Exhibit 13

[n-Vision Logo] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS

Some   statements  in  this   Management's   Discussion  and Analysis   contain
forward-looking  information  that involve a number of risks and  uncertainties,
the possible  realization  of which could have material adverse  effects on the
Company's  operating  results.  Factors that may cause actual  results to differ
materially  include:  development of new products and rapid change in technology
that may displace products sold by the Company; the highly competitive market in
which the Company  operates;  the Company's dependence upon a limited number of
suppliers for the availability of components used in its products;  fluctuations
in the Company's  quarterly  results of operations  and in the timing of orders
from customers; and other risk factors listed from time to time in the Company's
SEC filings including but not limited to the SB-2  Registration  Statement dated
May 28, 1996.

General

n-Vision,  Inc.  ("Company"),   a  Delaware  Corporation,   designs,   develops,
manufactures,  and markets  state-of-the-art,  proprietary 3D immersive displays
for use in advanced  visualization  applications.  The  Company's  products  and
systems are marketed  worldwide,  but principally to customers in North America,
Europe, and the Pacific Rim, e.g., U.S. Air Force, NASA Langley Research Center,
Lockheed  Martin,  Silicon  Graphics,  Inc., UK Defense  Research  Establishment
(Farnborough), Volvo, Volkswagen,  Daimler-Benz, Thomson CSF, KPMG Peat Marwick,
Rockwell international, The University of Illinois, and Raytheon among others.

   At the  beginning  of the  current  fiscal  year,  the Company was focused on
manufacturing  and marketing the Datavisor 10x, a high  performance Head Mounted
Display (HMD). The Company  completed and began marketing the second  generation
HMD's, the Datavisor HiRes and the Datavisor VGA. The Datavisor HiRes is an opto
mechanical  concept  first  used  in the  Datavisor  10x and  offers  additional
features at a reduced  cost.  The  Datavisor  VGA  includes the new features and
utilizes  special  electronics to address the lower resolution needs of the less
powerful workstations and PC's that operate in the VGA environment.  The product
was developed to maintain and expand the  Company's  position in the high end of
the  commercial  display  market as well as to  create  an  upward  path for the
existing  user base.  The  Company  also  completed  development  of the Virtual
Binoculars,  a hand-held  display  device  available  in both a high  resolution
format and a VGA format.  This  product  appears to have a  potential  market in
military and ship training systems. A fourth product introduced during the third
quarter was the Datavisor  80. The  Datavisor 80 maintains  the high  resolution
capability  but offers an expanded field of view, up to  120(degree).  The first
model was  delivered to NASA in November 1996 and a second unit was delivered in
early January,  1997. In December 1996 the Company entered the under $10,000 end
of the market by  announcing  an  agreement  with  Virtuality  plc of England to
resell the Visette Pro, an LCD based head mounted display, worldwide.

Results of Operations
Year Ended December 1996 Compared to December 31, 1995

For the year ended December 31, 1996, the Company reported revenue of $1,095,894
from the sale of 24 units of its VR products  and systems,  a 75% increase  from
the prior year where the Company  reported revenue of $626,763 on the sale of 14
units.  The increase in revenue was primarily the result of the  introduction of
new products  offering  additional  features at a reduced  cost.  The  Company's
geographic revenue mix shifted toward domestic operations in 1996. Revenues from
international operations represented 26% of total revenues in 1996 versus 53% in
1995. The Company has initiated a reformulated  distribution strategy for Europe
combined with a more diverse range of products.  Management  anticipates revenue
growth to continue as the Company  markets its products  both  domestically  and
internationally  and product  recognition is established.  Backlog plus sales to
date as of March 14, 1997 totaled approximately $580,000.

   The  Company's  gross  margin on sales for the year ended  December  31, 1996
increased  to 43% compared to 38% for the same period in 1995.  Management  does
not  necessarily  believe that this increase  constitutes a trend at the current
level of  production  and sales.  Management  fully  expects the gross margin to
remain  volatile  on a quarter  by quarter  basis as  reflected  on the  interim
financial  statements for the year ended  December 31, 1996.  Gross margins vary
from a high of 62% in the  first  quarter  of 1996 to a low of 12% in the fourth
quarter of 1996. This  volatility  could be seen in 1995 as well. At the current
level of sales and production, variances and inefficiencies may impact the gross
margin and may  continue to do so until  production  levels  increase and a full
scale assembly style  production line is established.  At such a time, it may be
that  economies of scale can be  established  which could drive down the cost of
production thus increasing  gross margins.  Management can make no determination
at present at what level production costs will begin to stabilize or decrease.

   Another factor  contributing  to changing  margins is the product mix. During
the year,  competitive  factors  influenced the Company's  decision to lower the
price of the Datavisor HiRes,  causing margins to slip in the second half of the
year. The introduction of the Datavisor 80, a high

                                       9

<PAGE>

cost/margin product, may help to increase margins in the coming year, however,
this may be offset by increased sales of the Datavisor VGA, a low cost/margin
product. The Datavisor VGA and the Datavisor 80 were both introduced in the last
six months of 1996. Management can make no determination at present as to the
product mix in the future.

A third factor which may contribute to changing margins is the dependence on
resellers in the international market.  Resellers are typically given a discount
of 15 to 30 percent, depending on volume, so as to encourage sales. During 1996,
new  resellers  were  established  in  the European   Community.   The  Company
anticipates  establishing  additional resellers in 1997 and 1998 so as to
further promote the products both domestically and internationally.  Further
emphasis on resellers  may contribute  to  decreasing  margins  in the  future
but  may be partially offset by an increase in productivity as production levels
increase.

General and administrative  costs decreased to $753,200 in 1996 from $829,085 in
1995.  This decrease was primarily due to an $81,000  charge  incurred by the
Company for an uncollectible  receivable from a distressed  distributor in 1995.
Otherwise, general and  administrative  costs would have  increased  marginally
which is to be  expected  as the Company  expands  its  operations.  The Company
expects that such  expenses will increase to support the growth and expansion of
the business.

Marketing and sales  expenses  increased to $287,694 in 1996 from $273,438 in
1995. The increase can be attributed to increased promotional activities related
to the  introduction of new products during the last six months of the year. The
Company  intends to increase  its  advertising  and trade show  budgets so as to
further  promote the Company and its products within the  industry.  Management
believes that  establishing  a reputation of quality and  performance is crucial
for the long-term  success of the Company. This is especially  important in the
early stages of the industry so as to prevent competitors with greater resources
from  effectively  entering and dominating  the market.  Management  intends to
invest  significantly in marketing so as to  strategically  position the Company
and its products in the near term.

Product  development  expenses increased to $592,799 in 1996 from $556,407 in
1995.  The increase is  attributable  to increased  investment in developing new
products such as the Datavisor VGA and the Datavisor 80 both introduced in 1996.
Other costs reflect  customizing  current commercial products for specific user
defined  applications,  specifically  in the military training  and  simulation
markets.  The Company  expects to increase  funding for new products and product
development  so as to remain in a strong competitive  position and to provide a
complete range of products for all price and performance levels. These costs may
be partially funded by customers requiring custom applications of the Company's
products and technology.


Non-Operating  expenses increased to $3,462,925 in 1996 from $710,561 in 1995
and are not fully  comparable from period to period because of certain  one-time
financing  charges  during both  periods.  In March 1996,  the Company  borrowed
$250,000 from three  nonaffiliated  persons under three  separate 8% convertible
promissory notes,  convertible into 750,000 shares of the Company's common stock
at the option of the shareholders. In April 1996, the three shareholders elected
to  convert  their  notes.  Because of the  conversion  feature of the notes was
granted  at a price  substantially  below the  initial  public  offering  price,
financing  expense of $3,500,000  was accrued during the period from the date of
the notes  payable  and the date of the  public  offering  with a  corresponding
credit  to  paid-in  capital.  In  1995,  the  Company  accrued  $559,245  as an
unrealized  offering expense from its first attempted but  unsuccessful  initial
public offering.

Adjusting for the one-time expenses in both years, the Company had a positive
net  interest  margin in 1996 of  $37,075  compared  to an interest  expense of
$151,316  in 1995.  Interest  was earned on  proceeds  from the  initial  public
offering  for  approximately  seven  months in 1996  while no such  revenue  was
recognized in 1995.  Furthermore,  interest was accrued in 1995 and subsequently
paid in 1996 on three  notes  payable  to  Advanced Technology  Systems.  As of
December 31, 1996 the notes were either  forgiven, converted into common stock,
or paid down  significantly  with the proceeds of the initial  public  offering.
(See NOTE F of  Financial  Statements  for further  information.)  The  Company
expects to continue to have a positive net interest margin during 1997.

In 1996, tax benefits  associated  with the Company's net operating loss were
fully reserved due to uncertainty of recoverability. The Company's provision for
income taxes in 1995 reflects a tax benefit derived primarily from the refund of
taxes paid in 1994  resulting  from the  carryback  of a portion of the 1995 net
operating loss.

Liquidity and Capital Resources

Working capital totaled  $4,232,653  as of December  31, 1996  compared to a
working  capital  deficit of  $1,267,610  on December 31, 1995.  The increase in
working  capital is due primarily to an initial public offering of the Company's
common  stock  in May of 1996.  Proceeds  from the  offering,  net of  expenses,
totaled  $5,945,135 from which $825,461 in short term debt and accrued  interest
was retired.  The Company  believes  that the current  level of working  capital
should provide  sufficient  liquidity to fund its operations through the current
year which  includes the previously  described  increase in the areas of product
development, marketing, and administration of the Company.

   Longer term cash  requirements,  other than  normal  operating  expenses  are
anticipated  for  the  development  of new  products,  enhancement  of  existing
products,  financing of anticipated  growth,  and the possible  acquisitions  of
related businesses and technologies. The Company believes that the current level
of working  capital is sufficient to satisfy the anticipated  cash  requirements
through the end of 1998, barring a major acquisition.  Should the Company expand
far in excess  of  anticipated

                                       10

<PAGE>

growth,  the  conversion  of  1,380,000  Class A warrants  may  provide a built
in  financing  mechanism,  should the  conversion requirements  be met. The
warrants  may be exercised  during a four year period commencing May 29, 1997
unless  redeemed by the Company.  The Company,  however, can make no assurances
that  investors  would elect to exercise the warrants or that the required
conversion price can be reached.  Until operations improve and the Company
obtains additional  underwriting support to replace Stratton Oakmont Inc.,  the
Company's  ability to generate  proceeds from the  conversion  may be affected.
Stratton  Oakmon Inc., the principal  market maker and underwriter of the
Company's  securities,  was barred  from the  exchange on December 6, 1996.
Additionally, the Company is in the process of negotiating a bank line of credit
with its primary financial institution.

Income Taxes

The Company is  organized  as a C  Corporation  and pays income taxes based upon
accrual based taxable income adjusted for differences in the timing of reporting
certain expenses for tax and financial statement purposes.  The Company's income
taxes  payable,  if any,  that may arise in the  future may be offset by credits
available for certain research and development expenditures incurred.

   As of December 31, 1996,  the Company had a net operating  loss  carryforward
available to offset future taxable income of approximately  $1,495,000 available
to offset future taxable income generated through 2010. In the event of a change
in control of the Company, the use of all or a portion of the net operating loss
may be limited.

Impact of Inflation

The Company does not believe that inflation has had a material adverse effect on
sales or income  during  the past two  years.  Increases  in  supplies  or other
operating costs may adversely affect the Company's operations.

Seasonality

Based on its limited  experience to date,  the Company  believes that its future
operating results will not be subject to seasonal changes. Such effects,  should
they occur, may be apparent in the Company's  operating  results during a period
of expansion.  However, the Company can make no assurances that its business can
be significantly expanded.

[n-Vision Logo] REPORT OF INDEPENDENT CERTIFIED
                PUBLIC ACCOUNTANTS

Board of Directors
n-Vision, Inc.

We have audited the accompanying balance sheet of n-Vision, Inc., as of December
31,  1996,  and the  related  statements  of  operations,  stockholders'  equity
(deficit)  and cash  flows for the two years in the  period  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 financial  statements  referred to above present fairly, in
all material respects, the financial position of n-Vision,  Inc., as of December
31, 1996, and the results of its operations and its cash flows for the two years
in the period then ended,  in  conformity  with  generally  accepted  accounting
principles.

                                         /s/ Grant Thornton LLP

Vienna, Virginia
February 18, 1997

                                       11

<PAGE>


[n-Vision Logo] BALANCE SHEET

<TABLE>
<CAPTION>

December 31, 1996
----------------------------------------------------------------------------------------------------------------
<S><C>
Current Assets
   Cash                                                                                              $ 2,422,839
   Investments                                                                                         1,250,000
   Accounts receivable
      Trade                                                                                              194,910
      Officer and employee travel advances                                                                48,731
   Income taxes receivable                                                                                17,389
   Inventories                                                                                           716,590
   Prepaid expenses                                                                                        1,943
----------------------------------------------------------------------------------------------------------------
      Total Current Assets                                                                             4,652,402
Property and Equipment, net                                                                              302,745
Other Assets
   Organization costs, net of amortization                                                                40,585
----------------------------------------------------------------------------------------------------------------
                                                                                                     $ 4,995,732
                                                                                                     ===========
Liabilities and Stockholders' Equity
Current Liabilities
   Current maturities of note payable to Advanced Technology Systems, Inc.                           $   120,000
   Current portion of capital lease obligation                                                            21,554
   Accounts payable                                                                                       52,131
   Accrued salaries and vacation                                                                          81,950
   Deferred revenue and accrued warranty costs                                                           144,114
----------------------------------------------------------------------------------------------------------------
      Total Current Liabilities                                                                          419,749
Long-Term Liabilities
   Note payable--Advanced Technology Systems, Inc.                                                       480,000
   Capital lease obligation--net of current portion                                                       27,334
Commitments and Contingencies                                                                               --  
Stockholders' Equity
   Common stock, $.01 par value; 25,000,000 shares authorized; 5,312,625 issued and outstanding           53,126
   Common stock subscriptions and notes receivable                                                       (91,722)
   Paid-in capital                                                                                    10,529,492
   Accumulated deficit                                                                                (6,422,247)
----------------------------------------------------------------------------------------------------------------
      Total Stockholders' Equity                                                                       4,068,649
----------------------------------------------------------------------------------------------------------------
                                                                                                     $ 4,995,732
                                                                                                     ===========
</TABLE>

The accompanying notes are an integral part of this statement.

                                       12

<PAGE>

[n-Vision Logo] STATEMENTS OF OPERATIONS

Year ended December 31,                             1996              1995
----------------------------------------------------------------------------
Sales                                            $1,095,894       $  626,763
Cost of Sales                                       621,142          390,466
----------------------------------------------------------------------------
Gross Margin                                        474,752          236,297
Operating Expenses
   General and administrative                       753,200          829,085
   Marketing and sales                              287,694          219,407
   Product development                              592,799          556,402
----------------------------------------------------------------------------
Loss from Operations                             (1,158,941)      (1,368,597)
Non-Operating Income (Expense)
   Interest income                                  156,244                -
   Unrealized offering expenses                           -         (559,245)
   Interest expense--bridge financing            (3,500,000)               -
   Interest expense--notes payable                 (119,169)        (151,316)
----------------------------------------------------------------------------
Loss Before Income Taxes                         (4,621,866)      (2,079,158)
Income Tax Benefit                                        -           91,000
----------------------------------------------------------------------------
Net Loss                                        $(4,621,866)     $(1,988,158)
                                                ============     ===========
Weighted Average Shares Outstanding               4,698,856        3,191,368
                                                ============     ===========
Loss Per Share                                  $      (.98)     $      (.62)
                                                ============     ===========

The accompanying notes are an integral part of this statement.

                                       13

<PAGE>


[n-Vision Logo] STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>

Years ended December 31, 1996 and 1995
----------------------------------------------------------------------------------------------------------------
                                                           Common
                                                            Stock
                                                        Subscriptions    Paid-in      Accumulated
                                              Common      and Notes      Capital       Earnings
                                               Stock     Receivable   (Deficiency)     (Deficit)         Total
---------------------------------------------------------------------------------------------------------------
<S><C>
Balance, January 1, 1995                    $ 28,487      $ (28,487) $ (1,008,664)   $   187,777     $ (820,887)
Forgiveness of Note Payable
   to Advanced Technology Systems, Inc.           -              -        500,000             -         500,000
Issuance of Stock for Notes
   Receivable and Related Interest             1,513       (671,877)      636,925             -         (33,439)
Provision for Contributed
   Stockholder/Officers Services                  -              -        312,500             -         312,500
Net Loss                                          -              -             -      (1,988,158)    (1,988,158)
---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995                    30,000       (700,364)      440,761     (1,800,381)    (2,029,984)
Cancellation of Shareholder
   Notes Receivable in Exchange
   for Common Stock                           (1,324)       612,413      (611,089)            -              -
Interest on Shareholder
   Notes Receivable                               -         (29,722)           -              -         (29,722)
Conversion of Note Payable
   to Advanced Technology Systems, Inc.,
   to Common Stock                             2,000             -        998,000             -       1,000,000
Conversion of Bridge Loans
   Payable to Shares and Associated
   Financing Expense                           7,500             -      3,742,500             -       3,750,000
Issuance of Common
   Stock and Warrants                         14,950             -      5,930,185             -       5,945,135
Proceeds on Subscriptions
   Receivable for Stock                           -          25,951         6,180             -          32,131
Provision for Contributed
   Stockholder/Officer Services                   -              -         22,955             -          22,955
Net Loss                                          -              -             -      (4,621,866)    (4,621,866)
---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                  $ 53,126      $ (91,722) $ 10,529,492    $(6,422,247)   $ 4,068,649
                                            ========      =========  ============    ===========    ===========
</TABLE>

The accompanying notes are an integral part of this statement.

                                       14

<PAGE>


[n-Vision Logo] STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

Year ended December 31,                                                                1996              1995
---------------------------------------------------------------------------------------------------------------
<S><C>
Increase (Decrease) in Cash
Cash Flows from Operating Activities
   Net loss                                                                       $ (4,621,866)     $(1,988,158)
---------------------------------------------------------------------------------------------------------------
   Adjustments to reconcile net loss to net cash used in operating activities
      Interest expense associated with convertible notes payable                     3,500,000               -
      Provision for contributed stockholder/officers services                           22,955          312,500
      Accrued interest on shareholders' notes payable                                  (29,722)              -
      Depreciation and amortization                                                     63,735           69,151
      Loss on disposal of fixed assets                                                   1,636               -
      Changes in assets and liabilities
         (Increase) decrease in accounts receivable--trade                             (65,649)         474,039
         Decrease (increase) in income tax receivable                                   83,974         (101,363)
         Decrease (increase) in officer and employee advances                            4,657             (788)
         Increase in inventories                                                      (219,502)        (235,543)
         (Increase) decrease in prepaid expenses                                       (43,436)          13,636
         Decrease in deferred tax asset                                                     -            28,000
         (Decrease) increase in accounts payable                                      (257,132)         297,833
         Increase in accrued salaries and vacation                                      40,897            4,450
         Decrease in accrued income taxes                                                   -          (119,000)
         Increase in deferred revenue and accrued warranty costs                        32,830          321,168
         Decrease in accrued interest on stockholder notes                            (253,445)         (49,019)
---------------------------------------------------------------------------------------------------------------
Total Adjustments                                                                    2,881,798        1,015,064
---------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities                                               (1,740,068)        (973,094)
---------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
   Purchase of property and equipment                                                 (243,262)         (33,857)
   Purchase of investments                                                          (1,250,000)              -
---------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities                                               (1,493,262)         (33,857)
---------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
   Net proceeds from issuance of common stock and warrants                           5,945,135               -
   (Payments to) proceeds from Advanced
      Technology Systems, Inc.                                                        (491,613)         791,748
   (Payments) borrowings on bank line of credit                                        (67,237)          67,237
   Proceeds from convertible note payable                                              250,000               -
   Decrease in deferred initial public offering costs                                       -            72,039
   Payments on capital lease obligations                                               (18,335)              -
   Proceeds from shareholder notes receivable                                           32,131               -
---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities                                            5,650,081          931,024
---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash                                                      2,416,751          (75,927)
Cash at Beginning of Year                                                                6,088           82,015
---------------------------------------------------------------------------------------------------------------
Cash at End of Year                                                               $  2,422,839      $     6,088
                                                                                  ============      ===========
</TABLE>

The accompanying notes are an integral part of this statement.

                                       15

<PAGE>

[n-Vision Logo] NOTES TO FINANCIAL STATEMENTS

December 31, 1996 and 1995

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of  Operations:  n-Vision,  Inc. (the  Company),  a Delaware
corporation,  was  incorporated  in 1994.  The Company designs, develops,
manufactures and markets state-of-the-art,  proprietary virtual (VR) products
and systems for a variety of commercial, industrial and military applications.

Revenue Recognition: Revenue from the sale of VR products is recognized when the
products are  shipped.  Related  warranty  costs are provided for at the time of
sale.  The Company had sales to customers  outside the United States  (primarily
Europe) constituting $288,503 and $332,144 for the years ended December 31, 1996
and 1995, respectively.

   Currently,  the  Company  has  non-exclusive   distribution  agreements  with
companies in the United Kingdom,  Europe and Japan. The Company performs ongoing
credit evaluations of its customers' financial condition and usually requires no
collateral.  The  Company's  typical  sales terms with  distributors  permit the
distributors to return  products for credit against future  purchases in certain
circumstances.  For the year ended  December 31, 1996,  there were no returns of
products. Product returns amounted to $185,000 in 1995. As of December 31, 1996,
a reserve for potential returns was not recorded because  distributors have sold
substantially all products to end-users.

   For the years ended  December 31, 1996 and 1995,  aggregate  revenue  derived
from  two  and  three  customers   amounted  to   approximately   31%  and  37%,
respectively, of the Company's total revenue.

Inventories:  Inventories  are stated at lower of cost or market.  Cost is
determined by the  first-in,  first-out  (FIFO) basis.

Property  and  Equipment:  Property  and  equipment  are  stated at cost and are
depreciated using the straight-line  method over estimated useful lives of three
to seven years.

Income  (Loss) Per Share:  Income  (loss) per share of common  stock is computed
using  weighted   average   shares   outstanding   for  each  period,   adjusted
retroactively  for  stock  splits.  Warrants  and  stock  options  have not been
reflected  in the  computation  of  weighted  average  shares  because  they are
anti-dilutive.

Income  Taxes:  The Company has  provided for income  taxes in  accordance  with
Statement of Financial  Accounting  Standards  (SFAS) No. 109,  "Accounting  for
Income Taxes." Under the liability  method  mandated by SFAS No. 109, a deferred
tax asset,  net of a valuation  allowance,  or  liability is recorded on the tax
effects of temporary  differences between the tax basis and financial amounts of
assets and liabilities. Temporary differences arise from accrued warranty costs,
receivable and inventory reserves and the liability for paid leave.

Research and Development Costs: Research and development costs are expensed in
the period in which they are incurred.

Organization Costs:  Organizational  costs representing fees associated with the
incorporation of the Company in September 1994, are amortized over a useful life
of five years.  Amortization  expense for the years ended  December 31, 1996 and
1995, was $13,393 and $12,236, respectively.

Use of Estimates  in  Preparing  Financial  Statements:  In preparing  financial
statements  in  conformity  with  generally  accepted   accounting   principles,
management  is  required  to make  estimates  and  assumptions  that  affect the
reported  amounts of assets and  liabilities  and the  disclosure  of contingent
assets and  liabilities at the date of the financial  statements and revenue and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

Fair Value of Financial  Instruments:  The financial  statements include various
estimated  fair value  information  as of  December  31,  1996,  as  required by
Statement of Financial Accounting  Standards (SFAS) No. 107,  "Disclosures About
Fair Value of Financial  Instruments."  Such  information  which pertains to the
Company's financial instruments  (primarily cash, investments and borrowings) is
based on the  requirements  set forth in SFAS No.  107 and does not  purport  to
represent  the  aggregate  fair value or the  Company.  Further,  the fair value
estimates  are  based  on  various  assumptions,  methodologies  and  subjective
considerations,  which vary widely among  different  entities and are subject to
change. Carrying value of financial instruments approximates market value.

                                       16

<PAGE>


[n-Vision Logo] NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE B -- INVESTMENT

Investments  consist  of debt  securities  with a  coupon  rate of  5.75%  and a
maturity date of November 15, 1998.  Investments are carried at market value and
are properly classified as available for sale. Market value approximated cost at
December 31, 1996.

NOTE C -- INVENTORIES

Inventories consist of the following at December 31, 1996:

Raw materials                                $ 298,529
Work in process                                113,709
Finished goods                                 381,217
Reserve for inventory obsolescence             (76,865)
------------------------------------------------------
                                             $ 716,590
                                             =========

NOTE D -- PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 1996:

Furniture                                    $  18,757
Equipment                                      312,656
Demonstration equipment                         43,517
Property under capitalized leases               67,223
------------------------------------------------------
                                               442,153
Less accumulated depreciation                  139,408
------------------------------------------------------
                                             $ 302,745
                                             =========

The net book value of property  under  capitalized  leases at December 31, 1996,
was approximately $48,000.

NOTE E -- INCOME TAXES

Income tax expense (benefit) consists of the following for the year ended
December 31:

                                        1996            1995
--------------------------------------------------------------
Current (benefit)                    $       -       $(119,000)
Deferred (benefit)                    (426,000)       (178,500)
Valuation allowance                    426,000         206,500
--------------------------------------------------------------
                                     $       -       $ (91,000)
                                     =========       =========

Following  is a  reconciliation  of the  statutory  federal  income  tax rate to
effective  rates  reflected in the  statements of operations for the years ended
December 31:

                                            1996             1995
--------------------------------------------------------------------
Pretax loss                            $(4,621,866)      $(2,079,158)
                                       ===========       ===========
Tax (benefit) at statutory rate        $(1,571,434)      $  (706,914)
State income tax benefit,
  net of federal expense                  (184,875)          (83,167)
Permanent differences                          309           492,581
Non-deductible bridge financing cost     1,330,000                 -
Change in valuation allowance              426,000           206,500
--------------------------------------------------------------------
Income tax benefit                     $         -       $   (91,000)
                                       ===========       ===========

Deferred tax assets are composed of the following at December 31, 1996:

Obsolescence reserve                         $  29,209
Inventory write-downs                           36,439
Organization costs                              (6,384)
Accrued warranty expense                         8,463
Accrued vacation                                12,650
Depreciation                                    (2,107)
Net operating loss carryforward                554,504
------------------------------------------------------
                                               632,774
Valuation allowance                         $ (632,774)
------------------------------------------------------
                                            $        -
                                            ==========

The Company has a net operating  loss  carryforward  as of December 31, 1996, of
approximately $1,459,000 available to offset future tax income generated through
2010.  In the event of a change in control of the  Company,  the use of all or a
portion of the net operating loss may be limited.

                                       17

<PAGE>


[n-Vision Logo] NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE F -- CAPITAL LEASE OBLIGATION AND NOTES PAYABLE

Convertible  Promissory Notes: In March 1996, the Company borrowed $250,000 from
three  nonaffiliated  persons  under three  separate 8%  convertible  promissory
notes,  convertible  into 750,000  shares of the  Company's  common stock at the
option of the  shareholders.  In April 1996,  the three  noteholders  elected to
convert their notes to a total of 750,000 shares of the Company's common stock.

   Because  the  conversion  feature  of  the  notes  was  granted  at  a  price
substantially  below the initial public  offering  price,  financing  expense of
$3,500,000  was accrued during the period from the date of the notes payable and
the date of the public offering with a corresponding credit to paid-in capital.

Notes  Payable--Advanced  Technology  Systems:  The Company is obligated under a
promissory note in the amount of $600,000 at December 31, 1996. The note payable
is unsecured and is due to Advanced  Technology  Systems,  Inc. (ATS), a Company
principally  owned and  controlled by a stockholder  and officer of the Company.
The principal balance on this note arose from a line-of-credit  arrangement with
ATS, the  borrowings on which  amounted to $1,127,328 at December 31, 1995.  The
balance due on the line of credit was  partially  curtailed in June 1996,  using
the  proceeds  of the  Company's  initial  public  offering.  Interest is due on
principal outstanding at 8% per annum. Principal payments of $60,000 are payable
twice each year in June and  December  and  commence  on June 30,  1997.  Annual
maturities of this note for each of the next five years are $120,000 after which
the note  will be paid in  full.  The fair  value  of the  note  payable  is not
practicable  to determine  inasmuch as the note is between  related  parties and
market data for comparable instruments cannot be obtained.

   In connection  with the  acquisition  of the  Company's  business from ATS in
1994, the Company  became  obligated  under a promissory  note payable to ATS of
$1,020,590.   The  note  was  payable  in  semiannual  installments  of  $80,000
commencing May 1, 1996,  with interest at the prime rate plus 1.375% (10.375% at
December 31, 1995).  In May 1996,  this note was retired for cash of $20,590 and
the issuance of 200,000 shares of the Company's common stock.

   In addition,  a second note payable to ATS of $500,000  arising from the 1994
acquisition  was  forgiven  in 1995,  and the  balance  was  credited to paid-in
capital in the financial  statements to reflect the  forgiveness of debt between
affiliates.

Capital Lease  Obligation:  The Company leases certain  equipment  under a lease
that has been  capitalized.  The lease commitment is for three years and expires
in January  1999.  Following is a schedule of minimum lease  payments  under the
capital lease  together with the present value of future  minimum  rentals as of
December 31, 1996:

Year ending December 31,
----------------------------------------------------------------
1997                                                    $ 26,988
1998                                                      26,988
1998                                                       2,249
----------------------------------------------------------------
Total minimum lease payments                              56,225
Amount representing interest                              (7,337)
Current portion of capital lease obligation              (21,554)
----------------------------------------------------------------
Present value of long-term capital lease obligation     $ 27,334
                                                        ========

NOTE G -- COMMITMENTS

Employment  Agreements:  The Company has employment  agreements with three
officers,  effective as of June 1, 1996. Two of the  agreements  extend  for a
period of two  years  and the third  agreement  extends  for a period  of three
years.  The Company's commitment under the agreements is as follows:

Year ending December 31,
----------------------------------------------------------------
1997                                                   $ 425,000
1998                                                     250,000
1999                                                      52,000
----------------------------------------------------------------
                                                       $ 727,000
                                                       =========

For the years ended December 31, 1996 and 1995, the Company recorded a provision
for  compensation  expense  of  $22,955  and  $312,500,   respectively,   and  a
corresponding  credit to stockholders' equity for the value of services rendered
by the officers (who are also  stockholders)  based upon the difference  between
the amount paid and the compensation called for in the above agreements.

                                       18

<PAGE>

[n-Vision Logo] NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Operating Leases: The Company is obligated under certain noncancelable operating
leases for  equipment.  The  following is a schedule of the  approximate  future
minimum rental payments  required under operating  leases with terms of one year
or more as of December  31, 1996,  including a  three-year  lease for office and
manufacturing space executed in 1996, which commences in March 1997:

Year ending December 31,
----------------------------------------------------------------
1997                                                   $ 147,641
1998                                                     168,335
1999                                                     145,194
2000                                                      23,155
----------------------------------------------------------------
                                                       $ 484,325
                                                       =========

Total rent expense for the years ended  December 31, 1996 and 1995,  was $18,462
and $14,872, respectively.

NOTE H -- STOCKHOLDERS' EQUITY

Stock Split and  Issuance:  In March  1996,  a 1.38:1  stock split was  effected
whereby each shareholder's  interest was increased pro rata such that the number
of shares of common stock outstanding after the split was 3,000,000.  The effect
of the  split  has been  reflected  retroactively  throughout  the  accompanying
financial statements.

   In March 1995, the Company issued 151,300 shares of common stock to employees
of the Company in exchange for non-recourse promissory notes,  collateralized by
the common stock issued. The value of the consideration was based upon the value
of the  shares  offered  at the time in a  proposed  public  offering.  In 1996,
132,400 of such shares were  returned  to the Company in  consideration  for the
cancellation  of the promissory  note by all but one employee at a time when the
value of the shares  equated to the principal and interest due on the promissory
note.  Upon the return of the common stock,  each employee was granted an option
to purchase stock at the fair value of the stock at the date of grant.

Initial  Public  Offering of  Securities:  In June 1996,  the  Company  received
proceeds,  net of expenses,  of $5,945,135  from an initial  public  offering of
securities.  The offering  included the sale of 1,495,000 shares of common stock
at an offering  price of $5.00 per share and 1,380,000  Class A warrants at $.15
per Class A warrant.  The Class A warrants shall be  exercisable  commencing one
year after the date of the  prospectus,  entitling  the holder to  purchase  one
share of common stock at $5.50 per share during the four-year period  commencing
one  year  from  the  effective  date of the  offering.  The  warrants  are also
redeemable  upon  certain  conditions.  The offering  also  included the sale of
750,000  shares  of common  stock  acquired  by  certain  stockholders  upon the
conversion  of  certain  promissory  notes  into  common  stock in April 1996 as
described in Note F.

Stock Option Plan:  In 1996,  the Company  issued  non-qualified  stock  options
accounted for under  Accounting  Principles  Board Opinion No. 25. These options
vested  immediately  on the date of grant and become  exercisable  in 1998.  The
exercise price is equal to the fair market value of the underlying shares at the
date of grant.

   Accordingly,  no  compensation  cost has been  recognized  for the plan.  Had
compensation  cost for the plan been  determined  based on the fair value of the
options  at the grant  dates  consistent  with the method of SFAS No.  123,  the
Company's net loss and loss per share would have been as follows:

                            As Reported           Pro forma
------------------------------------------------------------
Net loss                   $ (4,621,666)       $ (4,996,562)
Loss per share                     (.98)              (1.06)

   The fair value of each  option  grant is  estimated  on the date of the grant
using   the   Black-Scholes    options-pricing    model   with   the   following
weighted-average  assumptions  used for grants in 1996:  expected  volatility of
86.78%,   calculated  by  averaging  the  Company's  volatility  with  the  mean
volatility of an appropriate  peer group,  risk-free  interest rate of 5.86% and
expected lives of four years. The weighted-average fair value of options granted
during the year was $2.98.

   The Black-Scholes  option valuation model was developed for use in estimating
the fair value of traded  options  which have no  vesting  restrictions  and are
fully  transferable.  In addition,  option valuation models require the input of
highly  subjective  assumptions  including the expected stock price  volatility.
Because the Company's employee stock options have characteristics  significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

                                       19

<PAGE>


[n-Vision Logo] NOTES TO FINANCIAL STATEMENTS (CONTINUED)

   A summary of the status of the  Company's  incentive  stock option plan as of
December  31,  1996,  and  changes  for the year  then  ended on those  dates is
presented below:

                                                               1996 Weighted-
                                                                   Average
                                          Shares               Exercise Price
-----------------------------------------------------------------------------
Outstanding at beginning of year              -                     $  -
Granted                                  149,906                     3.62
Exercised                                     -                        -
Forfeited                                     -                        -
-----------------------------------------------------------------------------
Outstanding at year-end                  149,906                    $3.62
                                         =======                    =====
Options exercisable at year-end               -                     $  -
                                         =======                    =====

   The  following  information  applies to options  outstanding  at December 31,
1996:

Number outstanding                                   149,906
Range of exercise prices                      $1.75 to $3.84
Weighted-average exercise price                        $3.62
Weighted-average remaining contractual life             8.41


NOTE I -- RELATED PARTY TRANSACTIONS

During the years ended December 31, 1995, the Company paid approximately $85,000
to a consultant and stockholder of the Company for services rendered. During the
years ended  December 31, 1996 and 1995,  the Company paid $146,250 and $30,288,
respectively,  to a  company  owned by one of its  directors  for  research  and
development and inventory.

   During  the  year  ended   December  31,  1996,  the  Company  had  sales  of
approximately  $217,000 to a U.S.  government  customer  via a contract  held by
Advanced Technology Systems, Inc. (ATS). In addition, the Company was reimbursed
$28,088  by ATS in 1996  for  administrative  consulting  services  rendered  by
employees of the Company on behalf of ATS.

   For services rendered in connection with initial public offering described in
Note H, the Company paid  $425,000 to an attorney who is also a  stockholder  of
the Company.

NOTE J -- EMPLOYEE BENEFIT PLAN

The Company sponsors a 401(k) retirement plan (the Plan) that originated January
1, 1993, and is a defined  contribution plan covering all full-time employees of
the  Company  who  are at  least  21  years  of age and  have  three  months  of
continuous,  full-time  employment with the Company.  The Plan is subject to the
provisions of the Employee  Retirement  Income Security Act of 1974. The Company
made no contributions to the Plan during fiscal years 1996 and 1995.

NOTE K -- CONCENTRATION OF CREDIT RISK

Financial instruments which subject the Company to concentrations of credit risk
consist of demand-deposits placed with financial  institutions.  Funds in excess
of the federal  insurance  limit for the years ended December 31, 1996 and 1995,
totaled $2,322,839 and $-0-, respectively.

NOTE L -- SUPPLEMENTAL CASH FLOWS INFORMATION

Supplemental  Cash Flow  Information:  The Company paid the following amounts
for interest and income taxes during the year ended December 31:

                                   1996           1995
------------------------------------------------------
Interest                       $ 372,614     $ 200,335
                               =========     =========
Income taxes                   $       -     $       -
                               =========     =========

An income tax refund of $101,000 was received in 1996.

Supplemental  Non-Cash Financing and Investing  Activities:  In 1996, a capital
lease obligation of $65,000 was incurred by the Company for equipment.

   In 1995,  200,000 shares of common stock were issued to retire  $1,000,000 of
the balance due under a promissory note.

                                       20