U.S. 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

                                   (Mark One)
              |X| Annual report pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                   For the fiscal year ended December 31, 1998

     |_| Transition report pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934
       For the transition period from _______________ to ________________

                           Commission File No. 0-23723
                               Ambient Corporation
                 ----------------------------------------------
                 (Name of Small Business Issuer in its Charter)

                 DELAWARE                                    98-0166007      
     -------------------------------                   ----------------------
     (State or other jurisdiction of                      (I.R.S. Employer
      incorporation or organization)                   Identification Number)
                                                     
    270 Madison Avenue, New York, NY                            10016
----------------------------------------                      ----------
(Address of principal executive offices)                      (Zip Code)

                    Issuer's telephone number: (888) 861-0205

    Securities registered pursuant to Section 12(b) of the Exchange Act: None

      Securities registered pursuant to Section 12(g) of the Exchange Act:
<PAGE>

                          $.001 Par Value Common Stock
                          ----------------------------
                                (Title of Class)

Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Company was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |x|  No |_| 

Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Company'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 its year ended December 31, 1998 were $0.

As of April 12, 1999, the aggregate market value of the shares of the issuer's
Common Stock held by non-affiliates was approximately $2 1/4 per share based
upon the closing price per share as reported on the OTC Bulletin Board.

There were 3,111,833 outstanding shares of the issuer's Common Stock on April
12, 1999.

FORWARD-LOOKING STATEMENTS

Statements contained in this Report which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include
statements in "Item 1. Business," "Item 5. Market for Common Equity and Related
Stockholder Matters," and "Item 6. Plan of Operations," which can be identified
by the use of forward-looking terminology such as "believes," "expects," "may,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy.

Such forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from anticipated results. These
risks and uncertainties include regulatory constraints, changes in laws or
regulations governing the Company's products and international trade, the
ability of the Company to market successfully its products in an increasingly
competitive worldwide market, changes in the Company's operating or expansion
strategy, failure to consummate or successfully integrate proposed product
<PAGE>

developments, the ability of the Company to manage growth, the general economy
of the United States and the specific global markets in which the Company
competes, the availability of financing from internal and external sources and
other factors as may be identified from time to time in the Company's filings
with the Securities and Exchange Commission or in the Company's press releases.
No assurance can be given that the future results covered by the forward-looking
statements will be achieved. The matters identified in "Item 1. Business--Risk
Factors" contain cautionary statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
<PAGE>

                               AMBIENT CORPORATION
                                   FORM 10-KSB
                      FOR THE YEAR ENDED DECEMBER 31, 1998

                                      INDEX

PART I                                                                  PAGE

Item 1.  Business                                                          1
Item 2.  Properties                                                       11
Item 3.  Legal Proceedings                                                11
Item 4.  Submission of Matters to a Vote of Security Holders              11

PART II

Item 5.  Market for Common Equity and Related Stockholder Matters         11
Item 6.  Plan of Operations                                               13
Item 7.  Financial Statements and Supplementary Data                      17
Item 8.  Changes in and Disagreements with Accountants on Accounting and 
         Financial Disclosure                                             17

PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons; 
         Compliance with Section 16(a) of the Exchange Act                17
Item 10. Executive Compensation                                           19
Item 11. Security Ownership of Certain Beneficial Owners and Management   21
Item 12. Certain Relationships and Related Transactions                   22
Item 13. Exhibits and Reports on Form 8-K                                 23
<PAGE>

                                     PART I

ITEM 1. BUSINESS 

COMPANY OVERVIEW

Ambient Corporation, a development stage company, was founded 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, news stands 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.

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, 


                                       1
<PAGE>

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 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 has not generated any revenues from operations. The Company presently
intends to commence commercialization of its technology in the fourth quarter of
1999.

Ambient Corporation was organized under the laws of the state of Delaware 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.


                                       2
<PAGE>

Ambient plans to diversify through a new subsidiary established to develop
internet service over power lines utilizing Ambient's contactless connector
technology. The new product will be electronic equipment utilizing patented
technologies for transmitting data over power lines. This equipment will offer
consumers an alternative Internet connection with the advantages of quicker data
rates at lower costs. The Company will provide the devices for the electric
utility company to cost-effectively upgrade their existing equipment and will
provide the special modem for the connection to the customer's home.

SMART CARD INDUSTRY OVERVIEW

Datamonitor produced the Global Smart Card Opportunities report in 1997 in which
it values the worldwide smart card market at US$ 2.3 billion a year. Datamonitor
anticipates a market for almost 2.4 billion cards in 2000, growing to a demand
for some 3.9 billion smart cards in 2002. Datamonitor predicts that the growth
of the world smart card market will result in an average annual growth of 26% a
year for the years 1997-2002.

Datamonitor found that telecommunications dominated the smart card market in
1997, holding sixty percent, followed by health with twenty percent, and
financial applications, eight percent; these three market areas are expected to
dominate the smart card market from 1998-2002.

Datamonitor sees multipurpose cards, especially for financial and loyalty
functions, as the application area with the greatest annual growth rate (180%)
from 1998-2002, followed by transport (forty percent AGR). According to
Datamonitor, disposable prepaid electronic purses and multifunctional operating
system will fuel financial sector growth from 140 million to 570 million smart
cards between 1998 and 2002, representing an annual growth rate of 41%.

While Europe presently holds 75% of the worldwide smart card market, Europe's
demand is predicted to drop to 47% in 2002. The Asia/Pacific region will be a
close second, demanding 35% of all smart cards produced by 2002. However, the
US, presently a marginal smart card consumer mainly in closed applications, is
expected to become the fastest growing geographical area between 1997 and 2002.

In terms of cost, in 1997 contact cards cost an average of US$ 2.50 each, while
contactless cards were about US$ 20 each. There were 280 million contact cards
in use in 1997 but only 80 million contactless cards. The cost of contact cards
is expected to be approximately 50% lower by 2002 but with an increased market
value of US$ 1.6 billion due to increased volumes. It is interesting to note
that the market value of contactless cards in 1997 was US$ 1.6 billion, the same
as the predicted value for contact cards in 2002.

Datamonitor's 1997 report, US Plastic Cards 1998-2002, estimates that smart card


                                       3
<PAGE>

volume in the five years to 2002 is to grow in the US at a compound annual rate
of 107%. Datamonitor does not see the American market being taken by storm but
anticipates a more gradual penetration as the necessary factors converge to
offer an increasingly favorable climate for smart card adoption. Datamonitor
sees the financial industry as heading for a multifunctional card carrying
stored value, credit and debit facilities on a single American bank card, thus
appeasing the consumer's desire for convenience.

STRATEGY

The Company's strategy is to achieve sustained leadership in developing and
delivering contactless Smart Card solutions and gain worldwide acceptance and
usage of its technology.

The following discussions represent the Company's business strategy.

PRODUCT DEVELOPMENT

The Company believes its technology provides distinct advantages over known
competing Smart Card Systems including: (i) higher speed; (ii) lower power
consumption;and (iii) reliability with a virtually unlimited card life.

MARKETING

The Company promotes and markets its Smart Card Systems on a worldwide basis
using a multi-faceted marketing and sales strategy.

The Company will continue to utilize its existing network of independent sales
representatives. These representatives will focus their efforts on pursuing
OEM's and other large strategic accounts as defined by the Company.

The Company also markets its Smart Card Systems through participation in trade
shows, publication of trade articles, participation in industry forums and
technological standard-setting organizations and through distribution of sales
literature. The Company encourages customer referrals. The Company has
established an Internet web site and electronic mail capability.

MANUFACTURING AND ASSEMBLY

Since inception, the Company has subcontracted substantially all of its
manufacturing operations. The Company will continue to contract with third
parties to manufacture the Company's Smart Card products in order to avoid
capital intensive investments and to focus the Company's limited resources on
product development.


                                       4
<PAGE>

COMPETITION

The market for Smart Card products is new, intensely competitive, quickly
evolving and subject to rapid technological change. Competitors may develop
superior products or products of similar quality for sale at lower prices.
Moreover, there can be no assurance that the Company's Smart Card 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 current
and potential competitors are primarily subsidiaries of multinational companies
with established Contacted and Contactless Smart Card Products that 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 future business, operating results and financial condition.

Competitive factors in the industry include transaction speed, the extent and
flexibility of Smart Card memory, reliability, transaction accuracy and cost,
all of which are discussed below. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures faced by the Company will not materially adversely
affect its business, operating results and financial condition. Many of the
Company's 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.

Contacted Cards represent the Company's primary competition in electronic
commerce applications. Contacted Card competitors include such multinational
firms as Gemplus, Schlumberger and Group Bull. The Company believes that it is
able to compete favorably against Contacted Cards because the Company's
contactless Smart Cards (i) operate at higher speeds, (ii) use reliable solid
state electronics with no moving parts, exposed contact points or magnetic
stripes which can be erased by a magnetic field, and (iii)are lower in cost over
the product life.

The Company also competes against contactless Smart Cards designed by Philips
GmbH, Sony Corporation, Gemplus, Motorola and Micron Communications, Inc. The
Company believes that its Smart Cards compete favorably against these other
contactless technologies because the Company's contactless Smart Cards operate
at higher speeds, 


                                       5
<PAGE>

have higher endurance and do not require batteries for power.

PATENTS AND TRADE SECRETS

Ambient Israel has two patent applications pending in Israel which were filed in
1996, for one of which a corresponding application was filed in the United
States in 1997. The United States Patent and Trademark Office ("PTO") has
allowed one patent application, which was filed in the United States in 1996,
for which a corresponding application was filed under the international Patent
Cooperation Treaty in 1997. During the next 12 months, the Company's research
and development plans include, although there can be no assurance, filing one or
more additional 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, or if available, that it can be obtained on terms favorable to the
Company, or that such financing will not be dilutive to stockholders.

There can be no assurance that any of the Company's future patent applications
will be granted, that any current or future patent or patent application will
provide significant protection for the Company's products or technology, be of
commercial benefit to the Company, or that the validity of such patents or
patent applications will not be challenged. Furthermore, there can be no
assurance that any patent underlying licensed technology will not be challenged.
Moreover, there can be no assurance that foreign patent, trade secret or
copyright laws will protect the Company's technologies or that the Company will
not be vulnerable to competitors who attempt to copy or use the Company's Smart
Card products or processes.

EMPLOYEES

As of April 12, 1999, the Company has a total of nine employees. However, the
Company has given termination notices to four employees until additional funds
are raised. The Company believes its relations with its employees are
satisfactory.

RISK FACTORS

INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER
INFORMATION CONTAINED IN THIS REPORT BEFORE MAKING AN INVESTMENT DECISION WITH
REGARD TO THE 


                                       6
<PAGE>

COMPANY'S COMMON STOCK. INFORMATION CONTAINED IN THIS REPORT CONTAINS
"FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "SHOULD" OR
"ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY. SEE, E.G., "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"ITEM 1. BUSINESS." NO ASSURANCE CAN BE GIVEN THAT THE FUTURE RESULTS COVERED BY
THE FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED. THE FOLLOWING MATTERS
CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO
SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN
SUCH FORWARD-LOOKING STATEMENTS. OTHER FACTORS COULD ALSO CAUSE ACTUAL RESULTS
TO VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN SUCH FORWARD-LOOKING
STATEMENTS. LIMITED OPERATING HISTORY AND NO REVENUES; LOSSES AND INDEPENDENT
PUBLIC ACCOUNTANTS GOING CONCERN OPINION.

The Company began operations in June 1996 and has a limited operating history
upon which potential investors may base an evaluation of its performance. Since
inception, the Company has focused its efforts and resources on developing its
technology and on identifying products and applications for introduction into
the market. The Company has no revenues from its operations and therefore the
Company has historically incurred significant operating losses and cash flow
deficits. For the years ended December 31, 1998 and 1997, the Company had net
losses of $(2,820,314)and $(1,432,815), respectively. Moreover, at December 31,
1998, the Company had negative working capital of $(759,895) and had an
accumulated deficit of $(4,947,124). The Report of Independent Public
Accountants covering the Company's December 31, 1998 financial statements,
included elsewhere in this Report, contains an explanatory paragraph about the
Company's ability to continue as a going concern. There can be no assurance that
the Company's operations will generate sufficient revenues to fund its
operations and to allow it to become profitable. The likelihood of the Company's
success must be considered relative to the problems, experiences, difficulties,
complications and delays frequently encountered in connection with the operation
and development of a new business and the competitive environment in which the
Company operates. See "Item 7. Financial Statements."

DEVELOPING MARKET; UNPROVEN MARKET FOR THE COMPANY'S SMART CARD PRODUCTS. Smart
Card products and markets have only recently begun to develop, are rapidly
evolving and are characterized by an increasing number of market entrants who
have developed or are developing a wide variety of products. As is typical in a
new and rapidly evolving industry, demand and market acceptance for new products
are subject to a high level of uncertainty. There can be no assurance that the
Smart Cards designed by the Company will become widely accepted. Because the
market for the 


                                       7
<PAGE>

Company's Smart Cards is new and evolving, it is also difficult to predict with
any assurance the future growth rate, if any, and size of the market. If a
market fails to develop, develops more slowly than expected or becomes saturated
with competitors, or if the Company's Smart Cards do not achieve market
acceptance, the Company's business, operating results and financial condition
may be materially adversely affected. See "Item 1.Business."

COMPETITION; FREQUENT PRODUCT INTRODUCTIONS. The market for Smart Card products
is new, intensely competitive, quickly evolving and subject to rapid
technological change. Competitors may develop superior Smart Card products or
products of similar quality for sale at lower prices. Moreover, there can be no
assurance that the Company's Smart Cards 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 current and potential
competitors are primarily subsidiaries of multinational companies with
established Contacted Card and contactless Smart Card businesses which 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 future business, operating results and financial condition.

Competitive factors in the industry include transaction speed, the extent and
flexibility of Smart Card memory, reliability, transaction accuracy and cost.
Current competitors include such multinational firms as Gemplus, Schlumberger
and Group Bull, which primarily offer Contacted Cards, and Philips GmbH,
Motorola, Sony Corporation and Micron Communications, Inc.

There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, operating results and
financial condition. Many of the Company's 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
industry, including new products which may be introduced, changes in customer
preferences, demographic trends and pricing strategies by competitors, which
could adversely affect the Company's operating margins.

RISKS OF NEW PRODUCT DEVELOPMENT. The Company may experience difficulties that
could delay or prevent the development, introduction and marketing of new Smart
Card products. The Company will be substantially dependent in the near future
upon Smart Card products that are currently being developed. There can be no


                                       8
<PAGE>

assurance that, despite testing by the Company, errors will not be found in the
Company's Smart Card products, or, if errors are discovered, corrected in a
timely manner. If the Company is unable to develop on a timely basis existing or
new Smart Card products or enhancements to existing products, or if its Smart
Card products do not achieve market acceptance, the Company's business,
operating results and financial condition may be materially adversely affected.

RISKS ASSOCIATED WITH EXPANSION. The Company will seek to develop and expand its
Smart Card products and increase its marketing operations. Expansion will place
substantial strains on the Company's management and its operational, accounting
and information resources and systems. Successful management of growth will
require the Company to improve its financial controls, operating procedures and
information systems, and to hire, train, motivate and manage its employees. The
Company's failure to manage growth effectively would have a material adverse
effect on its results of operations and its ability to execute its business
strategy.

OBSOLESCENCE AND TECHNOLOGICAL CHANGE. The markets for Smart Card products are
characterized by rapidly changing technology and evolving industry standards
which result in product obsolescence and short product life cycles.

Accordingly, the Company's success is dependent upon its ability to anticipate
technological changes in the industry and to continually identify, develop and
successfully market new Smart Card products that satisfy evolving technologies,
customer preferences and industry requirements. There can be no assurance that
competitors will not market Smart Card products which have perceived advantages
over those of the Company or which render the Company's Smart Card products
obsolete or less marketable.

IMPEDIMENTS TO MARKET ACCEPTANCE OF PRODUCTS. As with other new products
designed to replace existing products or change product designs, potential
customers may be reluctant to integrate the Company's Smart Card products into
their systems unless the products are proven to be both reliable and available
at a competitive price in an assured quantity. Even assuming product acceptance,
the Company's customers may be required to redesign their systems to effectively
use the Company's Smart Card products. The time and costs necessary for such
redesign could delay or prevent market acceptance of the Company's Smart Card
products. A lack of, or delay in, market acceptance of one or more of the
Company's Smart Card products could adversely affect the Company's operations.

RELIANCE UPON PATENTS AND TRADE SECRETS. The Company relies on its patents,
trade secrets and copyrights and the patents, trade secrets and copyrights of
its licensors to protect its Smart Card technology. Although the Company intends
to enforce its patents, trade secrets and copyrights aggressively, there can be
no assurance that such protection will be available in any particular instance
or that the Company will have the financial resources 


                                       9
<PAGE>

necessary to adequately enforce its rights. The unavailability of such
protection or the inability to enforce adequately such rights could materially
adversely affect the Company's business and operating results. The Company
operates in a competitive environment in which it would not be unlikely for a
third party to claim that certain of the Company's present or future Smart Card
products or licensed technology may infringe the patents or rights of such third
parties. If any such infringements exist or arise in the future, the Company may
be exposed to liability for damages and may be required to obtain licenses
relating to technology incorporated into the Company's products. The Company's
inability to obtain such licenses on acceptable terms or the occurrence of
related litigation could materially adversely affect the Company's operations.

NEED FOR ADDITIONAL FINANCING. The Company anticipates, based on currently
proposed plans and assumptions relating to its operations, that its current
cash, together with projected cash flow from operations, will not be sufficient
to satisfy its contemplated cash requirements for at least 12 months following
the date of this Report. Therefore, the Company is seeking additional financing
or it will be forced to curtail its activities. (See Note 1B to the Financial
Statements regarding Management's plans to continue operations) Any issuance of
equity securities would result in dilution to the interests of the Company's
stockholders and any issuance of debt securities would subject the Company to
risks that interest rates may increase or cash flow may be insufficient to repay
such indebtedness. The Company has no arrangements or understandings for
additional financing and there can be no assurance that additional financing
will be available to the Company.

DEPENDENCE UPON QUALIFIED PERSONNEL AND EXECUTIVE OFFICERS. The Company's
operations depend in part upon its ability to retain and hire qualified
personnel, of which there can be no assurance. The Company's operations are also
dependent upon certain executive officers. The loss of services of any of the
Company's executive officers, whether as a result of death, disability or
otherwise, could have a material adverse effect upon the Company's operations.

NO DIVIDENDS. The Company has an accumulated deficit and therefore has not paid
any dividends on its Common Stock and does not intend to pay dividends in the
foreseeable future.

POSSIBLE VOLATILITY OF SECURITIES PRICES. The market price of the Common Stock
and Warrants may be highly volatile. Factors such as the Company's operating
results or public announcements by the Company or its competitors may have a
significant effect on the market price of the securities. In addition, market
prices for the securities of many small capitalization companies have
experienced wide fluctuations due to variations in quarterly operating results,
general economic conditions and other factors beyond the Company's control.

SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common 


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<PAGE>

Stock in the open market or the availability of such shares for sale could
adversely affect the market price of the securities. In addition, certain
stockholders prior to the IPO have agreed, pursuant to a lock-up agreement with
the underwriter not to dispose of their shares of Common Stock until August 1999
without the prior written consent of the underwriter.

LIMITATIONS ON LIABILITY OF DIRECTORS. The Company's Certificate of
Incorporation substantially limits the liability of the Company's directors to
the Company and its stockholders for breach of fiduciary or other duties to the
Company.

ITEM 2. PROPERTIES

The Company's Israel subsidiary leases on a monthly basis office space in
Jerusalem Israel. The Company has reduced the amount of space leased in
Jerusalem pending receipt of additional financing. The Company believes its
existing facility is adequate for its current needs and that suitable additional
or substitute space will be available as needed on commercially reasonable
terms.

ITEM 3. LEGAL PROCEEDINGS

None

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

Not applicable.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is quoted on OTCBB under the symbol "ABTG". The
following table sets forth, for the periods indicated the range of high and low
sales prices per share of the Company's Common Stock, as reported on OTCBB.

                                                             HIGH       LOW
                                                             ----       ---
By Quarter End

1998
First Quarter (beginning February 13, 1998)                  10.75      3.25
Second Quarter.......................................         9.5       4
Third Quarter........................................        10.5       4
Fourth Quarter.......................................         8         3.5


                                       11
<PAGE>

1999
First Quarter .......................................         8.5       2.625

As of April 12, 1999, the last reported sale price of the Company's Common Stock
was $2 1/4 per share, and there were approximately 350 holders of record of the
Common Stock.

The Company has not declared or paid dividends on its Common Stock since its
formation, and the Company does not anticipate paying dividends in the
foreseeable future. Declaration or payment of dividends, if any, in the future,
will be at the discretion of the Board of Directors and will depend on the
Company's then current financial condition, results of operations, capital
requirements and other factors deemed relevant by the Board of Directors.

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.

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

            Underwriting discounts and commissions:         $ 420,000
            Finder's fees:                                          0
            Expenses paid to or for the underwriters:         126,000
            Other expenses:                                   220,973
                        Total expenses:                     $ 766,973

All such expenses were paid directly or indirectly to others.

The net offering proceeds to the Company after deducting the above expenses were
$3,433,027.


                                       12
<PAGE>

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

Marketing                                                    $123,544
Additional Facilities                                               0
Research and Product Development                              606,450
Repayment of indebtedness                                   1,828,261
Capital Equipment                                              29,772
Working Capital and General Corporate                         495,000
Convertible Note Receivable from Ordacard                     350,000
      Total                                                $3,433,027

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 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. In
addition, the Company reserved the right in the prospectus to use all or a
portion of the net proceeds allocated for working capital to acquire other
companies. The Company used $350,000 to fund a loan to Ordacard in connection
with the proposed merger of Ordacard with and into the Company (or a subsidiary
thereof).

On August 1, 1998, the Company entered into a consulting agreement (the
"Consulting Agreement") with Mission Bay Consulting, Inc., a Delaware
corporation ("Mission Bay"), pursuant to which Mission Bay agreed to provide the
Company with certain consulting services. In connection therewith, and as
compensation therefor, the Company agreed to issue to Randolph Beimel, a
principal of Mission Bay: (i) an aggregate of 65,000 shares of Common Stock to
be issued in varying amounts upon certain future dates; and (ii) options to
purchase an aggregate of 80,000 shares of Common Stock under the Company's 1998
Stock Option Plan at an exercise price of $6.00 per share, all of which options
are fully vested. As of September 30, 1998, pursuant to the terms of the
Consulting Agreement, the Company had issued 20,000 unregistered shares of
Common Stock to Mr. Beimel. The issuance of such shares of Common Stock was
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act") by virtue of Section 4(2) thereof. Such shares were
subsequently registered pursuant to the Company's Registration Statement on Form
S-8, registration number 333-65893, which was declared effective by the
Securities and Exchange Commission on October 20, 1998.

ITEM 6. PLAN OF OPERATIONS

The Company was organized in June 1996 and is a development stage company. In
August 1996, Ambient Corporation purchased substantially all of the assets,
properties, 


                                       13
<PAGE>

business and goodwill and assumed 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.
Since inception , 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 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 its smart card technology since
its inception. For the fiscal years ended December 31, 1996, 1997, and 1998, the
Company has incurred net losses aggregating $4,947,124, reflecting principally
research and development expenses and general and administrative expenses. The
Company expects to incur significant up-front expenditures 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 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 and 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 of approximately $3,433,027. The Company is dependent upon obtaining
additional financing to implement its anticipated business plans.

As of December 31, 1998, the Company has expended $1,381,550 on its research and
development activities (including $326,428 received from the Office of Chief
Scientist of the Israeli Ministry of Industry and Trade ("OCS"). Ambient Israel
has two patent applications pending in Israel which were filed in 1996, for one
of which a corresponding application was filed in the United States in 1997. The
United States Patent and Trademark Office ("PTO") has allowed one patent
application, which was filed in the United States in 1996, for which a
corresponding application was filed under the international Patent Cooperation
Treaty in 1997. During the next 12 months, the Company's research and
development plans include, although there can be no assurance, filing one or
more additional 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 


                                       14
<PAGE>

development plans. The Company does not have any commitments for any future
financings and there can be no assurance such financing will be available, or if
available, that it can be obtained on terms favorable to the Company, or that
such financing will not be dilutive to stockholders. The Company anticipates
that its first Ambient product will be completed and ready for introduction into
the market by the third quarter of 1999. Product introduction will depend on
several factors, including the availability of funding, 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 1999.

The Company's marketing activity to date has consisted primarily of formulating
a marketing strategy. The Company's strategy focuses initially on approaching
and establishing relationships with large and mid-sized system integrators
already operating 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. 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 using the Company's
technology.

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 1999. There can be no
assurances, however, that the Company will generate significant revenues by this
date, or at all.

The Company currently has 9 full-time employees and several part time employees.
However, the Company has given termination notice to four employees until
additional funds are raised.The Company's product development is carried out at
Ambient Israel's facilities in Israel

Since inception, the Company has relied on certain debt financings, government
funding from the OCS, bank financing, loans from third parties, stockholder
loans, private placements and the IPO for its capital requirements. The Company
used $1,828,261 of the net proceeds from the IPO to satisfy the principal and
accrued interest due on certain third party loans (excluding the stockholder
loans), debt financing and private placements.

On March 25, 1998 the Israeli Investment Center granted "Approved Enterprise"
status to Ambient Israel, pursuant to The Law for the Encouragement of Capital
Investments, 1959 (the "Investment Law") with respect to its planned investment
in certain fixed assets for establishing a smart card production facility. The
Investment Law provides that certain capital investments may, upon application
to the Israeli Investment Center, be designated as an "Approved Enterprise".
Ambient Israel participates under the "Alternative Benefits Program" under the
Investment Law. Accordingly, taxable profits attributable to 


                                       15
<PAGE>

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)y12 years from the commencement of production or (ii)y14yyears 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
regulations 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 assurances that the Company will be able to continue to comply
with such requirements in the future. As of December 31, 1998 the Company has
not realized any benefit as an Approved Enterprise due to the net loss.

Certain statements made in this Annual Report on Form 10 KSB including
statements contained in the preceding Plan of Operation are "forward looking
statements" (within the meaning of the Private Securities Litigation Reform Act
of 1995) regarding the plans and objectives of management for future operations
and projections of revenues, earnings and capital expenditures. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. The Company's plans, objectives and expectations are based,
in part, on assumptions involving the growth of the Company's business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives, plans or expectations of the Company will
be achieved.

Ambient plans to diversify through a new subsidiary established to develop
internet service over power lines utilizing Ambient's contactless connector
technology. The new product will be electronic equipment utilizing patented
technologies for transmitting data over power lines. This equipment will offer
consumers an alternative Internet connection with the advantages of quicker data
rates at lower costs. The Company will provide the devices for the 


                                       16
<PAGE>

electric utility company to cost-effectively upgrade their existing equipment
and will provide the special modem for the connection to the customer's home.

Year 2000 Issues

Certain organizations anticipate that they will experience organizational
difficulties at the beginning of the year 2000 as a result of computer programs
being written using two digits rather than four digits to define the applicable
year. The Company's plan for the Year 2000 calls for compliance verification
with vendors, testing software in the Company's products for Year 2000 problems
and communication with significant suppliers to ascertain their readiness for
the Year 2000 problem.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's financial statements, which are included in this report on pages
F-1 through F-14, are incorporated herein by reference.

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

None.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 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:

Name                        Age            Position
---                         ---            --------
Jacob Davidson               29            Chairman of the Board, President, and
                                             Chief Executive Officer
Dr. Yehuda Cern              55            Chief Technical Officer
Aryeh Weinberg               41            Chief Financial Officer
Elie Wurtman                 29            Director and Secretary
Dr. George Kaplun            57            Senior Electrical Engineer

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 


                                       17
<PAGE>

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 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.


                                       18
<PAGE>

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, 1998, the Company's
executive officers and directors and beneficial owners of more than 10% of the
Company's Common Stock filed timely reports.

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 


                                       19
<PAGE>

years ended December 31, 1997 and 1998 by the Company's Chief Executive Officer.
No other executive officers received compensation in excess of $100,000 during
such period.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
       Name and          Year (b)              Annual Compensation                              Long-Term Compensation        
Principal Position (1)            -------------------------------------------------------------------------------------------------
          (a)                                                                         Awards                       Pay-outs
                                    Salary        Bonus         Other      --------------------------------------------------------
                                     ($)           ($)         Annual       Restricted      Securities        LTIP        All Other
                                     (c)           (d)         Compen-         Stock        Underlying    Pay-outs ($)     Compen- 
                                                               sation        Award(s)      Options/SARs        (h)         sation  
                                                                 ($)            ($)            (#)                           ($)   
                                                                 (e)            (f)            (g)                           (i)   
-----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>    <C>              <C>           <C>       <C>                 <C>             <C>           <C>
Jacob Davidson             1997   $  61,085(2)     --            (1)              --           --              --            --
Chairman of the Board,  -----------------------------------------------------------------------------------------------------------
President and Chief        1998   $  83,244        --            (1)              --           --              --            --
Executive Officer       
-----------------------------------------------------------------------------------------------------------------------------------
Yehuda Cern                1997   $  29,537        --            (1)       $ 336,668(3)        --              --            --
                        -----------------------------------------------------------------------------------------------------------
Chief Technical Officer    1998   $ 120,017        --            (1)                           --              --            --
-----------------------------------------------------------------------------------------------------------------------------------
</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 (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. 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 84,167 restricted shares of stock paid to Yehuda Cern pursuant
      to his employment agreement. The shares vested in August 1998.

In February 1998 the Company's shareholders approved a stock option plan for the
issuance of stock options to employees and consultants of the Company. Pursuant
to the plan, 250,000 common shares were reserved for issuance.

The Company did not grant any options or warrants during 1997 or 1998 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


                                       20
<PAGE>

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, 1998 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:

                                         Amount and
                                          Nature of
Name and Address                          Beneficial   Percentage of Outstanding
of Beneficial Owner(1)                   Ownership(2)        Shares Owned(3)
----------------------                   ------------        ---------------
Jacob Davidson .................            218,049               7.1%
                                                            
Elie Wurtman ...................                  0                 0%
                                                            
Directors and executive officers                            
as a group (5 persons) .........             349149              11.4%


                                       21
<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 3,074,333 shares.

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.

In November 1996, the Company entered into a six-month consulting 


                                       22
<PAGE>

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.

As of December 31, 1998, Mr. Davidson loaned the Company $53,367, bearing 10%
interest. The Company used $30,000 from such loans for general working capital
purposes. The remaining $23,367 was loaned in the form of unpaid accrued
salaries.

In May 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. 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 on a monthly basis.
The Company believes that these facilities are sufficient to meet the Company's
needs in Israel for the foreseeable future. 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

      Number              Description

       27.1         Financial Data Schedule

      (b) Reports on Form 8-K

      None


                                       23
<PAGE>

SIGNATURES

      In accordance with the requirements of the Exchange Act the registrant
caused this report to be signed by the undersigned thereunto duly authorized.

Date: April 15, 1999

      Ambient Corporation

      (Registrant)


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


      /s/ Aryeh Weinberg
      -----------------------------------------------
      Chief Financial Officer


                                       24
<PAGE>

                               AMBIENT CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                        CONSOLIDATED FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 1998
<PAGE>

                               AMBIENT CORPORATION

                          (A DEVELOPMENT STAGE COMPANY)

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                         Page
                                                                      ----------

REPORT OF INDEPENDENT AUDITORS                                              F-1

CONSOLIDATED FINANCIAL STATEMENTS:

   Balance Sheets                                                           F-2

   Statements of Operations                                                 F-3

   Statement of Changes in Shareholders Equity                              F-4

   Statements of Cash Flows                                                 F-5

   Notes to Financial Statements                                      F-6 - F-14
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS
                             TO THE SHAREHOLDERS OF
                               AMBIENT CORPORATION

We have audited the accompanying consolidated balance sheet of Ambient
Corporation (a development stage company) and subsidiary (collectively, "the
Company") as of December 31, 1998, and the related consolidated statements of
operations, changes in shareholders' deficiency and cash flows for the year then
ended. 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. The financial statements for the year ended
December 31, 1997 were audited by other auditors whose report, dated May 19,
1998, included an explanatory paragraph that described an uncertainty about the
Company's ability to continue as a going concern.

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, 1998, and the results of their
operations, changes in shareholders' deficiency and cash flows for the year then
ended in conformity with generally accepted accounting principles in the United
States.

As discussed in Note 1 to the consolidated financial statements, the Company
incurred a net loss in 1998 of approximately $2.8 million (and approximately
$4.9 million since inception) and anticipates that it will continue to incur
losses for some time. In addition, the Company had a working capital deficit of
$0.8 million and a shareholders' deficiency of $0.2 million as of December 31,
1998. Although the Company raised net proceeds of approximately $3.4 million
from an initial public offering in February 1998, it has substantially utilized
all of such proceeds, primarily for product development. The Company's continued
existence is dependent on obtaining additional financing for product development
and commercialization. During the second half of 1998 and the beginning of 1999,
the Company attempted to raise equity financing, either through a private
placement or public offering of shares, without success. The Company continues
to seek out potential sources of equity capital, but there can be no assurance
that it will be able to do so in the foreseeable future. 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.

Brightman Bar-Levav Friedman & Co. (a member of Deloitte Touche Tohmatsu )

Certified Public Accountants

Tel Aviv, Israel
April 15, 1999


                                      F-1
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                           CONSOLIDATED BALANCE SHEETS
                                (in U.S. dollars)

<TABLE>
<CAPTION>
                                                                                     As of December 31,
                                                                                     ------------------
                                                                           Note      1998          1997
                                                                           ----      ----          ----
<S>                                                                         <C>    <C>            <C>   
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                                          16,138            --
   Restricted cash                                                           3       131,259        30,000
   Receivables and prepaid expenses                                         11A      334,983        39,922
                                                                                  ----------    ----------
       Total current assets                                                          482,380        69,922
                                                                                  ----------    ----------
LOAN RECEIVABLE                                                              4       350,000            --
                                                                                  ----------    ----------
PROPERTY AND EQUIPMENT                                                       5
   Cost                                                                              328,320       248,421
   Less - accumulated depreciation                                                    92,057        51,478
                                                                                  ----------    ----------
       Property and equipment, net                                                   236,263       196,943
                                                                                  ----------    ----------
DEBT ISSUANCE COSTS, NET                                                     6            --       231,936
                                                                                  ----------    ----------
DEPOSITS FOR SEVERANCE PAY                                                  10         6,587         7,725
                                                                                  ----------    ----------
       Total assets                                                                1,075,230       506,526
                                                                                  ==========    ==========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
   Short-term credit                                                        7A       144,006     1,602,265
   Accounts payable                                                                  337,105       246,762
   Notes payable                                                             8       585,900            --
   Other current liabilities                                                 9       175,264       239,955
                                                                                  ----------    ----------
       Total current liabilities                                                   1,242,275     2,088,982
                                                                                  ----------    ----------
LONG-TERM LIABILITIES
   Long-term bank credit                                                    7B        37,886        24,740
   Liability for severance pay                                              10        37,613        27,725
                                                                                  ----------    ----------
       Total long-term liabilities                                                    75,499        52,465
                                                                                  ----------    ----------
       Total liabilities                                                           1,317,774     2,141,447
                                                                                  ----------    ----------
CONTINGENT LIABILITIES AND COMMITMENTS                                      11                           

SHAREHOLDERS' DEFICIENCY                                                    12                           

   Common stock $0.001 par value; authorized - 20,000,000 shares; issued
      and outstanding - 3,074,333 and 2,419,333 shares, respectively                   3,074         2,419
   Additional paid-in capital                                                      4,941,189       730,582
   Unearned compensation                                                            (239,683)     (241,112)
   Deficit accumulated during the development stage                               (4,947,124)   (2,126,810)
                                                                                  ----------    ----------
       Total shareholders' deficiency                                               (242,544)   (1,634,921)
                                                                                  ----------    ----------
       Total liabilities and shareholders' deficiency                              1,075,230       506,526
                                                                                  ==========    ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                      F-2
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                (in U.S. dollars)

<TABLE>
<CAPTION>
                                                                                             Cumulative from
                                                                       Year ended             inception to
                                                                       December 31,            December 31,
                                                                 ------------------------    ---------------
                                                          Note      1998          1997             1998
                                                          ----      ----          ----             ----
<S>                                                        <C>   <C>           <C>              <C>        
Research and development expenses                                   726,479       410,605        1,381,550
Less - participation by the Office of the                                                     
    Chief Scientist of the State of Israel                 11A      230,452            --          326,428
                                                                 ----------    ----------       ----------
                                                                    496,027       410,605        1,055,122
                                                                                              
Operating, general and administrative expenses              14    1,904,273       612,383        2,951,391
                                                                 ----------    ----------       ----------
                                                                                              
       Operating loss                                            (2,400,300)   (1,022,988)      (4,006,513)
                                                                                              
Financing expenses, net                                             416,427       409,827          937,024
Other expenses, net                                                   3,587            --            3,587
                                                                 ----------    ----------       ----------
                                                                                              
       Net loss                                                  (2,820,314)   (1,432,815)      (4,974,124)
                                                                 ==========    ==========       ==========
Basic and diluted loss per share                                      (0.95)        (0.61)                
                                                                 ==========    ==========              

Weighted average number of shares outstanding                     2,979,541     2,367,694              
                                                                 ==========    ==========              
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                      F-3
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                                (in U.S. dollars)

<TABLE>
<CAPTION>
                                                                                              Deficit
                                                                                            accumulated
                                                                  Additional                 during the
                                         Number of     Share       paid-in      Unearned    development
                                          shares      capital      capital    compensation      stage         Total
                                          ------      -------      -------    ------------      -----         -----
<S>                                     <C>          <C>          <C>          <C>           <C>           <C>
Issuance of common stock in July
   1996 to founders for nominal
   consideration                         2,028,833        2,029           --           --            --         2,029
Issuance of common stock in
   September 1996 to employees for
   services                                  5,000            5           --           --            --             5
Issuance of common stock in October
   1996 to employees for services          195,333          195           --           --            --           195
Net loss                                        --           --           --           --      (693,995)     (693,995)
                                        ----------   ----------   ----------   ----------    ----------    ----------

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

Issuance of common stock in March
   1997 to employees for services           20,000           20       50,000      (50,000)           --            20
Issuance of common stock in August
   1997 to employees for services           84,167           84      336,668     (336,668)           --            84
Issuance of common stock in
   September 1997 in connection with
   private placement of notes               60,000           60      239,940           --            --       240,000
Issuance of common stock in
   September 1997 to advisor for
   services                                  6,000            6       23,994           --            --        24,000
Issuance of common stock in October
   1997 in connection with private
   placement of notes                       20,000           20       79,980           --            --        80,000
Amortization of unearned compensation           --           --           --      145,556            --       145,556
Net loss                                        --           --           --           --    (1,432,815)   (1,432,815)
                                        ----------   ----------   ----------   ----------    ----------    ----------

   Balance - December 31, 1997           2,419,333        2,419      730,582     (241,112)   (2,126,810)   (1,634,921)
Stock issued pursuant to consulting
   agreement                                75,000           75      654,925     (655,000)           --            --
Initial public offering in February
   1998                                    525,000          525    3,432,502           --            --     3,433,027
Stock issued in connection with
   short-term debt financing                20,000           20       99,980           --            --       100,000
Additional stock pursuant to
   founders agreement for nominal
   consideration                            35,000           35           --           --            --            35
Warrants issued pursuant to private
   placement of units                           --           --       21,600           --            --        21,600
Options granted pursuant to
   consulting agreement                         --           --        1,600       (1,600)           --            --
Amortization of unearned compensation           --           --           --      658,029            --       658,029
Net loss                                        --           --           --           --    (2,820,314)   (2,820,314)
                                        ----------   ----------   ----------   ----------    ----------    ----------
   Balance - December 31, 1998           3,074,333        3,074    4,941,189     (239,683)   (4,947,124)     (242,544)
                                        ==========   ==========   ==========   ==========    ==========    ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                      F-4
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in U.S. dollars)

<TABLE>
<CAPTION>
                                                                                                Cumulative from
                                                                           Year ended            inception to
CASH FLOWS - OPERATING ACTIVITIES                                         December 31,            December 31,
                                                                  --------------------------    ---------------

                                                                      1998            1997            1998
                                                                  ----------      ----------      ----------
<S>                                                               <C>             <C>             <C>        
Net loss                                                          (2,820,314)     (1,432,815)     (4,947,124)
Adjustments to reconcile net loss to net cash used in operating                                  
   activities -                                                                                  
Items not involving cash flows:                                                                  
  Depreciation and amortization                                      950,009         518,439       1,487,614
  Financing expenses paid via the issuance of common stock           100,000              --         100,000
  Increase in net liability for severance pay                         11,026          15,594          31,026
  Accrued interest on loans and notes payable                             --         158,575         210,016
  Write-down of loan receivable                                      485,000              --         485,000
  Write off of leasehold improvements                                 20,453              --          20,453
Changes in operating assets and liabilities:                                                     
  Decrease (increase) in receivables and prepaid expenses           (295,061)         23,072        (308,221)
  Increase (decrease) in accounts payable                             90,343          (2,809)        107,858
  Increase (decrease) in other current liabilities                   (64,691)         (7,954)        (13,291)
                                                                  ----------      ----------      ----------
    Net cash used in operating activities                         (1,523,235)       (727,898)     (2,826,669)
                                                                  ----------      ----------      ----------
CASH FLOWS - INVESTING ACTIVITIES                                                                
Loan provided to another company                                    (835,000)             --        (835,000)
Additions to property and equipment                                 (112,317)        (53,810)       (359,717)
Increase in restricted cash                                         (101,259)             --        (131,259)
                                                                  ----------      ----------      ----------
    Net cash used in investing activities                         (1,048,576)        (53,810)     (1,325,976)
                                                                  ----------      ----------      ----------
CASH FLOWS - FINANCING ACTIVITIES                                                                
Proceeds from issuance of share capital                                   35           2,229           2,264
Proceeds from issuance of notes payable                              600,000         400,000       1,000,000
Repayment of notes payable                                          (400,000)             --        (400,000)
Proceeds of loans from shareholders, net                                  --          35,000         919,600
Repayment of loans from shareholders                                (968,000)             --        (968,000)
Proceeds (repayment) of loan from related party                      (13,947)         13,947              --
Proceeds (repayment) of long-term loan                              (120,000)        120,000              --
Proceeds from long-term bank credit                                   58,859          18,262          95,969
Repayment of long-term bank credit                                   (37,110)             --         (37,110)
Increase in bank overdraft                                            11,047          87,948          98,995
Public offering of common stock                                    3,433,027              --       3,433,027
Proceeds from short-term bank loan                                    24,038              --          24,038
                                                                  ----------      ----------      ----------
    Net cash provided by financing activities                      2,587,949         677,386       4,168,783
                                                                  ----------      ----------      ----------
    INCREASE (DECREASE) IN CASH AND                                                              
       CASH EQUIVALENTS                                               16,138        (104,322)         16,138
CASH AND CASH EQUIVALENTS - BEGINNING                                                            
    OF PERIOD                                                             --         104,322              --
                                                                  ----------      ----------      ----------
    CASH AND CASH EQUIVALENTS - END OF PERIOD                         16,138              --          16,138
                                                                  ==========      ==========      ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                      F-5
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                (in U.S. dollars)

NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL

      A.    Description of business

            Ambient Corporation ("Ambient"), 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.

            In August 1996, Ambient 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 its
            subsidiary, GenTec Ltd. (which subsequently changed its name to
            Ambient Ltd.). The results of operations of Gen Technologies, Inc.
            prior to the acquisition were not material. Ambient and its
            subsidiary are collectively referred to herein as "the Company."

            The Company has not generated any revenues since inception.

      B.    Going concern assumption

            The Company incurred a net loss in 1998 of approximately $2.8
            million (and approximately $4.9 million since inception) and
            anticipates that it will continue to incur losses for some time. In
            addition, the Company had a working capital deficit of approximately
            $0.8 million and a shareholders' deficiency of approximately $0.2
            million as of December 31, 1998. Although the Company raised net
            proceeds of approximately $3.4 million from an initial public
            offering in February 1998, it has substantially utilized all of such
            proceeds, primarily for product development. The Company's continued
            existence is dependent on obtaining additional financing for product
            development and commercialization.

            During the second half of 1998 and the beginning of 1999, the
            Company attempted to raise equity financing, either through a
            private placement or public offering of shares, without success. In
            connection therewith, the Company and another company signed a
            letter of intent relating to a proposed merger. Such merger was not
            consummated and there currently exists a dispute between the parties
            (see Note 4).

            Management's plans to continue operations in the normal course of
            business include the following: (i) continuing to seek out potential
            sources of equity capital; (ii) application for a $400,000 grant
            from the Office of the Chief Scientist; (iii) expanding sales
            efforts by entering into new agreements with distributors in a
            number of countries; (iv) negotiating with a number of companies to
            install pilot projects; and (v) diversification through
            establishment of a new subsidiary in the field of internet
            technology. In management's estimation, the above measures, if
            substantially realized, should enable the Company to continue
            operating through at least December 31, 1999, although there can be
            no assurance of this.

            In order to reduce its fixed costs until the above measures are
            partially or fully realized, in March 1999, the Company terminated
            the employment of approximately one-half of its employees. The
            Company has also undertaken other cost-cutting measures, such as
            reducing its lease space. In addition, due to the Company's adverse
            liquidity position, the Company did not pay salaries to its
            remaining employees for the month of March 1999.

            The above 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.


                                      F-6
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                (in U.S. dollars)

NOTE 1 - DESCRIPTION OF BUSINESS AND GENERAL (cont.)

      C.    Use of estimates in preparation of financial statements

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

      D.    Nature of industry

            The industry in which the Company conducts business is characterized
            by rapid changes. Software and software-related products quickly
            become out of date because of technological and other advances.
            Accordingly, the industry is typified by the constant need to
            develop and introduce new and enhanced products, which may result in
            substantial costs without any guarantee that such new products or
            enhancements will produce significant revenues.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

      A.    Cash and cash equivalents

            Cash and cash equivalents consist of cash and demand deposits in
            banks and other financial institutions, and other short-term, highly
            liquid investments (primarily interest-bearing time deposits) with
            maturity dates not exceeding three months from the date of deposit.

      B.    Functional currency and foreign currency translation

            The currency of the primary economic environment in which the
            operations of the Company are conducted is the U.S. dollar
            ("dollar"). Therefore, the Company uses the dollar as its functional
            and reporting currency. Certain of the dollar amounts in the
            financial statements may represent the dollar equivalent of other
            currencies, and may not necessarily be exchangeable for dollars.

            Transactions and balances denominated in dollars are presented at
            their dollar amounts. Non-dollar transactions and balances are
            remeasured into dollars in accordance with the principles set forth
            in Statement No. 52, "Foreign Currency Translation," of the
            Financial Accounting Standards Board of the United States ("FASB").
            Transaction gains and losses are reflected in net financing
            expenses.

      C.    Consolidation

            The consolidated financial statements include those of Ambient and
            its 95%-owned subsidiary. Material intercompany transactions and
            balances have been eliminated in consolidation. The Company has
            recorded 100% of the subsidiary's losses since acquisition and,
            accordingly, no minority interest has been recorded in the financial
            statements.


                                      F-7
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                (in U.S. dollars)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

      D.    Property and equipment

            Property and equipment are presented at cost, less accumulated
            depreciation. Depreciation is calculated based on the straight-line
            method over the estimated useful lives of the assets, as follows:

                                                                  Years
                                                                  -----
            Computers                                             4 (primarily)
            Motor vehicles                                        7
            Machinery and equipment                               7
            Furniture and office equipment                       14 (primarily)

            Management reviews property and equipment and other long-lived
            assets on a periodic basis to determine whether events or changes in
            circumstances indicate that the carrying amount of such assets may
            not be recoverable.

      E.    Research and development

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

      F.    Stock-based compensation

            The Company accounts for employee stock-based compensation in
            accordance with Accounting Principles Board Opinion No. 25,
            "Accounting for Stock Issued to Employees." Pursuant to this
            accounting standard, the Company records compensation for stock and
            stock options granted to employees at the date of grant based on the
            difference, if any, between the cost to the employee of the stock or
            options (including exercise price) and the market value of the
            Company's stock at that date. Deferred compensation is amortized to
            compensation expense over the vesting period of the stock or
            options. Grants to non-employees are accounted for at fair value as
            of the date of grant in accordance with Statement No. 123,
            "Accounting for Stock-Based Compensation," ("SFAS 123") of the
            Financial Accounting Standards Board. The pro forma effect of the
            application of SFAS 123 with respect to grants to employees was not
            material for the periods presented.

      G.    Loss per share

            Loss per share is presented in accordance with SFAS 128, "Earnings
            per Share." Pursuant to this standard, basic earnings (loss) per
            share exclude the dilutive effects of convertible securities and are
            computed by dividing income (loss) available to common shareholders
            by the weighted-average number of common shares outstanding for the
            period. Diluted earnings (loss) per share reflect the potential
            dilutive effect of all convertible securities and are presented in
            the financial statements with the same prominence as basic earnings
            per share. Diluted loss per share information has not been
            separately presented herein since the Company has recorded a net
            loss for all periods presented and, accordingly, the effects of
            potentially dilutive securities are antidilutive. Retroactive
            recognition has been given in the calculation of basic loss per
            share to shares issued for nominal consideration prior to the
            Company's initial public offering.


                                      F-8
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                (in U.S. dollars)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

      H.    Fair value of financial instruments

            The Company's financial instruments are principally non-derivative
            assets and non-derivative liabilities, such as cash and cash
            equivalents, deposits in banks, receivables, loan receivable,
            short-term and long-term credit, accounts payable and other current
            liabilities. Because of the nature of these financial instruments,
            fair value generally equals or approximates the amounts presented in
            these financial statements.

      I.    Statement of comprehensive income

            Effective January 1, 1998, the Company adopted FAS No. 130,
            "Reporting Comprehensive Income." FAS 130 establishes standards for
            reporting and display of comprehensive income and its components in
            the financial statements. The adoption of this standard had no
            impact on the Company's results of operations, financial position or
            cash flows.

      J.    Segment reporting

            Effective January 1, 1998, the Company adopted FAS No. 131,
            "Disclosure about Segments of an Enterprise and Related
            Information." FAS 131 establishes standards for the way business
            enterprises report information about operating segments. Due to the
            fact that the Company is still in the development stage, FAS 131 did
            not have a material effect on the Company's financial statements.

      K.    Post-retirement benefits

            Effective January 1, 1998, the Company adopted FAS No. 132,
            "Employers' Disclosures about Pensions and Other Postretirement
            Benefits." FAS 132 revises employers' disclosure requirements about
            pension and other postretirement benefit plans, but does not change
            the measurement and recognition of such plans. Due to the nature of
            the Company's employee termination benefits (see Note 10), the
            adoption of this standard had no material effect on the Company's
            financial statements.

NOTE 3 - RESTRICTED CASH

      In connection with a line of credit and short-term loan from a bank (see
      Note 7), the Company is required to maintain a compensating balance which
      is restricted for a period of up to one year. The restricted balance
      amounted to $131,259 as of December 31, 1998.

NOTE 4 - LOAN RECEIVABLE

      On May 20, 1998, a letter of intent was signed between the Company and
      Ordacard Hi-Tech Industries (1995) Ltd. ("Ordacard"), an Israeli
      manufacturer of plastic ID and bank cards, relating to a proposed merger
      with Ordacard, which was to be consummated by December 31, 1998.

      Pursuant to the letter of intent, the Company was to provide $1,000,000 of
      loans to Ordacard - $350,000 upon execution of the letter of intent and
      $650,000 by July 1, 1998. The loans were to be evidenced by two
      convertible promissory notes, secured by Ordacard's assets and
      subordinated to Ordacard's secured bank loans in existence as of the date
      of payment. The notes were to bear interest at an annual rate of 6%. In
      addition, the Company was to carry out a private or public offering of
      equity securities with minimum net proceeds (after commissions and
      expenses) of $7.5 million by December 31, 1998. If the merger and the
      equity financing were not consummated by December 31, 1998, then on such
      date Ambient had the option to demand full payment of the aggregate
      outstanding principal and accrued interest on the notes through the date
      of payment, or convert, at its sole option, the aggregate outstanding
      principal and interest into 50,000 shares of Ordacard.


                                      F-9
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                (in U.S. dollars)

NOTE 4 - LOAN RECEIVABLE (cont.)

      The Company provided the $350,000 loan upon execution of the letter of
      intent and provided additional cash advances during the third quarter of
      1998 in the total amount of $485,000, such that the amounts provided to
      Ordacard by the Company aggregated $835,000. In September 1998, an
      amendment to the letter of intent was proposed, as follows:

      (i)   The $835,000 loan balance was to be converted into Ordacard equity
            pursuant to an agreed-upon value.

      (ii)  The Company committed to make additional advances to Ordacard of up
            to $1,500,000 in various installments specified in the revised
            letter of intent, subject to the signing of a merger agreement
            between the parties by November 30, 1998.

      (iii) An extension of time was given to Ambient to carry out the $7.5
            million net equity financing, until September 30, 1999.

      (iv)  The merger was to be executed by September 30, 1999.

      The amendment to the letter of intent was subject to approval by the
      respective Boards of Directors of each company.

      The merger was not consummated due to the fact that a number of material
      conditions to the merger were not fulfilled. In addition, the Company was
      notified that the Israeli courts were unable to approve a merger between
      an Israeli corporation and a foreign corporation.

      A dispute currently exists between the Company and Ordacard as to the
      nature and substance of the $835,000 amounts provided by the Company to
      Ordacard. The Company maintains, based on the fact that the revised letter
      of intent was not approved by its Board of Directors, that such amount is
      a loan; whereas, Ordacard maintains that such amount represents an equity
      investment in Ordacard's shares.

      The Company intends to vigorously defend its rights under the
      aforementioned letters of intent to collect the $835,000 amounts advanced.
      Nevertheless, in light of significant financial difficulties currently
      existing at Ordacard, the Company has written-down the receivable to its
      estimated realizable value of $350,000.

NOTE 5 - PROPERTY AND EQUIPMENT

                                           December 31
                                        -----------------
                                          1998      1997
                                        -------   -------
      Computers                         104,437    72,755
      Machinery and equipment            63,164    49,535
      Furniture and office equipment     40,346    38,570
      Leasehold improvements                 --    32,930
      Motor vehicles (*)                120,373    54,631
                                        -------   -------
                                        328,320   248,421
      Less - accumulated depreciation    92,057    51,478
                                        -------   -------
                                        236,263   196,943
                                        =======   =======

      (*)   The motor vehicles are pledged as collateral for a long-term bank
            loan.


                                      F-10
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                (in U.S. dollars)

NOTE 6 - DEBT ISSUANCE COSTS, NET

      Debt issuance costs as of December 31, 1997 were stated net of accumulated
      amortization of $347,205. During 1998, the related loans and notes were
      repaid (see Note 7) and, accordingly, the debt issuance costs were
      written-off to financing expenses.

NOTE 7 - CREDITS

      A.    Short-term credit

                                             Interest rate      December 31
                                              at December ---------------------
                                               31, 1998      1998        1997
                                               --------   ---------   ---------
            Loans from shareholders (1)                          --     968,000
            Notes payable (2)                                    --     400,000
            Loan payable(3)                                      --     120,000
            Current maturities of long-term                          
                bank credit                     14%-16%      20,973      12,370
            Bank overdraft line of credit          18%       98,995      87,948
            Short-term bank loan                   14%       24,038          --
            Current maturities of loans from                         
                related parties                                  --      13,947
                                                          ---------   ---------
                                                            144,006   1,602,265
                                                          =========   =========
                                                                    
            (1)   Loans from shareholders bore interest at an annual rate of 10%
                  and were scheduled to mature on December 1, 1998. The loans
                  were repaid from the proceeds of the Company's initial public
                  offering. The unamortized balance of deferred financing costs
                  in connection with the loans was written-off upon repayment of
                  the loans.

            (2)   The Company issued $400,000 of notes pursuant to a private
                  placement conducted in 1997. In connection with the
                  transaction, the Company issued 80,000 common shares at par
                  value, recorded as deferred financing costs based on the
                  estimated fair value of the shares at the date of issuance.
                  The notes bore interest at an annual rate of 7% and were
                  repaid from the proceeds of the Company's initial public
                  offering. The unamortized balance of deferred financing costs
                  in connection with the notes ($224,936 at December 31, 1997)
                  was written-off upon repayment of the notes.

            (3)   The loan was received in June 1997. The loan bore interest at
                  a rate of 8% per annum and was repaid (including accrued
                  interest) from the proceeds of the Company's initial public
                  offering.

      B.    Long-term bank credit

            Consists of vehicle financing loans in the aggregate amount of
            $58,859, payable in monthly installments through 2002, including
            interest at various market rates. Current maturities in 1999 amount
            to $20,973.


                                      F-11
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                (in U.S. dollars)

NOTE 8 - NOTES PAYABLE

            In June 1998, the Company conducted a private placement of units.
            Each unit consisted of: (i) a promissory note in the principal
            amount of $50,000 and (ii) warrants to purchase 10,000 shares of the
            Company's common stock. The Company sold 12 units in the private
            placement for aggregate consideration of $600,000. The aggregate
            fair value of the consideration allocated to the warrants was
            $21,600, which was credited to additional paid-in capital.

            The notes bear interest at an annual rate of 10% and are repayable
            at the earlier of: (i) 12 months from the date of issuance or (ii)
            consummation by the Company of any public or private equity or debt
            financing in excess of $1,500,000 (as well as certain other
            conditions).

            The purchase price for each share pursuant to the warrants is equal
            to the lower of: (i) $8.00 and (ii) the offering price of the
            Company's common stock in a subsequent public offering with
            aggregate proceeds to the Company of at least $1,500,000. The
            warrants are exercisable for a period of four years from the date of
            issuance.

NOTE 9 - OTHER CURRENT LIABILITIES

                                                        As of December 31
                                                        -----------------
                                                       1998          1997
                                                       ----          ----

            Accrued vacation                           27,125        11,546
            Employees and officers                     54,839            --
            Accrued liabilities                        93,300       228,409
                                                     --------      --------
                                                      175,264       239,955
                                                     ========      ========

NOTE 10 - LIABILITY FOR SEVERANCE PAY

            Israeli law and labor agreements determine the obligations of the
            Company to make severance payments to dismissed employees and to
            employees leaving employment under certain other circumstances. The
            obligation for severance pay benefits, as determined by Israeli Law,
            is based upon length of service and the employee's most recent
            salary. This obligation is partially funded by the purchase from
            outside insurance companies of managers' insurance policies, which
            are controlled by the insurance companies and are not under the
            control and management of the Company.

            Expenses relating to severance pay benefits were $23,564 and $4,435
            in 1998 and 1997, respectively.


                                      F-12
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                (in U.S. dollars)

NOTE 11 - CONTINGENT LIABILITIES AND COMMITMENTS

      A.    In connection with its research and development, the Company
            received participation payments of $95,976 from the Office of the
            Chief Scientist in 1996. In addition, subsequent to December 31,
            1998, the Company received participation payments in respect of 1998
            of $230,452, which was included in receivables and prepaid expenses
            as of December 31, 1998. In return for such 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 royalties to a shareholder of its
            subsidiary, in connection with technology transferred by him to the
            Company, at rates of between 15% and 20% of the net proceeds from
            all sales, less the cost of components, as defined in an agreement
            with the shareholder.

      C.    Regarding the dispute with Ordacard, see Note 4.

NOTE 12 - SHAREHOLDERS EQUITY (DEFICIENCY)

      A.    General

            As of December 31, 1998 and 1997, Ambient's authorized share capital
            consisted of 20,000,000 shares of common stock and 5,000,000 shares
            of preferred stock of $0.001 par value per share. 3,074,333 and
            2,419,333 shares of common stock were issued and outstanding as of
            December 31, 1998 and 1997, respectively. Holders of common stock
            are entitled to participate equally in the payment of cash dividends
            and in stock dividend distributions and, in the event of the
            liquidation of the Company, in the distribution of assets after
            satisfaction of liabilities to creditors. Each share of common stock
            is entitled to one vote on all matters to be voted on by
            shareholders.

      B.    Stock option plan

            In February 1998, the Company's shareholders approved a stock option
            plan for the issuance of stock options to employees and consultants
            of the Company. Pursuant to the plan, 250,000 common shares were
            reserved for issuance. Options under the plan may be either
            incentive stock options under the Internal Revenue Code or
            non-qualified options. For incentive stock options, the exercise
            price may not be less than 110% of the fair market value of the
            Company's common stock at the date of grant and are exercisable for
            a period not exceeding five years from the date of grant. For
            non-qualified options, the exercise may not be less than 100% of the
            fair market value of the Company's common stock at the date of grant
            and are exercisable for a period not exceeding ten years from the
            date of grant. During 1998, 80,000 options were granted under the
            plan to a consultant of the Company. The exercise price of the
            options was $6 and the options are exercisable until August 1, 1999.
            Compensation expense of $1,600 was recorded in respect of this
            grant.

      C.    Restricted stock issuances to employees

            During 1997, the Company issued to certain employees 104,167 shares
            of common stock at par value. The Company recorded deferred
            compensation of $386,668 in respect of these issuances, based on the
            fair value of the shares at the date of issuance. The deferred
            compensation was amortized over the one-year vesting period of the
            shares.


                                      F-13
<PAGE>

                               AMBIENT CORPORATION
                          (A Development Stage Company)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                (in U.S. dollars)

NOTE 13 - INCOME TAXES

      A.    Tax loss carryforwards

            Due to the uncertainty of realizing the benefit of the Company's tax
            loss carryforwards, a valuation allowance for the entire amount of
            related deferred tax asset has been recorded.

      B.    Inflation adjustment for tax purposes

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

      C.    Approved investment program

            The Company's Israeli subsidiary received "approved enterprise"
            status for an investment plan of $180,000 under the Israeli Law for
            the Encouragement of Capital Investments - 1959. The Company has
            elected to receive benefits through the "alternative benefits"
            program. The benefits under this program include a tax exemption on
            income derived 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 14 - OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES

            Operating, general and administrative expenses in 1998 include
            approximately $518,000 of marketing advisory and other consulting
            fees, which were primarily paid via the issuance of common shares.

NOTE 15 - TRANSACTIONS WITH RELATED PARTIES

                                            Year ended December 31
                                          --------------------------
                                           1998                1997
                                           ----                ----

            Consulting fees                    --            100,000
                                          =======            =======
            Rent                           62,400                 --
                                          =======            =======
            Salary                         83,244             10,000
                                          =======            =======


                                      F-14