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________________________________________________________________________________
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                  FORM 10-K/A

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED JUNE 30, 1997

                                       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 33-28622-A
                            ------------------------

                                MSU CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                            ------------------------

<TABLE>
<S>                                                        <C>
                         FLORIDA                                                   22-274288
              (STATE OR OTHER JURISDICTION                           (I.R.S. EMPLOYER IDENTIFICATION NO.)
            OF INCORPORATION OR ORGANIZATION)
</TABLE>

                        ELDER HOUSE, 526-528 ELDER GATE,
                    CENTRAL MILTON KEYNES, MK9 1LR, ENGLAND
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 441908232100

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                  Common Stock
                            ------------------------

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or l5(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ].

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

     As of September 25, 1997, the aggregate market value of the voting stock
held by non-affiliates of the registrant, by reference to the closing price for
such stock as reported by Bloomberg Financial, Inc., was $21,997,925.

     As of September 25, 1997, the registrant had issued and outstanding
16,093,791 shares of Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The following documents, or indicated portions thereof, have been
incorporated herein by reference:

     (1) Specifically identified information in the registrant's definitive
proxy material for its 1997 annual meeting of stockholders is incorporated by
reference as Part III hereof, which definitive proxy material shall be filed not
later than 120 days after the registrant's fiscal year ended June 30, 1997.

________________________________________________________________________________

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                                FORM 10-K INDEX

<TABLE>
<S>        <C>
                                                          PART I

Item 1.    Business

Item 2.    Properties

Item 3.    Legal Proceedings

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

                                                         PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters

Item 6.    Selected Consolidated Financial Data

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 8.    Financial Statements and Supplementary Data

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

                                                         PART III

Item 10.   Directors and Executive Officers of the Registrant

Item 11.   Executive Compensation

Item 12.   Security Ownership of Certain Beneficial Owners and Management

Item 13.   Certain Relationships and Related Transactions

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K
</TABLE>

<PAGE>
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                                     PART I

ITEM 1. BUSINESS

BUSINESS DEVELOPMENT

     MSU Corporation, formerly Capital Acquisition Company ('Capital
Acquisition'), was incorporated in Florida in 1986. MSU Corporation conducted no
substantive business until October 1994 when all of the outstanding shares of
MSU Public Limited Company, an England and Wales company formed under the
Companies Act of 1985 ('MSU PLC') were exchanged for Capital Acquisition shares
(the 'Exchange'). The Exchange was treated for financial reporting purposes as a
reverse acquisition or purchase of Capital Acquisition by MSU PLC. MSU PLC, in
turn owns all of the outstanding shares of MSU (UK) Limited ('MSU Limited'), an
England and Wales company formed under the Companies Act of 1985. MSU Limited
was formed in March 1991 and commenced operations in March 1992. MSU
Corporation's business is based in the United Kingdom and is conducted almost
exclusively by MSU Limited, its second tier subsidiary. In February 1997 MSU US
Operations Inc., a North Carolina corporation and a wholly owned subsidiary of
MSU Corporation ('MSU US') was formed to act as a sales company, in the United
States, marketing and selling products developed by MSU Corporation.

     Unless the context otherwise requires, references in this Annual Report on
Form 10-K to the 'Company' refer to MSU Corporation, MSU PLC, MSU Limited and
MSU US. Historical financial information for periods prior to the Exchange has
been presented as that of MSU Corporation as if MSU PLC and MSU Limited were
owned by MSU Corporation during such periods. Unless otherwise stated, the
information contained in this Annual Report on Form 10-K is as of September 22,
1997.

EXCHANGE RATES

     MSU PLC and MSU Limited conduct a significant amount of their operations in
pounds sterling. References to dollars in this Annual Report on Form 10-K are to
US dollars and in many instances represent translations of pounds sterling into
dollars at specified rates. These translations should not be construed as
representations that the pound sterling amounts actually represent such dollar
amounts. Unless otherwise stated, the translations of pounds sterling into
dollars have been made at the average rate for the year indicated. The following
table sets forth, for the periods indicated, certain information concerning the
rates of pounds sterling per dollar:

<TABLE>
<CAPTION>
               FISCAL YEAR                    AT END         AVERAGE
              ENDED JUNE 30                  OF PERIOD       RATE(1)       HIGH(2)       LOW(2)
------------------------------------------   ---------       -------       -------       ------
<S>                                          <C>             <C>           <C>           <C>
1993......................................      .67            .63           .69          .50
1994......................................      .65            .67           .68          .65
1995......................................      .63            .63           .65          .61
1996......................................      .65            .65           .64          .61
1997......................................      .60            .61           .64          .59
</TABLE>

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

(1) Represents the average of the rates on the last day of each month during the
    relevant period.

(2) Represents the highest and lowest rates used in the average rate
    calculation.

GENERAL OVERVIEW

     The Company designs and develops computer chips and chipsets principally
for use in consumer electronics products. Most of the Company's chips
incorporate multiple functions, eliminating the need for several or more chips
and permit a more efficient printed circuit board design, a diminished risk of
malfunction and error, and a lower cost.

     The Company also develops prototype electronic products with particular
emphasis on prototype consumer electronic products. The prototype electronic
products developed by the Company are almost exclusively based on the Company's
proprietary chips and chipsets. Such prototype products are used for
demonstration and marketing purposes in connection with presentations before
consumer electronic manufacturers and others with an interest in the Company's
chip technology and products.

                                       1

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     The Company has, to date, developed numerous consumer electronic products
on its own behalf and on behalf of manufacturers pursuant to development
contracts or arrangements with manufacturers based in China, Taiwan, Germany,
the United States, Hong Kong and the United Kingdom. These contracts have
typically provided for the payment of development and/or license fees plus
royalties based on sales of products utilizing the Company's chips or chipsets.

     During the year ended June 30, 1997, sales by Mitac, Inc., a Taiwanese
corporation, ('Mitac') of Internet Access Devices utilizing the Company's
software and manufactured by Mitac, commenced, but to date only a limited number
of sales have been made. To facilitate the manufacture of the Internet Access
Devices, the Company arranged for the sourcing and purchase of chips used in the
Internet Access Devices which were sold to Mitac at cost. In the future it is
expected that Mitac will purchase all such chips directly from United Micro
Corporation or such other companies as agreed upon by the Company and Mitac.

     Other than as described above, no products developed pursuant to
development contracts have been sold and no royalties have been received. In
most instances, the Company has no control over a third party's manufacturing,
marketing or purchasing decisions, and accordingly there can be no assurance
that any developed products will be manufactured, marketed or sold. In fiscal
1997, the Company's revenues were derived from product development and license
fees (37% of total revenue), chip sales (41% of total revenue) and other
revenues (22% of total revenue).

     In October 1993, MSU Limited entered into several agreements with IBM
pertaining to the development of software and hardware for consumer multimedia
units using the Slipstream ASIC Chip -- version 4.5. See 'BUSINESS -- Chip
Technology'. In April 1995, after all development projects contemplated by the
agreements had been completed, IBM advised the Company that it had determined
not to pursue, at that time, the consumer multimedia product market. IBM retains
a non-exclusive license to use such intellectual property. Additionally, any
major enhancements to and replacement of such intellectual property as well as
other technology developed by the Company must be offered first to IBM. The
Company has offered its prototype Internet Access Device and related ISP Chip
technology to IBM which offers were not accepted. The Company has not yet
offered the Envoy Chip or the Wynpeg Chipset to IBM.

CHIP TECHNOLOGY

     Slipstream Application Specified Integrated Circuit ('Slipstream ASIC
Chip'). The Slipstream ASIC Chip is a multi-function chip which provides
graphics capability and high quality sound for multimedia systems. The
Slipstream ASIC Chip incorporates (i) a video generator, that generates the
video signal from digital information; (ii) a graphics accelerator, that
controls memory and access to digital information allowing the manipulation and
control of images; and (iii) digital signal processors, that allow the
compression and decompression of data from CDs permitting the storage of massive
amounts of data necessary for the storage and retrieval of images. These
functions are typically achieved through the use of a group of chips in series.

     Computer image creation begins with the creation of pixels. Pixels are
individual picture elements that make up a video display such as a computer or
television screen. Each pixel contains information that is defined by the signal
or program, such as a movie or video game, that it is displaying. The more
information that may be held in each unit, the sharper and the more defined the
image. As computer hardware is able to process the information in a signal or
program with greater speed, the information projected in each pixel may be
changed more quickly, creating an improved illusion of motion, animation and
shading of images on the computer screen. The Slipstream ASIC Chip generates and
processes the pixel information necessary for image creation and movement.
Because conventional computer discs and storage devices are unable to store
efficiently the additional amount of data necessary in each pixel and within
each time frame to generate images adequately, the Company's Slipstream ASIC
Chip makes use of CD technology and uses a CD interface and a graphics
accelerator for enhanced retrieval. The Slipstream Chip further enhances
retrieval from the CD using a digital signal processor that interfaces to a
digital-to-analog converter and makes use of the advanced CD compression
techniques. The signals are compressed to allow for more effective and efficient
storage.

                                       2

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The Slipstream ASIC Chip also includes algorithms which eliminate unimportant or
redundant data so that storage space is not wasted.

     The Slipstream ASIC Chip -- version 4.5 is available in silicon. The
Company's prototype generic (Video) CD Player is based upon the Slipstream ASIC
Chip. See 'BUSINESS -- Prototype Products'.

     Internet Services Processor ('ISP Chip'). The ISP Chip is a version of the
Slipstream ASIC Chip designed for use in Internet products such as the Company's
prototype Internet Access Device. See 'BUSINESS -- Prototype Products'. Prior
prototype Consumer Internet Access Devices used the Slipstream ASIC Chip. The
ISP Chip provides more Internet related features (at a lower cost) than the
Slipstream ASIC Chip. The ISP Chip is a graphics and sound processor which also
provides interfacing and logic for the CPU and system memory. The ISP Chip is
available in Silicon. The Company is in the late stages of development of an ISP
Chip -- version 2 and in the early stages of development of an ISP
Chip -- version 3. Such ISP Chips are intended to provide enhanced Internet
features and capabilities.

     CD Services Chip ('Envoy Chip'). The Envoy Chip reduces the complexity in
compact disc drive systems and the cost of interfacing to compact disc drives in
both PC's and consumer CD products. The Envoy Chip replaces six chips typically
used within a CD mechanism. The three principal electronic components of a
compact disc player are the servo processor, signal processor and micro
controller. The Envoy Chip provides the servo, signal and control functions. The
Envoy Chip is also suitable for CD ROM applications as it can replace principal
components along the data path. The Envoy Chip is available in silicon.

     M-PEG Chipsets ('Wynpeg Chipsets'). The Wynpeg Chipset incorporates the
Slipstream ASIC Chip and another non-proprietary chip that implements the
decoding standards of the Motion Picture Experts Group ('M-PEG'). M-PEG is an
international standards body that defined a world-wide standard for the
compression of video data called Philips White Book Video M-PEG Standard. The
Company's Wynpeg chipset is capable of decompressing video signals in accordance
with such standard. The Company intends to develop version 2 of the Wynpeg
Chipset in the future. There can be no assurance that the development of such
Wynpeg Chipset -- version 2 will ever be commenced or completed.

PROTOTYPE PRODUCTS

     Generic (Video) CD Player. The prototype Generic CD Player, based on the
Slipstream ASIC Chip, is a multi media product capable of use as a video CD
player, audio CD player, and for a photo CD and Karaoke. This CD based multi
media product consists of a conventional CD player equipped with an internal
audio amplifier; a karaoke function which has the ability to run stereo sound
track and produce graphics on the screen with overlaying text for lyrics; and a
photo CD compatible with standard photo CDs and capable of supporting Kodak
multi session-photo CDs. The prototype Generic CD Player operates with a
standard television set.

     The Company has utilized the prototype Generic CD Player for demonstration
purposes only. Specific products were designed and developed in connection with
development contracts with two manufacturers in Taiwan and China, respectively.
To date, no products have been manufactured for sale.

     Consumer Internet Access Device. The Company's prototype Consumer Internet
Access Device (the 'Internet Access Device') is a low cost, easy to use, small
set top device which provides access to the Internet and on-line services via a
telephone connection, standard television set and a hand held remote control
unit. A keyboard is available at an additional cost to the consumer. Access to
the Internet and on-line services is conventionally via PCs, which represent
both a cost and technology barrier to many consumers. Prior prototype Internet
Access Devices were based on the Company's Slipstream ASIC Chip; however, the
most recent prototype Internet Access Device is based on the ISP Chip -- version
2. It is anticipated that future generations of the prototype Internet Access
Device will be based on the ISP Chip -- version 3 or future generations and
derivations.

     The Company has developed and is continuing to modify the software
contained in its prototype Internet Access Device. The software is stored on
memory chips and hard coded in the prototype Internet Access Device. The
software enables users to interact with the Internet via its e-mail and browser
functions. During the year ended June 30, 1997 the Company made releases of its
software for

                                       3

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<PAGE>
use with production samples of its Internet Access Device. A significant release
of the software was made in August 1997 for use in its customised Internet
Access Devices which are now being manufactured by Mitac. Although there can be
no assurance, it is anticipated that software updates and 'bug' fixes to
Internet Access Devices sold and in use will be accomplished by downloading
software via the Internet or from a licensed on-line or Internet service
provider. Although steps will be taken by the Company to protect its software
from unauthorized modifications, there can be no assurance that unauthorized
modifications will not occur.

     The Company's ISP Chip prototype Internet Access Device has been
demonstrated internationally to manufacturers and others. The Company has
experienced significant interest in this prototype Internet Access Device and
related technology. The Company has entered into contracts with American
Interactive Media, Inc. a US corporation ('AIM') and Mitac for the development,
manufacture and sale of customized Internet Access Devices. It is anticipated
that Mitac will manufacture for sale all customized Internet Access Devices
developed pursuant to both the AIM and Mitac agreements. During fiscal 1997
approximately 9,000 devices were manufactured and either sold by Mitac to one of
its commercial customers or were purchased from Mitac by the Company and sold as
production samples to other potential customers. Production samples have been
approved yet pending final software release; however, the Company has received
no indication of any material problems with such samples. There can be no
assurance that the final production samples will be approved by either of these
two companies or any other third parties; that orders once placed by a third
party will not be cancelled; or that any products will be manufactured or sold
to any third party.

     The agreement with AIM grants AIM an exclusive right to manufacture, sell
and otherwise distribute the Accessor internet access device. The agreement
contemplates the formation of a joint venture between the parties. The agreement
expires December 31, 2006 and is renewed automatically for successive one year
periods unless terminated by either party on three months notice.

     The agreement with Mitac grants a non-exclusive license to Mitac to
manufacture and sell the Company's Internet Access Device, including the ISP
Chipset and software. The agreement also provides for a royalty payment by Mitac
in addition to the sharing of profits from product sales. The agreement had an
initial term of 18 months and is renewed automatically for successive one-year
periods unless terminated by either party on three months notice. The agreement
may also be terminated by either party in the event of a bankruptcy, assignment
or inability to perform by the other party.

     Consumer PC. The Consumer PC is a CD based consumer product compatible with
most PC software and providing Internet connection capability, but operating via
a standard television set. The Consumer PC resembles a VCR or CD player in both
appearance and operation but serves in many capacities including as a video CD
player and a PC CD ROM software disc player. The Consumer PC is not currently
based on chip technology, but is based on system software designed by the
Company. The Company plans to design a custom chip to incorporate the key
features of the Consumer PC in the near future. The Company has participated in
a Consumer PC product development arrangement with a German manufacturer.
Development of the product has been completed. However, to date, no products
have been manufactured for sale.

SUPPORT SERVICES

     The Company has provided and will continue to provide consulting and other
development services pursuant to contracts entered into with consumer electronic
manufacturers and others. Company employees assist in, among other matters,
identifying trends in consumer preference and generating new product ideas. The
Company is involved in the development of software compatible with certain of
its products and intends to offer technical support to consumers of its products
and hardware and software engineers; however, there can be no assurance that
such activities will result in profits to the Company.

SUPPLY AND MANUFACTURING

     American Microsystems, Inc., a semiconductor manufacturer, has historically
manufactured the Slipstream ASIC Chip -- version 4.5 and the ISP Chip. Prior
versions of the Slipstream ASIC Chip were

                                       4

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<PAGE>
manufactured by Toshiba and Es2. It is anticipated that United Micro
Corporation, a Taiwanese chip manufacturer, will manufacture the majority of the
ISP Chip -- version 2, to be used in the customized Internet Access Device
proposed to be manufactured by Mitac, and the Envoy chip. The Company has no
written agreement with either American Microsystems, Inc. or United Micro
Corporation. See 'BUSINESS -- Prototype Products -- Consumer Internet Access
Device'. To date the Company has not experienced any significant problems
obtaining the requisite number of chips for its operations, although its demands
have been relatively limited. The Company has commenced discussions with other
manufacturers for the production of other chips and chipsets should the need
arise. Should demand for the Company's chips and chipsets increase
significantly, there can be no assurance that the Company will be able to meet
such demand, which could have a material adverse effect on the Company's
business, financial conditions or results of operations. Furthermore,
arrangements with new manufacturers could result in substantial delays,
engineering charges and additional expenses.

     Mitac is the only present manufacturer of customized Internet Access
Devices using the Company's chips and software. Should Mitac cease to
manufacture the customized Internet Access Devices, the Company's business,
financial conditions or results of operation would be adversely affected.

RESEARCH AND DEVELOPMENT

     Since 1992 the Company has been engaged in developing its own chips and
prototype products. It has done so independently, pursuant to research and
development contracts. Research is conducted at the Company's facilities located
in Central Milton Keynes and Newmarket, England, through engineers and
programmers employed by it as well as independent contractors. During the fiscal
years ended June 30, 1995, 1996 and 1997, the Company expended approximately
$1.3 million, $1.2 million and $1.4 million, respectively on unreimbursed
research and development (which exclude all overhead costs other than employee,
independent contractor, development tool and prototyping cost), all of which has
been expensed. Approximately 56%, 28% and 40% of the amounts expended on
research and development in the fiscal years ended June 30, 1995, 1996 and 1997,
respectively, were customer sponsored.

     The multimedia, consumer electronics, computer and hardware and software
industries are characterized by rapidly changing technology, evolving industry
standards and frequent introductions of new products. The broad array of
competing and incompatible emerging technologies may lead consumers to postpone
buying decisions until one or more such technologies gain widespread acceptance.
The Company's success will depend upon its ability to anticipate such
technological changes, adapt its products, introduce competitive products with
features that meet changing customer requirements, and remain competitive in
terms of price and product performance. There can be no assurance that the
Company will be able to meet any of these demands. Any material failure of the
Company to meet any of these demands would adversely affect the use and
acceptance of the Company's chips and chipsets and the introduction and sale of
products using the Company's chips or chipsets, and would increase the
likelihood that competitive products would become broadly accepted. There can be
no assurance that the Company will successfully anticipate technological changes
or that products developed by others will not render obsolete or commercially
unviable the Company's chips and chipsets and the products using such chips and
chipsets.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

     The Company's ability to compete successfully depends, in part, on its
ability to protect its intellectual property and proprietary technology in the
United Kingdom, the United States and other countries. The Company has no issued
patents, other than its pending patent with respect to its Envoy CD Controller
(see below), but relies on a combination of trade secret protection,
confidentiality agreements and licensing agreements with strategic partners,
employees, consultants, vendors and licensees. The Company believes that the two
dimensional design representation prepared for each of its chips is protected
under the UK Copyright, Designs and Patent Act of 1988, which requires no
registration with respect to such technology, and that the three dimensional
aspects of each of its chips, including the electronic routes in the silicon,
are protected under the UK Topography Rights. The Company believes that its chip
technology is entitled to comparable protection under the US Copyright

                                       5

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Act of 1976 and the Semiconductor Chip Protection Act of 1984. Although the
Semiconductor Chip Protection Act does not require registration, the failure to
register results in the loss of benefits after the passage of two years from the
first commercial sale of a chip. The Company has not registered any of its chips
under such Act; however it intends to do so within the prescribed period. It is
the Company's belief that patents for ASIC Chip technology are rarely granted
because of rapid technology changes and the relative ease of designing around
such patents. Despite this, the Company filed patent applications in the United
Kingdom and the United States directed to the Slipstream ASIC Chip technology.
The Company elected not to continue with the prosecution of these applications,
due in large part to a lack of working capital, and the applications have been
abandoned.

     A UK Patent application (No. 9706198.0) in respect of the Envoy CD
Controller was filed on March 25, 1997 and will remain pending for twelve months
from that date. It is the Company's intention to complete the filing of the
necessary information to support this application within this period.

     No assurance can be given that any patent will issue from any application
that may be filed, or that if a patent does issue, the claims will be
sufficiently broad to provide effective legal protection or monopoly. In
addition, no assurance can be given that any patent issued to the Company will
not be challenged, invalidated or avoided by design-around efforts, that the
rights granted under any such patent will provide competitive advantages to the
Company or that the Company's competitors will not independently develop or
patent technologies that are substantially equivalent or superior to the
Company's technologies or that such patents will not be subservient to other
dominant patents. Accordingly, the Company may be unable to protect certain
technology relating to its chips.

     The Company's license agreements prohibit unauthorized disclosures of the
Company's technology to third parties. In cases where the Company has contracted
with third parties in foreign countries, these provisions may be difficult to
enforce in such foreign countries despite the existence of any applicable
international treaties or conventions designed to protect rights to technology.
The Company is aware that third parties may attempt to reverse engineer the
Company's technology. There can be no assurance that the Company's
confidentiality agreements will not be breached, or that the Company would have
adequate remedies for any such breach. There can be no assurance that the
Company's technology may not otherwise become known or be independently
discovered by competitors. Under United Kingdom law, copyrights and mask rights
related to technology designed and developed by independent contractors,
commissioned by the Company for such purpose, remain the property of the
Company, unlike in the United States where an assignment of such rights from the
independent contractor would be necessary to attain ownership of all such
rights.

     The Company has registered trademarks for the names:

          (i) Wynpeg in the United Kingdom (Reg. No. 1572811, effective May 21,
     1994), Hong Kong (Reg. No. 06937/96, effective December 20, 1994), Taiwan
     (Reg. No. 00708445, effective April 1, 1996) and the United States (Reg.
     No. 74/718836, effective March 25, 1997).

          (ii) Slipstream in the United Kingdom (Reg. No. 2114009) which is
     currently being advertised. The Certificate of Registration is expected in
     December 1997.

     In addition, applications have been filed for the registration of the Envoy
trademark in the United Kingdom (Application No. 217809 which the Company is
informed by its Patent Attorneys is proceeding to acceptance), China
(Application No. 970055064) and Hong Kong (Application No. 97/07465).
Applications have also recently been filed to register the Envoy trademark in
the European Community (Application No. 586107), the United States of America
(Application No. 75/304,571), Japan (Application No. 124075/97), Taiwan
(Application No. 86027777) and Singapore (Application No. s/6442/97).

     There can be no assurance that any of these trademark registrations will be
accepted or, if accepted, will later not be cancelled or invalidated or that the
Company's rights will not be subject to rights of prior users. The Company
relies heavily on trademark protection under common law. There can be no
assurance that such common law rights will not be limited or invalidated by
third parties.

                                       6

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EMPLOYEES

     The Company has 16 employees, including four executive officers, two
business development personnel, nine technical personnel and one administrator.
The Company uses independent contractors for certain research and development
matters.

     The Company is highly dependent on the experience of certain key personnel
including Wynford Peter Holloway and Keith Edward Pierson, as well as some of
its computer programmers, designers and engineers who contribute to the
development and production of the Company's chips, chipsets and other products.
If the Company were to lose the services of one or more of these key employees,
before a qualified replacement could be obtained, its business could be
materially adversely affected. The Company has entered into employment contracts
with Messrs. Holloway, Snowdon, Phillips, Capaci and Peirson which restricts
certain of their activities for one year after departure from the Company. See
'EXECUTIVE COMPENSATION -- Employment Agreements'. The Company plans to obtain
key-man life insurance on Wynford Peter Holloway, the Company's Chief Executive
Officer, for $5 million for one year. The Company has no plans to obtain key-man
insurance on any other key personnel. The multimedia, consumer electronics and
computer industries are characterized by a high level of employee mobility and
aggressive recruiting of skilled personnel. There can be no assurance that the
Company's current employees will continue to work for the Company or that the
Company will be able to obtain the services of additional personnel, whether for
replacement purposes or for new positions, necessary for the Company's growth
and success.

MARKETING

     The Company markets its chips and prototype electronic products through
exhibitions at trade shows and direct selling to OEMs and potential licensees of
its technologies. The Company targets corporations in the consumer electronic,
multimedia, computer hardware and software industries.

     No Sales of Products that Employ the Company's Chips; Dependence on Third
Parties; Adequacy of Insurance. Products that incorporate the Company's chips or
chipsets have only been manufactured in pre-production quantities pursuant to
development contracts and other arrangements. There can be no assurance that any
of these products will ever be manufactured, marketed and sold to the public. In
connection with the manufacture and sale of such products, the Company will be
dependent upon the manufacturing, marketing, financial, technological and other
abilities of third parties with which it has established, or is attempting to
establish commercial relations to develop, manufacture and market products using
the Company's chips or chipsets. If the Company is unable to establish the
requisite third party commercial relations, products using its chips or chipsets
may never be successfully manufactured, marketed or sold. If any such third
party fails to commit sufficient resources to complete the proper development,
manufacturing or marketing of such products, the Company's reputation, business
relationships, and product acceptance could be adversely affected. In addition,
the Company will have little, if any, control over the timing or methods
employed in the manufacture, marketing or sale of such products. Accordingly, if
any products using the Company's chips or chipsets perform poorly, are inferior
in quality or do not achieve market success, such distractions may be associated
with the Company's chips and chipsets. The Company continues to review the
adequacy of its insurance coverage. Presently, the Company believes that its
insurance coverage may be inadequate in light of current and prospective
agreements. However it continues to endeavour to obtain adequate coverage,
although no assurance can be given that adequate insurance will be obtained.

OPERATIONS IN CHINA, TAIWAN AND HONG KONG

     Peoples Republic of China. The Company's interests may be adversely
affected by the political environment in China. China is a communist country
which since 1949 has been, and is expected to continue to be, controlled by the
Communist Party of China. Changes in the top political leadership of the Chinese
government may have a significant impact on policy and the political and
economic environment in China. Moreover, economic reforms and growth in China
have been more successful in certain provinces than in others, and the
continuation or increase of such disparities could affect political or social
stability. China only recently has permitted greater flexibility in its economic
sector,

                                       7

<PAGE>
<PAGE>
however, the government of China has exercised and continues to exercise
substantial control over virtually every section of the Chinese economy through
regulation and state ownership. Accordingly, government actions in the future,
including any decision not to continue to support the economic reform program
that commenced in the late 1970's and possibly to return to the more
centrally-planned economy that existed prior thereto, could have a significant
effect on economic conditions in China and on the operations of the Company.

     The Company's interests may be adversely affected by the economic
environment in China. The economy of China differs significantly from the
economies of the United States and western Europe in such respects as structure,
level of development, gross national product, growth rate, capital reinvestment,
resource allocation, self-sufficiency, rate of inflation (see 'Inflation'
below), and balance of payments position, among others. Only recently has the
Chinese government encouraged substantial private economic activities.

     The Chinese economy has experienced significant growth in the past five
years, but such growth has been uneven among various sectors of the economy and
geographic regions. Actions by the Chinese central government to control
inflation have significantly restrained economic expansion recently. Similar
actions by the central government of China in the future could have a
significant adverse effect on economic conditions in China and the economic
prospects of the Company.

     Over the last few years, China's economy has registered a high growth rate
and there have been recent indications that rates of inflation have increased.
In 1996, China's overall inflation rate was estimated to be 6.3%, compared to
14.8% in 1995 and 21.7% in 1994. In response, the Chinese government recently
has taken measures to curb the excessive expansion of the economy. These
measures have included devaluations of the Chinese currency, the Renminbi,
restrictions on the availability of domestic credit (reducing the discretionary
spending capability of certain of the Company's customers) and limited
recentralization of the approval process for purchases of some foreign products.
There can be no assurance that these austerity measures alone will succeed in
slowing down the economy's excessive expansion or control inflation, nor that
they will not result in severe disclocations in the Chinese economy in general.
To further combat inflation, the Chinese government may adopt additional
measures, including the establishment of freezes or restraints on certain
projects or markets, which may have an adverse effect on the Company's
operations.

     China's legal system is a civil law system which is based on written
statutes and in which decided legal cases have little precedential value. China
does not have a well developed, consolidated body of laws governing enterprises
with foreign investments. As a result, the administration of laws and
regulations by government agencies may be subject to considerable discretion. As
legal systems in China develop, foreign business entities may be adversely
affected by new laws, changes to existing laws (or interpretations thereof) and
preemption of provincial or local laws by national laws. In circumstances where
adequate laws exist, it may not be possible to obtain swift and equitable
enforcement thereof.

     Hong Kong. The Company may be materially adversely affected by factors
affecting Hong Kong's political situation and its economy or in its
international political and economic relations. Hong Kong was a British Crown
Colony, but sovereignty over Hong Kong was transferred to China on July 1, 1997
and Hong Kong became a Special Administrative Region ('SAR') of the Peoples
Republic of China ('PRC'). As provided in the Sino-British Joint Declaration on
the Question of Hong Kong and Basic Law of the Hong Kong SAR of the PRC (the
'Basic Law'), the Hong Kong SAR is to have a high degree of autonomy except in
foreign affairs and defense. Under the Basic Law, the Hong Kong SAR is to have
its own legislature, legal and judicial system and economic autonomy for 50
years. Although, based on the current political conditions and the Company's
understanding of the Basic Law, the Company does not believe that the transfer
of sovereignty over Hong Kong will have a material adverse effect on the
Company's business, financial condition or results of operations of the Company
in the future, there can be no assurance as to the continued stability of
political, economic or commercial conditions in Hong Kong.

     The Company has been advised that no treaty exists between Hong Kong and
the United States providing for the reciprocal enforcement of foreign judgments.
However, the courts of Hong Kong are generally prepared to accept a foreign
judgment as evidence of a debt due. An action may then be

                                       8

<PAGE>
<PAGE>
commenced in Hong Kong for recovery of this debt. A Hong Kong court will only
accept a foreign judgment of a debt due if: (i) the judgment is for a liquidated
amount in a civil matter; (ii) the judgment is final and conclusive and has not
been stayed or satisfied in full; (iii) the judgment is not directly or
indirectly for the payment of foreign taxes, penalties, fines or charges of a
like nature (in this regard, a Hong Kong court is unlikely to accept a judgment
for an amount obtained by doubling, trebling or otherwise multiplying a sum
assessed as compensation for the loss or damage sustained by the person in whose
favor the judgment was given); (iv) the judgment was not obtained by actual or
constructive fraud or duress; (v) the foreign court has taken jurisdiction on
grounds that are recognized by the common lay/rules as to conflict of laws in
Hong Kong; (vi) the proceedings in which the judgment was obtained were not
contrary to natural justice (i.e., the concept of fair adjudication); (vii) the
proceedings in which the judgment was obtained, the judgment itself and the
enforcement of the judgment are not contrary to the public policy of Hong Kong;
(viii) the person against whom the judgment is given is subject to the
jurisdiction of the Hong Kong court; and (ix) the judgment is not on a claim for
contribution in respect of damages awarded by a judgment which does not satisfy
the foregoing. Enforcement of a foreign judgment in Hong Kong may also be
limited or affected by applicable bankruptcy, insolvency, liquidation,
arrangement, moratorium or similar laws relating to or affecting creditors'
rights generally and will be subject to a statutory limitation of time within
which proceedings may be brought.

SERVICE PROVIDER

     The Company has no binding agreement with an Internet or on-line service
provider. If customized Internet Access Devices using the Company's ISP Chip are
ultimately manufactured and sold to consumers, arrangements with service
providers will be required to ensure that a direct connection between a
customized Internet Access Device and the Internet can be effected. Such
arrangements will be between the service provider and either the Company, the
manufacturer or purchasers of the Internet Access Device. There can be no
assurance that satisfactory arrangements will be entered into with one or more
service providers or that the Company will enter into any agreement directly
with a service provider, which the Company believes would be preferable. A
service provider may agree to use the Company's developed software, as is, or
with minimal modifications; jointly to develop new software with the Company, or
to develop its own software. It is possible that a service provider could elect
to use the Company's software and retain the services of the Company for
software, technical and development support. It is also possible that a service
provider will purchase the Internet Access Device from the Company, the
manufacturer or other party, develop and incorporate its own software and sell
the Internet Access Device to consumers at a significantly lower price. Large
service providers will likely prefer to have less dependence on the Company.
There can be no assurance that a service provider will agree to use the
Company's software and retain the Company's services for support, if agreed,
which would likely result in greater potential revenues to the Company.

COMPETITION

     The market for multimedia, consumer electronics, computer and Internet
products is highly competitive. Numerous competitors have commercialized, are
developing or are expected to introduce hardware, software and other products
that are or may be directly competitive with the Company's products. Many of the
Company's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than the Company as well as substantially larger research and development staffs
and facilities. These companies also have greater name recognition and market
presence, longer operating histories, lower cost structures and larger customer
bases than the Company. The 3DO Company, C-Cube, and other companies are
believed by the Company to be engaged in research and development of products
with multimedia applications similar to certain of the Company's products. The
Company also believes that Motorola, Inc., Sony Corp. and Cirrus Logic Inc., may
be developing chips competitive with the Company's chips. Additionally numerous
companies such as Web TV, ViewCall, Oracle, Sun Microsystems, Microsoft and IBM
are involved in the development, sale and/or provision of Internet access
devices or alternative means of permitting access to the Internet, all of which
do or could compete with the Company's

                                       9

<PAGE>
<PAGE>
Internet Access Device. Competitive factors could result in price reductions or
increased spending on product development, marketing and sales that would
adversely affect the Company's ability to compete and to be profitable.
Accordingly, there can be no assurance that the Company will be able to compete
successfully with its present competitors or potential competitors or that such
competition will not have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, to the extent that
any of the Company's competitors are able to develop products similar to the
Company's products which become the industry standard, such competitor will have
a competitive advantage over the Company.

SIGNIFICANT CUSTOMERS

     The Company has no customers to date that frequently and systematically
purchase its products. The Company's revenue for the fiscal year ended June 30,
1997 was largely attributable to 4 customers. Such 4 companies were Mitac
(Internet Access Device royalties and chip sales), Zilog (product development),
AIM (product development), and C-Cube (Envoy -- product development). Revenues
from these 4 customers were $706,225, $204,440, $109,250 and $250,000,
respectively. The Company has entered into written agreements with each of these
customers. Unless the products developed or to be developed in conjunction with
the above companies are manufactured, marketed and sold, no future revenue,
other than development fees not yet paid, are likely to be received from any of
these companies under existing arrangements. The Company could be materially
adversely affected if no products developed in conjunction with these companies
are ultimately manufactured, marketed and sold.

     The agreement with Zilog provides for license fees and royalty payments to
the company by Zilog in exchange for the grant of a worldwide, non-exclusive
license to manufacture, market and sell the ISP Chipset revision 2 and future
ping-in replacements for use in the Company's Netbox designs. The agreement also
provides for support and development services by the Company to Zilog and its
customers. The agreement may be terminated by either party in the event of a
bankruptcy, breach, inability to perform, assignment or change in control of the
other party.

     The C-Cube agreement provides for the commercial development by C-Cube of
the Standalone Envoy Chip and for milestone payments to the Company at various
stages in the development. The agreement may be terminated by either party in
the event of a bankruptcy or breach of the agreement by the other party. If the
agreement is terminated by C-Cube due to a breach by the Company, milestone
payments paid to the Company under the agreement are refundable to C-Cube.

VARIABILITY OF OPERATING RESULTS

     If the Company is able to generate significant revenues, the Company
expects that its operating results will fluctuate as a result of changes in
composition of its revenues, the occurrence and timing of new product
introductions, if any, by third parties that it develops products with, and the
Company's expenditures on research and development. Should the Company derive
revenue from sales of its chips and chipsets to and/or royalties or license fees
from third parties, based on the sale of products utilizing the Company's chips
and chipsets, the Company's revenue will vary with demand for such products. Any
revenue may be affected by the seasonal nature of the market for consumer
electronics, multimedia and computer products. Such demand may increase or
decrease as a result of a number of factors that cannot be predicted and which
are not within the Company's control, such as consumer preferences and product
announcements by competitors.

     Modification of Auditors' Opinion; Going Concern. The Company's independent
accountants have included an explanatory paragraph in their report on the
Company's financial statements as of June 30, 1997, 1996, and 1995, which states
'the Company has suffered and continues to suffer significant losses from its
operations, has an accumulated deficit and revenue and cash flow from its
operations have not developed to the point where the Company can internally fund
its operations. These factors, among others, raise substantial doubt about its
ability to continue as a going concern'. See 'FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT ACCOUNTANTS'.

                                       10

<PAGE>
<PAGE>
     International Operations and Changes in Exchange Rates. The Company has
entered into contracts with manufacturers located in the United States, Taiwan,
Hong Kong, Germany and the Peoples Republic of China. The Company's
international operations will subject it to various government regulations,
export controls and the normal risks involved in international operations and
sales. A majority of the Company's revenue to date has been received in US
dollars; however, the Company's main operating subsidiary conducts business in
pounds sterling. Any decline in the value of pound sterling against the US
dollar will have the effect of decreasing the Company's earnings when stated in
US dollars. The Company currently does not engage in any hedging transactions
that might have the effect of minimizing the consequences of currency
fluctuations and does not intend to do so in the immediate future.

ITEM 2. PROPERTIES

     The Company presently leases:

          (i) Approximately 2,900 square feet of office space at Elder House,
     526-528 Eldergate, Central Milton Keynes, MK9 1LR, England. The lease is
     for a five year term expiring March 21, 2001 and provides for an annual
     rental of $45,700. The Company is also responsible for taxes, insurance and
     service charges which should approximate, in the aggregate, $36,000
     annually. Management believes that this leased facility is suitable and
     adequate for its intended use, although as the Company grows, additional
     facilities will be sought.

          (ii) Approximately 435 square feet of office and laboratory space at 8
     Kings Court, Willie Snaith Road, Newmarket, England. The lease is for a
     three year term expiring February 9, 2000 and provides for an annual rent
     of $7,470. The Company is also responsible for taxes, insurance and
     services charges which should approximate, in the aggregate, $4,150
     annually.

          (iii) The Company also uses offices for its MSU US operations, located
     at the home of Gerald Capaci, in Raleigh, North Carolina. The Company has
     no lease and pays no rent for this facility.

ITEM 3. LEGAL PROCEEDINGS

     The Company is not party to any material pending legal proceedings.

     In September 1994, MSU PLC entered into a placement agent agreement with
Millport Limited ('Millport'), believed by the Company to be a Liberian
corporation (with a Channel Islands office address), which arrangement was
amended and confirmed by the Company in June 1995 (collectively the 'Millport
Agreements'). Under the Millport Agreements, Millport agreed to place 2.2
million shares of the Company's common stock at $2.50 per share in a Regulation
S offering. It is the Company's belief that Martin Miller, an officer and
director of the Company from September 1994 through November 1994 and presently
a stockholder of the Company, is affiliated with and controls Millport, directly
or indirectly. In June and July 1995, the Company issued an aggregate 1,162,500
shares of common stock in connection with the Regulation S offering (although
additional shares were issued in contemplation of subscriptions which were
ultimately not received, which shares were subsequently cancelled). In June
1995, as part of such Regulation S offering, the Company issued 110,000 shares
of common stock to two Liberian corporations in consideration of $275,000, which
payment was never received. In July 1995, and as part of such Regulation S
offering, the Company issued 950,000 shares of common stock in consideration of
three promissory notes representing an aggregate principal amount of $1,297,500.
All three notes were due on December 31, 1995 and only $852,500 of the principal
amount has been repaid. The three obligors on the notes are Liberian
corporations. Limited information is obtainable regarding officers, directors
and principal stockholders of these Liberian corporations. Due to a lack of
working capital, the Company has been unable to proceed legally against the
Liberian corporations although demands have been made to Martin Miller who has
orally offered to pay various sums provided he is issued additional shares, and
subject to additional conditions. The Company has not accepted any of such
offers. Mr. Miller has also alluded to claims that customers of Millport may
have against the Company although no specific claims have been made. The Company
is unaware of any meritorious claims that any such customers might have. An
additional reason for not proceeding against potential defendants in this
matter, to date, has been the likelihood that it would be unable to collect

                                       11

<PAGE>
<PAGE>
any judgment it might obtain against any of such potential defendants. The
Company intends to proceed against these potential defendants to the extent
prudent and reasonable as soon as it has sufficient working capital; however
there can be no assurance that any action will be taken, that such action will
not be barred by applicable statutes of limitation or that if successful, the
Company will be able to collect upon any judgement it might obtain.

     The Company has no access to a significant portion of its corporate
records, other than drafts and copies of certain documents, for the period from
approximately September 1994 through December 1995, making it difficult to
conclude that certain corporate matters were properly effected. The Company
believes matters were effected properly; however it cannot confirm this with
total certainty. The corporate records are currently in the possession of one of
the Company's former New York law firms which refused, upon demand, to release
such records until amounts allegedly due such law firm are paid. The Company
intends to contest the amount allegedly due this firm based on the Company's
belief that it was billed for many matters that were not authorized by the
Company, some of which matters appear to have been rendered for or at the
request of Martin Miller and/or Millport Limited. The Company believes such law
firm also represents Martin Miller and represented Millport at the same time it
represented the Company in connection with the Regulation S offering. Such law
firm has never provided the Company with copies of the subscription agreements
governing the acquisition of the shares in consideration of the three notes,
referenced above, in connection with the Regulation S offering. The Company
relied to a significant extent on this New York law firm in light of the fact
that management and United Kingdom counsel had extremely limited knowledge of
United States securities laws.

     In November 1994, the Company received a written demand from Paragon
Capital Corporation for $75,000 plus additional unspecified amounts based upon
an alleged breach of contract entered into with MSU PLC and relative to public
and private financing for MSU PLC. Paragon claims that the Company negotiated
with a third party in breach of such contract. The Company's position was that
Paragon failed to perform in accordance with the contract and that the contract
was of no further effect. The Company advised Paragon that it did not believe it
had any liability to Paragon. To the Company's knowledge, Paragon has taken no
further action in connection with this claim.

     As of December 31, 1997, the Company has outstanding $2,299,750 in 10%
convertible notes on which it owes approximately $115,167 in past due interest.
The Company's creditors have not threatened any legal action to collect amounts
due under the notes; however, there can be no assurances that the creditors will
not institute legal or collection proceedings in the future. The Company has no
present plans to seek bankruptcy protection.

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

     None.

                                       12

<PAGE>
<PAGE>
                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Since May 24, 1995, bid and ask quotations of the Company's common stock
have been reported by the National Association of Securities Dealers ('NASD')
Electronic Bulletin Board. From November 2, 1994 through May 24, 1995 there was
no 'established public trading market', although bid quotations were reported
sporadically in the 'pink sheets' published by the National Quotation Bureau and
on the NASD Electronic Bulletin Board. The Company's NASDAQ symbol is MUCP. The
following table sets forth the range of high and low bid quotations without
adjustment for retail mark-ups, mark-downs or commissions which do not
necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                                                          RANGE OF
                                                                                       BID INFORMATION
                                                                                      -----------------
                                                                                       HIGH        LOW
                                                                                      ------      -----
<S>                                                                                   <C>         <C>
Fiscal Year ended June 30, 1997:
     Quarter ended June 30, 1997...................................................   $ 4.19      $1.75
     Quarter ended March 31, 1997..................................................   $ 6.87      $2.25
     Quarter ended December 31, 1996...............................................   $10.50      $4.50
     Quarter ended September 30, 1996..............................................   $11.31      $7.87
Fiscal Year ended June 30, 1996:
     Quarter ended June 30, 1996...................................................   $10.75      $4.38
     Quarter ended March 31, 1996..................................................   $ 5.63      $1.00
     Quarter ended December 31, 1995...............................................   $ 5.00      $3.03
     Quarter ended September 30, 1995..............................................   $13.75      $1.00
</TABLE>

     On June 30, 1997 there were approximately 148 stockholders of record of the
Company's common stock, including holders of record and participants in security
position listings, but excluding those shares of common stock held in street
name.

     The Company has never paid cash dividends on its common stock and does not
anticipate it will do so in the foreseeable future. The Company currently
intends to retain future earnings, if any, to fund the development and growth of
its business. The payment of future cash dividends by the Company on its common
stock will be at the discretion of the Board of Directors and will depend on the
Company's earnings (if any), financial condition, cash flows, capital
requirements, and contractual prohibitions with respect to the payment of
dividends and other considerations as the Board of Directors may consider
relevant.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected financial data has been derived from the financial
statements of the Company. The financial statements for each of the fiscal years
in the four-year period ended June 30, 1997 have been audited by Moore Stephen
Lovelace, P.L., independent certified public accountants. The financial
statements for the fiscal year ended June 30, 1993 are unaudited, however the
financial statements for MSU Limited for such period were audited by Michael Hoy
FCA. The following selected financial data should be read in conjunction with
and are qualified in their entirety by the MSU Corporation consolidated
financial statements and the notes thereto included elsewhere in this Report on
Form 10-K.

                                       13

<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                        FISCAL YEARS ENDED JUNE 30,
                                                        -----------------------------------------------------------
                                                          1997        1996        1995        1994         1993
                                                        --------    --------    --------    --------    -----------
                                                                                                        (UNAUDITED)
                                                             (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S>                                                     <C>         <C>         <C>         <C>         <C>
Income statement data:
     Total revenue...................................      1,480         393       1,596         875           152
     Loss from operations............................     (2,113)     (1,402)       (882)     (1,366)       (1,300)
     Net loss........................................     (2,107)     (1,397)       (878)     (1,365)       (1,296)
     Primary loss per share..........................      (0.13)      (0.10)      (0.07)      (0.31)        (0.38)
     Fully diluted loss per share....................      (0.13)      (0.10)      (0.07)      (0.31)        (0.38)
     Fixed charges to earnings deficiency............     (2,080)     (1,351)       (843)     (1,367)       (1,305)
Balance sheet data (at year end):
     Working capital (deficiency)....................     (1,556)     (1,856)     (2,662)     (1,841)       (1,290)
     Total assets....................................      2,086         164         363         197           229
     Long term debt..................................      1,830       --          --          --           --
     Stockholders' deficit...........................     (2,421)     (1,816)     (2,620)     (1,770)       (1,264)
</TABLE>

     Per share amounts were computed for 1993 on the number of shares
outstanding at the end of the fiscal year.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     This report on Form 10-K contains forward looking statements that involve
risks and uncertainties. The statements contained in this report on Form 10-K
that are not purely historical are forward-looking statements within the meaning
of Sections 27A of the Securities Act of 1933, as amended (the 'Securities Act')
and 21E of the Securities Exchange Act of 1934 (the 'Exchange Act'), including
without limitation statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this report on Form 10-K are based on information available to the
Company at the date of this report on Form 10-K, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
'Business' and elsewhere in this report on Form 10-K. The following discussion
and analysis should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in this report on Form 10-K.

OVERVIEW

     On October 3, 1994 MSU Corporation, formerly Capital Acquisition Company,
acquired the outstanding capital stock of MSU PLC, the parent of MSU Limited
(MSU PLC and MSU Limited referred to as 'MSU'), through the issuance of
9,422,222 shares of its common stock. This transaction has been accounted for as
a recapitalization of MSU, with MSU as the acquirer (a reverse acquisition) and
accordingly, the historical consolidated financial statements through the date
of the transaction are those of MSU. Shareholders' equity reflects the
equivalent number of common shares received in the recapitalization and all
references in the consolidated financial statements with regard to the number of
shares of common stock have been restated to give retroactive effect to the
transaction.

     The Company operates primarily through MSU Limited which is principally
engaged in the design and development of computer chips and chipsets for use in
consumer electronic products.

     The consolidated financial statements include the accounts of MSU
Corporation, MSU PLC, MSU Limited and MSU US (collectively the 'Company'). All
significant intercompany accounts have been eliminated in the consolidated
financial statements.

SIGNIFICANT RISKS

     The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the years ended June
30 1997, 1996 and 1995, the Company incurred net losses of approximately
$2,107,000, $1,397,000 and $878,000, respectively. At June 30, 1997

                                       14

<PAGE>
<PAGE>
there was an accumulated deficit of approximately $7,133,000. Additionally, the
Company has had recurring negative cash flows from operations. The Company
expects that it is likely to incur net losses at least through the end of the
first quarter of fiscal 1998 and possibly through that year as it attempts to
further develop, upgrade and market its products and to develop its
infrastructure and organization to support anticipated operations, including
anticipated product demand. The foregoing statement is a forward looking
statement that involves risks and uncertainties. The reader should be aware that
the Company is likely to incur net losses beyond the first quarter of fiscal
1998 if anticipated revenues from development fees and royalties in respect of
sales of the Envoy chip, or royalties and conditional and forecasted purchase
orders of customized Internet Access Devices, are not realized. Such conditional
and forecasted purchase orders in respect of the Internet Access Devices assume,
without limitation, approval of final production samples by potential
purchasers; acceptance by and demand for the customised Internet Access Devices
by consumers; satisfactory product performance, including chip and software
performance; and the ability of the products to compete successfully in an
extremely competitive marketplace. The Company believes such assumptions are
reasonable, however should any one of such assumptions prove to be unfounded,
the Company could incur net losses beyond the first quarter of fiscal 1998
and/or be unable to continue as a going concern. The foregoing factors raise
substantial doubt about the Company's ability to continue as a going concern
without sufficient funds to meet its cash requirements. There can be no
assurance that the Company will be able to obtain sufficient funds to enable it
to continue as a going concern.

     The Company's strategy is to increase cash flow from operations through
further development, upgrade and marketing of its chips and products
incorporating such technology, with particular emphasis on the Envoy chip and on
customised Internet Access Devices incorporating its ISP Chip-version 2. In
order to support this strategy, the Company anticipates that if sales revenues
are not generated in the coming months, it will, at least in the short term,
have to continue to fund a significant portion of its operations through private
sales of equity securities to and/or borrowings from third parties, to the
extent such sources of capital are available to the Company. The Company also
intends to further develop its infrastructure and organization to support its
anticipated operations, although it has no funds to presently address these
concerns.

     The markets for the Company's products have only recently begun to develop,
are rapidly evolving and are highly competitive, with substantially all
competitors having significantly greater resources than the Company. The Company
and its prospects must be considered in light of the substantial risks, expenses
and difficulties facing the Company. There can be no assurance that the Company
will be successful in addressing any of the foregoing risks, that it will be
successful in implementing its strategy, that any of its current agreements with
third parties will ever produce revenue for the Company, that it will ever
achieve profitability or that it will be able to continue as a going concern.
See Report of Independent Auditors and Company's financial statements appearing
elsewhere in this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

REVENUES

     The Company has no customers to date that frequently and systematically
purchase its products or retain its services. Revenues during the years ended
June 30, 1997, 1996 and 1995 were approximately $1,480,000, $393,000 and
$1,596,000 respectively. In fiscal 1997 the revenues were derived principally
from chip sales, license and development fees, and royalty fees paid in
connection with the sale of customized Internet Access Devices. In fiscal 1996,
revenues were derived principally through development arrangements in which the
Company performed engineering and design work for its customers for a
development fee and, in fiscal 1995, from chip sales in connection with a
development arrangement. Typically, the Company's development arrangements also
provide for royalties and/or license fees to be paid to the Company if the
customer sells products developed in conjunction with the Company and/or
incorporating the Company's proprietary technology. To date, apart from the
royalties received in 1997 in connection with the sale of the Internet Access
Devices, none of these development arrangements have resulted in royalty or
continuing license revenue to the Company. The Company

                                       15

<PAGE>
<PAGE>
would be materially adversely affected if customers fail to manufacture, market
or sell products developed in conjunction with the Company.

     During the years ended June 30, 1997, 1996 and 1995 the Company's revenues
were principally derived from four, three and two customers, respectively.
Because of the concentration of its revenues in such a small number of
customers, the loss of one customer could have a material adverse effect on the
Company's business.

     The Company's revenues by geographic region during the years ended June
30, 1997, 1996 and 1995 were approximately as follows:

<TABLE>
<CAPTION>
                        LOCATION                            1997($)     1996($)     1995($)
---------------------------------------------------------   --------    --------    --------
<S>                                                         <C>         <C>         <C>
Europe...................................................      --        110,000     440,000
Far East.................................................    730,000       --        640,000
North America............................................    750,000     280,000     520,000
</TABLE>

     The Company's revenues decreased approximately 75% in 1996 compared to
1995. The decrease was largely attributable to the fact that the Company was
devoting its efforts and limited capital to the initial phases of its
development arrangements with new customers involving the further development of
certain of its core technologies, including the development of a new version of
its ISP chip and its prototype Internet Access Device. The approximate 280%
increase in revenue in 1997 compared to 1996 is primarily a reflection of the
low revenue in 1996, but it does include royalties in respect of product sales
and fees from development contracts which the Company anticipates will provide
continuing revenue streams into 1998 and subsequent years. It should be noted
however that the Company's revenues in 1997 are lower than previously forecasted
because of increased lead time to market for the Internet Access Device
resulting from the incorporation of enhanced technology features.

COST OF REVENUES

     The cost of revenues for the years ended June 30, 1997, 1996 and 1995 were
approximately $651,000, $66,000 and $604,000 respectively. As a percentage of
revenues, cost of revenues were approximately 44% in 1997, 17% in 1996 and 38%
in 1995. The cost of revenue fluctuations are due to variations in gross margins
as between chip sales, support services and development services. The gross
margin on development and support services is approximately 90% to 95% while the
gross margin on chip sales until 1997 was usually approximately 48% to 54%
depending on the number and type of chips purchased. However, in fiscal 1997
most of the chip sales (approximately $600,000) were to Mitac and were sold at
cost.

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development expenses generally consist of expenditures,
relating to the Company's independent development of its chips and prototype
products, such as the ISP Chip, the Envoy Chip, the Consumer PC, and the
prototype Internet Access Device and specific research and development performed
pursuant to development arrangements with third parties. For the years ended
June 30, 1997, 1996 and 1995 research and development costs were approximately
$1,386,000, $1,248,000 and $1,297,000, respectively. As a percentage of
revenues, research and development expenses were approximately 94% in 1997, 318%
in 1996 and 81% in 1995. The fluctuations from year to year reflect the varying
demands for research and development which are dictated by technological changes
and the need for the Company's products to remain competitive and commercially
viable, and the requirements of the Company's customers. In order to remain
competitive in its business, the Company anticipates that research and
development expenditures in the foreseeable future will be a minimum of
$1,200,000 per year.

SELLING GENERAL AND ADMINISTRATIVE EXPENSES

     Selling general and administrative expenses were approximately $1,486,000,
$404,000 and $520,000 for the years ended June 30, 1997, 1996 and 1995,
respectively. Selling general and administrative

                                       16

<PAGE>
<PAGE>
expenses consist of advertising and promotion costs, communication, rent and
occupancy costs, and professional fees. In 1997 this category of expense is
higher than in 1996 primarily due to significantly increased costs associated
with sales, marketing and promotion which are charged to operations as incurred
(the Company exhibited at two consumer electronics shows in the year in Las
Vegas), and professional costs incurred in the preparation of prior years
delinquent Exchange Act periodic reports. In 1995 this category of expense was
higher than 1996 because of the costs associated with the Exchange.

DEPRECIATION EXPENSE

     Depreciation expense was approximately $44,000, $32,000 and $21,000 for the
fiscal years ended June 30, 1997, 1996 and 1995, respectively. Depreciation is
calculated using the straight line method over the estimated useful lives of the
Company's depreciable assets which consist principally of electronics equipment
used in the design and testing of the Company's products.

INTEREST EXPENSE

     Interest expense was approximately $26,000, $45,000 and $35,000 for the
fiscal years ended June 30, 1997, 1996 and 1995. The interest expense in 1997 is
principally due to the interest of $17,600 paid in respect of certain bridge
financing. In the event the Company's note holders do not convert their notes
into equity, interest expenses will continue to rise until such notes are paid.

     In addition, the Company has borrowed funds from time to time for working
capital under various secured credit facilities with its principal bank. These
borrowings have generally provided for interest on outstanding amounts at a rate
of 3% above the National Westminster Bank PLC prime rate. All such borrowings
have been subject to the bank's discretion, collateralized by a security
interest on substantially all of the assets of the Company and payable on
demand.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has financed its operations almost exclusively through private
sales of equity and debt securities. For the fiscal year ended June 30, 1997,
cash used in operating activities of approximately $2,911,000 was primarily
attributable to the Company's net loss for the fiscal year and to the costs
associated with the issuance of its 10% Convertible Notes. Cash used in
investment activities of approximately $77,000 for the fiscal year ended June
30, 1997 related primarily to the acquisition of electronics equipment. Cash
flows from financing activities of approximately $3,851,000 in the fiscal year
ended June 30, 1997 were primarily attributable to the issuance of shares of
common stock of the Company ($1,477,001) and to the issuance of its 10%
Convertible Notes ($1,829,742).

     Capital expenditures were approximately $77,000 for the fiscal year ended
June 30, 1997. The Company currently estimates that capital expenditures for
fiscal 1998 will be approximately $150,000 to $200,000. The Company has no
material commitments, other than operating leases and four employment
agreements.

     As at June 30, 1997 the Company's principal source of liquidity was
approximately $859,000 in cash. Since June 30, 1997 additional liquidity has
been provided from a further issuance of 10% Convertible Notes ($470,000) and
$79,000 from the sale of additional equity in the Company.

     The Company believes that the cash flows expected to be generated by
operations through the remainder of fiscal 1998 will be sufficient to meet a
significant portion of its cash needs for working capital and capital
expenditures for the remainder of fiscal 1998. The preceding statement is a
forward looking statement which assumes the realization of revenue from
conditional and forecasted purchase orders. Such forward looking statement is
subject to certain risks and uncertainties which could cause actual results to
differ materially from those set forth, including, but not limited to, approval
of final production samples of the Envoy chip and customized Internet Access
Devices by potential customers; acceptance by and demand for such product by
consumers; satisfactory product performance; and the ability of such products to
successfully compete in an extremely competitive market place. To satisfy the
balance of the Company's liquidity requirements, the Company will attempt to
sell additional equity or

                                       17

<PAGE>
<PAGE>
debt securities and/or obtain additional credit facilities to the extent the
Company is able to do so, of which there can be no assurance. The sale of
additional equity or convertible debt securities will result in additional
dilution to the Company's stockholders. There can be no assurance that the
Company's liquidity requirements will be met or that the Company will be able to
continue as a going concern.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements and supplementary data are set forth in this
Annual Report on Form 10-K commencing on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     In March 1996, the Board of Directors of the Company approved the
engagement of Moore Stephens Lovelace, P.L. as auditors of the Company's
consolidated audited financial statements for the fiscal year ended June 30,
1995. Subsequently such auditors were engaged to undertake the audit of the
Company's consolidated financial statements for the fiscal years ended June 30,
1996 and 1997. The consolidated audited financial statements for the fiscal year
ended June 30, 1995 are for the consolidated group as if MSU PLC and MSU Limited
were owned by MSU Corporation during the first portion of the fiscal year ended
June 30, 1995 prior to the Exchange in October 1994.

     In February 1996, MSU's prior auditors, Coopers & Lybrand LLP (which
audited the financial statements of Capital Acquisition Company prior to the
Exchange in October 1994), declined to stand for re-election as auditors in
connection with the preparation of the Company's consolidated audited financial
statements for the fiscal year ended June 30, 1995.

     There have been no disagreements between management and Coopers & Lybrand
LLP, or any predecessor firm, for any periods which they audited as set forth
below, in connection with Capital Acquisition Company's audits and any
subsequent interim period preceding the engagement of Moore Stephens Lovelace,
P.L. on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure of a nature which if not resolved to
the satisfaction of Coopers & Lybrand LLP would have caused it to make reference
in connection with its report to the subject matter of the disagreements.
Coopers & Lybrand LLP's report on the financial statements of Capital
Acquisition Company for the fiscal years ended February 28, 1993, February 28,
1994 and June 30, 1994 (a four month period) have not contained an adverse
opinion or a disclaimer of opinion and none of such reports was qualified as to
uncertainty, audit scope or accounting principles; except, however, that the
reports of Coopers & Lybrand LLP for such periods express an uncertainty as to
Capital Acquisition Company's ability to continue as a going concern.

                                       18

<PAGE>
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

     The directors and executive officers of the Company (and their respective
positions within MSU PLC, MSU Limited and MSU US Operations Inc.) and their
respective ages are as follows:

<TABLE>
<CAPTION>
                  NAME                      AGE                          POSITION
-----------------------------------------   ---   -------------------------------------------------------
<S>                                         <C>   <C>
Wynford Peter Holloway...................   48    President, Chairman, Chief Executive Officer and
                                                  Director of the Company, Chairman of MSU PLC and MSU
                                                  Limited, and President of MSU US Operations Inc.
Jeremy Miles Simpson.....................   63    Deputy Chairman of the Board of Directors of the
                                                  Company
William Derek Snowdon....................   43    Secretary and Director of the Company, Secretary of MSU
                                                  PLC and MSU Limited, and a Director and Secretary of
                                                  MSU US Operations Inc.
Richard Horby Phillips...................   51    Principal Financial Officer and Director of the
                                                  Company, Director of MSU PLC and MSU Limited and a
                                                  Director and Treasurer of MSU US Operations Inc.
Gerald J. Capaci.........................   40    Vice President of Marketing and Business Development,
                                                  Director of the Company and Vice President of MSU US
                                                  Operations Inc.
Appointed since June 30, 1997
Keith Peirson............................   55    Managing Director of the Company
Fred Kashkooli...........................   57    Director of the Company
</TABLE>

     Wynford Peter Holloway has served as Chief Executive Officer and a director
of the Company since October 1994, and as Chairman of MSU PLC and MSU Limited
since June 1994 and March 1991, respectively. He has been president of MSU US
Operations Inc. since its incorporation in February 1997. Mr. Holloway is the
founder of MSU Limited. From 1991 through 1992, Mr. Holloway was a self-employed
design consultant providing professional design services to clients in the
computer peripherals business.

     Jeremy Miles Simpson MA (Cantab) was appointed a director and Deputy
Chairman of the Company effective July 1, 1997. Mr. Simpson, who is a Freeman of
the City of London, was executive chairman of Gordon Russell Plc., a UK publicly
quoted company, from 1986 to 1989, prior to the sale of the company. Since that
date Mr. Simpson has held a number of non-executive directorships with smaller
growing and developing companies in the UK and Europe.

     William Derek Snowdon LLB has served as secretary and a director of the
Company since October 1994 and as secretary of MSU PLC and MSU Limited since
June 1994 and March 1991, respectively. He was appointed a director and
secretary of MSU US Operations Inc. on its incorporation in February 1997. Mr.
Snowdon is a solicitor and has been a partner with the firm of Phoenix Walters
for the past 15 years. Mr. Snowdon's practice focuses on commercial contracts
and intellectual property law. In addition Mr. Snowdon is a non-executive
director of two Regional Enterprise Agencies in the United Kingdom.

     Richard Horby Phillips FCA has served as principal financial officer and a
director of the Company since January 2, 1997 and also as a director of MSU PLC
and MSU Limited since that date. He was appointed Treasurer and a director of
MSU US Operations Inc. on its incorporation in February 1997. Mr. Phillips is a
chartered accountant who was with Coopers & Lybrand for 25 years. Mr. Phillips
was a partner in their London office from April 1983, providing advisory and
audit services to both public and private companies until August 1994 when he
formed his own firm to continue providing financial advice to emerging growth
companies in the US and UK. Mr. Phillips also currently serves on the Board of
five other UK companies.

                                       19

<PAGE>
<PAGE>
     Gerald J. Capaci has served as a director of the Company since February
1997. He has also served as a director and vice president (business development
and marketing) of MSU US since its incorporation in February 1997. Prior to
February 1997, Mr. Capaci spent over 10 years with IBM where he was most
recently Strategic Relationship Manager of their Internet Division where he was
responsible for assessing the technical, business and strategic value of
contracting with other software companies with special emphasis on internet
companies.

     Keith Peirson has served as a director of the Company since September 1997
and has been appointed the group's managing director. From 1995 to 1997, Mr.
Peirson acted as an independent consultant to various companies involved with
the distribution of computer products, construction of building facades and
automotive security. Mr. Peirson has previously served as managing director of
other companies in the electronics field, including Farnell Electronic Services,
where he spent 24 years, and Arrow Electronics (UK) Limited from 1991 to 1994.

     Fred Kashkooli has served as a director of the Company since August 1997.
Mr. Kashkooli has been an independent management consultant since 1991 and has
over twenty eight years of experience in the areas of microprocessors, memory,
logic, analog design, manufacturing, CAD design packaging, testing and
marketing. from 1984 to 1991, Mr. Kashkooli was Senior Vice President of
Research and Development at GE Intersil, responsible for design, manufacturing
and strategic marketing for analog and digital products. Additionally, Mr.
Kashkooli managed design centers in Singapore, New Jersey, North Carolina and
Florida. From 1980 to 1984, Mr. Kashkooli was a director of the microprocessor
and memory division of GE Intersil. Prior to this he worked ten years at
Sygenetics, a corporation engaged in the manufacture of semi-conductor chips.
Mr. Kashkooli holds a BS in Electrical Engineering from California State
University.

     Each director serves for a term of one year from his election. Each officer
serves for a term as set forth in his employment agreement.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

     The following table sets forth certain information concerning the
compensation earned during the Company's last three fiscal years by the
Company's Chief Executive Officer and the Company's other executive officers
receiving in excess of $100,000 in total annual salary and bonus (collectively
the 'named executive officers'):

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                      LONG-TERM COMPENSATION
                                                                        --------------------------------------------------
                                                                                 AWARDS                    PAYOUTS
                                                                        -------------------------   ----------------------
                                                         OTHER ANNUAL                  SECURITIES
                              FISCAL   SALARY    BONUS   COMPENSATION    RESTRICTED    UNDERLYING    LTIP      ALL OTHER
NAME AND PRINCIPAL POSITION    YEAR    ($)(1)     ($)       ($)(2)      STOCK AWARDS    OPTIONS     PAYOUTS   COMPENSATION
----------------------------  ------   -------   -----   ------------   ------------   ----------   -------   ------------
<S>                           <C>      <C>       <C>     <C>            <C>            <C>          <C>       <C>
Wynford Peter Holloway .....   1997    112,000    --        29,000         --             --          --          --
  Chief Executive Officer      1996    112,000    --        17,072         --             --          --          --
  and Director                 1995    112,000    --        24,083         --             --          --          --
Keith Charles Hall .........   1997     48,000*   --         4,400         --             --          --          --
  Former Director              1996     96,000    --         9,000*        --             --          --          --
                               1995     96,000    --         8,000         --             --          --          --
Richard Horby Phillips .....   1997     41,500*   --         7,470*        --             --          --          --
  Chief Financial and
  Accounting Officer and
  Director
Gerald J. Capaci ...........   1997     47,000*   --         3,500*        --             --          --          --
  Vice President and
  Director
</TABLE>

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

* Part of the year; to or from date of resignation/appointment

(1) All salaries and other annual compensation were paid by MSU Limited or MSU
    US Operations Inc.

                                              (footnotes continued on next page)

                                       20

<PAGE>
<PAGE>
(footnotes continued from previous page)

(2) Represents personal benefits in addition to salary. Of Mr. Holloway's
    personal benefits, 51% of the 1995 amount was for house rental expense; 40%
    and 60% of the 1996 amount were for a company car and house rental expense,
    respectively. The 1997 amount is in respect of a car allowance. Of Mr.
    Hall's personal benefits, 100% of each of 1995, 1996 and 1997 amounts were
    for a car allowance. All of Mr. Phillips benefits were in respect of a car
    allowance and all Mr. Capaci's personal benefits are in respect of
    contributions to a personal retirement plan.

EMPLOYMENT AGREEMENTS

     Effective September 1, 1994, MSU PLC entered into employment agreements
with each of Wynford Peter Holloway, Keith Hall and William Snowdon providing
for annual base salaries (subject to annual increases within the discretion of
the Board of Directors) of $206,670, $132,800 and $33,200 respectively (as
adjusted), which base salary requirement was waived by each of Messrs. Holloway
and Hall for the first three years of the employment term. Subject to earlier
termination as provided in the agreements, the agreements are each for a three
year period ending August 31, 1997. Unless terminated in accordance with the
agreements, each agreement renews for a further period of three years on each
anniversary of the commencement date.

     On January 6, 1997 the employment contract with Mr. Hall was terminated, by
mutual consent, effective December 31, 1996.

     Effective January 2, 1997 MSU Limited entered into an employment agreement
with Richard Horby Phillips, the Company's Chief Financial Officer, providing
for an annual base salary of $107,900, subject to annual increases within the
discretion of the Board of Directors. During an initial period, which is still
continuing, Mr. Phillips is to receive a lower base salary at the annual rate of
$83,000 as he is unable to devote all of his time to the Company's affairs due
to other commitments. At present Mr. Phillips is devoting approximately 4 days a
week to the Company's affairs.

     In September 1997 MSU Limited entered into an employment agreement with
Keith Peirson providing for an annual base salary of $160,000, subject to annual
increases within the discretion of the Board of Directors.

     All of the above agreements with Messrs. Holloway, Snowdon, Phillips and
Peirson, also provide for a car allowance or use of an automobile, including
reimbursement of any automobile expenses, and participation in bonus plans when
and if formulated by MSU PLC or MSU Limited. MSU is also obligated to provide
private medical coverage and life insurance. For one year after termination, the
executives are restricted from holding a material interest in any competitor,
seeking or receiving orders for any products or services produced or marketed by
MSU PLC or MSU Limited six months prior to termination of the executive.

     The agreement with Messrs. Holloway, Snowdon, Phillips and Peirson each
provide for automatic termination once the employee reaches 65 years of age. The
Company has the right under each agreement to terminate the agreement
immediately for cause and then has the option to pay the employee his base
salary for the remainder of the term. Each agreement contains a non-competition
clause, restricting the employee from soliciting the Company's customers and
employees and from holding an interest in a competing firm.

     Effective January 29 1997, MSU Limited entered into an employment agreement
with Gerald J. Capaci providing for an annual base salary of $125,000, subject
to annual increases within the discretion of the Board of Directors. In
addition, the Company will make an annual nondiscretionary contribution to a
retirement plan for Mr. Capaci at a rate of 7.5% of his annual salary and will
establish and maintain a medical benefits plan for Mr. Capaci, his spouse and
dependent children.

                                       21

<PAGE>
<PAGE>
COMPENSATION OF DIRECTORS

     Directors are reimbursed for all reasonable expenses in attending each
Board Meeting.

STOCK OPTION GRANT TABLE

     The following table sets forth certain information concerning options
granted to the named executive officers during the Company's fiscal year ended
June 30, 1997.

                      OPTIONS GRANTED IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                           PERCENT
                                          OF TOTAL
                                           OPTIONS                                                       POTENTIAL REALIZABLE VALUE
                            NUMBER OF      GRANTED                                                        AT ASSUMED ANNUAL RATE OF
                            SECURITIES       TO                                 MARKET                    STOCK PRICE APPRECIATION
                            UNDERLYING    EMPLOYEES     EXERCISE OF            PRICE ON                        FOR OPTION TERM
                             OPTIONS      IN FISCAL     BASE PRICE             DATE OF     EXPIRATION    ---------------------------
          NAME               GRANTED        YEAR       ($ PER SHARE)            GRANT         DATE       0%($)     5%($)     10%($)
-------------------------   ----------    ---------    -------------           --------    ----------    ------    ------    -------
<S>                         <C>           <C>          <C>                     <C>         <C>           <C>       <C>       <C>
Wynford Peter Holloway...     150,000        23.0%         $2.12                $ 2.12       4/18/02       --      87,858    194,142
                              (Note 1)
                               20,000         3.1%         $3.25                $ 3.25       6/24/02       --      17,958     39,683
                              (Note 2)
William Derek Snowdon....      20,000         3.1%         $3.25                $ 3.25       6/24/02       --      17,958     39,683
                              (Note 2)
Richard Horby Phillips...     100,000        15.3%         $2.12                $ 2.12       5/11/02       --      58,572    129,428
                              (Note 3)
Gerald J. Capaci.........     300,000        46.0%         $2.12                $ 2.12       5/11/02       --      58,572    129,428
                              (Note 3)
Jeremy Miles Simpson.....      62,500         9.5%         $2.12(50,000)        $ 2.12       5/11/02       --      29,286     64,714
                              (Note 4)                     $2.37(12,500)        $ 2.37       6/30/02       --       8,785     18,086
</TABLE>

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

(1) The stock options granted to Mr. Holloway (50,000) and to the Employee Trust
    (100,000), in which Mr. Holloway has an interest as the Settler and as a
    potential beneficiary, on May 12, 1997 were in consideration of the benefits
    derived by the Company from the provision of personal guarantees by Mr.
    Holloway and security given by the Trust to secure a loan facility for the
    Company.

(2) The stock options granted to Mr. Holloway and Mr. Snowdon were in
    consideration for the benefits derived by the Company from their agreeing to
    certain additional restrictions on their disposing of their existing
    holdings of shares of common stock in the Company; this being one of the
    conditions attaching to the issuance of the 10% Convertible Loan Notes on
    June 25 1997.

(3) The stock options granted to Messrs. Phillips and Capaci are in accordance
    with the provisions of their employment contracts with the Company. Mr.
    Phillips has been granted options in respect of 100,000 shares of common
    stock exercisable between November 11, 1997 and May 11, 2002. Mr. Capaci has
    been granted options in respect of 300,000 shares of common stock of which
    100,000 are exercisable between November 11, 1997 and May 11, 2002; the
    options in respect of the other 200,000 shares of common stock vest as to
    100,000 after January 1998 provided that the Company's share price has been
    quoted at $15.00, and 100,000 after January 1999 provided that the Company's
    share price has been quoted at $20.00.

(4) The stock options granted to Mr. Simpson were in consideration of his
    agreeing to subscribe for 79,012 shares of common stock of the Company on
    May 12, 1997 and 48,012 shares on June 4, 1997.

(5) As required by the rules of the Securities and Exchange Commission,
    potential values stated are based on the assumption that the Company's
    common stock will appreciate in value from the date of the grant to the end
    of the option term (five years from the date of the grant) at annualized
    rates of 5% and 10% (total appreciation of approximately 28% and 61%),
    respectively, and therefore are not intended to forecast possible future
    appreciation, if any, in the price of the common stock.

                                       22

<PAGE>
<PAGE>
STOCK OPTION EXERCISES AND HOLDINGS TABLE

     The following table provides information concerning the values of
unexercised options held by the named executive officers at June 30, 1997. No
options were exercised by such officers during the Company's fiscal year ended
June 30, 1997.

                         FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
                                                                                NUMBER OF SECURITIES
                                                                               UNDERLYING UNEXERCISED
                                                                                  OPTIONS AT FISCAL
                                                                                     YEAR END(#)
                                          SHARES ACQUIRED                    ---------------------------
                  NAME                      ON EXERCISE     VALUE REALIZED   EXERCISABLE   UNEXERCISABLE
----------------------------------------  ---------------   --------------   -----------   -------------
<S>                                       <C>               <C>              <C>           <C>
Wynford Peter Holloway..................       --               --             100,000        170,000(2)
William Derek Snowdon...................       --               --             100,000         20,000
Richard Horby Phillips..................       --               --                            100,000
Gerald J. Capaci........................       --               --                            300,000
Jeremy Miles Simpson....................       --               --                             62,500

<CAPTION>
                                                 VALUE OF UNEXERCISED
                                                    IN-THE-MONEY
                                                  OPTIONS AT FISCAL
                                                   YEAR END($)(1)
                                          ------------------------------------
                  NAME                    EXERCISABLE            UNEXERCISABLE
----------------------------------------  -------------          -------------
<S>                                       <C>                    <C>
Wynford Peter Holloway..................      --                     78,375
William Derek Snowdon...................      --                      6,250
Richard Horby Phillips..................                            144,250
Gerald J. Capaci........................                            144,250
Jeremy Miles Simpson....................                             87,031
</TABLE>

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

     In September 1997 Keith Peirson was granted options to purchase 300,000
shares of the Company's common stock at the closing price at the date of the
grant. The options are exercisable as to 100,000 from July 1, 1998, 100,000 from
July 1, 1999, and 100,000 from July 1, 2000. The options expire in September
2002.

(1) Values stated are based on the average bid and ask prices of $3.56 per share
    of the Company's common stock as reported by Bloomberg Financial Inc. on
    June 30, 1997, the last trading day of the fiscal year, and equal the
    aggregate amount by which the market value of the option shares exceeds the
    exercise price of such options at the end of the fiscal year. No value is
    attributed to option shares where the option price is higher than the market
    value.

(2) The Stock options above attributed to Mr. Holloway include 100,000 granted
    during the year ended June 30, 1997 to a Trust in which Mr. Holloway has an
    interest.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Company has no compensation committee. During fiscal 1997, Messrs.
Holloway, Snowdon, Hall (to December 31, 1996) and Phillips (from January 2,
1997) representing all of the Company's directors and executive officers,
participated in deliberations of the Board of Directors concerning executive
officer compensation.

     Since October 1994, the law firm of Phoenix Walters Solicitors has
regularly rendered legal services as counsel to the Company. W.D. Snowdon, a
director and executive officer of the Company, is a partner of Phoenix Walters
Solicitors. The Company, through the U.K. subsidiary, paid $117,000 in legal
fees to Phoenix Walters Solicitors during fiscal 1997.

     Between September 1994 and March 1995, Mr. Phillips provided consultancy
services to the Company for which he rendered invoices for $16,500. As of
September 1997, the amount remained unpaid.

     In November 1992, MSU Limited, Mr. Holloway, TXC Corporation and a third
party entered into an agreement relating to the development of a CD based
multisystem. Such agreement contemplated that a new entity, owned 46% by Mr.
Holloway, 46% by TXC Corporation and 5% by the third party, would develop and
own such project, however, MSU Limited, Mr. Holloway and TXC Corporation
subsequently agreed that MSU Limited would independently develop and own the
product. The third party never performed under the November 1992 agreement and,
accordingly MSU Limited's position is that such third party has no rights or
claims under such agreement. TXC Corporation and Mr. Holloway agreed to
indemnify MSU Limited in connection with any claim made by such third party.
Pursuant to the November 1992 agreement, TXC Corporation contributed $1,541,910
to MSU Limited. Pursuant to a June 1993 agreement, restating the 1992 agreement,
TXC Corporation loaned $618,000 to MSU

                                       23

<PAGE>
<PAGE>
Limited. Of the $2,159,910 aggregate capital contribution, $1,400,000 is
represented by an unsecured, interest free loan payable to TXC Corporation at
such time as the Company is reasonably able to do so without jeopardizing its
financial condition, and the balance was an equity contribution. Pursuant to a
March 1994 agreement, TXC Corporation and the Company mutually agreed to waive
their respective obligations under the November 1992 and June 1993 agreements in
exchange for 550,000 shares of MSU Limited stock and certain additional
consideration. TXC Corporation has waived any claims it may have had to such
additional consideration. The MSU Limited stock issued to TXC Corporation was
exchanged for MSU PLC stock in June 1994 and the MSU PLC stock was exchanged for
Company common stock in October 1994 in connection with the Exchange. TXC
Corporation is a principal stockholder of the Company and holds a non-exclusive
license to use the Wynpeg Chipset technology in connection with the manufacture
of video CD players. Such license was granted to TXC Corporation in connection
with a development contract entered into in July 1994.

     In August 1997, Mr. Holloway agreed to the terms of settlement of a loan
made in May 1994 by Sabre Advanced Micro Electronics Ltd., an agent for Americn
Micro Systems Inc. (which until 1996 was the Company's principal chip
manufacturer) in the approximate amount of $231,000. Settlement was effected by
the transfer of 70,000 shares of common stock of the Company owned by Mr.
Holloway. The pledge of all of the shares of common stock of Mr. Holloway given
as security for the loan was released as part of the settlement terms. Mr.
Holloway loaned approximately $68,000 of the loan proceeds to MSU Ltd. in July
1994 on an unsecured interest free basis. At September 1997, approximately
$3,000 was outstanding under that loan.

     In June 1996, MSU Limited obtained a $76,000 credit facility from National
Westminster Bank Plc ('Bank'). The credit facility was secured by a security
interest on all of the Company's assets and the personal guarantees of each of
Messrs. Holloway, Hall and Snowdon. The Guarantees of Messrs. Hall and Snowdon
were secured by a pledge of their shares of Company common stock. In
consideration of the benefit derived by the Company as a result of the
guarantees provided by these directors, each of the directors concerned was
granted, effective June 7, 1996, an option to acquire 100,000 shares of Company
common stock at an exercise price of $5.00. The options are exercisable in full
commencing on June 7, 1997 and expire on June 6, 2001. The credit facility
expired in August 1996 at which time there were no amounts outstanding under the
facility. A security interest remains in place with the Bank to serve as
collateral for additional credit facilities requested by the Company and
approved by the Bank. The pledged shares have been released.

     On October 14, 1994 the Company completed an exchange of all the shares of
MSU PLC for 9,422,222 shares of the Company's common stock pursuant to an
Exchange Agreement. After the Exchange, the former stockholders of MSU PLC owned
approximately 73.6% of the Company's common stock. Such stockholders presently
own approximately 51.5% of the Company's common stock. Upon completion of the
Exchange, Mr. Holloway, an officer and director of the Company, TXC Corporation,
and the Employee Discretionary Trust became the owners of more than five percent
(5%) of the Company's common stock. Additionally, each of Keith Hall and William
Snowdon, officers and directors of the Company, received 515,277 shares in
connection with the Exchange. All of MSU PLC shares were acquired in June 1994
in exchange for shares in MSU Limited.

     In September 1996, approximately $163,000 was loaned to the Company by the
Employee Trust. This loan was unsecured, interest free with no date fixed for
repayment. In July 1997, approximately $33,000 was repaid and the balance
remains outstanding.

     In consideration of the benefit derived by the Company as a result of the
above interest free loan of $160,000 and the guarantee provided by the Employee
Trust, the Trust was granted an option to acquire 100,000 shares of the
Company's common stock at an exercise price of $2.12 the market price of the
Company's common stock on the date of grant. The options are exercisable in full
commencing on November 11, 1997 and expire on May 11, 2002.

     In February, 1997 the Company sold 12 Promissory Notes each in the amount
of $50,000 and each bearing interest at 8.5% per annum and which were due to
mature in February 1998. Security for the borrowings was the Company's shares of
its subsidiaries together with 235,000 shares of common stock of the Company
which are owned by the Employee Trust. The Promissory Notes were repaid in June
1997 and no amount is now outstanding.

                                       24

<PAGE>
<PAGE>
     In September 1996 the Company sold 50,000 shares of common stock for
$250,000. This transaction was subsequently rescinded and the Company was
indebted to the purchaser for $250,000. Payment was guaranteed personally by Mr.
Holloway and was paid in full in July 1997. In consideration of the benefit
derived by the Company as a result of the above guarantee, Mr. Holloway was
granted an option to acquire 50,000 shares of the Company's common stock at an
exercise price of $2.12, being the market price of the shares of common stock in
the Company at the date of grant. The options are exercisable in full commencing
on November 11, 1997 and expire on May 11, 2002.

     On June 25, 1997, as part of the Placement Agent Agreement with Capitol Bay
Securities in connection with the issuance of the Company's 10% Convertible
Notes, Messrs. Holloway and Snowdon agreed to restrictions on their rights to
sell, or otherwise dispose of, their shares of common stock registered in their
respective names. In consideration for the benefit derived by the Company for
their agreeing to these restrictions, Messrs. Holloway and Snowdon were each
granted options to acquire 20,000 shares of the Company's common stock at $3.25
per share, the market price of the shares on the date of agreement. The options
are exercisable in full commencing on December 25, 1997 and expire on June 24,
2002.

     The Company believes that the abilities of the foregoing members of the
Board of Directors to make fair compensation decisions have not and will not be
compromised by the relationships referred to above.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information concerning the
beneficial ownership of the Company's common stock as of the date of this report
on Form 10-K, by (i) each person known by the Company to be the beneficial owner
of more than 5% of its common stock, (ii) each named executive officer of the
Company, (iii) each director of the Company, and (iv) all directors and
executive officers as a group. Unless otherwise indicated, each of the
stockholders has sole voting and investment power with respect to the shares
beneficially owned.

<TABLE>
<CAPTION>
                                                              SHARES BENEFICIALLY               PERCENTAGE OF CLASS
                 NAME OF BENEFICIAL OWNER                            OWNED                         (SEE NOTE 3)
-----------------------------------------------------------   -------------------               -------------------
<S>                                                           <C>                               <C>
*Wynford Peter Holloway....................................        5,057,777(1)(2)(3)(4)(5)             31.5%
*William Derek Snowdon.....................................          522,277(3)(4)(5)                    3.3%
*Jeremy Miles Simpson......................................          307,068(3)(4)                       1.9%
*Richard Horby Phillips....................................          100,000(3)                          0.6%
*Gerald J. Capaci..........................................          100,000(3)                          0.6%
*Keith Peirson.............................................                 (4)
*Fred Kashkooli............................................                 (7)
Peter Brian Weber and Vivian George Bines
  as Trustees for the Employee Trust
  48 The Parade, Cardiff
  CF2 3AB England..........................................        2,769,444(2)(3)                      17.2%
TXC Corporation
  5F No. 15 SEC 2
  Chung Yang S Road
  Peitoi, Taipei, Taiwan...................................        2,208,333                            13.7%
McLaughlin Group LLC
  13750 US 281 North #660
  San Antonio Texas 78232..................................        2,250,000(6)                         14.0%
*All Directors and Executive Officers as a group (7
  persons).................................................        6,102,122                            37.9%
</TABLE>

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

(1) Mr. Holloway owns 2,138,333 shares of record. Mr. Holloway's shares have
    been pledged as security for a loan from Sabre Advanced Microelectronic
    Limited. See 'Executive Compensation -- Compensation Committee Interlocks
    and Insider Participation.' Pursuant to an unwritten

                                              (footnotes continued on next page)

                                       25

<PAGE>
<PAGE>
(footnotes continued from previous page)
    agreement and understanding, Mr. Holloway shares voting and dispositive
    power with respect to the shares held by the Employee Trust.

(2) The Employee Trust constituted by a Trust Deed dated May 24, 1994 (of which
    Wynford Peter Holloway was the Settlor), is in favor of all past, present
    and future employees of MSU Limited and MSU PLC and any subsequent companies
    and their spouses and children. No allocations under the Trust have been
    made. Under the Trust Deed and so long as Mr. Holloway is living, his
    consent, as Settlor, is required for the appointment of beneficiaries and
    the appointment of new trustees. The Trustees also have the authority to
    delegate powers to Mr. Holloway. Pursuant to an unwritten agreement and
    understanding, Mr. Holloway shares voting and dispositive powers with
    respect to the shares held by the Employee Trust.

(3) For the purpose of the above table, a person or group of persons is deemed
    to have 'beneficial ownership' of any shares which such person has the right
    to acquire within 60 days. For purposes of computing the percentage of
    outstanding shares held by each person or group of persons named above, any
    security which such person or group of such persons has the rights to
    acquire within 60 days after such date is deemed to be outstanding for the
    purpose of computing ownership for such person or persons, but is not deemed
    to be outstanding for the purpose of computing the percentage of ownership
    of any other person. Accordingly the above table includes the following
    shares issuable pursuant to options which are now exercisable, or are
    exercisable within 60 days hereof.

<TABLE>
<CAPTION>
                                     NAME                                         NO. OF SHARES
-------------------------------------------------------------------------------   -------------
<S>                                                                               <C>
   Wynford Peter Holloway......................................................      150,000
   William Derek Snowdon.......................................................      100,000
   Jeremy Miles Simpson........................................................       50,000
   Peter Brian Weber and Vivian George Bines...................................      100,000
   Richard Horby Phillips......................................................      100,000
   Gerald J. Capaci............................................................      100,000
</TABLE>

(4) Excludes the following shares issuable pursuant to options which are not
    currently exercisable (or exercisable within 60 days).

<TABLE>
<CAPTION>
                                     NAME                                         NO. OF SHARES
-------------------------------------------------------------------------------   -------------
<S>                                                                               <C>
   Wynford Peter Holloway......................................................       20,000
   William Derek Snowdon.......................................................       20,000
   Jeremy Miles Simpson........................................................       12,500
   Gerald J. Capaci............................................................      200,000
   Keith Peirson...............................................................      300,000
</TABLE>

(5) See 'Executive Compensation -- Compensation Committee Interlocks and Insider
    Participation' regarding a potential pledge arrangement with National
    Westminster Bank Plc. covering shares held by Mr. Holloway and Mr. Snowdon.

(6) Includes 650,000 shares issuable pursuant to a currently execisable warrant
    to purchase 650,000 shares of Company common stock at $1 each.

(7) Mr. Kashkooli is the beneficial holder of $24,000 10% Convertible Notes
    which are convertible into 8,000 shares of the Company's common stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Martin Miller, a former director and executive officer of the Company, is
believed by the Company to be affiliated with Millport Limited ('Millport'), a
corporation retained by MSU Limited in September 1994 to serve as a placement
agent in connection with a Regulation S offering. The placement agent
arrangement was amended and confirmed by the Company in June 1995 (such
agreements collectively referred to as the 'Millport Agreements') and the
offering was conducted in June and July 1995. In connection with the offering,
Martin Miller was issued 150,000 shares of the

                                       26

<PAGE>
<PAGE>
Company's common stock and Millport received commissions on shares sold in
addition to being granted a two year option to acquire up to 500,000 shares of
the Company's common stock. The option was never granted because the Company
believes that Millport did not perform in accordance with the terms of the
Millport Agreements. The Company believes that it is not bound to any of the
restrictions under the Millport Agreements. See 'Item 3. LEGAL PROCEEDINGS'.

     The Company and Lawrence Ko, a director and former employee of TXC
Corporation, entered into an agreement in February 1996 pursuant to which Mr. Ko
will represent and promote the Company and its technologies in Taiwan, and at
the Company's request, mainland China and Hong Kong. The Company's intention is
to work through Mr. Ko in most matters relating to such countries and
territories; however the Company has reserved the right to handle independently
all matters relating to existing contacts, negotiations and contracts. Mr. Ko
will receive compensation based upon revenue attained by the Company (consisting
of from 5% to 10% of revenue, plus warrants to acquire 75,000 shares of common
stock for each $1 million of revenue attained, with an exercise price of 50% of
the market value at the time the warrant is issued, up to a maximum of 300,000
shares) as a result of transactions attributable to Mr. Ko.

     In August 1996, Direct International Limited, a Taiwanese company, loaned
$300,000 to the Employee Trust. Such loan is secured by 250,000 shares of the
Company's common stock owned by the Employee Trust and was originally due on
October 21, 1996. The loan was then to be repaid in 37,500 shares of the
Company's common stock owned by the Employee Trust no later than December 31
1996 with Direct International Limited also receiving on December 31, 1996,
10,000 shares of the Company's common stock owned by The Employee Trust as
consideration for the advance of the loan. On June 4, 1997 it was agreed that
the loan would be repaid with 88,000 shares of the Company's common stock owned
by the Employee Trust and this transfer was effected in September 1997. The
$300,000 received by the Employee Trust was loaned by it to Mr. Holloway
($140,000) and the Company ($160,000). Such loans are unsecured, interest free,
due and payable on an as yet to be determined date, and are not evidenced by
written agreements. In July 1997, $33,200 of the amount loaned to the Company
was repaid to the Employee Trust.

     Effective January 30, 1996 and February 29, 1996, pursuant to a stock
purchase agreement, McLaughlin Group LLC acquired from the Company, in private
transactions, 800,000 and 800,000 shares, respectively, of the Company's common
stock for an aggregate purchase price of $1 million. McLaughlin Group LLC was
also granted certain demand and piggyback registration rights. The Company has
agreed to indemnify McLaughlin Group LLC against certain liabilities, arising
out of any untrue statement of material fact contained in a prospectus, offering
circular or other document or any violation by the company of the Securities Act
or any regulations thereunder in connection with any shares so registered.

     On July 21, 1997 McLaughlin Group LLC was granted a warrant to purchase
650,000 shares of the Company's common stock at an exercise price of $1.00 per
share, such right to expire on July 20, 2002. In consideration for the granting
of this warrant McLaughlin Group LLC agreed to waive its rights under the stock
purchase agreement of January 30, 1996 whereby it had been granted (i) a warrant
to purchase such number of shares of the Company's common stock as equals 3.5%
of the outstanding shares of the common stock on the date the warrant was
exercised (with such determination to be made on a fully diluted basis). This
original warrant was exercisable, in whole only, at an exercise price of $1.
million and was due to expire eighteen months after March 1, 1996; and (ii) the
right to acquire additional shares of capital stock upon issuance by the Company
of additional capital stock (except in certain specified cases) in order to
maintain the same proportion of voting power of the Company as was owned prior
to the issuance.

     McLaughlin Group LLC has also been granted certain demand and piggyback
registration rights in connection with the shares issuable under the July 21,
1997 warrant. The Company has agreed to indemnify McLaughlin Group LLC against
certain liabilities, arising out of any untrue statement of material fact
contained in a prospectus, offering circular or other document or any violation
by the company of the Securities Act or any regulations thereunder in connection
with any shares so registered.

                                       27

<PAGE>
<PAGE>
     Mark McLaughlin, a member of McLaughlin Group LLC, is president and a
principal stockholder of McLaughlin International, Inc. ('MII'). MII serves as a
consultant to the Company pursuant to two engagement letters entered into on
November 8, 1995 and May 17, 1996. The engagement letters provide that MII will
act as a consultant to the Company in connection with certain strategic
transactions, relating to the marketing and distribution of the Company's
products and technology in Japan and to a select number of companies located
principally in the United States, for a period of six months, subject to
extension by mutual agreement. The November 8, 1995 engagement letter was
extended for a further six month period. As compensation under the November 8,
1995 engagement letter, which covers Japan, MII, Inc. will receive for a period
of seven years (in the case of revenues and royalties) or an indefinite period
or one time payment (in the case of fees) a percentage of revenues, royalties
and fees (with such percentages ranging from 5% to 10% dependent upon what and
how much is received) received by the Company as a direct or indirect result of
the efforts of MII. As additional compensation, MII will receive warrants to
acquire 75,000 shares of common stock per each $1 million in fees received by
the Company (not to exceed 750,000 warrant shares) plus bonus warrants to
acquire 250,000 shares in the event the Company receives $20 million in fees, in
each case as a direct or indirect result of the efforts of MII. Such warrants
will be exercisable for a five-year term at a price equal to the lesser of $10
or 50% of the market price of the Company's stock on the date of issue. Shares
of common stock issuable upon exercise of the warrants will carry customary
registration rights. As compensation under the May 17, 1996 engagement letter,
MII will receive, for the duration of the relationship (between the Company and
the party introduced by the consultant), a percentage of upfront research and
development fees/payments; equity private placement proceeds; service provider
revenue/fees; and chip sales (with such percentages ranging from 4% to 8%)
received by the Company as a direct or indirect result of the efforts of MII. To
be entitled to a percentage compensation under either engagement letter, the
revenue, payments, sales or fees must commence or be paid during the engagement
period or during the twelve month period immediately following the engagement
period. In November 1996 McLaughlin International Inc. declined to renew the
engagement letters dated November 8, 1995 and May 17, 1996. As of September 1997
no business has been procured from any companies that are the subject of the
engagement letters and no compensation payments are yet due.

     Effective May 7, 1997, June 4, 1997 and September 5, 1997 Jeremy Miles
Simpson acquired from the Company, in private transactions, 79,126, 48,042 and
26,900 shares respectively of the Company's common stock. Consideration for the
common stock was, approximately respectively, $162,000, $114,000 and $79,000 in
cash. The price paid for the shares of common stock in each case was the market
price prevailing on the respective dates. In addition, Mr. Simpson was granted
options to acquire 50,000 shares of common stock at a price of $2.12 per share
in respect of the May 7, 1997 transaction and 12,500 shares of common stock at a
price of $2.37 per share in respect of the June 4, 1997 transaction. In both
cases the options are exercisable at any time after six months from the date of
the respective grants. The end of the option term in each case is five years
from the date of the grant.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Keith Hall, Wynford Holloway, William Snowdon, R.H. Phillips, Jeremy
Simpson, MSU Employees Discretionary Trust have failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year and prior fiscal years. None of the aforesaid individuals and/or
entities have filed Form 3s. In addition, Mr. Holloway did not report 1
transaction; Mr. Snowdon did not report 3 transactions; and the MSU Employees
Discretionary Trust did not report 5 transactions on Form 4. The Company also
believes that Mr. Hall and McLaughlin Group LLC are delinquent in their Form 4
filings. The aforesaid parties are also delinquent in filing Form 5s.

     See 'Item 11. EXECUTIVE COMPENSATION -- Compensation Committee Interlocks
and Insider Participation' for additional relationships and related
transactions.

     The Company believes that all transactions with officers, directors or
affiliates to date are on terms no less favorable than those available from
unaffiliated third parties. It is the Company's policy that all future
transactions with officers, directors, or affiliates will be approved by members
of the Company's Board of Directors not having an interest in the transaction
and will be on terms no less favourable than could be obtained from unaffiliated
third parties.

                                       28

<PAGE>
<PAGE>
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMS 8-K

     (a) The following documents are filed as part of this report

          Financial Statements

          Independent Auditors' report

          Consolidated balance Sheets at June 30, 1996 and 1997

            Consolidated Statements of Income for the years ended June 30, 1995,
            June 30, 1996 and June 30, 1997

            Consolidated Statements of Changes in Stockholders' Deficit for the
            years ended June 30, 1995. June 30, 1996 and June 30, 1997.

            Consolidated Statements of Cash Flows for the years ended June 30,
            1995 June 30, 1996 and June, 30 1997

          Notes to Consolidated Financial Statements.

     Financial Statement Schedules

        None

     Exhibits

<TABLE>
    <S>     <C>
     2      -- Exchange Agreement among Capital Acquisition Company and the shareholders of MSU PLC(3)
     3.1    -- Articles of Incorporation(1)
     3.2    -- Amendment to Articles of Incorporation(4)
     3.3    -- Bylaws(1)
     3.4    -- Amendment to Bylaws(2)
     4.1    -- Common Stock Purchase Agreement with McLaughlin Group LLC(4)
     4.2    -- Amendment to Common Stock Purchase Agreement with McLaughlin Group LLC(4)
     4.3    -- Warrant issued to McLaughlin Group LLC(4)
    10.1    -- Service Agreement with Wynford Peter Holloway(4)
    10.2    -- Service Agreement with Keith Charles Hall(4)
    10.3    -- Service Agreement with William Derek Snowdon(4)
    10.4    -- Placement Agreement with Millport Limited as amended and confirmed(4)
    10.5    -- Employee Trust(4)
    10.6    -- Office Lease Agreement with Brixton Estates Plc.(4)
    10.7    -- Manufacturing, Distribution and Joint Venture Agreement with AmericanInteractive Media, Inc.
               Confidential treatment has been requested for specific portions of the Manufacturing, Distribution and
               Joint venture Agreement(4)
    10.8    -- Engagement letter, dated November 8, 1995 as amended with McLaughlin International, Inc.(4)
    10.9    -- Engagement letter, dated May 17, 1996 with McLaughlin International, Inc.(4)
    10.10   -- Form of Director Option granted to each Director in consideration of the Guarantee to national
               Westminster Bank Plc. credit facility(4)
    10.11   -- Development and licensing Agreement with TXC Corporation. Confidential treatment has been requested
               for specific portions of the License Agreement.(4)
    10.12   -- Agreement with Mitac, Inc. Confidential treatment has been requested for specific portions of the
               Agreement(4)
    10.13   -- Letter Agreement, dated February 15, 1997, with Forte Communications, Inc., as public relations
               consultants to the Company, together with letter amending such Letter Agreement(5)
    10.14   -- License Agreement, dated January 29, 1997, with Zilog Inc. a California corporation. Confidential
               treatment has been requested for specific portions of the License Agreement(5)
</TABLE>

                                       29

<PAGE>
<PAGE>

<TABLE>
    <S>     <C>
    10.15   -- License Agreement, dated August 18, 1997, with C-Cube Microsystems Inc., a Delaware corporation.
               Confidential treatment has been requested for specific portions of the License Agreement.(5)
    10.16   -- Service Agreement with Keith Edward Peirson(5)
    10.17   -- Service Agreement with Richard Horby Phillips
    10.18   -- Service Agreement with Gerald J. Capaci(5)
    16      -- Letter re change in certifying accountant from Coopers & Lybrand LLP(4)
    21      -- Subsidiaries of Registrant (5)
    24      -- Power of Attorney. reference is made to the signature page of this report
    27      -- Financial Data Schedule
</TABLE>

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

(1) Contained in exhibits to the Registration Statement on Form S-18 (File No.
    33-07861-A), declared effective by the Securities and Exchange Commission on
    November 6, 1986.

(2) Contained in exhibits to the Annual Report on Form 10-K for the fiscal year
    ended February 28, 1990, filed with the Securities and Exchange Commission
    in May 1990.

(3) Contained in exhibits to the Report on Form 8-K filed with the Securities
    and Exchange Commission in October 1994

(4) Contained in exhibits to the Annual Report on Form 10-K for the fiscal year
    ended June 30, 1995, filed with the Securities and Exchange Commission on
    November, 29 1996.

(5) Filed herewith

     (b) Reports on Forms 8-K

            On May 7, 1997, the Company filed a report on Form 8-K with respect
            to the subscription for 79,126 shares by Jeremy M. Simpson.

                                       30

<PAGE>
<PAGE>
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereto duly authorised.

                                          MSU CORPORATION

                                          By:     /s/  RICHARD HORBY PHILLIPS
                                             ...................................
                                             RICHARD HORBY PHILLIPS, DIRECTOR
                                             FINANCIAL AND ACCOUNTING OFFICER

Date: October 29, 1998

     Each person whose signature appears below authorizes Richard Horby Phillips
or William Derek Snowdon or either of them, each who may act without joinder of
the other, to execute in the name of such person who is an officer or director
of the Registrant and to file any amendments to this annual report on Form 10-K
necessary or advisable to enable the Registrant to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations and requirements of
the Securities and Exchange Commission in respect thereof, which amendments may
make such changes in such report as such attorney-in-fact may deem appropriate.

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.

<TABLE>
<CAPTION>
                SIGNATURE                                      TITLE                              DATE
------------------------------------------  --------------------------------------------   -------------------
<S>                                         <C>                                            <C>
        /s/ WYNFORD PETER HOLLOWAY          Chief Executive Officer and Director           October 29, 1998
 .........................................    (Principal Executive Officer)
         (WYNFORD PETER HOLLOWAY)

        /s/ WILLIAM DEREK SNOWDON           Secretary and Director                         October 29, 1998
 .........................................
         (WILLIAM DEREK SNOWDON)

        /s/ RICHARD HORBY PHILLIPS          Director (Principal Financial                  October 29, 1998
 .........................................    and Accounting Officer)
         (RICHARD HORBY PHILLIPS)

                    *                       Director                                       October 29, 1998
 .........................................
          (JEREMY MILES SIMPSON)

                    *                       Director                                       October 29, 1998
 .........................................
             (FRED KASHKOOLI)

                    *                       Director                                       October 29, 1998
 .........................................
             (KEITH PEIRSON)


*By: /s/ RICHARD HORBY PHILLIPS
 -------------------------------
         RICHARD HORBY PHILLIPS

</TABLE>

                                       31


<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
                       CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
                                    CONTENTS
 
<TABLE>
<CAPTION>
                                                                                                            PAGE
                                                                                                           NUMBER
                                                                                                           ------
<S>                                                                                                        <C>
Report of Independent Certified Public Accountants......................................................     F-2
Financial Statements:
     Consolidated Balance Sheets........................................................................     F-3
     Consolidated Statements of Operations..............................................................     F-4
     Consolidated Statements of Changes in Shareholders' Deficit........................................     F-5
     Consolidated Statements of Cash Flows..............................................................     F-6
     Notes to Consolidated Financial Statements.........................................................     F-7
</TABLE>
 
                                      F-1

<PAGE>

<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
Board of Directors
MSU CORPORATION
Central Milton Keynes, England
 
     We have audited the accompanying consolidated balance sheets of MSU
Corporation and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' deficit, and
cash flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MSU
Corporation and subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997 in conformity with generally accepted accounting principles.
 
     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered and
continues to suffer significant losses from its operations, has an accumulated
deficit and revenue and cash flows from its operations have not developed to the
point where the Company can internally fund its operations. These factors, among
others, raise substantial doubt about its ability to continue as a going
concern. Management's plans with regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
 
                                          Certified Public Accountants
 
Orlando, Florida
August 28, 1997
 
                                      F-2

<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                             JUNE 30, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                                                          1997           1996
                                                                                       -----------    -----------
 
<S>                                                                                    <C>            <C>
                                       ASSETS
Current assets:
     Cash and cash equivalents......................................................   $   859,238    $    54,805
     Accounts receivable............................................................       105,842         11,529
     Inventory......................................................................        12,325        --
     Prepaid expenses and other.....................................................       144,554         58,035
                                                                                       -----------    -----------
          Total current assets......................................................     1,121,959        124,369
Equipment, net of accumulated depreciation of $41,764 in 1997 and $47,191 in 1996...        76,305         39,887
Other assets:
     Deferred financing costs, net of accumulated amortization of $13,201...........       803,077        --
     Deferred registration costs....................................................        85,000        --
                                                                                       -----------    -----------
                                                                                           888,077        --
                                                                                       -----------    -----------
          Total assets..............................................................   $ 2,086,341    $   164,256
                                                                                       -----------    -----------
                                                                                       -----------    -----------
                       LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
     Bank overdraft.................................................................   $   131,595    $   --
     Current portion of long-term debt..............................................       162,680        --
     Shareholder advance payable....................................................     1,400,000      1,400,000
     Note payable...................................................................       250,000        --
     Accounts payable and accrued liabilities.......................................       713,461        572,294
     Related-party payable..........................................................        20,239          7,680
                                                                                       -----------    -----------
          Total current liabilities.................................................     2,677,975      1,979,974
Long-term debt......................................................................     1,829,742        --
Commitments and contingencies:
Shareholders' deficit:
     Common stock, $0.01 par value; 50,000,000 shares authorized; 15,986,891 and
      15,534,722 shares issued and outstanding at June 30, 1997 and 1996,
      respectively..................................................................       159,869        155,347
     Additional paid-in capital.....................................................     4,456,560      2,984,081
     Cumulative translation adjustments.............................................        94,701         70,651
     Accumulated deficit............................................................    (7,132,506)    (5,025,797)
                                                                                       -----------    -----------
          Total shareholders' deficit...............................................    (2,421,376)    (1,815,718)
                                                                                       -----------    -----------
          Total liabilities and shareholders' deficit...............................   $ 2,086,341    $   164,256
                                                                                       -----------    -----------
                                                                                       -----------    -----------
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-3
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                                            1997           1996           1995
                                                                         -----------    -----------    ----------
 
<S>                                                                      <C>            <C>            <C>
Revenues..............................................................   $ 1,479,911    $   392,693    $1,595,856
Expenses:
     Cost of revenues.................................................       650,790         65,795       604,058
     Selling, general and administrative..............................     1,485,577        403,636       520,196
     Depreciation.....................................................        43,709         31,545        20,996
     Interest expense.................................................        26,380         45,491        35,050
     Research and development.........................................     1,386,340      1,248,186     1,297,374
                                                                         -----------    -----------    ----------
          Total expenses..............................................     3,592,796      1,794,653     2,477,674
                                                                         -----------    -----------    ----------
          Operating loss..............................................    (2,112,885)    (1,401,960)     (881,818)
Nonoperating income:
     Interest income..................................................         6,176          5,199         3,399
                                                                         -----------    -----------    ----------
          Net loss....................................................   $(2,106,709)   $(1,396,761)   $ (878,419)
                                                                         -----------    -----------    ----------
                                                                         -----------    -----------    ----------
Loss per common share.................................................     $(0.13)        $(0.10)       $(0.07)
                                                                         -----------    -----------    ----------
                                                                         -----------    -----------    ----------
Weighted average number of common shares outstanding..................    15,700,000     14,494,000    12,508,000
                                                                         -----------    -----------    ----------
                                                                         -----------    -----------    ----------
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-4

<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
                                   COMMON STOCK
                                 $0.01 PAR VALUE     ADDITIONAL
                               --------------------   PAID-IN    ACCUMULATED
                                 SHARES     AMOUNT    CAPITAL      DEFICIT
                               ----------  --------  ----------  -----------
 
<S>                            <C>         <C>       <C>         <C>
Balance -- June 30,
  1994........................ 10,196,380  $101,964  $  805,492  $(2,750,617)
Issuance of common shares.....  2,738,342    27,383     268,589      --
Translation adjustments.......     --         --         --          --
Net loss......................     --         --         --         (878,419)
                               ----------  --------  ----------  -----------
Balance -- June 30,
  1995........................ 12,934,722   129,347   1,074,081   (3,629,036)
Issuance of common shares.....  2,600,000    26,000   1,888,500      --
Collection of stock
  subscriptions receivable....     --         --         --          --
Issuance of options to
  purchase 100,000 shares of
  common stock................     --         --         21,500      --
Translation adjustments.......     --         --         --          --
Net loss......................     --         --         --       (1,396,761)
                               ----------  --------  ----------  -----------
Balance -- June 30,
  1996........................ 15,534,722   155,347   2,984,081   (5,025,797)
Issuance of common shares.....    452,169     4,522   1,472,479      --
Translation adjustments.......     --         --         --          --
Net loss......................     --         --         --       (2,106,709)
                               ----------  --------  ----------  -----------
Balance -- June 30,
  1997........................ 15,986,891  $159,869  $4,456,560  $(7,132,506)
                               ----------  --------  ----------  -----------
                               ----------  --------  ----------  -----------
 
<CAPTION>
 
                                  STOCK       CUMULATIVE       TOTAL
                              SUBSCRIPTIONS   TRANSLATION  SHAREHOLDERS'
                               RECEIVABLE     ADJUSTMENTS     DEFICIT
                              -------------  -----------   -------------
<S>                            <C>           <C>             <C>
Balance -- June 30,
  1994........................$  --          $ 56,261      $(1,786,900)
Issuance of common shares..... (225,000)        --              70,972
Translation adjustments.......   --           (25,912)         (25,912)
Net loss......................   --             --            (878,419)
                              ---------      --------      -----------
Balance -- June 30,
  1995........................ (225,000)       30,349       (2,620,259)
Issuance of common shares.....   --             --           1,914,500
Collection of stock
  subscriptions receivable....  225,000         --             225,000
Issuance of options to
  purchase 100,000 shares of
  common stock................   --             --              21,500
Translation adjustments.......   --            40,302           40,302
Net loss......................   --             --          (1,396,761)
                              ---------      --------      -----------
Balance -- June 30,
  1996........................   --            70,651       (1,815,718)
Issuance of common shares.....   --             --           1,477,001
Translation adjustments.......   --            24,050           24,050
Net loss......................   --             --          (2,106,709)
                              ---------      --------      -----------
Balance -- June 30,
  1997........................$  --          $ 94,701      $(2,421,376)
                              ---------      --------      -----------
                              ---------      --------      -----------
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-5
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                                             1997           1996          1995
                                                                          -----------    -----------    ---------
 
<S>                                                                       <C>            <C>            <C>
Cash flows from operating activities
  Net loss.............................................................   $(2,106,709)   $(1,396,761)   $(878,419)
  Adjustments to reconcile net loss to net cash used in operating
     activities
     Depreciation......................................................        43,709         31,545       20,996
     Non-cash expense related to issuance of stock purchase options....       --              21,500       --
     (Increase) decrease in accounts receivable, net...................       (93,495)        36,907       15,533
     (Increase) decrease in inventories................................       (12,325)       --            10,205
     Decrease (increase) in prepaid expenses...........................       (82,401)       (15,076)      16,918
     Increase in other assets..........................................      (888,077)       --            --
     Increase (decrease) in accounts payable and accrued liabilities...       216,329        (87,414)     201,127
     Increase (decrease) in related-party payable......................        12,013         (5,462)      13,276
                                                                          -----------    -----------    ---------
          Total adjustments............................................      (804,247)       (18,000)     278,055
                                                                          -----------    -----------    ---------
          Net cash used in operating activities........................    (2,910,956)    (1,414,761)    (600,364)
Cash flows from investing activities
     Acquisitions of equipment, net....................................       (77,299)       (31,163)      (6,693)
Cash flows from financing activities
     Proceeds from (repayments of) borrowings under short-term credit
       facilities, net.................................................       131,595       (861,937)     753,328
     Proceeds from issuance of convertible 10% promissory notes........     1,829,742        --            --
     Proceeds from issuance of note payable............................       250,000        --            --
     Proceeds from issuance of note to related party...................       162,680        --            --
     Issuance of common stock..........................................     1,477,001      2,139,500       70,972
                                                                          -----------    -----------    ---------
          Net cash provided by financing activities....................     3,851,018      1,277,563      824,300
Effect of exchange rate changes........................................       (58,330)        (4,652)         429
                                                                          -----------    -----------    ---------
          Net increase (decrease) in cash..............................       804,433       (173,013)     217,672
Cash and cash equivalents at beginning of year.........................        54,805        227,818       10,146
                                                                          -----------    -----------    ---------
Cash and cash equivalents at end of year...............................   $   859,238    $    54,805    $ 227,818
                                                                          -----------    -----------    ---------
                                                                          -----------    -----------    ---------
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-6

<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
NOTE 1 -- ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT RISKS
 
ORGANIZATION AND BASIS OF PRESENTATION
 
     In October 1994, MSU Corporation, formerly Capital Acquisition Company,
acquired, through the issuance of 9,422,222 shares of its common stock, the
outstanding capital stock of MSU Public Limited Company (MSU Plc.), a private
company organized and based in the United Kingdom, which owns all of the capital
stock of MSU (UK) Limited (MSU Plc. and MSU (UK) Limited together referred to as
MSU). This transaction has been presented in the accompanying consolidated
financial statements as a recapitalization of MSU, with MSU as the acquirer (a
reverse acquisition) and, accordingly, the historical consolidated financial
statements through the date of the transaction are those of MSU. Shareholders'
deficit reflects the equivalent number of common shares received in the
recapitalization, and all references in the financial statements with regard to
number of shares of common stock have been restated to give retroactive effect
to the transaction.
 
     MSU Corporation operates primarily through MSU (UK) Limited, which is
principally engaged in the design and development of computer chips and chipsets
for use in consumer electronic products.
 
     In February 1997, MSU US Operations, Inc. was incorporated in North
Carolina to act as a sales company marketing and selling products developed by
MSU. All of the outstanding common stock of this company is owned by MSU
Corporation.
 
     The consolidated financial statements include the accounts of MSU
Corporation, MSU Plc., MSU (UK) Limited and MSU US Operations, Inc.
(collectively, the Company). All significant intercompany accounts have been
eliminated in the consolidated financial statements.
 
SIGNIFICANT RISKS
 
     The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the years ended June
30, 1997, 1996 and 1995, the Company incurred net losses of $2,106,709,
$1,396,761 and $878,419, respectively. At June 30, 1997, the Company had an
accumulated deficit of approximately $7,133,000. Additionally, the Company has
had recurring negative cash flows from operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
 
     Management's plans with regard to these matters include increased cash
flows from operations through further development, upgrade and marketing of its
chips and products, the issuance of additional shares of the Company's common
stock or debt securities in exchange for proceeds, which may be used to provide
the working capital needed to commercially exploit the Company's core
technologies. The Company will have to expend significant amounts of cash on
research and development in order to potentially produce revenues in the future,
and it anticipates the initial source of such funds to be derived from the
issuance of additional debt or equity securities. The issuance of any additional
securities would further dilute the current ownership structure. The Company
also intends to develop its infrastructure and organization to support its
enhanced operations as funds become available. In 1996, contracts were concluded
with American Interactive Media, Inc. for the development of customized Internet
Access Devices and for the formation of a joint venture to market the Company's
technology in the United States. Additionally, an agreement has been negotiated
which provides for Mitac, Inc. to manufacture and market customized Internet
Access Devices using the Company's proprietary technology. However, there can be
no assurance that management will be successful in the implementation of its
plans. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
                                      F-7
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
CASH EQUIVALENTS
 
     Cash equivalents include all highly liquid investments convertible into
known amounts of cash with an original maturity when purchased of three months
or less.
 
EQUIPMENT
 
     Equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the equipment, generally
four years.
 
INVENTORY
 
     Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Inventory is comprised of Internet Access
Devices, which are available for sale as production samples.
 
INCOME TAXES
 
     The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse (see Note 4).
 
REVENUE RECOGNITION
 
     The Company enters into development arrangements with certain customers to
design computer chips and chipsets using existing and enhanced technology, which
are suitable for use in the customer's application. The Company's development
arrangements are generally performed under contractual arrangements which
stipulate the Company's fee as certain performance criteria are met. The Company
recognizes these development fees when its customers acknowledge that the fee
has been earned by accepting the Company's work product. Development fees and
related support services fees revenue recognized by the Company amounted to
approximately $544,000, $368,000 and $772,000 for the years ended June 30, 1997,
1996 and 1995, respectively.
 
     Certain arrangements provide for the customer to pay a royalty or licensing
fee. Such fees are to be paid to the Company if the customer uses the Company's
work product in commercial applications. In addition, under certain agreements
the Company has granted exclusive manufacturing and product rights to various
third parties.  Such royalties and fees earned by the Company in the year ended
June 30, 1997, amounted to approximately $139,000. In the years ended June 30,
1996 and 1995, none of the arrangements resulted in royalty or licensing revenue
to the Company.
 
     Revenue from the sale of chipset products to customers is recognized at the
time the products are shipped.
 
DEFERRED FINANCING COSTS
 
     The costs attributable to the issuance of convertible promissory notes have
been deferred and are being amortized over the term of the notes. The
unamortized costs at June 30, 1997 are included in other assets. Any unamortized
costs at the date of conversion of the securities will be charged against
additional paid-in capital (see Note 8).
 
                                      F-8
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
DEFERRED REGISTRATION COSTS
 
     Legal, accounting and other costs related to the Company's proposed
registration of shares (see Note 10) are capitalized as deferred registration
costs. These costs will be offset against the anticipated conversion of the
Company's 10% convertible promissory notes.
 
RESEARCH AND DEVELOPMENT COSTS
 
     Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at discovery of new knowledge
which will be useful in developing new products or processes, or significantly
enhancing existing products, and the implementation of such through design,
building and testing of prototypes. The Company expenses all research and
development costs as they are incurred.
 
NET LOSS PER SHARE
 
     Net loss per common share is computed based upon the weighted average
number of common shares and common share equivalents outstanding during each
period, as restated for the reverse acquisition effected in October 1994. Common
share equivalents represent shares issuable upon the assumed exercise of stock
options or conversion of convertible debt. Common share equivalents are not
considered in calculations of per share data when their inclusion would be
anti-dilutive.
 
TRANSLATION OF FOREIGN CURRENCY
 
     The financial position and results of operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are included in
the cumulative translation adjustments account in shareholders' equity.
 
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposited in a
financial institution and accounts receivable. The Company primarily maintains
its cash in bank deposit accounts in the United Kingdom, which are not insured.
The Company has not experienced any losses in such accounts and believes that it
is not exposed to any significant credit risk on cash and cash equivalents.
 
     Financial instruments reflected in the Company's balance sheets at June 30,
1997 and 1996 include cash and cash equivalents, notes payable, and other
borrowings. The carrying amount of cash and cash equivalents, notes payable and
other short-term borrowings approximates fair value because of the short
maturity of those instruments. Because of the circumstances and the nature of
the Company's relationship with its creditors, it was not practical to estimate
the fair value of the $1,400,000 shareholder advance payable (see Note 3).
 
ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and
 
                                      F-9
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
 
NOTE 3 -- RELATED-PARTY TRANSACTIONS
 
     Prior to June 30, 1994, the Company was advanced a total of $2,159,910 from
a previously unrelated third party, of which $759,910 was contributed to capital
when the Company agreed to accept this amount as consideration for the issuance
of 2,208,333 shares of its common stock pursuant to a March 1994 agreement. As
of June 30, 1997, the $1,400,000 remaining balance of the advance remains
unpaid. The advance is noninterest bearing, unsecured and is due and payable,
under the terms of the borrowing, when the Company is reasonably able to do so
without jeopardizing its financial condition.
 
     The Company has received services from a law firm in which a director of
the Company is employed. Amounts charged to operations for these legal services
during the years ended June 30, 1997, 1996 and 1995, approximated $117,000,
$44,000 and $33,000, respectively.
 
     In November 1995, the Company entered into a consulting agreement with a
company indirectly controlled by one of its shareholders. The consulting
agreement provides, among other things, for the consultant to provide services
to the Company in connection with the marketing and distribution of the
Company's products and technology to certain potential customers and markets. As
compensation, the consultant will receive a fee to be calculated as a percentage
of the Company's revenues, if any, attributable to the consultant's efforts. In
addition, the consultant may receive warrants to acquire up to an aggregate of
1,000,000 shares of the Company's common stock, if certain revenue criteria are
met. The warrants, if issued, will be exercisable over a five-year period at a
price per share equal to the lesser of $10 or 50% of the market value of the
Company's common stock on the date of issuance of the warrants. During the years
ended June 30, 1997 and 1996, no fees were incurred under this agreement.
 
     The Company has also entered into a marketing agreement with an individual
who is a director of a principal shareholder of the Company. The agreement
provides, among other things, for the individual to receive compensation based
upon revenue attained by the Company, as a result of transactions attributable
to the individual's efforts. Compensation under the agreement will consist of
from 5% to 10% of such revenue plus warrants to acquire 75,000 shares of the
Company's common stock for each $1 million of revenue attained, with an exercise
price of 50% of market value at the time the warrants are issued, up to a
maximum of 300,000 shares. No expense has been incurred under this agreement
through June 30, 1997.
 
     In July 1994, a director loaned the Company approximately $68,000. The loan
is unsecured, bears no interest and has no defined terms for repayment.
 
     In September 1996, a trust in which a director has an interest loaned the
Company approximately $163,000 (see Note 8). The loan is unsecured, bears no
interest, and has no defined terms for repayment. As consideration for this, the
Company has granted to the trustees an option over a five-year period to
subscribe for 100,000 shares of the Company's common stock with an exercise
price of $2.12, being the market value of the Company's common stock at the date
of grant of the options.
 
NOTE 4 -- INCOME TAXES
 
     As of June 30, 1997, the Company has a U. S. net operating loss
carryforward of approximately $5,000 available to offset future taxable income.
The net operating loss carryforward expires ratably through the year 2010. Under
U. S. federal tax law, certain changes in ownership of a company may cause a
limitation on future utilization of these loss carryforwards.
 
                                      F-10
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
RELATED-PARTY TRANSACTIONS -- (CONTINUED)
     As of June 30, 1997, the Company's subsidiaries have a United Kingdom net
operating loss carryforward of approximately $6 million, which carries forward
indefinitely under United Kingdom tax laws.
 
     Deferred tax assets resulting from the Company's United Kingdom income tax
loss carryforwards were approximately $1.8 million and $1.2 million at June 30,
1997 and 1996, respectively. The Company has established a valuation allowance
to fully offset these deferred tax assets, as their future realization is
uncertain.
 
NOTE 5 -- STOCKHOLDERS' DEFICIT
 
     During the year ended June 30, 1995, the Company issued, in private
transactions, an aggregate of 2,738,342 shares of its common stock in exchange
for proceeds of $570,972. Of this amount, $70,972 was received in cash at the
time of the transactions and $500,000 was received in the form of notes
receivable, which were originally recorded as subscriptions receivable, reducing
shareholders' equity. As of June 30, 1996, of the $500,000 stock subscriptions
receivable, only $225,000 was subsequently collected. As a result, the balance
of the stock subscriptions receivable was charged to additional paid-in capital.
 
     During the year ended June 30, 1996, the Company issued, in private
transactions, an aggregate of 2,600,000 shares of its common stock in exchange
for proceeds of $2,359,500. Of this amount, $1,297,500 was received in the form
of notes receivable, which were originally recorded as stock subscriptions
receivable, reducing shareholders' equity. Subsequent collections on the notes
receivable amounted to $852,500. The $445,000 balance of the notes receivable
has not been collected and the notes are in default. As a result, the balance of
the notes representing stock subscriptions have been charged to additional
paid-in capital.
 
     During the year ended June 30, 1997, the Company issued, in private
transactions, an aggregate of 452,169 shares of common stock in exchange for net
proceeds of approximately $1,477,000. Gross proceeds of approximately $1,527,000
were offset by $50,000 of legal fees relating to the stock issuances. Of this
amount, approximately $1,027,000 was received in cash at the time of the
transactions, approximately $50,000 was received in the form of consulting
services, and $450,000 of stock was issued to the placement agent as partial
compensation for the issuance of the 10% convertible notes (see Note 8).
 
     In July 1997, warrants to purchase 20,000 shares of the Company's common
stock were exercised (see Note 6).
 
NOTE 6 -- STOCK OPTIONS AND WARRANTS
 
     During the year ended June 30, 1996, the Company issued to a consultant
warrants to purchase up to 100,000 shares of the Company's restricted common
stock at an exercise price of $1.00 per share. Compensation charged to
operations in the year ended June 30, 1996 related to these warrants amounted to
$21,500, which represents the difference between the market price of 100,000
shares of the Company's common stock on the date the options were granted,
discounted at 50% for the restrictions, and the $1.00 option exercise price. In
December 1996, 50,000 shares subject to these warrants were purchased.
 
     In connection with the private placement of 1,600,000 shares of its common
stock in 1996, the Company issued a warrant, which is exercisable through
September 1, 1997, to purchase 3.5% of the then outstanding shares (calculated
on a fully diluted basis) of the Company's common stock for consideration of
$1,000,000. The warrant was subject to certain anti-dilution provisions (see
Note 10).
 
                                      F-11
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
STOCK OPTIONS AND WARRANTS -- (CONTINUED)
     In February 1997, the Company entered into a 'Placement Agent Agreement and
a Bridging Loan Agreement,' which provided for the issuance to the Company of a
bridging loan of $600,000 in advance of the offering of approximately $2,000,000
of convertible notes (see Note 8). In accordance with these agreements, the
Company has issued warrants to the placement agent for 10,000 shares of the
Company's common stock, exercisable from May 1997 to May 2000 at a price of
$3.00 per share and to the bridge loan noteholders for 60,000 shares of the
Company's common stock exercisable at $3.00 per share through January 2000.
 
     In May 1997, the Company issued to a consultant a warrant to purchase up to
150,000 shares of the Company's restricted common stock at an exercise price of
$2.00 per share. No compensation expense was recorded for these options, as
management believes the restrictions associated with any shares received by the
option grantees on exercise will subject those shares to a discount from
unrestricted market value.
 
     In July 1997, in consideration for the cancellation of the warrant and
anti-dilutive provisions relating to the private placement of 1,600,000 shares
of the Company's common stock (see Note 6), the Company issued a new warrant to
purchase 650,000 shares of the Company's common stock for $650,000. This warrant
is exercisable through July 2002.
 
     In July 1997, the Company granted options to nine of its employees to
acquire an aggregate of 50,000 shares of the Company's common stock at an
exercise price of $3.56 per share. The option term is as follows: options
relating to 25,000 shares are exercisable on June 30, 1998; options relating to
25,000 shares are exercisable on June 30, 1999. The options expire in June 2002.
 
     Activity related to the Company's stock options during the years ended June
30, 1994, 1995, 1996 and 1997, was as follows:
 
<TABLE>
<CAPTION>
                                                                         OUTSTANDING OPTIONS
                                                                     ---------------------------
                                                                                     WEIGHTED
                                                                     NUMBER OF       AVERAGE
                                                                      SHARES      EXERCISE PRICE
                                                                     ---------    --------------
<S>                                                                  <C>          <C>
June 30, 1994.....................................................      --            --
     Grants.......................................................     115,000        $ 2.50
     Exercises....................................................      --            --
     Cancellations................................................     (65,000)       $ 2.50
                                                                     ---------
June 30, 1995.....................................................      50,000        $ 2.50
     Grants.......................................................     340,000        $ 4.77
     Exercises....................................................      --            --
     Cancellations................................................     (10,000)       $ 2.50
                                                                     ---------
June 30, 1996.....................................................     380,000        $ 4.47
     Grants.......................................................   1,622,500        $ 1.70
     Exercises....................................................      --            --
     Cancellations................................................      --            --
                                                                     ---------
June 30, 1997.....................................................   2,002,500        $ 2.22
                                                                     ---------
                                                                     ---------
     Options Exercisable at: June 30, 1997........................   1,332,000        $ 2.23
                                                                     ---------        ------
                                                                     ---------        ------
</TABLE>
 
                                      F-12
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
STOCK OPTIONS AND WARRANTS -- (CONTINUED)
 
     The range of exercise prices for options outstanding at June 30, 1997 was
$1.00 to $5.00. The following table summarizes information about options
outstanding at June 30, 1997:
 
<TABLE>
<CAPTION>
                                                                           OUTSTANDING OPTIONS
                                                              ----------------------------------------------
                                                                              WEIGHTED
                                                                               AVERAGE           WEIGHTED
                                                              NUMBER OF      CONTRACTUAL         AVERAGE
                 RANGE OF EXERCISE PRICES                      SHARES      LIFE (IN YEARS)    EXERCISE PRICE
-----------------------------------------------------------   ---------    ---------------    --------------
<S>                                                           <C>          <C>                <C>
$1.00 to $2.50.............................................   1,592,500          4.6              $ 1.48
$3.00 to $5.00.............................................     410,000          4.1              $ 4.52
                                                              ---------
                                                              2,002,500          4.5              $ 2.22
                                                              ---------
                                                              ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                   EXERCISABLE OPTIONS
                                                                               ---------------------------
                                                                                               WEIGHTED
                                                                               NUMBER OF       AVERAGE
                          RANGE OF EXERCISE PRICES                              SHARES      EXERCISE PRICE
----------------------------------------------------------------------------   ---------    --------------
<S>                                                                            <C>          <C>
$1.00 to $2.50..............................................................     962,000        $ 1.21
$3.00 to $5.00..............................................................     370,000        $ 4.54
                                                                               ---------
                                                                               1,332,000        $ 2.23
                                                                               ---------
                                                                               ---------
</TABLE>
 
     SFAS No. 123, 'Accounting for Stock-Based Compensation' (SFAS 123) was
issued during 1995 and is effective for the year ended June 30, 1997. This
pronouncement establishes financial accounting and reporting standards for
stock-based employee compensation plans. It encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. Companies that choose not to adopt the new fair value accounting rules
are required to disclose net income and earnings per share under the new method
on a pro forma basis. The Company accounts for its options and warrants
according to APB No. 25 and follows the disclosure provisions of SFAS 123.
Accordingly, if options or warrants are granted to employees or others for
services and other consideration with an exercise price below the fair market
value on the date of the grant, the difference between the exercise price and
the fair market value is charged to operations. The fair value of the options
granted during the fiscal years ended June 30, 1997 and 1996 reported below has
been estimated at the dates of grant using the Black-Scholes option-pricing
model with the following assumptions:
 
<TABLE>
<CAPTION>
                                                                                      1997      1996
                                                                                     -------   -------
 
<S>                                                                                  <C>       <C>
Expected life (in years)..........................................................     5         5
Risk-free interest rate...........................................................     6.0%      6.0%
Volatility........................................................................   135%      171%
Dividend yield....................................................................     0.0%      0.0%
</TABLE>
 
     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options.
 
                                      F-13
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
STOCK OPTIONS AND WARRANTS -- (CONTINUED)
     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
 
<TABLE>
<CAPTION>
                                                                                1997           1996
                                                                             -----------    -----------
 
<S>                                                                          <C>            <C>
Pro forma net loss........................................................   $(3,430,000)   $(1,406,000)
Pro forma loss per share..................................................   $     (0.22)   $     (0.10)
</TABLE>
 
     The effects on pro forma disclosures of applying SFAS 123 are not
necessarily indicative of the effects on pro forma disclosures of future years.
 
NOTE 7 -- SHORT-TERM BORROWINGS
 
     The Company has borrowed funds from time to time for working capital under
various secured credit facilities with its principal bank. These borrowings have
generally provided for interest on outstanding amounts at a rate of 3% above the
financial institution's prime rate. All such borrowings and bank overdrafts are
subject to the bank's discretion and are collateralized by a floating debenture
on substantially all of the assets of the Company and are payable on demand.
 
     In July 1997, the Company repaid the $250,000 noninterest-bearing note
payable and issued to the holder thereof 25,000 shares of its restricted common
stock.
 
NOTE 8 -- LONG-TERM DEBT
 
     During the year ended June 30, 1997, the Company issued approximately
$1,830,000 of 10% convertible promissory notes (the Notes). Interest is payable
quarterly and the Notes mature July 1, 1998. The Notes are collateralized by the
assets of the Company and are convertible into shares of the Company's common
stock at a rate of one share of common stock for each $3.00 of Note principal
converted. Proceeds received by the Company, net of offering costs, approximated
$1,524,000. Subsequent to June 30, 1997, the Company issued an additional
$470,000 of the Notes. The Company used approximately $600,000 of the proceeds
to repay certain bridge financing that it incurred during the year ended June
30, 1997 (see Note 6).
 
     In August 1996, the Company received a loan in the amount of approximately
$163,000 from its employee trust (see Note 9). The loan is unsecured, bears no
interest, and has no defined terms for repayment.
 
     Long-term debt consists of the following at June 30, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                                  1997          1996
                                                                               ----------    ----------
 
<S>                                                                            <C>           <C>
Convertible 10% promissory notes, interest payable quarterly, maturing July
  1, 1998, collateralized by assets of the Company, convertible into shares
  of the Company's common stock at a rate of one share for each $3.00 of
  note principal converted..................................................   $1,829,742    $   --
Unsecured, noninterest-bearing note payable, no specified date for
  repayment.................................................................      162,680        --
                                                                               ----------    ----------
                                                                                1,992,422        --
Less: current portion.......................................................     (162,680)       --
                                                                               ----------    ----------
          Total long-term debt..............................................   $1,829,742        --
                                                                               ----------    ----------
                                                                               ----------    ----------
</TABLE>
 
                                      F-14
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
LONG-TERM DEBT -- (CONTINUED)
 
     Maturities of long-term debt subsequent to June 30, 1997, are approximately
as follows:
 
<TABLE>
<CAPTION>

YEAR ENDING
  JUNE 30,                                                                                     AMOUNT
-----------                                                                                  ----------
 <S>                                                                                          <C>
   1998...................................................................................   $  160,000
   1999...................................................................................    1,830,000
   2000...................................................................................       --
   2001...................................................................................       --
   2002...................................................................................       --
   Thereafter.............................................................................       --
                                                                                             ----------
          Total...........................................................................   $1,990,000
                                                                                             ----------
                                                                                             ----------
</TABLE>
 
     Cash paid for interest was approximately $26,000, $45,000 and $35,000 for
the fiscal years ended June 30, 1997, 1996 and 1995, respectively.
 
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
 
LEASES
 
     The Company leases office space under operating leases entered into during
1996 and 1997, which expire through March 2001. Future minimum rental payments
and service charges required under the leases at June 30, 1997, are
approximately as follows:
 
<TABLE>
<CAPTION>

YEAR ENDING
  JUNE 30,                                                                                     AMOUNT
-----------                                                                                  ----------
<S>                                                                                             <C>
   1998......................................................................................   $93,000
   1999......................................................................................   $93,000
   2000......................................................................................   $88,000
   2001......................................................................................   $61,000
</TABLE>
 
     For the years ended June 30, 1997, 1996 and 1995, rent expense totaled
approximately $54,000, $26,000 and $24,000, respectively.
 
EMPLOYMENT AGREEMENTS
 
     In 1994, the Company entered into employment agreements with each of its
executive officers requiring the payment of aggregate minimum annual salaries of
approximately $355,000 until August 31, 1997. The agreements are rolling-term
agreements and automatically renew for a further three-year term at the
expiration of each year. The Company renegotiated the contracts with two of the
officers in each of the years ended June 30, 1997, 1996 and 1995. The revised
agreements resulted in a reduction in the related annual minimum salaries of
approximately $147,000, $130,000 and $130,000 for the years ended June 30, 1997,
1996 and 1995, respectively. The renegotiaions were due to lower than
anticipated operating performance and cash flows; accordingly, no compensation
expense has been recorded in the accompanying financial statements for that
amount representing the reduction in salary.
 
     In January 1997, the Company entered into an employment agreement with one
of its executive officers requiring payment of an aggregate minimum annual
salary of approximately $108,000 until June 30, 1997. As part of the employment
agreement, the executive officer was issued stock options to purchase 100,000
shares of the Company's common stock at a price per share equal to the market
value of the stock as of the date of grant. This agreement requires a six-month
notice to terminate by either party. A portion of the minimum salary requirement
was waived by the officer for the first six months of the employment term, due
to that officer's need to expend time on transitioning previous employment
 
                                      F-15
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
commitments that were not originally anticipated. In addition, in January 1997,
the Company entered into an employment agreement with another one of its
executive officers requiring payment of an aggregate minimum annual salary of
approximately $125,000. This agreement requires a six-month notice to terminate
by either party. As part of the employment agreement, the executive officer was
issued stock options to purchase 100,000 shares of the Company's common stock at
a price per share equal to the market value of the stock as of the date of
grant. The executive officer shall also receive up to an additional 200,000
stock options under this agreement, if certain stock prices are achieved and
maintained by the Company.
 
CONCENTRATIONS
 
     Revenues for the years ended June 30, 1997, 1996 and 1995 were generated
from a small number of customers, the loss of any one of which could have a
material adverse affect on the Company's business.
 
     The Company presently has only one supplier manufacturing customized
Internet Access Devices using its chips and software. Should the supplier cease
production, the Company could be adversely affected.
 
     The Company's revenue, by geographic region, during the years ended June
30, were approximately as follows:
 
<TABLE>
<CAPTION>
                            LOCATION                                  1997         1996         1995
----------------------------------------------------------------   ----------    --------    ----------
 
<S>                                                                <C>           <C>         <C>
Europe..........................................................   $   --        $110,000    $  440,000
Far East........................................................      730,000       --          640,000
North America...................................................      750,000     280,000       520,000
                                                                   ----------    --------    ----------
                                                                   $1,480,000    $390,000    $1,600,000
                                                                   ----------    --------    ----------
                                                                   ----------    --------    ----------
</TABLE>
 
CONTESTED LIABILITY
 
     In November 1994, the Company received a written demand from a third party
for $75,000, plus additional unspecified amounts based upon an alleged breach of
contract. The Company has advised the third party that it did not believe it has
any liability since the third party failed to perform in accordance with the
contract and that the contract was of no further effect. The ultimate outcome of
this matter and the amount of damages, if any, that may ultimately be incurred
cannot presently be determined, and no provision for liability has been made in
the accompanying consolidated financial statements.
 
EMPLOYEE TRUST
 
     As of June 30, 1997 and 1996, 2,914,444 and 2,944,444 shares of the
Company's common stock were held by an employee trust (the Trust), whose
beneficiaries are substantially all the employees of the Company. Contributions
to the Trust are at the discretion of the Company's Board of Directors. During
the years ended June 30, 1997 and 1996, the Company made no contributions to the
Trust.
 
OTHER
 
     The Company does not have access to certain of its corporate records, other
than drafts and copies of certain documents, for the period from approximately
September 1994 through December 1995, making it difficult for the Company to
conclude that certain corporate matters were properly effected. Current
management believes that all matters during this period were effected properly,
including approval of the reverse acquisition of Capital Acquisition Corporation
by MSU, Plc. (see Note 1). The corporate records for the aforementioned period
are in the possession of one of the Company's former
 
                                      F-16
 
<PAGE>

<PAGE>
                        MSU CORPORATION AND SUBSIDIARIES
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                    YEARS ENDED JUNE 30, 1997, 1996 AND 1995
 
COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
law firms, which has refused to release such records until amounts allegedly due
such firm are paid. The Company is contesting the amount allegedly due that firm
based on the Company's belief that it was billed for services that were not
authorized by the Company. The ultimate outcome of these matters and the amount
of damages, if any, that may ultimately be incurred cannot presently be
determined. The accompanying financial statements contain no provision or
adjustments related to the ultimate outcome of these uncertainties.
 
     The Company continues to review the adequacy of its insurance coverage.
Presently, the Company believes that its insurance coverage may be inadequate in
light of current and prospective agreements. However, management continues to
endeavor to obtain adequate coverage, although no assurance can be given that
adequate insurance will be obtained.
 
NOTE 10 -- REGISTRATION OF SHARES
 
     The Company intends to file a registration statement on Form S-1 under the
Securities Act of 1933, as amended, for the purpose of registering shares of
common stock that are issuable upon the conversion of the Company's 10%
convertible promissory notes (see Note 8) and to register 218,000 shares of
common stock to be sold by certain selling shareholders.
 
                                      F-17