SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

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

      For the fiscal year ended December 31, 2002

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the transition period from ______________ to _______________

                         Commission File Number 0-11883

                                 Telebyte, Inc.
                 (Name of small business issuer in its charter)


                Delaware                               11-2510138
      (State or other jurisdiction                  (I.R.S. Employer
            of incorporation)                      Identification No.)

                  270 Pulaski Road, Greenlawn, New York 11740(
                    Address of principal executive offices)

                                 (631) 423-3232
                (Issuer's telephone number, including area code)

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

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

                     Common Stock, par value $0.01 per share
                                (Title of class)

Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.

Yes |X|   No |_|

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

The issuer's revenues for its most recent fiscal year were $5,161,828

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant at March 14, 2003 was $474,026

The number of shares of common stock outstanding at March 15, 2003 was
1,253,631.

Transitional Small Business Disclosure Format (check one): Yes  |_| No |X|

DOCUMENTS INCORPORATED BY REFERENCE:  None


<PAGE>


                           FORWARD-LOOKING STATEMENTS

Cautionary Statements Regarding Forward-Looking Statements. Statements in this
Annual Report on Form 10-KSB and as statements made in press releases and oral
statements that may be made by the Company or by officers, directors or
employees of the Company acting on the Company's behalf, that are not statements
of historical fact, constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
could cause the actual results of the Company to be materially different from
the historical results or from any future results expressed or implied by such
forward-looking statements. In addition to statements which explicitly describe
such risks and uncertainties, readers are urged to consider statements labeled
with the terms "believes," "belief," "expects," "plans," "anticipates," or
"intends," to be uncertain and forward-looking. All cautionary statements made
in this Form 10-KSB should be read as being applicable to all related
forward-looking statements wherever they appear.

                                     PART 1

Item 1. Description of Business

Introduction

      Telebyte, Inc., formerly known as Telebyte Technology, Inc. (herein either
the "Company" or "Telebyte") was formed as a New York corporation in August
1983, re-incorporated in Nevada in 1987, and re-incorporated in Delaware in
1999. The Company changed its name to Telebyte, Inc. in 1999. The Company's
headquarters is located in Greenlawn, New York.

      The Company is focused in two separate business segments.

      The first segment is Telebyte, Inc, which manufactures, markets and sells
technology products. This business segment has two product lines: Data
Communications and Broadband Test Equipment. The Data Communications product
line is focused on premises and local area data communications products used
with both twisted pair copper cable and fiber optic cable transmission media.
The Broadband Test Equipment product line is focused on test equipment products
to be used in the development of signaling devices for technologies achieving
broadband access to the Internet.

      The second segment is Nextday.com, Inc. ("Nextday.com"), a wholly owned
subsidiary of Telebyte that concentrates on reselling products over the
Internet. Nextday.com's operations are carried out in Greenlawn, New York.
Nextday.com has formed an alliance with a third-party fulfillment company for
the warehousing and distribution of its products. Nextday.com does not conduct
any foreign operations. Nextday.com was incorporated in New York in 1999.

Business Developments for 2000, 2001 and 2002

      During 2000, the Company decided to focus significant attention on the
growth of its Broadband Test Equipment product line. To this end, it adopted and
began executing a detailed plan for the development of new products in this
area. It also undertook an aggressive promotional strategy, which included
attendance at tradeshows, industry trade group meetings and customer visits. The
Company also opened up a sales office in Duluth, Georgia dedicated to the
marketing and sales of its Broadband Test Equipment.

         The activities of the Company's e-commerce subsidiary, Nextday.com were
significantly impacted when its Applications Service Provider ("ASP") announced
the cessation of its business in 2000. This was a major setback in the growth of


                                       2
<PAGE>

Nextday.com and as a result the Company decided not to rely on the services of
an ASP for future operations. Instead, the Company decided to obtain and own
required hardware and software for both Nextday.com and Telebyte. This became
part of an overall approach "to e-business enable" the Company as a whole on a
common platform. In large part, the Company realized its goal of having Telebyte
and Nextday.com on this new platform by the end of 2002.

      During 2001, the Company broadened its strategy to include the
development, manufacturing and sale of products allowing the realization of
wireless communication links between Internet Service Providers ("ISPs") and
their customers. To this end, the Company entered into agreements with
Renaissance Networking Inc. of Tempe Arizona for the joint development and
manufacture of such products. However, the Company abandoned this strategy in
2002, and terminated its relationship with Renaissance Networking Inc. as of
December 31, 2002.

      Sales declined markedly in 2001, in large measure due to a worldwide
economic slowdown, particularly in the technology and telecommunications
sectors, especially after the events of September 11, 2001. In responding to
these challenging conditions, the Company decided to close the office in Duluth,
Georgia. The termination of the lease on the office space and the termination of
personnel associated with this operation allowed the Company to realize savings.

      During 2002 the Company's sales declined further, in large measure due to
the continued worldwide economic slowdown and continued slowdown in the
technology and telecommunications sectors. In addition, sales by Nextday.com
decreased $301,676, from $497,121 to $195,445. In responding to this continued
decline the Company took actions to decrease its operating costs. These actions
included cutbacks in personnel, reductions in salary of certain personnel,
renegotiation of existing service contracts and adherence to a strict budget.
Furthermore, the Company concentrated its Research and Development activities
principally on its Broadband Test Equipment Product line.

Products

Data Communications.

      This product line principally consists of Interface Converters, Short Haul
Modems, LAN Products and Surge/Lightning Protectors. These are described below:

      Interface Converters. These products transform the characteristics of the
electrical interface of one data terminal or communication device to enable it
to be compatible with the electrical interface of another. This allows different
devices to communicate. The conversion may include modifying the protocol and/or
the physical transmission medium. By employing interface converters, a data
communications network can be established or expanded using heterogeneous
equipment types. Without the use of interface converters, such equipment would
be unable to communicate. Because the data communications industry continues to
develop new interface standards, the Company anticipates that the market may
require new varieties of interface converters. Customers for these products
include system and network integrators. Telebyte's line of interface converters
is available in most of the configurations now required by the market and
includes programmable devices.

      Short Haul Modems (alternatively referred to as either line drivers or
limited distance modems). These products are communications signaling devices
used to implement a data communications link over the short distances of the
premises environment. Customers for these products include system and network
integrators. The premises environment is that of the office building, campus,
industrial or other sites. Data communication distances here vary from a few


                                       3
<PAGE>

feet to a few miles. Short haul modems are used to connect computers with
accessory equipment such as terminals, printers, badge readers, scales, bar code
readers, and other computer controlled machines. Short haul modems are also used
in establishing data communications between personal computers and mini
computers or mainframe computers. In some cases, short haul modems can be used
to signal on telephone company ("Telco") lines used for special services such as
Internet access. Short haul modems are often confused with "dial-up" modems used
for wide area network and/or Internet communications.

      LAN Products. These products support Local Area Network ("LAN") computer
communication connectivity in the office building, campus or manufacturing
environment when such connectivity follows the Ethernet standard.

      Surge/Lightning Protectors. These products prevent computers, modems, and
computer peripherals from damage caused by voltage and current surges. Such
surges may result from lightning or other electronic disturbances. Broadband
Test Equipment.

Broadband Test Equipment

      This product line principally consists of Digital Subscriber Line ("DSL")
Wire Line Simulators. These simulators are used in engineering design,
performance verification and production testing of DSL modems and Digital
Subscriber Line Access Multiplexers ("DSLAMs"). These products are used by
design and development engineers, laboratory test and verification engineers and
production test engineers. Primarily companies that are involved in the
manufacture of DSL modems and DSLAMs use these simulators.

      The DSL modems are used as Customer Premises Equipment ("CPE"). They
enable the user or the customer, at either residence or business, to connect to
the Internet by the broadband, high speed, or DSL service. The DSLAMs are used
at a Telco Central Office ("CO"). They are the Telco termination of the
customer's DSL line. With one exception, the DSL Wire Line Simulators simulate
the amplitude and delay of the local loop (twisted pair of cable) extending from
the CO to the CPE. These products differ in the loop lengths and bandwidths that
they can accurately represent. The single exception is a product that simulates
the various noise and interference impairments present on the local loop.

Manufacturing

      The Company generally manufactures and maintains an inventory of products
based upon historical levels of demand and sales forecasts. Most of its products
are standard or catalog items. On occasion, the Company produces custom products
manufactured to a customer's specifications or for a specific application.

      The Company has not experienced a shortage of manufacturing materials or
components, and it purchases raw materials and supplies from domestic and
foreign sources.

      During 2002, the Company purchased approximately 42% of its products from
one supplier.

Research and Development

      The research and new product development budget for 2003 is $793,000. The
Company spent approximately $728,000 in 2002 and spent approximately $727,000 in
2001 on research and development. Generally, the cost of research and
development is not borne directly by the Company's customers.


                                       4
<PAGE>

Government Regulation

      Federal, state and local environmental laws and regulations have no
material impact on Telebyte or its business. The Company is subject to the
governmental regulations that apply to businesses generally and to businesses
with international sales.

Sales and Marketing

      These activities are performed by a Company employed sales staff. Customer
contact is maintained by personal visits, telephone, fax and e-mail. Sales in
the United States and Canada are primarily direct to the end-users. The Company
utilizes a limited number of Manufacturer's Representatives for sales of
broadband test equipment in the United States. Sales outside the United States
and Canada are primarily carried out through distributors.

      Although Internet sales constitute a small amount of our total sales,
marketing activities are focused on the Internet using several websites. The
websites include www.telebyteusa.com, www.telebytebroadband.com,
www.telebytedatacom.com and www.nextday.com. These web sites include various
content for all of Telebyte's products including product descriptions,
specifications, application notes, and product manuals. Attracting an increasing
number of customers to these web site is a high priority of the Company. To
realize this end, the Company conducts search engine optimization activities.
Specifically, the Company designs its web site pages to increase the likelihood
that they will be ranked high by the major Internet search engines. Such search
engine optimization may increase the likelihood that customers for Telebyte's
products will find the Company's products on the Internet before other sources.
Marketing activities for Broadband Test Equipment rely heavily upon attendance
and participation in trade shows focused on broadband products.

Intellectual Property

      Historically, the Company has not relied upon patents, registered
trademarks or licenses to give it a competitive advantage. The Company does not
have any patents or copyrights. The Company has one trademark, 'Telebyte.'

Competition

      There are a significant number of companies engaged in manufacturing and
selling data communications equipment in the same markets as the Company's Data
Communications product line. Because Telebyte's Data Communications product line
is diverse, it is difficult to define and enumerate this competition. Several
competitors are larger and more established than Telebyte. Such competitors have
greater technical, capital, sales, marketing and other resources than does the
Company.

      The Company's principal competitors for Data Communications products are
RAD Data Communications, Ltd. (which is based in Israel with local offices in
New Jersey), Black Box (with headquarters based in Pennsylvania), Patton
Electronics (based in Maryland), B & B Electronics (based in Illinois),
Dataforth (based in Arizona) and a number of smaller companies. Telebyte
competes with these companies on the basis of availability, price, quality,
breadth of product line, technical support innovation and its willingness to
accommodate requests for modifications and customization.

      Telebyte is fortunate in having had and still having only one principal
competitor for its Broadband Test Equipment product line, Spirent LLC.


                                       5
<PAGE>

      Of the factors cited above, the Company relies principally upon the
price/performance ratio of its many products. However, Telebyte also attracts
market share by its ability to fill orders quickly and provide technical support
to its customers.

Employees

      On December 31, 2002 the Company had 45 employees, of which 31 were
full-time employees. None of the employees are represented by a labor union and
the Company considers its employee relations to be good. The Company also uses
subcontractors to support its current operations.

Backlog

      At December 31, 2002, the Company's backlog was $369,941 all of which the
Company expects to fill in fiscal 2003. Comparable backlog at December 31, 2001
was $254,794.

Item 2. Description of Property

      Telebyte's executive office, plant, and manufacturing facility are located
in a 20,000 square foot building on 3.2 acres, at 270 Pulaski Road, Greenlawn,
New York 11740. The Company purchased the land and building in September 1985.
The Company refinanced the existing mortgage in March 1998, and the property now
secures a mortgage loan payable on a fully self-amortizing basis over 10 years.
Under the Mortgage Modification Agreement, interest is payable at 9.3% through
June 1, 2003. At that time and every three years thereafter, the interest rate
will be adjusted to the three-year weekly average US Treasury Constant Maturity
Rate plus 3%. The outstanding principal balance of the mortgage loan, as of
December 31, 2002, was $629,297. Management believes that all of its properties,
plant, and equipment are well maintained and adequate for its requirements.
Management believes that the property is adequately covered by insurance.

      Of the 20,000 square feet, the Company has leased 5,300 square feet to an
unaffiliated tenant. Management believes that Telebyte's existing manufacturing
facilities are sufficient to support its present needs and anticipated growth,
and the Company does not foresee any significant capital expansion of its plant
in Greenlawn for the next three years.

Item 3. Legal Proceedings

      Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

      Not applicable.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

      The Company's common stock is traded in the over the counter bulletin
board under the symbol "TBTI."

      The following table sets forth the high and low bid prices for the common
stock for each fiscal quarter during 2002 and 2001 as reported by NASDAQ Trading
and Market Services. The bid and ask prices for the common stock on March 14,
2003 were $0.40 and $1.01, respectively.


                                       6
<PAGE>

        ----------------------------------------------------------------
                                        2002                  2001
                                  ----------------      ----------------
                                   High       Low        High       Low
        --------------------      -----      -----      -----      -----
        1st Quarter               $1.20      $0.81      $2.56      $1.44
        --------------------      -----      -----      -----      -----
        2nd Quarter                1.15       0.55       1.88       1.45
        --------------------      -----      -----      -----      -----
        3rd Quarter                0.55       0.40       1.82       0.87
        --------------------      -----      -----      -----      -----
        4th Quarter                0.65       0.41       1.10       0.80
        ----------------------------------------------------------------

      The above quotations reflect inter-dealer prices, and may not include
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions.

      At March 14, 2003, there were approximately 207 holders of record of the
Company's common stock. Most of the shares of the common stock are held in
street name for a larger number of beneficial owners.

      To date, Telebyte has not paid a cash dividend. The payment and amount of
any future dividends will necessarily depend upon conditions then existing,
including the Company's earnings, financial condition, working capital
requirements, and other factors. The Company does not anticipate paying any
dividends in the foreseeable future. The Line of Credit Agreement dated June 23,
1994 between Merrill Lynch and the Company and the $1,000,000 Reducing Revolving
Line of Credit Agreement dated January 20, 1999 between Merrill Lynch and the
Company contain certain financial covenants that limit the ability of the
Company to pay dividends.

Item 6. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

Summary of Critical Accounting Policies; Significant Judgments and Estimates

      Our discussion and analysis of our financial condition and results of
operations are based upon our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. These items are regularly monitored and analyzed by management
for changes in facts and circumstances, and material changes in these estimates
could occur in the future. Changes in estimates are recorded in the period in
which they become known. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from our estimates if past experience
or other assumptions do not turn out to be substantially accurate.

      A summary of those accounting policies that we believe are most critical
to fully understanding and evaluating our financial results is set forth below.
This summary should be read in conjunction with our Consolidated Financial
Statements and the related Notes included elsewhere in this Annual Report.

Revenue Recognition and Allowance for Doubtful Accounts

      We recognize revenue from sales when product is shipped and title passes
to customers. Service fees are recognized upon he completion of service. We
recognize revenue for services where collection from the client is probable.
Amounts invoiced to clients in excess of revenue recognized are classified as
deferred revenues. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our clients to make required payments. We
base our estimates on our historical collection and write-off experience,
current trends, credit policy, detailed analysis of specific client situations
and percentage of our accounts receivable by aging category. While such credit


                                       7
<PAGE>

losses have historically been within our expectations and the allowances we
established, we cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past. If the financial condition of our
clients were to deteriorate, resulting in an impairment of their ability to make
payment, additional allowances may be required. Our failure to accurately
estimate the losses for doubtful accounts and ensure that payments are received
on a timely basis could have a material adverse effect on our business,
financial condition and results of operations.

Accounting for Income Taxes.

      We record income taxes using the asset and liability method. Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax bases, and net
operating loss and tax credit carryforwards. Our financial statements contain
deferred tax assets which have arisen primarily as a result of temporary
differences between book as well as State net operating losses incurred in 2001
and 2002. Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. We evaluate
all available evidence to determine whether it is more likely than not that some
portion or all of the deferred income tax assets will not be realized. We have
determined that all deferred tax assets are realizable at December 31, 2002. The
establishment and amount of the valuation allowance requires significant
estimates and judgment and can materially affect our results of operations. Our
effective tax rate may vary from period to period based on changes in estimated
taxable income or loss, changes to the valuation allowance, changes to federal
or state tax laws, future expansion into areas with varying country, state, and
local income tax rates, deductibility of certain costs and expenses by
jurisdiction and as a result of acquisitions.

Valuation of Long-Lived Assets.

      In accordance with Financial Accounting Standards Board Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that may suggest impairment. Factors we consider important which
could trigger an impairment review include:

      o     significant underperformance relative to historical or projected
            future operating results;

      o     significant negative industry or economic trends;

      o     significant decline in our stock price for a sustained period; and

      o     our market capitalization relative to net book value.


      If such circumstances exist, we evaluate the carrying value of long-lived
assets, other than goodwill, to determine if impairment exists based upon
estimated undiscounted future cash flows over the remaining useful life of the
assets and comparing that value to the carrying value of the assets. If the
carrying value of the asset is greater than the estimated future cash flows, the
asset is written down to its estimated fair value. In determining expected
future cash flows, assets are grouped at the lowest level for which cash flows
are identifiable and independent of cash flows from other asset groups. We
determined that the expected undiscounted cash flows related to our long-lived
asset groups would recover the carrying value of the assets over their remaining
useful lives. Accordingly, we compared the carrying amounts of our long-lived
assets to their estimated fair values. The valuation of long-lived assets
requires significant estimates and assumptions, including fair value estimates
such as estimated replacement cost. These estimates contain management's best
estimates, using appropriate and customary assumptions and projections at the
time. If different estimates or adjustments were used, it is reasonably possible
that our analysis would have generated materially different results.


                                       8
<PAGE>

Results of Operations

Fiscal 2003 Compared to Fiscal 2002

      Sales for the year ended December 31, 2002 decreased by $613,284 to
$5,161,827 compared to $5,775,111 for 2001. This decrease in sales is due
primarily due to the general downturn in the economy.

      With respect to the sales in each of the Company's product lines results
are as follows. For the Data Communications products; the sale of interface
converters represented 38% of Telebyte's revenue in 2002 as compared to 40% in
2001, the sale of short haul modems represented 12% of Telebyte's net sales in
2002 as compared to 20.2% in 2001, the sale of LAN products represented 2% of
Telebyte's net sales in 2002 as compared with 4.6% in 2001, the sale of
Surge/Lightning Protectors represented 4% of Telebyte's net sales in 2002 as
compared with 2.6% in 2001. Broadband test equipment represented 33% of
Telebyte's net sales in 2002 as compared with 16.7% in 2001.

      The gross profit for 2002 was 41.6% as compared to 41.7% for 2001.

      Selling, general, and administrative costs decreased by $415,534 to $
1,970,353 in 2002, compared to $2,385,887 in 2001. The decrease was due
primarily to the cost reduction program started by the Company in the second
half of 2001, which included the closing of our sales and marketing office for
the Broadband products, located in Duluth, Georgia, reductions in staff, wage
reductions of key personnel, and general reductions in operating expenses.

      Research and development expenses increased in 2002 to $728,297, or 14.1%
of sales, from $727,062, or 12.6% of sales, in 2001. The primary focus of
Research and development during 2002 was on the development of advanced local
loop simulators for the laboratory market. The Company began development of a
VDSL loop simulator for both North America and Japan and an ADSL+ loop simulator
for Japan.

      Interest expenses for 2002 were $103,708, or a 2.01% of sales, as compared
to $98,471, or 1.7% of sales, in 2001. Interest expenses are primarily incurred
in connection with the mortgage note payable and the Company's lines of credit.

      Interest income decreased to $759 in 2002, compared to $6,346 in 2001. The
decrease in 2002 was due to lower average levels of cash on hand during 2002. In
2002, the Company had rental income of $48,195, equal to the 2001 rental income.
Rental income is derived from the tenant in the Greenlawn, NY facility. For
2003, the Company expects rental income of approximately $48,000.

      The Company had a net loss of $ 362,524 or $0.29 basic and diluted per
share in 2002, compared to a net loss of $398,507 or $0.32 diluted per share,
for 2001.

Liquidity and Capital Resources

      In 2002, the Company invested $11,001 in property and equipment, which was
financed through internally generated funds. Net cash provided by operating
activities during 2002 was $250,798 compared to net cash used in operation of
$574,680 in 2001. The increase was principally due to the decrease in inventory
in 2002 as compared to 2001.

      Working capital decreased, at December 31, 2002 by $ 297,596, to
$2,019,502 compared with $2,317,098 at December 31, 2001. The current ratio
increased to 4.2 to 1 at December 31, 2002, compared to 2.9 to 1 at December 31,
2001.


                                       9
<PAGE>

      The Company has an agreement with a financial institution (the
"Agreement"), expiring April 30, 2003, which provides us with a line of credit
of up to $500,000 based on our eligible accounts receivable, purchased
components and materials and finished goods inventories, as defined in the
Agreement. Further, the Agreement contains certain financial covenants, which
require us to maintain a minimum level of tangible net worth and places
limitations on the ratio of our total debt to our tangible net worth, as defined
in the Agreement. Borrowings under the line of credit bear interest at the
bank's specified prime rate plus 1%. There was no outstanding balance against
this line at December 31, 2002.

      While the Company believes that the Agreement will be renewed upon its
expiration on April 30, 2003, the Company has no guarantee of a renewal and,
accordingly, there is a risk that the corresponding line of credit could be
eliminated as a resource on April 30, 2003. If the line of credit is not
renewed, the Company believes it can obtain alternative financing; however,
there can be no assurances that alternative financing will be available.

      In January 1999, we secured an additional reducing revolving line of
credit from the same institution that provides for initial borrowings up to a
maximum of $1,000,000. Availability under the reducing revolving line of credit
decreases by approximately $11,900 per month and the line expires January 2006.
Availability under this line at December 31, 2002 was approximately $440,000.
Borrowings under this loan agreement bear interest at the 30-Day Commercial
Paper Rate plus 2.90%. Net borrowings under this line of credit totaled $394,110
at December 31, 2002.

      We believe that cash generated by our future operations, current cash and
cash equivalents, and the existing lines of credit should supply the cash
resources to meet our cash needs for at least the next 12 months. However, this
expectation is not at all guaranteed and it may be that these cash resources
fall short of the Company's cash needs over the next 12 months.

A summary of our contractual cash obligations at December 31, 2002 is as
follows:

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------------
      Contractual Obligations             Total         2003         2004         2005         2006         2007     Thereafter
----------------------------------     ----------     --------     --------     --------     --------     --------     -------
<S>                                    <C>            <C>          <C>          <C>          <C>          <C>          <C>
Long-term borrowings under credit
line                                      394,110     $     --     $     --     $     --     $394,110     $     --     $    --
----------------------------------     ----------     --------     --------     --------     --------     --------     -------
Long-term debt                            642,912       97,184      106,577      116,880      122,823      134,745      64,703
----------------------------------     ----------     --------     --------     --------     --------     --------     -------
Operating leases                           15,654        9,533        3,989        2,132           --           --          --
----------------------------------     ----------     --------     --------     --------     --------     --------     -------
Capital leases including interest          13,776       12,716        1,060
----------------------------------     ----------     --------     --------     --------     --------     --------     -------
Total contractual cash obligations     $1,066,452     $119,433     $111,626     $119,012     $516,933     $134,745     $64,703
-------------------------------------------------------------------------------------------------------------------------------

</TABLE>


Effect of Inflation

      During the five-year period ended December 31, 2002, the Company was able
to decrease its costs of sales of its products to compensate for the effect of
inflation on the cost of components due in large part to changes in
manufacturing methodology, namely, increasing the amount of product manufactured
on a sub-contractor basis.


                                       10
<PAGE>

Risk Factors

WE HAVE A LIMITED OPERATING HISTORY WITH RESPECT TO THE INTERNET, AND WE EXPECT
TO ENCOUNTER RISKS FREQUENTLY FACED BY EARLY-STAGE COMPANIES IN NEW AND RAPIDLY
EVOLVING MARKETS.

      We incorporated our company in 1983 and launched Telebyteusa.com in 1995.
We formed Nextday.com as a wholly owned subsidiary in 1999, and launched its web
site that same year. Accordingly, the Internet segment of our business has a
limited operating history upon which you can evaluate that portion of our
business. In addition, we launched other major web sites in 2001, including
Telebytedatacom.com and Telebytebroadband.com. In order to be successful, we
must attract more traffic to Telebyteusa.com and Nextday.com, and generate
significant e-commerce revenues. However, as a relatively recent entrant in a
new and rapidly evolving market like the Internet, we face numerous risks and
uncertainties. Some of these risks and uncertainties relate to our ability to:

      o     develop further Telebyteusa.com, Telebytebroadband.com,
            Telebytedatacom.com and Nextday.com awareness and brand loyalty;

      o     attract a larger audience to, and increase frequency of use of, our
            Telebyteusa.com, Telebytebroadband.com, Telebytedatacom.com and
            Nextday.com web sites;

      o     increase customer acceptance of the online purchase of products
            through our sites;

      o     generate increased e-commerce revenues through our web site from
            consumers and other commercial vendors;

      o     anticipate and adapt to the changing market for Internet services
            and e-commerce;

      o     respond to actions taken by our competitors;

      o     manage our growth effectively;

      o     implement our advertising and marketing strategies;

      o     develop and renew strategic relationships, particularly with
            suppliers;

      o     attract, retain and motivate qualified personnel; and

      o     continue to upgrade and enhance our technologies and services to
            accommodate expanded service offerings and increased consumer
            traffic.

      We may not be successful in accomplishing any or all of these objectives,
and we cannot be certain that we will be able to maintain our current level of
revenues from our present operations.

WE EXPECT LOSSES FROM OPERATIONS, AND OUR FUTURE PROFITABILITY OF SUCH
OPERATIONS REMAINS UNCERTAIN.

      Our ability to generate significant revenue from our web sites is
uncertain. We have incurred and will continue to incur substantial costs to
create, launch and enhance Telebyteusa.com, Telebytebroadband.com,
Telebytedatacom.com and Nextday.com, to build brand awareness and to grow our
business. We expect losses from operations and negative cash flows from our
Internet business for the foreseeable future because we plan to incur
significant expenses as we expand our advertising and marketing programs,
continue to develop and extend the Telebyteusa.com, Telebytebroadband.com,
Telebytedatacom.com and Nextday.com brands, expand our infrastructure and data
collection capabilities, and seek to acquire complementary businesses and
technologies. If our revenues do not increase and if our spending levels are not
adjusted accordingly, we may not generate sufficient revenues to achieve
profitability of this segment. Even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis in the future.


                                       11
<PAGE>

THE LOSS OF THE SERVICES OF OUR KEY PERSONNEL, OR OUR FAILURE TO ATTRACT,
ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE, COULD
SERIOUSLY HARM OUR BUSINESS.

      Our future success depends, in part, on the continued services of our
senior management. Our future success also depends on our ability to retain and
motivate our key employees. The loss of the services of our Chief Executive
Officer, Dr. Kenneth S. Schneider, or any key employee would have a material
adverse effect on our business, results of operations and financial condition.
Except for Dr. Schneider and Michael Breneisen, our President, none of our
officers or key employees is currently bound by an employment agreement for any
specific term. Our relationships with these remaining officers and key employees
can be terminated at any time.

      Our future success also depends on our ability to identify, attract, hire,
train, retain and motivate highly skilled technical, managerial, merchandising,
marketing and customer service personnel. Competition for such personnel is
intense, and we cannot be certain that we will be able to successfully attract,
assimilate or retain sufficiently qualified personnel. Our inability to do so
could have a material adverse effect on our business, results of operations and
financial condition.

OUR OPERATING RESULTS ARE VOLATILE, WHICH COULD AFFECT OUR AND YOUR ABILITY TO
PREDICT OUR OPERATING RESULTS IN ANY GIVEN PERIOD AND COULD ALSO AFFECT OUR
MARKET PRICE.

      You should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. We expect our quarterly
operating results to vary significantly in the future due to a variety of
factors, many of which are outside of our control. These factors include:

      o     the demand for technology and technology-related products on the
            Internet in general, or on Telebyeusa.com or Nextday.com in
            particular;

      o     traffic levels on Telebyteusa.com, Telebytebroadband.com and
            Nextday.com and on other web sites that refer consumers to our web
            site;

      o     the announcement or introduction of new or enhanced sites, services
            and products by our competitors or us;

      o     our ability to attract and retain qualified personnel in a timely
            and effective manner;

      o     acceptance by consumers and companies of the Internet for technology
            and technology-related products and advertising;

      o     our ability to maintain and implement strategic alliances and
            relationships with manufacturers, suppliers, high-traffic web sites
            and portals and other third parties;

      o     changes in product sales resulting from competition or other
            factors;

      o     technical difficulties or system downtime affecting the Internet or
            the operation of Telebyteusa.com, Telebytebroadband.com,
            Telebytedatacom.com and Nextday.com;

      o     the amount and timing of our costs related to advertising and
            marketing efforts, sales and other initiatives and the timing of
            revenues generated from such activities;

      o     fees we may pay for distribution or content or other costs we may
            incur as we expand our operations;

      o     changes in state and federal government regulations and their
            interpretations, especially with respect to the Internet;

      o     costs related to possible acquisitions of businesses, technologies
            and services; and

      o     general economic conditions and those conditions that specifically
            affect the Internet and Internet services.

                                       12
<PAGE>

      Traffic levels on web sites may fluctuate on a seasonal basis, which could
result in a decrease in user traffic on Telebyteusa.com, Telebytebroadband.com,
Telebytedatacom.com and Nextday.com during certain periods. Seasonal or other
patterns may develop in our industry, which can affect the quarterly revenue of
our firm within a year.

WE EXPECT TO INCUR SIGNIFICANT COSTS IN DEVELOPING OUR BRAND.

      Because of the limited operating history of our Internet business, we must
continue to build the brand identity of Telebyteusa.com, Telebytebroadband.com,
Telebytedatacom.com and Nextday.com to be successful. To build brand awareness,
which may be particularly critical for Internet companies, we must succeed in
our marketing efforts, provide high-quality services and increase traffic to
Telebyteusa.com, Telebytebroadband.com, Telebytedatacom.com and Nextday.com. If
our marketing efforts are unsuccessful or if we cannot increase our brand
awareness, our business, financial condition and results of operations would be
materially adversely affected. We may find it necessary to further increase our
financial commitment to creating and maintaining a strong brand name among
consumers. If we incur excessive expenses in our attempt to promote and maintain
Telebyteusa.com, Telebytebroadband.com, Telebytedatacom.com and Nextday.com, our
business, results of operations and financial condition could be materially
adversely affected.

IF INTERNET USAGE DECREASES AS A RESULT OF DECLINES IN USER CONFIDENCE IN THE
INTEGRITY OF THE INTERNET, OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED.

      Our future success is substantially dependent on the continued growth in
the use of the Internet. The Internet is relatively new and is rapidly evolving.
Our business would be adversely affected if Internet usage does not continue to
grow. Internet usage may be inhibited for a number of reasons, such as:

      o     the Internet infrastructure may not be able to support the demands
            placed on it, or its performance and reliability may decline as
            usage grows;

      o     security and authentication concerns with respect to transmission
            over the Internet of confidential information, such as credit card
            numbers, and attempts by unauthorized computer users, commonly
            referred to as "hackers," to penetrate online security systems; and

      o     privacy concerns, such as those related to the placement by web
            sites of certain information to gather user information, known as
            "cookies," on a user's hard drive without the user's knowledge or
            consent.

WE MAY NOT BE ABLE TO ADAPT TO RAPIDLY CHANGING TECHNOLOGIES, OR WE MAY INCUR
SIGNIFICANT COSTS IN DOING SO.

      Our market is characterized by rapidly changing technologies, evolving
industry standards, frequent new service introductions and changing customer
demands. To be successful, we must adapt to our rapidly evolving market by
continually enhancing our web site and introducing new services to address our
customers' changing demands. We may use new technologies ineffectively or we may
fail to adapt our web site, transaction-processing systems and network
infrastructure to customer requirements, competitive pressures or emerging
industry standards. We could incur substantial costs if we need to modify our
services or infrastructure in order to adapt to these or other changes affecting
providers of Internet services. Our business, results of operations and
financial condition could be materially adversely affected if we incurred
significant costs to adapt, or cannot adapt, to these changes. Due to the


                                       13
<PAGE>

rapidly changing nature of the Internet business, we may be subject to risks,
now and in the future, of which we are not currently aware.

WE MAY BE UNABLE TO CONTINUE TO DEVELOP COMPETITIVE PRODUCTS.

      The technology upon which our products are based is subject to continuous
development of materials and processes. Our business is in large part contingent
upon the continuous refinement of our technological and engineering expertise
and the development of new or enhanced products and technologies to meet the
rapidly developing demands of an evolving market and increased competition.
There can be no assurance that we will continue to be successful in our efforts
to develop new or refine existing products, that such new products will meet
with anticipated levels of market acceptance or that we will otherwise be able
to timely identify and respond to technological improvements made by our
competitors. Significant technological breakthroughs by others could also have a
material adverse effect on our business.

THE INABILITY TO RESPOND TO PRICING PRESSURES WITHIN THE INDUSTRY MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

      Competition in the data communications and business-to-business reselling
industries is intense and, in general, is based primarily on price. We compete
with a number of electronic data communications manufacturers who have broader
product lines and greater financial, marketing and technical resources than us.
There can be no assurance that we will be able to improve the productivity and
efficiency of our manufacturing and distribution processes in order to respond
to pricing pressures, and the failure to do so could have a material adverse
effect on our business. Our subsidiary competes with a number of providers of
similar services who offer a broader array of services and greater financial,
marketing and technical resources. There can be no assurance that we will be
able to improve the productivity and efficiency of our servicing processes in
order to respond to pricing pressures, and the failure to do so could have a
material adverse effect on our business.

OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INDIVIDUAL STOCKHOLDERS.

      The price of our common stock has fluctuated substantially recently. The
trading price of our common stock may continue to be volatile in response to
factors such as:

      o     actual or anticipated variations in our quarterly operating results;

      o     failure of our results of operation to meet the expectations of
            public analysts and investors;

      o     announcements of new product or service offerings;

      o     technological innovations;

      o     competitive developments;

      o     changes in financial estimates by securities analysts;

      o     conditions and trends in the Internet and electronic commerce
            industries;

      o     changes in the economic performance and/or market valuations of
            other electronic data communications companies; and

      o     general market conditions and other general factors.

      Further, the stock markets have experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many technology companies, and have often been unrelated or


                                       14
<PAGE>

disproportionate to the operating performance of such companies. Additionally,
the market price of our common stock could be adversely affected by losses or
other negative news regarding one or more other companies, despite the fact that
such information is not related specifically to us and may even be contradictory
to information that is specifically applicable to us. These broad market factors
may adversely affect the market price of our common stock. In addition, general
economic, political and market conditions such as recessions, interest rates
fluctuations or international currency fluctuations, may adversely affect the
market price of the common stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been instituted against such a company. Such litigation, if
instituted, could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on our
business, results of operations and financial condition.

WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS.

      We have never paid any cash or other dividends on our common stock.
Payment of dividends on our common stock is within the discretion of the Board
of Directors and will depend upon our earnings, our capital requirements and
financial condition, and other factors deemed relevant by the Board. For the
foreseeable future, the Board intends to retain future earnings, if any, to
finance our business operations and does not anticipate paying any cash
dividends with respect to the common stock.

WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.

      We may need to raise additional funds in the future in order to fund more
aggressive brand promotion or more rapid expansion, to develop new or enhanced
services, to respond to competitive pressures or to acquire complementary
businesses, technologies or services. We cannot assure you that any required
additional financing will be available on terms favorable to us, or at all. If
additional funds are raised by our issuing equity securities or any instruments
convertible into equity securities, stockholders may experience dilution of
their ownership interest and such securities may have rights senior to those of
the holders of our common stock. If additional funds are raised by our issuing
debt, we may be subject to certain limitations on our operations, including
limitations on the payment of dividends. If adequate funds are not available or
not available on acceptable terms, we may be unable to fund our expansion,
successfully promote our brand name, take advantage of acquisition
opportunities, develop or enhance services or respond to competitive or business
pressures, which could have a material adverse effect on our business, results
of operations and financial condition.

WE DEPEND ON RELATIONSHIPS WITH THIRD PARTIES, AND THE LOSS, OR CHANGE IN TERMS,
OF ANY RELATIONSHIP COULD ADVERSELY AFFECT US.

      We depend on relationships with third parties, and our business could be
adversely affected if we do not maintain our existing commercial relationships
on terms as favorable as currently in effect, if we do not establish additional
commercial relationships on commercially reasonable terms or if our commercial
relationships do not result in the expected increased use of our web site. We
have entered into commercial relationships with various third parties, some of
which require us to feature them prominently in certain sections of our web
site. Existing and future arrangements may prevent us from entering into other
content agreements, advertising or sponsorship arrangements or other commercial
relationships. Many companies that we may pursue for a commercial relationship
may also offer competing services. As a result, these competitors may be
reluctant to enter into commercial relationships with us.

      We also depend on establishing and maintaining a number of commercial
relationships with various web sites and networks to increase traffic on
Telebyteusa.com, Telebytebroadband.com, Telebytedatacom.com and Nextday.com.


                                       15
<PAGE>

There may be intense competition for placements on these sites and networks, and
in the future we may not be able to enter into distribution relationships for
such placement on commercially reasonable terms or at all. Even if we enter into
distribution relationships with these web sites and networks, they may not
attract significant numbers of consumers. Therefore, our web site may receive
less than the number of additional consumers we expect from these relationships.
Moreover, we may have to pay significant fees to establish or renew these or
comparable relationships.

WE MAY NOT BE ABLE TO CONTINUE TO DEVELOP OUR CONTENT AND SERVICE OFFERINGS TO
REMAIN COMPETITIVE.

      If we fail to develop and introduce new features, functions or services
effectively, it could have a material adverse effect on our business, results of
operations and financial condition. To remain competitive, we must continue to
enhance and improve our content offerings, the ease of use, responsiveness,
functionality and features of the Telebyteusa.com, Telebytebroadband.com,
Telebytedatacom, and Nextday.com sites and develop new services in addition to
continuing to improve the consumer purchasing experience on our site. These
efforts may require the development or licensing of increasingly complex
technologies. We may not be successful in developing or introducing new
features, functions and services, and these features, functions and services may
not achieve market acceptance or enhance our brand loyalty.

WE MAY NOT BE ABLE TO INCREASE OR RETAIN OUR INTERNAL DIRECT SALES FORCE TO
SUPPORT OUR ANTICIPATED GROWTH.

      We rely on our sales personnel to sell our products and services. To
support our growth, we need to substantially maintain, and may need to increase,
our internal sales force over time. Our ability to do this involves a number of
risks, including:

      o     the competition we face in hiring sales personnel;

      o     our ability to integrate, motivate and retain our sales personnel;
            and

      o     the length of time it takes new sales personnel to become
            productive.


         Our business, results of operations and financial condition will be
adversely affected if we do not develop, retain and grow an effective internal
sales force.

THE NUMBER OF INTERNET COMPETITORS CONTINUES TO INCREASE,WE MAY NOT
BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE COMPETITORS.

      The number of internet competitors continues to increase, which could
result in less traffic to our web site, and reduced margins or loss of market
share, any of which would have a material adverse effect on our business,
results of operations and financial condition. We compete with other web sites
for Internet advertisers' and e-commerce marketers' dollars. The number of these
web sites has increased significantly, and we expect such competition to
continue to increase. Competition may also increase as a result of ongoing
industry consolidation.

      We believe that our ability to compete depends on many factors, many of
which are beyond our control. We believe that the principal competitive factors
in attracting consumers to our web site are:

      o     brand awareness and loyalty;

      o     strategic relationships with high-traffic web sites and networks;


                                       16
<PAGE>

      o     a positive shopping and purchasing experience for the consumer in
            our client's sites;

      o     breadth and depth of selection of product;

      o     price;

      o     ease of use;

      o     quality of content, other service offerings, and speed of our site;

      o     quality of content, fulfillment and customer service by our clients;
            and

      o     web site functionality, responsiveness, reliability, and speed.


      Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. This may allow them to devote greater resources than we
can to the development and promotion of customer services. Such competitors may
also engage in more extensive research and development, undertake more
far-reaching marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to existing and potential employees, manufacturers,
retailers, distribution partners, and advertisers and e-commerce partners. Our
competitors may develop services that are equal or superior to those of
Telebyteusa.com, Telebytebroadband.com, Telebytedatacom.com and Nextday.com or
that achieve greater market acceptance than Telebyteusa.com,
Telebytebroadband.com, Telebytedatacom.com and Nextday.com. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their services to address the needs of advertisers and e-commerce marketers. As
a result, it is possible that new competitors may emerge and rapidly acquire
significant market share. We may not be able to compete successfully or
competitive pressures may have a material adverse effect on our business,
results of operations and financial condition.

IF THE INTERNET DOES NOT GROW AS A MEDIUM FOR COMMERCE, OUR BUSINESS COULD BE
MATERIALLY ADVERSELY AFFECTED.

      Our future success and revenue growth will depend upon the adoption of the
Internet by consumers and manufacturers as a mainstream medium for commerce.
While we believe that our services offer significant advantages to consumers and
manufacturers and retailers, we cannot be certain that widespread acceptance of
Internet commerce in general, or of our services in particular, will occur. Our
success assumes that consumers who have historically relied upon traditional
means of commerce to purchase technology or technology-related products will
accept new methods of conducting business and exchanging information. Moreover,
critical issues concerning remote purchases on the Internet, including clarity
of picture, and the commercial use of the Internet, including ease of access,
security, reliability, cost, and quality of service, remain unresolved and may
impact the growth of Internet use. If the market for Internet-based technology
sales fails to develop, develops more slowly than expected or becomes saturated
with competitors, or if our services do not achieve market acceptance, our
business, results of operations and financial condition could be materially
adversely affected.

      The market for Internet-based purchasing services has only recently begun
to develop and is rapidly evolving. While many Internet commerce companies have
grown in terms of revenue, few are profitable. We cannot assure that we will be
profitable, and we anticipate losses for the foreseeable future. As is typical
for a new and rapidly evolving industry, demand and market acceptance for
recently introduced services and products over the Internet are subject to a
high level of uncertainty and there are few proven services and products.
Moreover, as the market for selling technology products online is relatively new
and evolving, it is difficult to predict the future growth rate, if any, and
size of this market.


                                       17
<PAGE>

IF OUR SYSTEM'S OR THE INTERNET'S INFRASTRUCTURE DO NOT GROW OR IMPROVE TO MEET
INCREASED CONSUMER DEMANDS, THE GROWTH OF OUR BUSINESS COULD BE MATERIALLY
ADVERSELY AFFECTED.

      Our ability to retain and attract consumers and advertisers, and to
achieve market acceptance of our services and our brand, depends significantly
upon the performance of our systems and the Internet's infrastructure. Our
revenues depend on the number of visitors to our web site and the traffic and
activity created by those visitors. Any system or network failure that causes
interruption or slower response time of our services could result in less
traffic to our web site and, if sustained or repeated, could reduce the
attractiveness of our services to consumers, manufacturers, retailers and
advertisers. We have experienced periodic system interruptions, which we believe
may continue to occur from time to time. An increase in the volume of our web
site traffic could strain the capacity of our technical infrastructure, which
could lead to slower response times or system failures. This would cause the
number of advertising impressions, click throughs to our clients and our
information offerings to decline, any of which could hurt our revenue growth and
our brand loyalty. In addition, if traffic increases, we cannot assure you that
our technical infrastructure, such as a reliable network backbone with the
necessary speed and data capacity and the development of complementary products
such as high-speed modems, will be able to increase accordingly, and we face
risks related to our ability to scale up to expected consumer levels while
maintaining performance. Further, security and authentication concerns regarding
the transmission of confidential information over the Internet, such as credit
card numbers, may continue. Any failure of our server and networking systems to
handle current or higher volumes of traffic could have a material adverse effect
on our business, results of operations and financial condition.

      The recent growth in Internet traffic has caused frequent periods of
decreased performance, requiring Internet service providers and users of the
Internet to upgrade their infrastructures. If Internet usage continues to
increase rapidly, the Internet infrastructure may not be able to support the
demands placed on it by this growth and its performance and reliability may
decline. If these outages or delays on the Internet occur frequently, overall
Internet usage or usage of our web site could increase more slowly or decline.
Our ability to increase the speed with which we provide services to consumers
and to increase the scope of such services is limited by and dependent upon the
speed and reliability of the Internet. Consequently, the emergence and growth of
the market for our services is dependent on future improvements to the entire
Internet.

      In addition, our operations depend upon our ability to maintain and
protect our computer systems. Our third-party provider maintains, within their
own control and to their own specifications, the only backup disaster recovery
program. The system therefore is vulnerable to damage from a disastrous event,
such as fire, flood, earthquake, power loss, telecommunications failures,
hackers and similar occurrences which cannot be controlled or corrected by the
third party as well as being vulnerable to any failure by the third party to
adequately maintain or protect our equipment or their own facilities. The
occurrence of a disastrous event could have a material adverse effect on our
business, results of operations and financial condition.

WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.

      We could be exposed to liability for third-party information that may be
accessible through our web site. Such claims might assert, among other things,
that, by directly or indirectly providing links to web sites operated by third
parties, we should be liable for copyright or trademark infringement or other
wrongful actions by such third parties through such web sites. It is also
possible that, if any third-party content information provided on our web site
contains errors, consumers might make claims against us for losses incurred in
reliance on such information.


                                       18
<PAGE>

      At times, we also enter into agreements with other companies under which
any revenue that results from the purchase of services through direct links to
or from our web site is shared. Such arrangements may expose us to additional
legal risks and uncertainties, including local, state, federal and foreign
government regulation and potential liabilities to consumers of these services,
even if we do not provide the services ourselves. We cannot assure you that any
indemnification provided to us in our agreements with these parties, if
available, will be adequate.

      Even to the extent any of the claims referred to above do not result in
liability to us, we could incur significant costs in investigating and defending
against such claims. The imposition on us of potential liability for information
carried on or disseminated through our system could require us to implement
measures to reduce our exposure to such liability, which might require the
expenditure of substantial resources or limit the attractiveness of our services
to consumers and others.

      We may not be able to obtain and maintain adequate insurance. Our general
liability insurance may not cover all potential claims to which we are exposed
and may not be adequate to indemnify us for all liability that may be imposed.
Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on our business, results
of operations and financial condition.

IF OUR ONLINE SECURITY MEASURES FAIL, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY
AFFECTED.

      Our network is vulnerable to computer viruses, physical or electronic
break-ins and similar disruption. We expect that these problems will occur from
time to time. The inadvertent transmission of computer viruses could expose us
to litigation or to a material risk of loss. Such security breaches and
inadvertent transmissions could have a material adverse effect on our business,
results of operations and financial condition.

      In our prior offerings of certain online payment services, we relied on
technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission of confidential
information, such as consumer credit card numbers. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the algorithms that we use
to protect our consumers, transaction data or our software vendors and products.
Any well-publicized compromise of security could deter use of the Internet in
general or use of the Internet to conduct transactions that involve transmitting
confidential information or downloading sensitive materials. Someone who is able
to circumvent our security measures could misappropriate proprietary information
or cause interruptions in our operations. We may be required to expend
significant capital and other resources to protect against such security
breaches or alleviate problems caused by such breaches. Such expenditures could
have a material adverse effect on our business, results of operations and
financial condition.

WE MAY BE UNSUCCESSFUL IN ENTERING NEW BUSINESS AREAS.

      We may choose to expand our operations by developing new web sites,
promoting new or complementary products or formats, expanding the breadth and
depth of products and services offered or expanding our market presence through
relationships with third parties. In addition, we may pursue the acquisition of
new or complementary businesses, products or technologies, although we have no
present plans or commitments with respect to any material acquisition or
investment. If we acquire a company, we could face difficulties in assimilating
that company's personnel and operations. In addition, key personnel of the
acquired company might decide not to work for us. Furthermore, any new business
or web site launched by us not favorably received by consumers could damage the
reputation of the Telebyteusa.com, Telebytebroadband.com, Telebytedatacom.com


                                       19
<PAGE>

and Nextday.com brand. The lack of market acceptance of such efforts or our
inability to generate satisfactory revenues from such expanded services or
products to offset their cost could have a material adverse effect on our
business, results of operations and financial condition.

IF GOVERNMENT REGULATION INCREASES, WE MAY NEED TO CHANGE THE MANNER IN WHICH WE
CONDUCT OUR BUSINESS.

      The adoption of new legislation or regulation which impacts Internet
businesses, the application of laws and regulations from jurisdictions whose
laws do not currently apply to our business, or the application of existing laws
and regulations to the Internet and other online services could have a material
adverse effect on our business. We are not currently subject to direct
regulation by any domestic or foreign governmental agency, other than
regulations applicable to businesses generally, and laws or regulations directly
applicable to access to online commerce. However, due to the increasing
popularity and use of the Internet and other online services, it is possible
that laws and regulations may be adopted with respect to the Internet or other
online services covering issues such as user privacy, pricing, content,
copyrights, distribution, and characteristics and quality of products and
services. Furthermore, the growth and development of the market for online
commerce may prompt more stringent consumer protection laws that may impose
additional burdens on those companies conducting business online. The adoption
of any additional laws or regulations may decrease the growth of the Internet or
other online services, which could, in turn, decrease the demand for our
products and services and increase our cost of doing business. Moreover, the
applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes and personal privacy is uncertain and may take years to resolve. In
addition, as our web site is available over the Internet in many states and
foreign countries, and as we sell to numerous consumers residing in such states
and foreign countries, such jurisdictions may claim that we are required to
qualify to do business as a foreign corporation in each such state and foreign
country. We are qualified to do business in only two states, and our failure to
qualify as a foreign corporation in a jurisdiction where such qualification is
required could subject us to taxes and penalties for the failure to qualify.

IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS IS INADEQUATE, OUR
BUSINESS MAY BE MATERIALLY ADVERSELY AFFECTED.

      Although our ability to compete depends, to some extent, upon copyright
law and confidentiality agreements, we believe that the technical and creative
skills of our personnel, continued development of our proprietary systems and
technology, brand name recognition and reliable web site maintenance are more
essential in establishing and strengthening our brand. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our services or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our proprietary rights is difficult. Other than our
registration of certain domain names, we do not have any other protection for
the "Telebyteusa.com", "Telebytedatacom.com", Telebytebroadband.com" and
"Nextday.com" names. We do not believe that we or anyone else can obtain
protection for such names in the United States. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our products and services are made available online. In
addition, litigation may be necessary in the future to enforce or protect our
intellectual property rights or to defend against claims or infringement. As
part of our confidentiality procedures, we generally enter into agreements with
our employees and consultants. We cannot assure that the steps taken by us will
prevent misappropriation of technology or that the agreements entered into for
that purpose will be enforceable. Misappropriation of our intellectual property
or the costs associated with litigation related thereto could have a material
adverse effect on our business, results of operations and financial condition.


                                       20
<PAGE>

EXISTING STOCKHOLDERS WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL OVER US.

      Approximately 35% of our outstanding common stock is beneficially owed by
our executive officers and directors, including 23% of our outstanding stock
beneficially owned by Dr. Kenneth S. Schneider, our Chief Executive Officer.
Accordingly, our management in general and Dr. Schneider in particular will have
substantial influence over the outcome of any matter submitted to a vote of
stockholders, including the election of directors and the approval of
significant corporate transactions (such as acquisitions of us or our assets).
Such influence could delay or prevent a change of control of our Company. Please
see Item 11, "Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters."

WE MAY BE UNABLE TO RESPOND TO EVENTS OUTSIDE OUR CONTROL

      Our business may also be adversely affected by matters and events
affecting businesses generally, including, without limitation, political and
economic events, labor unrest, acts of God, war and other events outside of our
control.

Item 7. Financial Statements

      The audited financial statements of the Company as of December 31, 2002
and 2001 and for the years then ended are included in this Annual Report on Form
10-KSB following Item 14 thereof.

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

         None.

                                    Part III

Item 9. Directors and Executive Officers of the Registrant

      The following table sets forth certain information concerning the
Company's officers and directors as of December 31, 2002. Telebyte's directors
are elected to serve until the next annual meeting of shareholders or until
their successors are elected and qualified. The executive officers are appointed
annually by, and serve at the pleasure of, the Board of Directors.

<TABLE>
<CAPTION>
      Name, age, and positions               Business experience during past                 Director
        held with the Company              five years and principal occupation                 since
        ---------------------              -----------------------------------                 -----
<S>                                    <C>                                                     <C>
Kenneth S. Schneider, Ph.D., age 57,   Dr. Schneider served as Vice President and              1983
Chairman, CEO, Secretary and Director  Treasurer from August 1983 to January
                                       1999. He was elected Secretary in June
                                       1991. He became Chairman of the Board and
                                       CEO in January 1999.

Michael Breneisen, age 38              Mr. Breneisen served as Controller from                 1999
President, COO, CFO,                   July 1992 and Vice President and CFO from
Treasurer and Director                 January 1997. He became President, COO and
                                       CFO in January 1999 and Treasurer in
                                       March 2000. He became CEO of Nextday.com
                                       in June 1999.

Jamil Sopher, age 59                   Mr. Sopher is an independent consultant.                1996
Director                               Previously, Mr. Sopher worked for the World
                                       Bank here he was employed from 1980 to 2000.

Jonathan D. Casher, age 58             Mr. Casher is the founder, Chairman and CEO             2000
Director                               of RECAP, Inc. and has worked for RECAP,
                                       Inc. since 1989.
</TABLE>


                                       21
<PAGE>

Section 16 Beneficial Ownership Reporting

      Based upon a review of copies of the forms required to be filed under
Section 16(a) of the Securities Exchange Act of 1934 or written representations
from officers and directors, the Company believes all officers and directors,
and greater than ten percent owners of the Company's common stock have complied
with Section 16(a).

Item 10. Executive Compensation

                           Summary Compensation Table

      The following table provides summary information concerning the cash and
certain other compensation paid or accrued by the Company during the last three
fiscal years to the executive officers of the Company whose cash compensation
exceeded $100,000. The table includes Company contributions on the officer's
behalf to the Company's 401(k) Plan.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                       Annual Compensation                                 Long-Term Compensation
                            ----------------------------------------- --------------------------------------------------------------
                                                                                 Awards                           Payouts
                    ------- ----------- ---------- ------------------ ------------------------------ -------------------------------
Name and Positions                                                    Restricted      Securities
                                                     Other Annual        Stock        Underlying        LTIP            All Other
                     Year     Salary      Bonus      Compensation       Awards       Options/SARs      Payout         Compensation
                               ($)         ($)            ($)             ($)            (#)             ($)               ($)
       (a)           (b)       (c)         (d)            (e)             (f)            (g)             (h)               (i)
------------------  ------- ----------- ---------- ------------------ ------------ ----------------- ------------- -----------------
<S>                 <C>     <C>         <C>        <C>                <C>          <C>               <C>           <C>
Kenneth S.           2002    $108,872       0              0               0              0           $4,080(1)         $3,869(2)
Schneider           ------- ----------- ---------- ------------------ ------------ ----------------- ------------- -----------------
Chairman, CEO,       2001    $151,259       0              0               0              0           $4,080(1)         $4,437(2)
Secretary and       ------- ----------- ---------- ------------------ ------------ ----------------- ------------- -----------------
Director             2000    $136,836       0              0               0              0           $4,080(1)         $5,110(2)
------------------  ------- ----------- ---------- ------------------ ------------ ----------------- ------------- -----------------
Michael              2002    $ 95,865       0              0               0              0               0             $6,090(2)
Breneisen           ------- ----------- ---------- ------------------ ------------ ----------------- ------------- -----------------
President,           2001    $100,000       0              0               0              0               0             $6,537(2)
COO, CFO,           ------- ----------- ---------- ------------------ ------------ ----------------- ------------- -----------------
Treasurer and        2000    $ 85,577       0              0               0              0               0             $6,503(2)
Director
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

      (1)   Deferred Compensation - see Long-Term Incentive Plans Table below.

      (2)   Fringe benefits including life insurance, employer 401k
            contributions and automobile.


                                       22
<PAGE>

                      Option/SAR Grants in Last Fiscal Year
                               (Individual Grants)

      None.

               Aggregated Option/SAR Exercises in Last Fiscal Year
                          and FY-End Option/SAR Values

      The following table sets forth information concerning each exercise of
stock options during fiscal 2002 by each of the named executive officers and
fiscal year-end value of unexercised options:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                      Number of Securities
                                                                           Underlying
                                                                          Unexercised          Value of Unexercised
                                                                        Options/SARs at            In-the-Money
                                                                           FY-End (#)         Options/SARs at FY-End
                          Shares Acquired on                              Exercisable/           ($) Exercisable/
          Name                 Exercise           Value Realized         Unexercisable            Unexercisable
                                  (#)                  ($)                                             (e)
          (a)                     (b)                  (c)                    (d)                      (1)
------------------------- -------------------- --------------------- ----------------------- -------------------------
<S>                       <C>                  <C>                   <C>                     <C>
Kenneth S. Schneider               0                    0              45,000/160,000 (2)              0/0
------------------------- -------------------- --------------------- ----------------------- -------------------------
Michael Breneisen                  0                    0              50,000/160,000 (2)              0/0
----------------------------------------------------------------------------------------------------------------------
</TABLE>

      (1)   Calculation based upon the closing price of the Company's common
            stock ($0.41 per share) as reported by Nasdaq Trading and Market
            Services on December 31, 2002.

      (2)   60,000 option shares vest June 30, 2004, and 100,000 option shares
            vest January 1, 2005; subject, however, to accelerate if certain
            targets are met.

<TABLE>
                                  Long-Term Incentive Plans - Awards in Last Fiscal Year
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                          Estimated Future Payouts Under
                                                                           Non-Stock Price-Based Plans
                                                           -------------------------------------------------------------
                            Number of
                             Shares,      Performance or
                            Units or       Other Period
                              Other      Until Maturation         Threshold              Target            Maximum
          Name             Rights (#)       Or Payout                ($)                  ($)                ($)
          (a)                  (b)             (c)                   (d)                  (e)                (f)
------------------------- -------------- ----------------- ------------------------ ----------------- ------------------
<S>                       <C>            <C>               <C>                      <C>               <C>
Kenneth S. Schneider            0         April 16, 2010          26,667(1)            26,667(1)          26,667(1)
------------------------- -------------- ----------------- ------------------------ ----------------- ------------------
Michael Breneisen               0              N/A                    0                    0                  0
------------------------------------------------------------------------------------------------------------------------
</TABLE>

      (1)   In 1990, the Company entered into a deferred compensation agreement
            with Kenneth S. Schneider, pursuant to which he will receive a
            defined amount, approximately 30% of his 1990 base salary, each year
            for a period of 10 years after reaching age 65. The deferred
            compensation plan is funded through life insurance and is being
            provided for currently. The expense charged to operations in 2002
            for such future obligations was $4,080.

Compensation of Directors

      The outside directors do not receive a per-meeting fee, but do receive
reimbursement of expenses for attending each meeting and are eligible to receive
stock options.

Employment Contracts and Termination of Employment and Change in Control
Arrangements

      During 2000, the Company renewed, for an additional three-year term, the
employment agreement with Kenneth S. Schneider. The employment agreement


                                       23
<PAGE>

provides that Dr. Schneider would receive a minimum salary of $151,259 per
annum. During the employment period, Dr. Schneider is entitled upon termination
or expiration of the agreement under certain circumstances (including a change
of control) to certain severance benefits. In order to help the Company meet the
challenges of cost reduction during the current worldwide economic downturn Dr.
Schneider took a voluntary, temporary, reduction in his salary beginning in
February 2002.

      During 2001, the Company renewed, for an additional three-year term, the
employment agreement with Michael Breneisen. The employment agreement provides
that Mr. Breneisen would receive a minimum salary of $100,000 per annum. During
the employment period, Mr. Breneisen is entitled upon termination or expiration
of the agreement under certain circumstances (including a change of control) to
certain severance benefits. In order to help the Company meet the challenges of
cost reduction during the current worldwide economic downturn Mr. Breneisen took
a voluntary, temporary, reduction in his salary beginning in February 2002.

Report on Repricing of Options/SARs

      None.

Item 11. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters

Securities Authorized for Issuance Under Equity Compensation Plans.

      The following table provides equity compensation plan information as of
December 31, 2002 with respect to compensation plans under which the Company's
equity securities are authorized for issuance:

<TABLE>
                                           Equity Compensation Plan Information
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Number of securities remaining
                               Number of securities to be                                      available for future issuance under
                                 issued upon exercise of         Weighted-average exercise          equity compensation plans
                              outstanding options, warrants    price of outstanding options,    (excluding securities reflected in
                                       and rights                   warrants and rights                    column (a))
                                           (a)                              (b)                                (c)
---------------------------- -------------------------------- -------------------------------- -------------------------------------
<S>                          <C>                              <C>                              <C>
Equity compensation plans                616,250                           $1.04                             485,000
approved by security
holders (1)
---------------------------- -------------------------------- -------------------------------- -------------------------------------
Equity compensation plans                  N/A                              N/A                                N/A
not approved by security
holders
---------------------------- -------------------------------- -------------------------------- -------------------------------------
Total                                    616,250                           $1.04                             485,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

      (1)   Includes the Company's 2001,1999,1993 and 1987 Stock Option Plans
            and 2001 Employee Stock Purchase Plan. The 2001 Employee Stock
            Purchase Plan, which authorizes the sale and issuance of up to
            400,000 shares of common stock of the Company to employees on a
            discounted basis, has been temporarily suspended by the Board of
            Directors. It is anticipated that this program will be re-instituted
            during fiscal year 2004.


                                       24
<PAGE>

Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth as of December 31, 2001 information
concerning (i) the shares held by each person or group known to own beneficially
more than 5% of the outstanding shares of common stock, (ii) shares owned by the
Chief Executive Officer (iii) shares owned by all executive officers and
directors as a group.


                                       25
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
              (1)                             (2)                           (3)                     (4)
        Title of Class           Name and Address of               Amount and Nature of         Percent of
                                 Beneficial Owner                    Beneficial Owner              Class
-------------------------------- ------------------------------ ---------------------------- ------------------
<S>                              <C>                               <C>                          <C>
            Common               Kenneth S. Schneider                   328,037(1)                 23.0%
                                 270 Pulaski Road
                                 Greenlawn, NY 11740
-------------------------------- ------------------------------ ---------------------------- ------------------
            Common               Michael Breneisen                                                  5.7%
                                 270 Pulaski Road                        81,900(2)
                                 Greenlawn, NY 11740
-------------------------------- ------------------------------ ---------------------------- ------------------
            Common               Jamil Sopher                            63,980(3)                  4.5%
                                 270 Pulaski Road
                                 Greenlawn, NY 11740
-------------------------------- ------------------------------ ---------------------------- ------------------
            Common               Jonathan D. Casher                      25,750(4)                  1.8%
                                 270 Pulaski Road
                                 Greenlawn, NY 11740
-------------------------------- ------------------------------ ---------------------------- ------------------
                                 All executive officers and             499,667                      35%
                                 directors
                                 As a group (4 in number)
---------------------------------------------------------------------------------------------------------------
</TABLE>

      (1)   Includes 45,000 shares issuable upon exercise of stock options
            granted under the Company's 1999 Stock Option Plan. Does not include
            160,000 shares issuable upon exercise of stock options under the
            1999 Plan. Of such options 60,000 option shares vest June 30, 2004,
            and the remaining 100,000 option shares vest January 1, 2005;
            subject, however, to acceleration if certain targets are met.

      (2)   Includes 5,000 shares issuable upon exercise of stock options
            granted under the Company's 1987 Stock Option Plan. Includes 45,000
            shares issuable upon exercise of stock options granted under the
            Company's 1999 Stock Option Plan. Does not include 160,000 shares
            issuable upon exercise of stock options under the 1999 Plan. Of such
            options 60,000 option shares vest June 30, 2004, and the remaining
            100,000 option shares vest January 1, 2005; subject, however, to
            acceleration if certain targets are met.

      (3)   Includes 20,000 shares issuable upon exercise of stock options
            granted under the Company's 1993 Stock Option Plan. Includes 34,750
            shares issuable upon exercise of stock options granted under the
            Company's 1999 Stock Option Plan.

      (4)   Includes 1,000 shares issuable upon exercise of stock options
            granted under the Company's 1993 Stock Option Plan. Includes 24,750
            shares issuable upon exercise of stock options granted under the
            Company's 1999 Stock Option Plan.

Item 12. Certain Relationships and Related Transactions

      None.

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits

3(a) The Company's Certificate of Incorporation under the State of Delaware
(incorporated herein by reference to the exhibits filed with the Company's
Annual Report on Form 10-K, dated March 31, 2000).

3(b) The By-laws of the Company as a Delaware corporation (incorporated herein
by reference to the exhibits filed with the Company's Annual Report on Form
10-K, dated March 31, 2000).


                                       26
<PAGE>

10(a) The Company's 1993 Stock Option Plan (incorporated herein by reference to
the exhibits filed with the Company's Proxy Statement for the 1994 Annual
Meeting of Shareholders, dated June 24, 1994).

10(b) Commercial mortgage and consolidation agreement dated May 25, 1988 between
Home Federal Savings Bank (now known as North Fork Bank) and Telebyte
Technology, Inc. (incorporated herein by reference to the exhibits filed with
the Company's Annual Report on Form 10-K, dated March 31, 1989).

10(c) Deferred compensation agreements dated December 12, 1990 between Telebyte
Technology, Inc. and Joel A. Kramer and Kenneth S. Schneider (incorporated
herein by reference to the exhibits filed with the Company's Annual Report on
Form 10-K, dated March 29, 1991).

10(e) $1,000,000 Revolving Line of Credit agreement dated June 23, 1994 between
Merrill Lynch and Telebyte Technology, Inc (incorporated herein by reference to
the exhibits filed with the Company's Annual Report on Form 10-KSB, dated March
24, 1995).

10(f) Employment Agreement between the Company and Kenneth S. Schneider dated
August 1, 1997 (incorporated herein by reference to the exhibits filed with the
Company's Annual Report on Form 10-KSB, dated March 31, 1998).

10(g) Mortgage Loan Modification Agreement dated March 18, 1998 between the
Company and Home Federal Savings Bank 1997 (incorporated herein by reference to
the exhibits filed with the Company's Annual Report on Form 10-KSB, dated March
31, 1998).

10(h) Stock Purchase Agreement dated January 20, 1999 between the Company and
Joel A. Kramer (incorporated herein by reference to the exhibits filed with the
Company's Current Report on Form 8K, dated January 27, 1999).

10(i) Consulting Agreement dated January 20, 1999 between the Company and Joel
A. Kramer (incorporated herein by reference to the exhibits filed with the
Company's Current Report on Form 8K, dated January 27, 1999).

10(j) Termination Agreement dated January 20, 1999 between the Company and Joel
A. Kramer (incorporated herein by reference to the exhibits filed with the
Company's Current Report on Form 8K, dated January 27, 1999).

10(k) Agreement and Release dated January 20, 1999 between the Company and Joel
A. Kramer (incorporated herein by reference to the exhibits filed with the
Company's Current Report on Form 8K, dated January 27, 1999).

10(l) Employment Agreement between the Company and Michael Breneisen dated June
25, 1999 (incorporated herein by reference to exhibits filed with the Company's
Annual Report on Form 10-KSB, dated March 31, 2000).

10(m) The Company's 1999 Stock Option Plan (incorporated herein by reference to
the exhibits filed with the Company's Annual Report on Form 10-KSB, dated March
31, 2000).

10(n) $1,000,000 Reducing Revolving Line of Credit Agreement dated January 20,
1999 between Merrill Lynch and Telebyte Technology, Inc. (incorporated herein by
reference to the exhibits filed with the Company's Annual Report on Form 10-KSB,
dated March 31, 2000).


                                       27
<PAGE>

10(o) The Company's 2001 Stock Option Plan (incorporated herein by reference to
the exhibits filed with the Company's Annual Report on Form 10-KSB, dated April
1, 2002).

10(p) The Company's 2001 Employee Stock Purchase Plan (incorporated herein by
reference to the exhibits filed with the Company's Annual Report on Form 10-KSB,
dated April 1, 2002).

(21) Subsidiaries of the Small Business Issuer.

(23) Consent of Holtz Rubenstein & Co., LLP, independent certified public
accountants.

(b) Reports on Form 8-K

      The Company did not file any Current Reports on Form 8-K with the
Commission during the fourth quarter of fiscal year 2002.

Item 14. Controls and Procedures

      The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures within 90 days prior to the
filing of this Annual Report on Form 10-KSB, and based on their evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.


                                       28
<PAGE>

Signatures

In accordance with 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.

TELEBYTE, INC.


By:   /s/ Kenneth S. Schneider
      ------------------------------
      Kenneth S. Schneider
      Chairman of the Board
      (Chief Executive Officer)


By:   /s/ Michael Breneisen
      ------------------------------
      Michael Breneisen
      President
      (Chief Operating Officer and Principal Financial and Accounting Officer)


Date: March 31, 2003


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


By:   /s/ Kenneth S. Schneider
      ------------------------------
      Kenneth S. Schneider, Director

Date: March 31, 2003


By:   /s/ Jamil Sopher
      ------------------------------
      Jamil Sopher, Director

Date: March 31, 2003


By:   /s/ Michael Breneisen
      ------------------------------
      Michael Breneisen, Director

Date: March 31, 2003


By:   /s/ Jonathan D. Casher
      ------------------------------
      Jonathan D. Casher, Director

Date: March 31, 2003


                                       29

<PAGE>
                          TELEBYTE, INC. AND SUBSIDIARY

                               REPORT ON AUDITS OF
                        CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2002 AND 2001


<PAGE>






                          TELEBYTE, INC. AND SUBSIDIARY

                               REPORT ON AUDITS OF
                        CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2002 AND 2001

                                    CONTENTS
<TABLE>
<CAPTION>
                                                                                               Page
                                                                                               ----
<S>                                                                                      <C>
Report of Independent Certified Public Accountants - Holtz Rubenstein & Co., LLP                F-1

Report of Independent Certified Public Accountants - Grant Thornton LLP                         F-2

Consolidated Balance Sheets                                                                     F-3

Consolidated Statements of Operations                                                           F-4

Consolidated Statement of Shareholders' Equity                                                  F-5

Consolidated Statements of Cash Flows                                                           F-6

Notes to Consolidated Financial Statements                                               F-7 - F-18

Consent of Independent Certified Public Accountants                                            F-19
</TABLE>




<PAGE>




               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
  Telebyte, Inc. and Subsidiary


We have audited the accompanying consolidated balance sheet of Telebyte, Inc.
and Subsidiary as of December 31, 2002, and the related consolidated statements
of operations, shareholders' equity and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Telebyte, Inc. and Subsidiary as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.

                                                 /s/ HOLTZ RUBENSTEIN & CO., LLP
                                                     HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
March 15, 2003



                                      F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
  Telebyte, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of Telebyte, Inc.
and Subsidiary as of December 31, 2001, and the related consolidated statements
of operations, shareholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telebyte, Inc. and
Subsidiary as of December 31, 2001, and the consolidated results of their
operations and their consolidated cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.

GRANT THORNTON LLP


Melville, New York
March 15, 2002


                                      F-2
<PAGE>

<TABLE>
                          TELEBYTE, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                               December 31,
                                                          ----------------------
                                                              2002       2001
                                                          ----------  ----------
                               ASSETS
<S>                                                       <C>         <C>
CURRENT ASSETS:
   Cash and cash equivalents                              $  122,489  $  245,057
   Accounts receivable, net of allowance of
      $45,000 in 2002 and $38,000 in 2001                    452,295     561,723
   Inventories                                             1,607,787   2,089,233
   Prepaid expenses and other                                 86,150     127,333
   Refundable income taxes                                   172,126     253,961
   Deferred income taxes                                     208,000     282,000
                                                          ----------  ----------
        Total current assets                               2,648,847   3,559,307

PROPERTY AND EQUIPMENT, net                                1,095,185   1,237,192

INTANGIBLE ASSETS, NET                                        87,473     136,006

OTHER ASSETS                                                  36,777       1,777
                                                          ----------  ----------
                                                          $3,868,282  $4,934,282
                                                          ==========  ==========
                LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                       $  329,859  $  464,416
   Accrued expenses                                          190,254     278,729
   Borrowings under line of credit                                --     399,400
   Current maturities of long-term debt                       97,184      88,618
   Current maturities of capital lease obligations            12,048      11,046
                                                          ----------  ----------
        Total current liabilities                            629,345   1,242,209
                                                          ----------  ----------
LONG-TERM BORROWINGS UNDER LINE OF CREDIT                    394,110     257,149
                                                          ----------  ----------
LONG-TERM DEBT, less current maturities                      545,728     642,002
                                                          ----------  ----------
CAPITAL LEASE OBLIGATIONS, less current maturities             1,051      13,100
                                                          ----------  ----------
DEFERRED SERVICE REVENUE                                      21,750          --
                                                          ----------  ----------
DEFERRED INCOME TAXES                                         76,000     217,000
                                                          ----------  ----------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
   Common stock - $.01 par value; 9,000,000
      shares authorized; 1,253,631 shares issued and
      outstanding in 2002 and 2001                            12,536      12,536
   Capital in excess of par value                          1,781,672   1,781,672
   Retained earnings                                         406,090     768,614
                                                          ----------  ----------
                                                           2,200,298   2,562,822
                                                          ----------  ----------
                                                          $3,868,282  $4,934,282
                                                          ==========  ==========
</TABLE>

         The accompanying notes are an integral part of these statements


                                      F-3
<PAGE>

                          TELEBYTE, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                         Years Ended
                                                         December 31,
                                                -----------------------------
                                                    2002              2001
                                                -----------       -----------

NET SALES                                       $ 5,161,827       $ 5,775,111
COST OF SALES                                     3,016,138         3,366,830
                                                -----------       -----------
    Gross profit                                  2,145,689         2,408,281
                                                -----------       -----------
OPERATING EXPENSES:
  Selling, general and administrative             1,970,353         2,385,887
  Research and development                          728,297           727,062
                                                -----------       -----------
                                                  2,698,650         3,112,949
    Operating loss                                 (552,961)         (704,668)
                                                -----------       -----------
OTHER INCOME (EXPENSE):
  Interest income                                       759             6,346
  Rental income                                      48,195            48,195
  Other income                                       20,191            78,855
  Interest expense                                 (103,708)          (98,471)
                                                -----------       -----------
                                                    (34,563)           34,925
                                                -----------       -----------
LOSS BEFORE INCOME TAXES                           (587,524)         (669,743)

INCOME TAX (BENEFIT)                               (225,000)         (271,236)
                                                -----------       -----------
LOSS                                            $  (362,524)      $  (398,507)
                                                ===========       -----------
LOSS PER COMMON SHARE:
  Basic                                         $     (0.29)      $     (0.32)
                                                ===========       ===========
  Diluted                                       $     (0.29)      $     (0.32)
                                                ===========       ===========
WEIGHTED-AVERAGE SHARES:
  Basic                                           1,253,631         1,253,631
                                                ===========       ===========
  Diluted                                         1,253,631         1,253,631
                                                ===========       ===========





         The accompanying notes are an integral part of these statements

                                       F-4


<PAGE>

                          TELEBYTE, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 2002 AND 2001
<TABLE>
<CAPTION>

                                                                 Capital in
                                        Number of       Common    Excess of      Retained
                                      Shares Issued     Stock     Par Value      Earnings          Total
                                      -------------    -------    ----------    -----------     -----------

<S>                                       <C>           <C>       <C>           <C>             <C>
Balance at January 1, 2001                1,253,631     12,536    $1,781,672    $ 1,167,121     $ 2,961,329

Net loss                                         --         --            --       (398,507)       (398,507)
                                      -------------    -------    ----------    -----------     -----------

Balance at December 31, 2001              1,253,631     12,536     1,781,672        768,614       2,562,822

Net loss                                         --         --            --       (362,524)       (362,524)
                                      -------------    -------    ----------    -----------     -----------

Balance at December 31, 2002              1,253,631    $12,536    $1,781,672    $   406,090     $ 2,200,298
                                      =============    =======    ==========    ===========     ===========
</TABLE>





         The accompanying notes are an integral part of these statements

                                       F-5


<PAGE>

                          TELEBYTE, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                          Years Ended
                                                                          December 31,
                                                                    ----------------------
                                                                       2002          2001
                                                                    ---------     ---------
<S>                                                                 <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                         $(362,524)    $(398,507)
   Adjustments to reconcile net loss to net
      cash provided by (used in) operating activities
         Provision for bad debt expense                                 7,000        25,500
         Depreciation and amortization                                197,618       246,770
         Provision for inventory obsolescence                         113,500        77,834
         Loss from disposal of property and equipment                   3,923            --
         Deferred income taxes                                        (67,000)      (87,000)
         Imputed interest                                               1,171         1,480
         Decrease (increase) in operating assets
           Accounts receivable                                        102,428       189,445
           Inventories                                                367,946      (492,374)
           Prepaid expenses, taxes and other                           88,018      (258,060)
         Increase (decrease) in operating liabilities
           Accounts payable                                          (134,557)      149,477
           Accrued expenses and taxes payable                         (88,475)      (29,245)
           Deferred service revenue                                    21,750            --
                                                                    ---------     ---------
        Net cash provided by (used in) operating activities           250,798      (574,680)
                                                                    ---------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to property and equipment                                (11,001)     (173,999)
                                                                    ---------     ---------
        Net cash used in investing activities                         (11,001)     (173,999)
                                                                    ---------     ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Principal payments on long-term debt                               (88,880)      (87,202)
   Principal payments on capital lease obligation                     (11,046)       (9,314)
   Net (payments) borrowings under line of credit agreement          (399,400)      399,400
   Net borrowings under long-term line of credit agreement            136,961       257,149
                                                                    ---------     ---------
        Net cash (used in) provided by financing activities          (362,365)      560,033
                                                                    ---------     ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS                            (122,568)     (188,646)

CASH AND CASH EQUIVALENTS, beginning of year                          245,057       433,703
                                                                    ---------     ---------

CASH AND CASH EQUIVALENTS. end of year                              $ 122,489     $ 245,057
                                                                    =========     =========

NONCASH FINANCING ACTIVITIES:
   Equipment acquired under capital lease obligation                $      --     $  33,460
                                                                    =========     =========
</TABLE>

         The accompanying notes are an integral part of these statements

                                       F-6


<PAGE>




                          TELEBYTE, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 2002 AND 2001

1.    Summary of Significant Accounting Policies:

      Telebyte, Inc. and Subsidiary (the "Company") designs, manufactures and
markets electronic data communications products. The Company's products are
primarily sold to end-users, domestic dealers and distributors, foreign dealers
and distributors and original equipment manufacturers. Through the Company's
wholly-owned subsidiary, Nextday.com, Inc. ("Nextday.com"), the Company,
utilizing electronic commerce (e-commerce) via the Internet, resells products
manufactured principally by other companies in the business-to-business
marketplace. The Company currently operates in two business segments, data
communications and e-commerce.

      A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows:

      a. Principles of consolidation

      The accompanying consolidated financial statements include the accounts of
Telebyte Inc. and its subsidiary, Nextday.com. All significant intercompany
balances have been eliminated in consolidation.

      b. Allowance for doubtful accounts

      Management must make estimates of the uncollectability of accounts
receivable. Management specifically analyzes accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts.

      c. Inventories

      Inventories are stated at the lower of cost (first-in, first-out) or
market.

      d. Property and equipment

      Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on the straight-line basis over the estimated useful
lives of the assets, which are 35 years for building and improvements, 5 years
for equipment and 2 years for software.

      e. Intangible assets

      Intangible assets include the unamortized costs of certain intangible
assets including a license agreement and deferred loan costs. Amortization is
provided for on a straight-line basis over the shorter of the estimated useful
lives or the related contractual life. Aggregate amortization expense was
$48,533 and $90,093 for the years ended 2002 and 2001, respectively.

                                       F-7


<PAGE>


1.    Summary of Significant Accounting Policies: (Cont'd)

      e. Intangible assets (Cont'd)

      Amortization expense related to intangible assets for the next five years
is as follows:

                        For the Year                 Amount
                        ------------                -------
                            2003                    $34,500
                            2004                     34,500
                            2005                     12,500
                            2006                      5,000
                            2007                        500

      f. Long-lived assets

      It is the Company's policy to evaluate and recognize an impairment to its
long-lived assets if it is probable that the recorded amounts are in excess of
anticipated undiscounted future cash flows.

      g. Income taxes

      Deferred income taxes are recognized for temporary differences between
financial statement and income tax basis of assets and liabilities for which
income tax benefits are expected to be realized in future years. A valuation
allowance is established to reduce the deferred tax assets if it is more likely
than not that all, or some portion, of such deferred tax assets will not be
realized. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.

      h. Loss per share

      Loss per share is determined by dividing the Company's net loss by the
weighted- average shares outstanding. Excluded from the calculation of diluted
loss per share are 616,250 and 524,000 options to purchase the Company's common
stock in 2002 and 2001, respectively, as their inclusion would have been
antidilutive.

      i. Stock-based compensation plans

      The Company maintains four fixed stock option plans, as more fully
described in Note 7 to the consolidated financial statements, accounted for
using the "intrinsic value" method pursuant to the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations, and, accordingly, recognizes no compensation expense.
Therefore, the Company has elected the disclosure provisions only of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."

      j. Consolidated statements of cash flows

      For purposes of the consolidated statements of cash flows, the Company
considers highly liquid cash investments with an original maturity of three
months or less to be cash equivalents. The Company paid interest of $82,492 and
$73,092 and income taxes of $955 and $217,825 in 2002 and 2001, respectively.

      k. Revenue recognition

      Revenue is recognized from sales when a product is shipped and title
passes to customers. Service fees are recognized upon the completion of the
related service.

                                       F-8


<PAGE>


1.    Summary of Significant Accounting Policies: (Cont'd)

      l. Advertising

      Advertising costs are expensed as incurred and totaled $30,000 and $6,000
in 2002 and 2001, respectively.

      m. Research and development

      Research and development costs are expensed as incurred.

      n. Shipping and handling fees and costs

      The Company includes fees billed to a customer relating to shipping and
handling costs in net sales. All shipping and handling expenses incurred by the
Company are included in cost of sales.

      o. Use of estimates and fair value of financial instruments

      In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.

      Management of the Company believes that the fair value of financial
instruments, consisting of cash, accounts receivable and debt, approximates
carrying value due to the immediate or short-term maturity associated with its
cash and accounts receivable and the interest rates associated with its debt.

      p. New accounting pronouncements

      In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires that a liability
for a cost that is associated with an exit or disposal activity be recognized
when the liability is incurred. It supersedes the guidance in EITF Issue No.
94-3. Under EITF 94-3, an entity recognized a liability for an exit cost on the
date that the entity committed itself to an exit plan. Under SFAS 146, an
entity's commitment to a plan does not, by itself, create a present obligation
to other parties that meets the definition of a liability. SFAS 146 also
establishes that fair value is the objective for the initial measurement of the
liability. SFAS 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002.

      In November 2002, the FASB's Emerging issues Task Force finalized EITF
Issue No. 00-21 (EITF 00-21), "Revenue Arrangements with Multiple Deliverables."
EITF 00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. EITF 00-21 also
addresses how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. However, it does not address
when the criteria for revenue recognition are met or provide guidance on the
appropriate revenue recognition convention for a given unit of accounting. EITF
00-21 is effective for all revenue arrangements entered into in fiscal periods
beginning after June 15, 2003, and early application is permitted. Upon
adoption, entities may elect to either apply EITF 00-21 prospectively or report
the change in accounting as a cumulative-effect adjustment. The adoption of EITF
00-21 is not expected to have a significant impact on the Company.

                                       F-9


<PAGE>


1.    Summary of Significant Accounting Policies: (Cont'd)

      p. New accounting pronouncements (Cont'd)

      In November 2002, the FASB issued Interpretation No. 45 (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN
45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit and warranty
obligations. It also clarifies that at the time a company issues a guarantee, a
company must recognize an initial liability for the fair value of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The provisions of FIN 45
relating to initial recognition and measurement must be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. We do not expect
the adoption of the initial recognition and measurement provisions in the first
quarter of 2003 to have a significant impact on our financial condition or
results of operations. The disclosure requirements of FIN 45, which are
effective for both interim and annual periods that end after December 15, 2002,
were adopted by us for the year ended December 31, 2002.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123," which amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. The transition and annual disclosure provisions of SFAS No. 148
are effective for fiscal years ending after December 15, 2002. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company will continue to account for stock-based
compensation to employees under APB Opinion No. 25 and related interpretations.
The Company adopted the disclosure requirements of this Statement as of December
31, 2002.

      In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46).
"Consolidation of Variable Interest Entities." FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is required to be applied to preexisting
entities of the Company as of the beginning of the first quarter after June 15,
2003. FIN 46 is required to be applied to all new entities with which the
Company becomes involved beginning February 1, 2003.

      q. Reclassification

      Certain 2001 year amounts have been reclassified to conform to the 2002
year presentation.

      2. Inventories:

      Inventories consist of the following at December 31:

                                                    2002           2001
                                                 ----------     ----------

      Purchased components and materials         $  656,350     $  843,295
      Work in process                               438,987        659,628
      Finished goods                                512,450        586,310
                                                 ----------     ----------

                                                 $1,607,787     $2,089,233
                                                 ==========     ==========

                                      F-10


<PAGE>

3.    Property and Equipment, net:

      Property and equipment consist of the following at December 31:

                                                   2002            2001
                                                ----------      ----------

      Land                                      $  300,000      $  300,000
      Building and improvements                  1,045,570       1,045,570
      Equipment                                    783,734         854,766
      Software                                     115,563         115,563
                                                ----------      ----------
                                                 2,244,867       2,315,899
      Less accumulated depreciation              1,149,682       1,078,707
                                                ----------      ----------

                                                $1,095,185      $1,237,192
                                                ==========      ==========

4.    Debt:

      a. Line of credit facility

      The Company has an agreement with a financial institution, expiring April
30, 2003, which provides the Company with a line of credit facility of up to
$500,000 based on eligible accounts receivable and purchased components and
materials and finished goods inventories of the Company, as defined in the
agreement. Further, the agreement contains certain financial covenants which
require the Company to maintain a minimum level of tangible net worth and places
limitations on the ratio of the Company's total debt to Company's tangible net
worth, as defined in the agreement. The Company intends to renew this facility
in April 2003.

      Borrowings under the line of credit bear interest at the bank's specified
prime rate plus 1% (5.25% at December 31, 2002). There was no outstanding
balance against this line at December 31, 2002.

      The Company also has available a Reducing Revolving line of credit from
this institution, which provided for initial borrowings up to a maximum of
$1,000,000. Availability under the Reducing Revolving line of credit is reduced
monthly by approximately $11,900 and will expire January 2006. Availability
under this line at December 31, 2002 was approximately $440,000. Borrowings
under this loan agreement bear interest at the 30-Day Commercial Paper Rate plus
2.90% (4.23% at December 31, 2002). Net borrowings under this line of credit
totaled $394,110 at December 31, 2002.

      b. Mortgage note

      The Company's first mortgage note is collateralized by land and building.
The remaining unpaid mortgage note balance at December 31, 2002 is payable in
equal monthly installments of $12,297 (inclusive of interest at 9.3%) with a
maturity date of June 2008. Under the mortgage modification agreement, interest
is payable at 9.3% through June 1, 2003. At that time, and every three years
thereafter, the interest rate will be adjusted to the three-year weekly average
U.S. Treasury Constant Maturity Rate plus 3%.

      Financing and other costs aggregating $95,122 incurred in connection with
the acquisition of real property and the refinancing of mortgage debt are stated
at cost, net of accumulated amortization of $73,941 and $68,761 at December 31,
2002 and 2001, respectively, and are included in "Intangible assets" in the
accompanying consolidated balance sheets. Amortization is provided on a
straight-line basis over the life of the mortgage note.


                                      F-11

<PAGE>

4.  Debt: (Cont'd)

      b. Mortgage note (Cont'd)

      Long-term debt is summarized as follows at December 31:

                                                    2002            2001
                                                  --------        --------

      Mortgage payable                            $629,297        $713,176
      Other                                         13,615          17,444
                                                  --------        --------
                                                   642,912         730,620
      Less current maturities                       97,184          88,618
                                                  --------        --------

                                                  $545,728        $642,002
                                                  ========        ========

    Aggregate maturities of long-term debt as of December 31, 2002 are as
follows:

                    Year Ending
                    December 31,
                    ------------
                        2003                $ 97,184
                        2004                 106,577
                        2005                 116,880
                        2006                 122,823
                        2007                 134,745
                    Thereafter                64,703
                                            --------

                                            $642,912
                                            ========

5.    Employee Benefit Plans:

      The Company sponsors an employee investment savings 401(k) plan to which
both the Company and employees contribute. All employees are eligible to
participate; the Company contributed 50% of the first 2% deferred by the
employee through July 2002. Company Management has indefinitely suspended future
contributions. Each employee may voluntarily contribute up to 15% of annual
compensation, or the maximum allowed as determined by the Internal Revenue Code.
Benefits are 100% vested and are payable upon the employee's death, disability,
retirement, termination and under certain financial circumstances. Employer
contributions of $6,291 and $11,025 were made to the plan in 2002 and 2001,
respectively.

      The Company maintains a deferred compensation agreement with a key
officer, whereby the officer will receive a defined amount approximating 30% of
his 1990 base salary for a period of 10 years after reaching age 65. The
deferred compensation plan is funded through life insurance and is being
provided for currently. The expense charged to operations in 2002 and 2001 for
such future obligations was approximately $4,000 in each year.


                                      F-12

<PAGE>

6.    Income Taxes:

      The provision (benefit) for income taxes is summarized as follows:

                                            2002          2001
                                         ---------     ---------
      Current:
          Federal                        $(158,000)    $(187,236)
          State                                 --         3,000
                                         ---------     ---------
                                          (158,000)     (184,236)
      Deferred                             (67,000)      (87,000)
                                         ---------     ---------

                                         $(225,000)    $(271,236)
                                         =========     =========

      The actual income tax expense (benefit) differs from the Federal statutory
rate as follows:

                                           2002                     2001
                                  --------------------     -------------------
                                   Amount          %        Amount         %
                                  ---------     ------     ---------     -----
Federal statutory rate            $(200,000)     (34.0)%   $(227,700)    (34.0)%
State income taxes, net of
  federal income tax benefit        (19,000)      (3.1)      (32,500)     (4.8)
Officers' life insurance              1,500         .2         1,500        .2
Other permanent differences          (7,500)      (1.4)      (12,536)     (1.9)
                                  ---------     ------     ---------     -----

                                  $(225,000)     (38.3)%   $(271,236)    (40.5)%
                                  =========     ======     =========     =====

      The tax effects of temporary differences which give rise to deferred tax
assets (liabilities) at December 31, 2002 and 2001 are summarized as follows:

                                                             2002        2001
                                                          ---------   ---------
Deferred tax assets:
  Deferred compensation                                   $  14,000   $  85,000
  Inventory valuation                                       142,000     107,000
  Allowance for doubtful accounts                            17,000      15,000
  Accrued expenses                                           34,000      41,000
  Net operating loss carryforwards                           73,000      34,000
                                                          ---------   ---------
    Gross deferred tax assets                               280,000     282,000
Deferred tax liabilities:
  Excess tax over book depreciation and amortization       (148,000)   (217,000)
                                                          ---------   ---------

Net deferred tax asset                                    $ 132,000   $  65,000
                                                          =========   =========

      The Company has available state net operating loss carryforwards
approximating $976,000 to offset future taxable income, expiring through 2022.

7.    Stock Option Plans and Employee Stock Purchase Plan:

      In 1987, the Company adopted a plan which provided for the granting, to
officers and key employees of the Company, of incentive stock options, as
defined in the Internal Revenue Code, for the purchase of a maximum of 250,000
shares of the Company's common stock. Options to purchase 10,000 shares are
outstanding under this plan. Under the terms of the plan, the options, which
expire ten years after grant, are exercisable at a price equal to the fair
market value of the stock at the date of the grant. The options become
exercisable in four annual installments, the first installment occurring within
one year after the date of grant.

                                      F-13


<PAGE>


7.    Stock Option Plans and Employee Stock Purchase Plan: (Cont'd)

      In 1994, the Company adopted the 1993 Stock Option Plan (the "1993 Plan"),
which provides for the granting, to directors and key employees of the Company,
of incentive stock options and nonqualified stock options for the purchase of a
maximum of 100,000 shares of the Company's common stock. Under the terms of the
1993 Plan, the options, which expire from five to ten years after grant, are
exercisable at a price equal to the fair market value of the stock at the date
of the grant for incentive stock options and at prices determined by the Board
of Directors for nonqualified stock options, and become exercisable in
accordance with terms established at the time of the grant. At December 31,
2002, there were no shares available for grant under the 1993 Plan.

      In 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Plan"),
which provides for the granting, to employees, nonemployee directors,
consultants and advisors of the Company, of incentive stock options, Stock
Appreciation Rights ("SARS") and nonqualified stock options for the purchase of
a maximum of 500,000 shares of the Company's common stock. The Plan also
provides for a reload feature for options issued. Under the terms of the 1999
Plan, the options, which expire from five to ten years after grant, are
exercisable at a price equal to the fair market value of the stock at the date
of the grant for incentive stock options and at prices determined by the Board
of Directors for nonqualified stock options, and become exercisable in
accordance with terms established at the time of the grant. At December 31,
2002, there were no shares available for grant under the 1999 Plan.

      In 2001, the Company adopted the 2001 Stock Option Plan (the "2001 Plan"),
which provides for the granting, to employees, nonemployee directors,
consultants and advisors of the Company, of incentive stock options, Stock
Appreciation Rights ("SARS") and nonqualified stock options for the purchase of
a maximum of 500,000 shares of the Company's common stock. The Plan also
provides for a reload feature for options issued. Under the terms of the 2001
Plan, the options, which expire from five to ten years after grant, are
exercisable at a price equal to the fair market value of the stock at the date
of the grant for incentive stock options and at prices determined by the Board
of Directors for nonqualified stock options, and become exercisable in
accordance with terms established at the time of the grant. At December 31,
2002, there were 485,000 shares available for grant under the 2001 Plan.

      In 2001, the Company adopted the Employee Stock Purchase Plan, which was
approved by the stockholders on July 12, 2001. In accordance with Section 423 of
the Internal Revenue Code, eligible employees may authorize payroll deductions
of their salary to purchase shares of the Company's common stock at the lower of
85% of the fair market value of common stock on the first or last day of the
offering period. An eligible employee may purchase up to 2,000 shares of stock
during any single offering period. The maximum number of shares offered under
the 2001 Employee Stock Purchase Plan is 400,000 shares. No shares were
purchased under the 2001 Employee Stock Purchase Plan during the year ended
December 31, 2002. Due to the significant costs involved in administering the
Employee Stock Purchase Plan, Company Management has decided to suspend the
Plan's operation temporarily, while it deals with the challenges presented by
the worldwide economic downturn. It is expected that the plan will begin during
2004.

                                      F-14


<PAGE>


7.    Stock Option Plans and Employee Stock Purchase Plan: (Cont'd)

      The following is a summary of activity with respect to stock options under
the plans:

<TABLE>
<CAPTION>
                                                                                   Weighted-average
                                                    Shares      Price per share    price per share
                                                    ------      ---------------    ---------------

<S>                                                 <C>           <C>                <C>
Outstanding at January 1, 2001                      524,000       $.90 to 3.80       $   1.18
  Granted                                            16,000       1.22 to 1.87           1.83
  Expired                                           (16,000)      2.75 to 2.875          2.87
                                                    -------

Outstanding at December 31, 2001                    524,000       .90 to 3.80            1.14
  Granted                                            97,250       .55 to .72              .57
  Expired                                            (5,000)      1.28 to 3.80           2.54
                                                    -------

Outstanding at December 31, 2002                    616,250       .55 to 3.80            1.04
                                                    =======

Balance exercisable at December 31, 2002            227,000       .55 to 3.80            1.33
                                                    =======
</TABLE>

      The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 2002:

                               Options outstanding         Options exercisable
                      ----------------------------------  --------------------
                                  Weighted-    Weighted-             Weighted-
                                   Average      Average               Average
      Ranges of                   Remaining    Exercise              Exercise
   Exercise Prices     Shares   Life in Years    Price    Shares       Price
  ----------------    --------  -------------  ---------  -------    ---------
    $.55 to $1.25      568,250      6.95         $.95     192,500      $.93
   $1.63 to $3.80       48,000      7.59         2.12      36,500      2.17

      The weighted-average option fair value on the grant date was $.45 and
$1.45 for options issued during the years ended December 31, 2002 and 2001,
respectively.

      If the Company had elected to recognize compensation expense based upon
the fair value at the grant dates for awards under these plans consistent with
the methodology prescribed by SFAS No. 123, the Company's reported net loss and
loss per share would be adjusted to the pro forma amount indicated below for the
years ended December 31:

                                                 2002              2001
                                             -----------       -----------
     Net loss
       As reported                           $  (362,524)      $  (398,507)
       Pro forma                                (369,059)         (440,003)
     Basic loss per common share
       As reported                           $      (.29)      $      (.32)
       Pro forma                                    (.29)             (.35)
     Diluted loss per common share
       As reported                           $      (.29)      $      (.32)
       Pro forma                                    (.29)             (.35)

      These pro forma amounts may not be representative of future disclosures
because they do not take into account pro forma compensation expense related to
grants made before 1997. The fair value of these options was estimated at the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended December 31, 2002 and 2001:
expected volatility of 197% in 2002 and 120% in 2001; risk-free interest rates
ranging from 4.87% to 5.81% in 2002 and 3.86% to 4.32% in 2001. The expected
lives of options issued are four years for 2002 and 2001.

                                      F-15


<PAGE>


7.    Stock Option Plans and Employee Stock Purchase Plan: (Cont'd)

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

8.    Business Segments:

      The Company has two reportable segments: Telebyte is a manufacturer of
technology products and Nextday.com distributes products through e-commerce.

      The Company's chief operating decision maker utilizes net sales and net
earnings (loss) information in assessing performance and making overall
operating decisions and resource allocations. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. Information about the Company's segments for the years
ended December 31, 2002 and 2001 are as follows:

                                                   2002            2001
                                               -----------     -----------
     Net sales from external customers:
       Telebyte                                $ 4,966,382     $ 5,277,990
       Nextday.com                                 195,445         497,121
                                               -----------     -----------
                                               $ 5,161,827     $ 5,775,111
                                               ===========     ===========
     Intersegment net sales:
       Telebyte                                $    (2,631)    $   218,191
       Nextday.com                                      --              --
                                               -----------     -----------
                                               $    (2,631)    $   218,191
                                               ===========     ===========
     Operating profit (loss)
       Telebyte                                $  (500,007)    $  (526,106)
       Nextday.com                                 (52,954)       (178,562)
                                               -----------     -----------
                                               $  (552,961)    $  (704,668)
                                               ===========     ===========
     Interest expense:
       Telebyte                                $   103,708     $    98,471
       Nextday.com                                      --              --
                                               -----------     -----------
                                               $   103,708     $    98,471
                                               ===========     ===========
     Other income:
       Telebyte                                $    68,822     $    53,386
       Nextday.com                                     323          80,010
                                               -----------     -----------
                                               $    69,145     $   133,396
                                               ===========     ===========
     Income tax benefit:
       Telebyte                                $  (191,000)    $  (231,324)
       Nextday.com                                 (34,000)        (39,912)
                                               -----------     -----------
                                               $  (225,000)    $  (271,236)
                                               ===========     ===========


                                      F-16

<PAGE>

8.    Business Segments: (Cont'd)


     Identifiable assets:
       Telebyte                                $ 3,765,033     $ 4,591,629
       Nextday.com                                 103,249         342,653
                                               -----------     -----------
                                               $ 3,868,282     $ 4,934,282
                                               ===========     ===========
     Capital expenditures:
       Telebyte                                $    11,001     $   147,599
       Nextday.com                                      --          26,400
                                               -----------     -----------
                                               $    11,001     $   173,999
                                               ===========     ===========
     Depreciation and amortization:
       Telebyte                                $   161,631     $   157,116
       Nextday.com                                  35,987          89,654
                                               -----------     -----------

                                               $   197,618     $   246,770
                                               ===========     ===========

9.    Commitments and Contingencies:

      a. Lease commitments

      The Company leases certain equipment used in its operations pursuant to
noncancellable operating and capital leases expiring through September 2005. The
minimum rental commitments under these noncancellable leases, at December 31,
2002, are summarized as follows:

              Year Ending                           Operating       Capitalized
              December 31,                            Leases           Leases
              ------------                           -------          -------
                  2003                               $ 9,533          $12,716
                  2004                                 3,989            1,060
                  2005                                 2,132               --
                                                     -------          -------
                                                      15,564           13,776
   Less amount representing interest                      --              677
                                                     -------          -------
     Total minimum lease payments                    $15,564           13,099
                                                     =======          =======
        Less current maturities                                        12,048
                                                                      -------

Long-term capitalized lease obligations                               $ 1,051
                                                                      =======

      Rent expense for all operating leases was $10,042 and $62,140 in 2002 and
2001, respectively.

      b. Employment contracts

      The Company has employment contracts with various officers with remaining
terms ranging from two to three years at amounts approximating their current
levels of compensation. The Company's remaining aggregate commitment at December
31, 2002 under such contracts is approximately $338,000.

      c. Purchase commitment

      The Company has an agreement with one of its suppliers to purchase
approximately $87,000 of product by October 2006.

                                      F-17


<PAGE>


10.   Loss Per Share:

      The following table sets forth the computation of basic and diluted loss
per share:

                                                             Years Ended
                                                             December 31,
                                                      -------------------------
                                                         2002            2001
                                                      ---------     -----------
   Numerator:
     Net loss                                         $(362,524)    $  (398,507)
                                                      =========     ===========

   Denominator:
     Denominator for basic loss per
       share (weighted-average shares)                1,253,631       1,253,631
     Effect of dilutive securities
       (employee stock options)                              --              --
                                                      =========     ===========
     Denominator for diluted loss per
       share (adjusted weighted-average shares and
       assumed conversions)                           1,253,631       1,253,631
                                                      =========     ===========

   Basic loss per share                               $    (.29)    $      (.32)
                                                      =========     ===========
   Diluted loss per share                             $    (.29)    $      (.32)
                                                      =========     ===========


11.   Off Balance Sheet Risk and Concentration of Credit Risk:

      Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company places its temporary cash investments with high credit
quality financial institutions that are FDIC insured. The Company performs
on-going credit evaluations of its customers financial condition and payment
history. Generally, accounts receivable are due within 30 days. Credit losses
have historically been insignificant and consistently within management's
expectations.

12.   Transactions with Major Customers:

      The Company does not depend upon sales to a single customer or a limited
group of customers and there were no sales to a single customer during the last
two years exceeding 10% of net sales. The Company has no foreign operations.
Export sales were $1,260,000 and $828,000 in 2002 and 2001, respectively.

                                      F-18