                                                 ============         ==========           ============

Net loss per share                                                    $(0.61)            $(0.32)
                                                                      =======            =======

Weighted average number of shares                                  2,367,694          2,156,548
outstanding                                                        =========          =========
</TABLE>




    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

                                       F-4


<PAGE>
 
<PAGE>


                               AMBIENT CORPORATION
                          (A Development Stage Company)

               CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY

                                 In U.S. dollars



<TABLE>
<CAPTION>

                                                                                                       Deficit
                                                                                                      accumulated
                                                                     Additional                       during the
                                      Number       Share               paid in         Deferred        development
                                    of shares     capital              capital       compensation         stage          Total
                                   ------------   -------            ----------      ------------      ------------      -----
<S>                               <C>             <C>               <C>               <C>              <C>               <C>
Issuance of common stock
  in July 1996                      2,028,833       $ 2,029           $     -           $     -          $     -           $ 2,029

Issuance of common stock
  in September 1996                     5,000             5                 -                 -                -                 5

Issuance of common stock
  in October 1996                     195,333           195                 -                 -                -               195

Net loss                                    -             -                 -                 -        (693,995)          (693,995)
                                       ------        ------            ------            ------        ---------          ---------

Balance as of December 31,
1996                                2,229,166         2,229                 -                          (693,995)          (691,766)

Issuance of common stock
in March 1997                          20,000            20            50,000                 -                -            50,020

Issuance of common stock
in August 1997                         84,167            84           336,668                 -                -           336,752

Issuance of common stock
in September 1997                      60,000            60           239,940                 -                -           240,000

Issuance of common stock
in September 1997                       6,000             6            23,994                 -                -            24,000

Issuance of common stock
in October 1997                        20,000            20            79,980                 -                -            80,000

Deferred compensation                       -             -                 -          (386,668)               -          (386,668)

Amortization of deferred
  compensation                              -             -                 -           145,556                -           145,556

Net loss                                    -             -                 -                 -      (1,432,815)        (1,432,815)
                                       ------        ------          --------        ----------     ------------       ------------
Balance as of
  December 31, 1997                 2,419,333        $2,419          $730,582         $(241,112)    $(2,126,810)       $(1,634,921)
                                    =========        ======          ========        ==========     ============       ============
</TABLE>



    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.


                                       F-5



<PAGE>
 
<PAGE>



                               AMBIENT CORPORATION
                          (A Development Stage Company)

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                                 In U.S. dollars




<TABLE>
<CAPTION>

                                                                                                                     Cumulative
                                                                                                                        from
                                                                                                                     inception
                                                                                   For the year ended                    to
                                                                                      December 31                    December 31
                                                                            --------------------------------        ------------
                                                                               1997                 1996                1997
                                                                               ----                 ----                ----
<S>                                                                        <C>                    <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net loss                                                                $(1,432,815)           $(693,995)        $(2,126,810)
    Adjustments to reconcile net loss to net cash
        used in operating activities -
           Items not involving cash flows:
               Depreciation and amortization                                    518,439               19,166             537,605
               Severance pay, net                                                15,594                4,406              20,000
               Accrued interest on long-term loan and notes                     158,575               51,441             210,016
           Changes in operating assets and liabilities:
               Decrease (increase) in receivables and prepaid
                  expenses                                                       23,072              (36,232)            (13,160)
               Increase (decrease) in accounts payable                           (2,809)              20,324              17,515
               Increase (decrease) in other current liabilities                  (7,954)              59,354              51,400
                                                                              ---------            ---------          ----------
                  Net cash used in operating activities                        (727,898)            (575,536)         (1,303,434)
                                                                              ---------            ---------          ----------
CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of property and equipment                                          (53,810)            (193,590)           (247,400)
    Restricted cash                                                                   -              (30,000)            (30,000)
                                                                              ---------            ---------           ---------
                  Net cash used in investing activities                         (53,810)            (223,590)           (277,400)
                                                                              ---------            ---------           ---------
CASH FLOWS FROM FINANCING ACTIVITIES
    Issuance of share capital                                                     2,229                    -               2,229
    Issuance of long-term notes                                                 400,000                    -             400,000
    Receipt of loans from shareholders, net                                      35,000              884,600             919,600
    Receipt of long-term loan                                                   120,000                    -             120,000
    Increase in bank overdraft                                                   87,948                    -              87,948
    Receipt (repayment) of loan from bank                                        18,262               18,848              37,110
    Receipt of short-term loans                                                  13,947                    -              13,947
                                                                                -------            ---------          ----------
                  Net cash provided by financing activities                     677,386              903,448           1,580,834
                                                                                -------            ---------          ----------
INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS                                                           (104,322)             104,322                   -
CASH AND CASH EQUIVALENTS
    BEGINNING OF PERIOD                                                         104,322                    -                   -
                                                                               --------             --------            --------
CASH AND CASH EQUIVALENTS
    END OF PERIOD                                                              $      -             $104,332            $      -
                                                                               ========             ========            ========
</TABLE>

       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

                                      F-6



<PAGE>
 
<PAGE>


                              AMBIENT CORPORATION
                         (A Development Stage Company)

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1   -GENERAL

         A.       Ambient Corporation (the "Company"), a development stage
                  Company, was founded in June 1996 to design and develop
                  advanced smart card interface technology. A smart card is a
                  credit card-sized plastic card equipped with an integrated
                  circuit that can store and transfer information in electronic
                  form. The Company has not generated revenues.

                  In August 1996, the Company purchased substantially all of the
                  assets and assumed substantially all of the liabilities of Gen
                  Technologies, Inc., a smart card research and development
                  company, at their approximate book value including the capital
                  stock of Gen Technology subsidiary, GenTec Ltd. The results of
                  operations of Gen Technologies, Inc. prior to the acquisition
                  were not material. GenTec Ltd. changed its name to Ambient
                  Ltd.

                  The consolidated financial statements include those of the
                  Company and its 95% owned Israeli subsidiary, Ambient Ltd.

                  The Company incurred a net loss in 1996 and 1997 and
                  anticipates that it will continue to incur losses for some
                  time. The Company's continued existence is dependent on
                  obtaining additional financing for product development and
                  commercialization from its shareholders and outside sources.
                  These matters raise substantial doubt about the Company's
                  ability to continue as a going concern. The financial
                  statements do not include any adjustments that might be
                  necessary should the Company be unable to continue as a going
                  concern.

         B.       The accompanying consolidated financial statements have been
                  prepared in U.S. dollars, as the currency of the primary
                  economic environment in which the operations of the Company
                  and its subsidiary are conducted is the U.S. dollar.



                                       F-7


<PAGE>
 
<PAGE>


                               AMBIENT CORPORATION
                          (A Development Stage Company)

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

NOTE 1   -        GENERAL (CONT.)

                  Transactions and balances originally denominated in U.S.
                  dollars are presented at their original amounts. Transactions
                  and balances in other currencies are remeasured into U.S.
                  dollars in accordance with the principles identical to those
                  set forth in Statement No. 52 of the Financial Accounting
                  Standards Board of the United States ("FASB"), as follows:

                  Monetary items - at the current exchange rate at balance sheet
                  date.

                  Nonmonetary items - at historical exchange rates.

                  Income and expenditure items - at exchange rates current as of
                  date of recognition of those items (excluding depreciation and
                  other items deriving from nonmonetary items).

         C.       In February 1998 the Company completed an initial public
                  offering of 525,000 shares of common stock in return for gross
                  proceeds of $4.2 million (before issuance expenses of
                  approximately $943,000).

         D.       The preparation of consolidated 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 expenses
                  during the reporting period. Actual results could differ from
                  those estimates.

NOTE 2   -        ACCOUNTING POLICIES

                  The consolidated financial statements have been prepared in
                  conformity with accounting principles generally accepted in
                  the United States. The significant accounting policies
                  followed in the preparation of the financial statements, on a
                  consistent basis, are:


                                       F-8


<PAGE>
 
<PAGE>


                               AMBIENT CORPORATION
                          (A Development Stage Company)

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

         A.       CASH AND CASH EQUIVALENTS

                  All highly liquid investments with an original maturity of
                  three months or less are considered cash equivalents.

         B.       PROPERTY AND EQUIPMENT

                  These assets are presented at cost. Depreciation is calculated
                  by the straight-line method over the estimated useful lives of
                  the assets, ranging as follows:
<TABLE>
<CAPTION>

                                                                       Years
                                                                       -----
                    <S>                                         <C>
                       Computers                                         4
                                                                  (mainly)
                       Leasehold improvements                            5
                       Motor vehicles                                    7
                       Machinery and equipment                           7
                       Furniture and office equipment                    14
                                                                  (mainly)
</TABLE>



         C.       RESEARCH AND DEVELOPMENT COSTS

                  Research and development costs, net of participation by the
                  Government of Israel through the Ministry of Industry and
                  Trade, Office of the Chief Scientist (the "Office of the Chief
                  Scientist"), are charged to operations as incurred.

         D.       LOSS PER SHARE

                  Loss per share is computed based on the weighted average
                  number of ordinary shares outstanding during the period.
                  Retroactive recognition has been given in the calculation of
                  loss per share, using the treasury stock method, to shares
                  granted in the twelve-month period preceding the Company's
                  initial public offering for consideration below the initial
                  public offering price per share of common stock, although the
                  effect is antidilutive.



                                       F-9


<PAGE>
 
<PAGE>


                               AMBIENT CORPORATION
                          (A Development Stage Company)

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

NOTE 3   -        RESTRICTED CASH

         The Company has a line of credit from a bank in Israel for which the
         Company agreed to maintain a compensating balance of $30,000 which is
         restricted for a period of up to one year.

NOTE 4   -        PROPERTY AND EQUIPMENT


<TABLE>
<CAPTION>

                                                              DECEMBER 31
                                                         --------------------
                                                         1997             1996
                                                         ------           -----
                 <S>                               <C>              <C>
                  Computers                           $ 72,755          $ 45,306
                  Machinery and equipment               49,535            45,500
                  Furniture and office equipment        38,570            37,255
                  Leasehold improvements                32,930            32,930
                  Motor vehicle (*)                     54,631            32,599
                                                       248,421           193,590
                  Less - accumulated depreciation       51,478            19,166
                  Net book value                      $196,943          $174,424
</TABLE>


            (*)   Motor vehicle is pledged as collateral for a long-term bank
                  loan.

                  Ambient Ltd. entered into an agreement on May 1, 1998 to lease
                  space for production facilities. The lease is for
                  approximately 2,000 square feet at $20,400 per year. As part
                  of the agreement Ambient Ltd. is purchasing production
                  equipment for approximately $40,000 payable over three years
                  without interest.

NOTE 5   -        DEBT ISSUANCE COSTS

         Debt issuance costs are stated net of accumulated amortization of
         $347,205 (1996 - nil).



                                      F-10


<PAGE>
 
<PAGE>


                               AMBIENT CORPORATION
                          (A Development Stage Company)

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

NOTE 6   -        CREDITS

         A.       Short term credit


<TABLE>
<CAPTION>

                                                                              DECEMBER 31
                                                                         ----------------------
                                                                       1997                   1996
                                                                      ------                 -----
                <S>                                           <C>                       <C>
                  Current maturities of loans from
                         shareholders (1)                            968,000                12,565
                  Current maturities of notes (2)                    400,000                     -
                  Current maturities of long-term loans (3)          120,000                     -
                  Current maturities of long-term
                         bank loans                                   12,370                     -
                  Bank overdrafts                                     87,948                     -
                  Current maturities of loans from
                         related parties                              13,947                     -
                                                                  ----------               -------
                                                                  $1,602,265               $12,565
                                                                  ==========               =======
</TABLE>


                  (1)    Loans received from shareholders bear interest of 10%
                         per annum and mature on December 1, 1998. Upon receipt
                         of the loan, the Company was charged a commission of
                         $96,000, which is amortized over the expected loan
                         repayment period (unamortized balance at December 31,
                         1997 - $7,000; 1996 - $48,400). Subsequent to balance
                         sheet date, the loan and accrued interest were repaid
                         out of the initial public offering proceeds (see Note
                         1).

                  (2)    The Company issued in 1997 long-term notes amounting to
                         $400,000 and 80,000 common shares in a private
                         placement. The notes bear interest at 7% per annum and
                         are repayable at the earliest of March 1999 or at the
                         Company's initial public offering. Subsequent to
                         balance sheet date, the notes were repaid out of the
                         initial public offering proceeds (see Note 1). Upon
                         issuing of the notes, the Company has incurred
                         financing costs of 482,341, which are amortized over
                         the expected notes repayment period (amortized balance
                         at December 31, 1997 - $224,936).

                  (3)    The loan was received in June 1997. The loan bears
                         interest of 8% per annum and is repayable from the
                         proceeds of the Company's initial public



                                      F-11


<PAGE>
 
<PAGE>


                               AMBIENT CORPORATION
                          (A Development Stage Company)

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

                         offering. Subsequent to balance sheet date, the loan
                         and accrued interest were repaid out of the initial
                         public offering proceeds (see Note 1).

         B.       LONG TERM CREDIT - BANK

                  Loan that matures in March 30, 2001 and bears interest at
                  Prime plus 2.25% per annum.

NOTE 7   -        SEVERANCE  PAY

         The Company's liability for severance pay to its employees is
         principally covered by monthly deposits with a severance pay fund. The
         balance of the Company's liability for severance pay, in excess of the
         amounts funded, is reflected in the accrual for severance pay.

NOTE 8   -        COMMITMENTS

         A.       In connection with its research and development, the Company
                  received participation payments from the Office of the Chief
                  Scientist of the Government of Israel in the total amount of
                  $95,976 in 1996. In return for the participation, the Company
                  is committed to pay royalties at a rate of 3%-5% of sales of
                  the product, up to 100% of the amount of grants received.

         B.       The Company is committed to pay a shareholder of the
                  subsidiary royalties, in connection with technology
                  transferred by him to the Company, at rates of 15% to 20% of
                  net proceeds from all sales by Ambient Ltd. less the cost of
                  components, as defined in an agreement with the shareholder.

NOTE 9   -        SHARE CAPITAL

                  Authorized share capital - 20,000,000 shares of common stock
                  and 5,000,000 preferred shares of $0.001 par value per share.
                  Issued and outstanding - 2,419,333 common stock shares of
                  $0.001 par value per share.



                                      F-12


<PAGE>
 
<PAGE>


                               AMBIENT CORPORATION
                          (A Development Stage Company)

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

                  The Company issued 80,000 shares at par value, as part of the
                  private placement in 1997. In addition, the Company issued
                  6,000 shares at par value to a general consultant of the
                  Company. The Company recorded debt issuance costs and
                  consulting expense in respect of the above issuances.

                  In addition the Company issued to certain employees 104,167
                  shares with a vesting period of one year. The Company recorded
                  deferred compensation in respect of these shares which will be
                  amortized over the vesting period. Unamortized balance as of
                  December 31, 1997 is $241,112.



                                      F-13


<PAGE>
 
<PAGE>


                               AMBIENT CORPORATION
                          (A Development Stage Company)

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

         NOTE 10  -        TAXES ON INCOME

                  Carryforward losses for tax purposes approximate reported
                  losses. Due to the uncertainty of realizing the benefit of the
                  loss carryforwards, a valuation allowance for the related
                  deferred tax assets has been recorded.

                  The Company's Israeli subsidiary is subject to the Income Tax
                  Law (Inflationary Adjustments), 1985, measuring income on the
                  basis of changes in the Israeli Consumer Price Index.

                  The Company's Israeli subsidiary investment plan of $180,000
                  has been granted "Approved Enterprise" status under the Laws
                  for the Encouragement of Capital Investments, 1959. The
                  Company has chosen to receive its benefits through the
                  "Alternative Benefits" program. The benefits under this
                  program include a tax exemption on income deriving from the
                  "Approved Enterprise" for a period of six years and a reduced
                  tax rate for a period of up to four years commencing with the
                  date on which taxable income is first earned.

         NOTE 11  -        TRANSACTIONS WITH RELATED PARTIES

<TABLE>
<CAPTION>
                                             FOR THE YEAR ENDED
                                                 DECEMBER 31
                                           ----------------------
                                           1997               1996
                                           ----               ----
<S>                                       <C>               <C>
         Consulting fees                  $100,000          $164,863
         Rent                             $      -          $  9,600
         Salary                           $ 10,000          $      -
</TABLE>


NOTE 12  -        FINANCIAL EXPENSES, NET

                  Financing expenses include debt issuance costs amortization
                  amounting to $300,427 (1996 - $48,400)


                                   # # # # # #



                                      F-14








<PAGE>
 
<PAGE>



                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the State of
Israel, on May 28, 1998.

                                                AMBIENT CORPORATION

                                                By: /s/ Jacob Davidson
                                                   -----------------------------
                                                   Jacob Davidson
                                                   President, Chairman and
                                                      Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant
and in the capacities indicated on May 28, 1998.

<TABLE>
<CAPTION>

                 Signature                                            Title                                  Date
                 ---------                                            -----                                  ----
<S>                                          <C>                                                         <C>

            /s/ Jacob Davidson               Chairman of the Board, President and Chief                  May 28, 1998
     --------------------------------        Executive Officer (Principal Executive Officer)
              Jacob Davidson

            /s/ Aryeh Weinberg               Chief Financial Officer (Principal Financial and            May 28, 1998
     --------------------------------        Accounting Officer)
              Aryeh Weinberg 

             /s/ Elie Wurtman                Director and Secretary                                      May 28, 1998
     --------------------------------
               Elie Wurtman

</TABLE>




<PAGE>