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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

   
                               AMENDMENT NO. 1 TO
                                   FORM 10-KSB
    

(Mark One)
    [X]         ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED MARCH 31, 1998

                                       OR

    [ ]          TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                    For the transition period from ___ to ___
                         Commission file number 0-13992

                               CYBER DIGITAL, INC.
                 (Name of small business issuer in its charter)

                    New York                             11-2644640
       ---------------------------------              ------------------       
           (State or other jurisdiction                (I.R.S. Employer
       of incorporation or organization)               Identification No.)
                                                   
                   400 Oser Avenue, Hauppauge, New York 11788
                   ------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (516) 231-1200
                                 --------------
                           (Issuer's telephone number)

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

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

                          Common Stock, $.01 par value
                                (Title of Class)

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

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

This issuer's revenues for its most recent fiscal year are $66,110.

The  aggregate  market value of the voting and  non-voting  common stock held by
nonaffiliates  of the  registrant at April 30, 1998 was  $21,655,425  based on a
total of 12,374,529  shares held by  nonaffiliates  and the closing bid price in
the over-the-counter market on that date which was $1.75.

The number of shares of common stock  outstanding at March 31, 1998:  17,386,053
shares of Common Stock, par value $.01 per share.

Transitional Small Business Disclosure Format (check one)
Yes  [ ]     No   [X]

Documents Incorporated by Reference:  None

    =======================================================================


<PAGE>

                                     PART I

ITEM 1 - DESCRIPTION OF BUSINESS

The Company

         Cyber Digital,  Inc. (the "Company") was incorporated under the Laws of
the State of New York in 1983. It designs, develops,  manufactures,  markets and
services high performance  distributed  digital switching and networking systems
that enable both public  telephone  exchanges and private  network  operators to
provide cost  effective  simultaneous  communication  of voice and data services
with minimal or no  infrastructure  cabling.  The Company's systems are based on
its proprietary  software  technology.  Cyber's systems also permit  "modemless"
transmission of data between a variety of incompatible  and dissimilar  end-user
equipment, such as computers, printers, work stations and data terminals as well
as high speed  Internet  access  over  standard  telephone  lines.  The  Company
believes that its systems are the only ones available with this capability.

         The Company has designed and developed a family of switches (see "Types
of Systems" below) which, by interfacing  with  appropriate  methods of wireless
transmission,  can easily and  rapidly  provide  telecommunications  services to
consumers who are  underserved or have no service at all, as in the case of many
developing  countries.  The  Company's  products  are  suitable for both densely
packed  urban areas as well as sparsely  populated  rural  areas.  In the United
States,   the   enactment   of  the   Telecommunications   Act  of   1996   (the
"Telecommunications Act") has resulted in the creation of a large market for the
Company's  products since they are capable of serving the  requirements  of some
carriers now attempting to by-pass the regional Bell operating companies.

         The  Company has sold  approximately  76 systems  substantially  all of
which have been the Cyber Switch Exchange ("CSX"),  an integrated voice and data
switch which functions as a private network for up to 100,000 users. It has sold
one Cyber Rural Exchange  ("CRX") which functions as a rural telephone  exchange
to serve widely  dispersed  subscribers.  The Cyber  Distributed  Central Office
("CDCO") is  designed to serve  subscribers  in densely  populated  metropolitan
areas.  CRXs and CDCOs  communicate  with each other by wireless  means  thereby
eliminating the need for infrastructure cabling.

         After development of its first technology in 1987, the Company targeted
the Federal  Government  market for sale of CSX.  CSX was also sold to a Chinese
Government  owned joint  venture.  These sales  established  the efficacy of the
Company's base technology.  Concurrently  with the on-going  development of CDCO
and CRX, the Company has targeted the huge emerging  international  market which
is  seeking  cost-effective  technology  as well as the newly  created  domestic
market for CDCO and CRX type systems.

Industry Background

         Since   the   advent   of   telecommunications,   voice   communication
technologies were developed and managed by large telephone  operating  companies
which were largely insulated from competition.  The data communications industry
grew  independently,  and provided the specialized  communications  link between
computers  and  office  systems.   In  recent  years,  there  has  also  been  a
proliferation of office systems consisting of personal computers, work stations,
printers  and storage  devices,  which has  resulted in the growth of a separate
office  automation  industry.  These three industries  developed in parallel and
took independent approaches to the application of technology.

         In  the  area  of  voice  communications,  digital  technology  enabled
telephone  companies  to improve  the  quality of voice  communication  and also
provide  additional   features  and  services,   such  as  call  forwarding  and
conferencing    and    least-cost-routing    for   long   distance    calls   by
microprocessor-based  software control. Such digital technology has been applied
to both public exchanges,  which serve cities,  towns and villages,  and private
branch exchanges (or "PBXs") which serve offices and other large  organizations.
The need for data


                                       3
<PAGE>


communications arose largely within the office environment. These needs were met
by local area networks  ("LANs")  which require a different  type of cabling and
associated  equipment than the Company provides.  Such LANs are limited to small
offices typically having less than a hundred data users.

         The numerous productivity enhancing devices and systems which have been
introduced  into the market by the office  automation  industry  also  created a
greater  need  for  the   accessing,   sharing  and  exchange  of   information.
Traditionally,  these  products and systems could  communicate  with one another
only if they were made by the same manufacturer.  Furthermore,  as the number of
data users increase,  where each user is connected to all other users, a network
becomes increasingly complex and less manageable.

         As separate data networks  became more  prevalent,  it became  apparent
that a data network which utilizes the existing  telephone  cabling would be the
most cost effective solution,  and would also provide greater manageability with
an increasing  number of users.  In an effort to facilitate  such  deployment of
integrated voice and data networks  (commonly  referred to as Integrated Service
Digital Networks  ("ISDN")),  the International  Telephone Union ("ITU") adopted
international  standards  for ISDN in 1987;  Bell  Communications  and  Research
("BELLCORE")  adopted ISDN standards for the U.S. market in November 1992. It is
anticipated  that the  combined  power of ISDN based  switches  and fiber  optic
cables  will  provide the basis for the growth in an array of  applications  and
electronic information services,  such as  computer-to-computer  communications,
office  systems  integration,   video-text,   video-phone,   video-conferencing,
electronic mail,  informational  data bases,  Internet and multi-media usage and
access,  all  simultaneously  with voice  transmission  capability over the same
network.

         In technologically advanced countries, extensive public voice telephone
networks are already in place. Innovation and change in the form of simultaneous
voice and data  communications  are now taking  place in the domain  serviced by
private  networks.  Private  networks  providing  new  types  of  services  are,
therefore,  growing at a much  faster rate than public  voice  networks.  On the
other hand, in the developing world (Eastern Europe,  Russia,  China, India, and
Latin  America),  there  is  demand  for  voice-only  public  networks  to serve
individuals  and  business  subscribers  in  cities,  towns  and  villages.  The
Company's  systems are designed to meet the  sophisticated  voice/data  needs of
private  networks in the United States and the basic  voice-only needs of public
networks in developing countries.

         Unlike  advanced  countries,  where the existing public voice telephone
network  consists  of  monolithic   centralized  digital  switches,   developing
countries  are  seeking an  alternative  cost  effective  approach,  such as the
Company's  distributed digital switching systems.  The Company believes that the
trend in the  telecommunications  industry  towards  distributed  switching from
monolithic  centralized  switching  is  similar  to the  trend  in the  computer
industry  towards  distributed  networking  personal  computers from  monolithic
centralized mainframe computers. Similar to the computer industry where personal
computing  has been  brought  closer to the  users,  the  Company's  distributed
switching  systems  are also being  installed  closer to groups of  subscribers,
thereby  dramatically  reducing the cost of cabling.  The Company  believes that
with its distributed  switching system, the public telephone operating companies
in the  developing  countries can rapidly  provide  telephone  services to their
customers. It is substantially easier to install small distributed switches than
large  monolithic  centralized  switches  with its  corresponding  long  cabling
infrastructure.  The  Company  believes  that its  systems  are well  suited for
developing countries.

         Prior to 1996,  regional Bell operating companies (and some independent
telephone  operating  companies) had a monopoly in providing  local services and
long distance access in their respective defined  territories.  The enactment of
the  Telecommunications  Act  dismantled  the  barriers  between  local and long
distance  carriers which prevented them from offering  services to one another's
customers.  Furthermore,  the Telecommunication Act also enabled new entrants to
the telecom  business to provide both local and long distance  services  without
any  restrictions  as to the  geographical  territory  served,  subject  to such
companies obtaining any required license. These entrants in the telecom business
as  well  as  existing  carriers  are  seeking  to  employ  new  cost


                                       4
<PAGE>


effective  technologies made possible by software based systems and applications
of wireless  technology.  The Company's  believes that its range of products can
satisfy a significant part of this emerging switching market demand.


Types of Systems

         The Company  completed the development of its first technology in 1987,
at which time it began marketing its CSX system on a limited basis.  The Company
is  constantly  developing  additional  new  technologies  and software that has
enabled  it to  create  new  systems  such as the CDCO  and the CRX for  various
applications,  primarily for  developing  countries and domestic  local carriers
attempting to bypass the Bell operating companies. Although the Company has only
recently  started to market these new systems,  the Company  believes that these
systems  are  capable  of  providing  the  functions  for  which  they have been
designed.

Cyber Distributed Central Office

         The  Company  has  developed  but  not  yet  commercialized  the  Cyber
Distributed  Central Office  ("CDCO") which is designed to provide digital voice
communications  to subscribers  in densely  populated  urban areas.  The CDCO is
essentially  a digital  switch  with  trunk  and  tandem  exchange  capabilities
enabling it to connect  subscribers  served by other exchanges.  The CDCO system
interfaces with digital  telecommunications  networks and older analog telephone
networks.  The CDCO system consists of nodes connected by standard digital links
which permit optimization of the network with respect to specific size, required
traffic  capacity,  and desired  applications.  The modularity  derived from the
nodal structure of the CDCO provides an economical  digital  switching  exchange
from as little as a few hundred lines up to 1,000,000 lines capacity.

         The nodal structure of the system permits changes to the  functionality
of the system simply by using  different  software while keeping the same common
hardware.  CDCO's  flexibility  offers a vast array of system  configurations to
telephone  operating  companies and  administrations  to fulfill a wide range of
applications, including the following:

     o    Local CDCO exchange serves subscribers in cities and towns.

     o    Cyber  Tandem  exchange   ("CTSX")  serves  as  a  regional   exchange
          connecting to various local exchanges.

     o    Toll and transit CDCO  exchanges are used for long  distance  national
          service and international gateway.

     o    Integrated local and tandem exchanges.

     o    Integrated local, tandem and toll exchanges.

     o    Integrated local, tandem, toll and transit exchanges.

     o    Cyber Digital Access  Cross-connect  ("CDAC") is a network  management
          system providing  optimal routing and control of heavy traffic through
          software.

         The  flexibility  of CDCO  systems  are  further  enhanced  by software
configurable Peripheral and Switching Nodes performing the following functions:


                                       5
<PAGE>

     o    Cyber Multi-tenant exchange ("CMT") serves subscribers in large office
          complexes and buildings where many business tenants can be served by a
          resident exchange.

     o    Cyber Urban Line Concentrator ("CULC") serves subscribers in congested
          areas where  traffic is moderate,  such as in apartment  dwellings and
          suburban communities.

     o    Cyber Remote Line Switch ("CRLS") serves business  subscribers in high
          growth  areas,  such  as  in  industrial  parks  and  complexes,   and
          university campus settings.

         The control  functions  of the CDCO system are totally  distributed  in
autonomous  processing  sub-systems (nodes). Node processors are loosely coupled
and exchange information through standardized inter-nodal  communication digital
links. The distributed  approach permits  switching systems to be located closer
to groups of subscribers or at subscribers' premises, which dramatically reduces
the cost of  wiring  and  cabling.  It also  results  in  instant  installation.
Moreover,  a failure in one node does not affect other nodes.  In addition,  the
distributed approach eliminates bottlenecks as the system offers multiple routes
for call completion.

Cyber Rural Exchange

         The Company has developed the Cyber Rural Exchange ("CRX"),  which is a
specialized  version of the CDCO.  The  Company  has sold only one CRX system to
date, which is currently  serving about 400 users. The CRX is designed to handle
the traffic requirements of widely dispersed single-line users, such as users in
a small town or rural area.

Cyber Switch Exchange

         Cyber Switch Exchange  ("CSX") is a digital  switching  system designed
for use as a private  network for  offices,  universities,  hospitals  and other
large  organizations.  The CSX system  employs  nodes,  each offering 512 ports,
which can be used to network up to 100,000 users within one mile from each node.
Users are equipped  with iSTs which permit  communication  between data devices.
The CSX system enables data device users to communicate with other users without
single purpose data links and modems.  The system also accommodates  traditional
analog telephones. The CSX can be designed to provide voice-only applications.

Cyber Local Area Network

         The Company has  developed but not yet  commercialized  the Cyber Local
Area Network ("CLAN").  CLAN is a data only local area network which unlike most
LANs covering distances of a few hundred feet at most, can network users up to a
distance of approximately one mile.

Cyber Hub

         The  Company has  developed  but not yet  commercialized  the Cyber Hub
Controller ("CHUB").  CHUB is an integrated voice and data switch which combines
the  capabilities of the CLAN and CSX systems to offer total integrated data and
voice communications  capability in a single,  multi-purpose system. CHUB offers
digital transmission, switching and networking capabilities, thus enabling voice
and data communications both within a local area and with the outside world.


                                       6
<PAGE>


Sales and Marketing


Customers

   
         To date, the Company has sold  approximately 76 systems,  substantially
all of which have been the CSX. The Company has not commercialized the CLAN, the
CHUB or the  CDCO and has sold one CRX.  The  Company  has sold its  systems  to
federal and state government agencies and to Tianchi  Telecommunications Company
in China.  Due to  constrained  financial,  personnel and other  resources,  the
Company has been  engaged in limited  marketing  activities  relating to the CSX
system directed  principally to the government market. The Company permits field
trials by  potential  customers  who commit to  purchase of the  system(s)  upon
successful  completion of the field trial.  Such  commitment of purchase must be
guaranteed by irrevocable letter of credit.
    

         In December 1995, the Company signed a manufacturing licensing contract
with the National Telecommunications Company ("NTC") of Egypt, pursuant to which
NTC will  assemble the systems in Egypt with parts  provided by the Company.  In
addition, NTC will market,  install,  maintain and service the Company's systems
in Egypt, Kenya, Tanzania, Uganda, Sudan, Yemen, United Arab Emirates and Qatar.
Sales of the Company's  products to NTC have not yet  commenced.  As at present,
NTC has trained its personnel to fulfill its obligations under the contract. NTC
has been delayed in its performance for a variety of reasons,  such as a lack of
a suitable assembly facility in Egypt at this time.

         In August 1996, the Company entered into a non-exclusive  Manufacturing
Licensing  Agreement with Gujarat  Communications & Electronics Ltd. ("GCEL" - a
company based in India) which will, pursuant to a license, assemble and sell the
Company's products in Russia and certain CIS countries.  GCEL has the benefit of
certain  financial  facilities  made  available  to it  under  the  terms  of an
intergovernmental  agreement  between the Government of India and Russia as well
as certain CIS countries.  The telecom  industry in Russia and the CIS countries
has  been  undergoing  a  process  of  deregulation  and  privatization.  Due to
inactivity  of GCEL,  there  can be no  assurances  that any  revenues  could be
realized under this contract.

         Public  and  private  telecom  companies  in several  other  developing
countries have taken an interest in the Company's  products.  It is not possible
to estimate  the sales  revenues  which may  eventually  be  generated  from the
international  market and the timing thereof since substantially long lead times
are involved even after a contract has been executed.

         In fiscal 1998,  the Company  assembled a sales and  marketing  team to
explore  domestic  opportunities.  Target  markets in the United  States for the
Company's switches may be categorized as follows:

         (i)  Existing  national  interexchange  carriers  such a AT&T,  MCI and
Sprint which will be building  local networks both to compete with the incumbent
local exchange carriers and also to protect their long distance market share.

         (ii) Newly formed telecommunications companies which are building local
networks and which offer both local and long distance service.  Examples are ICG
Communications and GST Telecom.

         (iii) Start up  competitive  local  exchange  carries which build local
networks and offer long distance  service to their  customers by resale of other
companies' long distance network offerings.

         (iv) Large companies such as electric  utilities with certain rights of
way and other  capabilities  in place  which are  studying  whether and where to
enter the telephone business.

         (v) Independent  telephone  companies which must upgrade their networks
rapidly or risk losing their franchise to aggressive competition.

                                       7
<PAGE>

         (vi) Any large  telephone  user which  believes that it can operate its
own telephone  company in a more efficient and cost effective manner than can be
provided  for  it  by  others.   Examples  include  government  at  all  levels,
universities, utilities and real estate operators.

Government Contracts

         A significant portion of the Company's business since its inception has
consisted of sales under United States  government  contracts.  Certain of these
contracts are competitive  bid contracts,  which were awarded after a formal bid
and proposal competition among suppliers.  Virtually all of the Company's United
States  government  contracts are fixed price  contracts,  pursuant to which the
Company  agrees to provide a system for a fixed  price and  assumes  the risk of
cost  overruns.  The Company has not  experienced  cost  overruns on fixed price
contracts. As more fully set out in "Management Discusssion and Analysis" below,
revenues from government  contracts has become  insignificant since fiscal 1997.
The Company is now  concentrating  its marketing  efforts on  international  and
domestic non-governmental markets.


Competition

         The   telecommunications   and  related   networking   industries   are
characterized  by  intense  competition.  The  Company  competes  with  numerous
well-established   foreign  and  domestic  companies,   many  of  which  possess
substantially greater financial,  marketing,  personnel and other resources than
the Company and have  established  reputations  for success in the  development,
sale and service of  high-speed  digital  switching and  networking  and related
products.

         Products  which perform many of the functions of the Company's  systems
are readily available from several  competitors,  including Lucent Technologies,
Nortel, Ericsson, DSC, Alcatel, Siemens, Fujitsu and NEC. These competitors also
have the research and  development  capabilities  and  financial  and  technical
resources  necessary to enable them to respond to technical  advances as well as
evolving industry requirements and standards.

         The  Company's  products  have three  strengths  in the  United  States
marketplace:  (a) the installed cost of Cyber  Digital's  switching  networks is
less  than  those  of the  competition;  (b)  the  switches  can be  engineered,
installed  and put  into  service  much  more  quickly,  and  (c) the  Company's
distributed  architecture  fits with the marketing  strategy of the  competitive
local exchange  carriers who will target specific  customers  rather than entire
geographic areas; the Company's architecture will allow these carriers to tailor
their local networks to their marketplace  successes without stranding  capacity
and capital.


Proprietary Technology

         The Company does not hold any patents or  copyrights,  nor has it filed
any patent or  copyright  applications,  relating  to its  products  or software
technology.  The Company regards its software  technology and certain components
of its  system  hardware,  including  the iSTs,  as  proprietary  and relies for
protection upon copyright and trade secret laws and  confidentiality  agreements
with its employees.  In addition, the Company requires customers to enter into a
license and confidentiality  agreement permitting the customer the exclusive use
of the system operating  software,  which is furnished to the customer in object
form.

         The Company  believes that these  protections are sufficient to protect
the Company's rights as to its systems and software.  Despite these protections,
however,  it is possible that  competitors,  employees,  licensees or others may
copy  one or  more  of  the  Company's  products  or its  technology  or  obtain
information that the Company regards as proprietary.  In addition,  there can be
no assurance that others will not


                                       8
<PAGE>


independently  develop products or technologies similar to those of the Company,
that  confidentiality  agreements  will not be breached or that the Company will
have  adequate  resources  to protect its  proprietary  technology.  The Company
believes, however, that because of the rapid pace of technological change in the
digital switching and networking industries,  protection for its systems is less
significant  than  the  knowledge,  ability  and  experience  of  the  Company's
employees,  the frequency of product  enhancements  and the level of service and
support provided by the Company.


Government Regulation and Industry Standards

         The  telecommunications  and related networking industries in which the
Company   competes  are  highly   regulated  in  both  the  United   States  and
internationally.   Imposition  of  public   carrier   tariffs  and  taxation  of
telecommunications  services could  materially  adversely  affect demand for the
Company's  products.  Furthermore,  regulation or deregulation of public carrier
services by the United States and other governments,  including  permiting local
carriers to manufacture  switching equipment,  may determine the extent to which
the Company will be able to enter and penetrate markets in the United States and
internationally  and may result in significantly  increased  competition,  which
would significantly  impact the Company's future operating results. In addition,
the Company's  products must comply with equipment,  interface and  installation
standards promulgated by communications  regulatory  authorities,  including the
Federal Communications Commission.

         In  addition,  the  Company is  required  to obtain a license  from the
Department of Commerce prior to exporting to certain  countries.  A denial of an
export  license to the Company,  however,  would probably be based upon a policy
which also affects other American companies exporting similar products.

         Industry  standards  bodies  such  as ITU  and  BELLCORE  have  created
committees  to address  the matter of  standards  within the  telecommunications
industry. The purpose of such standards is to facilitate the interoperability of
products from various vendors and, through standardization, create a competitive
environment  which is anticipated  to result in lower product costs.  During the
past few years,  many new standards have been adopted and more are pending.  The
International  Standards  Organization  ("ISO"),  one  of the  primary  standard
setting  bodies in the  communications  industry,  has developed a framework for
network  standard  called the Open System  Interconnection  Reference Model (the
"OSI Model").  The OSI Model represents a standard approach by which information
can be  communicated  throughout a network,  so that a variety of  independently
developed  computer and communications  devices can interoperate.  The design of
the Company's products incorporates the OSI Model and accommodates most existing
and   pending   ISDN   standards,   including   applicable   BELLCORE   and  ITU
specifications.  In most foreign countries, government departments or ministries
set industry standards.

         Changes  in  government   policies,   regulations   and  interface  and
installation  standards  or industry  standards  imposed by domestic and foreign
carriers in the future could  require the Company to alter methods of operation,
resulting in additional costs, which could have a material adverse effect on the
Company.

Production and Supply

         The Company engages in manufacturing,  software programming,  assembly,
system  testing and quality  assurance  operations at its facility in Hauppauge,
New York. The Company's  operations  involve the creation of the required system
software,  the inspection of system  components  manufactured  by third parties,
programming of microchips and microprocessors, assembly of the components of the
system   hardware  and  quality  and  testing  to  certify   final   performance
specification.  The Company  believes that it has sufficient  excess  production
capacity  to  satisfy  any  increased  demand for the  Company's  systems in the
foreseeable future.


                                       9
<PAGE>


         The  Company  is  dependent  on   third-party   arrangements   for  the
manufacture  of all of the  component  parts  incorporated  into  the  Company's
systems.  The Company  purchases its component  parts from numerous  third-party
manufacturers  and  believes  that  numerous  alternative  sources of supply are
readily  available,  except for a few  semiconductor  components  purchased from
single source vendors,  such as Pentium based  processors  manufactured by Intel
Corporation and ISDN chips manufactured by Motorola,  Inc. If such semiconductor
components are discontinued by their respective manufacturers, the Company would
be required to redesign some of its products by using other vendors  components,
which can cause set back for product delivery.  The Company currently  purchases
all of its  requirements of specially  designed plastic parts for the iST from a
single source supplier.  The Company believes that alternative sources of supply
for such components are available. The Company is substantially dependent on the
ability of its suppliers, among other things, to satisfy performance and quality
specifications  and dedicate  sufficient  production  capacity for plastic parts
within scheduled  delivery times.  The Company does not maintain  contracts with
any of its suppliers and purchases system components pursuant to purchase orders
placed from time to time in the ordinary course of business. Failure or delay by
the Company's suppliers in supplying  necessary  components to the Company would
adversely  affect the  Company's  ability to obtain and  deliver  products  on a
timely and competitive basis.

         The Company offers a one-year  warranty for sales in the United States,
covering  operating  defects  during which period the Company will replace parts
and make repairs to the system components at its expense.


Research and Development

         Since its inception,  the Company has devoted substantial  resources to
the design and development of the Company's systems.  For the fiscal years ended
March  31,  1998 and 1997,  the  Company  expended  approximately  $388,854  and
$109,322,  respectively,  on  research  and  development.  Although  some of the
Company's basic systems have been developed,  the Company is continually seeking
to refine  and  enhance  its  systems,  including  enhancements  to comply  with
emerging  regulatory or industry  standards or the  requirements of a particular
customer or country.

         The markets for the  Company's  products are  characterized  by rapidly
changing technology and evolving industry standards,  often resulting in product
obsolescence or short product lifecycles.  Accordingly, the Company's ability to
compete  will depend in large part on its ability to  introduce  its products to
the  marketplace  in a timely manner,  to  continually  enhance and improve such
products and maintain development capabilities to adapt to technological changes
and  advances in the  communications  industry,  including  insuring  continuing
compatibility  with evolving  industry  standards such as Signaling  System No 7
which the Company is currently  developing.  There can be no assurance  that the
Company will be able to compete successfully,  that competitors will not develop
technologies  or products  that render the  Company's  systems  obsolete or less
marketable, or that the Company will be able to keep pace with the technological
demands of the  marketplace  or  successfully  enhance and adapt its products to
satisfy industry standards.

Service and Support

         The Company  believes that service,  support and training are important
factors in  promoting  sales and  customer  satisfaction.  Service  and  support
include system planning, site preparation,  installation, customer training, and
maintenance.  In the United States,  the Company typically charges an annual fee
for ongoing support services. The Company has just established a small technical
support and services team in Bluffton,  Indiana to  complement  the promotion of
product sales in the U.S.

         Because  the  Company's  system  hardware  consists  of a cabinet  with
shelves  having  printed   circuit  boards   inserted  into  physical  slots,  a
substantial  part of  repair  and  maintenance  can be  accomplished  by  simply
substituting the component in need of repair. In addition, the Company's systems
are designed to be accessible


                                       10
<PAGE>


by computer from the Company's  headquarters  or technical  services  offices in
Bluffton, allowing the Company's service personnel to remotely call up, diagnose
and otherwise support systems, thereby reducing response time and cost.

         In addition,  the Company  intends to enter into  agreements with third
party service  providers to provide customer support on a local basis in foreign
markets, as needed.

Employees

         As of  the  date  hereof,  the  Company  had  thirty  three  full  time
employees,  of which eight were engaged in marketing and sales activities,  five
were engaged in technical  services and support,  eight were engaged in research
and development,  eight were engaged in production  testing and operations,  and
four in  administration.  None of the Company's  employees is  represented  by a
labor union. The Company considers its employee relations satisfactory.

ITEM 2 - Description of  Property

         The Company's  executive offices and assembly operations are located in
approximately  8,200 square feet of leased  space in  Hauppauge,  New York.  The
lease expires on March 31, 1999,  with an annual rental payment of $51,250.  The
Company  believes  that its facility is adequate for its current and  reasonably
foreseeable future needs. The Company believes that additional physical capacity
at its current facility will accommodate expansion, if required.

ITEM 3 - Legal Proceedings

         On  or   about   August   5,   1996,   Brockington   Securities,   Inc.
("Brockington")  commenced an action,  in the Supreme  Court of the State of New
York,  County of Suffolk,  against the Company  for  wrongful  termination  of a
purported  agreement for  investment  banking  services.  Brockington is seeking
damages in the amount of (i) $775,000 based upon the alleged net aggregate value
of the shares of the Company's  Common Stock upon which  Brockington  alleges it
had a purchase option and (ii) $1 million for the alleged wrongful termination.

         The  Company  has  asserted   counterclaims  based  upon  Brockington's
wrongful  conduct and is seeking  damages in the amount of  $428,000  or, in the
alternative,  recission  of the alleged  contract  and the return of the 100,000
shares previously issued Brockington.

         The Company  believes that  Brockington's  claims are without merit and
intends to vigorously defend its position.


ITEM 4 - Submission of Matters to a Vote of Security Holders

         None.

                                     PART II

ITEM 5 - Market for Common Equity and Related Stockholder Matters

         The Company's Common Stock is traded in the over-the-counter market and
quoted on the National  Association of Securities  Dealers'  Electronic Bulletin
Board (the  "Bulletin  Board") under the symbol "CYBD" since its initial  public
offering in 1984. The following table sets forth, for each of the fiscal periods
indicated,


                                       11
<PAGE>


the high and low trade prices for the Common Stock,  as reported on the Bulletin
Board.  These  per  share  quotations  represent   inter-dealer  prices  in  the
over-the-counter market, do not include retail markups, markdowns or commissions
and may not represent actual transactions.

                                                          Price Per Share
                                                          ---------------
                                                        High              Low
                                                        ----              ---

Fiscal Year Ended March 31, 1998
         First Quarter...............................   $3.56            $1.69
         Second Quarter..............................    2.87             2.03
         Third Quarter...............................    2.87             1.38
         Fourth Quarter..............................    2.50             1.25

Fiscal Year Ended March 31, 1997
         First Quarter...............................   $6.93            $2.43
         Second Quarter..............................    7.50             3.62
         Third Quarter...............................    4.18             1.93
         Fourth Quarter .............................    3.06             1.75


         On March 31,  1998,  the  closing  trade  price of the Common  Stock as
reported on the Bulletin Board was $1.81 per share. As of such date,  there were
approximately 520 holders of record of the Company's Common Stock.

         To date, the Company has not paid any dividends on its Common Stock and
does not expect to  declare  or pay any  dividends  in the  foreseeable  future.
Instead,  the Company  intends to retain all earnings  for use in the  Company's
business operations.


ITEM 6 - Management's Discussion and Analysis or Plan of  Operation

Overview

         The Company was incorporated in April 1983 to develop,  manufacture and
market high performance  software  controlled  digital  switching and networking
systems  providing  simultaneous  voice and data  communications  over  standard
telephone  lines.  Since  completion of development  of its first  technology in
1987,  which  resulted  in the  development  of CSX,  CLAN and CHUB  systems for
private  communications  networks,  the  Company  has been  engaged  in  limited
marketing activities targeted to federal government agencies with respect to CSX
systems only and,  therefore,  generated limited  revenues.  The Company did not
attempt  to  commercialize  CLAN and CHUB  office  switching  systems  as it was
devoting most of its efforts to the marketing of CSX.

         The Company  targeted  the federal  government  market  since its early
products received certification from the General Services  Administration.  This
drastically  reduced the Company's  marketing  expenses.  Furthermore,  sales to
Federal Government  agencies (which included the U.S. Air Force and Navy) proved
the efficacy of the Company's products in a challenging  operating  environment.
Nevertheless, the Company's available working capital was limited in view of the
long  selling  and  receivables   cycles  typical  of  the  Government   market.
Furthermore, although the Company was the lowest qualified bidder in some larger
Government  contracts,  it was  not  awarded  the  job in  view  of its  limited
financial  resources.  Vendor  financing,  as is typically  available for export
contracts, is not available for Government contracts. Export financing available
for the  international  market led management to concentrate its efforts in that
market segment since fiscal 1996.

         As part of the  Company's  plans to expand  its  marketing  efforts  in
foreign countries with favorable  regulatory  environments and which are seeking
to upgrade their telecommunications network infrastructure, the


                                       12

<PAGE>

Company completed the initial development of CDCO and CRX systems in late fiscal
1994 and has continued  enhancements  of these  systems.  In December  1995, the
Company signed a manufacturing  license contract with NTC, pursuant to which NTC
will  assemble  the  systems in Egypt with parts  provided  by the  Company.  In
addition, NTC will market,  install,  maintain and service the Company's systems
in Egypt,  Tanzania,  Uganda,  Sudan,  Yemen,  United Arab  Emirates  and Qatar.
Consistent  with this  strategy,  the Company is seeking to enter into long-term
contracts,   licensing,   joint  venture  or  other  similar  arrangements  with
government  authorities which typically operate public telephone networks. As at
present,  NTC has trained its  personnel  to fulfill its  obligations  under the
agreement,  however, no revenues have been generated from the contract with NTC.
NTC has been delayed in its performance for a variety of reasons, such as a lack
of a suitable assembly facility in Egypt at this time.

         In  August  1996,  the  Company  signed a  non-exclusive  Manufacturing
Licensing  Contract with GCEL which will assemble and sell the Company's systems
in Russia and  certain  CIS  countries.  GCEL  received  the  benefit of certain
financing  facilities  pursuant  to  intergovernmental  agreements  between  the
Government  of India and these  countries.  The  telecommunications  industry in
Russia and some CIS countries have been going through a process of  deregulation
and privatization.  Due to inactivity of GCEL, there could be no assurances that
any revenues could be realized under this contract.

         In view of long lead times  involved,  it is  impossible to project the
volume of revenues which may be generated from the contracts with NTC and GCEL.

         During fiscal 1997 and 1998 the Company invested significant management
time and  financial  resources  to focus on  research  and  development  for the
completion of CRX and CDCO systems and the initial introduction of these systems
to targeted foreign countries such as Egypt,  India and Russia.  However,  there
can be no  assurance  that the Company  will be  successful  in  establishing  a
reasonable business in such countries.

Results of Operations

Year Ended March 31, 1998, Compared to Year Ended March 31, 1997

Net sales

   
         The Company's net sales for the year ended March 31, 1998, were $66,110
representing  an increase of $20,725 or  approximately  45% from $45,385 for the
year ended  March 31, 1997  primarily  due to volume  increases.  Net sales were
insignificant,  primarily  attributable to management's  focus on completing the
development of new products and  introduction  of these products to the domestic
and international market.
    

Gross margin

         The Company includes in its cost of sales the materials and labor used,
subcontractor costs and overhead incurred in the manufacture of its systems. The
Company's  gross margin  decreased from 42% to 32% of net sales from fiscal 1997
to 1998.  Fluctuations in gross margins are primarily  attributable to inventory
changes, material price changes and changes in sales mix by system.

Selling, general and administrative

         Selling, general and administrative expenses increased from $849,491 in
fiscal 1997 to $1,674,977 in fiscal 1998,  representing  an increase of $825,486
or  approximately  97%. The absolute  dollar  increases in selling,  general and
administrative  expenses  from fiscal 1997 to fiscal 1998 were  principally  the
result of increased  selling expenses  incurred with respect to introductory and
exploratory  marketing efforts in the U.S. Such efforts have not resulted in any
sales to date.

Provision for bad debt

         Bad debt  expense  amounted  to zero in  fiscal  1998 as well as fiscal
1997.


                                       13
<PAGE>


Research and development

         Research and  development  expenses  increased  from $109,322 in fiscal
1997 to  $388,854  in fiscal  1998,  representing  an  increase  of  $279,532 or
approximately 355%. These dollar increases in research and development  expenses
were primarily due to development of CDCO for the U.S.  market.  All development
costs are expensed in the period  incurred.  The Company  expects to continue to
commit  reasonable  resources  to research  and  development  in the future,  as
commercialization of ISDN applications for CDCO and CSX continue to be developed
in the U.S. and digital voice applications in the developing countries.

Income (loss) from operations or income (loss) before extraordinary item

         Loss from  operations  in fiscal  1998 was  $(1,864,876)  or $(.10) per
share as compared with $(706,102) or $(.04) per share in fiscal 1997.

Extraordinary item

         Extraordinary  gain on debt  restructure  in fiscal 1998 was $0 or $.00
per share as compared to $291,756 or $.02 per share in fiscal 1997.

Net  income (loss)

         As a  result  of the  foregoing,  the  net  loss  in  fiscal  1998  was
$(1,864,876) or $(.10) per share as compared to a net loss of $(414,346) or $.02
per share in fiscal 1997.

Liquidity and Capital Resources

         The  Company's  ability to  generate  cash  adequate  to meet its needs
results  primarily  from sale of  preferred  and common stock and cash flow from
operations; it is anticipated that export financing will also play a role in the
foreseeable future.  Total working capital decreased by $2,582,171 to $3,150,422
at March 31, 1998 from $5,732,593 at March 31, 1997. The current ratio decreased
to 23.4 to 1 as at March 31, 1998 from 136.6 to 1 as at March 31, 1997.  Current
levels of inventory are adequate to meet short term sales.  The Company believes
that its current  sources of liquidity  will be sufficient to meet its needs for
the foreseeable future. The Company believes that, if needed, it will be able to
obtain additional funds required for future needs.

         The  Company  used  $219,625  and $26,071  during  fiscal 1998 and 1997
respectively,  for investing activities.  The cash used for investing activities
relates primarily to purchases of equipment in fiscal 1998 and 1997.

         Net cash (used)  provided by financing  activities  was  $(529,470) and
$5,570.417  for fiscal  1998 and 1997,  respectively.  The  decrease in net cash
provided by financing  activities in 1998 was  principally  due to redemption of
preferred  stock.  The Company  made  principal  payments on  long-term  debt of
$489,482  (inclusive  of cash  settlements,  given  below) in fiscal  1997.  The
payments of long-term debt principally relate to amounts owed to Job Development
Authority of New York and Regional Development Corporation in fiscal 1997.

         On July 11,  1996,  the Company  concluded a private  placement  of its
Series A Preferred Stock and accompanying  warrants to accredited  institutional
investors and received net proceeds of approximately  $7.1 million.  On December
30,  1996,  the Company  concluded a private  placement  of 2,000  shares of its
Series B-1 Preferred Stock to Syndicated  Communications  Venture  Partners III,
L.P. and received net proceeds of $1.7 million.  Some of the proceeds from these
offerings have been used for retirement of long-term debt,  redemption of Series
A Preferred  Shares prior to conversion,  and to fund research and  development,
marketing and production expenses.  All of the Series A Preferred Stock has been
converted or redeemed and there are no such shares outstanding.  However,  there
are 824,013  warrants  outstanding  in connection  with the offering of Series A
preferred stock at an exercise price of $6.35 per share for an aggregate  amount
of  $5,232,482.  On December 30,  1997,  the Series B-1  preferred


                                       14
<PAGE>


stockholders  received a 10% dividend  through  issuance of 200 shares of Series
B-1 Preferred Stock, in accordance with the terms of the private placement.

         Due to the  completion  of the  Series A and Series B  Preferred  Stock
transactions  and together with expected  cash flow from  operations  and export
financing,  the Company  believes its liquidity  will be sufficient to meets its
needs for the next 18 months.

   
         No credit is available to the Company and there were no commitments for
capital expenditures as at March 31, 1998.
    

Impact of Inflation

         Inflation has  historically  not had a material effect on the Company's
operations.

ITEM 7 - Financial Statements

         The  Financial  Statements  of the  Company  are  listed in the  "Cyber
Digital, Inc. Financial Statements" filed as part of this Form 10-KSB.


ITEM 8 -  Changes  In and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.

None.

                                    PART III

ITEM  9  -  Directors,   Executive  Officers,  Promoters  and  Control  Persons;
Compliance With Section 16(a) of the Exchange Act.

         The directors and executive officers of the Company are:


Name                         Age                      Office

Jawahar C. Chatpar            50        Chairman of the Board, President, and
                                                Chief Executive Officer

Jack P. Dorfman               60        Director and Secretary

Jatinder V. Wadhwa            63        Director and Treasurer

Terry L. Jones                50        Director

Khushi A. Nichani             60        Director

Robert G. Keller              53        Vice President - United States

Larry S. Shluger              59        Vice President of Operations

       Jawahar C. Chatpar is a founder of the Company and has served as Chairman
of the Board,  Chief  Executive  Officer and  President  since  March  1991,  as
Chairman of the Board,  Chief Executive Officer and Secretary from November 1986
until March 1991, and as President and Chief  Executive  Officer since inception
until November 1986. Mr. Chatpar has also served as a director since  inception.
Mr. Chatpar founded the Company in 1983 as a successor to a Canadian corporation
of the same name which he founded in 1982.  From 1980 to 1982,  Mr.  Chatpar was
employed   by   Bayly   Engineering   Limited,   a   manufacturer   of   digital
telecommunication  systems and a member of A.E.G. Telefunken Group, as a Manager
of Digital


                                       15
<PAGE>


Transmission and Fiber Optics Engineering (research and development).  From 1974
to 1980,  Mr. Chatpar  served in various  engineering,  management and marketing
positions  with  Northern  Telecom.  He  holds  an  M.S.  degree  in  Electrical
Engineering from the University of Waterloo, Canada.

         Jack P. Dorfman  joined the Company as a Director in November 1993, and
has served as Secretary  since October  1995.  Mr.  Dorfman has  otherwise  been
retired  since June 1996.  Prior  thereto,  since 1992,  Mr.  Dorfman  served as
consultant and manager for a number of pharmacies.  From 1990 to 1992, he served
as  a  management  consultant  for  Clark  Container,  a  division  of  Mark  IV
Industries,  a conglomerate.  From 1988 to 1990, he served as Vice President and
Treasurer of US Distribution, a transportation company. Prior to 1988, he owned,
managed and operated an independent community pharmacy for over fifteen years.

         Jatinder  Wadhwa has served as a Director of the Company since 1986 and
as Treasurer of the Company  since August 1997. He had been the Secretary of the
Company  from 1993 to 1995.  Since  1994,  Mr.  Wadhwa  has  served as the Chief
Executive  Officer of Security First  Financial  Corp., a financial  institution
dealing  with  first  and  second   mortgages  on  residential   and  commercial
properties.  From 1989 to 1994, Mr. Wadhwa had served as a management consultant
to Gibbons  Goodwin van Amerongen,  an investment  banking firm,  Wells Aluminum
Corporation,  a manufacturer of aluminum  extrusion  products and Sealy Mattress
Company. From 1970 to 1990, Mr. Wadhwa had served as Chief Operating Officer and
Vice President of Operations of EZ Por  Corporation,  a manufacturer of aluminum
products.

         Terry L. Jones has served as a Director of the Company  since  November
1997. He has been the President of Syndicated Communications, Inc. ("Syncom"), a
communications  venture capital investment company, since 1990. He joined Syncom
in 1978 as a Vice President.  Mr. Jones serves in various capacities,  including
director,  president,  general  partner and vice  president  for  various  other
entities  affiliated  with  Syncom.  He also serves on the Board of Directors of
Radio One, Inc. Mr. Jones earned his B.S. degree from Trinity College,  his M.S.
from George Washington University and his M.B.A. from Harvard Business School.

         Khushi  A.  Nichani  has  served as a  Director  of the  Company  since
November 1997. He has been a commercial manager at Black & Veatch  Incorporated,
an engineering and architectural firm for power industrial  projects,  since May
1997, where his  responsibilities  included negotiating orders for turnkey power
plants.  From 1973 to May 1997,  he held  various  positions  (most  recently as
Manager of Proposals & Estimating) at GE Co. Power Generation, the power project
division of General Electric.

         Robert G. Keller  joined the Company as Vice  President - United States
in June  1997.  Since  1991,  Mr.  Keller was  engaged  in  various  consultancy
assignments.  From  1986 to 1991,  he was Vice  President  and  Chief  Operating
Officer of NYNEX  Mobile  Communications  Company.  Between  1970 and 1986,  Mr.
Keller held several management  positions  initially with New York Telephone and
later with NYNEX.

         Larry S. Shluger has been Vice  President of  Operations of the Company
since August 1996. From 1991 to 1996, Mr. Shluger was Director of Purchasing and
Operations  at  Cashtek  Corporation,  a company  which  designs,  develops  and
manufactures  computerized gaming systems. From 1975 to 1991, he was Director of
Purchasing  and  Operations  at  Kenilworth   Systems   Corporation   until  its
acquisition  by Cashtek  Corporation.  Prior to 1975 he was  employed in various
management  positions  at  Ecologic  Instruments  Corporation,  a company  which
designs,  develops and  manufactures  test  equipment  for the  environment  and
pollution control fields, and Dynamic Instruments Corporation, a manufacturer of
battery chargers.

         There is no family relationship among the Directors and Officers of the
Company.

      Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended (the
"1934 Act"),  requires the  Company's  directors  and  executive  officers,  and
persons  who own more  than  ten  (10%)  percent  of a  registered  class of the
Company's equity securities, to file with the Securities and Exchange Commission
(the


                                       16
<PAGE>


'Commission")  initial  reports of ownership and reports of changes in ownership
of Common Stock and other equity  securities of the Company.  Reporting  persons
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.

         To the  Company's  knowledge,  based  solely on review of the copies of
such reports furnished to the Company,  the following persons failed to file, on
a timely basis, the following reports required by Section 16(a) of the 1934 Act:
J.C.  Chatpar failed to timely file two Forms 4, in connection  with the receipt
of certain stock options,  during the fiscal year ended March 31, 1998. Jatinder
Wadhwa failed to timely file three Forms 4, in  connection  with the receipt and
exercise of certain stock options,  during the fiscal year ended March 31, 1998.
Jack Dorfman  failed to timely file two Forms 4, in connection  with the receipt
of certain  stock  options,  during the fiscal year ended March 31, 1998.  Terry
Jones  failed to timely  file a Form 3, and in  connection  with the  receipt of
certain  stock  options,  a Form 4 during the fiscal year ended March 31,  1998.
Khushi  Nichani  failed  to  timely  file a Form 3, and in  connection  with the
receipt of certain  stock  options,  a Form 4 during the fiscal year ended March
31, 1998.  Robert Keller failed to timely file a Form 3, and in connection  with
the  receipt of certain  stock  options,  a Form 4, during the fiscal year ended
March 31, 1998.  Larry Shluger failed to timely file a Form 3, and in connection
with the  receipt of certain  stock  options,  a Form 4,  during the fiscal year
ended March 31, 1998. These forms are currently being prepared for filing.

ITEM 10 - Executive Compensation

Summary Compensation Table

         The following table sets forth information  concerning the compensation
for services in all capacities  for the fiscal years ended March 31, 1998,  1997
and 1996 of those  persons  who were,  at March 31,  1998,  the chief  executive
officer and the most highly  compensated  executive officers of the Company (the
"Named  Officers").  During such  periods,  no executive  officer of the Company
received compensation in excess of $100,000 other than J.C. Chatpar.

<TABLE>
<CAPTION>


                                        Annual Compensation                             Long Term Compensation
                                        -------------------                             ----------------------

                                                                                      Awards               Payouts
                                                                              ------------------------     -------



                                                                 Other       Restricted     Securities
                                                                 Annual        Stock        Underlying       LTIP       All
 Name and Principal              Salary           Bonus       Compensation   Awards          Options/      Payouts     Other
      Position         Year        ($)             ($)           ($)(1)         ($)          SARs(#)          ($)  Compensation
------------------     ----        ---             ---           ------         ---          -------          ---  ------------

<S>                   <C>      <C>            <C>              <C>           <C>         <C>                <C>       <C>
J.C. Chatpar,
Chairman of the
Board, President      1998     $150,000           None          None          None        140,000(3)         None      None
and Chief Executive   1997     $130,000(2)    $100,000(2)       None          None        None               None      None
Officer               1996     $80,000            None          None          None        440,000            None      None


</TABLE>


(1)  The Company has concluded  that the  aggregate  amount of  perquisites  and
     other  personal  benefits paid to each of the Named  Officers  named in the
     table did not  exceed  the  lesser of 10% of such  officer's  total  annual
     salary and bonus for the 1998, 1997 and 1996 fiscal years or $50,000, thus,
     such amounts are not included in the table.

(2)  Mr.  Chatpar's  salary was raised from  $80,000  per annum to $150,000  per
     annum effective August 12, 1996.

(3)  Mr.  Chatpar was  granted  110,000  options at $2.56 and 30,000  options at
     $2.43 in fiscal 1998.


                                       17
<PAGE>


                        Option Grants In Last Fiscal Year

         The  following  table sets forth  information  concerning  stock option
grants  made  during  fiscal  1998 to the Named  Officers.  The  Company has not
granted any stock appreciation rights.

<TABLE>
<CAPTION>

                                                   Individual Grants
                           ------------------------------------------------------------------
                               Number                 % of Total
                                 of                     Options
                             Securities               Granted To
                             Underlying              Employees in              Exercise
                              Options                 Fiscal Year                Price          Expiration
                              Granted                     1997                  ($/Share)          Date

         Name                   (#)                       (1)                     (2)              (3)
         ----                   ---                       ---                     ---              ---
<S>                           <C>                        <C>                     <C>            <C>
     J.C. Chatpar             110,000                    23.3%                   $2.56          8/03/2007
     J.C. Chatpar              30,000                     6.3%                   $2.43          8/03/2007
</TABLE>

(1)  During fiscal 1998, options to purchase an aggregate of 140,000 shares were
     granted to Mr.  Chatpar and options to  purchase  an  aggregate  of 332,000
     shares were granted to thirteen other employees.

(2)  The  exercise  price of the options  granted  were equal to the fair market
     value of the underlying stock on the date of grant.

(3)  Options are immediately exercisable.

                    Aggregated Fiscal Year-End Option Values

         The following  table sets forth  information  concerning  the number of
unexercised options and the fiscal 1998 year-end value of unexercised options on
an aggregated basis held by the Named Officers.  The Company has not granted any
stock appreciation rights and no options were exercised in fiscal 1998.

<TABLE>
<CAPTION>

                             Number of Securities                               Value of
                            Underlying Unexercised                      Unexercised In-The-Money
                        Options at Fiscal Year-End (#)               Options at Fiscal Year-End ($)
                        ------------------------------               ------------------------------

     Name             Exercisable           Unexercisable          Exercisable          Unexercisable
     ----             -----------           -------------          -----------          -------------

<S>                     <C>                     <C>                 <C>                      <C>
J.C. Chatpar            620,000                 0.00                $401,200                 0.00

</TABLE>


(1)  Options are  "in-the-money"  if, on March 31, 1998, the market price of the
     Common Stock ($1.81) exceeded the exercise price of such options. The value
     of such options is calculated by  determining  the  difference  between the
     aggregate  market price of the Common Stock underlying the options on March
     31, 1998 and the aggregate exercise price of such options.

Compensation of Directors

         The  directors  of the  Company  are paid  $250 per Board  meeting.  In
addition,  the Company currently  reimburses each director for expenses incurred
in  connection  with  his or her  attendance  at each  meeting  of the  Board of
Directors or a committee on which he or she serves.


Employment Agreements and Insurance

         The  Company  has  entered  into an  Amended  and  Restated  Employment
Agreement  with Mr.  J.C.  Chatpar  dated as of August 4, 1997 (the  "Employment
Agreement") for a three year term.  Such three-year


                                       18
<PAGE>


term shall be  automatically  extended for  successive  three-year  terms unless
either party gives the other party 120 days prior written  notice of termination
before  the end of any such  three-year  period.  The  Board,  however,  has the
authority  to  terminate  such  extension  upon  cause.  "Cause"  is  defined as
conviction of a felony or willful misconduct. Mr. Chatpar is entitled to receive
a salary of $150,000 per annum,  with an annual  increase of 10%. In recognition
of the complex  scientific and technical  leadership which Mr. Chatpar brings to
the Company,  the Company has also agreed that its Board of Directors  may raise
his salary during the term of his employment as soon as the financial  resources
of the  Company  and  other  business  conditions  permit.  In such  event,  Mr.
Chatpar's  salary  shall be at a level  comparable  to that of  chief  executive
officers of other comparable technology-driven publicly held companies.

         In  addition  to his base  salary,  Mr.  Chatpar  shall be  entitled to
receive a bonus based upon the following  formula:  (a) 1% of gross revenues for
each fiscal  year in excess of $3 million  provided,  however,  that the Company
shall be  profitable,  plus (b) 5% of net income  after  deduction  of the bonus
provided  for in (a) above,  and plus (c) 10% of the increase in net income over
that of the prior fiscal year after  deduction of the bonus  provided for in (a)
above.

         In the  event  of a  termination  of Mr.  Chatpar's  employment  due to
disability, he shall receive royalty payments of 5% of the gross revenues earned
by the Company ("Royalties") for a period of 15 years following termination.  In
the event of Mr. Chatpar's death, his wife, if any, or his estate, shall receive
a payment equal to six months of his base salary and Royalties for 15 years.  In
the event of a termination of Mr. Chatpar's employment for any reason other than
pursuant to disability,  death or for cause,  or if there is a change of control
(as defined in the  Employment  Agreement)  of the Company  which  results in an
actual or constructive  termination of employment (as defined therein), he shall
receive a payment  equal to three  years of his base salary plus three times his
prior year's bonus,  Royalties for 15 years, and all of his outstanding  options
will be deemed  immediately vested and exercisable for a period of one year from
the effective termination date.

         The Company does not have  employment  contracts with any other officer
or director.  The Company offers basic health,  major medical and life insurance
to its employees. No retirement,  pension or similar program has been adopted by
the Company.

ITEM 11 - Security Ownership of Certain Beneficial Owners and Management

The  following  table  sets  forth  certain  information  known  to the  Company
regarding  beneficial  ownership of the  Company's  Common Stock as of March 31,
1998,  for (i) each  person  or  group  that is  known  by the  Company  to be a
beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii)
each of the Named Officers and directors,  and (iii) all directors and executive
officers of the Company as a group. Except as otherwise  indicated,  the Company
believes that such  beneficial  owners,  based on information  furnished by such
owners,  have sole  investment  and voting  power with  respect to such  shares,
subject to community property laws, where applicable.


                                       19
<PAGE>


Names and Address
of Beneficial Owners                   Number of Shares  Percentage Owned (1)(2)
--------------------                   ----------------  -----------------

J.C. Chatpar(3)                            5,345,712           28.4%
c/o Cyber Digital, Inc.
400 Oser Avenue
Hauppauge, NY 11788


Jack P. Dorfman(4)                          200,000            1.1%

Jatinder V. Wadhwa(5)                       197,812            1.1%

Terry L. Jones (6)                          10,000               *

Khushi A. Nichani (7)                       18,000               *



All directors and executive
officers as a group:  (7) persons
                                           5,981,024           32.5%
*less than 1%

(1)  For purposes of computing the  percentage of  outstanding  shares of Common
     Stock held by each person or group of persons  named  above,  any  security
     which such  person or persons  have or have the right to acquire  within 60
     days is deemed to be  outstanding,  but is not deemed to be outstanding for
     the purpose of computing the percentage of ownership of any other person.

(2)  Assumes the exercise of the warrants to purchase  824,013  shares of Common
     Stock  issued in  connection  with the offering of the  Company's  Series A
     Preferred stock.

(3)  Does not include  476,000  shares owned by Sylvie  Chatpar,  his wife,  and
     175,000  shares  owned by  certain  other  relatives,  as to  which  shares
     beneficial ownership is disclaimed. Includes 620,000 shares as to which Mr.
     Chatpar holds  non-qualified  stock options,  which are  exercisable at any
     time.

(4)  Includes 80,000 shares as to which Mr. Dorfman holds a non-qualified  stock
     option,  which are exercisable at any time. Does not include 360,000 shares
     owned by his wife,  Sandra  Dorfman,  as to which  beneficial  ownership is
     disclaimed.

(5)  Includes  40,000  shares as to which Mr. Wadhwa holds  non-qualified  stock
     options which are exercisable at any time.

(6)  Terry  Jones is a  general  partner  of a limited  partnership  that is the
     general  partner of Syndicated  Communications  Venture  Partners III, L.P.
     ("Syncom  III"),  a fund which owns all the 2,200  shares of the  Company's
     Series B  convertible  preferred  stock  (the  "Series B Stock")  currently
     outstanding.   Includes   10,000   shares  as  to  which  Mr.  Jones  holds
     non-qualified stock options which are exercisable at any time.

(7)  Includes  10,000 shares as to which Mr. Nichani holds  non-qualified  stock
     options which are exercisable at any time.

                                       20
<PAGE>

ITEM 12 - Certain Relationships and Related Transactions

         In August 1997,  the Company issued to J.C.  Chatpar,  Jack Dorfman and
Jatinder  Wadhwa,  directors  of the  Company,  non-qualified  stock  options to
purchase 110,000, 10,000, and 10,000 shares of Common Stock, respectively, at an
exercise price of $2.56 per share.

         In November  1997, the Company  issued to J.C.  Chatpar,  Jack Dorfman,
Jatinder  Wadhwa,  Terry Jones and Khushi  Nichani,  directors  of the  Company,
non-qualified  stock options to purchase 30,000,  30,000,  30,000,  10,000,  and
10,000 shares of Common Stock,  respectively,  at an exercise price of $2.43 per
share.

         On December 30, 1996,  the Company  consummated a private  placement of
its Series B Stock, to Syncom III. The Company issued 2,000 shares of its Series
B Stock to Syncom III in return for $2,000,000. Such shares are convertible into
shares of the Company's  Common Stock commencing one year from closing date. The
conversion price is lesser of either  eighty-five  (85%) per cent of the average
closing  price during the five trading days  preceding  the  conversion  date or
$7.50 per share.  All shares of Series B Stock shall  automatically be converted
into shares of the Company's  Common Stock on December 21, 2001. On December 30,
1997,  Syncom III received 10% dividend through issuance of 200 shares of Series
B Stock.

         Terry Jones,  a director,  is the general  partner of WJM Partners III,
L.P.  ("WJM"),  the general partner of Syncom III.  Pursuant to the terms of the
Stock Purchase Agreement entered into in connection with such placement, so long
as Syncom III holds at least 750 shares of Series B Stock  and/or  shares of the
Company's  Common Stock issued upon conversion of such shares of Series B Stock,
or any  combination  thereof,  the Company's Board of Directors shall consist of
not less than five  members and the Company  shall use its best efforts to cause
Terry Jones (or another partner of WJM) to be elected as a director.


                                       21
<PAGE>

ITEM 13 - Exhibits and Reports on Form 8-K

(a)   Exhibits.

     3.1  Composite   Amended  and   Restated   Certificate   of   Incorporation
          (incorporated  herein by  reference  to Exhibit  3.1 to the  Company's
          Quarterly  Report on Form  10-QSB for the period  ended  December  31,
          1996).

     3.2  Composite  Amended  and  Restated  By-Laws   (incorporated  herein  by
          reference  to Exhibit 3.1 to the  Company's  Quarterly  Report on Form
          10-QSB for the period ended  September 30, 1997 (the  "September  1997
          Form 10-QSB")).

     10.1 Cyber Digital,  Inc. 1993 Stock Incentive Plan (incorporated herein by
          reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K
          for the fiscal year ended March 31, 1994).

     10.2 Amended and Restated Employment Agreement, dated as of August 4, 1997,
          between the Company and J.C. Chatpar (incorporated herein by reference
          to Exhibit 10.1 to the September 1997 Form 10-QSB).

     10.3 Manufacturing  License  Contract  between  the  Company  and  National
          Telecommunications  Co.,  dated as of December  4, 1995  (incorporated
          herein by reference to Exhibit 10(c) to the Company's Annual Report on
          Form 10-KSB/A for the fiscal year ended March 31, 1996)).

     10.4 Manufacturing   License  Contract  between  the  Company  and  Gujarat
          Communications  and  Electronics,  Ltd.  dated  as  of  May  30,  1996
          (incorporated  herein by reference  to Exhibit  10.5 to the  Company's
          Annual  Report on Form  10-KSB  for the fiscal  year  ended  March 31,
          1997).

     10.5 Cyber Digital, Inc. 1997 Stock Incentive Plan

     27   Financial Data Schedule.


(b) Reports of Form 8-K. No reports on Form 8-K were filed for the three  months
ended March 31, 1998.


                                       22
<PAGE>


                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

   
Dated:  March 16, 1999
    


                                            CYBER DIGITAL, INC.

                                            By: /s/ J.C. Chatpar
                                               -----------------
                                                J.C. Chatpar
                                            Chairman of the Board, President
                                           and Chief Executive Officer


         In accordance  with the Exchange Act, this report has been signed below
by the following person on behalf of the registrant and in the capacities and on
the dates indicated.

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

   
/s/ J.C. Chatpar          Chairman of the Board, President     March 16, 1999
--------------------      and Chief Executive Officer
    J.C. Chatpar          (Principal Executive , Accounting
                          and Financial Officer)


/s/ Jack P. Dorfman       Secretary and Director               March 16, 1999
-------------------
    Jack P. Dorfman

/s/ Jatinder Wadhwa       Treasurer and Director               March 16, 1999
-------------------
    Jatinder Wadhwa

/s/ Terry Jones           Director                             March 16, 1999
-------------------
    Terry Jones

/s/  Khushi Nichani       Director                             March 16, 1999
-------------------
     Khushi Nichani
    


                                       23

<PAGE>

                                Index to Exhibits

Exhibit Number                     Description
--------------                     -----------

     3.1  Composite   Amended  and   Restated   Certificate   of   Incorporation
          (incorporated  herein by  reference  to Exhibit  3.1 to the  Company's
          Quarterly  Report on Form  10-QSB for the period  ended  December  31,
          1996).

     3.2  Composite  Amended  and  Restated  By-Laws   (incorporated  herein  by
          reference  to Exhibit 3.1 to the  Company's  Quarterly  Report on Form
          10-QSB for the period ended  September 30, 1997 (the  "September  1997
          Form 10-QSB")).

     10.1 Cyber Digital,  Inc. 1993 Stock Incentive Plan (incorporated herein by
          reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K
          for the fiscal year ended March 31, 1994).

     10.2 Amended and Restated Employment Agreement, dated as of August 4, 1997,
          between the Company and J.C. Chatpar (incorporated herein by reference
          to Exhibit 10.1 to the September 1997 Form 10-QSB).

     10.3 Manufacturing  License  Contract  between  the  Company  and  National
          Telecommunications  Co.,  dated as of December  4, 1995  (incorporated
          herein by reference to Exhibit 10(c) to the Company's Annual Report on
          Form 10-KSB/A for the fiscal year ended March 31, 1996)).

     10.4 Manufacturing   License  Contract  between  the  Company  and  Gujarat
          Communications  and  Electronics,  Ltd.  dated  as  of  May  30,  1996
          (incorporated  herein by reference  to Exhibit  10.5 to the  Company's
          Annual  Report on Form  10-KSB  for the fiscal  year  ended  March 31,
          1997).


     10.5 Cyber Digital, Inc. 1997 Stock Incentive Plan.

   
     10.6 Contractor  Agreement  between the Company and GTE Data Services GmbH,
          dated as of December 9, 1997.
    

     27   Financial Data Schedule


                                       24

<PAGE>

                               CYBER DIGITAL, INC.

                              FINANCIAL STATEMENTS


<PAGE>


                                TABLE OF CONTENTS
                                -----------------

                                                                      Page No.
                                                                      --------


Independent Auditors' Report......................................          F-1

Financial Statements

    Balance Sheets................................................          F-2

    Statements of Operations......................................          F-3

    Statements of Changes in Shareholders' Equity (Deficit).......          F-4

    Statements of Cash Flows......................................          F-5

    Notes to Financial Statements.................................   F-6 - F-16



   All schedules omitted are not required, not applicable, or the information is
   provided in the financial statements or notes therein.



<PAGE>


   
ALBRECHT, VIGGIANO, ZURECK
      & COMPANY, P.C.
                                                  CERTIFIED PUBLIC ACCOUNTANTS
                                                              25 SUFFOLK COURT
                                                          HAUPPAUGE, NY  11788
                                                                (516) 434-9500
    


                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------

To the Board of Directors and Stockholders
Cyber Digital, Inc.
Hauppauge, New York


We have audited the  accompanying  balance sheets of Cyber  Digital,  Inc. as of
March 31, 1998 and 1997 and the related statements of operations,  shareholders'
equity, and cash flows for the years then ended. These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion,  the accompanying  financial statements referred to in the first
paragraph presents fairly, in all material  respects,  the financial position of
Cyber  Digital,  Inc.  as of March  31,  1998 and  1997 and the  results  of its
operations  and its cash  flows  for the years  then  ended in  conformity  with
generally accepted accounting principles.


/s/ Albrecht, Viggiano, Zureck & Company, P.C.

Hauppauge, New York
June 14, 1998


                                       F-1

<PAGE>

                               CYBER DIGITAL, INC.
                                 BALANCE SHEETS
                             March 31, 1998 and 1997
<TABLE>
<CAPTION>

                                                                                              1998                 1997
                                                                                         -----------------    -----------------
ASSETS
<S>                                                                                      <C>                  <C>
Current Assets
   Cash and cash equivalents                                                             $       2,436,473    $       5,002,773
   Accounts receivable, net                                                                        383,603              327,377
   Inventories                                                                                     447,750              434,473
   Prepaid and other                                                                                23,545               10,243
                                                                                         -----------------    -----------------

                                                                Total Current Assets             3,291,371            5,774,866

Property and Equipment, net                                                                        227,965               44,098

Other Assets                                                                                        14,350               10,392
                                                                                         -----------------    -----------------

                                                                                         $       3,533,686    $       5,829,356
                                                                                         =================    =================
LIABILITIES AND SHAREHOLDERS'  EQUITY

Current Liabilities
   Accounts payable, accrued expenses, and taxes                                         $         140,949    $          42,273
                                                                                         -----------------    -----------------

                                                           Total Current Liabilities               140,949               42,273
                                                                                         -----------------    -----------------

Commitments and Contingencies

Shareholders' Equity
   Convertible preferred stock - Series A $.05 par value;  authorized  9,991,940
     shares; issued and outstanding,
     -0- and 86 shares at March 31, 1998 and 1997, respectively                                        -0-                    4
   Convertible, cumulative and participating preferred
     stock - Series  B-1 $.05 par value;  authorized  3,225  shares;  issued and
     outstanding 2,200 and 2,000 shares at
     March 31, 1998 and 1997, respectively                                                             110                  100
   Preferred stock - Series B-2 cumulative, convertible and
     participating $.05 par value; authorized 4,835 shares;
     issued and outstanding; none                                                                      -0-                  -0-
   Common stock $.01 par value; authorized 30,000,000
     shares; issued and outstanding 17,386,053 shares and
     17,095,176 shares at March 31, 1998 and 1997, respectively                                    173,861              170,952
   Additional paid-in capital                                                                   13,892,867           13,919,241
   Retained deficit                                                                            (10,674,101)          (8,303,214)
                                                                                         -----------------    -----------------

                                                                                                 3,392,737            5,787,083
                                                                                         -----------------    -----------------

                                                                                         $       3,533,686    $       5,829,356
                                                                                         =================    =================
</TABLE>




                       See notes to financial statements.

                                       F-2

<PAGE>


                               CYBER DIGITAL, INC.
                            STATEMENTS OF OPERATIONS
                       Years ended March 31, 1998 and 1997

<TABLE>
<CAPTION>

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

<S>                                                                                      <C>                  <C>
Net Sales                                                                                $          66,110    $          45,385


Cost of Sales                                                                                       44,946               26,120
                                                                                         -----------------    -----------------

                                                                        Gross Profit                21,164               19,265
                                                                                         -----------------    -----------------

Operating Expenses
   Selling, general and administrative expenses                                                  1,674,977              849,491
   Research and development                                                                        388,854              109,322
                                                                                         -----------------    -----------------

                                                            Total Operating Expenses             2,063,831              958,813
                                                                                         -----------------    -----------------

                                                                Loss from Operations            (2,042,667)            (939,548)

Other Income (Expense)
   Interest income                                                                                 188,146              176,702
   Interest expense                                                                                 (4,606)             (11,231)
   Other income (expense)                                                                             (972)              51,911
   Loss on disposal of fixed assets                                                                     -0-                (387)
                                                                                         ------------------   -----------------

                                                                  Total Other Income               182,568              216,995

                                     Loss Before Income Taxes and Extraordinary Item            (1,860,099)            (722,553)

Provision (Benefit) for Income Taxes                                                                 4,777              (16,451)
                                                                                         -----------------    -----------------

                                                      Loss Before Extraordinary Item            (1,864,876)            (706,102)
                                                                                         -----------------    -----------------

Extraordinary Item (less applicable income taxes)                                                       -0-             291,756
                                                                                         ------------------   -----------------

                                                                            Net Loss     $      (1,864,876)   $        (414,346)
                                                            Preferred Stock Dividend              (232,610)                 -0-
                                                                                         ------------------   -----------------
                                             Income Available to Common Stockholders            (2,097,486)            (414,346)
                                                                                         =================    =================



Net Earnings (Loss) Per Share of Common Stock (See Note 6)

                                                      Before extraordinary item - Basic  $           (.12)    $           (.05)
                                                                                         ================     ================
                                                                                Diluted  $           (.12)    $           (.05)
                                                                                         ================     ================

                                                             Extraordinary item - Basic  $             .00    $             .02
                                                                                         =================    =================
                                                                                Diluted  $             .00    $             .02
                                                                                         =================    =================

                                                                     Net Income - Basic  $           (.12)    $           (.03)
                                                                                         ================     ================
                                                                                Diluted  $           (.12)    $           (.03)
                                                                                         ================     ================

Weighted average number of common shares outstanding                                           17,312,550           15,896,524
                                                                                         ================     ================
</TABLE>



                       See notes to financial statements.

                                       F-3

<PAGE>

                               CYBER DIGITAL, INC.
             STATEMENTS OF CHANGE IN SHAREHOLDERS' EQUITY (DEFICIT)
                       Years ended March 31, 1998 and 1997

<TABLE>
<CAPTION>

                                                        Preferred Stock
                                     ------------------------------------------------------------------
                                           Series A             Series B-1            Series B-2             Common Stock
                                     --------------------- --------------------- ---------------------- -----------------------
                                      Shares     Amount     Shares     Amount     Shares      Amount      Shares      Amount
                                     ---------  ---------- ---------- ---------- ----------  ---------- ----------- -----------

<S>                                 <C>         <C>         <C>        <C>       <C>         <C>        <C>          <C>
   Balance at March 31, 1996                                                                            15,110,311   $ 151,103

   Exercise of stock options                                                                               109,286       1,093

   Preferred stock issued - Series A      805        $ 40

   Preferred stock issued - Series B-1                         2,000      $ 100

   Conversion of preferred stock -
     Series A                            (496)        (25)                                               1,875,579      18,756

   Remption of Series A
     preferred stock                     (223)        (11)

   Net Loss
                                     ---------  ---------- ---------- ---------- ----------  ---------- ----------- -----------

   Balance - March 31, 1997                86         $ 4      2,000      $ 100        -0-       $ -0-  17,095,176   $ 170,952

   Exercise of stock options                                                                                90,000         900

   10% Preferred stock dividend - Series B-1                     200       $ 10

   Conversion of preferred stock -
     Series A                             (38)         (2)                                                 200,877       2,009

   Redemption of Series A
     preferred stock                      (48)         (2)

   Net Loss
                                     ---------  ---------- ---------- ---------- ----------  ---------- ----------- -----------

   Balance - March 31, 1998               -0-       $ -0-      2,200      $ 110        -0-       $ -0-  17,386,053   $ 173,861
                                     =========  ========== ========== ========== ==========  ========== =========== ===========
</TABLE>




                                       Additional Paid-  Retained
                                         in Capital      Deficit       Total
                                       ------------   ------------- -----------

   Balance at March 31, 1996           $ 6,253,146   $ (6,378,515)   $ 25,734

   Exercise of stock options               141,203                    142,296

   Preferred stock issued - Series A     7,049,460                  7,049,500

   Preferred stock issued - Series B-1   1,684,900                  1,685,000

   Conversion of preferred stock -
     Series A                              743,364       (762,095)        -0-

   Remption of Series A
     preferred stock                    (1,952,832)      (748,258) (2,701,101)

   Net Loss                                              (414,346)   (414,346)
                                       ------------  ------------- -----------

   Balance - March 31, 1997            $ 13,919,241  $ (8,303,214) $ 5,787,083

   Exercise of stock options                82,900                     83,800

   10% Preferred stock dividend -
    Series B-1                             232,600       (232,610)        -0-

   Conversion of preferred stock -
     Series A                               78,466        (80,473)        -0-

   Redemption of Series A
     preferred stock                      (420,340)      (192,928)   (613,270)

   Net Loss                                            (1,864,876) (1,864,876)
                                       ------------  ------------- -----------

   Balance - March 31, 1998            $ 13,892,867  $ (10,674,101)$ 3,392,737
                                       ============  ============= ===========


                       See notes to financial statements
                                      F-4

<PAGE>

                               CYBER DIGITAL, INC.
                            STATEMENTS OF CASH FLOWS
                       Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>

                                                                                               1998                 1997
                                                                                         -----------------    -----------------
<S>                                                                                      <C>                  <C>               
Cash Flows from Operating Activities
   Net loss                                                                              $      (1,864,876)   $        (414,346)
   Adjustments to reconcile net loss to
       net cash used in operating activities:
     Depreciation                                                                                   35,758               12,277
     Loss on sale of fixed assets                                                                       -0-                 387
     Forgiveness of debt                                                                                -0-            (291,756)
     (Increase) decrease in operating assets:
       Accounts receivable                                                                         (56,226)               8,789
       Inventories                                                                                 (13,277)               (891)
       Prepaid and other assets                                                                    (17,260)             (5,948)
     Increase (Decrease) in operating liabilities:
       Accounts payable, accrued expenses, and taxes                                                98,676               (6,112)
                                                                                         -----------------    -----------------

                                               Net Cash Used in Operating Activities            (1,817,205)            (697,600)
                                                                                         -----------------    -----------------

Cash Flows from Investing Activities
   Purchase of equipment                                                                          (219,625)             (30,183)
   Proceeds from sale of fixed assets                                                                   -0-               4,112
                                                                                         ------------------   -----------------

                                               Net Cash Used in Investing Activities              (219,625)             (26,071)
                                                                                         -----------------    -----------------

Cash Flows from Financing Activities
   Issuance of common stock                                                                         83,800               26,500
   Payments of long-term debt                                                                           -0-            (489,482)
   Issuance of preferred stock                                                                          -0-           8,734,500
   Redemption of preferred stock                                                                  (613,270)         (2,701,101)
                                                                                         -----------------    ----------------

                                    Net Cash (Used) Provided by Financing Activities              (529,470)           5,570,417
                                                                                         ------------------   -----------------

                                Net (Decrease) Increase in Cash and Cash Equivalents            (2,566,300)           4,846,746

Cash and Cash Equivalents at Beginning of Period                                                 5,002,773              156,027
                                                                                         -----------------    -----------------

                                          Cash and Cash Equivalents at End of Period     $       2,436,473    $       5,002,773
                                                                                         =================    =================

Supplemental  Disclosures of Cash Flow  Information  
  Cash paid during the period for:
     Income taxes                                                                        $           6,949    $           3,328
     Interest                                                                                        4,606                   42

Supplemental Schedule of Non Cash Investing
  and Financing Activities:
   Issuance of common stock in exchange for legal services                                             -0-              10,000
   Issuance of common stock in exchange for debt                                         $             -0-    $         115,796
                                                                                         =================    =================
</TABLE>


                       See notes to financial statements.

                                       F-5

<PAGE>

                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 1 - Summary of Significant Accounting Policies

Description of Business

Cyber Digital, Inc. (the "Company") was incorporated in the state of New York in
April 1983. The Company  designs,  develops,  manufactures  and markets  digital
switching and networking systems that enable simultaneous communication of voice
and data to a large  number of users.  The  Company's  systems  are based on its
proprietary  software technology which permits "modemless"  transmission of data
between a variety of incompatible  and dissimilar  end-user  equipment,  such as
personal computers,  printers,  work stations and data terminals,  over standard
telephone lines.

Operating and Financing Matters

Since inception, the Company has devoted substantial resources to the design and
development  of the  Company's  systems.  As such,  the Company has not achieved
revenue growth and has incurred operating losses. At March 31, 1998, the Company
had  an  accumulated  deficit  of  $10,641,491  and a  shareholders'  equity  of
$3,392,737.  The decrease in equity from March 31, 1997 to March 31, 1998 is due
mainly  to the  redemption  of  $613,270  of  preferred  stock and a net loss of
$1,864,876  for the fiscal  year ended March 31,  1998.  The Company had working
capital  of  $3,150,422  at March 31,  1998  relating  largely  to cash and cash
equivalents  from prior  year's  stock  issuances  as  discussed  in Note 8. The
Company historically has sufficient cash flow generated mainly from the issuance
of debt and equity  securities  and  funding  from state and local  agencies  as
discussed in Note 8.

Estimates

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

Fair Value of Financial Instruments

The Company has a number of  financial  instruments,  none of which are held for
trading  purposes.  The Company  estimates  that the fair value of all financial
instruments  at March 31,  1998 does not differ  materially  from the  aggregate
carrying  values  of its  financial  instruments  recorded  in the  accompanying
balance  sheets.  The estimated  fair value amounts have been  determined by the
Company  using  available  market  information  and  the  appropriate  valuation
methodologies. Considerable judgment is necessarily required in the interpreting
of market data to develop the  estimates of fair value,  and,  accordingly,  the
estimates are not  necessarily  indicative of the amounts that the Company could
realize in a current market exchange.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers highly liquid
temporary cash investments with an original  maturity of three months or less to
be cash equivalents.


                                       F-6

<PAGE>


                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 1 - Summary of Significant Accounting Policies (continued)

Accounts Receivable

Accounts  receivable are presented net of a zero allowance for doubtful accounts
at March 31,  1998 and 1997.  The  allowance  is based on prior  experience  and
management's evaluation of the collectibility of accounts receivable. Management
believes that the allowance is adequate. However, additions to the allowance may
be necessary based on changes in economic conditions.

Inventories

The Company  uses a cost  system  which  approximates  the  first-in,  first-out
method. Inventories are valued at the lower of cost or market.

Property and Equipment

Property  and  equipment  are  stated at cost,  less  accumulated  depreciation.
Depreciation  and  amortization  are computed by the  straight-line  method over
their  estimated  useful  lives.  Repairs and  maintenance  are charged  against
operations as incurred.

Revenue Recognition

The Company  recognizes product system sales upon shipment and acceptance by the
customer.  Component part and software sales are recognized upon shipment to the
customer.

Income Taxes

Income taxes are provided  for the tax effects of  transactions  reported in the
financial  statements  and consist of taxes  currently due plus  deferred  taxes
related primarily to differences between the bases of assets and liabilities for
financial  and income tax  reporting.  The deferred  tax assets and  liabilities
represent the future tax return  consequences of those  differences,  which will
either be taxable or deductible when the assets and liabilities are recovered or
settled.

Deferred taxes also are  recognized  for operating  losses that are available to
offset future  federal  income taxes.  The Company  accounts for  investment tax
credits using the  flow-through  method,  and thus reduces income tax expense in
the year the related assets are placed in service.

Research and Development Costs

Research and development costs are charged to expense when incurred.

Warranty Expense

The Company records  warranty  expense as incurred and does not make a provision
as shipments are made. Such expense is not significant.





                                       F-7
<PAGE>

                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 1 - Summary of Significant Accounting Policies (continued)

Impairment of Long-Lived Assets

The  Financial   Accounting  Standards  Board  has  issued  Statement  No.  121,
"Accounting for Impairment of Long-Lived  Assets and for Long-Lived Assets to be
Disposed of" (FASB 121), which the Company has adopted  effective April 1, 1996.
FASB  No.  121  requires  that  long-lived   assets  and  certain   identifiable
intangibles  held and used by the Company be reviewed  for  possible  impairment
whenever events or changes in circumstance  indicate that the carrying amount of
an asset may not be  recoverable.  FASB No. 121 also  requires  that  long-lived
assets and  certain  identifiable  intangibles  held for sale be reported at the
lower of carrying  amount of fair value less cost to sell.  The Company  adopted
FASB No. 121 effective April 1, 1996 and determined that no impairment loss need
be recognized for the applicable assets.

Reclassifications

Certain prior period amounts have been  reclassified to conform with the current
financial statement presentation.

Earnings (Loss) Per Share

Effective for the Company's  financial  statements  for the year ended March 31,
1998, the Company adopted SFAS No. 128, "Earnings per Share," which replaces the
presentation of primary  earnings per share ("EPS") and fully diluted EPS with a
presentation  of basic EPS and diluted  EPS,  respectively.  Basic EPS  excludes
dilution and is computed by dividing earnings  available to common  stockholders
by the  weighted-average  number of common  shares  outstanding  for the period.
Similar to fully diluted EPS, diluted EPS assumes  conversion of the convertible
preferred  stock,  the  elimination  of the  related  preferred  stock  dividend
requirement, and the issuance of common stock for all other potentially dilutive
equivalent shares outstanding. All prior-period EPS data have been restated. The
adoption of this new accounting  standard did not have a material  effect on the
Company's reported EPS amounts.

Recently Issued Pronouncement

In June  1997,  the  Financial  Accounting  Standards  Board  issued  SFAS  130,
"Reporting  Comprehensive  Income."  This  statement  establishes  standards for
reporting and display of comprehensive  income and its comprehensive  (revenues,
expenses,  gains  and  losses)  in  a  full  set  of  general-purpose  financial
statements.  Comprehensive  income  is  the  change  in  equity  of  a  business
enterprise  during a period from transactions and other events and circumstances
from nonowner  sources.  This statement is effective for fiscal years  beginning
after December 15, 1997.  Reclassification of the Company's financial statements
for earlier  periods  provided for  comparative  purposes will be required.  The
Company  believes  that this  standard  will not have a  material  effect on the
Company's financial statements.



                                       F-8
<PAGE>

                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 1 - Summary of Significant Accounting Policies (continued)

In June 1997,  SFAS No. 131,  "Disclosures  About  Segments of an Enterprise and
Related information" (Statement 131), was issued. This statement will change the
way public  companies  report  information  about  segments of their business in
their annual  financial  statements and requires them to report selected segment
information in their quarterly reports issued to shareholders.  It also requires
entity-wide  disclosures  about the products,  services an entity provides,  the
material countries in which it holds assets and reports revenues,  and its major
customers.  Statement 131 is effective for fiscal years beginning after December
15, 1997.  The Company  does not expect that  Statement  131 will have  material
effect upon the Company's financial statements.

In February 1998, SFAS No. 132,  "Employers  Disclosure About Pensions and Other
Post  Retirement  Benefits"  (Statement  132),  was issued.  This statement will
change  the way  companies  report  information  about  pensions  and other post
retirement benefits. Statement 132 is effective for fiscal years beginning after
December 15, 1998.  The Company does not expect that  Statement  132 will have a
material effect upon the Company's financial statement.

Note 2 - Accounts Receivable

Pursuant to a federal  government  agency  contract  that was  terminated at the
convenience of the government,  the Company was requested to bill the government
for actual costs  incurred plus a reasonable  mark-up for profit.  In accordance
with this request, the Company has billed the government agency $263,219 and has
included this amount in accounts receivable at March 31, 1998 and 1997.

Note 3 - Inventories

Inventories consist of:
                                        1998             1997
                                   ---------------   ---------------

        Raw materials              $       312,792   $       277,532
        Work-in-process                     37,076            46,718
        Finished goods                      97,882           110,223
                                   ---------------   ---------------

                                   $       447,750   $       434,473
                                   ===============   ===============


                                       F-9
<PAGE>


                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 4 - Property and Equipment

Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>

                                            1998               1997              Useful Lives
                                       ----------------    ---------------     ---------------

<S>                                    <C>                 <C>                     <C>    
  Machinery and equipment              $        275,819    $        66,345             5 years
  Furniture and fixtures                         68,271             58,120             7 years
  Leasehold improvements                          2,920              2,920          lease term
                                       ----------------    ---------------

                                                347,010            127,385
  Less:  Accumulated depreciation               119,045             83,287
                                       ----------------    ---------------

                                       $        227,965    $        44,098
                                       ================    ===============
</TABLE>

Note 5 - Other Assets

Other assets consist of various security deposits.

Note 6 - Earnings (Loss) Per Share

Earnings per share has been computed and presented pursuant to the provisions of
Statement of Financial  Accounting  Standards No. 128, Earnings per Share, which
was adopted during the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>

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

<S>                                                     <C>                    <C>           
Net Loss                                                $      (1,864,876)     $    (414,346)
Dividends paid on Preferred Stock Series B-1                     (232,610)                -0-
                                                        -----------------     ---------------

Income Available to Common Shareholders                 $      (2,097,486)    $     (414,346)
                                                        ------------------    ---------------
Weighted Average Common Shares Outstanding                     17,312,550         15,896,524
                                                        ------------------    ---------------

Basic EPS                                               $            (.12)    $         (.03)
Diluted EPS                                             $            (.12)    $         (.03)
</TABLE>

Diluted  earnings  per share does not include any stock  warrants,  options,  or
convertible   preferred   stock  as  the  inclusion  of  these  items  would  be
antidilutive to earnings per share.


                                      F-10

<PAGE>

                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 7 - Stock Option Plans

The  Company's  Board of  Directors  adopted,  on November 7, 1997, a 1997 Stock
Incentive Plan (the "1997 Plan"). The 1997 plan is a successor to the 1993 plan,
which has been terminated. Under the terms of the 1997 Plan, 850,999 shares were
reserved for issuance to officers,  directors,  other  employees and consultants
meeting certain qualifications. Under the 1997 Plan, incentive stock options are
granted at 100% of fair market on the date of grant.  The right to exercise  the
options  accrued at one quarter of the shares  subject to grant in each year for
four years after grant.  Options granted under the plan expire on the day before
the tenth anniversary of the plan.

Pursuant to the 1997 Plan, incentive stock options,  nonqualified stock options,
restricted stock and stock appreciation  rights may be granted to such officers,
directors,  and employees of the Company, and to such consultants to the Company
and such other persons or entities,  as the Stock Option  Committee of the Board
of Directors  (the  "Committee")  shall  select.  All  incentive  stock  options
("ISO"),  which may be granted only to employees and which  provide  certain tax
advantages to the optionee,  must have an exercise price of at least 100 percent
of the fair  market  value of a share of common  stock on the date the option is
granted. No ISOs will be exercisable more than 10 years after the date of grant.
ISOs granted to ten percent shareholders must have an exercise price of at least
110 percent of fair market value and may not be exercisable after the expiration
of five years from grant. The exercise price and the term of nonqualified  stock
options will be determined by the Committee at the time of grant.

Stock appreciation rights ("SARS") may be granted independently or in connection
with all or any part of any option  granted  under the 1997 Plan,  either at the
time of grant of the option or at any time thereafter.  The holder of an SAR has
the right to receive  from the  Company,  in cash or in shares as the  Committee
shall  determine,  an amount equal to the excess of the fair market value of the
shares covered by the SAR at the date of exercise over the exercise price set at
the date of grant of the SAR.  At the  request of the  holder of an option,  the
committee  may at its  discretion  substitute  for the  exercise  of the option,
compensation  (in cash or in  shares)  in an  amount  equal to or less  than the
excess of the fair  market  value of the  shares  covered  by the  option at the
request date over the exercise price set at the grant of the option.

A restricted  stock award,  entitling the recipient to acquire  shares of common
stock for a  purchase  price at least  equal to par value may be granted to such
persons  and in such  amounts and  subject to such terms and  conditions  as the
Committee may determine.  Shares of restricted stock may not be sold,  assigned,
transferred,  pledged or otherwise encumbered or disposed of except as specified
in the 1997 Plan or the written agreement governing the grant. The Committee, at
the  time  of   grant,   will   specify   the   date  or  dates  on  which   the
nontransferability  of the  restricted  stock shall  lapse.  During the 120 days
following  the  termination  of the  grantee's  employment  for any reason,  the
Company has the right to require the return of any shares to which  restrictions
on  transferability  apply, in exchange for which the Company shall repay to the
grantee any amount paid by the grantee for such shares.


                                      F-11

<PAGE>

                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 7 - Stock Option Plans (continued)

Unless sooner terminated by the Board, the provisions of the 1997 Plan regarding
the grant of ISOs shall  terminate on the tenth  anniversary  of the adoption of
the 1997 Plan by the Board. No ISOs shall  thereafter be granted under the Plan,
but all ISOs granted theretofore shall remain in effect in accordance with their
terms.

In addition to these plans, the Company has issued  non-qualified  stock options
and  warrants  upon the  approval by the Board of  Directors.  Such  options and
warrants  are  granted  at 100% of fair  market  value on the date of the grant.
Information  with  respect to  non-qualified  stock  options  and  warrants  are
summarized as follows:
                                                 Price              Shares

  Outstanding, March 31, 1997              $  .38 to $ 6.35          2,654,013
    Granted                                $ 1.50 to $10.00            532,000
    Exercised                              $  .38 to $ 1.00            (90,000)
    Canceled                               $ 3.38 to $ 4.50            (45,000)
                                                                  -------------

  Outstanding  March 31, 1998                                         3,051,013
                                                                  =============

In October 1995, the Financial  Accounting  Standards Board issued Statement No.
123 "Accounting for Stock-Based  Compensation"  ("FASB 123"), which is effective
for the Company's year beginning April 1,1996.  As permitted under FASB 123, the
Company has elected not to adopt the fair value based method of  accounting  for
its  stock-based  compensation  plans,  but will  continue  to account  for such
compensation under the provisions of Accounting Principles Board Opinion No. 25.
Pro forma information regarding net income and earnings per share is required by
FASB 123, and has been  determined as if the Company had accounted for its stock
options under the fair value method of that Statement.  The fair value for these
options was estimated at the date of grant using a Black-Scholes  option pricing
model.

The  following  assumptions  were  employed to estimate  the fair value of stock
options granted:



                                     Fiscal Year Ended March 31,
                                     ---------------------------
                                        1998           1997
                                        ----           ----
Expected dividend yield                 0.00%          0.00%
Expected price volatilities            95.20%         95.20%
Risk-free interest rate                 5.00%          5.20%
Expected life (years)                   6.75           9.25


For pro forma puposes,  the estimated fair value of the Company's  stock options
is amortized over the options' vesting period. The Company pro forma information
follows:


                                           1998               1997
                                           ----               ----
Weighted average fair value of
  Options granted                       $         0.19   $         0.62

Net Loss
  As reported                           $   (1,864,876)  $     (414,346)
  Pro forma                                 (1,882,448)        (414,346)

Net Loss Per Share                                                      
  As reported                                                          
    Basic                               $        (0.12)  $        (0.05)
    Diluted                             $        (0.12)  $        (0.05)
Pro Forma
    Basic                               $        (0.12)  $        (0.05)
    Diluted                             $        (0.12)  $        (0.05)



                                      F-12

<PAGE>

                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 8 - Convertible, Cumulative and Participating Preferred Stock

In the fiscal  year ended March 31,  1997,  the  Company  completed  two private
placements  of  preferred  stock.  The  Company  sold 805 shares of 10% Series A
convertible  preferred stock, priced at $10,000 per share. The Company also sold
2,000  shares  of 10%  Series  B-1  convertible,  cumulative  and  participating
preferred stock, priced at $1,000 per share.

Throughout  the fiscal  years  ended  March 31,  1998 and 1997,  pursuant  to an
optional  conversion or redemption of Series A preferred  stock,  38 shares were
converted into 200,877  shares of common stock and 48 shares were redeemed,  496
shares were converted into 1,875,579  shares of common stock and 223 shares were
redeemed  during the years  ended  March 31,  1998 and 1997,  respectively.  The
converted  shares were converted based upon 85% of the average closing bid price
for the five trading days prior to the conversion.

The 10% Series B-1 convertible,  cumulative and participating preferred stock is
convertible  into  restricted  common shares after  December 31, 1997 at a price
which is the  lesser of (a) $7.50  per share or (b) 85% of the  average  closing
price for the five days  prior to the  conversion  date.  As of March 31,  1998,
there are $54,849 of undeclared dividends on the Series B-1 preferred stock.

In December  1997,  the Board of  Directors  declared  and  distributed  a stock
dividend on the preferred Series B-1 stock.  The stock dividend  amounted to 200
shares of preferred Series B-1 stock at $1,000 per share. The stock dividend was
equivalent  to the 10% annual  dividend on the  preferred  Series B stock,  plus
$32,610  represents the  beneficial  conversion  feature on the preferred  stock
dividend.

The 10% Series B-2 preferred stock is convertible into restricted  common shares
at a price which is the greater of (a) $7.50 per share or (b) 85% of the average
closing  price for the five days prior to the  conversion  date. As of March 31,
1998, this preferred stock remains unissued.

Note 9 - Income Taxes

The Company has net operating loss  carryforwards for tax purposes  amounting to
approximately  $9.5 million that may be offset  against  future  taxable  income
which expire through 2013. In addition,  the Company has investment and research
and development tax credits for tax purposes amounting to approximately $196,000
which expire through 2003.

Deferred income taxes are recognized for differences between the bases of assets
and liabilities for financial statement and income tax purposes. The utilization
of these tax  attributes  is contingent  upon the Company's  ability to generate
future  taxable  income  and tax  before  the tax  attributes  expire as well as
Internal Revenue Code limitations.  As a result, a valuation  allowance equal to
the full extent of the  deferred tax asset has been  established.  The change in
the deferred  tax asset (as well as the  valuation  account)  was  approximately
$624,000 for the fiscal year ended March 31, 1998.

The Company was subject to capital  based taxes for New York State for the years
ended March 31, 1998 and 1997.


                                      F-13

<PAGE>

                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 10 - Commitments and Contingencies

Employment Contract

The Company is obligated under an employment  agreement with the Chairman to pay
him $150,000 during the year ended February 28, 1998.

During the year ended March 31, 1998, the Company  entered into a new employment
agreement  with the  Chairman.  The new  agreement  is for a three  year  period
covering  August 4, 1997 through August 3, 2000. This agreement is renewable for
successive three year periods.

Under this  employment  agreement,  the Company is obligated to pay the Chairman
$150,000 for the period ending August 3, 1998 with an annual increase of 10% for
each subsequent year under the terms of employment. The Company also agrees that
its Board of Directors may raise the Chairman's  salary as soon as the financial
resources of the Company and other business  conditions  permit.  In such event,
the Chairman's salary shall be comparable to that of chief executive officers of
other technology driven publicly held companies.

This employment  agreement can terminate for one of the following  reasons:  (1)
disability, (2) death, (3) for cause, and (4) without cause, change in control.

The following payout terms apply if this agreement is terminated:

     1.   In the case of disability, the Chairman shall be paid until the end of
          the month in which such termination  occurs. The Chairman will receive
          royalties of 5% of the gross revenues earned by the Company each month
          for a period of fifteen years from the effective date of termination.

     2.   If the  agreement  terminates  due to the death of the  Chairman,  the
          agreement  shall  terminate  immediately,  except that the  Chairman's
          wife,  if any, or otherwise his estate,  shall receive the  Chairman's
          salary  until the  termination  date,  payments  in the  amount of the
          Chairman's  base  salary for a period of six  months  from the date of
          termination and the aforementioned royalty.

     3.   If the agreement  terminates due to cause. Cause is defined as willful
          misconduct  by  the  executive  or the  conviction  of a  felony,  the
          Chairman  shall receive his regular  salary until the end of the month
          in which such  termination  occurs.  The Chairman  must be notified at
          least ten days prior of his termination.

     4.   If the  agreement  terminates  due to a change in  control  or without
          cause,  the  Chairman  shall  receive his salary  until the end of the
          month in which he is  terminated,  an amount equal to three years base
          salary  plus three  times the prior  year  bonus,  the  aforementioned
          royalties and all of the Chairman's outstanding options will be deemed
          immediately  vested and  exercisable for a period of one year from the
          effective date of termination.


                                      F-14

<PAGE>

                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 10 - Commitments and Contingencies (continued)

Operating Leases

Effective April 1, 1994, the Company commenced a noncancellable  operating lease
that expired on March 31, 1998. In April 1998 this lease was renewed at the same
terms for a one year period with respect to the Company's  executive offices and
operations.  Rent  expense was $58,714 and $55,416 for the years ended March 31,
1998 and 1997, respectively.

In January 1998, the Company  commenced a  noncancellable  operating  lease that
expires on February 28, 2000, with a renewal option for two additional, two year
periods,  with respect to the companies Indiana office.  Rent expense was $3,092
for the year ended March 31, 1998.

The Company also has  non-cancelable  operating  leases for a vehicle and office
equipment.  The monthly  rental on the vehicle and office  equipment is $303 and
$205,  respectively.  The  amount  charged  to  expense  was  $3,636  and  $-0-,
respectively,  for  the  year  ended  March  31,  1998  and  $3,636  and  $2,315
respectively,  for the year  ended  March  31,  1997.  The  lease on the  office
equipment expired in February 1997.

Future minimum rentals are as follows:

         For years ending March 31, 1999           $        71,086
                          March 31, 2000                    16,200
                                                   ---------------

                                                   $        87,286
                                                   ===============

Government Regulation

The Company's operations are highly sensitive to regulations  promulgated by the
United  States and  throughout  the world in which the Company has  targeted its
marketing  efforts.  These  regulations or  deregulations  could affect both the
competition for the Company's product as well as the costs associated with doing
business abroad.

Cash in Excess of SIPC Limit

At March 31,  1997,  the  Company  has a money  market fund with the Bank of New
York, which is insured by the Security Investors Protection  Corporation (SIPC).
The SIPC insures these accounts up to $500,000, at March 31, 1997, the uninsured
balance was $4,488,897. At March 31, 1998, the balance in this money market fund
was  $242,413.  The Company held a treasury bill at March 31, 1998 in the amount
of $2,194,720 which matured on April 16, 1998.

Pending Litigation

The  Company  is a  defendant  in an action  arising  from an  alleged  wrongful
termination  of a purported  agreement  with  Brockington  Securities,  Inc. The
Company  has  asserted  counter  claims  and  intends to  vigorously  defend its
position.  Inasmuch  as  discovery  has not begun in this case,  the outcome and
range of damages or settlement (if any) is unknown.


                                      F-15

<PAGE>

                               CYBER DIGITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS
                             March 31, 1998 and 1997

Note 11 - Segment Information and Significant Customers

Significant Customers

   
The Company  considers  itself to be in a single industry defined as the design,
manufacturing,  and marketing of high performance  distributed digital switching
and  networking  systems.  For fiscal  years ended March 31, 1998 and 1997,  the
Company derived 9% and 100% of its revenue from Federal government agencies. For
the fiscal year ended March 31, 1998, the Company had sales  representing 91% of
its revenue from two customers,  namely National  Telecommunications Company and
GTE Data Services GmbH,  representing 43% and 48% of revenue  respectively.  The
accounts receivable for these customers accounted for 100% of the total accounts
receivable at March 31, 1998 and 1997.
    

Note 12 - Extraordinary Item

In May 1996, the Company  entered into an agreement to restructure the debt with
the New York Job Development Authority (JDA). The agreement required the Company
to pay $300,000.  This amount was paid in full in July 1996.  The  extraordinary
item in the amount of  $291,756 is  included  in the  calculation  of net income
(loss)  for the fiscal  year ended  March 31,  1997 and has been  calculated  as
follows:

         Debt payable to the JDA                             $        591,756
         Cash paid in settlement of debt                              300,000
                                                             ----------------

         Extraordinary Gain on Extinguishment of Debt        $        291,756
                                                             ================

Note 13 - Foreign Operations

During the fiscal year ended March 31, 1998,  the Company  formed a wholly owned
subsidiary,   Cyber  Digital  (India)  Private  Limited,  under  the  rules  and
regulations of the Country of India. The subsidiary has not begun operations and
has no assets as of March 31, 1998.

Note 14 - Related Party Transactions

On September 25, 1995, the Company borrowed $100,000 from Dr. Anil K. Agarwal, a
Director of the Company,  for working capital purposes.  This note was converted
into common stock in October 1996.



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