UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB

      /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  For the fiscal year ended SEPTEMBER 30, 1998

                                       OR

    / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
        For the transition period from ______________ to ______________

                        Commission file number 333-59133

                             V3 SEMICONDUCTOR, INC.
             (Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S>                                                                   <C>       
          Nevada                                                      87-0429263
(State or Other Jurisdiction of                                       (I.R.S. Employer
 Incorporation or Organization)                                       Identification No.)
</TABLE>



                               250 Consumers Road
                                   Suite 901
                          North York, ON Canada M2J 4V6
               (Address of Principal Executive Offices) (Zip Code)


                                 (416) 497 8884
                 Issuer's Telephone Number, Including Area Code)

         Securities Registered under Section 12(b) of the exchange Act:


                              Name of Each Exchange
                     Title of Each Class on Which Registered
                                      None




         Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, $.001 par value per share
                                (Title of Class)


                                (Title of Class)

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

     Indicate by check mark if no disclosure of  delinquent  filers  pursuant to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained,  to the best of  registrant's  knowledge,  in definitive  proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ______

     The issuer's revenues for its most recent fiscal year. $4,022,161

     The aggregate  market value of the voting and non-voting  common stock held
by non-affiliates of the registrant  computed by reference to the price at which
the common stock was sold as of September 30, 1998 was: $9,254,769.

     The  number  of  shares  outstanding  of  the  registrant's   Common  Stock
outstanding as of September 30, 1998 was 5,471,628.

DOCUMENTS INCORPORATED BY REFERENCE:                                 

     Reference is made to the Registrant's  Prospectus,  dated October 21, 1998,
filed pursuant to Rule 424(b) of the Securities Act of 1933.

     Reference  is made to the  Registrant's  Form SB-2  Registration  Statement
(File No. 333-59133), as filed on July 15, 1998, which is hereby incorporated by
reference.

     Reference  is made to  Amendment  Number 1 to the  Registrant's  Form  SB-2
Registration  Statement  (File No.  333-59133),  as filed on September 22, 1998,
which is hereby incorporated by reference.

     Reference  is made to  Amendment  Number 2 to the  Registrant's  Form  SB-2
Registration Statement (File No. 333-59133),  as filed on October 8, 1998, which
is hereby incorporated by reference.

     Reference  is made to  Amendment  Number 3 to the  Registrant's  Form  SB-2
Registration Statement (File No. 333-59133), as filed on October 19, 1998, which
is hereby incorporated by reference.



<PAGE>
                                     PART I

ITEM 1.           DESCRIPTION OF BUSINESS

History

         V3 Semiconductor,  Inc. (the "Company") was incorporated under the laws
of the State of Nevada on  December  23,  1985 under the name  Ariel,  Inc.  The
Company was dormant and did not engage in any  business  activities  until April
1994 when the  Company  merged  with V3  Corporation  and  changed its name from
Ariel,  Inc. to V3  Incorporated.  V3 Corporation,  was  incorporated  under the
Ontario  Business  Corporations  on October  22,  1985.  During the period  from
October  22,  1985 to April  1994,  V3  Corporation  engaged in the  business of
designing,  engineering and marketing semiconductors and integrated circuits. On
April  18,  1994,  the  Company  and V3  Corporation  entered  into  a  plan  of
reorganization  agreement  through  which  the  two  companies  merged  into  V3
Incorporated and in 1996, V3 Incorporated  changed its name to V3 Semiconductor,
Inc.

Overview

         The overall  mission of the Company is to originate,  design and market
high  performance  peripheral and core silicon products for the Embedded Systems
market.  The Company believes that the Embedded Systems market has the potential
for significant growth as Embedded System  applications  evolve in functionality
from  relatively  simple  industrial   controllers  to  use  in  highly  complex
networking and telecommunications applications.

         The Company's products are designed to function in tandem with specific
microprocessors   manufactured  by  third  parties  such  as  Intel  Corporation
("Intel"),  Motorola Corporation  ("Motorola"),  International Business Machines
("IBM"),  Hitachi  Semiconductor of America  ("Hitachi"),  Quantum Effect Design
("QED"),  Texas Instruments  ("T.I."),  Integrated Device Technology ("IDT") and
Advanced Micro Devices ("AMD"). Microprocessors,  which include microcontrollers
or central processing units ("CPUs"),  are the central  controllers of virtually
all computer systems. In addition,  they are also used in a relatively invisible
but very large segment of the computer  industry as "Embedded  Controllers" in a
variety of products and  applications.  The  Company's  products work with these
CPUs by  directing  and  controlling  the flow of data  between the CPUs and the
various  peripherals  that  the  CPUs  control.  Applications  include  servers,
communication  routers,  data  switches,   mass  storage  controllers,   modems,
facsimiles (fax) and imaging equipment,  telecommunication  switching equipment,
networking   controllers,   instrumentation,   industrial   tools  and  consumer
appliances.

         The Company's  products are co-peripherals to all major RISC processors
including, but not limited to, Intel's i960 family of processors,  IBM's PowerPC
series and AMD's 29K,  as well as  embedded  x86  processors  which are used for
lower  cost  applications.  In  addition,  with a minimum  of  programming,  the
Company's  controllers  (System,  Memory  and PCI) can be used  with any and all
embedded  processors,  such as:  Motorola  (PowerPC  TM,  68K TM,  Coldfire  TM,
PowerQUICC  TM  families),  Hitachi  (Super-H  TM,  SCA-II TM  Series),  MIPS TM
Processors  (QED,  MIPS TM, IDT,  NEC,  Toshiba).  The  Company's  products  are
designed to be compatible with existing and new standards and technologies  such
as PCI with I2O and are used in such new  technologies  as ATM,  xDSL,  Ethernet
(10BaseT), Fast Ethernet (100BaseT), Gigabit Ethernet etc.

         The Company has identified  target  markets for its business,  designed
and developed  products that satisfy the  requirements of key customers in those
markets,  and established a number of important  strategic alliances with Intel,
IBM,  Motorola,  Hitachi and QED. The Company is presently listed on Intel's and
Motorola's  websites  and  believes  it will be on  Hitachi's,  T.I.'s and QED's
websites in the near future.  The  Company's  sales and  marketing  channels are
designed in order to provide total market coverage.  The Company has now reached
the stage in the  development of its business plan and has the right  management
team in place, to aggressively pursue marketing and sales strategies to maximize
market share in its target markets and reinforce its  competitive  advantages in
the Embedded Systems market.
<PAGE>
Product Lines

         The Company  produces  processor  specific  semiconductors,  integrated
circuits,  for the Embedded  Systems  market.  These products are used by system
designers who are utilizing  high-speed RISC and 'Super Scalar'  microprocessors
within their embedded systems design. These processors demand efficient coupling
to memory  and  peripheral  input/output  (I/O)  devices  in order to attain any
degree of efficiency.  The system  designer faces three  alternative  choices in
achieving this coupling:  (1) use PLDs or FPGAs (Field  Programmable Gate Array)
which must be customized to the application,  (2) designing an ASIC to implement
the application, or (3) using a V3 Semiconductor standard product which requires
no design work and whose functionality has been fully tested.

         The Company's principal product lines fall into three categories: Burst
(DRAM) Memory  Controllers (BMC Family),  Small System  Controllers (SSC Family)
and PCI Bridge  Controllers  (PBC, EPC & PSC  Families).  Today's market demands
also require  support for these silicon  devices in the form of  evaluation  and
reference design boards, application notes, documentation and software that will
enable engineers ease of interfacing to other devices in their design.

         Burst (DRAM) Memory Controllers

         Semiconductor  memory is typically available in two major types, Static
Random Access Memory  ("SRAM") and Dynamic Random Access Memory  ("DRAM").  SRAM
devices are somewhat  faster than DRAMs,  however,  they are  considerably  more
expensive,  particularly in systems where a significant  amount of random access
memory is required. DRAM Controllers are integrated circuits that are physically
installed  between the  microprocessor  and an array of DRAM devices and execute
the appropriate control strategy to make DRAM devices behave like SRAM devices.

         The Company's Burst Memory  Controllers  ("BMCs") are DRAM  Controllers
interfaces the host processor to the low cost commodity  DRAMs  manufactured  by
merchant  semiconductor  manufacturers.  Systems employing these controllers can
replicate the  performance of an SRAM based system at a fraction of the cost, at
lower power levels,  at higher speeds and with no design or production  overhead
to either the DRAM  manufacturer  or the system  designer.  In order to increase
flexibility  to system  designers and to expand their  marketability,  most BMCs
have  features that are software  programmable,  enabling  these  features to be
easily modified for performance or convenience.

         The Company has a Canadian  patent on a DRAM  Controller  design  which
minimizes the power required and heat  generated  during the access stage with a
proprietary  design  feature that may only be  functionally  replicated by other
technologies at materially higher prices.

         Small System Controllers ("SSC")

         System  Controllers are integrated  circuits that expand the functional
use of DRAM  controllers  by adding  control  features  that would  normally  be
provided by external  devices.  The Company's system  controllers (SSC family of
integrated circuits) are designed to operate with specific  microprocessors such
as Intel's i960 Sx/Jx,  and IBM's PPC401  PowerPC  processors  and are typically
used in high-performance  network equipment and RAID (Storage) Controllers.  The
Company's  SSC product  family,  allows  system  designers to replace many lower
integration support components with a single integrated component.

         The Company's SSC System  Controller family includes a high performance
DRAM  controller,  DMA  controllers,  interrupt  management,  serial ports,  I/O
control logic,  timers and I/O ports. The SSC can be combined with Intel i960 or
IBM PowerPC  processors  to build  powerful,  low-component  could add-in cards,
robotics controllers and networking systems.

         PCI Bridge Controllers (PBC)

         Peripheral Component  Interconnect (PCI) is a new system "bus" standard
developed by more than 100 industry leading  companies,  including  Intel,  IBM,
AMD, H.P. and Apple to define a single  standard  method of  connecting  CPUs to
peripheral   devices  such  as  disk  controllers,   graphics   controllers  and
communication  devices. Most computers today use the PCI bus interface which has
replaced the Industry Standard Architecture (ISA) bus interface.
<PAGE>
         The Company was the first company to go to production with devices that
supported  the  intelligent  input/output  (I2O)  standard.  This  new  standard
provides a software  solution  (along with PCI, a standard bus interface)  which
optimizes CPU and system performance by handling the overhead of I/O interrupts.

         The  Company  has  now  launched  its  Second  Generation  of  I2O  PCI
Controllers,   the  EPC  (Enhanced  PCI  Controller).  The  EPC  has  additional
functionality such as DMA Chaining, which supports Multi-Processor capabilities.
These features are in demand by mainly networking  companies such as: Cisco, Bay
Networks, 3 Comm,  Ascend/Cascade  Communications,  Hewlett Packard,  Cabletron,
Nortel, Newbridge and others.

         A more recent and more widely  applicable  family of PCI Controllers is
the PCI Slave Controller ("PSC"). This family is targeted for the cost sensitive
ISA devices, which are now migrating to PCI adapter cards. These are lower cost,
high volume products  targeted for a lower-end adapter mass market which in turn
addresses  the  conversion  from older  limited and obsolete data buses (ISA) to
wider and more efficient ones (PCI).

Embedded Systems Industry Overview

         According to the March 17, 1997 edition of the  publication  Electronic
Design which cites the report "The World Embedded Controller Market" prepared by
Frost and Sullivan, a market research company (the "Frost and Sullivan Report"),
the  total  embedded  market  (4,  8,  16 and  especially  32  and  64 bit  RISC
Processors) is expected to grow to  approximately  $34 billion by the year 2002.
The embedded  market is driven by the increasing  performance  demands for speed
and functionality,  of the server,  mass storage,  networking and communications
technologies.  Global players, such as Intel, Motorola, IBM, Hitachi and Hewlett
Packard, who also are the Company's technology partners and/or customers, attest
to this  unprecedented  growth by investing heavily into product  development in
RISC  processors,  new standards such as I2O and new 32 and 64 bit  peripherals.
Their heavy  investments  are driven  either by the need to develop,  design and
market end-user  equipment or semiconductor  products in support of the embedded
market.

         According to the Frost and Sullivan Report,  the high-end 32 and 64 bit
processor segment of the embedded market is expected to exceed $9 billion by the
year 2002. The embedded PCI market,  a major  subsection of the embedded  market
that the Company  serves,  is expected to grow to $1.7  billion  during the same
time period.  The Company is targeting a subset of this market,  the peripherals
sector,  which is  expected  to grow to over $1 billion  by the year  2002.  The
Company's goal is to attain  significant  market share of this surging market by
2001.  Emerging  standards,  such as I2O  (Intelligent  I/O)--which  address and
resolve the serious and costly systems problem of data  bottlenecks--create  new
opportunities  in this market,  by providing  solutions to data transfer and CPU
overhead problems.  In an embedded system,  these are crucial design issues that
seriously impact system performance. The increasing need to move data faster and
more efficiently will require  solutions  supported by the Company's current and
future products.

         Initially  the  Company's  products  were  developed  to  support  RISC
processors  in embedded  applications.  As Embedded  Systems  requirements  have
evolved,  driven mainly by networking  and office  equipment  applications,  the
Company  has moved to  designing  more  advanced  products in support of the I/O
(input/output)  needs that are driven by such  industry  leaders as Intel,  IBM,
H.P., US Robotics,  Compaq,  Cisco, Bay Networks etc. New products may include a
RISC  processor  core or "coring" with a partner as part of a highly  integrated
silicon based system,  as well as other highly integrated  peripherals  targeted
for certain segments (telecom and data equipment,  imaging, set-top and high-end
server) of the market.

Semiconductor Industry Market Structure

         There are three  major  segments  in the  semiconductor  industry:  the
standard integrated circuit ("IC") segment,  the application specific integrated
circuit  ("ASIC")  segment and the  "chipset"  segment  which is a hybrid of the
other two segments. Each of these market segments can be further subdivided into
"merchant"  and "captive"  markets.  The merchant  market  consists of producers
involved in sales to unrelated third parties,  while the captive market involves
sales to affiliated  parties.  For example,  while IBM is reportedly the largest
producer of semiconductors in the world, its production is principally  consumed
internally by its "captive"  vertically  integrated business groups. AMD , T.I.,
Motorola,  SGS-Thompson  and NSC,  on the other hand,  are  examples of merchant
semiconductor suppliers.
<PAGE>
IC Business Segment

         The  IC  business  segment  generally  sells  two  types  of  products:
relatively  generic  high  volume,  low  margin  devices  (such  as DRAM  memory
devices),  and proprietary  technologies  (such as  microprocessors,  peripheral
controllers,  graphics  ICs and signal  processing  ICs).  In the "high  volume"
product  lines,  key  factors  for  success  are  cost  controls,  manufacturing
efficiency  and quality.  In the  "proprietary"  product  areas,  while cost and
quality issues remain relevant, intellectual property and innovative design take
precedence.

         For most large semiconductor  producers in the merchant market,  volume
output  and  economies  of scale are  critical  to  success.  However,  costs of
production  being  relatively  uniform (or at least  potentially  so) for larger
manufacturers,   the  value  of  a  semiconductor   manufacturer's  products  is
determined  by  market  demand  for the  features  embodied  in those  products.
Consumers of merchant market ICs select  semiconductors  for incorporation  into
their products based principally on their  functionality  (roughly determined by
the surface area  consumed per product  unit) and the degree to which  competing
designs can be excluded from the marketplace.

         The volume requirements of major merchant market suppliers,  their cost
of production constraints, and the effect that this has on product selection for
inclusion   in  the   semiconductors   they   design  and  produce  has  created
opportunities for smaller and innovative semiconductor companies, such as Cyrix,
Atmel, Actel and Xilinx. This is the niche market in which the Company operates.
These kinds of producers  are known in the  industry as "fabless"  semiconductor
manufacturers.  These companies,  under subcontracting  arrangements with larger
semiconductor  manufacturers,  focus on  developing  niche  designs and products
which can be incorporated into, or added on to, the semiconductors  manufactured
by  principal   merchant  market   semiconductor   suppliers.   Because  fabless
manufacturers  do not have the high fixed costs  associated  with  semiconductor
manufacturing,  profitable  sales can be made at lower volume  targets and their
niche  products  can  be  brought  to  market  both  independently  and  through
arrangements with the principal merchant market semiconductor manufacturers.

         The  Company,   for  example,   has   partnered   with  a   traditional
semiconductor  maker,  National  Semiconductor  Corporation,  to not only "make"
products for incorporation into NSC designs but also to develop, market and sell
ICs jointly with NSC.




ASIC Business Segment

         ASICs are  essentially  customized  ICs designed for specific  customer
applications. The desire among manufacturers who use embedded control systems to
pursue  differentiation in developing their own product designs, and their needs
to increase  performance  and reduce  costs in a number of specific  areas,  has
fueled  the  demand  for  ASICs.  While  this  should  be, in  theory,  a highly
profitable  value  added  undertaking  for larger  semiconductor  manufacturers,
several factors have impeded market growth and  profitability  in this area. The
major  problems of ASICs is that they are  expensive  to design,  do not achieve
full functionality  without substantial  upgrading and have limited market scope
in the semiconductor  merchant market as specific-purpose  products.  ASICs also
are not easily accommodated within the established architecture of most systems.
As a  result,  a number  of  semiconductor  manufacturers  specializing  in ASIC
products  have  encountered  serious  financial  difficulties  and  have  either
discontinued  operations  or have been  acquired by other firms in recent years.
For this  reason,  the  Company  has  focused  upon the  chipset  segment of the
semiconductor industry.
<PAGE>
Chipset Business Segment

     Traditionally,  "chipsets"  were  not a part of the  embedded  market.  The
Company's entry into the semiconductor  business was founded on the premise that
32-Bit RISC processors would change the embedded design marketplace.  The 32-Bit
RISC processors are inexpensive and powerful, and allow functions  traditionally
implemented in hardware  through the use of "chipsets" to be moved into software
without sacrifice in performance or cost.  Through the use of 32-Bit processors,
the Company has defined "chipsets" for the embedded marketplace. These "chipset"
devices  are  part  of a new  segment  of  the  IC  business  segment  known  as
Application Specific Standard Products ("ASSPs").

     ASSPs are  designed,  manufactured,  marketed  and sold as merchant  market
commodity  devices or standard products and they are targeted at interfacing key
functions  like  memory  control  and other  peripheral  functions  to  specific
processors.  The Company's  interface devices cost less than equivalent ASICs or
discrete  solutions  that  would  otherwise  be  required,   and  there  are  no
development costs to the end-user.

     The 32-Bit  Embedded  RISC market has  exploded  over the past 6 years from
100,000  units  shipped in 1989 to 7 million  units  shipped  in 1994.  In 1996,
volumes  are  expected  to exceed 15 million  units for a total value of over $1
billion and by 2002 to exceed $7 billion.  The Company has had an early start in
this  marketplace  and given its current and planned  product  mix,  anticipates
being one of only a few suppliers of this technology.

Marketing and Sales Strategy & Strategic Partnerships

     The Company has identified  target  markets for its business,  designed and
developed  products  that  satisfy the  requirements  of key  customers in those
markets,  and established a number of important  strategic alliances with Intel,
IBM,  Motorola,  Hitachi and QED. The Company is presently listed on Intel's and
Motorola's  websites  and  believes  it will be on  Hitachi's,  T.I.'s and QED's
websites in the near  future.  The Company  markets it products  through  direct
sales to its major,  global  corporate  customers;  sales  through the Company's
network of manufacturers' representatives which include major original equipment
manufacturers  worldwide and sales through  distributors.  The Company  believes
that it has reached the stage in the development of its business to aggressively
pursue  marketing and sales  strategies  to maximize  market share in its target
markets and reinforce its competitive advantages in the Embedded Systems market.

     The  Company   markets  its  products   worldwide   through  a  network  of
manufacturers'  representatives  and  distributors.  The  Company  utilizes  the
technical   support,   customer   service  and   materials   management  of  its
representatives  and  distributors.  The Company's  customers  include  Adaptec,
Ascend/Cascade,  Cabletron,  Data  General,  Hewlett  Packard,  Hitachi,  Hughes
Communications, IBM, Kodak, NEC, Netspeed, Nortel, Samsung, Scitex and Sony.

     The Company has developed a number of relationships with strategic partners
who  combine  the  Company's  products  with  their  own in  recommended  system
solutions for customers.  These include the i960 division of Intel, the High End
Microprocessor  group of Motorola,  the Embedded  Processor Division of AMD, the
RISC product  group of IDT, the  Embedded  Processor  group of IBM, the Embedded
Super-H group of Hitachi and the MIPs Intellectual Property House QED.

     To date the Company's  marketing  strategy has focused on building end-user
and  strategic  partner  confidence  in its IC  products.  Information  has been
disseminated to strategic  partners and consultations have been held with a view
to presenting the Company's products as part of the strategic  partners' overall
design solution to their customer's specific requirements.  The Company has been
able to access the  resources  of its  strategic  partners  to  identify  target
markets,  determine market sizes,  develop design  proposals and solutions,  and
establish pricing policies.


<PAGE>
     This third party  marketing  approach  has enabled the Company to develop a
substantial base of customers.  These alliances have been particularly important
in  developing  relationships  and  product  distribution  channels  to  smaller
customers  who are more risk  averse and less  prepared  to  embrace  technology
solutions offered by smaller customers such as the Company. Due to its strategic
relationships with established  merchant market  manufacturers,  the Company has
been able to develop a level of  confidence in smaller  suppliers  that makes it
easier to establish  ongoing  relationships  with them.  Smaller  customers  are
important  to the  Company's  overall  market  development  strategy  since they
purchase  smaller  quantities of its products at higher average  selling prices.
They also provide a more  diverse and stable  revenue base than that which would
apply if the Company held a small number of large accounts.

Manufacturing

         The Company does not own or operate silicon fabrication  facilities and
therefore is referred to as a "fabless"  semiconductor  company. The Company has
chosen  to be  fabless  as a result  of (i) the  significant  front end costs of
constructing  and  owning  silicon  fabrication  facilities  (estimated  at $500
million  to $1  billion)  and (ii)  the  overabundance  of low cost  fabrication
capacity  available in the market.  The  Company's  semiconductor  manufacturers
include Samsung and Hyundai,  both located in Korea and KLSI,  located in Japan.
The  Company  is also in  discussions  with  IBM,  Hitachi,  TSMC,  SGS-Thomson,
S-MOS/Seiko Epson and UMC regarding fabrication.

         To assure its products  meet  high-quality  standards,  the Company has
established a  Manufacturing/Process  Engineering  group and a Quality Assurance
department.  The  continuous  audits by these groups  assure that the  Company's
manufacturing partners and its employees have the discipline to meet the quality
requirements to establish ISO 9001 certification.  The ISO 9001 certification is
a quality management and quality assurance  certification  standard developed by
the  International  Organization  for  Standardization  ("ISO").  The  ISO  9001
certification  is the  highest  standard  in the ISO 9000  series.  The ISO 9000
series was  developed to provide an  internationally  accepted  system of rating
quality and for providing product  standardization  V3 is the only company among
its competitors that is ISO 9001 compliant, a definite asset in getting approved
with large customers such as NorTel and H.P. etc.

Research and Development/Product Development

         The  Company has  assembled a strong  engineering  team,  comprised  of
senior  architects and designers  from companies such as ATI and LSI Logic.  The
Company's  engineering  group has designed and developed  the Company's  product
families,  including the Burst Mode Controller and the System Controller series,
both of which  remain in  production  today.  The  Company  plans to expand  its
product  line and enter the  64-Bit PCI  Controller  market,  based on  customer
demands and embedded market and RISC processor evolution.  The Company maintains
a continuous  dialogue with customers and technology partners to ensure that the
Company's  products  incorporate  features  that are  essential  for the rapidly
evolving (embedded) systems design requirements.  As a result, the Company's new
products will incorporate inputs from current customers  (Hewlett Packard,  IBM,
Bay  Networks,  Cisco,  Nortel,  Scitex,  US Robotics,  Kodak,  Ascend etc.) and
leverage the expertise gained from joint product  development  with Intel,  IBM,
Motorola,  Hitachi,  QED,  IDT and Hewlett  Packard.  For  example,  the Company
utilized such expertise to become the first  semiconductor  company to introduce
and  demonstrate  a family of products  compatible  with the newly  emerging I2O
standard.

Beta-Site and Key Customer Support Programs

         As part of its product  and market  development  strategy,  the Company
supplies  unpublished  designs  that  it has  developed  to a  small  number  of
end-users on a trial basis, and works with those end-users to further refine and
develop new products or modifications to existing  products,  that will meet the
requirements of a particular market segment.


<PAGE>
         The  Company  retains   ownership  and  control  over  any  proprietary
information disclosed under a Beta-site agreement and retains clear title to any
developments that may result from such joint efforts.

         When the design  specifications are finalized and product functionality
has been  demonstrated,  the Company is well  positioned  to provide the ongoing
supply  requirements  of those  end-users  or other end users in the same market
segment. This process of complementary  development work with end-users enhances
the  Company's  design  reputation,  instills  customer  confidence  and expands
potential markets for the Company's products.

V3 Cubed Corporation ("V Cubed")

         V Cubed  was  incorporated  under  the laws of the  State of  Nevada on
September 30, 1994,  and is qualified to do business in the State of California.
V Cubed is a wholly owned subsidiary of the Company that was formed for the sole
purpose  of  providing  sales and  marketing  support  for the  products  of the
Company.  V Cubed's  principal  office is located at 2348  Walsh  Avenue,  Santa
Clara, California 95051.

         In order to  maximize  the  exposure of the  Company's  products to the
marketplace, it is important that strict attention be paid to product marketing,
customer  support  and  sales  support.  While  the  design,  manufacturing  and
strategic  positioning  of the Company  products are managed from the  corporate
head office in Toronto,  it was felt that the public face of the Company  should
be located in a geographical region (historically and) presently associated with
the business of the Company and one with geographical proximity to the Company's
largest customer base in the world.

         The net  effect of  establishing  a presence  in the heart of  "Silicon
Valley" has been to spread the ability to support  customers across several time
zones  and to  develop  an image  of the  Company  consistent  with  that  which
customers  expect.  V Cubed is  chartered  with the  responsibility  of managing
customer  contact on both a regional and worldwide  basis even though  resources
from the Toronto  office are  sometimes  required to assist in this regard.  The
Company's Vice President of Sales and Marketing resides at V Cubed and it is the
Company's  goal  to  expand  this  location's  resources  significantly  to take
advantage of this huge market.

V3 Semiconductor Corp.

              V3 Semiconductor  Corp. is a corporation  organized under the laws
of the  Province  of Ontario,  Canada and is a wholly  owned  subsidiary  of the
Company.  The Company's  research and development (R&D) activities are conducted
through V3 Semiconductor Corp.



Employees

              As  of  September  30,  1998,   the  Company   currently   employs
approximately 34 individuals,  including 4 senior  executives,  17 engineers,  6
individuals  in sales and  marketing,  4 individuals  in operations  and support
staff.  The company  plans to increase the number of employees to 45-50  persons
over the next year.  Most new employees will be hired to expand the  engineering
and sales and marketing departments.

ITEM 2.           DESCRIPTION OF PROPERTY

     The Company leases its  headquarters,  a 7,500 square foot located in North
York, Ontario. The lease is for a term of 5 years and 6 months, expiring January
31,  2002,  with  an  annual  base  rent  of  Cdn.$7,491  for  the  first  year,
Cdn.$9,363.75 the second year,  Cdn.$11,236.50  the third year,  Cdn.$14,982 the
fourth  year,  and   Cdn.$18,727.50   for  the  remaining  term  of  the  lease.
Additionally,  on August 13, 1998, the Company leased an additional 3,346 square
feet of  office  space for a period of three  years  and five  months,  expiring
January 31, 2002.  The Company leases this  additional  space for an annual base
rent of $15,123.92.  The headquarters houses the Company's President & CEO, Vice
President of Engineering,  General  Manager and Financial  Officer and Corporate
Secretary and the Director of Manufacturing and Quality.

     The Company leases office space located in Santa Clara,  California,  which
is the principal office of its subsidiary,  V3 Cubed. The lease is for a term of
one year, renewable annually, with an annual base rent of $25,200.


<PAGE>
ITEM 3.           LEGAL PROCEEDINGS

         Mr. Patrick  Prentiss,  a former  employee and original  founder of the
Company, filed a claim against V3 Corporation,  a wholly owned subsidiary of the
Company,  in August 1995. The suit,  which has been brought in the Ontario Court
(General Division) (Commercial List), court file number B224/95, seeking damages
of an undetermined  number of Class "A" preferred  shares of V3 Corporation.  In
addition,  Mr. Larry Krauss,  an individual  who was going to act as a finder to
find  investors  for the Company,  filed a claim against the Company in November
1995 alleging breach of contract. The suit has been brought in the Ontario Court
(General   Division)  court  file  number   95-CU-94054  and  seeks  damages  of
$6,000,000.  The Company  believes that it has  meritorious  defenses to both of
these actions and intends to vigorously  contest the actions.  As a result,  the
Company does not believe that these actions will have a material  adverse effect
upon the  financial  conditions  or results of  operations  of the Company.  The
Company is not aware of any other  material  legal  proceedings  now  pending or
threatened against the Company.

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

         None.



<PAGE>
                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market For Securities

         The high and low bid  price(price  which a market  maker is  willing to
pay) and ask price (price at which a market maker will sell)  quotations for the
Company's  common  stock,  $.001 par value per share (the  "Common  Stock"),  as
reported to the Company's  management by the OTC Bulletin Board is listed in the
following chart.  These  quotations are between  dealers,  do not include retail
mark-ups,  markdowns or other fees and commissions, and may not represent actual
transactions.
<TABLE>
<CAPTION>


DATE                                              LOW BID             HIGH BID           LOW ASK             HIGH ASK
----
Fiscal 1996
<S>           <C> <C>                             <C>                 <C>                <C>                 <C>  
     December 31, 1995                            $ 4.50              $7.50              $5.50               $8.25
     March 31, 1996                               $ 3.50              $5.875             $4.25               $6.875
     June 30, 1996                                $ 1.50              $6.00              $2.00               $8.00
     September 30, 1996                           $ 1.50              $4.125             $2.25               $8.00
Fiscal 1997
     December 31, 1996                            $ 0.625              $3.25             $1.75               $4.25
     March 31, 1997                               $ 1.00              $3.00              $2.50               $4.50
     June 30, 1997                                $ 1.25              $4.125             $2.25               $5.00
     September 30, 1997                           $3.50               $4.375             $4.25               $5.25
Fiscal 1998
     December 31, 1997                            $ 2.375             $4.25              $3.25               $5.00
     March 31, 1998                               $3.75               $7.00              $4.00               $7.75
     June 30, 1998                                $ 3.875             $6.125             $4.00               $6.75
     September 30, 1998                           $3.25               $4.125             $3.625              $4.375

</TABLE>

     At September 30, 1998,  there were 828 shareholders of the Company's Common
Stock.  The  Company  has not paid  dividends  on its  shares  of  Common  Stock
outstanding  during the past two fiscal years.  There are no  restrictions  that
limit the ability of the Company to pay  dividends or are likely to do so in the
future.

Recent Sale of Unregistered Securities

     On March 16, 1998,  the Company,  through its  placement  agent,  The Mason
Cabot  ("Mason  Cabot")  Division  of W.J.  Nolan & Co.,  undertook  the private
placement  of Common  Stock of the  Company at a price of $3.50 per  share.  The
Common Stock was sold pursuant to an exemption from  registration  under Section
4(2) and Regulation D, Rule 506, of the Securities Act of 1933 (the  "Securities
Act") as not involving a public  offering.  The offering  contemplated a minimum
gross amount of  $1,000,000  and a maximum of  $5,500,000.  On May 6, 1998,  the
initial  closing was  conducted  in which the Company  sold  687,926  shares for
aggregate  gross proceeds of $2,407,741.  On June 15, 1998, the second and final
closing was  conducted in which the Company sold  684,732  shares for  aggregate
gross  proceeds of  $2,396,562.  In the two closings the Company sold a total of
1,372,658  shares of Common  Stock for  $4,804,303.  Mason  Cabot  received a 7%
selling commission and a 1.5% non-accountable expense allowance for its services
as  placement  agents.  The  Company  received  net  proceeds  of  this  sale of
approximately  $4,375,000.  The  Company has not used any of the  proceeds  from
foregoing offering. Such proceeds are presently invested in short-term notes and
will be used for the  purchase  of  software,  hardware  and for the  hiring  of
additional personnel.


<PAGE>
         In  addition  to  the  foregoing,  the  Company  filed  a  registration
statement  on Form  SB-2  with  the  Securities  and  Exchange  Commission  (the
"Commission")  pursuant to which the Company registered 518,082 shares of Common
Stock,  consisting  of shares of Common  Stock  underlying  various  options and
warrants.  The registration statement was assigned the file number 333-59133 and
was declared effective on October 21, 1998.

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     The  statements  contained  in this  Report  that  are not  historical  are
forward-looking   statements,   including  statements  regarding  the  Company's
expectations,  intentions,  beliefs or strategies regarding the future. Forward-
looking  statements  include  the  Company's   statements  regarding  liquidity,
anticipated  cash needs and  availability  and anticipated  expense levels.  All
forward-looking  statements  included  in this  Report are based on  information
available  to the  Company  on the  date  hereof,  and the  Company  assumes  no
obligation to update any such forward-looking statement. It is important to note
that the Company's  actual  results could differ  materially  from those in such
forward-looking statements.  Additionally, the following discussion and analysis
should be read in  conjunction  with the Financial  Statements and notes thereto
appearing  elsewhere in this Report. The discussion is based upon such financial
statements which have been prepared in accordance with U.S.  Generally  Accepted
Accounting Principles and are presented in United States dollars ($).

General

         The Company  designs and markets high  performance  peripheral and core
silicon  products for the Embedded  Systems market.  The Company's  products are
co-peripherals  to  microprocessors  manufactured by third parties such as Intel
Corporation,  Motorola  Corporation,  International  Business  Machine,  Hitachi
Semiconductor of America,  Quantum Effect Design, Texas Instruments,  Integrated
Device  Technology and Advanced Micro Devices.  The principal product lines fall
into three  categories:  Burst DRAM  Memory  Controllers  (BMC  family),  System
Controllers ( SSC and USC families) and PCI Bridge Controllers (PBC, EPC and PSC
families).   These   products  are  used  in   applications   such  as  servers,
communication  routers,  data  switches,   mass  storage  controllers,   modems,
facsimiles  and  imaging  equipment,   telecommunications  switching  equipment,
networking   controllers,   instrumentation,   industrial   tools  and  consumer
appliances.

         The Company does not own or operate any silicon fabrication  facilities
and therefore is referred to as a "fabless"  semiconductor  company. The Company
has chosen to be fabless as a result of: (i) the significant  front end costs of
constructing  and  maintaining  a  silicon  fabrication  facility;  and (ii) the
overabundance  of  low  cost  fabrication  capacity  available.   The  Company's
manufacturing  subcontractors  include  Samsung and Hyundai in Korea and KLSI in
Japan.

         The  Company's  products are sold to Original  Equipment  Manufacturers
(OEM's) to be  incorporated  into  products  such as the ones  listed  above.  A
"design win" is recorded when an OEM decides to incorporate one, or more, of the
Company's products into one of their end products. It could take anywhere from 3
to 24 months for a design win to proceed to  production  volumes as the OEM must
design,  test  market  and build the market for its  product.  As a result,  the
Company is highly  dependent  on design wins  generated  in the  current  fiscal
period to yield revenues in future fiscal periods.


<PAGE>
Results of Operations

Overview

         The following  table sets forth for the years ended September 30, 1998,
1997 and 1996:  (i) certain  items in the  Company's  Consolidated  Statement of
Operations expressed as a percentage of revenues; and (ii) the percentage change
in dollar amounts of such items as compared to the indicated prior fiscal year:
<TABLE>
<CAPTION>

                                                                          Items as a Percentage       Period to Period Percentage
                                                                              Of Net Sales                Increase (Decrease)
                                                                               Years Ended                    Years Ended
                                                                              September 30,                  September 30,
                                                                         1998     1997     1996          1997-98     1996-1997
<S>                                                                     <C>      <C>      <C>             <C>         <C>   
Sales                                                                   100.0%   100.0%   100.0%          95.8%       121.2%

Gross Profit                                                             68.8     61.6     53.1          118.8        156.9

Other Income                                                              5.3     13.3     88.4        (22.7)       (66.7)

R&D Expenditures                                                         14.5     18.9     59.3           50.5      (29.6)

Selling, General & Administrative                                        55.2     62.6    144.8           73.1       (4.5)

Net Income                                                                4.4   (6.5)   (62.5)
</TABLE>

     (1) The R&D  expenditures  are expressed before applying R&D tax credits of
$306,000 in 1998, $35,032 in 1997 and $39,132 in 1996.

     Fiscal  Year  Ended  September  30,  1998  Compared  to Fiscal  Year  Ended
September 30, 1997.

Sales

         Sales for 1998  increased  $1,870,059 to  $3,821,512,  a 95.8% increase
over sales of $1,951,453 in 1997. The dramatic  sales increase was  attributable
to an increase in the number of design wins that are now shipping in  production
volumes,  the release of an updated SSC device,  the  introduction  of the first
members of the EPC product family and an increase in the number of manufacturers
sales representatives promoting the Company's products.  Increases in the number
of production design wins resulted in an increase of 94% and 69% in sales of the
BMC and PBC product families,  respectively.  The introduction of an updated SSC
device  boosted  sales  of  that  device  by  254%.  Increasing  the  number  of
manufacturing sales  representatives  helped to increase the Company's products'
exposure in the marketplace and resulted in additional design wins.

Gross Profit

     Gross profit was $2,630,989 in 1998, an $1,428,619 or 118.8%  increase over
gross  profit of  $1,202,370  in 1997.  The increase  was  predominantly  due to
increased sales and reduced product costs. In 1998,  gross profit margins,  as a
percentage  of sales,  were 68.8%,  compared to 61.6% in 1997.  The  increase in
gross margin is a reflection of the reduced  product costs  negotiated  with the
manufacturing  subcontractors.  Such a reduction in costs would have resulted in
even greater profit  margins;  however,  the Company's  sales mix has changed to
include an increased volume of transactions at reduced margins. As the number of
volume transactions increase,  gross margin is expected to level off and decline
slightly.


<PAGE>
Other Income

         Included  in other  income  are  royalty  income,  consulting  fees and
interest  income  totaling  $200,649  in 1998,a  decrease  of  $59,063  or 22.7%
compared to $259,712 in 1997.

         In 1998,  royalty  income  decreased  by  $166,336  or 64.6% to $91,136
compared to $257,472 in 1997.  This  decrease was a direct result of a reduction
in royalty payments from National Semiconductor Corporation ("NSC"). In 1998 the
Company  received $36,122 in consulting fees for work performed on the behalf of
non-related  companies.  The Company did not receive consulting fees in 1997. In
1998  interest  income  increased by $71,151 or 3,176.4% to $73,391  compared to
$2,240 in 1997. In 1998 the main source of interest  income was  generated  from
investing  the funds raised from the private  placement in  short-term  interest
bearing notes.

Research & Development ("R&D") Expenditures

         R&D expenditures  increased by 50.5% to $553,641 in 1998, from $367,959
in 1997,  before applying R&D tax credits of $306,000 in fiscal 1998 and $35,032
in fiscal 1997. The increase in R&D  expenditures  was due to an increase in R&D
personnel.  The number of  employees  involved in R&D  increased by 240% in 1998
compared  to 1997  and  resulted  in an  increase  of 145% in R&D  wages in 1998
compared to 1997.  R&D costs were reduced by  government  funding of $157,958 in
1998, compared to government funding of $124,989 in 1997. The Company expects to
double the number of engineering  personnel  currently involved in R&D to enable
it to release products into the marketplace on a more expedited basis.

Net Income (Loss) for the year

         Net income for 1998 was $167,193, compared to a net loss of $124,596 in
1997. The Company's return to  profitability  was  predominately  due to a 95.8%
increase  in sales  from  1997 to 1998,  as well as the 7.2%  increase  in sales
margin during the same time period. In 1998, selling, general and administrative
expense  increased by 73.2% or $892,085 to  $2,110,804  in 1998,  as compared to
$1,218,719  in 1997,  as a result of  substantial  increases  in non-R&D  wages,
selling commissions paid to manufacturers sales  representatives,  promotion and
advertising expenses, and professional fees.

     Fiscal  Year  Ended  September  30,  1997  Compared  to Fiscal  Year  Ended
September 30, 1996.

Sales

     Sales  increased  121% to  $1,951,453  in fiscal 1997 from $882,042 for the
1996 fiscal year.  The dramatic sales  increase was due to the  introduction  of
revision  B2 of the PBC  devices as well as the  revision D of the BMC  devices.
These updated devices accounted for an increase in sales of 261.9% and 82.3% for
the PBC and BMC devices respectively.

Gross Profit

     Gross profit  increased  156.9% to $1,202,370 in fiscal 1997, from $468,080
in fiscal 1996.  The  increase in gross  profit was a result of increased  sales
combined with higher profit margins.  The Company was able to increase its gross
profit  percentage  by (i)  reducing  the  prices the  Company  pays to its ASIC
manufacturing  subcontractors by 20% to 60% through  negotiating  better pricing
terms,  and  (ii)  streamlining  the  product  delivery  structure.  Most of the
Company's products are now shipped directly from its manufacturing subcontractor
to the Company's third party inventory logistics partner. The logistics partner,
at the direction of the Company's,  is responsible  for shipping  product to the
customer. As a result, all costs related to inventory storage, product handling,
quality inspections and product delivery are incurred by the logistics partner.


<PAGE>
Other Income

     Other income during fiscal 1997 was  $259,712,  a decrease of $520,286,  or
67%, as compared to $779,998 during fiscal 1996.  Other income includes  royalty
income, consulting fees and interest income totaling.

     In 1997,  royalty  income  decreased  by  $347,598,  or 57.4%,  to $257,472
compared to $605,070 in 1996.This decrease was a direct result of a reduction in
royalty payment from National  Semiconductor  Corporation  ("NSC").  NSC has the
rights to  manufacture  and market an earlier  version  of the  Company's  Burst
Memory Controller  ("BMC") product family.  NSC paid the Company a royalty equal
to 50% of the  selling  price  on the  first  100,000  units  shipped  to  their
customers; thereafter, the royalty is reduced to 7.5% per unit. In January 1997,
NSC shipped their  100,000th unit and, as a result,  the royalty  payable on all
additional  units sold was  reduced to 7.5% per unit.  The  reduction  in "Other
Income" is a direct reflection of the reduction in the royalty  percentage.  The
Company  believes that the decrease in royalty  payments from NSC will be offset
by  increased  sales  of its  newer  BMC  products.  The  Company  is  currently
contacting  customers that have  purchased the Company's  older BMC products and
converting them to its new line of BMC products.  In 1996, the Company generated
$174,450 in consulting  fees for work performed for non-related  companies.  The
Company did not  generate  consulting  fees in 1997.  In 1997,  interest  income
increased  $1,762, or 368.6%, to $2,240 compared to $478 in 1996. In both years,
daily interest paid on deposits accounted for all interest income.

Research & Development ("R&D") Expenditures

     R&D  expenditures  decreased  by 29.6% to  $367,959  in  fiscal  1997  from
$522,783 in fiscal  1996,  before  applying R&D tax credits of $35,032 in fiscal
1997 and $39,132 in fiscal  1996.  The  Company  reduced the costs of its R&D by
reducing the number of  modifications  made to its products.  Products are often
modified after they have been designed and produced due to shifting standards in
the  semiconductor  industry and because of bugs that may be discovered in early
versions  of  products.  The  Company  has been  able to  reduce  the  number of
modifications or "re-spins" that it has to make to its products. For example, in
1996 the Company re-spun its PCI Bridge  Controllers  ("PBC") three times and in
1997 the  Company  did not have to re-spin  its PBC device at all.  The  Company
further  reduced its R&D expenses in 1997 by reducing  the number of  evaluation
boards designed and built in favor of an increased number of application  notes.
In  the  past,  the  Company  would  demonstrate  how  its  products  worked  in
applications  by producing  actual  evaluation  boards  containing the Company's
products.  Customers  could  then use these  boards to  evaluate  the  Company's
products.  During  1997,  the  Company  shifted  to using  application  notes to
demonstrate  its  products  rather  than  producing   evaluation   boards.   The
application notes are essentially paper designs which demonstrate, on paper, how
customers  can build  systems with the Company's  parts,  without  incurring the
costs of actually building the board level systems.

Loss for the Year

     Losses  for the fiscal  year 1997 were  reduced  by 77.4% to  $124,596,  as
compared to the loss of $551,467 for fiscal year 1996.  The Company's  reduction
in losses was a result of increased sales, increased profit margins, reduced R&D
costs and improvements in operating efficiencies.

Liquidity and Capital Resources

     In 1998,  the  Company  generated  a  positive  cash  flow  from  operating
activities  of  $97,092.  The  principal  source of cash was from net  income of
$167,193 and an increase in accounts  payable of $244,211.  Net income increased
principally  because of increases in sales and gross profit.  Payable  increased
because of the increased  volume of business.  The principal use of cash was for
an increase in  inventory of $73,038 and in increase in accounts  receivable  of
$522,227.  Both inventory and accounts  receivable  increased as a result in the
increase  in the  volume of  business.  Cash used by  investing  activities  was
$170,842 as a result of the purchase of computer  equipment and software used to
run the business and develop products.  Financing  activities  provided net cash
flow in the  amount of  $4,311,371.  The  principal  source of cash was from the
issuance of 1,372,658  shares of Common  Stock.  The  principal use of cash flow
generated  from  financing  is  repayment  of bank loan payable in the amount of
$55,313. Net cash flow generated after all activities was $4,237,621.
<PAGE>
     In 1997,  the  Company  generated  a  positive  cash  flow  from  operating
activities  of  $374,190.  The  principal  source of cash was from a decrease in
accounts  receivable of $158,319,  a decrease in  inventories  of $53,097 and an
increase in accounts payable of $136,281.  Accounts receivable decreased because
the Company started  shipping more products  through  distribution and utilizing
discounts to generate faster invoice  payments.  Inventories were reduced due to
the addition of the  inventory and logistics  subcontractor.  Payable  increased
because of an increase in the volume of business.  The principal use of cash was
from a net loss of $124,596. The net loss was generated mainly from increases in
R&D expenses.  Cash used by investing  activities was $62,553 as a result of the
purchase of computer equipment used to develop products. Net cash flow generated
after all activities was $242,224.

     On March 16, 1998,  the Company,  through its  placement  agent,  The Mason
Cabot  ("Mason  Cabot")  Division  of W.J.  Nolan & Co.,  undertook  the private
placement  of  Common  Stock  at a  price  of  $3.50  per  share.  The  offering
contemplated  a minimum gross amount of $1,000,000  and a maximum of $5,500,000.
On May 6, 1998,  the initial  closing was  conducted  in which the Company  sold
687,926 shares for aggregate gross proceeds of $2,407,741. On June 15, 1998, the
second and final closing was conducted in which the Company sold 684,732  shares
for aggregate gross proceeds of $2,396,562. In the two closings the Company sold
a total of 1,372,658 shares of Common Stock for $4,804,303. Mason Cabot received
a 7% selling  commission and a 1.5%  non-accountable  expense  allowance for its
services as placement agents.  The Company received net proceeds of this sale of
approximately $4,374,000.

     In  September  1997,  the  Company  entered  into a line of credit with the
Canadian Imperial Bank of Commerce ("CIBC") for a maximum of $140,000.  No funds
have ever been drawn on this facility. This facility bears interest at the prime
rate, as established by the Royal Bank of Canada, plus two percent.

     In April  1998,  the  Company  entered  into an  agreement  with the Export
Development  Corporation  ("EDC"),  a company  developed  by the  Government  of
Canada, whereby the Company purchases insurance from EDC, which covers up to 90%
of the Company's receivables. The premium for such insurance, on average, equals
one half of one percent of the Company's receivables in a given month.

     Management  believes that the net proceeds of the private  placement,  cash
flow generated from  operations and the funds available under the line of credit
will be  sufficient to meet the  Company's  capital,  operating and research and
development requirements for the next 12-18 months.

Foreign Exchange

     All sales are received in US dollars and all goods purchased for resale are
purchased in US dollars. Although the Company is a US company, expenses incurred
by V3  Semiconductor  Corp, a wholly owed  subsidiary of the Company  located in
Toronto, Canada, are incurred in Canadian dollars.  Operational expense incurred
by V3 Semiconductor  Corp.  accounted for 77% of the Company's total operational
expenses in 1998.  Upward  variations  in the value of the Canadian  dollar,  as
compared to the value of the US dollar,  could  adversely  effect the  Company's
results.

Year 2000

     Many currently  installed  computer systems and software products are coded
to accept only two digit entries in the date code field.  These date code fields
will need to accept  four digits to  distinguish  21st  century  dates from 20th
century dates.  Therefore,  any such computer systems and software products that
recognize  a date code field of "00" as the year 1900  rather than the year 2000
could result in errors or system failures. As a result, many companies' software
and computer systems may need to be upgraded or replaced in order to resolve the
potential  impact of this  misinterpretation  and the resulting errors or system
failures and to make such systems,  equipment and software Year 2000  compliant.
In addition,  the Company  relies upon  products and  information  from critical
suppliers,  large customers and other outside  parties,  in the normal course of
business,  whose software programs are also subject to the same problem.  Should
miscalculations  or other operational  errors occur as a result of the Year 2000
issue,  the  Company or the parties on which it depends may be unable to produce
reliable information or process routine transactions.  Furthermore, in the worse
case, the Company or the parties on which it depends may, for an extended period
of time, be incapable of conducting critical business activities,  which include
but are not limited to, manufacturing and shipping products, invoicing customers
and paying vendors.


<PAGE>
     The Company is  continuing  to assess the impact that the Year 2000 Problem
may have on its operations  and has identified the following  three key areas of
its business that may be affected:

Products

         The Company has  evaluated  each of its products and believes that each
is substantially Year 2000 compliant.  However,  the Company believes that it is
not possible to determine whether all of its customers'  products into which the
Company's  products are  incorporated  will be Year 2000  compliant  because the
Company has little or no control over the design,  production and testing of its
customers' products.

Business Systems

         Based  on  the  Company's  continuing   assessment,   the  Company  has
determined that the core of its business software applications,  including those
critical to the Company's normal operation are Year 2000 compliant.  However the
Company is currently  evaluating business and planning software from JD Edwards,
BAAN and Navision and plans to install one of these systems  early in 1999.  The
costs  associated  with  bringing   on-line  one  of  these  business   planning
applications,  estimated  to be between  $100,000  and  $250,000,  have not been
allocated  to the Year 2000 issue as they will be  purchased  by the  Company to
satisfy its business needs and not solely to address the Year 2000 issue.

Third-Party Suppliers

         The Company  relies,  directly  and  indirectly,  on  external  systems
utilized  by its  suppliers  for the  management  and  control  of  fabrication,
assembly and testing of substantially all of the Company's products. The Company
has contacted all of its major suppliers and other critical business partners in
an effort to identify and  mitigate  Year 2000  matters  originating  from third
parties which may adversely affect the Company.  Contingency plans, if required,
will be developed for transactions with suppliers that appear to be lagging with
their Year 2000 readiness programs.  This may include replacing these suppliers.
The  Company  is  currently   reviewing  supplier  responses  and  is  obtaining
additional information.

         The Company  will use  internal  resources  to  complete  the Year 2000
project  and does not expect the costs from  implementing  the project to have a
material effect on the Company's business operations or financial condition.

ITEM 7. FINANCIAL STATEMENTS

         All  financial  information  required by this Item is  attached  hereto
beginning on Page F-1.

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

         None.


<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT

Directors and Executive Officers

         The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>

Name                                                      Age         Position

<S>                                                        <C>        <C>
John Zambakkides                                           48         President, Chief Executive Officer and Director

Carl Mitchell                                              38         General Manager, Secretary  and Treasurer

Michael Alford                                             38         Vice President of Engineering

Gregg Smith                                                50         Vice President Sales and Marketing

Bernard N. Slade                                           74         Director

Jim Wilkinson                                              50         Director

John A. Fazackerley                                        63         Director

Robert Skinner                                             48         Director
</TABLE>


     Set  forth  below  is a brief  background  of the  executive  officers  and
directors of the Company, based on information supplied by them.

     John Zambakkides. Mr. John Zambakkides joined the Board of Directors of the
Company in May,  1995 and on April 13, 1996,  he was  appointed as President and
Chief  Executive  Officer of the Company.  Mr.  Zambakkides  has an  Electronics
Diploma from Niagara  College and an Electronics  Bachelor of  Engineering  from
Ryerson Polytechnical Institute.  From 1992 to 1996, Mr. Zambakkides worked with
InTELaTECH,  Inc. From 1972 to 1992, Mr.  Zambakkides served as Regional Manager
for Fairchild  Semiconductor  during which time he helped to establish Fairchild
in the Canadian  market.  After National  Semiconductor  Corp.  ("NSC") acquired
Fairchild,  Mr.  Zambakkides was made General  Manager for NSC. Mr.  Zambakkides
served on the Board of Directors of the Canadian  subsidiaries of both Fairchild
and NSC for a total of 13 years where he contributed  his expertise in the areas
of sales, engineering and corporate development.  In addition, his expertise was
supplemented by numerous courses in management, finance as well as Total Quality
Management  ("TQM"),  whereby  he was  also  an  accredited  instructor  for the
Canadian organization.

     Carl Mitchell.  Mr. Mitchell has served as the Company's  General Manager &
Corporate  Secretary  since  June  1994  and  is  responsible  for  the  General
Administration  and  Management of the business  operations of the Company.  Mr.
Mitchell joined V3  Semiconductor  Corp. in 1987 and was responsible for writing
and  documenting  the user interface for the Pc/La Personal Logic  Analyzer,  as
well as setting up and  maintaining the  distribution  channels for that product
family.  In  1989  Mr.  Mitchell  was  appointed  Company   Controller  and  was
responsible  for the  accounting  functions  as well as the  preparation  of the
financial statements.  Mr. Mitchell is currently responsible for the operations,
administration and financial & corporate reporting of the V3 group of companies.
Mr. Mitchell  graduated from the University of Toronto in 1984 with a Specialist
Degree in Computer  Science.  Prior to joining the  Company,  Mr.  Mitchell  was
Software Group Manager at Syntronics Inc.


<PAGE>
     Michael Alford.  Michael Alford,  B.E.Sc.  (Electrical)  graduated from the
University of Western  Ontario in 1983 with a degree in Electrical  Engineering.
Since that time Mr.  Alford has  developed  a wide  range of  experience  in all
phases  of  electronic  design,  with a  particular  emphasis  on the  design of
semiconductors.  Mr. Alford was one of the first design engineers employed by V3
and has recently  returned as hardware design manager.  Prior to his return,  he
was the  design  group  leader for  multi-media  products  at ATI.  While at ATI
Technologies,  he led a team that designed part of an Intel i750  derivative for
acceleration  of digital  video.  He was also a project  manager for ATI's first
video re-sizing and reformatting chip. He has experience in ASIC and custom VLSI
chip designs  (CMOS  technology),  and he holds  several  patents in the area of
multi-media  architectures.  Mr. Alford graduated from the University of Western
Ontario in 1983 with a degree in Electrical Engineering.

     Gregg Smith.  Mr.  Smith has been the Vice  President  Sales and  Marketing
since he joined the Company in 1997.  Prior  thereto,  from 1986 to 1997, he was
the Western Area Vice President with Future Electronics,  Corp.  responsible for
the largest  territory in the world where he supervised the management of eleven
sales  offices,  employing  more than 250  people.  From 1975 to 1986 Mr.  Smith
worked for National  Semiconductor  Corp.,  first as Canadian  Regional Manager,
then starting in 1979 as an Area Sales Manager based in Arizona, then in 1982 as
Area  Sales  Manager  based in  Southern  California.  From  1972 to 1975 he was
General Manager for one of Hamilton  Avnet's largest  branches in North America.
Mr. Smith is senior sales  executive with over 20 years  experience in sales and
sales  management with national and regional  organizations  in the manufacturer
and distribution areas of the Semiconductor  Industry.  Mr. Smith graduated from
the University of New Brunswick with a Bachelor of Science and Business Degree.

     Bernard N. Slade. Mr. Slade was elected to the Company's board of directors
in April,  1996.  Mr.  Slade also  serves on the board of  directors  of YieldUp
International,  a firm he founded in 1993. From 1993 to 1984, Mr. Slade acted as
a consultant for Arthur D. Little, Inc. and Gemini Consulting. Prior to becoming
a consultant, Mr. Slade spent 28 years working for IBM, from 1956 to 1984, where
he held a number of senior positions including management of product development
and  manufacturing  for  the  components  division  and  Corporate  Director  of
Manufacturing  Technology.  From 1948 to 1956 Mr.  Slade  worked in research and
development for RCA. Mr. Slade is the author of "Compressing Product Development
Cycle" and "Winning the Productivity Race."

     James  Wilkinson.  Mr.  Wilkinson  was  elected to the  Company's  board of
directors in April,  1996 and is also  currently  working as a consultant in the
industry.  From 1994 to 1997, Mr. Wilkinson served as the Vice-President,  Chief
Operating Officer and Secretary to Tee-Comm  Electronics,  Inc. and has 30 years
of experience in corporate  finance.  From 1987 to 1994, Mr. Wilkinson served as
Vice President and Treasurer of Northern Telecom Ltd., and from 1984 to 1987 Mr.
Wilkinson was the Assistant  Treasurer of Corporate Finance for Northern Telecom
Ltd. Prior thereto,  he held senior  financial  positions with Shell Canada Ltd.
and Canadian National Railway Co.

     John A. Fazackerley.  Mr. Fazackerley was elected to the board of directors
in September, 1997. Mr. John Fazackerley , founded Digital Processing Systems in
1987 and is currently  serving as its Chairman of the Board.  From 1975 to 1987,
Mr.  Fazackerley was employed by Scientific  Atlanta.  When he joined Scientific
Atlanta,  he served as head of  Broadband  sales  for  their  newly  established
Canadian  facility.  In 1977 he was  promoted to General  Manager and in 1987 he
purchased  Scientific Atlanta's studio (equipment)  products,  under its Digital
Video Systems division,  and formed Digital Processing Systems.  Mr. Fazackerley
has  served  as a  director  on the  Board  of  the  Canadian  Cable  Television
Association  for  seven  years  and  he  presently  serves  as an  international
representative  on the Management  Committee of the  International  broadcasting
Convention in London, England. He was born in Cheshire, England were he received
his Radio and Television Engineering diploma from Sanford University.




<PAGE>
     Robert Skinner.  Mr. Skinner was elected to the board of directors in March
1998.  From  1992  to  1998  Mr.  Skinner  has  managed  his  own   investments,
specializing in emerging companies in the technology market.  From 1980 to 1992,
Mr.  Skinner  was an  executive  director of Bain  Capital  Markets  Ltd.,  Bain
Securities  Ltd.,  and Bain and Co. Ltd.,  the group holding  company.  He first
joined  Bain and Co. in 1980  working  in its Fixed  Income  Division,  and soon
thereafter became a partner in the firm in December 1981. During his career with
Bain and Co. he was also involved in risk management,  mortgage  securitization,
and commodities  markets with emphasis on both coal and industrial  metals.  Mr.
Skinner's  experience  in the  securities  industry  commenced in 1977,  when he
joined  Capel  Court  Corporation  Ltd.,  a merchant  bank,  where he engaged in
securities trading and structuring transactions.

     Directors  serve until the next  annual  meeting of  stockholders  or until
their successors are elected and qualified.  Officers serve at the discretion of
the Board of Directors. Directors are reimbursed for travel expenses and, during
fiscal  1998,  each of Mssrs.  Slade,  Wilkinson,  Fazackerley  and Skinner were
granted  10,000  options to  purchase  Common  Stock as  compensation  for their
services as directors of the Company.

Section 16(a) Beneficial Ownership Reporting Compliance

     The Company did not become a reporting  company  until October 21, 1998. As
such,  as of September  30, 1998,  the Company had no obligation to file reports
required by Section 16(a) of the Securities Exchange Act of 1934.

ITEM 10. EXECUTIVE COMPENSATION

     The following table sets forth certain summary  information with respect to
the  compensation  paid  to the  Company's  Chief  Executive  Officer,  and  the
Company's  Vice-President  of Sales and Marketing,  for services rendered in all
capacities to the Company for the fiscal period ended September 30, 1998.  Other
than as listed below,  the Company had no executive  officers whose total annual
salary and bonus exceeded $100,000 for that fiscal year:
<TABLE>
<CAPTION>

                                                                                                                      Long Term
Name and Principal Position                                  Other               Annual          All Other            Compensation
                               Year             Salary       Compensation        Bonus           Compensation         Awards/Options
<S>                            <C>              <C>            <C>               <C>             <C>                       <C>   
John Zambakkides, 
President and Chief 
Executive Officer...           1998(1)          $141,657         ---             $80,000         $19,010(2)                ---

Gregg Smith, Vice 
President Sales 
and Marketing............      1998              $67,384      $23,265(3)           ---           $54,950(4)                ---
</TABLE>

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

     1.  All dollar amounts for Mr. Zambakkides reported in Canadian dollars.

     2.  Represents  car  allowance  paid  to Mr.  Zambakkides  pursuant  to his
employment agreement with the Company.

     3.  Represents commissions paid to Mr. Smith.

     4.  Represents  $48,950 in consulting fees and $6,000 in car allowance paid
to Mr. Smith.

<PAGE>
     The following  table shows the value at September  30, 1998 of  unexercised
options held by the named executive officers:
<TABLE>
<CAPTION>
                 Aggregated Option Exercises in Last Fiscal Year
                        And Fiscal Year-end Option Values


                                                                   Number of Securities 
                                    Shares                         Underlying Unexercised          Value of Unexercised
                                   Acquired          Value            Options at                 In-the-Money Options at 
                                      On            Realized        Fiscal Year-end (#)            Fiscal Year-end ($)
Name                               Exercise (#)      ($)         Exercisable/Unexercisable          Exercisable/Unexercisable  
John Zambakkides, 
President and Chief 
<S>                                     <C>             <C>                 <C>     <C>                    <C>      <C>
Executive Officer.....                  0               0                   160,000/0                      $50,000*/$0
</TABLE>

     * The options held by Mr. Zambakkides are exercisable at $3.75 per share of
Common Stock. Assumes a fair market value of $4.0625 per share. 

Employment Arrangements

         From  October 1, 1998 to  December  31,  1998,  John  Zambakkides,  the
Company's  President and Chief Executive  Officer,  was employed  pursuant to an
agreement  providing for annual  compensation  of Cdn.  $160,000.  On January 1,
1998, Mr. Zambakkides  entered into a new agreement with the Company whereby Mr.
Zambakkides  will be employed as the  Company's  President  and Chief  Executive
Officer  for a term of five  years  and,  thereafter,  the  agreement  shall  be
renewable  annually.  The agreement provides for a base salary of Cdn. $200,000,
however Mr.  Zambakkides has elected to receive a salary of Cdn.  $140,000.  The
employment  agreement  provides for a car allowance of Cdn. $1,000 per month. In
addition,  Mr. Zambakkides is entitled to receive a bonus and options based upon
achieving certain goals and objectives as determined by the Board of Directors.

Employee Stock Option Plan

         In  February  1996,  the  Company  adopted,  by  action of the board of
directors and  stockholders,  the 1996 Employee  Stock Option Plan (the "Plan").
The Plan which was  amended in  February  1997,  provides  for the  issuance  of
incentive  stock  options  to  qualified  employees.  The Plan  does not have an
expiration  date.  Set forth below is a summary of the Plan, but this summary is
qualified  in its  entirety by reference to the full text of the Plan, a copy of
which is filed as an exhibit to the Company's Registration Statement.

         The  Plan  is  authorized  to  grant  options  or  other   equity-based
incentives  for  400,000  shares of the Common  Stock.  If shares  subject to an
option under the Plan cease to be subject to such option,  or if shares  awarded
under the Plan are forfeited,  or otherwise  terminated  without a payment being
made to the  participant  in the  form of  stock,  such  shares  will  again  be
available for future distribution under the Plan.

         Awards under the Plan may be made to key employees,  including officers
of and consultants to the Company,  its subsidiaries  and affiliates,  including
any director.  The Plan imposes no limit on the number of officers and other key
employees  to whom awards may be made;  however,  no person shall be entitled to
receive  awards which would  entitle such person to acquire more than 10% of the
number of shares of Common Stock available under the Plan.

         The  Plan is to be  administered  by a  committee  of no less  than two
disinterested  directors  to be  appointed  by the board (the  "Committee").  No
member or alternate member of the Committee shall be eligible to receive options
or stock  under  the Plan  (except  as to the  automatic  grant  of  options  to
directors)  or  under  any plan of the  Company  or any of its  affiliates.  The
Committee has broad  discretion in determining the persons to whom stock options
or other  awards  are to be  granted,  the terms and  conditions  of the  award,
including the type of award,  the exercise  price and term and the  restrictions
and forfeiture  conditions.  If no Committee is appointed,  the functions of the
Committee shall be performed by the board of directors.

<PAGE>
         The Committee  will have the authority to grant the following  types of
awards under the Plan:  incentive or  non-qualified  stock options.  The Plan is
designed to provide  the  Committee  with broad  discretion  to grant  incentive
stock-based rights.

         As of the  September  30,  1998,  the Board  granted  stock  options to
purchase an  aggregate  of 548,483  shares of Common  Stock at  exercise  prices
between $1.75 and $6.25. Such exercise prices were determined by the Board to be
the fair market value per share on the date of grant. Under the Plan the options
become  exercisable  as to 33.33%  upon grant and 33.33% on each of the next two
anniversaries  of the grant,  however,  the Committee,  at its  discretion,  can
establish  other vesting  schedules.  All options  granted under the Plan expire
five years from the date of grant.  The options  which have been granted  expire
between July 7, 1999 and February 22, 2006.

Employee Stock Purchase Plan

         On February 12, 1996, the Board of Directors approved an employee stock
purchase  plan.  The plan reserves  20,000  shares of Common  Stock,  out of the
shares of Common  Stock  reserved  under the Stock  Option  Plan,  for  eligible
employees  and  permits  employees  to purchase  Common  Stock  through  payroll
deductions  at a purchase  price of 90% of the fair  market  value of the Common
Stock on the purchase date.



<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table sets forth,  as of September  30,  1998,  certain
information  concerning  beneficial  ownership  of shares of Common  Stock  with
respect  to (i)  each  person  known  to the  Company  to own 5% or  more of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii) the
executive  officers of the Company,  and (iv) all  directors and officers of the
Company as a group:

<TABLE>
<CAPTION>

                                   Number of Shares              Approximate 
                                     Beneficially               Percentage of 
                                        Owned                   Common Stock**
Name*


<S>             <C>                            <C>                      <C>
John Zambakkides(1)                            160,000                  3%

Carl Mitchell(2)                               712,336                 13%

Michael Alford(3)                              483,248                  9%

Alan Simmons(4)                                689,434                 13%

Bernard N. Slade(5)                             85,000                  2%

Jim Wilkinson(6)                                25,000                 0.5%

John A. Fazackerley(7)                          15,833                 0.3%

Robert Skinner(8)                              210,002                  4%

Patrick Prentiss                               543,654                 10%

Bellingham Industries Inc.                     599,857                 11%

All Officers and Directors 
as a Group (4 persons)
                                             1,691,419                 31%

------------------
</TABLE>

     * Except as noted above, the address for the above identified  officers and
directors of the Company is c/o V3  Semiconductor,  Inc.,  250  Consumers  Road,
Suite 901, North York, Ontario, Canada M2J 4V6.

     **  Percentages  are based upon the  assumption  that the  shareholder  has
exercised  all of the  currently  exercisable  options  he or she owns which are
currently   exercisable  or  exercisable  within  60  days  and  that  no  other
shareholder has exercised any options he or she owns.

     (1) Includes  160,000  shares of Common Stock issuable upon exercise of the
stock options  granted John  Zambakkides as part of a special  grant,  which are
immediately exercisable.

     (2) Includes 50,000 shares of Common Stock owned by Mr. Mitchell's wife and
40,000 shares of Common Stock  issuable  upon exercise of stock options  granted
under the Company's Employee Stock Option Plan ("ESOP"). Of such options, 35,000
are immediately exercisable.




<PAGE>
     (3) Includes  140,000 shares of Common Stock owned by Mr. Alford's wife and
40,000 shares of Common Stock  issuable  upon exercise of stock options  granted
under the Company's ESOP. Of such options, 35,000 are immediately exercisable.

     (4) Includes  159,101 shares of Common Stock owned by Mr. Simmons' wife and
142,650 shares of Common Stock owned by Mr.  Simmons'  mother-in-law  and 15,000
shares of Common Stock issuable upon exercise of stock options granted under the
Company's ESOP.

     (5) Includes  25,000 shares of Common Stock issuable upon exercise of stock
options  granted under the  Company's  ESOP plan,  all of which are  immediately
exercisable.  Includes  20,000 shares owned by Mr. Slade's wife and 6,000 shares
owned by Mr. Slade's son.

     (6) Includes  25,000 shares of Common Stock issuable upon exercise of stock
options  granted under the  Company's  ESOP plan,  all of which are  immediately
exercisable.

     (7) Includes  15,833 shares of Common Stock issuable upon exercise of stock
options  granted under the  Company's  ESOP plan,  all of which are  immediately
exercisable.

     (8) Includes 200,002 shares of Common Stock owned by Cedar Capital Limited.
Robert Skinner is the sole shareholder of Cedar Capital Limited. Includes 10,000
shares of Common Stock issuable upon exercise of stock options granted under the
Company's ESOP plan, all of which are immediately exercisable.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     A shareholder, Alan Simmons, provided consulting and management services to
the Company  for fees in the amount of $67,757  for fiscal year ended  September
30, 1997 and $28,246 in fiscal year ended September 30, 1998.  These amounts are
included in the Company's  Research and  Development  expense.  From October 27,
1997 to May 1, 1997, prior to joining the Company as Vice President of Sales and
Marketing,  Scott  Smith  provided  consulting  and  management  services to the
Company for fees in the amount of $48,950 for fiscal  year ended  September  30,
1998.  The consulting and  management  services  provided by Mssrs.  Simmons and
Smith were on terms no less  favorable  than those that could have been obtained
from an unaffiliated party.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

         The  Company  has not filed any  reports  on Form 8-K  during  the last
quarter of the period covered by this report.

Exhibits

         The following Exhibits are filed as part of this Report:
<TABLE>
<CAPTION>

       Exhibit
       Number              Description

<S>      <C>      <C>
         3.1      Certificate of Incorporation, as amended to date (1)
         3.2      By-Laws (1)
         4.1      Form of Common Stock Certificate (2)
         4.2      1996 Stock Option Plan (1)
         10.1     Lease of premises located at 250 Consumers Road, North York, Ontario, Canada (2)
                  Employment Agreement between the Company and John Zambakkides, executed on February 23, 1996 (3)
         10.2     Lease of additional space at the Company's headquarters located at
                  250 Consumers Road, North York, Ontario, Canada, executed on August 13,
                  1998. 
         10.3     Letter agreement, dated August 19, 1998, between the Company
                  and Commerce  Communities  renewing the lease on the  Company's  office
                  space in Santa Clara, California.
         23.1     Consent of KPMG LLP, the Company's Independent Auditors, regarding Form SB-2 Registration Statement (4)
         23.2     Consent of Sichenzia, Ross & Friedman LLP regarding Form SB-2 Registration Statement (4)
         27.1     Financial Data Schedule
</TABLE>
-------------

     (1) Reference is made to the Registrant's Form SB-2 Registration  Statement
(File No. 333-59133), as filed on July 15, 1998, which is hereby incorporated by
reference.

     (2) Reference is made to Amendment Number 1 to the  Registrant's  Form SB-2
Registration  Statement  (File No.  333-59133),  as filed on September 22, 1998,
which is hereby incorporated by reference.

     (3) Reference is made to Amendment Number 2 to the  Registrant's  Form SB-2
Registration Statement (File No. 333-59133),  as filed on October 8, 1998, which
is hereby incorporated by reference.

     (4) Reference is made to Amendment Number 3 to the  Registrant's  Form SB-2
Registration Statement (File No. 333-59133), as filed on October 19, 1998, which
is hereby incorporated by reference.


                                       
<PAGE>



                      Consolidated Financial Statements of

                             v3 semiconductor, inc.

                     Years ended September 30, 1998 and 1997



<PAGE>

                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

V3 Semiconductor, Inc.:

<S>                                                                                                         <C>
       Report of Independent Auditors.....................................................................F-3

       Balance Sheet......................................................................................F-4

       Statement of Operations............................................................................F-5

       Statement of Stockholders Equity...................................................................F-6

       Statement of Cash Flows............................................................................F-7

       Notes to Financial Statements......................................................................F-8 - F-25




</TABLE>





<PAGE>
                          independent Auditors' Report


To the Shareholders of V3 Semiconductor, Inc.



We  have   audited  the   accompanying   consolidated   balance   sheets  of  V3
Semiconductor,  Inc.  as  at  September  30,  1998  and  1997  and  the  related
consolidated statements of operations,  changes in shareholders' equity and cash
flows for each of the years in the three-year  period ended  September 30, 1998.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of the Company as at
September  30,  1998 and 1997,  and the results of its  operations  and its cash
flows for each of the years in the three-year  period ended  September 30, 1998,
in  accordance  with  generally  accepted  accounting  principles  in the United
States.



/s/ KPMG LLP               

KPMG LLP

Chartered Accountants



Toronto, Canada

November 30, 1998


<PAGE>
v3 semiconductor, inc.
Consolidated Balance Sheets
(Stated in United States dollars)

September 30, 1998 and 1997
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                                                     1998                 1997
-------------------------------------------------------------------------------------------------------------------

Assets

Current assets:
<S>                                                                        <C>                   <C>          
     Cash and cash equivalents                                             $    4,821,556        $     558,676
     Accounts receivable, net of allowance for doubtful
       accounts of $15,533; $1,104 at September 30, 1997                          754,119              231,892
     Inventories (note 2)                                                         168,490               95,452
     Prepaid expenses                                                              39,694               31,172
-------------------------------------------------------------------------------------------------------------------
                                                                                5,783,859              917,192

Capital assets (note 3)                                                           420,794              372,709

-------------------------------------------------------------------------------------------------------------------
                                                                           $    6,204,653        $   1,289,901
-------------------------------------------------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
     Accounts payable                                                      $      576,055        $     331,844
     Accrued liabilities                                                           64,777               27,160
     Capital taxes payable                                                          4,940                2,534
     Deferred revenue                                                             105,394                6,699
     Bank term loan                                                                     -               55,313
     Obligation under capital lease (note 5)                                            -                8,350
-------------------------------------------------------------------------------------------------------------------
                                                                                  751,166              431,900

Shareholders' equity:
     Capital stock:
         Preferred shares:
              Authorized 10,000,000; no shares issued
                and outstanding (note 6)                                                -                    -
         Special shares:
              Authorized  3,400,000;  46,368  shares issued and  outstanding  at
                September 30, 1998; 697,310 shares issued and outstanding at
                September 30,1997 (note 6)                                            124                  449
         Common shares:
              Authorized 50,000,000; 5,471,628 shares issued and
                outstanding at September 30, 1998; 3,437,928
                issued and outstanding at September 30, 1997 (note 6)               5,472                3,438
         Additional paid-in capital                                             6,050,500            1,649,175
-------------------------------------------------------------------------------------------------------------------
                                                                                6,056,096            1,653,062
     Cumulative translation adjustment                                             15,728               (9,531)
     Deficit                                                                     (618,337)            (785,530)
-------------------------------------------------------------------------------------------------------------------
                                                                                5,453,487              858,001
Commitments (note 11)
Contingent liabilities (note 12)

-------------------------------------------------------------------------------------------------------------------
                                                                           $    6,204,653        $   1,289,901
-------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.

                                      F-4

<PAGE>
V3 semiconductor, inc.
Consolidated Statements of Operations
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                                            1998             1997                  1996
-------------------------------------------------------------------------------------------------------------------

<S>                                                              <C>               <C>                  <C>            
Sales                                                            $     3,821,512   $    1,951,453       $       882,042

Cost of goods sold                                                     1,190,523          749,083               413,962
-------------------------------------------------------------------------------------------------------------------

                                                                       2,630,989        1,202,370               468,080

Other income (note 7)                                                    200,649          259,712               779,998

Expenses:
     Selling, general and administrative                               1,891,758          987,616             1,070,050
     Research and development (note 8)                                   247,641          332,927               483,651
     Depreciation and amortization                                       122,757          143,151               128,497
     Rent and utilities                                                   90,183           77,252                56,786
     Bank charges and interest                                             6,106           10,700                21,429
-------------------------------------------------------------------------------------------------------------------
                                                                       2,358,445        1,551,646             1,760,413
-------------------------------------------------------------------------------------------------------------------

Income (loss) before income taxes                                        473,193          (89,564)             (512,335)

Income taxes:
     Current                                                             306,000           35,032                39,132
     Deferred                                                                  -                -                     -
-------------------------------------------------------------------------------------------------------------------
                                                                         306,000           35,032                39,132

-------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                $       167,193   $     (124,596)      $      (551,467)
-------------------------------------------------------------------------------------------------------------------

Net income (loss) per share (note 13):
     Basic                                                       $         0.04     $       (0.03)      $         (0.13)
     Diluted                                                               0.03             (0.03)                (0.13)

-------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-5

<PAGE>
V3 semiconductor, inc.
Consolidated Statements of Changes in Shareholders' Equity
(Stated in United States dollars)
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------
                                                                             Additional       Total share
                                                                             Paid-in capital  capital and  Retained
                                                                             special shares   additional   earnings      Cumulative 
                                   Special shares          Common shares     and              paid-in      (accumulated  translation
                               Shares       Par value   Shares    Par value  common shares    capital      deficit)      adjustment 
---------------------------------------------------------------------------------------------------------------------

<S>              <C>           <C>          <C>         <C>       <C>        <C>            <C>            <C>           <C>        
Balance, October 1, 1995       1,623,194    $     812   2,712,044 $  2,712   $  1,649,538   $ 1,653,062    $(109,467)    $ (9,784)  

Changes during the year:
Conversion of special shares
to common shares                (713,384)        (357)    713,384      713           (356)            -            -            -   
Cancellation of special shares
(note 6(a))                     (200,000)           -           -        -              -             -            -            -   
Loss for the year                      -            -           -        -              -             -     (551,467)           -   
Translation adjustment                 -            -           -        -              -             -            -       (2,949)  
---------------------------------------------------------------------------------------------------------------------

Balance, September 30, 1996      709,810          455   3,425,428    3,425      1,649,182     1,653,062     (660,934)     (12,733)  

Changes during the year:
Conversion of special shares
to common shares                 (12,500)          (6)     12,500       13             (7)            -            -            -   
Loss for the year                      -            -           -        -              -             -     (124,596)           -   
Translation adjustment                 -            -           -        -              -             -        3,202        3,202
---------------------------------------------------------------------------------------------------------------------

Balance, September 30, 1997      697,310          449   3,437,928    3,438      1,649,175     1,653,062     (785,530)      (9,531)  

Changes during the year:
Conversion of special shares
to common shares                (650,942)        (325)    650,942      651           (326)            -            -            -   
Issuance of common shares              -            -   1,382,758    1,383      4,401,651     4,403,034            -            -   
Net income                             -            -           -        -              -             -      167,193            -   
Translation adjustment                 -            -           -        -              -             -            -       25,259   
---------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998       46,368    $     124   5,471,628 $  5,472     $6,050,500   $ 6,056,096 $   (618,337)   $  15,728   
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
V3 semiconductor, inc.
Consolidated Statements of Changes in Shareholders' Equity
(Stated in United States dollars)
(cont.)
<TABLE>
<CAPTION>
                               Total
                               shareholders'
                               equity (deficit)    
<S>                            <C>           
Balance, October 1, 1995       $1,533,811

Changes during the year:
Conversion of special shares
to common shares                       -
Cancellation of special shares
(note 6(a))                            -
Loss for the year               (551,467)
Translation adjustment            (2,949)
                              -----------

Balance, September 30, 1996      979,395

Changes during the year:
Conversion of special shares
to common shares                      -
Loss for the year               (124,596)
Translation adjustment             3,202
                              -----------

Balance, September 30, 1997      858,001

Changes during the year:
Conversion of special shares
to common shares                       -
Issuance of common shares      4,403,034
Net income                       167,193
Translation adjustment            25,259

                              -----------
Balance, September 30, 1998   $5,453,487
                              -----------

</TABLE>


See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
V3 semiconductor, inc.
Consolidated Statements of Cash Flows
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                                            1998             1997                  1996
-------------------------------------------------------------------------------------------------------------------

Operating activities:
<S>                                                              <C>                <C>                 <C>             
     Net income (loss)                                           $       167,193    $    (124,596)      $      (551,467)
     Add items not involving cash:
         Depreciation and amortization                                   122,757          143,151               128,497
         Deferred revenue                                                 98,695            6,699                     -
         Non-cash administrative services                                 28,000                -                     -
     Changes in working capital balances:
         Accounts receivable                                            (522,227)         158,319              (240,345)
         Income taxes                                                      2,406            2,167                13,704
         Inventories                                                     (73,038)          53,097               (17,018)
         Prepaid expenses                                                 (8,522)         (11,446)               (5,948)
         Accounts payable                                                244,211          136,281               (71,552)
         Accrued liabilities                                              37,617           10,518                16,642
-------------------------------------------------------------------------------------------------------------------
     Total cash provided by (used by) operating activities                97,092          374,190              (727,487)

Investing activities:
     Additions to capital assets                                        (170,842)         (62,553)             (254,929)
-------------------------------------------------------------------------------------------------------------------
     Total cash used by investing activities                            (170,842)         (62,553)             (254,929)

Financing activities:
     Repayment of bank term loan                                         (55,313)         (61,970)              (69,042)
     Repayment of loan payable                                                 -                -               (99,733)
     Repayment of obligation under capital lease                          (8,350)          (7,443)                    -
     Increase in obligation under capital lease                                -                -                15,793
     Net proceeds from issuance of common shares                       4,375,034                -                     -
-------------------------------------------------------------------------------------------------------------------
     Total cash provided by (used by) financing activities             4,311,371          (69,413)             (152,982)
-------------------------------------------------------------------------------------------------------------------

Increase (decrease) in cash and cash equivalents                       4,237,621          242,224            (1,135,398)

Effect of currency translation adjustments on cash                        25,259            3,202                (2,949)

Cash and cash equivalents, beginning of year                             558,676          313,250             1,451,597

-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                           $     4,821,556    $     558,676       $       313,250
-------------------------------------------------------------------------------------------------------------------

Cash paid for:
     Interest                                                    $         2,869   $        8,337       $        18,305

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

</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996

1.     Significant accounting policies:


       (a) Basis of presentation:


           V3 Semiconductor, Inc. (the "Company") is incorporated under the laws
           of the State of Nevada. The consolidated  financial statements of the
           Company  include the accounts of its  wholly-owned  subsidiaries,  V3
           Semiconductor  Corp.,  a  Canadian  company  incorporated  under  the
           Ontario  Business  Corporations  Act  and  V  Cubed  Corporation,   a
           California-based  company,  registered  in the State of  Nevada.  All
           intercompany  balances and  transactions  have been  eliminated.  The
           Company's   principal   business   activities   are  the  design  and
           development of integrated circuits for the embedded computer market.


       (b) Inventories:


           Raw materials,  which are used in the production of computer  boards,
           are valued at the lower of cost or replacement value. Finished goods,
           which  consists  of  embedded  chips are  valued at the lower of cost
           (cost  has  been  determined  on  the  average  cost  basis)  or  net
           realizable value.


       (c) Capital assets:


           The  Company  records  capital  assets  at cost,  net of  accumulated
           depreciation  and  amortization.  These assets are  depreciated  over
           their estimated useful lives as follows:
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
           Asset                                              Basis                                       Rate
-------------------------------------------------------------------------------------------------------------------

<S>                                                           <C>                                          <C>
           Furniture and equipment                            Declining balance                            20%
           Computer equipment                                 Declining balance                            30%
           Computer software                                  Declining balance                            30%
           Patent                                             Straight line                           17 years

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

</TABLE>


       (d) Share issue costs:


           Share issue costs are charged against share capital.


       (e) Revenue recognition:


           Revenues  from the sale of chipsets and chips are  recognized  at the
time of shipment.


                                      F-8
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996

1.     Significant accounting policies (continued):


       (f) Research and development costs:


           Research and development  costs are charged to operations as incurred
           less investment tax credits related to these costs.


       (g) Foreign currency translation:


           The Company's Canadian subsidiary measures and reports its results in
           Canadian dollars. The amounts relating to assets and liabilities have
           been  translated  into United States  dollars at the current  balance
           sheet rate and amounts  relating to the profit and loss accounts have
           been translated using the year's average  exchange rate.  Differences
           arising from  currency  translation  are  presented as a component of
           shareholders' equity.


       (h) Income taxes:


           The Company records income taxes using the asset and liability method
           as required by the Financial  Accounting Standards Board Statement of
           Financial  Accounting Standards No. 109, Accounting for Income Taxes.
           Under this method, deferred tax assets and liabilities are determined
           based on  differences  between  financial  reporting and tax bases of
           assets and  liabilities  and are measured using the enacted tax rates
           and laws that are expected to be in effect when the  differences  are
           expected  to  reverse.  Valuation  allowances  are  established  when
           necessary to reduce  deferred tax assets to the amounts that are more
           likely than not to be realized. The effect on deferred tax assets and
           liabilities of a change in tax rates is recognized in the period that
           such tax rates changes are enacted.


       (i) Use of estimates:


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



<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996

1.     Significant accounting policies (continued):


       (j) Cash and cash equivalents:


           The Company considers all highly liquid investments  purchased with a
           maturity  of 90 days or less to be cash  equivalents.  Cash  and cash
           equivalent balances consist of cash balances and term deposits.


2.     Inventories:


       Inventories are comprised of the following:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                     1998                 1997
-------------------------------------------------------------------------------------------------------------------

<S>                                                                         <C>                    <C>        
       Raw materials                                                        $       6,423          $    14,501
       Finished goods                                                             162,067               80,951

-------------------------------------------------------------------------------------------------------------------
                                                                            $     168,490          $    95,452
-------------------------------------------------------------------------------------------------------------------
</TABLE>


3.     Capital assets:
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                                               Accumulated            Net book
       September 30, 1998                                          Cost       amortization               value
-------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>                 <C>                 <C>           
       Furniture and equipment                          $       131,972     $       54,165      $       77,807
       Computer equipment                                       311,661            155,045             156,616
       Computer software                                        415,283            244,431             170,852
       Patent                                                     8,461              1,510               6,951
       Computer equipment under
         capital lease                                           20,183             11,615               8,568

-------------------------------------------------------------------------------------------------------------------
                                                        $       887,560     $      466,766      $      420,794
-------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      F-10

<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996


3.     Capital assets (continued):
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                                               Accumulated            Net book
       September 30, 1997                                          Cost       amortization               value
-------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>                 <C>                 <C>           
       Furniture and equipment                          $       111,387     $       41,158      $       70,229
       Computer equipment                                       231,100            115,204             115,896
       Computer software                                        384,657            219,208             165,449
       Patent                                                     9,381              1,312               8,069
       Computer equipment under
         capital lease                                           21,962              8,896              13,066

-------------------------------------------------------------------------------------------------------------------
                                                        $       758,487     $      385,778      $      372,709
-------------------------------------------------------------------------------------------------------------------

</TABLE>

4.     Banking facilities:


       (a) The bank term loan bears  interest at the bank prime rate plus 2%, is
           repayable in monthly payments of $5,028 plus interest,  is secured by
           a specific charge on certain capital assets, a general  assignment of
           accounts  receivable  and a  general  security  agreement.  The  loan
           matured on August 31, 1998.


       (b) The Company has a $143,980 line of credit,  payable on demand,  which
           bears  interest at the Canadian bank prime rate plus 2% of which none
           was drawn at  September  30,  1998.  Advances  under the facility are
           secured by a general security  agreement  covering  substantially all
           the assets of the Company.


                                      F-11
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996


5. Obligation under capital lease:


       The obligation  under capital lease represents the total present value of
       future minimum lease payments discounted at the implicit interest rate of
       12.9% in the lease. The obligation was fully paid during the year.


       The  following  is a schedule of minimum  lease  payments  under  capital
lease:
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                                                                          1997
-------------------------------------------------------------------------------------------------------------------

<S>    <C>                                                                                       <C>          
       1998                                                                                      $       8,746
-------------------------------------------------------------------------------------------------------------------

       Total minimum lease payments                                                                      8,746

       Less amount representing interest                                                                  (396)

-------------------------------------------------------------------------------------------------------------------
       Obligation under capital lease                                                            $       8,350
-------------------------------------------------------------------------------------------------------------------

</TABLE>

6.     Capital stock:


       The  authorized  capital  stock of the Company  consists  of:  50,000,000
       common  shares  with a par  value of  $.001  each,  10,000,000  preferred
       shares,  which may be issued in  different  series  and whose  rights and
       privileges  are to be  determined  at the time of  issue,  and  3,400,000
       special  shares with a par value of $0.0005 each.  The special shares are
       voting,  are not  entitled to any  dividends  and can not be  transferred
       without the consent of the Board of Directors.


       The holders of the special  shares are able to exchange one special share
       together  with one  preferred  share of V3  Semiconductor  Corp.  for one
       common share of the Company.


       (a) Pursuant  to the terms of an escrow  agreement  the  Company's  stock
           transfer agent held 400,000 Special shares of the Company and 400,000
           preferred shares of V3 Semiconductor  Corp., which would be issued if
           certain  profit  performance  targets  were met by June 30,  1995 and
           March 31, 1996,  otherwise they are subject to cancellation.  In 1996
           and 1995,  200,000 shares were cancelled each year, since the targets
           had not been met.


                                      F-12
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996




6.     Capital stock (continued):


       (b) The Company undertook a private  placement  offering (the "Offering")
           of a minimum of 1,000,000 and a maximum of 5,500,000 of common shares
           at $3.50 per common share.  In connection  with the Offering  between
           the Company and The Mason Cabot  Division of W. J. Nolan & Co.,  (the
           "Placement Agent"),  the Placement Agent offered the minimum offering
           on a "best efforts,  all or none" basis and any additional  shares up
           to the maximum offering on a "best efforts" basis. The Company agreed
           to pay the  Placement  Agent a fee of 7% of each  common  share sold,
           plus an expense allowance of 1.5% of the aggregate  purchase price of
           the common  shares sold.  The Company  also granted to the  Placement
           Agent,  warrants to purchase 96,505 common shares. Each warrant has a
           3 year  exercise  period  commencing on the date of the Final Closing
           (June 22, 1998) at $3.50 per common share.  The Company  received net
           proceeds in the amount of  $2,188,000  representing  the  issuance of
           687,926  common shares in May 1998 and  $2,186,000  representing  the
           issuance  of 684,732  common  shares in June 1998.  Share issue costs
           relating to the May 1998 and June 1998  private  placement  offerings
           were $219,316 and $210,155, respectively.


           During the year,  the Company  issued 10,000 common shares in the
           amount of $28,000 as consideration for legal services.


       (c) During fiscal 1996, the board of directors approved an employee share
           purchase plan. The plan reserves 20,000 common shares for purchase by
           eligible  employees  and permits  employees to purchase  common stock
           through  payroll  deductions  at a purchase  price of 90% of the fair
           market  value of the common  shares on the purchase  date.  No shares
           have yet been issued under this plan.


       (d) Stock option plan:


           During fiscal 1996, the board of directors approved an employee stock
           option plan. Pursuant to the plan, 250,000 common shares are reserved
           for issue to eligible  employees.  During  fiscal 1997,  the board of
           directors  approved an amendment to the employee stock option plan to
           increase the shares  reserved for issue from 250,000 common shares to
           400,000. In addition, the board of directors approved the issuance of
           10,000 options to each director as compensation.


                                      F-13
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996


6.     Capital stock (continued):


           A total of 548,483  share  options  were  granted and approved by the
           board of directors during 1996 to 1998 which expire between July 1999
           and February 2006. Of this total,  90,833 options were granted to the
           members of the board of directors and 160,000 options were granted to
           an officer and  director of the Company.  The options  granted to the
           officer  and  director  of the Company are in addition to the options
           reserved for under employee  stock option plan. The options  exercise
           prices range from $1.75 to $6.25 per share.  Subsequent  to year end,
           the Company granted 30,500 options to employees.


           The Company measures compensation cost for stock option awards issued
           to employees  using the  intrinsic  value based method of  accounting
           prescribed by the United States  Accounting  Principles Board Opinion
           No. 25, "Accounting for Stock Issued to Employees".  Had compensation
           cost for these  plans been  determined  under the  provisions  of the
           United  States  Financial  Accounting  Standards  Board  Statement of
           Financial  Accounting  Standards No. 123, "Accounting for Stock-Based
           Compensation" which utilizes a fair value based method, the Company's
           net income  (loss)  and  earnings  (loss)  per share  would have been
           changed to the following pro forma amounts:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                        1998                         1997                          1996
-------------------------------------------------------------------------------------------------------------------
                                    As           Pro            As            Pro            As            Pro
                              reported         forma      reported          forma      reported          forma
-------------------------------------------------------------------------------------------------------------------
<S>                        <C>           <C>           <C>            <C>           <C>           <C>          
           Net income
              (loss)       $   167,193   $  (191,992)  $  (124,596)   $  (319,321)  $  (551,467)  $ (1,156,910)

           Net income (loss) per share:
                Basic             0.04         (0.04)        (0.03)        (0.08)          (0.13)        (0.27)
                Diluted           0.03         (0.04)        (0.03)        (0.08)          (0.13)        (0.27)

-------------------------------------------------------------------------------------------------------------------
</TABLE>

           For  purposes  of the pro forma  disclosures,  the fair value of each
           option   grant  is   estimated   on  the  date  of  grant  using  the
           Black-Scholes  option pricing model with following  weighted  average
           assumptions used for options as at September 30, 1998, 1997 and 1996,
           respectively:  risk-free  interest  rates  of 5.0%,  5.0%  and  5.0%;
           expected  dividend  yields of 0%, 0% and 0%;  expected  volatility of
           90%, 90% and 90%; and expected lives of 5 years, 5 years and 5 years.


                                      F-14
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996


6.     Capital stock (continued):


           Certain   additional   disclosures   with   respect  to   stock-based
compensation are as follows:


           Stock option information:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                      1998                        1997                         1996
-------------------------------------------------------------------------------------------------------------------
                                            Weighted                     Weighted                     Weighted
                                             average                      average                      average
                                            exercise                     exercise                     exercise
                                Number         price        Number          price        Number          price
-------------------------------------------------------------------------------------------------------------------

           Balance,
              beginning
<S>                            <C>              <C>        <C>           <C>                  <C>    <C>  
              of year          384,083          2.87       283,750       $  2.95              -      $       -

           Options
              granted          164,500          4.59       100,333          2.67        283,750           2.95
           Options
              exercised            100          -                -          -                 -              -

-------------------------------------------------------------------------------------------------------------------
           Balance,
              end of year      548,483          3.39       384,083       $  2.87        283,750      $    2.95
-------------------------------------------------------------------------------------------------------------------

           Exercisable, at
              end of year      395,096                     322,798                      243,750
-------------------------------------------------------------------------------------------------------------------

</TABLE>


           Stock options outstanding and exercisable as at September 30 1998 are
as follows:
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                         Options outstanding                                      Options exercisable
-------------------------------------------------------------------------------------------------------------------
                                                                       Weighted
                                                                       average
                                                                       remaining
                                                                       contractual
           Exercise price                      Number                  life                             Number
-------------------------------------------------------------------------------------------------------------------

<S>        <C>       <C>                      <C>                      <C>   <C>                       <C>    
           $  1.75 - 2.00                     113,750                  1.0 - 3.0 years                 113,750
              2.02 - 2.75                      80,900                  3.1 - 4.0 years                  67,336
              3.00 - 3.88                     226,500                  4.1 - 5.0 years                 147,506
              4.00 - 6.25                     127,333                  5.0 - 8.0 years                  66,504

-------------------------------------------------------------------------------------------------------------------
                                              548,483                                                  395,096
-------------------------------------------------------------------------------------------------------------------



</TABLE>
                                      F-15
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996


7.     Revenue:


       Included in revenue are the following amounts:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                   1998               1997                1996
-------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>                 <C>                 <C>           
       Royalty income                                   $        91,136     $      257,472      $      605,070
       Consulting fees                                           36,122                  -             174,450
       Interest                                                  73,391              2,240                 478

-------------------------------------------------------------------------------------------------------------------
                                                        $       200,649     $      259,712      $      779,998
-------------------------------------------------------------------------------------------------------------------
</TABLE>

       The Company's Canadian subsidiary entered in a royalty agreement with one
       of its  suppliers  whereby the supplier was granted the right to sell the
       Company's  product.  The  royalty  agreement  provided  for a 50% royalty
       payment  on the first  100,000  units  shipped  to  customers  and a 7.5%
       royalty  payment on any  additional  units  shipped to  customers up to a
       maximum royalty payment of  approximately  $1.7 million.  As at September
       30,  1998,  approximately  $1.6  million  of royalty  payments  have been
       received. Royalty revenues are recognized in accordance with the terms of
       the agreement.

8.     Research and development:


       (a) Government assistance:


           Research and  development  is undertaken by the Canadian  subsidiary.
           The Company received government  assistance covering a portion of the
           salaries  incurred on qualifying  research and development  projects.
           Government  assistance  has  been  accrued  and  netted  against  the
           research and development expense as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

<S>        <C>                                                                                   <C>          
           1998                                                                                  $     157,958
           1997                                                                                        124,989
           1996                                                                                         73,430

-------------------------------------------------------------------------------------------------------------------
</TABLE>



                                      F-16
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996

8.     Research and development (continued):


       (b) Investment tax credits ("ITCs"):

           The  Company's   Canadian   subsidiary  incurs  current  and  capital
           expenditures   which  are   eligible  as   scientific   research  and
           experimental  development ("SR&ED")  expenditures.  The Company earns
           ITCs at a rate of 20% on SR&ED expenditures each year. These ITCs are
           available for application against the Canadian  subsidiary's  federal
           income taxes  payable.  Unclaimed  ITCs can be carried  forward for a
           period of 10 years.  The Company has  unclaimed  ITCs which expire as
           follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

<S>        <C>                                                                                   <C>          
           2007                                                                                  $      43,700
           2008                                                                                        171,500

-------------------------------------------------------------------------------------------------------------------
</TABLE>

           ITCs  claimed  each year have been netted  against the  research  and
development expense as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

<S>        <C>                                                                                   <C>          
           1998                                                                                  $     306,000
           1997                                                                                         35,000
           1996                                                                                         39,000

-------------------------------------------------------------------------------------------------------------------
</TABLE>

       (c) Research and development expenditures:


           The Company's Canadian subsidiary incurs SR&ED expenditures which can
           be deducted against taxable income.  The Company has undeducted SR&ED
           expenditures  of  approximately  $1,858,000  available to be deducted
           against  future  years'  taxable  income and can be  carried  forward
           indefinitely.


                                      F-17
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996

9.     Income taxes:


       The tax effects of temporary  differences  that give rise to  significant
       portions of the  deferred  tax assets and  deferred  tax  liabilities  at
       September 30, 1998, are presented below:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                 Canada     United States                Total
-------------------------------------------------------------------------------------------------------------------

       Deferred tax assets:
<S>                                                    <C>                 <C>               <C>              
         Net operating loss carryforwards              $              -    $      130,400    $         130,400
         Unclaimed research and
           development expenditures                             828,700                 -              828,700
         Unclaimed investment tax credits                       215,200                 -              215,200
-------------------------------------------------------------------------------------------------------------------
         Total gross deferred tax assets                      1,043,900           130,400            1,174,300

         Less valuation allowance                              (681,400)         (130,400)            (811,800)
-------------------------------------------------------------------------------------------------------------------

         Net deferred tax assets                                362,500                 -              362,500

       Deferred tax liabilities:
         Investment tax credits                                 232,500                 -              232,500
         Fixed assets                                           130,000                 -              130,000
-------------------------------------------------------------------------------------------------------------------
         Total gross deferred tax liabilities                   362,500                 -              362,500

-------------------------------------------------------------------------------------------------------------------
       Net deferred tax liability                      $              -    $            -    $               -
-------------------------------------------------------------------------------------------------------------------

       The tax effect of  temporary  differences  that give rise to  significant
       portions of the  deferred  tax assets and  deferred  tax  liabilities  at
       September 30, 1997, are presented below:

-------------------------------------------------------------------------------------------------------------------
                                                                 Canada     United States                Total
-------------------------------------------------------------------------------------------------------------------

       Deferred tax assets:
         Net operating loss carryforwards              $        257,788    $      100,400    $         358,188
         Unclaimed research and
           development expenditures                             219,878                 -              219,878
         Unclaimed investment tax credits                       379,000                 -              379,000
         Fixed assets                                            48,730                 -               48,730
-------------------------------------------------------------------------------------------------------------------
         Total gross deferred tax assets                        905,396           100,400            1,005,796

         Less valuation allowance                              (736,362)         (100,400)            (836,762)
-------------------------------------------------------------------------------------------------------------------

         Net deferred tax assets                                169,034                 -              169,034

       Deferred tax liabilities:
         Investment tax credits                                 169,034                 -              169,034
-------------------------------------------------------------------------------------------------------------------
         Total gross deferred tax liabilities                   169,034                 -              169,034

-------------------------------------------------------------------------------------------------------------------
       Net deferred tax liability                      $              -    $            -    $               -
-------------------------------------------------------------------------------------------------------------------

</TABLE>


                                      F-18
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996


9.     Income taxes (continued):


       At  September  30, 1998,  the  Company's  United  States  subsidiary  had
       operating loss carryforwards for tax purposes which expire as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

<S>    <C>                                                                                       <C>          
       2009                                                                                      $      40,000
       2010                                                                                             71,000
       2011                                                                                             76,000
       2013                                                                                             87,000

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

                                                                                                 $     274,000
-------------------------------------------------------------------------------------------------------------------
</TABLE>
       The effective tax rate on income is different  from the statutory  income
tax rate as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                     1998            1997                 1996
-------------------------------------------------------------------------------------------------------------------

<S>                                                                  <C>             <C>                 <C>  
       Statutory tax rate                                            44.6%           44.6%               44.6%

       Effect of ITC claims                                          68.3           (39.1)               (7.6)
       Effect of non-deductible expenses                              0.5           (10.0)               (1.7)
       Benefits of prior year losses                                (54.5)           22.2                 -
       Other                                                         (0.6)          (30.9)                -
       Losses not tax effected                                        6.4           (25.9)              (42.9)

-------------------------------------------------------------------------------------------------------------------
                                                                     64.7%          (39.1%)              (7.6%)
-------------------------------------------------------------------------------------------------------------------

</TABLE>

10.    Related party transactions:

       A shareholder  provided consulting and management services for fees which
       are included in research and development expense as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

<S>    <C>                                                                                       <C>          
       1998                                                                                      $      28,246
       1997                                                                                             67,757
       1996                                                                                             65,814

-------------------------------------------------------------------------------------------------------------------
</TABLE>

       These  transactions  are in the  normal  course  of  operations  and  are
       measured at the  exchange  amount,  which is the amount of  consideration
       established and agreed to by the related parties.


                                      F-19
<PAGE>
11.    Commitments:


       (a) The Company  leases  office  premises  under  operating  leases which
expire in 2002.


           The minimum lease payments due under these leases are as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

           Year ending September 30:

<S>        <C>                                                                                   <C>          
           1999                                                                                  $      17,624
           2000                                                                                         20,069
           2001                                                                                         22,108
           2002                                                                                          7,369

-------------------------------------------------------------------------------------------------------------------
                                                                                                 $      67,170
-------------------------------------------------------------------------------------------------------------------
</TABLE>


       (b) The Company has entered into a five year  employment  agreement  with
           the Company's President and Chief Executive Officer,  which commenced
           February 1996. The employment  agreement  provides for an annual base
           salary of approximately $112,000 (Cdn. $160,000).

12.    Contingent liabilities:


       (a) A lawsuit was instituted against the Company's subsidiary by a former
           employee  for  entitlement  of  additional  preferred  shares  of the
           Company in 1995.  The  Company  has  contested  the legal  action and
           management  believes that it has a valid defense in this matter.  The
           Company  can not  estimate  the  reasonably  possible  loss from this
           contingency  as neither the number of additional  shares nor a dollar
           amount was specified on the claim.


       (b) During  fiscal  1996,  a breach of contract  lawsuit  was  instituted
           against the  Company's  subsidiary in the amount of  $6,000,000.  The
           Company  filed a Statement of Defense in December 1995 and offered to
           settle the lawsuit for $30,000.  Management,  after  consulting legal
           counsel,  is of the opinion that the Company has a strong  defense to
           the  claim.  The  Company  has  estimated  that the  range of loss is
           between $30,000 and $6,000,000 and has accrued $30,000,  representing
           the settlement offer amount as its best estimate within the range.


F-20
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996


13. Net income (loss) per share:


       Net  income  (loss)  per share  has been  calculated  using the  weighted
       average  number of common  and  special  shares  outstanding  during  the
       periods. Special shares have been included in the weighted average number
       of shares  outstanding as the special shares are exchangeable into common
       shares of the Company (note 6).


       The  weighted  average  number of common and special  shares  outstanding
       which was used to calculate the net income (loss) per share was:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

<S>    <C>                                                                                       <C>          
       1998                                                                                      $   4,742,496
       1997                                                                                          4,135,238
       1996                                                                                          4,284,827

-------------------------------------------------------------------------------------------------------------------
</TABLE>

       Application  of the  provisions  of  Statement  of  Financial  Accounting
       Standards No. 128 results in disclosure of two income per share measures,
       basic and assuming dilution, on the face of the consolidated statement of
       income.


                                      F-21
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996

13. Net income (loss) per share (continued):


       The reported net income represents the net income available to common and
       special  shareholders  for  purposes  of  computing  both  measures.  The
       following  reconciles shares  outstanding at the beginning of the year to
       average  shares  outstanding  used  to  compute  both  income  per  share
       measures:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                   1998               1997                1996
-------------------------------------------------------------------------------------------------------------------

       Common and special shares outstanding,
<S>                                                           <C>                <C>                 <C>      
         beginning of year                                    4,135,238          4,135,238           4,335,238

       Weighted average shares issued                           607,258                  -                   -

       Weighted average shares cancelled                              -                  -             (50,411)
-------------------------------------------------------------------------------------------------------------------

       Average shares outstanding - basic                     4,742,496          4,135,238           4,284,827

       Effect of dilutive securities:
         Dilutive shares contingently
           issuable upon the exercise
           of stock options and warrants                        487,284            325,719             145,486

       Shares assumed to have been purchased for treasury with assumed  proceeds
         from the exercise of stock options and
         warrants                                              (384,782)           (90,603)            (92,227)

-------------------------------------------------------------------------------------------------------------------
       Average shares outstanding
       - assuming dilution                                    4,844,998          4,370,354           4,338,086
-------------------------------------------------------------------------------------------------------------------


</TABLE>

                                      F-22
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996


14.    Segment information:


       The Company's  operations  involve a single industry segment - the design
       and development of integrated  circuits for the embedded computer market.
       Except for the $4.4  million of net proceeds  from the private  offering,
       substantially,  all the  operations  of the Company are conducted by, and
       assets held by the Canadian subsidiary. Financial information, summarized
       by geographic area, is as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                   1998              1997                 1996
-------------------------------------------------------------------------------------------------------------------

       Sales

<S>                                                     <C>               <C>                    <C>          
       Canada                                           $     3,821,512   $     1,951,453        $     882,042
       United States                                            508,940           318,000              447,435
       Corporate - United States                                      -                 -                    -
       Eliminations                                            (508,940)         (318,000)            (447,435)

-------------------------------------------------------------------------------------------------------------------
       Total sales                                      $     3,821,512   $     1,951,453        $     882,042
-------------------------------------------------------------------------------------------------------------------

       Income (loss) before income taxes

       Canada                                           $       565,027   $       (37,158)       $    (442,657)
       United States                                             (9,703)          (15,109)             (25,924)
       Corporate expenses - United States                       (87,664)          (43,904)             (49,373)
       Eliminations                                               5,533             6,607                5,619

-------------------------------------------------------------------------------------------------------------------
       Total income (loss) before income taxes          $       473,193   $       (89,564)       $    (512,335)
-------------------------------------------------------------------------------------------------------------------

       Assets

       Canada                                           $     1,721,251   $     1,059,756        $   1,026,728
       United States                                             38,342            30,750               47,994
       Corporate - United States                              4,445,060           199,395              250,320

-------------------------------------------------------------------------------------------------------------------
       Total assets                                     $     6,204,653   $     1,289,901        $   1,325,042
-------------------------------------------------------------------------------------------------------------------
</TABLE>

       The corporate  assets  consist mainly of cash and cash  equivalents.  The
       United States operations  provide marketing  services  exclusively to the
       Canadian subsidiary.


                                      F-23
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996

14.    Segment information (continued):


       The Company has several  customers  whose sales  represent a  significant
       portion of the  Company's  total  sales.  Sales to each of the four major
       customers  for  the  year  ended  September  30,  1998  were  $1,572,000,
       $397,000, $360,000 and $317,000,  respectively.  Sales to each of the two
       major  customers for the year ended  September 30, 1997 were $644,000 and
       $585,000, respectively. Sales to each of the four major customers for the
       year ended  September  30, 1996 were  $272,000,  $160,000,  $147,000  and
       $84,000,  respectively.  Sales to all  customers  are conducted in United
       States dollars.


       Export sales by the Company's Canadian subsidiary were as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                   1998               1997                1996
-------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>                 <C>                 <C>           
       United States                                    $     1,630,091     $      526,892      $      423,380
       Middle East                                              397,382            585,436              97,025
       Other                                                    209,029            175,631               8,820

-------------------------------------------------------------------------------------------------------------------
                                                        $     2,236,502     $    1,287,959      $      529,225
-------------------------------------------------------------------------------------------------------------------

</TABLE>

15.    Financial instruments:

       The reported  values of financial  instruments  which consist of cash and
       cash  equivalents,  accounts  receivable,  accounts  payable  and accrued
       liabilities approximate their fair values due to the short-term nature of
       these instruments.


16. Concentration of credit risk:


       Financial   instruments   which   potentially   expose  the   Company  to
       concentrations of credit risk consist principally of accounts receivable.


       The  Company's  exposure  to  credit  risk is  impacted  by the  economic
       conditions  of  the  embedded  systems  market  which  could  affect  the
       customers' ability to satisfy their obligations to the Company.  In order
       to reduce risks, the Company has credit procedures in place whereby trade
       receivables  are insured and the insuring  company  performs  analysis to
       control the granting of credit to high-risk customers.


                                      F-24
<PAGE>
V3 semiconductor, inc.
Notes to Consolidated Financial Statements (continued)
(Stated in United States dollars)

Years ended September 30, 1998, 1997 and 1996


17. New accounting standards not yet adopted:


       SFAS 130, "Reporting  Comprehensive  Income",  establishes  standards for
       reporting and display of a comprehensive  income (which is all changes in
       the net  equity of a business  due to  transactions  or other  events not
       involving  owners)  and its  components  (revenues,  expenses,  gains and
       losses).  While it does not  specify a format of  presentation,  SFAS 130
       does  require  that all  items  that are  required  to be  recognized  as
       components of comprehensive  income be reported in a financial  statement
       that is displayed with the same prominence as other financial statements.
       SFAS 130,  which does not address issues of recognition or measurement of
       comprehensive  income,  is  effective  for fiscal years  beginning  after
       December 15, 1997.


       SFAS  131,  "Disclosure  about  Segments  of an  Enterprise  and  Related
       Information",  establishes new standards for the reporting of information
       about the operating segments of a business. It also establishes standards
       for related disclosures about products and services, geographic areas and
       major  customers.  Generally,  SFAS 131 requires  that the  definition of
       operating  segments  reflect the manner in which the  enterprise's  chief
       operating  decision  maker  decides how to allocate  resources and assess
       performance.
       SFAS 131 is effective for fiscal years beginning after December 15, 1997.


       Management  does not believe  that the  adoption of these new  accounting
       standards will materially affect its historical  results of operations or
       shareholders' equity.


       In June 1998, the Financial  Accounting  Standards Board issued Statement
       of Financial Accounting  Standards No. 133 (`SFAS 133'),  `Accounting for
       Derivative   Instruments   and  Hedging   Activities'.   This   statement
       establishes   accounting   and   reporting   standards   for   derivative
       instruments,  including certain derivative  instruments embedded in other
       contracts  (collectively  referred  to as  derivatives),  and for hedging
       activities.  It requires  that an entity  recognize  all  derivatives  as
       either assets or liabilities  in the statement of financial  position and
       measure those  instruments as fair value. This statement is effective for
       all fiscal  quarters  of fiscal  years  beginning  after  June 15,  1999.
       Management  has not  determined  the effect of SFAS 133 on its  financial
       statements.


                                      F-25