U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

        For the fiscal year ended March 31, 1997

                                       OR

[_]     TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
        ACT OF 1934

        For the transition period from ____________ to ____________

                          Commission File No.: 0-13117

                                MICROFRAME, INC.
                 ----------------------------------------------
                 (Name of Small Business Issuer in Its Charter)


          New Jersey                                    22-2413505
-------------------------------             ------------------------------------
(State or Other Jurisdiction of             (IRS Employer Identification Number)
 Incorporation or Organization)

  21 Meridian Road, Edison, New Jersey                                  08820
----------------------------------------                              ----------
(Address of Principal Executive Offices)                              (Zip Code)

Issuer's telephone number, including area code:  (908) 494-4440
                                                ----------------

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

Securities registered under Section 12(g) of the Exchange Act:   Common Stock,
                                                                 $.001 par value
                                                                 ---------------

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 is not  contained  in  this  form,  and no  disclosure  will  be
contained,   to  the  best  of  registrant's   knowledge,  in  definitive  proxy
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  [_]

The issuer's revenues for its most recent fiscal year totaled $7,343,624.

The aggregate market value of the voting stock held by  non-affiliates  computed
by  reference  to the  average of the bid and asked  prices as  reported  by the
National Quotation Bureau as of June 1997 was approximately $5,910,710.

There were 4,838,803 shares of Common Stock outstanding as of June 11, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None



<PAGE>



                                     PART I

ITEM 1.      DESCRIPTION OF BUSINESS.

General
-------

             MicroFrame, Inc., a New Jersey corporation (the "Company"), founded
in  1982,  designs,  develops  and  markets  a broad  range  of  remote  network
management and remote  maintenance  and security  products for mission  critical
voice and data communications networks. The Company's products provide for alarm
and fault monitoring,  proactive administration and reporting capabilities which
are being used as a basis for remote  network  management  and  maintenance.  In
addition,  by  incorporating  a variety of  hardware  and  software  options for
security and user  authentication,  these  products can deter as well as prevent
unauthorized dial-in and/or in-band access to network elements and systems (such
as computers,  local area networks (LANs),  wide area networks (WANs),  routers,
hubs,  servers,  Private Branch Exchange  telephone switches ("PBXs") as well as
other network elements),  while allowing authorized  personnel access to perform
needed  administration  and maintenance of host devices and networks from remote
locations.

             In  May  1993,  the  Company   completed  a  private  placement  to
accredited investors of an aggregate of 800,000 shares (after giving effect to a
reverse stock split as noted below) of common stock,  par value $.001 per share,
of the Company (the "Common Stock"), for $1,000,000.

             In September  1993,  the Company  effected a  one-for-five  reverse
stock  split of the  issued  and  outstanding  shares of the  Common  Stock (the
"Reverse Stock Split").

             In September  1995, the Company  formed a wholly-owned  subsidiary,
MicroFrame  Europe  N.V.,  which,  in  turn,  acquired  all  of the  issued  and
outstanding shares of capital stock of European Business Associates BVBA ("EBA")
of Brussels, Belgium.

             In April,  1996,  the Company  completed a private  placement  (the
"1996 Private  Placement") to accredited  investors of an aggregate of 1,101,467
Units for gross proceeds of $1,376,933.75,  each unit consisting of one share of
Common  Stock and one Class A Warrant and one Class B Warrant,  each of which is
exercisable  into one share of Common  Stock at an  exercise  price of $1.50 and
$2.00, respectively.


Principal Products and Markets
------------------------------

             The  Company  has   established   a  strong   customer  base  (both
domestically and internationally) through the development of a family of modular
industry  standards based hardware and software  offerings designed to interface
with a customer's existing dial-up and/or in-




                                       2
<PAGE>


band  WAN  communications  and  network  management   environment  and/or  on  a
standalone  basis.  The  Company  believes  that each of these  offerings,  when
combined with the  programmability as provided by the Company's unique software,
support  and meet the  needs  of a wide  variety  of  customer  element  network
management  and security  requirements.  The software is designed to permit easy
modification,  thus allowing customized solutions for monitoring and controlling
telemanagement (intelligent agent) and/or network access. In other words, Secure
Remote Telemanagement and Telemaintenance.

             The  Company   develops  and  markets  a  broad  range  of  network
management,  remote  maintenance  and  security  products  for  voice  and  data
communications  networks.  The  Company's  products  are based  upon a family of
hardware  and  software  components  which,  when  combined  with the  Company's
uniquely  developed  software  "engine",   provide   programmability   and  easy
modification  wherein  customized  solutions for network access,  monitoring and
telemanagement of mission-critical applications and network elements can readily
be accommodated.


New Products and Markets
------------------------

           In fiscal 1997, the Company continued its evolutionary development of
products to address its strategic direction and goals of establishing a position
in the combined data and voice Network Management/ Distributed Device Management
and Security  marketplaces  by introducing a new family of products  referred to
collectively  as Secure  Network  Systems/  2000  ("SNS/2000").  This  family of
industry  standards based products is designed to address the growing demand for
remote network management of mission critical  integrated voice and data network
elements.  The SNS/2000  product family consists  primarily of Sentinel 2000 and
Manager 2000.

           These products  integrate  element  monitoring,  fault management and
security    management    as    well    as    remote    access    and    problem
identification/resolution  into a powerful suite of network management solutions
to monitor,  maintain and increase the operational  integrity,  availability and
access for mission-critical networks.

           As telecommunications networks continue to expand to support more and
more mission  critical  applications,  the  economic  impact of downtime and the
importance  of secure  remote  access  to manage  and  maintain  these  networks
increases exponentially. According to a third party study, "network downtime for
a typical network consisting of two servers and 100 personal computers" can cost
companies,  on average,  up to $1,000 per minute in lost  revenues  and employee
productivity.  In addition, the technical support staff necessary to administer,
support  and  maintain  combined  voice  and data  networks  containing  a large
distributed base of legacy and standards based devices, remains extremely costly
and  inefficient.  Faced with  budget  constraints  and a lack of skilled  staff
resources  due to downsizing  programs,  network and system  managers  today are
searching  for new tools to more  effectively  manage,  secure and control their
expanding



                                       3
<PAGE>



and increasingly more complex networks. The SNS/2000 family of products provides
cost effective solutions to these problems.  The products are completely modular
by design.  Each product element provides a unique stand alone  feature/function
set enabling one to choose only the products  needed to enhance the  performance
of their existing network management  systems.  Or, for maximum  advantage,  the
elements may be integrated  into a  comprehensive,  secured  telemanagement  and
remote access control  solution easily  customized and tailored to meet specific
organizational requirements.

           SECURE REMOTE  TELEMANAGEMENT/  TELEMAINTENANCE.  One major aspect of
the SNS/2000  family of products is its design which is to  specifically  reduce
network "downtime" by significantly  enhancing and bringing new capabilities for
detection, reporting, handling and resolution of alarm/fault conditions. It also
directly   addresses  the  requirement  to  manage  both  "legacy"  as  well  as
standards-based  communications  resources across widely dispersed heterogeneous
network  environments.   The  SNS/2000  product  set  is  fully  Simple  Network
Management  Protocol  ("SNMP")  compliant.  It offers  comprehensive  standalone
network  management and remote access  solutions  which can be fully  integrated
into existing  SNMP-based  central  management  systems  and/or  Trouble  Ticket
Management  Systems.  Its SNMP proxy agent  capability  enables  non-SNMP legacy
devices,  such as  PBXs,  to  communicate  with  SNMP  network  managers  (e.g.,
HP/Openview,  Cabletron  Spectrum,  IBM's  Netview,  et al)  for  more  cohesive
centralized control of all communications resources.

           SNS/2000 provides  redundant,  secured access and alarm monitoring to
all  network  resource  maintenance  ports  via  both  in-band  and  out-of-band
connectivity  to  increase  system  reliability,  access and  availability.  All
network  access  and/or  access to network  elements may be channeled  through a
secure central gateway where users are authenticated  and  transparently  routed
only to authorized  destinations.  Network elements are continually monitored by
local  intelligent  agents to  proactively  detect  (and in many cases  resolve)
alarms and fault  conditions as well as threshold  violations.  This  monitoring
includes ensuring that  environmental  conditions (e.g.  temperature,  moisture,
battery  voltage,  etc.) at various points in the network are also within preset
thresholds.  Critical fault  conditions are promptly  identified and 1) resolved
via the  intelligent  agent  technology of these products  and/or 2) immediately
transmitted to the appropriate  management  center for analysis,  trouble ticket
generation,  corrective action,  and escalation where appropriate.  This enables
organizations  to improve network  availability  through  proactive  response to
potential network problems before they manifest  themselves in potential network
outages.

           SECURE  REMOTE  ACCESS.  A second  aspect of the  SNS/2000  family of
products is designed to address a rapidly growing group of telecommuters who are
redefining  the  boundaries of the  traditional  workplace.  They are placing an
increasing demand for convenient remote access to network resources.  By opening
the  networks  to meet  these  demands,  the  networks  are left  vulnerable  to
unauthorized  entry. Such unauthorized  access carries security  liabilities and
exposure to critical  company  resources,  data and  information.  In  addition,
unauthorized  users are  consuming  valuable  network  bandwidth,  thus reducing
availability for legitimate users. SNS/2000



                                       4
<PAGE>



offers remote access security  solutions for host  computers,  LANs and WANs, as
well as other  network  elements  by  providing  front-end  barriers  to prevent
unauthorized entry. Access control is managed,  monitored and administered via a
client/server architecture. Centralized administration is provided to facilitate
ease of administration,  monitoring and maintenance. Alerts are issued when user
defined  events  occur  and/or  thresholds  are  exceeded.  Extensive  reporting
capabilities are provided which are useful for identifying  trends and analyzing
network utilization. A wide choice of authentication  technologies are supported
and, based on operational  needs, can easily be incorporated  into the Company's
remote access security solutions.

           SNS/2000   FEATURE/FUNCTION/BENEFIT  SET.  The  primary  benefits  of
SNS/2000 include:

SNMP Agent/Proxy
           Standards-based  SNMP Proxy alarm reporting for non-compliant  legacy
           devices.   Centralized   telemaintenance  for  both  voice  and  data
           communications networks.
Alarm Reporting & Evaluation
           Distributed Rules Based (Intelligent Agent) alarm filtering to reduce
           network  bandwidth consumption as well as insure delivery of critical
           alarms/faults.
           Multilevel  alarm  reporting with  programmable  escalation to insure
           prompt   response.   PBX  toll  fraud   detection  and  reporting  to
           reduce/minimize toll fraud loss potential.
Remote Maintenance & Monitoring
           Programmed  monitoring  of device  fault  tables to enable  proactive
           maintenance activity.  Locally executed  auto-recovery  procedures to
           reduce costly downtime.
Security
           Secured  in-band/out-of-band  access  to  insure  network  integrity.
           Secured remote telecommuting access to eliminate unauthorized network
           access.
Graphical User Interface ("GUI") Based System
           Central  GUI  based  system   administration  for  convenient  system
management Open DataBase Compliant ("ODBC") compliant
           To allow easy  integration  with major  database  offerings  (Oracle,
           Sybase, SQL/Server, Informix, etc.)
Controlled Access & Ethernet Capabilities
           Controlled vendor access for secure out-of-band device management and
           administration.  Ethernet  and dial  access  allowing  for  redundant
           access/reporting paths for increased network reliability. Distributed
           intelligent   agent   device   controllers   for  reduced   bandwidth
           utilization.
Buffering/Database Capabilities
           Central  relational  database  with  ad  hoc  report  generation  for
           convenient   activity/utilization   analysis.  Buffering  system  for
           storage/retrieval of data (i.e. CDR Records, Critical Logs, etc.)

           SENTINEL  2000.  The flagship  member of the  Company's new family of
SNS/2000 products.  In the first quarter of fiscal 1997,  MicroFrame  introduced
the  Sentinel  2000.  The  Sentinel  2000 is a  stand-alone,  secure  multi-port
programmable Remote Site Element Manager.



                                       5
<PAGE>



It comes  complete  with  integrated  application  software  designed to provide
alarm/fault  monitoring,  security  and remote  access for  controlling/managing
remote voice and data network elements via their out-of-band dial-up maintenance
ports as well as via in-band Ethernet  connectivity.  The system provides device
alarm/fault   monitoring   and  reporting,   SNMP   management  and  SNMP  proxy
functionality,   PCMCIA  high  speed   modem(s)  plus   Ethernet   connectivity,
environmental monitoring and control, and secured  in-band/out-of-band access to
device  maintenance and control ports. The Sentinel 2000 is a comprehensive site
element  management  solution  that  facilitates  convenient,  reliable,  remote
network element telemanagement and telemaintenance of voice and data networks.

A  powerful  and  comprehensive  offering,  based on the  Motorola  68360  Multi
controller  processor  chip,  the  Sentinel  2000  is  easily  administered  and
maintained  with the  Company's  new  GUI-based  Manager 2000  software  product
offering.  The  Sentinel  2000  integrates  a wide range of  applications  which
provide for robust Remote Network Management of a wide range of network elements
(either  directly  or  via an  SNMP  proxy  function),  Access  Security,  Alarm
Management,  Environmental  Monitoring and Control, PBX Toll Fraud Detection and
Remote Device Reboot and power management capabilities.

The Company has enjoyed  early and strong  acceptance  of the Sentinel 2000 from
such companies as MCI, AT&T, Vyvx,  Ameritech,  U.S. West,  TeleFinland,  Kaiser
Permanente,   and  Telstra  Australia.  In  fiscal  1997,  the  Company  shipped
approximately  1,100 units of the  Sentinel  2000,  generating  net  revenues of
approximately $2,670,000, representing 36% of the Company's net revenues for the
year.

             MANAGER 2000. During the fourth quarter of fiscal 1997, the Company
introduced a second  member of the SNS/2000  family of products - Manager  2000.
Manager  2000 is a set of  software  applications  that  collectively  provide a
comprehensive  solution  for  remote  site  management,  and  the  servicing  of
real-time alarms being generated by remote  monitoring  equipment.  Manager 2000
integrates the Sentinel 2000 and IPC/Secure  Sentinel  programmable  remote site
managers with central-site  management tools to provide maintenance managers and
technicians  with a seamless  network  overview.  Manager  2000  automates  many
time-consuming  remote  management  tasks for a faster  response time,  improved
fault isolation,  identification and resolution, and differentiation of critical
and non-critical events. In conjunction with Sentinel systems,  Manager 2000 can
limit access to maintenance  ports and devices to authorized  individuals  only.
The authorized access is controlled at the central management site. This permits
frequent  changes and the  assignment  of  temporary  privileges  to  outsiders.
Manager 2000  features  include Alarm  Processing,  Trouble  Ticket  Management,
Secured Remote Site Access, Security, Remote Site Administration. All of this is
done based on industry standard architecture  (Windows 3.1, Windows/95,  Windows
N/T, ODBC, etc.), and is designed for scalability.





                                       6
<PAGE>



Other Products and Markets
--------------------------

             The Company's first major product  success,  the  DL-4000(TM),  was
introduced  in  1986  and  is  designed  to  protect  mainframe  computers  from
unauthorized  dial-up  access.  Since that time, more than 1,000 units have been
installed  worldwide  and the product  continues  to be a part of the  Company's
product offerings.

             Recognizing that  organizations  were restructuring data processing
away from centralized  mainframes and into various network  configurations,  the
Company  re-engineered its original  fixed-function,  "black box" product into a
flexible,  programmable hardware/software system capable of securing access at a
wide variety of "nodes" in the network. The foundation of this re-design was the
development   of  a  proprietary   software   "engine,"   which   maximizes  the
programmability  of the hardware,  defining and  controlling the functions to be
performed by various hardware components.

             Beginning  in  1991,  the  Company  determined  that an  additional
related market  opportunity was developing with the proliferation of PBXs, voice
mail systems and other privately-owned voice communications systems and security
devices.  The Company  believes that theft of long distance  telephone  services
("toll  fraud")  through  unauthorized  access to these  devices has resulted in
substantial  losses and thus the  support of PBXs  through the  development  and
marketing  of data  communications  security  products is a good  business to be
engaged in due to customer  demand for greater  system  reliability,  protection
against toll fraud and security against network intrusion.

             A  vulnerability  of these systems  results from the fact that PBXs
and other devices used in the voice communications system have what are referred
to as remote maintenance and administrative "ports." These ports permit a system
administrator  or maintenance  personnel to "dial in" or gain access to a device
electronically,  by  telephone,  and to monitor  and,  if  necessary,  change or
manipulate the software and hardware embedded in the equipment.  This can all be
accomplished  without  having to be  physically  present  at the site  where the
equipment is located.  Without proper  security,  an unauthorized  user can gain
access to a system  through  one of these  ports,  a  potential  exposure of PBX
customers  to toll  fraud.  With a remote  maintenance  facility,  PBX and other
telecommunications  product  vendors can respond to and provide their  customers
with  cost-effective  solutions  that  address the  customers  demand for highly
responsive service for their products.

             After initiating discussions with major PBX suppliers,  the Company
developed a group of products,  referred to as  "Intelligent  Port  Controllers"
("IPC"),  designed to provide security for these dial access remote ports. Among
these products are a Remote Port Security Device (RPSD(TM)),  which was designed
and manufactured  exclusively for AT&T (now Lucent  Technologies),  beginning in
1991 and the Secure Sentinel(TM) family of devices, which were introduced by the
Company in 1992.

             The RPSD is provided on an original equipment  manufacturer ("OEM")
basis under  Lucent  Technologies'  own label,  as a security  device for Lucent
Technologies'  Definity  PBX. Over 16,200 RPSD units have been shipped to Lucent
Technologies since 1991 and the Company has begun



                                       7
<PAGE>



shipping the product to other customers as well.  During fiscal 1997, sales from
the RPSD product line were  responsible for  approximately  15% of the Company's
overall revenue.

             The  Secure  Sentinel(TM)  is a  family  of  programmable  hardware
platforms  which  combine  security  management  of  remote  maintenance  ports,
protection  against  toll  fraud,  a  comprehensive  range  of fault  and  alarm
reporting  functions  and  real-time  call  detail  record  analysis.  Since its
introduction,  the Company has expanded both the number of Secure  Sentinels(TM)
offered and the functionality of each, shipping more than 10,900 units which has
accounted for more than  $13,000,000 in revenue.  During fiscal 1997, sales from
the Secure  Sentinel(TM)  product line were responsible for approximately 35% of
the Company's overall revenue.

             Beginning in fiscal 1993, the Company began offering a new product,
the Secured Database Server (SDS(TM)).  Like the DL-4000, this is a programmable
system  designed to prevent  unauthorized  dial-in  access to a computer or data
communications  network.  The SDS,  however,  incorporates the technology of the
DL-4000  in a personal  computer,  allowing  storage of greater  amounts of user
data,  which permits a customer to both monitor a greater number of users and to
store  more  detailed   identification  data  about  each  user.  The  SDS  also
incorporates  redundant processor  elements,  reducing the possibility of system
down-time.  This product is thus suitable for  protecting  significantly  larger
systems  and is  currently  implemented  by MCI to  provide  secured  access for
network  administration  of over  500 of its  long  distance  service  switching
facilities, as well as for Chemical Bank, Key Corp., Lockheed/Marietta and other
major companies worldwide.

             Building on the SDS, in fiscal  1994,  the Company  introduced  the
Secured Gateway System  (SeGaSys(TM)),  designed to provide centrally controlled
access to and  administration of a large number of remotely located  maintenance
ports  on  both  voice  and  data  communications  devices.  It  consists  of  a
"communication firewall" or secured gateway which controls and routes all access
to remote port destinations, a central database management server which uses the
SDS software to administer and control user access and resource  authorizations,
remote security modems and/or alarm reporting devices which provide  fault/alarm
management capabilities. SeGaSys effectively manages a number of Secure Sentinel
devices located at remote locations which provide the security, alarm monitoring
and reporting for those locations.


OVERALL TARGET MARKETS

             The Company  believes  its  products  are well  positioned  to take
advantage  of  what  it  believes  are  current   significant   trends  in  data
communications  and  voice  communications  networks.  In  the  Company's  view,
organizations  are seeking to increase  productivity by providing  sophisticated
communications  networks  which  connect all of their  separate  units,  whether
locally, nationally or internationally.  As the price of equipment decreases and
power increases,  such networks become cost effective,  justifiable and possible
for more and more groups,  and it becomes  feasible to  introduce  sophisticated
networks into  technologically  less advanced regions regardless of size. At the
same time more of the  organizations'  data and other  resources  are being made
available to more users by



                                       8
<PAGE>



means of these systems.  These market dynamics are causing networks to become an
ever  increasing  and vital  source of revenue  generation  as well as  employee
productivity.  Therefore,  proactive  management  of these  networks  to  insure
network  availability,  which, in turn supports employee productivity as well as
revenue  generation,  is  increasingly  becoming a necessary  imperative for all
companies.  Because of these  market  factors,  the  Company  believes  that the
security and network  management issues resulting from this growth will generate
demand for the Company's products.


REMOTE NETWORK MANAGEMENT AND REMOTE TELEMAINTENANCE MARKETS

             The  requirement  for increased  service levels and overall network
availability,  especially for mission-critical  networks,  has created a rapidly
growing market demand for remote  element  network  management  and  distributed
device  management.  Remote element network  management  offerings include alarm
monitoring systems which monitor network elements and their internal  diagnostic
routines and fault tables,  determine alarm status,  and  automatically  execute
appropriate reporting and/or corrective action procedures.

             Alarm Monitoring:  With the Sentinel 2000 and Secure  Sentinel(TM),
alarms can be  transmitted/reported  to central network management systems (such
as Cabletron's  Spectrum,  HP's Openview,  IBM's Netview,  etc.), trouble ticket
management  packages  (such as  offered by  Remedy),  a single or  multiple  PCS
(personal communication system), personal pagers, etc. as well as provide for an
alarm to be escalated to ensure  timely  response.  The Sentinel 2000 and Secure
Sentinel(TM) also allows programmed administration of the host devices via their
maintenance port connection.

             Alarm  Reporting:  This  provides  for  automatic  transmission  of
information  regarding  network  element  statuses,  alarms,  etc. It allows for
automatic  escalation  of alarms when there is no response.  Information  may be
automatically  transmitted  to computers  via modem,  or to humans via pager and
recorded voice.

             "Help Desk" Enhancements:  Most data networks include a "help desk"
operator,  a resource available to assist other personnel and to resolve network
problems  encountered by dial-in users.  The Company's  proprietary  HelpNET(TM)
software  permits  the user to page the help  desk  terminal  and  automatically
effect  an  interactive  link  with  the  help  desk  operator  when the page is
acknowledged.  Without leaving the control  station,  the help desk operator can
then directly  observe and  participate  in the user's session with the relevant
network  device  and, if  necessary,  take  temporary  command of the session to
correct the problem,  thus providing more cost-effective  corrections than would
occur if the help desk operator  physically  had to visit the device in question
or had to "talk the user through" the necessary procedures.

             Environmental   Monitoring   and  Control:   Since   communications
equipment  is sensitive  to changes in the  physical  environment,  the Sentinel
2000, as well as the Secure Sentinel(TM),  can be enhanced to monitor changes in
temperature,  humidity,  moisture,  battery  voltage,  LED  indicators and other
similar  environmental  indicators to determine if current trends exceed pre-set
limits. If such



                                       9
<PAGE>



limits are exceeded,  the device can be programmed to issue an appropriate alarm
or take corrective action using multiple  internal relays to activate  necessary
environmental controls.


SECURITY MARKET

             As   previously   noted,   widely   distributed   data  and   voice
communications  networks  incorporate numerous network elements and devices with
dial-in  ports.  The  Company  offers a variety of  products,  Manager  2000 and
SeGaSys(TM),   which  when   combined  with  the  Sentinel  2000  and/or  Secure
Sentinel/IPCs, permits centralized control for secure remote access to all ports
on the network.  All users (such as maintenance  providers and others authorized
to service or administer  devices in the network) dial a single telephone number
and/or are  connected/authorized  in-band for access. Upon successful validation
of access for the  requested  device,  the user is  automatically  routed to the
target device by Manager 2000 and/or  SeGaSys(TM).  This eliminates the security
risk  inherent in  providing  lists of  telephone  numbers and access  codes for
numerous devices,  as well as reduces the burden of administering  many remotely
located  security  devices.  Once  authenticated  and  routed,  the  transaction
(including  session  activity,  if  desired),  is logged to a central  database,
available for audit review and analysis.

             The  Sentinel  2000  and  IPC  family  of  products  -  the  Secure
Sentinel(TM)   and  the  RPSD,  are  designed  to  secure  the  maintenance  and
administration  ports on a wide variety of network  elements and  communications
equipment.  In addition to preventing  unauthorized  access through these ports,
the products can be customized to provide the following features:

             Security Management: Provide a secure path to network elements both
via in-band (Ethernet) as well as out-of-band (dial up) protocols.

             PBX  Toll  Fraud/Abuse   Control:   PBXs  and  voice  mail  systems
frequently  permit  dial-in users access to outbound trunk lines to enable users
to take advantage of a company's WATs lines or similar services.  However, abuse
of these services can result in substantial  charges.  The product offerings can
be  programmed  to monitor and analyze all dial-in call activity to determine if
current activity exceeds specified parameters or selected criteria indicative of
potential  toll fraud or abuse.  If the  activity  exceeds the  parameters,  the
system  issues an alarm to the  appropriate  personnel or  initiates  protective
procedures.

             The  DL-4000  can be used to  secure  dial-up  access  to any  host
computer,  LAN or WAN by  monitoring  and  centrally  administering  up to 4,096
dial-up "ports" or telephone  access points located in up to 256 locations.  The
SDS(TM),  as noted above,  expands the number of users and other features of the
DL-4000 by  incorporating  the same technology into a personal  computer.  Using
"open system" software, the products allow the system administrator to configure
each channel separately with one or more access control technologies as required
by the application assigned to the channel or as preferred by the user.




                                       10
<PAGE>



             The Sentinel  2000, IPC and  SeGaSys(TM)  (DL-4000 and the SDS(TM))
incorporate a comprehensive,  high level programming language and program editor
developed  specifically  for  these  products,  which  is  referred  to  as  the
Communication  Control Language ("CCL").  This language allows standard programs
incorporated  into these  products to be  modified  or  enhanced  easily to meet
specific  customer  requirements.  The  incorporation of CCL into these products
also facilitates the introduction of additional product enhancements.


SUPPORT SERVICES

             In  addition  to  the  normal  training,  installation  and  repair
services  provided  for all of its  products,  the  Company  also  provides  its
customers with consulting, specialized programming and turnkey installations.


MARKETING AND DISTRIBUTION

             The Company  believes that the markets for remote  element  network
management, distributed device management, and security are rapidly emerging and
growing.  Therefore,  the Company is  approaching  each of these markets with an
integrated marketing strategy.  The SNS/2000 family of products, the DL-4000 and
the SDS(TM),  data  communications  security  products,  have been sold and will
continue to be sold to major telecommunications companies, networking companies,
network security customers,  systems integrators,  facility managers and others,
via its direct sales organization,  in-house  telemarketing efforts and selected
distributors.

             In fiscal 1995, the Company commenced expansion of its direct sales
force and its  network  of  distributors  into major  geographic  markets in the
United States as well as internationally. As this sales and distribution network
is  established  and  continues  to  grow,  the  telemarketing  effort  will  be
redirected to generate sales leads by the Company and to provide support for the
field organization. In addition, the Company will look to continue to expand its
channels of distribution via major systems  integrators,  facilities  management
companies and network outsourcers.

             With respect to the  communications  security  market,  the Company
recognized  that  product  sales could be effected  more  economically  if major
telecommunications companies could be convinced to promote the products to their
own  customers.  The Company has been  successful  in  establishing  contractual
relations in the United States with Lucent Technologies, MCI, Southwestern Bell,
US WEST and Ameritech. During fiscal 1995, the Company expanded its distribution
into Canada  through a  non-exclusive  distribution  agreement with TTS Meridian
Systems, Inc. of Willowdale, Ontario, a Northern Telecom subsidiary. The Company
expects to  continue  seeking  additional  arrangements  with the other  network
element and PBX systems vendors and distributors in North America.




                                       11
<PAGE>



             In connection with the foreign  distribution  of its products,  the
Company  appointed EBA of Brussels,  Belgium in November  1993, as its exclusive
sales  representative  for Europe to provide sales and technical  support to the
Company's authorized distributors and to directly sell the Company's products to
accounts  in that  region.  In  September  1995,  the Company  acquired  through
MicroFrame  Europe  NV,  its  wholly-owned  subsidiary,  all of the  issued  and
outstanding shares of capital stock of EBA. In fiscal 1995, the Company signed a
five-year agreement with LM Ericsson ("Ericsson") of Stockholm, Sweden, a global
telecommunications   equipment   manufacturer  and  distributor.   Ericsson  has
qualified for use and will promote the Company's  Secure Sentinel  products with
Ericsson  PBX  equipment,  worldwide,  with an initial  roll-out in Europe,  the
Pacific Rim and the United States. During fiscal 1995, a three-year distribution
agreement  was  also  entered  into  with  Racal  Australia  PTY,  Ltd.  ("Racal
Australia") of Brookdale,  South Wales,  Australia, a wholly-owned subsidiary of
Racal  Electronics plc of the United Kingdom.  Racal  Australia,  which provides
data communications, data security and digital cellular equipment throughout the
Pacific Rim, will distribute the Company's  product line  throughout  Australia,
New Zealand,  Singapore and Hong Kong.  Additionally,  during  fiscal 1995,  the
Company signed its first  distribution  agreement in Eastern Europe with Netlink
of Prague,  in the Czech Republic.  With the acquisition of EBA in place and the
maturation of the agreements consummated in previous years, the revenues related
to the  international  segment  were  approximately  $1,310,000  (21%  of  Total
Revenues) in fiscal 1996 and approximately $1,530,000 (21% of Total Revenues) in
fiscal 1997.


COMPETITION

             The  markets for remote  element  network  management,  distributed
device  management as well as security products to monitor and control access to
computer and telecommunications  network elements are highly competitive.  There
can be no assurance that the  proprietary  technology  which forms the basis for
most of the Company's  products will continue to enjoy market acceptance or that
the Company will be able to compete successfully on an on-going basis.

             The  Company   believes  that  the  principal   factors   affecting
competition  in these markets are: (1) the  products'  ability to conform to the
network  topologies and/or computer systems;  (2) the products' ability to avoid
technological  obsolescence;  (3) the willingness and the ability of a vendor to
support customization, training, and installation; and (4) the price.

             Although  the  Company  believes  that  its  present  products  and
services are  competitive,  the Company  competes in its general  markets with a
number of large computer, electronics and telecommunications manufacturers which
have financial,  research and development,  marketing,  and technical  resources
substantially  greater  than  those  of the  Company.  The  Company  also  faces
competition from a variety of niche market players. In security situations, they
include Security  Dynamics,  Inc.,  Digital Pathways,  Inc. and the Lee Mah Data
Systems Corp. In remote network management and telemaintenance  situations, they
include TSB International,  Inc. and Teltronics, Inc. Such companies may succeed
in producing and distributing competitive products more effectively



                                       12
<PAGE>



than the Company can produce and distribute  its products,  and may also develop
new products which compete effectively with those of the Company.


SOURCES AND AVAILABILITY OF MATERIALS

             The Company designs its products  utilizing readily available parts
manufactured  by  multiple  suppliers  and the Company  currently  relies on and
intends to continue to rely on these suppliers. The Company has been and expects
to continue to be able to obtain all of the parts  required to  manufacture  its
products,  without  any  significant  interruption  or  sudden  price  increase,
although there is no assurance of this.

             There  are  cases  where  the  Company  is  utilizing  a  component
available  from only one  supplier.  If a supplier  were to cease to supply this
component,  the  Company  would most  likely  have to  redesign a feature of the
affected device.  In these cases, the Company  maintains a greater supply of the
component on hand in order to allow the time  necessary to effectuate a redesign
or alternative course of action.


DEPENDENCE ON PARTICULAR CUSTOMERS

             The  Company  sells a  substantial  portion of its  products to two
customers,  Lucent  Technologies  and MCI. Sales to Lucent  Technologies and MCI
represented  16.8% and 17.1%,  respectively,  of the Company's revenue in fiscal
1997. This is down from 23.8% and 24.8%, respectively,  in fiscal 1996. The loss
of  either  of these  customers  could  have a  material  adverse  effect on the
Company's  business.  The  improvement  of fiscal  1996 (the first time in three
years where the total  percentage  of revenues  generated to these two customers
fell below 50%) continued in fiscal 1997, as the combined  percentage dropped to
34%. This is attributable to two factors:  (1) a reduction in absolute  revenues
of approximately $550,000 (18%) from year to year from these two customers;  and
(2) an increase in North American revenues,  exclusive of these two customers of
approximately $1,400,000 (68%).

             The Company's  installed  customer base is estimated to number over
200 companies  constituting  more than 2,300  customer sites  worldwide.  In the
United  States,  virtually  all of the  Company's  customers  are Fortune  1,000
industrial  companies and large U.S.  financial  institutions.  Customers in the
U.S. represented  approximately 79% of the Company's revenue in both fiscal 1997
and fiscal 1996.

             Under an agreement with Lucent  Technologies,  the Company has been
manufacturing  the RPSD for  Lucent's  resale  to its PBX  customers.  As of the
fiscal year ended March 31, 1997,  Lucent had purchased and installed  more than
16,200 RPSD units.




                                       13
<PAGE>



             In fiscal 1996,  MCI and the Company  expanded  their  relationship
across multiple  operating units within MCI, including that unit responsible for
outsourcing and MCI's joint venture with British Telecom,  known as Concert,  as
well as with SHL Systemhouse of Calgary, Canada.


INTELLECTUAL PROPERTY, LICENSES AND LABOR CONTRACTS

             The Company holds no patents on any of its technology.  Although it
does license some of its technology from third parties, it does not consider any
of these licenses to be critical to the Company's operations.

             The Company has made a consistent effort to minimize the ability of
competitors  to duplicate  the  Company's  software  technology  utilized in its
products. However, there remains the possibility of duplication of the Company's
products and competing products have already been introduced.

             Microframe's name and the Secure Sentinel are registered trademarks
of the Company filed with the United States Patent and Trademark Office ("PTO").
The Company also has  trademark  applications  pending with the PTO for SeGaSys,
Sentinel 2000,  Sentinel 2000S,  Manager 2000, PassKEY,  SofKEY,  Secure Network
Systems 2000,  the MicroFrame  Logo,  the MicroFrame  Wizard and the tagline "We
Bring Wizardry To Remote Network  Management."  Provided there is no opposition,
these trademarks shall be registered.

             None of the Company's  employees are  represented  by labor unions.
The Company considers its relations with its employees to be satisfactory.


GOVERNMENTAL APPROVALS REQUIRED AND EFFECT OF GOVERNMENT REGULATION

             Due  to  the  sophistication  of  the  technology  employed  in the
Company's  devices,  export of the Company's products is subject to governmental
regulation.  As required by law or  demanded by customer  contract,  the Company
routinely  obtains  approval  of its  products  by  Underwriters'  Laboratories.
Additionally,   because  many  of  the   Company's   products   interface   with
telecommunications  networks,  its  products  are subject to several key Federal
Communications  Commission  ("FCC")  rules and thus FCC approval is necessary as
well.

             Part 68 of the FCC rules  contains  the  majority of the  technical
requirements  with  which  telephone  systems  must  comply to  qualify  for FCC
registration  for  interconnection  to the  public  telephone  network.  Part 68
registration  represents  a  determination  by the  FCC  that  telecommunication
equipment  interfacing with the public  telephone  network complies with certain
interference  parameters  and  other  technical  specifications.   FCC  Part  68
registration for the Company's products has been granted and the Company intends
to apply for FCC Part 68 registration for all of its new and future products.



                                       14
<PAGE>



             Part  15  of  the  FCC  rules  requires  equipment   classified  as
containing  a Class A  computing  device to meet  certain  radio and  television
interference  requirements,  especially  as they  relate  to  operation  of such
equipment in a residential area.  Certain of the Company's  products are subject
to and comply with Part 15.

             The European  Community has developed a similar set of requirements
for its members and the Company has begun the compliance process of its products
for Europe.

             Although the Company has not experienced any difficulties obtaining
such  approvals,  failure to obtain  approval for new and future  products could
have a material  adverse  effect on the  Company's  business.  The  Company  has
obtained  licenses to export  certain of its products in limited  quantities  to
Sweden, Norway,  Switzerland,  South Africa, the United Kingdom,  France, Italy,
Germany, Australia and Singapore.


RESEARCH AND DEVELOPMENT ACTIVITIES

             During fiscal 1997, the Company continued  development of its "next
generation"  of products  built on an entirely new  architecture  to  ultimately
replace  its IPC  products - the  Secure  Sentinel(TM)  and RPSD -  referred  to
collectively as SNS/2000.  As discussed  previously,  this family of products is
designed to address the growing demand for remote element network management and
security of  mission-critical  integrated voice and data networks.  Research and
development expenses were $893,852 in fiscal 1997 and $713,441 in fiscal 1996.


COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS

             The  Company's  business  is not subject to  regulations  involving
discharge of materials into the environment.


EMPLOYEES

             As of June 6, 1997,  the Company had 37 employees,  all of whom are
full-time employees,  and of which 12 are technical personnel,  10 are in sales,
marketing and support, 6 are in production and 9 are in executive, financial and
administrative capacities.


ITEM 2.      DESCRIPTION OF PROPERTY.

             The  Company  currently  leases  8,900  square  feet of space at 21
Meridian Road, Edison, New Jersey for its  administrative,  sales and marketing,
and research and development  functions (the "Lease").  The Lease provides for a
monthly rental of $5,429 and shall expire on June 30, 1999.



                                       15
<PAGE>



From the period  commencing  July 1, 1997 until June 30, 1999 the total  monthly
rental  shall be $5,579 per month.  An  additional  2,000  square feet of office
space and 2,600  square feet of warehouse  space is currently  leased to another
tenant with a concurrent  expiration  date of June 30, 1999.  The Company is the
sole  guarantor for the full  performance  of this tenant through the expiration
date.

             In  addition,  the Company  currently  leases  5,112 square feet of
space at 300E Corporate  Court,  South  Plainfield,  New Jersey for its finance,
manufacturing,  and  warehousing  functions.  This lease  provides for a monthly
rental of $3,408 and shall expire on June 30, 1999.

             In  addition,  the Company  currently  leases 245 square  meters of
office space in Antwerp, Belgium for its European operating headquarters..  This
lease  provides for a monthly rental of 81,083 Belgian Francs per month US$2,316
at an exchange rate of 35BEF to 1US$) and shall expire on July 31, 2005, with an
option to the Company to  terminate  the lease on either July 31, 1999 and again
on July 31, 2002.


ITEM 3.      LEGAL PROCEEDINGS.

             The Company reached a settlement with the New York State Department
of Taxation and Finance in April 1997 as it related to a sales tax assessment of
$227,392  received in a Notice of  Determination  in March 1996.  The settlement
amount of $55,513 was paid in full as of April 1997.


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

             None.



                                       16
<PAGE>




                                     PART II

ITEM 5.      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

             The Company's Common Stock commenced  trading on August 17, 1995 on
the NASDAQ  SmallCap  Market under the symbol  "MCFR".  Prior to that date,  the
Common  Stock was not traded on any  registered  national  securities  exchange,
although several  registered  broker-dealers  made a market in the Common Stock.
The  following  table sets forth the high and low bid prices of the Common Stock
in the over-the-counter  market as reported by National Quotation Bureau through
August 16, 1995 and by NASDAQ from August 17, 1995 through  March 31, 1997.  The
quotations  set  forth  below  do  not  include  retail  markups,  markdowns  or
commissions and may not represent actual transactions.


                                          HIGH            LOW
                                          ----            ---
Fiscal 1996
     June 30                             $2.88           $2.00
     September 30                         3.13            2.56
     December 31                          2.63            1.41
     March 31                             1.88            1.56

Fiscal 1997
     June 30                             $2.88           $1.75
     September 30                         2.25            1.06
     December 31                          2.56            1.50
     March 31                             2.44            1.56



HOLDERS

             The  Company   believes  that  as  of  June  11,  1997  there  were
approximately 373 record holders of its Common Stock (including  brokers holding
in street name).


DIVIDENDS

             The Company  has not paid any cash  dividends  on its Common  Stock
during the two fiscal years ended March 31, 1997 and March 31, 1996. The Company
presently intends to retain all earnings to finance its operations and therefore
does not  presently  anticipate  paying any cash  dividends  in the  foreseeable
future.



                                       17
<PAGE>



             Under the  terms of the  Company's  credit  agreement  with  United
National Bank (which acquired Farrington Bank, the original lender), the Company
may not,  without the prior written consent of United National Bank,  declare or
pay any dividends in cash or otherwise on any shares of stock of the Company.


ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS.

             A number of statements contained in this Report are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve  risks and  uncertainties  that could cause actual  results to
differ materially from those expressed or implied in the applicable  statements.
These  risks  and  uncertainties  include  but are  not  limited  to the  recent
introduction of, and the costs  associated with, a new product line;  dependence
on the acceptance of this new family of products; risks related to technological
factors;  potential  manufacturing  difficulties;  dependence  on certain  third
parties; a limited customer base; and liability risks.


PLAN OF OPERATION

             During the next 12 months,  the Company will continue its effort to
expand its existing customer  relationships and marketplace  penetration,  while
tightly controlling operating costs. The Company will place substantial emphasis
on the  distribution  of its new  family of  products,  continued  international
business expansion and continuing its successful  two-year trend of reducing its
reliance on two major customer organizations.

             During  fiscal 1997,  the Company  continued  development  of a new
generation  of products  based on more  advanced  technology.  The products were
formally introduced at an industry trade show to enthusiastic customer reception
in January,  1996. The new network management product family, known as SNS/2000,
integrates network management,  security  management,  and fault management,  as
well  as  problem  resolution  into  a  powerful  suite  of  network  management
solutions.  This technology will allow for increased  operational  integrity and
access  to voice  and data  networks.  The  Company  began  shipment  of the new
finished  tested product of this next generation  product  family,  the Sentinel
2000 in  May,  1996  and  volume  production  shipments  began  in  June,  1996.
Approximately  1,100 units of the Sentinel  2000 were shipped in fiscal 1997. In
January,  1997,  another member of the SNS/2000  family,  the Manager 2000 , was
introduced.  Manager 2000 is a set of software  applications  that  collectively
provide a comprehensive  tool for remote site  management,  and the servicing of
real-time alarms being generated by remote monitoring equipment.

             The Company  believes this next generation of products is beginning
to create the  foundation  and growth that will help the Company  meet its goals
and  objectives  in the coming  years.  With the  addition of several  major new
customers,  the  Company  continues  to  strengthen  its  established  worldwide
customer base which  includes  major U.S. and  International  telecommunications
providers,  PBX  vendors,  financial  institutions,  Fortune 500  companies  and
numerous governmental agencies.



                                       18
<PAGE>



The  Company  has more than 2,300  installations  across  North  America,  South
America,  Europe and the Pacific Rim. The September 1995  acquisition of EBA has
caused the Company to focus more on expanding the  international  customer base.
Based in  Brussels,  Belgium,  EBA had acted as the  Company's  exclusive  sales
representative in the European market since November, 1993, providing both sales
support and technical support to the Company's authorized distributors,  as well
as selling directly to accounts in the region.  During the latter part of fiscal
1996, the Company's  international revenue stream increased as it capitalized on
relationships with new global PBX suppliers  including LM Ericsson of Stockholm,
Sweden  and  Alcatel  Bell  of  Antwerp,   Belgium.   A  major  new  contractual
relationship was formed in fiscal 1997 as a result of this improved focus. After
announcing this new relationship with TELE Business Communications of Finland, a
subsidiary of Telecom Finland, in November,  1996, the Company proceeded to ship
over $260,000 of product,  primarily the Sentinel  2000, in the last four months
of the fiscal year.  Additionally,  it expanded its  distribution in the Pacific
Rim with a significant increase in shipments to Racal Australia.

             The major  concern of the Company over the past  several  years was
alleviated  to a  significant  extent in fiscal 1997.  The reliance on two major
customers,  MCI and  Lucent  Technologies  (formerly  AT&T),  for a  significant
portion of its current revenue stream, was reduced as the Company forged several
strong new relationships domestically. The most significant of these was the new
contractual  relationship  formed in September 1996 with US WEST  Communications
Services.  Over the second half of fiscal 1997,  shipments  to US WEST  exceeded
$600,000,  all of it derived from the SNS/2000  family,  both  Sentinel 2000 and
Manager 2000.  Ongoing solid  relationships,  primarily with  Southwestern  Bell
Communications,  were maintained.  Relationships  begun in fiscal 1996 improved,
the primary  example being Ameritech  Information  Systems.  Finally,  other new
relationships were formed, including Vyvx, Inc. and Sprint Communications.  As a
result,  overall revenues generated from the Company's two primary customers has
dropped  from 60% in fiscal  1995 to 49% in fiscal  1996 to 34% in fiscal  1997.
However, these customers are still the two largest, and therefore, significantly
important  to the  Company.  Its  relationship  with  MCI  extends  to  multiple
operating units within the organization,  each with divergent business needs and
different market characteristics. The Company ships multiple products to MCI for
security  and  alarm  management  of  various  internal  switch   installations,
including shipments to Concert Global Networks, MCI's joint venture with British
Telecom,  as well as to various  outsource  relations which MCI manages.  In its
relationship with Lucent Technologies,  the Company has been manufacturing RPSDs
for Lucent's resale to its PBX customers.  The RPSD is a secured access product,
provided under Lucent's own label, custom designed to operate with Lucent's PBX,
Key Systems and Voice Processing products,  primarily the Definity product line.
As of the fiscal year ended March 31, 1997,  Lucent had  purchased and installed
more than 16,200  RPSDs  since 1991.  In  October,  1995,  the Company  signed a
two-year renewal of an OEM agreement,  through which Lucent purchases RPSDs. The
Company expects to continue the growth and development of its domestic  customer
base outside of these two primary customers in fiscal 1998.

             The Company's employee base dropped from 42 full-time  employees in
fiscal 1996 to 37 full-time employees during fiscal 1997. It is anticipated that
the number of  employees  will  increase  throughout  fiscal 1998 as the desired
return to profitability is achieved. These additional resources



                                       19
<PAGE>



would be devoted  primarily to the marketing and development of a more extensive
system  integration  capability  which  would  enable  the  Company  to  gain an
increasing share of the market. Due to the growth which the Company  experienced
in fiscal  1995,  an  additional  facility in South  Plainfield,  New Jersey was
leased with expiration terms  concurrent with its existing lease in Edison,  New
Jersey.  The operations  group  relocated to this facility in August,  1995. The
Company's  European  operation also moved to a new,  larger facility in Antwerp,
Belgium in August,  1996.  The Company feels that it has space  adequate to meet
its growth requirements for the foreseeable future.

             The Company  believes that as data and voice  networks  continue to
grow and companies  grow more reliant on these  networks for revenue  generation
and employee productivity, the recognition of system vulnerability will continue
to increase and the  Company's  products  will be in greater  demand.  After the
unsatisfactory performance in fiscal 1996, the Company rebounded in fiscal 1997,
achieving  Management's primary mission for the year of returning the Company to
profitability. The Company believes many significant events occurred to position
the Company for future growth.


RESULTS OF OPERATIONS

Fiscal Year 1997 Compared to Fiscal Year 1996
---------------------------------------------

             The  Company's  revenues  for fiscal  1997 were  $7,343,624  versus
revenues of $6,258,243  for fiscal 1996,  an increase of 17.3%.  The increase in
revenues is primarily attributable to the significant expansion of the Company's
customer base outside of its two major customers,  MCI and Lucent  Technologies,
especially in the United States. Net revenues  generated in the U.S.,  excluding
MCI and Lucent  increased  from  approximately  $1,910,000 to  $3,330,000  which
represented  a  74%  increase  from  year  to  year.  The  Company  also  showed
significant   growth  in  the  Pacific  Rim,   where  net  revenues   (primarily
attributable to one major customer,  Racal  Australia)  increased over threefold
from $98,000 to $350,000.

             The Company's cost of sales  increased  from  $2,789,855 for fiscal
year 1996 to  $2,903,705  for  fiscal  year  1997.  However,  cost of sales as a
percentage  of sales  decreased  from 44.6% for fiscal  1996 to 39.5% for fiscal
1997. This substantial  decrease is primarily the result of a reduced  provision
for inventory  obsolescence (from $176,660 to $75,000,  or approximately 1.0% of
revenue),  a reduction in capitalized  software  amortization  (from $279,000 to
$163,000,  or  approximately  1.6% of  revenue),  and a general  improvement  in
purchasing and materials  efficiencies,  which is responsible  for the remaining
2.5%  reduction.  It is  important  to note that this  improvement  was achieved
despite  the initial  volume  shipments  of the  Sentinel  2000.  As new product
introductions  generally  carry higher initial  costs,  the Sentinel 2000 was no
exception.  These  initially  lower gross margins were offset by improvements in
the  Company's  mature  product  lines.  As the  Sentinel  2000  matures,  it is
reasonable to expect an improvement in gross margins as volume manufacturing and
purchasing efficiencies are achieved.




                                       20
<PAGE>



             Selling,   general  and  administrative   expenses  decreased  from
$4,043,356  for fiscal 1996 to $3,355,961  for fiscal 1997, a decrease of 17.0%.
As a percentage of revenues,  the decrease was more pronounced as this reduction
occurred while revenues increased. Fiscal 1997 showed an improvement to 45.7% of
sales from 64.6% of sales in fiscal 1996.  While  approximately  $250,000 of the
decrease was related to the one-time  adjustments  recorded at the end of fiscal
1996,  the  major  factor  contributing  to  this  decrease  was  the  Company's
commitment  to reduce  administrative  overhead in order to achieve its targeted
goal for fiscal 1997 of a return to profitability.

             Research  and  development  costs,  net  of  capitalized   software
development,  rose from  $713,441  during fiscal year 1996 to $893,852 in fiscal
year 1997. As a percentage  of sales,  the  Company's  research and  development
costs  increased  from 11.4% in fiscal  year 1996 to 12.2% in fiscal  year 1997.
This  increase is directly  attributable  to the  Company's  increased  activity
related to the  development  of the SNS/2000  family of products  introduced  in
fiscal 1997.

             The income tax  benefit of  $141,165  in fiscal 1997 and the income
tax  provision  of $574,900 in fiscal 1996 relates to the  Financial  Accounting
Standards  Board's  Statement  No.  109,  "Accounting  for Income  Taxes."  This
Statement,  issued in February 1992, and adopted by the Company  effective April
1, 1993,  requires  deferred tax assets and  liabilities  to be recorded for the
difference  between  the  financial  statement  and  tax  bases  of  assets  and
liabilities  ("temporary  differences")  using enacted tax rates.  The Statement
also requires  that the Company  record a valuation  allowance  when it is "more
likely than not that some  portion or all of the deferred tax assets will not be
realized."  It further  states  that  "forming  a  conclusion  that a  valuation
allowance is not needed is  difficult  when there is negative  evidence  such as
cumulative  losses in recent  years." Due to the operating  loss in fiscal 1996,
the  realization  of the deferred tax asset was more uncertain and, as a result,
the Company provided a full valuation  allowance  against deferred tax assets at
March 31, 1996. At March 31, 1997, the deferred tax asset and related  valuation
allowance  have been reduced  primarily  due to the  utilization  of Federal and
state net operating loss carryforwards.


Fiscal Year 1996 Compared to Fiscal Year 1995
---------------------------------------------

             The  results  for  fiscal  1996  were  well  below  the   Company's
expectations.  An operational loss of approximately $800,000 was supplemented by
fourth quarter  adjustments of approximately  $1,200,000.  The $800,000 loss was
directly  related to the quarter  ended  September  30, 1995 when  revenues were
negatively  impacted by two simultaneous  events at its two major  customers:  a
"capital spending freeze" at MCI  Communications  and an "overstocked"  position
regarding  the  Company's  products due to a change in sales  strategy at Lucent
Technologies.  The Company's  performance in the other three fiscal quarters was
approximately at a break-even level in terms of operating results.  However,  in
the  quarter  ended  March  31,  1996,   the  Company   recorded  the  following
adjustments:  (1) a $575,000 valuation  allowance against the deferred tax asset
on the  books  at  March  31,  1995;  (2) a  $150,000  provision  for  inventory
obsolescence  as the  Company  began  phasing  out  existing  product  lines  in
preparation  for the  introduction  of the SNS/2000  family of  products;  (3) a
$100,000  write-off  of  certain  capitalized  software  costs;  (4) a  $100,000
provision related to a sales tax



                                       21
<PAGE>



assessment by the State of New York which the Company contested;  (5) a $120,000
provision related to the separation of an officer;  and (6) a $100,000 provision
related  to  the  Company's  vacation  accrual.   In  addition,   several  minor
adjustments totalling $50,000 were made.

             The  Company's  revenues  for fiscal  1996 were  $6,258,243  versus
revenues of  $7,126,391  for fiscal 1995,  a decrease of 12.2%.  The decrease in
revenues is attributable  to decreased  sales of the Company's  products to both
MCI and Lucent  Technologies.  The decrease of  approximately  $1.300,000  (from
$4,300,000 to $3,000,000)  represented a 29% reduction from the previous  fiscal
year. The majority of the shortfall occurred in the quarter ending September 30,
1995,  with the remainder of the year  stabilized at expected  levels.  In fact,
sales to all other  customers  increased to  approximately  $3,300,000 in fiscal
1996 from approximately $2,800,000 in fiscal 1995, representing an 18% increase.
Of this total,  international  sales increased to approximately  $1,300,000 from
approximately  $950,000 in fiscal 1995,  representing a 38% increase from fiscal
1995 to fiscal 1996.

             The Company's cost of sales  decreased  from  $3,015,520 for fiscal
year 1995 to $2,789,855  for fiscal year 1996.  Cost of sales as a percentage of
sales  increased from 42.3% for fiscal 1995 to 44.6% for fiscal 1996 as a result
of provisions for excess and obsolete  inventory of approximately  $150,000,  or
2.4% of revenue,  as well as an increase of approximately  $130,000,  or 2.1% of
revenue, in capitalized software amortization. Exclusive of these two items, the
Company  continued  its positive  trend begun in fiscal 1995 of reducing  direct
material and labor costs over the course of fiscal 1996.

             Selling,   general  and  administrative   expenses  increased  from
$3,048,224 for 1995 to $4,084,254 for 1996, an increase from 42.8% to 64.6% as a
percentage of sales.  The major factors  contributing  to this increase were (1)
the expansion of senior  management  and the domestic sales force late in fiscal
1995 and early in fiscal 1996 in preparation  for the  anticipated  growth which
did not  materialize;  and (2) costs associated with the separation of employees
from the Company as part of the  austerity  measures  implemented  in the second
half of the fiscal year. The Company's  acquisition  of its European  subsidiary
did not have a material effect on the Company's financial position or results of
operations.

             Research  and  development  costs,  net  of  capitalized   software
development,  rose from  $488,339  during fiscal year 1995 to $713,441 in fiscal
year 1996. As a percentage  of sales,  the  Company's  research and  development
costs increased from 6.9% in fiscal year 1995 to 11.4% in fiscal year 1996. This
increase  is  directly  attributable  to  the  non-capitalized  portion  of  the
development of the SNS/2000 family of products.





                                       22
<PAGE>



LIQUIDITY AND CAPITAL RESOURCES

             During  fiscal 1997,  the  Company's  financial  position  improved
substantially  as  assets  increased  from  $3,558,171  to  $4,682,373,  and the
Company's working capital increased from $837,064 to $2,381,178, net of deferred
taxes.  The primary  contributor to this  improvement  in the Company's  working
capital  position was the  completion  of the 1996 Private  Placement of 860,000
shares  of  the  Company's  Common  Stock  for  net  proceeds  of  approximately
$1,030,000.  In  addition,  241,467  shares of the  Company's  Common Stock were
issued in June 1996 to existing  shareholders  who had the contractual  right to
maintain   their   percentage   ownership  in  the  Company.   Net  proceeds  of
approximately   $300,000   were   received   from  this   issuance  to  existing
shareholders.  Of these total proceeds from the issuances of stock, $500,000 was
used to pay down in full the Company's line of credit which had been outstanding
at March 31,  1996.  Excluding  the net proceeds of the Private  Placement,  the
Company's  working capital position improved over $200,000,  which  approximates
the Company's income before income tax benefit for fiscal 1997.

           The Company  previously had a credit  agreement with  CoreStates Bank
("CoreStates") for a credit line of $1,000,000 to finance future working capital
requirements,  collateralized by accounts receivable,  inventory,  equipment and
all other  assets of the  Company,  as well as a  $150,000  credit  facility  to
finance  purchases of machinery  and  equipment,  convertible  into a three-year
secured term loan when  utilized.  The Company  borrowed  $124,000  against this
facility  in  November,  1995,  at which  time  this debt was  converted  into a
three-year term loan. As of March 31, 1997, $72,664 remained outstanding on this
loan. The Company was informed in June,  1996,  that the working  capital credit
line  would  not be  renewed  upon its  expiration  date of July 31,  1996.  The
outstanding  balance  was  repaid  by the  Company  on  September  5,  1996,  in
accordance  with an agreement with  CoreStates.  On August 30, 1996, the Company
executed a credit agreement with Farrington Bank of North Brunswick,  New Jersey
(subsequently acquired by United National Bank of Bridgewater,  New Jersey). The
agreement  provides the Company with a $500,000 line of credit to finance future
working  capital  requirements,  collateralized  by accounts  receivable  of the
Company. The agreement expires on August 30, 1997. No amount of this credit line
had been utilized as of March 31, 1997.

             Based on its current cash and working capital position,  as well as
its available line of credit,  the Company believes that it will have sufficient
capital to meet its operational needs over the next twelve months.

             In  fiscal  1998,  the  Company  will  be  required  to  adopt  the
provisions  of the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
is effective for financial  statements  for annual periods ending after December
15, 1997. SFAS 128 establishes  standards for the computation,  presentation and
disclosure requirements for earnings per share. The adoption of this standard is
not expected to have a material  impact on the Company's  reported  earnings per
share.






                                       23
<PAGE>



ITEM 7.      FINANCIAL STATEMENTS.

             The financial  statements  required hereby are located on pages F-1
through F-18.


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

             None





                                       24
<PAGE>



                                    PART III


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

DIRECTORS AND EXECUTIVE OFFICERS

        Name            Age                Position Held with the Company
        ----            ---                ------------------------------

Stephen M. Deixler       61       Chairman of the Board of Directors, Treasurer

Stephen B. Gray          39       President, Chief Executive Officer,
                                  Chief Operating Officer, Director

Michael Radomsky         44       Executive Vice President, Secretary, Director

William H. Whitney       42       Chief Technology Officer, Assistant Secretary,
                                  Director

Mark A. Simmons          36       Vice President - Operations, Chief Financial 
                                  Officer

Robert M. Groll          63       Vice President - Marketing

David I. Gould           66       Director

Stephen P. Roma          49       Director


             All  directors  of the Company  hold  office  until the next annual
meeting  of  shareholders  and until  their  successors  have been  elected  and
qualified.  No family  relationship  exists  between any  director or  executive
officer and any other director or executive officer of the Company.

             The  officers of the Company are elected by the Board of  Directors
at its first meeting after each annual meeting of the Company's shareholders and
hold office until their successors are chosen and qualified,  until their death,
or until they resign or have been removed from office.

             STEPHEN M.  DEIXLER  has been  Chairman  of the Board of  Directors
since 1985 and served as Chief Executive  Officer of the Company from April 1996
to May 1997, as well as from June 1985 through October 1994. He was President of
the Company from May 1982 to June 1985.  Mr.  Deixler served as Treasurer of the
Company from its formation in 1982 until  September 1993 and since October 1994.
Mr.  Deixler  served on the Board of  Directors  of  Farrington  Bank  until its
acquisition by United National Bank on February 27, 1997. During April 1995, Mr.
Deixler sold his interest in Princeton Credit Corporation,  a company engaged in
the business of buying, selling, and leasing high



                                       25
<PAGE>



technology products, to Greyvest Capital Inc., a Toronto Stock Exchange company.
Prior to the sale, Mr. Deixler was Chairman of Princeton Credit Corporation.  He
previously served as President of Atlantic  International  Brokerage,  a leasing
company,  which is a wholly owned subsidiary of Atlantic Computer Systems, Inc.,
which was  liquidated as a result of the  bankruptcy  proceedings  of its parent
company,  Atlantic Computer Systems PLC. Prior to holding this position,  he was
President and sole shareholder of Princeton Computer  Associates,  Inc. ("PCA").
PCA was a company  engaged in the  business  of buying,  selling  and leasing of
large-scale computer systems as well as functioning in consulting and facilities
management and was sold to Atlantic Computer Systems, Inc. in 1988.

             STEPHEN B. GRAY has been President,  Chief Operating  Officer and a
director since April 1996. He was elected to serve in the additional capacity as
the Chief  Executive  Officer in May 1997.  He also is a director of  MicroFrame
Europe N.V. He Served as Senior Vice  President-Sales,  Marketing and Support of
the Company  From  December  1994  through  March 1996.  From July 1993  through
December 1994, Mr. Gray was an independent consultant, engaged in assisting both
private  and  publicly-held   companies  with  strategy  development,   internal
operational reviews and shareholder value enhancement  programs.  From September
1988 through June 1993, he held a series of management  positions within Siemens
Nixdorf  USA,  the last as Vice  President,  (reporting  to the Chief  Executive
Officer  and  Board of  Directors),  and a  member  of the  executive  committee
overseeing Siemens Information Systems businesses in the United States. Prior to
joining  Siemens,  Mr.  Gray  previously  held a series of  rapidly  progressive
positions  within  IBM  including   various   technical,   sales  and  marketing
assignments.

             MICHAEL RADOMSKY is an original founder of the Company and has been
the Executive  Vice  President and a director  since the Company's  formation in
1982 and has served as  Secretary  of the Company  since  November  1994.  He is
currently   responsible  for  multiple  tasks,  the  most  important  being  the
identification  of industry  directions,  and the technical  appropriateness  of
Company designs as well as products acquired, licensed or jointly developed with
others. In addition, Mr. Radomsky has been responsible for the design of network
topologies for large  corporate  customers,  ensuring  compatibility  for future
products.  Mr. Radomsky has also  previously been  responsible for the Company's
technical support,  purchasing and manufacturing operations.  Prior to 1989, Mr.
Radomsky was  responsible  for the mechanical and electronic  engineering of the
Company's products.

             WILLIAM H.  WHITNEY is an  original  founder of the Company and has
been the Chief  Technology  Officer  (formerly  titled Vice President - Software
Development) and a director since the Company's formation in 1982 and has served
as  Assistant  Secretary  of the Company  since  November  1994.  Along with Mr.
Radomsky,  he developed all of the  Company's  initial  products,  including the
DL-4000 and the IPC product line. As Chief Technology  Officer,  Mr. Whitney has
been  responsible  for  development  of  hardware  and  software  for all of the
Company's standard offerings,  including all products being sold through OEM and
distributor channels.





                                       26
<PAGE>



             MARK A. SIMMONS has been the Company's  Vice President - Operations
and Chief  Financial  Officer since January 1995. His  responsibilities  include
finance,  administration,  purchasing/materials  management and production.  Mr.
Simmons is a finance  professional  and Certified Public  Accountant.  From 1987
through  1994,  he was with the  Communications  Division of General  Instrument
Corporation  where he served as Controller from 1992 through 1994 and Manager of
Financial  Reporting and  Accounting  Services  from 1987 to 1992.  From 1985 to
1987, Mr. Simmons was Accounting Manager for UGI Development Company, an oil and
gas equipment supplier. Prior to this, he was with KPMG Peat Marwick.

             ROBERT M. GROLL has been Vice  President - Marketing of the Company
since March 1986.  From 1970 until joining the Company in June 1985, as Director
of Marketing,  Mr. Groll was the President of PTM Associates,  Inc.  ("PTM"),  a
firm engaged in management  consulting  in the areas of technical  marketing and
computer  system design.  While with PTM, during 1983 and 1984, Mr. Groll became
Vice President of Cable Applications,  Inc. a New York corporation, where he was
responsible for initiating and managing new product development efforts.

             DAVID I. GOULD,  retired as Vice Chairman of the Board of Directors
at the end of April 1995, a position in which he had served since December 1993.
He  presently  is a director of the Company and has been since April 1985 and he
is President of Gould  Consulting  since May 1, 1995. He served as President and
Chief  Operating  Officer of the Company from June 1985 until  December 1993. He
was Vice  President-Marketing  of the  Company  from April 1985 until June 1985.
From 1982 until  joining the Company in 1985,  he was an officer of The Ultimate
Corporation  ("Ultimate"),  a computer manufacturer listed on the New York Stock
Exchange,  eventually serving as Senior Vice President of Marketing.  During his
three years at Ultimate, Mr. Gould managed the growth of that company's revenues
from $40 million to more than $100 million.

             STEPHEN P. ROMA has been a director  of the  Company  since  August
1991 and since August 1994 is the President and Chief Executive  Officer of Wow!
WorkOut World, a chain of neighborhood Health and Fitness Centers.  During April
1995, he sold his interest in Princeton Credit Corporation, a company engaged in
the  business of buying,  selling  and  leasing  high  technology  products,  to
Greyvest Capital, Inc., a Toronto Stock Exchange company. Prior to the sale, Mr.
Roma was President and Chief Operating Officer of Princeton Credit  Corporation.
He previously  served as Vice  President of  Sales/Northeast  Region of Atlantic
Computer  Systems,  Inc.,  which was  liquidated  as a result of the  bankruptcy
proceedings of its parent  company,  Atlantic  Computer  Systems,  PLC. Prior to
holding this  position,  he was a principal and  President  and Chief  Operating
Officer of Princeton  Computer Group,  Inc., which was sold to Atlantic Computer
Systems, Inc. in 1988.


COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

             The following persons have failed to file on a timely basis certain
reports  required by Section  16(a) of the  Securities  Exchange  Act of 1934 as
follows: Each of Messrs. Stephen M. Deixler,  Stephen P. Roma and David I. Gould
filed one late report on Form 5,  disclosing the grant of a  non-








                                       27
<PAGE>



employee  stock option  pursuant to the  Company's  1994 Stock  Option Plan,  as
amended (the "1994 Plan").  Each of Messrs.  Stephen B. Gray,  Michael Radomsky,
William Whitney and Mark Simmons filed one late report,  a Form 4 disclosing the
grant of a non-plan stock option. Mr. William Whitney has filed two late reports
on Form 4, disclosing the sale of stock.  During the fiscal year ended March 31,
1997,  the Company is not aware of other late filings,  or failure to file,  any
other reports required by Section 16(a) of the Exchange Act.


ITEM 10.  EXECUTIVE COMPENSATION.

             The following table summarizes the compensation  paid or accrued by
the  Company  during the three  fiscal  years  ended  March 31,  1997,  to those
individuals  who as of March 31, 1997 served as the  Company's  Chief  Executive
Officer  during  fiscal 1997 and to the Company's  four most highly  compensated
officers  other  than  those who served as the Chief  Executive  Officer  during
fiscal 1997 (these five executive officers being hereinafter  referred to as the
"Named Executive Officers").


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                 Annual Compensation                                     Long Term Compensation
                                 -------------------           ---------------------------------------------------------------------
                                                                       Awards                                        Payouts
                                                               --------------------------                   ------------------------
                                                                Other
                                                                Annual       Restricted      Securities                    All Other
Principal                                                       Compen-        Stock         Underlying     LTIP           Compen-
Position                   Year   Salary ($)      Bonus($)     sation($)     Awards(s)($)    Options (#)    Payouts ($)    sation($)
--------                   ----   ----------      --------     ---------     ------------    -----------    -----------    ---------
<S>                        <C>       <C>                                                       <C>                             
Stephen M. Deixler         1997      14,000(1)           --        --               --         10,000           --           --
Chairman, Chief            1996          --              --        --               --             --           --           --
Executive Officer(1)       1995          --              --        --               --             --           --           --
                                                                                                         
Stephen B. Gray            1997     163,386              --        --               --        400,000           --           --
President, Chief           1996     134,675              --        --               --          2,309           --           --
Executive Officer (2),     1995      42,000(2)     2,213(3)        --               --         40,000           --           --
Chief Operating Officer                                                                                  
                                                                                                         
Michael Radomsky           1997     128,773              --        --               --         90,000           --            541(4)
Executive Vice-            1996     122,800              --        --               --          8,208           --          1,047(4)
President                  1995     111,588        2,910(3)        --               --          1,192           --          1,997(4)
                                                                                                         
William H. Whitney         1997     128,773              --        --               --         90,000           --          2,318(4)
Chief Technology           1996     122,800              --        --               --          8,136           --          2,152(4)
Officer                    1995     111,588        2,841(3)        --               --          1,209           --          1,997(4)
                                                                                                         
Mark A. Simmons            1997     116,956              --        --               --         40,000           --          2,105(4)
V-P, Operations, Chief     1996      92,800              --        --               --          6,579           --          1,612(4)
Financial Officer          1995      16,012        1,513(3)        --               --         20,000           --            177(4)
</TABLE>




                                       28
<PAGE>



(1)  The Company does not have a written  employment  agreement with Mr. Stephen
     M. Deixler, the Company's Chairman of the Board. However, under an informal
     agreement, the Company has agreed to pay him $1,000 per day to perform such
     services as jointly agreed to by the Company and Mr. Deixler,  and approved
     by the  Board of  Directors.  Mr.  Deixler  ceased  to  serve as the  Chief
     Executive Officer of the Company on May 19, 1997.

(2)  Mr.  Gray was  elected  to serve in the  additional  capacity  as the Chief
     Executive Officer of the Company on May 19, 1997. Compensation for Mr. Gray
     includes  payments he earned as a consultant  of the Company in the amounts
     of $42,000.  Mr. Gray served as a  consultant  to the Company  prior to the
     time he became a full-time  employee  pursuant to his employment  agreement
     with the Company dated March 27, 1995.

(3)  Represents compensation earned under the Company's Incentive Bonus Plan for
     the fiscal year ended March 31, 1995 (the "Incentive  Plan"). The Incentive
     Plan covers all Company  employees and was effective as of October 1, 1994.
     The  Incentive  Plan is based on  achievement  in  three  specific  areas -
     Company revenue,  Company  operating income,  and individual/  departmental
     objectives.

(4)  Represents contribution of the Company under the Company's 401(k) Plan.





                                       29
<PAGE>



                        OPTION GRANTS IN FISCAL YEAR 1997

             The following table sets forth certain information concerning stock
option  grants  during  the year  ended  March 31,  1997 to the Named  Executive
Officers (after giving effect to the Reverse Stock Split):



                                          Individual Grants
                        --------------------------------------------------------
                                        Percent
                        Number of       of Total
                        Securities      Options
                        Underlying      Granted to      Exercise or
                        Options         Employee in     Base Price    Expiration
      Name              Granted(#)      Fiscal Year     ($/Sh)           Date
      ----              ----------      -----------     ------           ----

Stephen M. Deixler      10,000(1)       (1)             $1.50            9/17/01

                        65,784          5.3%            $1.31                (2)
Stephen B. Gray         400,000         32.3%           $1.16            9/25/06

                        45,850          3.7%            $1.31                (2)
Michael Radomsky        90,000          7.3%            $1.16            9/25/06

                        45,850          3.7%            $1.31                (2)
William H. Whitney      90,000          7.3%            $1.16            9/25/06

                        39,869          3.2%            $1.31                (2)
Mark A. Simmons         40,000          3.2%            $1.16            9/25/06

(1)  Represents stock options granted to Mr. Deixler under the 1994 Stock Option
     Plan in  consideration  of his  service to the  Company  as a  non-employee
     director. Mr. Deixler is not considered an employee of the Company

(2)  Represent  options issued under a Time  Accelerated  Restricted Stock Award
     Program (TARSAP). These options were terminated by mutual agreement between
     the Company and the Named Executive Officers on March 31, 1997.




                                       30
<PAGE>



                 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
                        AND FISCAL YEAR-END OPTION VALUES

             The following table sets forth certain information  concerning each
exercise of stock options during the fiscal year ended March 31, 1997 by each of
the Named  Executive  Officers and the number and value of  unexercised  options
held by each of the Named  Executive  Officers on March 31,  1997 (after  giving
effect to the Reverse Stock Split).

<TABLE>
<CAPTION>
                                                                          Value of
                                               Number of Securities       Unexercised
                                               Underlying Unexer-         In-the-Money
                     Shares                    cised Options              Options at
                     Acquired on   Value       at FY-End(#)               FY-End ($)(1)
Name                 Exercise(#)   Realized($) Exercisable/Unexercisable  Exercisable/Unexercisable
----                 -----------   ----------  -------------------------  -------------------------
<S>                                            <C>    <C>                 <C>    <C>   
Stephen M. Deixler   --            --          15,000/5,000               $1,250/$1,250
Stephen B. Gray      --            --          202,309/200,000            $118,000/$118,000
Michael Radomsky     --            --          99,400/0                   $53,100/$0
William H. Whitney   --            --          99,345/0                   $53,100/$0
Mark A. Simmons      --            --          46,579/0                   $23,600/$0
</TABLE>

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

(1)  The  average  price  for the  Common  Stock  as  reported  by the  National
     Quotation Bureau on March 31, 1997 was $1.75 per share. Value is calculated
     on the basis of the difference  between the option exercise price and $1.75
     multiplied by the number of shares of Common Stock underlying the options.






COMPENSATION OF DIRECTORS

             On September 17, 1996, each of Stephen M. Deixler,  Stephen P. Roma
and  David I.  Gould,  the  Company's  non-employee  directors,  were  granted a
non-employee  director  option  pursuant to the Company's  1994 Plan to purchase
10,000  shares  of  Common  stock  exercisable  as to  2,500  shares  upon  each
three-month  anniversary  of the date of grant,  provided  that such  individual
continues to serve as a non-employee director of the Company on such dates.




                                       31
<PAGE>



             In addition,  the Company  adopted a policy  commencing  October 1,
1995,  that all  non-employee  directors  traveling  more than fifty  miles to a
meeting of the Board of directors shall be reimbursed for all reasonable  travel
expenses.


EMPLOYMENT   CONTRACTS,   TERMINATION   OF  EMPLOYMENT  AND  CHANGE  OF  CONTROL
ARRANGEMENTS

             The Company entered into employment agreements with each of Messrs.
Robert M. Groll, Michael Radomsky and William H. Whitney,  which commenced as of
July 1, 1994 and expire on June 30, 1997.  Each agreement  provides for a salary
of not less than $100,000 per year to continue through the term of the agreement
unless  terminated for cause. Each agreement also provides each executive during
the term with disability  payments,  reimbursement  for reasonable  expenses and
fringe benefits that generally are available to the Company's  executives.  Each
of the executives has agreed not to disclose any confidential information of the
Company  during the term of his  employment or  thereafter  and will not compete
with  the  Company  for a  period  of two  years  following  termination  of his
employment.

             On  April 1,  1996,  the  Board  of  Directors  did not  renew  the
Company's  employment  agreement with Mr. Lonnie L. Sciambi,  the Company's then
President and Chief Executive Officer and simultaneously approved a compensation
arrangement between the company and Mr. Sciambi to be effective as of such date.
See "Certain Relationships and Related Transactions."

             Mr. Simmons has tendered his resignation as an employee and officer
of the Company.  His resignation is not effective,  by its terms, until June 30,
1997.


ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

             The  following  table  sets  forth  the  number  of  shares  of the
Company's Common Stock,  owned by each person or institution who, as of June 11,
1997, owns of record or is known by the Company to own  beneficially,  more than
5% of such securities,  and by the Company's Named Executive Officers and by its
Directors,  both  individually  and as a  group,  and  the  percentage  of  such
securities owned by each such person and the group. Unless otherwise  indicated,
such persons have sole voting and investment power with respect to shares listed
as owned by them.

Name and Address                      Shares Owned*          Percent of Class
----------------                      -------------          ----------------

Stephen M. Deixler (1)                  750,532                   15.3%
371 Eagle Drive
Jupiter, Florida 33477

David I. Gould (2)                      275,837                    5.6%
10844 White Aspen Way
Boca Raton, Florida  33428




                                       32
<PAGE>


Stephen B. Gray (3)                      202,309                   4.0%
37 Shy Creek Road
Alexandria,  NJ   08867

Michael Radomsky (4)                     313,804                   6.4%
8 Zaydee Drive
Edison, New Jersey 08837

William H. Whitney (5)                   182,159                   3.7%
15 Jackson Avenue
Chatham, New Jersey 07928

Robert M. Groll (6)                       82,913                    1.7%
52 Village Lane
Freehold, New Jersey 07728

Mark A. Simmons (7)                       46,579                    1.0%
218 Victoria Court
Doylestown, Pennsylvania 18901

Stephen P. Roma (8)                      474,399                    9.7%
91 Durand Drive
Marlboro, New Jersey 07748

Special Situations Fund, III, L.P.(9)    855,863                   16.8%

MGP Advisers Limited Partnership (9)     855,863                   16.8%

AWM Investment Company, Inc. (9)       1,170,133                   22.5%

Austin W. Marxe (9)                    1,170,133                   22.5%

Jay Associates LLC (10)                  480,000                    9.3%
1118 Avenue J
Brooklyn, New York  11230

Alpha Investments LLC (11)               336,000                    6.6%
5611 North 16th Street #300
Phoenix, Arizona  85016





                                       33
<PAGE>



Jules Nordlicht (12)                     300,000                     6.1%
255 West Palm Beach
Long Beach, New York  11561

Directors and executive
  officers as a group (8 Persons)       2,328,532                   42.1%



------------------
*    All shares and per share  amounts  have been  adjusted to take into account
     the Company's Reverse Stock Split.

     (1)  Does not include 214,436 shares of Common Stock owned by Mr. Deixler's
          wife,  mother,  children  and  grandchildren  as to which  shares  Mr.
          Deixler  disclaims  beneficial  ownership.  Includes 120,406 shares of
          Common  Stock held by Merrill  Lynch Pierce  Fenner & Smith  custodian
          f/b/o Stephen M. Deixler,  IRA. Includes 17,500 shares of Common Stock
          which may be acquired pursuant to currently  exercisable  non-employee
          director  options  under the 1994 Plan.  Also  includes  53,330 shares
          issuable  upon exercise of currently  exercisable  Class A and Class B
          Warrants of the 1996 Private Placement.

     (2)  Includes 50,000 shares of Common Stock which may be acquired  pursuant
          to currently  exercisable  options  granted outside the Company's 1984
          Stock Option Plan and the 1994 Plan.  Also  includes  17,500 shares of
          common Stock which may be acquired  pursuant to currently  exercisable
          non-employee director options under the 1994 Plan.

     (3)  Includes 200,000 shares of Common Stock which may be acquired pursuant
          to currently  exercisable  options  granted outside the Company's 1994
          Plan. Also includes 2,309 shares of Common Stock which may be acquired
          pursuant to currently  exercisable options granted under the Company's
          1994 Plan.

     (4)  Includes 90,000 shares of Common Stock which may be acquired  pursuant
          to currently  exercisable  options  granted outside the Company's 1994
          Plan. Also includes 9,400 shares of Common Stock which may be acquired
          pursuant to currently  exercisable options granted under the Company's
          1994 Plan.

     (5)  Includes 90,000 shares of Common Stock which may be acquired  pursuant
          to currently  exercisable  options  granted outside the Company's 1994
          Plan. Also includes 9,345 shares of Common Stock which may be acquired
          pursuant to currently  exercisable options granted under the Company's
          1994 Plan.

     (6)  Includes 10,000 shares of Common Stock which may be acquired  pursuant
          to currently  exercisable  options  granted under the  Company's  1984
          Plan. Also includes



                                       34
<PAGE>



          28,745  shares  of Common  Stock  which may be  acquired  pursuant  to
          currently exercisable options granted under the 1994 Plan.

     (7)  Includes 40,000 shares of Common Stock which may be acquired  pursuant
          to currently  exercisable  options  granted outside the Company's 1994
          Plan. Also includes 6,579 shares of Common Stock which may be acquired
          pursuant to currently  exercisable options granted under the Company's
          1994 Plan.

     (8)  Includes  47,877  shares of Common Stock held by  Donaldson,  Lufkin &
          Jenrette Securities  Corporation custodian f/b/o Stephen P. Roma, IRA.
          Includes 8,400 shares of Common Stock held by Mr. Roma and his wife as
          joint tenants.  Also includes  17,500 shares of common Stock which may
          be acquired pursuant to currently  exercisable  non-employee  director
          options under the 1994 Plan. Also includes 53,330 shares issuable upon
          exercise of currently  exercisable Class A and Class B Warrants of the
          1996 Private Placement.  Does not include 1,200 shares of Common Stock
          held by Mr. Roma as  custodian  for his son or 29,108  shares owned by
          Mr.  Roma's  wife,  some of which are held in Mrs.  Roma's  individual
          retirement account,  as to which shares Mr. Roma disclaims  beneficial
          ownership.

     (9)  Special Situations Fund III, L.P., a Delaware limited partnership (the
          "Fund"),  MGP  Advisers  Limited   Partnership,   a  Delaware  limited
          partnership  ("MGP"),   AWM  Investment  Company,   Inc.,  a  Delaware
          corporation  ("AWM"),  and Austin W. Marxe have filed a Schedule  13G,
          the latest amendment of which is dated January 27, 1997. All presented
          information is based on the information contained in the Schedule 13G,
          as amended.  The address of each of the reporting  persons is 153 East
          53rd Street,  New York,  New York 10022.  The Fund has sole voting and
          dispositive  power  with  respect  to  855,863  shares;  MGP has  sole
          dispositive power with respect to 855,863 shares;  AWM has sole voting
          power with respect to 314,270 shares and sole  dispositive  power with
          respect to 1,170,133 shares;  and Mr. Marxe has sole voting power with
          respect to 314,270 shares, shared voting power with respect to 855,863
          shares and sole  dispositive  power with respect to 1,170,133  shares.
          MGP is a general  partner of and investment  advisor to the Fund. AWM,
          which is primarily  owned by Mr. Marxe, is the sole general partner of
          MGP. Mr. Marxe, the principal limited partner of MGP and the President
          of AWM, is principally responsible for the selection,  acquisition and
          disposition of the portfolio



                                       35
<PAGE>



          securities  by AWM on behalf of MGP,  the Fund and  another  fund that
          beneficially owns shares included in the shares  beneficially owned by
          AWM and Mr. Marxe. Also includes 267,242 shares issuable upon exercise
          of  currently  exercisable  Class A and Class B  Warrants  of the 1996
          Private Placement held by the Fund and MGP and 364,422 shares issuable
          upon exercise of currently exercisable Class A and Class B Warrants of
          the 1996 Private Placement held by AWM and Mr. Marxe.

     (10) Includes   320,000   shares   issuable   upon  exercise  of  currently
          exercisable  Class  A  and  Class  B  Warrants  of  the  1996  Private
          Placement.

     (11) Includes   224,000   shares   issuable   upon  exercise  of  currently
          exercisable  Class  A  and  Class  B  Warrants  of  the  1996  Private
          Placement.

     (12) All presented  information is based upon information  contained in the
          Schedule 13G filed in August 1996.  Includes  200,000 shares  issuable
          upon exercise of currently exercisable Class A and Class B Warrants of
          the 1996 Private Placement.


ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

             Mr. David I. Gould,  formerly an executive  officer and currently a
director of the Company  entered  into a consulting  agreement  with the Company
which become effective on May 1, 1995 upon the expiration date of his employment
agreement on April 30, 1995. The consulting  agreement  provides for a four-year
term, with an automatic one year renewal, and compensation at the rate of $1,000
per day for services  provided.  The consulting  agreement further provides that
Mr. Gould will not receive  less than  $40,000 nor more than  $220,000 per year,
and that the  rendering  of any  services  above  $40,000 must be with the prior
approval of the Company.  In the fiscal year ended March 31, 1997, Mr. Gould was
paid $40,000 under this agreement.

             On April 1, 1996, the Company entered into a six-month compensation
agreement with Mr. Lonnie L. Sciambi, a former executive officer and director of
the Company  after not  renewing the  Company's  employment  agreement  with Mr.
Sciambi.  The compensation  agreement provided for compensation in the aggregate
sum of $100,000,  as well as certain benefits during the term. In addition,  Mr.
Sciambi was granted a stock  option  under the  Company's  1994 Plan to purchase
23,196 shares of Common Stock.

             In April 1996, the Company  completed the 1996 Private Placement to
accredited  investors of an aggregate of 1,101,467  Units for gross  proceeds of
$1,376,933.75, each Unit consisting of one share of Common Stock and one Class A
Warrant and one Class B Warrant, each of which are exercisable into one share of
Common  Stock.  Stephen M. Deixler,  an executive  officer and a director of the
Company and Stephen P. Roma, a director of the Company, who each held preemptive
rights to purchase  Units in this  offering,  each  purchased  26,665 Units at a
price  of  $1.25  per  Unit  for  the  aggregate   consideration  of  $33,331.25
Additionally, in connection with the 1996 Private Placement,



                                       36
<PAGE>



Special  Situations  Fund  III,  L.P.,  also the  holder  of  preemptive  rights
purchased 133,621 Units at $1.25 for the aggregate consideration of $167,026.25.

             In September  1995, the Company  formed a wholly owned  subsidiary,
MicroFrame  Europe  N.V.,  which,  in  turn,  acquired  all  of the  issued  and
outstanding  shares  of  capital  stock of EBA of  Brussels,  Belgium  from Marc
Kegelaers, its sole shareholder. In connection with such acquisition, MicroFrame
Europe N.V. entered into a consulting agreement with Mr. Kegelaers for a term of
five years.  The  consulting  agreement  provides  for a  consulting  fee in the
aggregate sum of U.S. $75,000 annually,  with annual 5% increases over the term,
as well as the reimbursement of certain expenses during the term.




                                       37

<PAGE>




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

(a)  Exhibits and Index of Exhibits

<TABLE>
<CAPTION>

Exhibit No.            Description                                Exhibit Reference
-----------            -----------                                -----------------

<C>                                                    <S>
3.1         Certificate of Incorporation of the        Incorporated by reference to Exhibit
            Company                                    3.2 of the Form 10-K for the fiscal
                                                       year ended March 31, 1992 (the
                                                       "1992 10-K")

3.2         By-Laws of the Company                     Incorporated by reference to Exhibit
                                                       3.2 of Amendment No. 1 to the
                                                       Company's Registration Statement
                                                       on Form SB-2 (No. 33-66688)
                                                       dated October 26, 1993
                                                       ("Amendment No. 1 to the
                                                       Registration Statement")

3.3         Amendment to Certificate of                Incorporated by reference to Exhibit
            Incorporation filed September 14,          3.3 of the Form 10-KSB for the
            1992                                       fiscal year ended March 31, 1993
                                                       (the "1993 10-KSB")

3.4         Amendment to Certificate of                Incorporated by reference to Exhibit
            Incorporation filed September 20,          3.4 of Amendment No. 1 to the
            1993                                       Registration Statement

3.5         Form of Specimen Common Stock              Incorporated by reference to Exhibit
            Certificate                                3.5 of Amendment No. 2 to the
                                                       Company's Registration Statement
                                                       on Form SB-2 (No. 33-66688)
                                                       dated December 1, 1993
                                                       ("Amendment No. 2 to the
                                                       Registration Statement")

10.1        1984 Stock Option Plan                     Incorporated by reference to Exhibit
                                                       10.4 of the of the Form 10-K for the
                                                       fiscal year ended March 31, 1985





                                       38
<PAGE>




10.2        Amendment No. 2 to 1984 Stock              Incorporated by reference to Exhibit
            Option Plan                                10.5 of the Form 10-K for the fiscal
                                                       year ended March 31, 1986 (the
                                                       "1986 10-K")

10.3        Lease Agreement                            Incorporated by reference to Exhibit
                                                       10.6 of the Form 10-K for the fiscal
                                                       year ended March 31, 1991 (the
                                                       "1991 10-K")


10.4        Stock Purchase Agreement dated             Incorporated by reference to Exhibit
            May 10, 1993 pursuant to Private           10.4 of the 1993 10-KSB
            Placement

10.5        Employment Agreement dated as              Incorporated by reference to Exhibit
            of May 2, 1992 between David I.            10.5 of Amendment No. 2 to the
            Gould and the Company                      Registration Statement

10.6        Loan Agreement between the                 Incorporated by reference to Exhibit
            Company and New Jersey National            10.6 of the 199310-KSB
            Bank

10.7        Letter Agreement dated April 28,           Incorporated by reference to Exhibit
            1993 between the Company and               10.7 of Amendment No. 1 to the
            New Jersey National Bank                   Registration Statement

10.8        Form of Consulting Agreement               Incorporated by reference to Exhibit
            between David I. Gould and the             10.8 of Amendment No. 1 to the
            Company                                    Registration Statement

10.9        Agreement between American                 Incorporated by reference to Exhibit
            Telephone and Telegraph Company            10.9 of Amendment No. 2 to the
            and the Company dated September            Registration Statement
            17, 1993







                                       39
<PAGE>




10.10       Joint Marketing Agreement                  Incorporated by reference to Exhibit
            between MCI Telecommunications             10.10 of Amendment No. 2 to the
            Corporation and the Company                Registration Statement
            dated September 1, 1992, together
            with Amendment No. 1 dated July
            7, 1993

10.11       Employment Agreement dated as              Incorporated by reference to Exhibit
            of January 1, 1994 between                 10.11 of Form 10-KSB for the fiscal
            Michael Radomsky and the                   year ended March 31, 1994 (the
            Company                                    "1994 10-KSB")

10.12       Employment Agreement dated as              Incorporated by reference to Exhibit
            of January 1, 1994 between                 10.12 of the 1994 10-KSB
            William H. Whitney and the
            Company

10.13       Employment Agreement dated as              Incorporated by reference to Exhibit
            of January 1, 1994 between Robert          10.13 of the 1994 10-KSB
            M. Groll and the Company

10.14       Employment Agreement dated as              Incorporated by reference to Exhibit
            of January 1, 1994 between P.              10.15 of Amendment No. 2 to the
            David Bocksch and the Company              Registration Statement

10.15       Amendments to Lease                        Incorporated by reference to Exhibit
                                                       10.15 of the 1994 10-KSB


10.16       Amendment to Loan and Security             Incorporated by reference to Exhibit
            Agreement between the Company              10.16 of Form 10-QSB for the
            and CoreStates Bank, N.A. dated            quarter ended September 30, 1994
            September 8, 1994.

10.17       Consulting Agreement between the           Incorporated by reference to Exhibit
            Company and P. David Bocksch               10.17 to Form 8-K dated November
            dated November 14, 1994                    30, 1994

10.18       Employment Agreement dated as              Incorporated by reference to Exhibit
            of October 11, 1994 between the            10.18 to Form 10-QSB for the
            Company and Lonnie L. Sciambi              quarter ended December 31, 1994





                                       40
<PAGE>




10.19       Incentive Bonus Plan of the                Incorporated by reference to Exhibit
            Company for the fiscal year ended          10.19 to Form 10-QSB for the
            March 31, 1995                             quarter ended December 31, 1994


10.20       Letter from Feldman Sablosky &             Incorporated by reference to Exhibit
            Company to the Securities and              10.20 to Form 8-K dated March 13,
            Exchange Commission relating to            1995
            Item 4 of Form 8-K

10.21       1994 Stock Option Plan                     Incorporated by reference from the
                                                       Company's Proxy Statement dated
                                                       August 15, 1994 for the Company's
                                                       Annual Meeting of Shareholders
                                                       held on September 19, 1994

10.22       Non-Qualified Stock Option                 Incorporated by reference to Exhibit
            Agreement dated December 19,               10.22 of the Form 10-KSB for the
            1994 between the Company and               fiscal year ended March 31, 1995
            Cameron Towey Neilson, Inc.                (the "1995 10-KSB")

10.23       Purchase Agreement dated                   Incorporated by reference to Exhibit
            December 21, 1994 between the              10.23 of the 1995 10-KSB
            Company and Ericsson Business
            Networks AB

10.24       Employment Agreement dated as              Incorporated by reference to Exhibit
            of March 27, 1995 between the              10.24 of the 1995 10-KSB
            Company and Stephen B. Gray

10.25       Letter dated April 5, 1995 from the        Incorporated by reference to Exhibit
            Company to P. David Bocksch                10.25 of the 1995 10-KSB
            terminating his Consulting
            Agreement

10.26       Incentive Bonus Plan of the                Incorporated by reference to Exhibit
            Company for the fiscal year ending         10.26 of the 1995 10-KSB
            March 31, 1996

10.27       Employment Agreement dated as              Incorporated by reference to Exhibit
            of July 1, 1995 between the                10.27 of Form 10-QSB for the
            Company and Mark A. Simmons                quarter ended September 30, 1995





                                       41
<PAGE>




10.28       Lease Agreement dated as of July           Incorporated by reference to Exhibit
            20, 1995 between 46.25                     10.28 of Form 10-QSB for the
            Associates, L.P. and the Company           quarter ended September 30, 1995
            for premises at the Middlesex (New
            Jersey) Business Center

10.29       Share Purchase Agreement (EBA)             Incorporated by reference to Exhibit
            dated September 15, 1995 between           10.30 of Form 10-QSB for the
            Marc Kegelaers and MicroFrame              quarter ended September 30, 1995
            Europe N.V.

10.30       Consulting Agreement dated as of           Incorporated by reference to Exhibit
            September 15, 1995 between Marc            10.31 of Form 10-QSB for the
            Kegelaers and MicroFrame Europe            quarter ended September 30, 1995
            N.V.

10.31       Termination Letter dated                   Incorporated by reference to Exhibit
            September 15, 1995 from                    10.32 of Form 10-QSB for the
            European Business Associates               quarter ended September 30, 1995
            BVBA to the Company

10.32       Letter from Price Waterhouse LLP           Incorporated by reference to Exhibit
            to the Securities and Exchange             10.33 of Form 8-K dated January
            Commission relating to Item 4 of           30, 1996
            Form 8-K

10.33       Form of Purchase Agreement dated           Incorporated by reference to Exhibit
            April 1996 pursuant to the 1996            10.33 of the Form 10-KSB for the
            Private Placement                          fiscal year ended March 31, 1996
                                                       (the "1996 10-KSB")

10.34       Consulting Agreement between the           Incorporated by reference to Exhibit
            Company and Lonnie L. Sciambi              10.34 of the 1996 10-KSB
            dated April 1, 1996

10.35       Fiscal 1997 Incentive Plan                 Incorporated by reference to Exhibit
                                                       10.35 of the 1996 10-KSB

23 (a)      Consent of Coopers and Lybrand LLP         Filed herewith

(b)             Reports on Form 8-K
                None
</TABLE>



                                       42
<PAGE>



                          Index to Financial Statements


Report of Independent Accountants.                                           F-1

Consolidated Balance Sheets as of March 31, 1997 and March 31, 1996.         F-2

Consolidated Statements of Operations for the years 
ended March 31, 1997 and 1996.                                               F-3

Consolidated Statements of Cash Flows for the years ended March 31, 
1997 and 1996.                                                               F-4

Consolidated Statements of Changes in Stockholders' Equity 
for the years ended March 31, 1997 and March 31, 1996.                       F-5

Notes to Consolidated Financial Statements.                               F-6-18



                                       43


<PAGE>



                                   SIGNATURES


             In accordance  with the  requirements of Section 13 or 15(d) of the
Securities  Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the  undersigned,  thereunto duly  authorized,  in this City of
Edison and State of New Jersey, on June 19, 1997.


                                    MICROFRAME, INC.


                                    By:  /s/ Stephen B. Gray
                                        --------------------------------------
                                        Stephen B. Gray, President, Chief 
                                        Executive Officer, and Chief Operating
                                        Officer


             In accordance with the requirements of the Securities  Exchange Act
of 1934,  this report has been signed by the following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

                               Signature and Title
                               -------------------



/s/ Stephen B. Gray
--------------------------------------                             June 19, 1997
Stephen B. Gray, President, Chief
Executive Officer, Chief Operating
Officer (Principal Executive Officer)


/s/ Mark A. Simmons
--------------------------------------                             June 19, 1997
Mark A. Simmons, Vice President -
Operations, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)


/s/ Stephen M. Deixler
--------------------------------------                             June 19, 1997
Stephen M. Deixler, Chairman of the
Board of Directors, Treasurer


/s/ Michael Radomsky
--------------------------------------                             June 19, 1997
Michael Radomsky, Executive Vice
President, Secretary, Director


/s/ William H. Whitney
--------------------------------------                             June 19, 1997
William H. Whitney, Chief Technology
Officer, Assistant Secretary, Director





<PAGE>






/s/ Stephen P. Roma
--------------------------------------                             June 19, 1997
Stephen P. Roma, Director


/s/ David I. Gould
--------------------------------------                             June 19, 1997
David I. Gould, Director






<PAGE>


                         MICROFRAME, INC. AND SUBSIDIARY


                        CONSOLIDATED FINANCIAL STATEMENTS

                   FOR THE YEARS ENDED MARCH 31, 1997 AND 1996




<PAGE>





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





Report of Independent Accountants                                           F-1


Consolidated Balance Sheets as of March 31, 1997
    and March 31, 1996                                                      F-2


Consolidated Statements of Operations for the years
    ended March 31, 1997 and 1996                                           F-3


Consolidated Statements of Cash Flows for the years
    ended March 31, 1997 and 1996                                           F-4


Consolidated Statements of Stockholders' Equity for
    the years ended March 31, 1997 and March 31, 1996                       F-5


Notes to Consolidated Financial Statements                               F-6-18




<PAGE>









REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders of

MicroFrame, Inc. and Subsidiary:



We have audited the accompanying consolidated balance sheets of MicroFrame, Inc.
and  Subsidiary  (the  "Company") as of March 31, 1997 and 1996, and the related
consolidated  statements of operations,  stockholders' 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 consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of the
Company  as of March 31,  1997 and 1996 and the  consolidated  results  of their
operations  and their cash flows for the years then ended,  in  conformity  with
generally accepted accounting principles.


                                             /s/ Coopers & Lybrabd, LLP

New York, New York
May 27, 1997



                                      F-1

<PAGE>

MICROFRAME, INC. AND SUBSIDIARY


Consolidated Balance Sheets
as of March 31, 1997 and 1996

<TABLE>
<CAPTION>
                       ASSETS                               1997           1996
                                                        -----------    -----------
<S>                                                     <C>            <C>        
Current assets:
   Cash and cash equivalents                            $   539,214    $    48,302
   Accounts receivable, less allowance for doubtful
   accounts of $100,000                                   1,898,810      1,540,561
   Inventory                                              1,030,343      1,084,870
   Deferred tax asset                                       314,242           --
   Prepaid expenses and other current assets                120,990         77,426
                                                        -----------    -----------

Total current assets                                      3,903,599      2,751,159

Property and equipment at cost, net                         343,123        409,866
Capitalized software, less accumulated amortization 
   of $812,257 and $649,332, respectively                   315,568        266,319
Goodwill, less accumulated amortization of
   $16,230 and $5,766, respectively                          85,380         95,844
Security deposits                                            34,703         34,983
                                                        -----------    -----------

         Total assets                                   $ 4,682,373    $ 3,558,171
                                                        ===========    ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Bank borrowings                                         $    42,266    $   538,754
Accounts payable                                            361,537        395,619
Accrued payroll and related liabilities                     280,512        285,651
Deferred income                                             268,518        258,856
Other current liabilities                                   255,346        435,215
                                                        -----------    -----------

         Total current liabilities                        1,208,179      1,914,095
                                                        -----------    -----------

Commitments and contingencies (Notes 8 and 9)
Deferred tax liabilities                                    173,077           --
Long-term debt                                               30,398         72,833

Stockholders' equity:
Common stock - par value $.001 per share;  authorized
  50,000,000 shares, issued 4,839,203 shares and
  outstanding  4,838,803 shares at March 31, 1997
  issued 3,718,075 shares and outstanding 3,717,675
  shares at March 31, 1996;                                   4,839          3,718
Preferred stock - par value $10 per share; authorized
  200,000 shares, none issued                                  --             --
Additional paid-in capital                                6,212,828      4,856,924
Accumulated deficit                                      (2,942,948)    (3,285,399)
                                                        -----------    -----------

                                                          3,274,719      1,575,243

Less - Treasury stock, 400 shares, at cost                   (4,000)        (4,000)
                                                        -----------    -----------

Total stockholders' equity                                3,270,719      1,571,243
                                                        -----------    -----------

      Total liabilities and stockholders' equity        $ 4,682,373    $ 3,558,171
                                                        ===========    ===========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-2
<PAGE>



MICROFRAME, INC. AND SUBSIDIARY


Consolidated Statements of Operations
for the years ended March 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                          1997           1996
                                                       -----------    -----------
<S>                                                    <C>            <C>        
Net sales                                              $ 7,343,624    $ 6,258,243

Cost of sales                                            2,903,705      2,789,855
                                                       -----------    -----------

Gross margin                                             4,439,919      3,468,388

Research and development expenses                          893,852        713,441
Selling, general and administrative expenses             3,355,961      4,043,356
                                                       -----------    -----------

Income (loss) from operations                              190,106     (1,288,409)

Interest income                                             35,560          3,649
Interest expense                                           (24,380)       (34,917)
Other expense, net                                            --          (99,123)
                                                       -----------    -----------

Income (loss)  before income tax (benefit) provision       201,286     (1,418,800)

Income tax (benefit) provision                            (141,165)       574,900
                                                       -----------    -----------

Net income (loss)                                      $   342,451    $(1,993,700)
                                                       ===========    ===========

Per share data:

  Net income (loss)  per share                         $      0.07    $     (0.54)
                                                       -----------    -----------

  Weighted average number of common shares outstanding   4,968,782      3,703,476
                                                       -----------    -----------
</TABLE>


                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                       F-3
<PAGE>



MICROFRAME, INC. AND SUBSIDIARY


Consolidated Statements of Cash Flows
for the years ended March 31, 1997 and 1996
<TABLE>
<CAPTION>

                                                                         1997           1996
                                                                     -----------    -----------
<S>                                                                  <C>            <C>         
Cash flows from operating activities:
  Net income (loss)                                                  $   342,451    $(1,993,700)
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization                                        360,263        431,739
    Provision for doubtful accounts                                       55,751         89,121
    Provision for inventory obsolescence                                  75,000        176,660
    Deferred tax provision                                              (141,165)       574,900
    Changes in operating assets and libefore effect 
      of acquisitions:
        Accounts receivable                                             (414,000)       289,525
        Inventory                                                        (20,473)      (465,863)
        Prepaid expenses and other current assets                        (43,564)       (24,773)
        Security deposits                                                    280         (1,921)
        Accounts payable                                                 (34,082)        10,887
        Accrued payroll and related liabilities                           10,738         40,311
        Deferred income                                                    9,662         56,378
        Other current liabilities                                       (179,869)       347,447
                                                                     -----------    -----------

        Net cash provided by (used in) operating activities               20,992       (469,289)
                                                                     -----------    -----------

Cash flows from investing activities:
  Capital expenditures                                                  (120,131)      (210,304)
  Capitalized software                                                  (212,174)      (333,170)
  Acquisition of European Business Associates, net of cash acquired         --          (50,208)
                                                                     -----------    -----------

        Net cash used in investing activities                           (332,305)      (593,682)
                                                                     -----------    -----------

Cash flows from financing activities:
  Proceeds of short-term borrowings                                         --          500,000
  Proceeds of long-term debt                                                --          124,000
  Repayments of debt                                                    (538,923)       (12,413)
  Issuance of common stock                                             1,341,148          9,425
                                                                     -----------    -----------

        Net cash provided by financing activities                        802,225        621,012
                                                                     -----------    -----------

Net increase (decrease) in cash and cash equivalents                     490,912       (441,959)


Cash and cash equivalents - beginning of period                           48,302        490,261
                                                                     -----------    -----------

Cash and cash equivalents - end of period                            $   539,214    $    48,302
                                                                     ===========    ===========

Supplemental information:
   Cash paid during period for interest                              $    24,380    $    34,095
                                                                     -----------    -----------

Noncash investing and financing activities: Common stock issued in
  connection  with  acquisition  of
    European  Business  Associates  and related share earn out
      agreement                                                      $    15,877    $    78,124
                                                                     ===========    ===========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       F-4

<PAGE>



MICROFRAME, INC. AND SUBSIDIARY


Consolidated Statements of Stockholders' Equity
for the years ended March 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                        Additional                                     Total
                                  Common Stock           Paid-in     Accumulated     Treasury      Stockholders'
                             Shares       Par Value      Capital       Deficit         Stock          Equity
                           -----------   -----------   -----------   -----------    -----------    -----------
<S>                          <C>             <C>         <C>          <C>                <C>         <C>      
Balance, March 31, 1995      3,686,798       $  3687     4,769,406    (1,291,699)        (4,000)     3,477,394
                           -----------   -----------   -----------   -----------    -----------    -----------

Net loss                          --            --            --      (1,993,700)          --       (1,993,700)
                           
Issuances of common stock       30,877            31        87,518          --             --           87,549
                           -----------   -----------   -----------   -----------    -----------    -----------
                           
Balance, March 31, 1996      3,717,675         3,718     4,856,924    (3,285,399)        (4,000)     1,571,243
                           -----------   -----------   -----------   -----------    -----------    -----------
                           
Net income                                                               342,451           --          342,451
                           
Issuances of common stock    1,121,128         1,121     1,355,904          --             --        1,357,025
                           -----------   -----------   -----------   -----------    -----------    -----------
                           
Balance, March 31, 1997      4,838,803   $     4,839   $ 6,212,828   $(2,942,948)   $    (4,000)   $ 3,270,719
                           ===========   ===========   ===========   ===========    ===========    ===========
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       F-5

<PAGE>




MICROFRAME, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements
For the Years Ended March 31, 1997 and 1996


1.      ORGANIZATION:

        THE COMPANY

        MicroFrame, Inc., founded in 1982, designs, develops and markets a broad
        range of security,  network management and remote  maintenance  products
        for voice and data communications  networks.  By incorporating a variety
        of hardware and software options for user authentication, these products
        can deter unauthorized  dial-in access to both devices and systems (such
        as computers,  local area networks and Private Branch Exchange telephone
        switches),  while allowing authorized personnel access to perform needed
        administration  and maintenance of host devices and networks from remote
        locations.  The products  also provide  alarm  monitoring  and reporting
        capabilities, a basis for remote network management and maintenance.


2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

        PRINCIPLES OF CONSOLIDATION

        The accompanying  consolidated financial statements include the accounts
        of MicroFrame,  Inc. and its subsidiary  (collectively,  the "Company").
        All material intercompany accounts and balances have been eliminated.

        CASH AND CASH EQUIVALENTS

        The Company  considers  all highly liquid  investments  with an original
        maturity  of three  months  or less at the time of  purchase  to be cash
        equivalents.

        INVENTORY

        Inventory  is  stated  at the  lower of cost  (first-in,  first-out)  or
        market,  and consists of hardware and  software  components  designed to
        interface with network communications environments.

        The markets for the  Company's  products  are  characterized  by rapidly
        changing technology and the consequential obsolescence of relatively new
        products.  The Company has recorded certain  estimated  reserves against
        inventories related to such technological obsolescence.

        PROPERTY AND EQUIPMENT

        Property  and  equipment  are stated at cost.  Depreciation  is provided
        using the  straight-line  method over the estimated  useful lives of the
        assets,  which  are  generally  three to five  years.  Expenditures  for
        maintenance and repairs, which do not extend the economic useful life of
        the  related  assets are charged to  operations  as  incurred.  Gains or
        losses on  disposal of  property  and  equipment  are  reflected  in the
        statements of operations.

                                       F-6

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

        CAPITALIZED SOFTWARE

        The  Company   capitalizes   computer  software   development  costs  in
        accordance  with the  provisions  of Statement  of Financial  Accounting
        Standards No. 86,  "Accounting for the Costs of Computer  Software to be
        Sold,  Leased or Otherwise  Marketed" ("SFAS 86"). SFAS 86 requires that
        the Company  capitalize  computer  software  development  costs upon the
        establishment  of the  technological  feasibility  of a product,  to the
        extent that such costs are expected to be recovered through future sales
        of the product.

        The Company  capitalized  $212,174 and $333,170 of software  development
        costs for fiscal 1997 and 1996, respectively.  These costs are amortized
        by the greater of the amount  computed  using (i) the ratio that current
        gross  revenues  from the sales of software bear to the total of current
        and  anticipated  future gross revenues from sales of that software,  or
        (ii) the  straight-line  method  over the  estimated  useful life of the
        product  (generally three years).  It is reasonably  possible that those
        estimates of anticipated future gross revenues,  the remaining estimated
        economic life of the product,  or both will be reduced  significantly in
        the near term (due to competitive pressures).  As a result, the carrying
        amount of the  capitalized  software costs may be reduced  materially in
        the near term.  Amortization  expense totaled  $162,925 and $278,453 for
        fiscal 1997 and fiscal 1996, respectively.

        GOODWILL

        Goodwill is being amortized on a straight-line basis over ten years.

        RESEARCH AND DEVELOPMENT COSTS

        The Company  charges all costs  incurred to establish the  technological
        feasibility  of a product or  enhancement  to research  and  development
        expense.

        REVENUE RECOGNITION POLICY

        The Company  records  revenue in accordance  with  Statement of Position
        91-1, "Software Revenue Recognition" (the "SOP"). In accordance with the
        SOP, the Company records revenue from product sales upon shipment to the
        customer  if  there  exists  no  significant   vendor   obligations  and
        collectibility  is probable.  Maintenance  contracts are sold separately
        and maintenance  revenue is recognized on a straight-line basis over the
        period the service is provided.  At March 31, 1997 and 1996, the Company
        has deferred  income  related to  maintenance  contracts of $268,518 and
        $258,856, respectively.

        WARRANTY COSTS

        Warranty  costs  associated  with the sale of hardware  and software are
        accrued at the time of sale.  The warranty  reserve as of March 31, 1997
        and 1996  included in other current  liabilities  amounts to $35,000 and
        $25,000, respectively.



                                       F-7

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

        USE OF 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 year. Actual results could differ from those estimates.

        FAIR VALUE OF FINANCIAL INSTRUMENTS

        The carrying value of cash and cash  equivalents,  accounts  receivable,
        accounts  payable,  accrued  payroll and related  liabilities,  deferred
        income, and other current liabilities approximates fair value because of
        the relatively short maturity of these  instruments.  The Company's line
        of credit has a variable  interest  rate which  adjusts  with changes in
        market interest rates and the book value of such  indebtedness is deemed
        to approximate fair value.

        LONG-LIVED ASSETS

        Statement of Financial Accounting Standards No. 121, "Accounting for the
        Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"
        ("SFAS 121"), requires that long-lived assets be reviewed for impairment
        whenever events or changes in  circumstances  indicate that the carrying
        amount of the asset in  question  may not be  recoverable.  The  Company
        adopted SFAS 121 during fiscal 1997 and there was no material  impact on
        the Company's financial position or results of operations.

        PER SHARE DATA

        The per share data  appearing in the  statements of  operations  for the
        years ended March 31, 1997 and 1996 has been prepared in accordance with
        the Accounting Principles Board Opinion No. 15. For the year ended March
        31, 1997,  such amounts have been  computed  based on the income for the
        period divided by the weighted  average number of shares of common stock
        outstanding during the period plus the dilutive effects of approximately
        238,000 common stock equivalents. For the year ended March 31, 1996, the
        weighted  average  number of shares  outstanding  excludes the number of
        common shares  issuable upon the exercise of  outstanding  stock options
        and warrants since their inclusion would have been anti-dilutive.


                                       F-8

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED MARCH 31, 1997 AND 1996


2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

        INCOME TAXES

        The Company  accounts for income taxes in accordance with the provisions
        of Statement of Financial  Accounting Standards No. 109, "Accounting for
        Income Taxes" ("SFAS 109").  SFAS 109 requires  recognition  of deferred
        tax liabilities  and assets for the expected future tax  consequences of
        events  that have  been  included  in the  financial  statements  or tax
        return.  Under this  method,  deferred  tax  liabilities  and assets are
        determined based on the difference  between the financial  statement and
        tax basis of assets  and  liabilities  ("temporary  differences")  using
        enacted  tax rates in effect for the year in which the  differences  are
        expected to reverse.  Recognition  of a deferred tax asset is allowed if
        it is more  likely  than not  that the  asset  will be  realized  in the
        future.

        RECLASSIFICATION

        The Company has reclassified  certain prior year amounts to conform with
        the 1997 presentation.



3.      INVENTORY:

        Inventory,  net of reserve for  obsolescence of $200,000 and $150,000 at
        March 31, 1997 and 1996, respectively, consists of the following:


                                                       1997                 1996
                                                 ----------           ----------
          
          
          Raw materials                          $  625,583           $  676,120
          Work-in-process                           374,802              367,820
          Finished goods                             29,958               40,930
                                                 ----------           ----------
                                                 $1,030,343           $1,084,870
                                                 ----------           ----------


                                       F-9

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

4.      PROPERTY AND EQUIPMENT AT COST, NET:

        At March  31,  1997 and 1996  property  and  equipment  consists  of the
        following:

                                                     1997              1996
                                                  -----------       -----------
         
         Demonstration and service equipment      $   832,478       $   727,517
         Furniture and fixtures                       180,940           175,174
         Leasehold improvements                        68,340            58,936
                                                  -----------       -----------
         
                                                    1,081,758           961,627
         
         Less:  Accumulated depreciation             (738,635)         (551,761)
                                                  -----------       -----------
         
         Total                                    $   343,123       $   409,866
                                                  ===========       ===========


        Depreciation  expense for  property  and  equipment  for the years ended
        March 31, 1997 and 1996 amounted to $186,874 and $147,520, respectively.


5.      BANK BORROWINGS:

        The Company has an available  line of credit through August 30, 1997, in
        the amount of $500,000.  All amounts were unused at March 31, 1997.  The
        line is  collateralized by the accounts  receivable of the Company.  Any
        advances under the bank line are payable at maturity,  and bear interest
        at the Wall  Street  prime rate (8.5% at March 31,  1997) plus 0.5%.  At
        March 31, 1996,  $500,000 was  outstanding  under a line of credit.  The
        final  installment  on this  outstanding  line  of  credit  was  made on
        September 5, 1996 at which time the bank line was closed.

        In  addition,  the  Company had an  outstanding  facility of $150,000 to
        support  80% of  capital  expansion.  In  November  1995,  $124,000  was
        borrowed  against  the  facility  with a term of  three  years,  payable
        monthly,  at an interest rate of 8.55%. Upon expiration of this facility
        at July 31, 1996,  the bank agreed to honor the  existing  terms of this
        credit  facility.  At March 31, 1997 and 1996,  $72,664 and $111,587 was
        outstanding,  of which $30,398 is non-current at March 31, 1997.  Future
        principal  repayments  under this loan are $42,266,  and $30,398 for the
        years ending March 31, 1998 and 1999, respectively.

        The bank lines of credit and facilities  contain various covenants which
        among other things, restrict payment of dividends without prior approval
        from the bank,  require the  maintenance  of certain  amounts of working
        capital and debt to tangible net worth ratio.

                                      F-10

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

6.      INCOME TAXES:

        As of March 31,  1997,  the Company has  available,  federal,  state and
        foreign net operating loss  carryforwards of  approximately  $1,975,206,
        $660,561 and $458,000,  respectively,  to offset future taxable  income.
        The federal and state net operating loss carryforwards expire during the
        years 2001 through 2011. In addition,  the Company has investment credit
        and   research  and   development   credit   carryforwards   aggregating
        approximately $131,046, which may provide future tax benefits,  expiring
        from 1999 through 2002.


                                                            March 31,
                                                  -----------------------------
                                                     1997              1996
                                                  -----------       -----------

Effective tax rate reconciliation:
      Statutory federal tax rate                          34%             (34)%
      State taxes, net of federal benefit                  6%              (6)%
      Effect of valuation allowance                     (70)%               78%
      Foreign loss with no benefit                        53%                3%
      Utilization of NOL's                              (93)%             --
                                                  -----------       -----------
                                                        (70)%               41%
                                                  -----------       -----------


        The tax effect of temporary  differences  which make up the  significant
        components of the net deferred tax asset and liability at March 31, 1997
        and 1996 are as follows:




                                                     1997               1996
                                                  -----------       -----------
Deferred tax assets:

    Accounts receivable                           $    40,000       $    40,000
    Inventory                                         192,000           130,000
    Accrued expenses                                   82,242           121,645
    Net operating loss carryforward                   834,324           947,378
    Research and development credit                   131,046            97,307

 Deferred tax liability:
    Equipment                                         (46,849)          (22,849)
    Capitalized software                             (126,228)         (106,528)

  Valuation allowance                                (965,370)       (1,206,953)
                                                  -----------       -----------

  Net deferred tax asset                          $   141,165       $      --
                                                  ===========       ===========




        The  change  in  the  valuation   allowance  is  primarily  due  to  the
        utilization of federal and state net operating loss carryforwards during
        the year ended March 31, 1997.

                                      F-11

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

7.      STOCKHOLDERS' EQUITY:

        During the year ended March 31, 1997,  options to purchase  9,500 shares
        of common stock under the Company's  stock option plans were  exercised,
        for an aggregate consideration of $15,755. In addition, 10,161 shares of
        common stock were issued as part of the stock earn out as  stipulated in
        the Share Purchase  Agreement (see Note 12). The aggregate fair value of
        this consideration was $15,877.

        During the year ended March 31, 1996,  options to purchase  5,877 shares
        of common stock under the Company's  stock option plans were  exercised,
        for an aggregate consideration of $9,425. In addition,  25,000 shares of
        common stock were issued as part of the  consideration  for the purchase
        of European  Business  Associates BVBA (see Note 12). The aggregate fair
        market  value of  consideration  of $78,124 was  recorded as part of the
        total consideration paid for this acquisition.

        In April,  1996,  the Company  sold  860,000  shares of common  stock to
        unrelated  investors,  at $1.25 per share and  received  net proceeds of
        approximately  $1,023,559.  In conjunction  with this sale,  warrants to
        purchase  860,000 shares of common stock with an exercise price of $1.50
        and warrants to purchase an  additional  860,000  shares of common stock
        with an  exercise  price of $2 were  issued.  These  warrants  expire in
        April, 2000.

        In addition,  the Company  sold  241,467  shares of common stock to four
        current  shareholders  of  record  who  held  the  contractual  right to
        maintain their share of ownership.  The Company received net proceeds of
        $301,834.  In conjunction  with this sale,  warrants to purchase 241,467
        shares of common  stock with an exercise  price of $1.50 and warrants to
        purchase an additional  241,467  shares of common stock with an exercise
        price of $2 were issued. These warrants expire in April, 2000.

        WARRANTS

        During October 1995, in connection  with services  being  performed by a
        consultant,  the Company  issued  250,000  warrants to the consultant to
        purchase  shares of the  Company's  common  stock.  Warrants to purchase
        50,000  shares of common  stock at $3.25 per share  vested  immediately.
        Warrants to purchase  each  additional  block of 50,000 shares of common
        stock are  exercisable  at  $3.75,  $4.25,  $4.75  and $5.25 per  share,
        respectively  and shall  vest on each  three  month  anniversary  of the
        agreement. The warrants expire five years from the date of grant.

                                      F-12

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

7.      STOCKHOLDERS' EQUITY (CONTINUED):

        STOCK OPTION PLANS

        In August  1984,  the Company  adopted  its 1984 Stock  Option Plan (the
        "Plan") to authorize  the  granting of both options  intended to qualify
        under the  provisions  of Section 422A of the Internal  Revenue Code, as
        amended,   and  nonqualified   options.  The  Plan  also  permits  Stock
        Appreciation  Rights ("SAR's") to be granted with an option. An optionee
        may be  granted a SAR with  respect to the number of shares for which he
        is  simultaneously  granted an option. A SAR provides the recipient with
        the right to receive  cash or stock having a value equal to the increase
        in value of the shares  subject to the SAR from the date of grant to the
        date of exercise. SAR's may be exercised in addition to, but only at the
        same time and to the same extent as, the related options.  No SAR's have
        been granted by the Company.

        The Plan  provides  options to  purchase  a maximum  of  220,000  shares
        (subject to adjustment in certain circumstances) of the Company's common
        stock.  The exercise price of each option is fixed at the time of grant,
        but must not be less than 100% (110% if the person  granted such options
        owns more than ten percent of the outstanding  common stock) of the fair
        market value of the common stock at the time the option is granted.  The
        Plan expired in August 1994. At March 31, 1997,  18,800 options remained
        outstanding to be exercised.

        In August  1994,  the Company  adopted  its 1994 Stock  Option Plan (the
        "1994 Plan"). The 1994 Plan as amended increased the number of shares of
        common stock for which  options may be granted to a maximum of 1,250,000
        shares.  The  aggregate  fair market value  (determined  at the time the
        option is granted) of shares which are  exercisable  during any calendar
        year by any one  individual may not exceed  $100,000.  The term of these
        non-transferable  stock  options may not exceed ten years.  The exercise
        price of these  stock  options  may not be less than  100%  (110% if the
        person   granted  such  options  owns  more  than  ten  percent  of  the
        outstanding  common  stock) of the fair market value of one common stock
        on the date of grant.  During the year ended March 31, 1997, the Company
        granted options to purchase 657,629 shares of its common stock under the
        1994 Plan. At March 31, 1997,  298,693 options were outstanding  against
        the 1994 Plan, of which 270,483 options were exercisable.

        OTHER OPTIONS

        During  September  1996, the Company issued options to purchase  620,000
        shares  of  the  Company's   common  stock,   of  which  420,000  vested
        immediately  and  100,000  vest each  April 1 of 1998 and 1999.  Options
        expire  ten years  from the date of  grant.  The  exercise  price of the
        options is equal to the market value of the Company's  stock on the date
        of grant.

        The Company also has outstanding  options to purchase  130,000 shares of
        the Company's stock.  Options expire in terms ranging from 5 to 10 years
        from the date of grant.  The  exercise  price of the options is equal to
        the market value of the Company's stock on the date of grant.



                                      F-13

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

7.      STOCKHOLDERS' EQUITY (CONTINUED):

        ACCOUNTING FOR STOCK-BASED COMPENSATION

        The  Company  applied  Accounting   Principles  Board  Opinion  No.  25,
        "Accounting  for Stock Issued to Employees" and related  Interpretations
        in accounting for its options.  Accordingly,  no  compensation  cost has
        been  recognized  for its fixed  stock  option  plans in its  results of
        operations.

        The Company has adopted the  disclosure-only  provisions of Statement of
        Financial  Accounting  Standards No. 123,  "Accounting  for  Stock-Based
        Compensation"  ("SFAS  123").  If the Company  had elected to  recognize
        compensation  costs  based  on the fair  value at the date of grant  for
        awards in fiscal 1997 and 1996,  consistent  with the provisions of SFAS
        No. 123, the Company's  net income (loss) and earnings  (loss) per share
        would have been reduced/increased by $770,146 and $0.15 and $128,375 and
        $0.03, respectively.

        The  proforma  effect on net income for fiscal  1997 and 1996 may not be
        representative  of the pro forma  effect on net  income of future  years
        because the SFAS No. 123 method of accounting for pro forma compensation
        expense has not been applied to options granted prior to April 1, 1995.

        The  weighted-average  fair values at date of grant for options  granted
        during fiscal 1997 and 1996 were $0.96 and $1.57, respectively. The fair
        value of each option grant for the  Company's  common stock is estimated
        on the date of the grant using the Black Scholes  option  pricing model,
        with the  following  weighted  average  assumptions  used for  grants in
        fiscal 1997 and 1996:  expected  volatility of 77%;  risk-free  interest
        rate of 6.56; and expected option lives of 6.76 years.

        Details of options granted are as follows:

<TABLE>
<CAPTION>
                                                              Weighted
                                                              Average
                                                              Exercise     Option  Price
                                                 Shares        Price       Per Share ($)
                                              -----------     ---------    ------------
<S>                                               <C>           <C>        <C>     <C> 
Options outstanding at March 31, 1995             353,845       2.07       1.25 to 2.75
Granted                                           116,533       2.38       1.78 to 3.13
Canceled                                          (28,503)      1.53       1.25 to 2.87
Exercised                                          (5,877)      1.60       1.25 to 2.14
                                              -----------                  ------------
                                                                           
Options outstanding at March 31, 1996             435,998       2.11       1.25 to 3.13
Granted                                         1,277,629       1.31       1.16 to 2.00
Canceled                                         (636,634)      1.55       1.25 to 3.13
Exercised                                          (9,500)      1.66       1.25 to 1.83
                                              -----------                  ------------
                                                                           
Options outstanding at March 31, 1997           1,067,493       1.49       1.16 to 2.87
                                                                           
Options exercisable at March 31, 1997             839,283       1.56       1.16 to 2.87
                                                                    
</TABLE>

                                      F-14

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

7.      STOCKHOLDERS' EQUITY (CONTINUED):

<TABLE>
<CAPTION>
                                        Options Outstanding               Options Exercisable
                             ---------------------------------------   -------------------------
                                             Weighted
                                             Average
                                             Remaining     Weighted                     Weighted
                                             Years of      Average                      Average
        Range of               Number       Contractual    Exercise       Number        Exercise
        Exercise Prices      Outstanding       Life        Price        Exercisable     Price
        ---------------      -----------    -----------    --------     -----------     --------
<S>     <C>     <C>            <C>             <C>        <C>            <C>          <C>     
        $1.16 - $1.72          722,800         8.69       $    1.22      501,550      $   1.22
        $1.83 - $2.14          277,438         3.77       $    1.92      273,836      $   1.92
        $2.25 - $2.87           67,255         4.84       $    2.68       63,897      $   2.67
</TABLE>



8.      COMMITMENTS

        OPERATING LEASES

        In June 1993, the Company amended its lease for office and manufacturing
        facilities.  Such amendment extends the term of the lease until June 30,
        1999. In July 1995,  the Company  executed an additional  building lease
        for the purpose of expanding  its office and  manufacturing  facilities.
        The terms of the new lease  provide for an  expiration  date  concurrent
        with that of the existing  building  lease.  In August 1996, the Company
        executed  a  building  lease  for its  European  operation  in  Antwerp,
        Belgium.  The terms of the lease are for expiration in August 2005, with
        options to terminate in August 1999 or August 2002.

        The fixed minimum  payments under operating leases for future periods is
        as follows:


                Year ending March 31,
                 1998                                           $   155,100
                 1999                                               150,800
                 2000                                                44,500
                 2001                                                     0
                 2002                                                     0
                 Thereafter                                               0
                                                                -----------
                    Total minimum lease payments                $   350,400
                                                                ===========
         

        Rent expense, in addition to allocated occupancy expenses, for the years
        ended  March  31,  1997 and 1996  approximated  $145,700  and  $119,300,
        respectively.


                                      F-15

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

8.      COMMITMENTS (CONTINUED):

        CONSULTING CONTRACT

        The Company  entered into a consulting  agreement  with an officer which
        became   effective  upon  the   expiration  (or  mutually   agreed  upon
        termination)  of his employment  agreement on May 2, 1995. The agreement
        provides  that the officer  will not receive  less than $40,000 per year
        nor more than $220,000 per year, the amount of which is dependent on the
        level of services provided. The costs incurred related to the consulting
        agreement  are $40,000 and  $36,667,  respectively,  for the years ended
        March 31, 1997 and 1996.

        In connection with the acquisition of European Business  Associates BVBA
        of  Brussels,  Belgium  from Marc  Kegelaers  (see Note 12), the Company
        entered into a consulting  agreement  with Mr.  Kegelaers  for a term of
        five years. The consulting  agreement  provides for an annual consulting
        fee of $75,000 with 5% annual  increments,  as well as  reimbursement of
        certain expenses.

        Effective  April 1,  1996,  the  Company  did not renew  the  employment
        agreement  of  one of  its  officers  and  entered  into a  compensation
        arrangement.  This  arrangement was entered into, in part as a result of
        the Company not achieving  certain  performance  milestones for the year
        ended March 31, 1996,  pursuant to the officer's  employment  agreement.
        The  agreement  provided  that the officer  receive an aggregate  sum of
        $100,000  payable  at the rate of  $15,000  per  month,  with an initial
        payment of $10,000. In addition, the agreement called for a continuation
        of Company  benefits  for the  period of the  agreement,  a monthly  car
        allowance  of $750 for the  period  of the  agreement,  and  options  to
        purchase  23,196  shares of the  Company's  common  stock at an exercise
        price of $1.94 per share with an expiration date of March 31, 2001. As a
        result of this  agreement,  the Company  accrued  $120,000 in the fiscal
        year ended March 31, 1996 to cover the costs of this agreement.


9.      CONTINGENT LIABILITIES:

        The Company was involved in  proceedings  with respect to certain  sales
        tax matters.  Total amounts  included in other current  liabilities  and
        other expense,  net, related to these  proceedings was $100,000 at March
        31,  1996,  respectively.  During  the  year  ended  March  31,  1997  a
        settlement was reached which resulted in no additional  liability to the
        Company.

                                      F-16

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

10.     EMPLOYEE BENEFIT PLANS:

        Effective  April 1, 1993,  the  Company  adopted a defined  contribution
        savings  plan.  The terms of the plan  provide  for  eligible  employees
        ("participants")  who have met certain age and service  requirements  to
        participate by electing to contribute up to 15% of their gross salary to
        the plan, as defined,  with the Company  matching 30% of a participant's
        contribution in cash up to a maximum of 6% of gross salary,  as defined.
        Company  contributions  vest at the rate of 25% of the  balance  at each
        employee's second,  third,  fourth, and fifth anniversary of employment.
        The  employees'  contributions  are  immediately  vested.  The Company's
        contribution  to the savings plan for the years ended March 31, 1997 and
        1996 was $27,641 and $29,729, respectively.


11.     SALES:

        Sales by geographic area for the years ended March 31, 1997 and 1996 are
        as follows:


                                        1997                 1996
                                     ----------           ----------
        
        
        United States                $5,813,584           $4,946,702
        Europe                        1,047,980            1,058,960
        Pacific Rim                     349,732               98,156
        Other                           132,328              154,425
                                     ----------           ----------
                                     $7,343,624           $6,258,243
                                     ==========           ==========

        The  Company  sells  a  substantial  portion  of  its  products  to  two
        customers.  Sales to these customers  amounted to $2,484,939 (34% of net
        sales) in 1997 and $3,039,086 in 1996 (49% of net sales),  respectively.
        At March 31, 1997 and 1996, amounts due from these customers included in
        accounts receivable, were $1,022,787 and $1,022,725,  respectively.  The
        loss of either of these two  customers  would  have a  material  adverse
        effect on the Company's financial position and results of operations.


12.     RELATED PARTY TRANSACTION:

        A  director  of the  Company  was  also  a  director  of  the  financial
        institution  through which the Company has an available  line of credit.
        The director's position with the financial  institution was dissolved as
        a result of the acquisition of the financial institution on February 28,
        1997.


13.     CONCENTRATION OF CREDIT RISK:

        The  Company  maintains  deposits in a  financial  institution  which is
        insured by the  Federal  Deposit  Insurance  Corporation  ("FDIC") up to
        $100,000.  At March  31,  1997 and  periodically  throughout  1997,  the
        Company had  deposits  in this  financial  institution  in excess of the
        amount insured by the FDIC.

                                      F-17

<PAGE>


MICROFRAME, INC. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996

14.     ACQUISITION OF EUROPEAN BUSINESS ASSOCIATES:

        On  September  15,  1995,   MicroFrame   Europe  N.V.,  a  newly  formed
        wholly-owned  subsidiary,  acquired  all of the issued  and  outstanding
        shares  of  capital  stock  of  European  Business  Associates  BVBA  of
        Brussels,   Belgium  ("the  Seller"),  a  marketing  organization  which
        specializes  in creating  and  managing  distribution  networks  and OEM
        relations for suppliers to the telecommunications  industry.  MicroFrame
        Europe N.V. will serve as the Company's  European sales and distribution
        coordinator  as well  as  provide  technical  support  services  for the
        Company's authorized European distributors.

        The   acquisition  was  accounted  for  under  the  purchase  method  of
        accounting.  The results of the operations of MicroFrame Europe N.V. are
        included  with the  Company's  results  of  operations  from the date of
        acquisition.  This acquisition did not have a significant  impact on the
        results of  operations.  The Company issued cash and common stock valued
        at $128,125,  assumed  liabilities of $59,783,  and incurred  $35,075 in
        additional  costs related to the acquisition.  In addition,  the Company
        shall pay the Seller,  on each anniversary for a period of five years, a
        cash and stock earn out as stipulated in the Share  Purchase  Agreement.
        At March 31,  1997 and  1996,  respectively,  the  Company  has  accrued
        approximately  $27,400 and $25,000 for these costs. Total  consideration
        as allocated to the assets acquired was as follows:


         Current assets                                    $ 90,226
         Property and equipment                              29,497
         Other assets                                         1,650
         Goodwill                                           101,610
                                                           --------
                                                           $222,983
                                                           ========


15.     OF THE FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS:

        In February  1997,  the  Financial  Accounting  Standards  Board  issued
        Statement of  Financial  Accounting  Standards  No. 128,  "Earnings  Per
        Share" ("SFAS 128"),  which is effective  for financial  statements  for
        annual  periods  ending after  December 15, 1997.  SFAS 128  establishes
        standards for the computation,  presentation and disclosure requirements
        for earnings per share. The adoption of this standard is not expected to
        have a material impact on reported earnings per share.



                                      F-18