UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB
(Mark One)
   [ X ]   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                    SECURITIES EXCHANGE ACT OF 1934
           For the fiscal year ended   September 30, 1998

   [   ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                    SECURITIES EXCHANGE ACT OF 1934
           For the transition period from ________________ to_______________

                         Commission file number 1-14072

                             PEN INTERCONNECT, INC.
        (Exact name of small business issuer as specified in its charter)

            UTAH                                       87-0430260
 (State or other jurisdiction               (I.R.S. Employer Identification No.)
 of incorporation or organization)

                 2351 South 2300 West, Salt Lake City, UT 84119
               (Address of Principal Executive Offices) (Zip Code)

                                 (801) 973-6090
                           (Issuer's telephone number)

         Securities registered under Section 12(b) of the Exchange Act:
                     Common Stock, par value $0.01 per share
                              Common Stock Warrants

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

                                    Yes X No

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

           State issuer's revenues for its most recent fiscal year.  $17,091,432

           As of December 16, 1998,  there were 6,068,481 shares of the Issuer's
common stock,  par value $0.01,  issued and  outstanding.  The aggregate  market
value of the  Issuer's  voting  stock held by  non-affiliated  of the Issuer was
approximately  $8,396,384  computed at the closing  quotation  for the  Issuer's
common stock of $1.563 as of January 11, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE
           Definitive  Proxy Statement for the Annual Meeting of Shareholders to
be held in 1999.  Certain  information  therein  is  incorporated  into Part III
hereof.

<PAGE>



                                   FORM 10-KSB

                             PEN INTERCONNECT, INC.

                                Table of Contents

                                                                           Page

PART I

1   Description of Business                                                    3

2   Description of Property                                                   10

3   Legal Proceedings                                                         10

4   Submission of Matters to a Vote of Security Holders                       10

PART II

5   Market for Common Equity and Related Stockholder Matters                  11

6   Management's Discussion and Analysis or Plan of Operation                 12

7   Financial Statements                                                      15

8   Changes in and Disagreements With Accountants on
         Accounting and Financial Disclosure                                  15

PART III

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

10  Executive Compensation                                                    16

11  Security Ownership of Certain Beneficial Owners and Management            16

12  Certain Relationships and Related Transactions                            16

13.  Exhibits and Reports on Form 8-K                                         17

Signatures                                                                    18


<PAGE>
--------------------------------------------------------------------------------
                                     PART I

                         ITEM 1. DESCRIPTION OF BUSINESS
--------------------------------------------------------------------------------



FORWARD-LOOKING  STATEMENTS. This annual report contains certain forward-looking
statements  within the meaning of section 27A of the  Securities Act of 1933, as
amended,  and section 21E of the  Securities  Exchange Act of 1934,  as amended,
that involve risks and uncertainties.  In addition, the Company may from time to
time make oral forward-looking statements.  Actual results are uncertain and may
be impacted by many factors. In particular, certain risks and uncertainties that
may  impact the  accuracy  of the  forward-looking  statements  with  respect to
revenues,  expenses and operating results include without limitation;  cycles of
customer  orders,  general  economic  and  competitive  conditions  and changing
consumer trends, technological advances and the number and timing of new product
introductions,  shipments of products and components from foreign suppliers, and
the timing of operating and changes in the mix of products ordered by customers.
As a result,  the actual results may differ  materially  from those projected in
the forward-looking statements.

Because  of these and other  factors  that may affect  the  Company's  operating
results,  past  financial  performance  should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.

(A) BUSINESS DEVELOPMENT

General

     Pen Interconnect, Inc. (the "Company" or "Pen"), develops and produces on a
turnkey basis, interconnection and contract manufacturing solutions for original
equipment   manufacturers   ("OEMs")  in  the  computer,   computer  peripheral,
telecommunications,  instrumentation,  medical and testing equipment  industries
(See "Business of Issuer").  The Company currently  operates four divisions:  1)
the Pen Cable  division,  located in Salt Lake City,  Utah,  offers internal and
external custom cable and harness  interconnections between electronic equipment
such as computers and various external devices such as video screens,  printers,
external disk drives, modems, telephone jacks and other peripheral equipment; 2)
the Incirt division, located in Irvine,  California,  provides sophisticated ISO
9002-certified  assembly and testing services for complex printed circuit boards
and subsystems; 3) the PowerStream division,  located in Orem, Utah, designs and
manufactures custom power supplies,  battery chargers and uninterruptible  power
supply (UPS) systems;  and 4) the MotoSat  division,  located in Salt Lake City,
Utah,  manufactures  mobile satellite  equipment.  During fiscal year 1996 and a
portion of fiscal year 1997 the Company operated a division located in San Jose,
California  (the "San Jose  Division").  The San Jose  Division  was sold by the
Company on November 12, 1996 (See Note C of Notes to Financial Statements).  The
executive  offices of the Company are located at 2351 South 2300 West, Salt Lake
City, Utah 84119.  The Company was  incorporated  under the laws of the State of
Utah on September 30, 1985.
<PAGE>

Summary of Current Year Events and Subsequent Events

     Since the end of fiscal year 1998,  the Company  has entered  into  several
agreements  which have had, or will have, a material  impact on the Company.  To
ensure that the information set forth in this Form 10-KSB is not misleading,  it
is  necessary to set forth these  subsequent  events along with a summary of the
prior year.

     Over the course of fiscal year 1998, the Company  experienced a lower level
of  profitability  than was  anticipated  at the  beginning  of the year and the
Company has  consequently  experienced  continued cash flow problems.  The lower
than expected  level of  profitability  has been the result of several delays in
expected  contracts  with new  customers  and lower  margins  realized  on a new
contract that yielded significantly higher sales.

     For  most  of the  year,  the  market  price  of the  Company's  stock  was
sufficient  to raise  additional  cash to support  the  negative  cash flow from
operations.  In addition to raising approximately  $490,000 from the exercise of
stock warrants,  the Company completed private placements of debentures totaling
$2.5 million.  Debentures  totaling  $1,100,000  were issued during  December of
1997,  $400,000 were issued in April of 1998 and the remaining  $1,000,000  were
issued  in June of  1998.  The  debentures  carry an  interest  rate of 3% and a
conversion  feature into common stock. The conversion feature allows each $1,000
of  debentures  to be converted  into common shares at a rate of $2.75 or 80% of
the  current  market  price  which ever is lower.  (See Note P to the  Financial
Statements).  The difference between the market price of the stock and the price
used in  conversion  is  considered  interest  expense  and  must be set up as a
discount against the debenture and expensed as the debentures become convertible
to stock.  The offset to the  discount  is an  increase  to  additional  paid in
capital.

     The Company  signed a Letter of Intent in June of 1998 to enter into merger
discussions  with  Touche  Electronics,  Inc.  (Touche),  a  subsidiary  of TMCI
Electronics Inc.  (TMCI).  The intent to merge with Touche was seen by the Board
of Directors of the Company as a means to take advantage of synergies  resulting
from the strategic mix of the two companies'  products and vertical  integration
which would result from the merger.  The merger would also supply needed working
capital to help fund the  operations  of the  Company's  divisions.  As business
valuations were secured by each company,  the ratio of stock  conversion  became
less attractive to the Company and the merger was terminated.

     In  September  of  1998  the  Company  entered  into   discussions  with  a
prospective buyer for the MotoSat and the Pen Technology Cable divisions because
of  continued  losses  generated by these  divisions  and the lack of capital to
adequately  fund and grow the  business of these two  divisions.  Moreover,  new
management   determined   that  the  MotoSat   business  and  products  did  not
strategically  fit the goals and  directions  established  by the  Company.  The
Company has entered into a letter of intent with James Pendleton,  the Company's
CEO,  for the sale of the MotoSat  division  and  anticipates  this sale will be
completed in January of 1999.  The sale will not generate  cash  proceeds to the
Company but will eliminate monthly operating losses associated with MotoSat. The
Company has also entered into a contract  with Cables To Go Inc. for the sale of
the Pen  Technology  Cable  division.  The Company hopes to complete the sale of
this  division in January of 1999 and  anticipates  that it will  generate  cash
proceeds  to the  Company in the  amount of  approximately  $1,075,000  but will
result in a loss for financial  reportisng purposes on the sale of approximately
$1 million.

     In late December,  the Company  entered into an agreement  with  Laminating
Technologies,  Inc.  ("LTI"),  whereby a newly formed  subsidiary of the Company
will  merge  into  LTI and LTI  will  become a  wholly-owned  subsidiary  of the
Company.  Shareholders of LTI will receive shares of common stock of the Company
in  exchange  for  their  shares  in LTI.  The  Company  and LTI have  commenced
preparation  of a  registration  statement on Form S-4. The merger is subject to
the  Form  S-4  becoming  effective  and  approval  of the  shareholders  of the
respective companies.
<PAGE>

     In December 1998, the Company signed a letter of intent with  Transdigiital
Communications  Corporation  (TCC) to  negotiate  a  possible  merger.  TCC is a
privately  held  developer  of  entertainment   and  database  systems  for  the
transportation  markets which  includes  narrow bodied  commercial  aircraft and
cruise  ships.  The Company  believes  that its  manufacturing  capability  will
provide  vertical  integration to TCC as it begins  production of these database
systems  for their  customers  while  giving  the  Company  the  opportunity  to
diversify its product offerings.



(B) BUSINESS OF ISSUER

1. Principal Products and Services

     The Company focuses on selling  products and services to OEMs interested in
utilizing contract manufacturers for some or all components  incorporated in OEM
products.  OEMs have been  increasing  their use of  contract  manufacturers  to
provide such components and expertise in order to reduce the capital  investment
necessary to  manufacture  such  components  thereby  enabling the OEMs to focus
their resources on their end products.

     Advances in  technology of  electronic  products and increased  unit volume
would  require  OEMs to invest more  heavily in internal  manufacturing  through
increased working capital, capital equipment, labor, systems and infrastructure.
Use of  contract  manufacturers  such as the  Company  allow  OEMs  to  maintain
advanced   manufacturing   capabilities   while   minimizing   overall  resource
requirements.  Contract  manufacturers  also allow OEMs to focus more sharply on
their own core  competencies  where they add the greatest  value such as product
development and marketing.

     The Company  markets its  products and  services to its  customers  through
in-house  salesmen and  independent  sales  representatives.  The  Company's OEM
customers are located  throughout  the  continental  U.S. and Canada and certain
foreign countries.

     The  following  is a summary  of the  products  and  markets of each of the
Company's  four  divisions.  While the Pen  Technology  Cable  division  used to
contribute  the most revenue to the Company,  as stated  above,  the Company has
entered  into  a  letter  of  intent  for  the  sale  of  the  Cable   division.
Consequently,  the Company  anticipates that the Incirt Division will constitute
the greatest  source of revenue for fiscal year 1999.  As the primary  source of
revenue going forward,  the Incert division will be addressed ahead of the Cable
division.

     InCirT Division

     The  Company's  InCirT  Division  (Incirt)  is  engaged  in the  Electronic
Manufacturing   Services   Industry  (EMSI)  and  provides   sophisticated   ISO
9002-certified  assembly and testing services for complex printed circuit boards
and subsystems through advanced surface mount technology (SMT)  manufacturing as
well as traditional  through-hole assembly. These products are used primarily in
computer instrumentation, testing, and medical equipment.

     The Incirt  division has  experienced a significant  increase in sales as a
result of the contract with Alaris  Medical  Systems (See  "Dependence  on Major
Customers").  The Alaris  contract,  while  providing a significant  increase in
revenue for the Incirt division,  provides for lower margins than most contracts
secured by the Incirt division.  (See  "Management's  Discussion and Analysis or
Plan of Operation").

     Pen Technology / Cable

     The  Pen  Technology   Cable  division's  sales  consist  of  custom  cable
interconnections  developed  in  close  collaboration  with its  customers.  The
Company's  customers include OEMs of computers including  mainframes,  desktops,
portables,  laptops,  notebooks,  pens, and palmtops as well as OEMs of computer
peripheral  equipment  such as modems,  memory  cards,  LAN  adapters,  cellular
phones, faxes and printers.  Other customers include OEMs of telecommunications,
medical, instrumentation and testing equipment.
<PAGE>

     Many OEMs in the  computer  and  related  industries  targeted by the Cable
division increasingly rely upon outsourcing of their manufacturing.  Outsourcing
allows  OEMs to take  advantage  of the  expertise  and capital  investments  of
contract  manufacturers  thereby enabling companies to concentrate on their core
activities. The Cable division has extensive in-house technical capabilities and
multiple  molding  machines  which  enable the Cable  division to assist its OEM
customers  by quickly  developing  and  prototyping  customized  interconnection
assemblies in conjunction with the customers' design staffs.  The Cable division
can then efficiently produce the customized  interconnections within time frames
and  specialized  quantities  to meet its  customers'  needs  in  these  rapidly
changing  markets.  With its U.S.  domestic  facilities  and in-house  technical
capabilities,  the Company concentrates on higher margin products, which require
customization,  rapid  production  turnaround  and  constant,  real-time  client
communication.  The Company also has entered  into an agreement  with lower cost
foreign manufacturers in order to competitively service its customers' needs for
lower margin, high volume standardized products.

     As set forth above,  the Company has entered into the letter of intent with
Cable To Go, Inc. for the sale of this  division.  (See "Summary of Current Year
Events and Subsequent Events").


     PowerStream Division

     The PowerStream  division  designs custom power supplies,  battery chargers
and UPS systems for OEMs and has been able to produce  several of those  designs
for sale to other companies.  It is expected that a major share of the Company's
future  business  will come from this  division  and  market.  Since the Company
acquired the PowerStream  division,  sales of PowerStream  products grew from an
average  monthly  amount  of  $42,935  for FY 98 to  $270,000_  for the month of
December,  1998. The division has a major contract with L3 Communications  which
is expected to yield significant sales in the next fiscal year. (See "Dependence
on Major  Customers").  The power  supply  units being  supplied to L3 are being
manufactured  in China.  Contracts  with other  customers  are  manufactured  by
domestic contract manufacturers.

     PowerStream  has no  material  backlog of orders but suffers  instead  from
delays by their  customers in the projected  shipping  dates for orders  placed.
These delays have resulted from product modifications,  testing by the customers
of the products they are purchasing and securing quality  approvals from various
customer and  independent  agencies.  Most delays have been remedied and greater
sales are now beginning to materialize.


     MotoSat Division

     The MotoSat division manufactures  satellite receivers for mobile homes and
yachts.  This division markets its products  primarily to distributors of mobile
homes and boats with a small percentage being sold to electronics  distributors.
Marketing  projections  show that the  recreational  vehicle  business will grow
substantially  in  the  coming  years  as the  "Baby  Boom"  generation  expands
significantly  into this consumer market. In addition,  many retired persons are
choosing  recreational  vehicles as their main means of housing in their  golden
years which affords low cost and mobility.
<PAGE>

     MotoSat  has also been  developing  mobile  satellite  technology  allowing
signals to continue to be  received  as the mobile  home or boat  receiving  the
signal is in motion.  This technology is still in the development stage but will
add to the marketability of MotoSat's  products once it is developed.  Projected
completion on the continual tracking technology is for fiscal year 1999.

     The Company has entered into a letter of intent for the sale of the MotoSat
division. (See "Summary of Current Year Events and Subsequent Events").

2. Distribution Methods

     The  Company  receives  orders  directly  from OEM's and ships the  product
directly to them. No other distribution method is employed.

 3. Status of Publicly Announced New Products

     None

 4.  Competitive Business Conditions

     The  Company's  primary  products  and  services  are sold to OEM's in high
technology  industries.  The  computer  industry  in  particular  has been under
intense  pressure to provide faster and more powerful  products at a lower cost.
Consequently,  many contracts  calling for large  production  runs are now being
processed  in the  Pacific  Rim  countries  due to  favorable  labor  rates.  To
compensate  for this shift to overseas  manufacturing,  the Cable  division must
focus on short run business with short  turnaround times as its strategic focus.
Many  other  domestic  cable  companies  have  also  adopted  this  strategy  so
competition  remains  strong in this area.  Sales have declined 44% in the Cable
division over the last year. The drop in business has primarily come from losing
major  contracts  to  overseas  producers  and  from a  delay  in new  contracts
materializing into expected sales.

     The remaining  sales after the loss of contracts to overseas  manufacturers
includes a contract with Unisys,  accounting for  approximately 40% of the Cable
division's  average  monthly sales,  for various types of cables which are short
production runs in general and will exist over a long period of time.

     PowerStream  has  only a small  number  of  competitors.  Furthermore,  the
Company  has a policy of  flexibility  in  working  with  customers  on  product
modifications  and the  PowerStream  products  are  competitively  priced.  As a
result, PowerStream has been successful in securing contracts for its products.

     The MotoSat division has developed a good reputation among the recreational
vehicle industry.  Furthermore,  there are not many competitors for this market.
Marketing efforts focus on advertising in industry  publications and displays at
RV shows which MotoSat has participated in.

5. Sources and Availability of Raw Material

     There are a large number of vendors which provide the raw materials used by
all of the Company's divisions and the Company does not foresee any shortages or
other  restrictions  on the  availability  of the necessary raw  materials.  The
Company's  principal  suppliers are Arrow  Electronics,  Praegitzer  Industries,
Future  Electronics  and  Winonics  which  are all  associated  with the  Incirt
Division which contributed 71% of the Company's sales in fiscal year 98.
<PAGE>

     The  availability  of raw  materials  has been hampered by the lack of cash
flow and the  corresponding  inability to pay vendors in a timely  manner.  As a
result of slow or untimely  payments  to vendors,  some  vendors  have  withheld
necessary raw materials until payments have been brought current.  The impact of
this is  potential  delays in meeting  customer  shipping  deadlines,  incurring
overtime expenses to comply with customer shipping  schedules and more expensive
freight  costs  to have  materials  arrive  in a  timely  manner,  all of  which
negatively  impact  profitability.  Through  the  divestiture  of the  Cable and
MotoSat divisions,  the merger  opportunities with TCC and LTI, and securing new
sales orders  through an expanded sales staff,  the Company  expects to create a
positive cash flow which will allow for timely payment for the raw materials.


6. Dependence on Major Customers

     The Company sells its products and services  principally  to OEMs.  Because
the  products  are not sold at  retail  to the  public,  the  Company  is always
dependent on having supply contracts with OEMs. Consequently,  at any given time
the Company can be dependent on one or a few major customers until new contracts
can be secured.

     During the past year, sales of the Incirt  division's  medical  application
SMT has grown  substantially  with the  short-term  expansion of a contract with
Alaris Medical Systems.  This contract expansion  generated 24% of the Company's
total  revenues  for fiscal  year 1998.  The  increase  in sales to Alaris  will
subside to levels  existing  before the contract  expansion as it expires at the
end  of  December,  1998.  Total  sales  to  Alaris  Medical  Systems  comprised
approximately 59% of the Company's sales in fiscal year 1998 and sales to Alaris
are projected to comprise  approximately  47% of the  Company's  sales in fiscal
year 1999 based on the existing  customer  base. The loss of this customer would
impair the Company's ability to continue  operating.  As the contract  expansion
winds down, it is critical  that Incirt  replace the Alaris  contract  expansion
with  other  contracts  that have  higher  margins.  The  Company  is  currently
investing  in efforts to build its  marketing  and sales force to assist in this
effort.

     The Company's  PowerStream  Division also has  significantly  increased its
sales as a  result  of a  contract  with L3  Communications.  Fiscal  year  1999
projections for L3 comprise 35% of the total projected revenues for PowerStream.


7. Intellectual Property

     The Company,  through its PowerStream division,  has submitted applications
for patents on various technologies developed by PowerStream. These applications
are pending and are in various  stages of  evaluation  at the end of fiscal year
1998.

     The Company does not have any other intellectual property.


8. Need For Governmental Approval

     None of the Company's products require governmental approval.


9. Effect of Governmental Regulation on Business

     The Company is not aware of any existing  governmental  regulation and does
not  anticipate  any  governmental   regulation  which  materially  affects  the
Company's ability to conduct its business operations.
<PAGE>
10. Research and Development

     The Company shows an increase in research and  development  costs in fiscal
year 1998 which is related to an entire years of operations for the  PowerStream
division in FY 98 as opposed to six months of operations in FY 97.


11. Compliance with Environmental Laws

     The Company has not incurred,  and does not presently anticipate incurring,
any material costs in complying with all federal and state environmental laws.

12. Employees

     As of September 30, 1998, the Company employed  approximately  279 full and
part-time employees. Seven employees were executive personnel, 14 were technical
and  engineering  personnel,  9  were  in  marketing  and  sales,  220  were  in
manufacturing, and 29 were administrative,  accounting, information systems, and
clerical  personnel.  The number of employees at September  30, 1998  represents
approximately  a 43%  increase  from  September  30,  1997.  This  increase  was
primarily due to the increase in manufacturing  employees at the Incirt division
relating to the increase in the Alaris contract.  The increase in administrative
and clerical employees  represents  additional buyers, an accounting clerk and a
receptionist to handle the increased workload from the Alaris contract.
<PAGE>

--------------------------------------------------------------------------------
                         ITEM 2. DESCRIPTION OF PROPERTY
--------------------------------------------------------------------------------

FACILITIES

     In July of 1998,  the Incirt  division moved into a new  manufacturing  and
office  facility in Irvine,  California.  This new  facility  consists of 51,400
square  feet of which  46,400 is  currently  being used;  35,000  square feet of
manufacturing  space and 16,400 of office space.  The expansion  capacity can be
converted into both office and manufacturing space as the need arises. The lease
on the property runs until July of 2005.

     The Company maintains  manufacturing and administrative  facilities in Salt
Lake City,  Utah under a lease which expired  September 30, 1998. The Company is
still in  negotiations  with the landlord on a new lease  agreement.  The leased
facilities  contains 40,500 square feet of space, of which 3,000 square feet are
utilized for sales and  administration  and 37,500  square feet are dedicated to
manufacturing,  material  control,  quality  control  and the  machine  shop for
prototype  development.  As part of the  negotiations for renewing the lease and
efforts to control costs,  the Company will reduce the space it is leasing so as
to permit current and projected production levels and compensate for a projected
increase in the price per square foot to be paid under the new  contract.  It is
estimated that the net impact of the new lease  agreement for the Cable division
will net the same monthly lease expense as the  previously  expired  lease.  The
reduced space will primarily  involve a realignment of  non-manufacturing  space
and warehouse space. As previously mentioned, the Company has signed a letter of
intent to sell the Cable and MotoSat divisions which both use this facility. The
sale of these divisions would eliminate the rent on this facility.

     The PowerStream  division's sales and engineering facilities are located in
Orem,  Utah,  under a lease which  expires in February  2001,  which  management
intends to extend.  The  premises  contains  approximately  5,200 square feet of
space,  all of which is utilized  for sales,  research,  development,  prototype
production and administration. The annual rental is approximately $29,400.

     Management  believes  that the  above  properties  and their  contents  are
adequately  covered by insurance  and that the square  footage is  sufficient to
meet the Company's needs.

--------------------------------------------------------------------------------
                            ITEM 3. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------


     Currently, there are no legal proceedings against the Company of a material
nature.

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


     The  annual  shareholder's  meeting  was held in  August  of  1998.  At the
meeting,  the shareholders were asked to vote on the following matters:  (i) the
nomination and election of the directors;  (ii) to approve the Company's  public
accountants;  (iii)  to  ratify  the  issuance  of  convertible  debentures  and
warrants;  and (iv) to ratify the issuance and grant of stock options to certain
of the Company's officers and directors entitling such individuals to acquire up
to 675,500  shares of the Company's  common stock.  All matters put to a vote of
the  shareholders  were  approved.  There were no other  matters voted on by the
shareholders in the fourth quarter.
<PAGE>
--------------------------------------------------------------------------------
                                     PART II

                      ITEM 5. MARKET FOR COMMON EQUITY AND
                          RELATED STOCKHOLDERS MATTERS
--------------------------------------------------------------------------------


     The common  stock and  warrants of the  Company are listed on the  National
Association of Securities Dealers Automated  Quotation system ("NASDAQ"),  under
the symbol "PENC" for the common stock and "PENCW" for the warrants.  The common
stock and warrants were first publicly traded on November 17, 1995.

     The  following  table  sets  forth  the  range of high and low bids for the
common stock of the Company since the Company's  common stock and warrants began
active trading on the NASDAQ.

                       Common Stock Schedule

                 Fiscal Year 1998 Quarter Ended       High    Low
                 ------------------------------      ------  -----
                 September 30, 1998               $   2.22  $ 0.81
                 June 30, 1998                        3.09    1.88
                 March 31, 1998                       3.19    2.50
                 December 31, 1997                    3.13    1.88

                 Fiscal Year 1997 Quarter Ended   High        Low
                 ------------------------------   -----     ------
                 September 30, 1997               $   2.50  $ 1.13
                 June 30, 1997                        1.88    1.38
                 March 31, 1997                       2.75    0.88
                 December 31, 1996                    3.38    1.94

     On December 16, 1998, the closing  quotation for the common stock on NASDAQ
was $1.938 per share.  As of December 16, 1998,  there were 6,068,481  shares of
common stock issued and outstanding,  held by approximately 1135 shareholders of
record, including several holders who are nominees for an undetermined number of
beneficial owners.

     The  following  table  sets  forth  the  range of high and low bids for the
warrants  of the  Company  during  the  periods  indicated  since the  Company's
warrants began trading on the NASDAQ.

                       Warrants Schedule

                 Fiscal Year 1998 Quarter Ended   High      Low
                 ------------------------------   -----    ------
                 September 30, 1998               $ 0.38  $ 0.13
                 June 30, 1998                      0.44    0.19
                 March 31, 1998                     0.61    0.31
                 December 31, 1997                  0.81    0.25


                 Fiscal Year 1997 Quarter Ended   High      Low
                 ------------------------------   -----    ------
                 September 30, 1997               $ 0.56  $ 0.22
                 June 30, 1997                      0.69    0.38
                 March 31, 1997                     0.81    0.44
                 December 31, 1996                  1.00    0.44
<PAGE>

     On December 16, 1998, the closing  quotation for the warrants on NASDAQ was
$0.325 per warrant.  As of December 16, 1998,  there were issued and outstanding
warrants to purchase 5,409,382 shares.

     The  trading  volume of the common  stock and  warrants  of the  Company is
limited,  creating  significant changes in the trading price of the common stock
and warrants as a result of  relatively  minor changes in the supply and demand.
Consequently,  potential  investors should be aware that the price of the common
stock and  warrants in the  trading  market can change  dramatically  over short
periods  as a result  of  factors  unrelated  to the  operations,  earnings  and
business activities of the Company.

     The Company has not paid any dividends with respect to its common stock and
does not  anticipate  paying any  dividends  in the near future.  The  Company's
credit  facility with its bank  prohibits  the payment of dividends  without the
consent of the bank.

--------------------------------------------------------------------------------
                  ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
                              OR PLAN OF OPERATION
--------------------------------------------------------------------------------


     The following  discussion and analysis  provides certain  information which
the Company's management believes is relevant to an assessment and understanding
of the Company's  results of operations  and financial  condition for the fiscal
years ended  September 30, 1998 and 1997. This discussion and analysis should be
read  in  conjunction  with  the  Company's  financial  statements  and  related
footnotes.

      Results of Operations

     The  acquisition  of  the  net  assets  of  PowerStream  Technology,   Inc.
("PowerStream"),  which was effective as of April 1, 1997 has been accounted for
as a  purchase.  The  statement  of  operations  data for the fiscal  year ended
September 30, 1997 includes the results of operations of PowerStream since April
1, 1997.

     The San Jose  Division was acquired on March 24, 1995 and was accounted for
as a purchase.  The division was subsequently  sold effective  November 1, 1996.
The  statement of operations  data for the fiscal year ended  September 30, 1997
includes the results of operations of the San Jose Division for one month.

Net  sales.  Net  sales  for  the  Company  decreased   $1,147,028  (6.3%)  from
$18,238,460  for  fiscal  year 1997 to  $17,091,432  for the  fiscal  year ended
September 30, 1998.  The decrease is primarily the result of continual  declines
in sales of the cable  division.  Sales in 1998 for the Cable division were $3.8
million compared to $6.9 million in 1997. This decline was offset by an increase
in sales for the  Incirt  division  of $2.7  million  for the same  period.  The
decline in sales for the cable  division has been a result of delays in expected
contracts for new orders.  The decline in sales at the Cable division was offset
by an  increase  in sales at  Incirt as a result of a  contract  expansion  with
Alaris Medical Systems.  Monthly sales averaging  approximately  $700,000 in the
third quarter  increased to an average of approximately  $1.5 million by the end
of fiscal year 1998.  The  increased  volume at Incirt is not expected to remain
throughout  the next  year and will  return to the level  which  existed  before
unless new orders are obtained.
<PAGE>


Cost of sales.  Cost of sales as a percentage  of net sales has  decreased  from
approximately  96% in fiscal year 1997 to 93% in fiscal year 1998. This decrease
in costs  was  primarily  attributable  to the  Cable  Division  as a result  of
significant reserves for inventory obsolescence booked in fiscal year 97 and the
loss of  production  contracts  which had very low  margins  due to  competitive
pricing.

Operating  expenses.  Operating  expenses  increased from  $3,659,583 in 1997 to
$4,736,421 in 1998 for a total  increase of $1,076,838.  This increase  resulted
from the following areas: 1) an increase of $290,089 in research and development
costs based on an entire years operations for the PowerStream  division in FY 98
vs. six months in FY 97. 2) an increase in general and  administrative  expenses
totaling  $432,165  resulting  from an  increase  in legal and  accounting  fees
associated with merger and  acquisition  negotiations as well as the issuance of
the  debentures.  General and  administrative  expenses  also  increased  due to
clerical  staff  increases  at  Incirt as a result of the  higher  sales  volume
associated with the expanded Alaris contract and a reclassifying  of $100,000 in
salaries  and  benefits  from  marketing   expense  in  FY  97  to  general  and
administrative  expense in FY 98 3) a decline in sales and marketing expenses of
$242,022 as a result of cash flow  restrictions  and  reclassifying  $100,000 of
salaries  and  benefits  from  marketing   expense  in  FY  97  to  general  and
administrative  in FY 98  due  to a  change  in  assignment.  4) a  decrease  in
abondoned lease fees of $195,226 which  represents a payment made on the sale of
the  San  Jose  division  in FY  97  and  5) an  increase  in  depreciation  and
amortization  expense of $220,867  resulting from normal  acquisitions  of fixed
assets during the year and a full years amortization of research and development
at  PowerStream  compared to a partial year for FY 97 when much of the R&D costs
were being  incurred.  6). An adjustment  for  impairment  of investment  assets
totaling $303,351 and intangible assets totaling $267,414.

Other income and expenses.  The Company  experienced an increase in other income
and  expenses  totaling  $1,209,240  from  ($69,162)  in  fiscal  year  1997  to
$1,140,078 in fiscal year 98. This increase stems from two primary  sources:  1)
the  fiscal  year 1997  statements  included  a gain on the sale of the San Jose
division  totaling  $611,912  which is not  included  in the  fiscal  year  1998
statements and 2) interest expense totaling $541,052 resulting from the issuance
of debentures. The difference between the market price of the stock and the most
favorable  conversion  price stated in the debenture at the time the  debentures
are issued is considered as additional  interest  expense and must be recognized
over the period until the debentures are convertible into shares of common stock

Net loss and loss per share.  Net losses  increased to ($5,445,383)  ($1.24) per
share in fiscal year 98 from ($1,735,483)  ($0.54) per share in fiscal year 1997
or an increase of  ($3,709,900)  ($0.70).  This increased loss resulted from the
following:  the gain on the sale of the San Jose division  which was recorded in
fiscal  year  1997  for  $611,912  with no  corresponding  entry  in FY 98,  the
increased interest expense of $541,052  associated with the debentures  recorded
in fiscal year 1998, the negative adjustment of $1,071,211 to tax and investment
assets due to impaired value to the Company,  the increase in operating expenses
of $1,076,838  and a tax benefit of  $1,109,600  recorded in FY 97 which was not
repeated in FY 98. Shares issued during the year total 945,574: 245,000 from the
conversion of warrants,  689,332 from the  conversion  of debentures  and 11,242
from other miscellaneous issues.
<PAGE>

Liquidity and Capital Resources

     During  fiscal  year 1997 and fiscal year 1998,  the Company has  sustained
losses from operations which has consumed rather than provided cash. The Company
has had to raise working capital through the issuance of stock and debentures to
meet its  obligations.  In addition to raising  approximately  $490,000 from the
exercise  of  stock  warrants,  the  Company  completed  private  placements  of
debentures  totaling $2.5 million.  Debentures  totaling  $1,100,000 were issued
during December of 1997, $400,000 were issued in April of 1998 and the remaining
$1,000,000  were issued in June of 1998. Of these  debentures,  $1,000,000  were
converted  into shares of common stock in fiscal year 1998 and another  $550,000
have been  subsequently  converted in fiscal year 1999.  The conversion of these
debentures  increases  the  shareholder  equity and net  tangible  assets of the
Company and reduces the interest charge.

     In  signing  the  Letter  of Intent  with  Touche,  the stock  price of the
Company's common shares became linked in market  perception with the stock price
of Touche's  shares.  Subsequent to the signing of the Letter of Intent,  Touche
experienced a 50% decline in the price of their common stock.  The decline had a
similar  impact on the price of the  Company's  common stock which  dropped from
$2.12 on June 1, 1998 to $1.00 on  September  30,  1998 and $0.81 on October 26.
With the expiration of the Letter of Intent to merge with Touche,  the Company's
stock is now independent of Touche's stock price.

     The Company  received a notice from NASDAQ  questioning  compliance  with a
market capitalization  requirement of $4 million of non-affiliated stock holders
for continued NASDAQ listing. The Company  subsequently  enlisted the help of an
investor  relations  firm to assist  in  marketing  its stock to the  investment
community.  The Company  believes that it now meets this requirement and, at the
request of NASDAQ, has requested a hearing to confirm this compliance. As of the
date of  this  report,  the  hearing  has not  been  scheduled.  However,  after
completing  the analysis in  producing  the attached  financial  statements,  it
appears that the  Company's  net tangible  assets as of September  30, 1998 will
fall below the amount of $4 million  required for  continued  listing on NASDAQ.
The Company is currently  engaged in acquisition and financing  activities which
the  Company's  management  believes  will  restore  the  required  level of net
tangible  assets.  However,  these  activities have not been completed as of the
date  hereof  and  there  can be no  assurance  that the  Company  will  acquire
sufficient net tangible assets tomaintain its NASDAQ National Market listing. In
such event,  the Company's stock might be listed for trading on the NASDAQ Small
Cap market.

     Because  of the  lower  price  of the  stock it is more  difficult  for the
Company  to raise  funds in the  capital  markets  and thus  meet its  financial
obligations.  As a result,  the Company has  entertained  recent  proposals  for
merger with other  companies  which should supply needed cash and/or  strengthen
the price of the stock.  Notwithstanding  a strengthening of the Company's stock
price  through  merger  and/or  acquisition,  the need remains to eliminate  the
causes of continual losses from operations and generate cash from operations. To
accomplish  this, the Company is in various stages of discussions on selling the
Cable  and  MotoSat  divisions  which are  considered  by  management  to be the
greatest  sources of  depletion  of working  capital and would  require the most
investment of working  capital and time to transform them into  contributors  of
positive cash flow.

     The Incirt  division has recently gone from being a cash supplier to a cash
consumer as a result of the Alaris  contract  expansion.  This  contract has low
gross  margins  built into it yet  requires  additional  overhead to sustain the
higher volumes of sales. With the end of this short-term  production  expansion,
the Company is directing its efforts to generating new customers. As of the date
of this report, no firm commitments from new customers are in place.

     The  PowerStream  division which has consumed cash since its acquisition in
fiscal  year 1997 has now become a cash  supplier to the Company due to sales to
L3 which began is December of 1998.
<PAGE>

     In  summary,  the  Company  continues  to incur  losses  and  suffers  from
inadequate  cash flow.  There can be no assurances that the Company will be able
to obtain further funds from issuing equities as in fiscal year 1998. Management
believes that a combination of new and more  profitable  sales contracts for the
Incirt  division,  divesting  the  Company of the Cable and  MotoSat  divisions,
recognition  of sales from the L3  contract  with  PowerStream  and  acquisition
and/or merger opportunities with other companies is necessary for the Company to
build a strong  financial  foundation  for future  growth.  The Company  cannot,
however, guarantee that any or all of the factors will occur in a timely manner.

Seasonality of business

     None of the  segments  of the  Company is  materially  impacted by seasonal
fluctuations on sales.

Backlog of orders

     The only  material  backlog  of orders  exists at the  Incirt  division  in
relation to the Alaris  contract.  The expansion of the contract with Alaris has
created a backlog  position for most of the year. The Company  anticipates  this
backlog will be eliminated by the end of January, 1999 when the expansion of the
contract  will  expire  and  production   will  be  caught  up.  The  cash  flow
restrictions  mentioned  earlier have contributed to the delay in resolving this
backlog.

 Year 2000 Readiness

     In general,  the Year 2000 issue  relates to  computers  and other  systems
being unable to distinguish between the years 1900 and 2000 because they use two
digits,  rather than four, to define the applicable  year.  Systems that fail to
properly recognize such information will likely generate erroneous data or cause
a system to fail possibly resulting in a disruption of operations. The Company's
products do not incorporate such date coding so the Company's efforts to address
the Year  2000  issue  fall in the  following  three  areas:  (i) the  Company's
information  technology ("IT") systems; (ii) the Company's non-IT systems (i.e.,
machinery,  equipment and devices which utilize  technology  which is "built in"
such as embedded microcontrollers);  and (iii) third-party suppliers. Management
has  initiated  a program to prepare  for  compliance  in these  three areas and
expects such program to be implemented and completed by June 1999. Costs will be
expensed as incurred and currently are not expected to be material.

     The Company  believes its current IT systems,  with a few exceptions  which
are  being  addressed,  are  year  2000  compliant.  The  Company  is  currently
conducting an inventory of non-IT systems which may have  inadequate date coding
and will commence efforts to remedy any non-compliant  systems by the end of the
first quarter of 1999.  Third party suppliers and customers  present a different
problem in that the Company  cannot  control the efforts of such third  parties.
The Company anticipates requesting confirmations from third party suppliers that
they are year 2000  compliant to avoid  disruptions  of services  and  supplies.
However,  any  failure  on the part of such  companies  with  whom  the  Company
transacts  business to be year 2000  compliant on a timely  basis may  adversely
affect the operations of the Company.

     The foregoing statements are based upon management's current assumptions

--------------------------------------------------------------------------------
                          ITEM 7. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

      The financial  statements and supplementary data are included beginning at
page F1.
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                            Page
PEN INTERCONNECT, INC 

Report of Independent Certified Public Accountants                             1

Financial Statements

    Balance Sheets as of September 30, 1998 and 1997                           3

    Statements of Operations for the Years Ended
        September 30, 1998 and 1997                                            4

    Statement of Stockholders' Equity for the Years Ended
        September 30, 1998 and 1997                                            5

    Statements of Cash Flows for the Years Ended
        September 30, 1998 and 1997                                            6

    Notes to Financial Statements                                             10



<PAGE>

                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
Pen Interconnect, Inc.


We have audited the  accompanying  balance sheets of Pen  Interconnect,  Inc. (a
Utah Corporation), as of September 30, 1998 and 1997, and the related statements
of operations,  stockholders'  equity,  and cash flows for the years then ended.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Pen Interconnect,  Inc., as of
September  30,  1998 and 1997,  and the results of its  operations  and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note B to the
financial statements,  the Company has suffered recurring losses from operations
and as of September 30, 1998,  the Company's  current  liabilities  exceeded its
current assets by $1,714,606.  These factors, among others, as discussed in Note
B to the  financial  statements,  raise  substantial  doubt about the  Company's
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also  described in Note B. The  financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.



                                                             Grant Thornton LLP
Salt Lake City, Utah
January 12, 1999
                                      F-2

<PAGE>
                             Pen Interconnect, Inc.

                                 BALANCE SHEETS

                                  September 30,


                                     ASSETS

                                                          1998            1997
                                                  --------------  --------------
CURRENT ASSETS
    Cash and cash equivalents ........................  $   657,777  $   272,148
    Receivables (Notes D and I)
       Trade accounts, less allowance for doubtful
         accounts of $108,575 in 1998 and $137,058
         in 1997 .....................................    3,350,970    2,093,056
       Current maturities of notes receivable
         (Notes C and E) .............................       35,675      357,006
    Inventories (Notes F and I) ......................    3,680,169    3,355,871
    Investments (Note C) .............................      242,739      400,000
    Prepaid expenses and other current assets ........      261,375      289,991
    Deferred income taxes (Note L) ...................       41,324      141,324
                                                        -----------  -----------

           Total current assets ......................    8,270,029    6,909,396
                                                        -----------  -----------


PROPERTY AND EQUIPMENT, AT COST
   (Notes I, J and K)
      Production equipment ...........................    2,624,513    2,418,368
    Furniture and fixtures ...........................      837,594      834,971
    Transportation equipment .........................       83,522       69,217
    Leasehold improvements ...........................      613,248      368,137
                                                        -----------  -----------
                                                          4,158,877    3,690,693
    Less accumulated depreciation ....................    1,680,266    1,303,063
                                                        -----------  -----------
                                                          2,478,611    2,387,630

OTHER ASSETS
    Notes receivable, less current maturities
      (Notes C and E) ................................        3,989      607,524
    Deferred income taxes (Note L) ...................      725,667    1,392,658
    Goodwill and other intangibles, net of accumulated
      amortization (Note Q) ..........................    2,031,685    2,287,146
    Investments (Note C) .............................      482,220         --
    Other ............................................       98,455      322,630
                                                        -----------  -----------

                                                          3,342,016    4,609,958
                                                        -----------  -----------

                                                        $14,090,656  $13,906,984
                                                        ===========  ===========

        The accompanying notes are an integral part of these statements.
                                      F-3

<PAGE>
                             Pen Interconnect, Inc.

                           BALANCE SHEETS - CONTINUED

                                  September 30,


                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                       1998              1997
                                                 --------------   --------------
CURRENT LIABILITIES
    Notes payable (Note G) .......................  $       --     $    641,505
    Bridge loan (Note H) .........................          --          100,000
    Line of credit (Note I) ......................     4,064,361      2,237,690
    Subordinated debentures (Note P) .............     1,401,429           --
    Current maturities of long-term
      obligations (Notes I and J) ................     1,132,538        263,255
    Current maturities of capital leases (Note K)         69,621         66,464
    Accounts payable .............................     2,926,797      2,053,348
    Accrued liabilities ..........................       389,889        481,356
                                                    ------------   ------------

           Total current liabilities .............     9,984,635      5,843,618


LONG-TERM OBLIGATIONS, less current
   maturities (Notes I and J) ....................        51,965        681,722


CAPITAL LEASE OBLIGATIONS,
   less current maturities (Note K) ..............        22,333         70,889

DEFERRED INCOME TAXES (Note L) ...................       165,755        165,755
                                                    ------------   ------------

           Total liabilities .....................    10,224,688      6,761,984

COMMITMENTS AND CONTINGENCIES (Notes K, M and N) .          --             --

STOCKHOLDERS' EQUITY (Notes C, I, M and P)
    Preferred stock, $0.01 par value,
     authorized 5,000,000 shares, none issued ....          --             --
    Common stock,$0.01 par value,
     authorized 50,000,000 shares; issued and
     outstanding 5,018,437 shares in 1998
     and 4,072,863 shares in 1997 ................        50,184         40,729
    Additional paid-in capital ...................    10,890,022      8,733,126
    Accumulated deficit ..........................    (7,074,238)    (1,628,855)
                                                    ------------   ------------

           Total stockholders' equity ............     3,865,968      7,145,000
                                                    ============   ============

                                                    $ 14,090,656   $ 13,906,984
                                                    ============   ============



        The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>

                             Pen Interconnect, Inc.

                            STATEMENTS OF OPERATIONS

                            Year ended September 30,


                                                        1998             1997
                                                ---------------  ---------------
Net sales (Note D) .............................   $ 17,091,432    $ 18,238,460
Cost of sales ..................................     15,892,456      17,493,122
                                                   ------------    ------------
                                                   ------------    ------------

           Gross profit ........................     1,1,98,976         745,338

Operating expenses
    Sales and marketing ........................        565,185         807,207
    Research and development ...................        550,843         260,554
    General and administrative .................      2,357,875       1,925,710
    Abandoned lease fees (Note C) ..............         16,000         211,226
    Asset impairment charges (Notes Q and R) ...        570,765            --
    Depreciation and amortization ..............        675,753         454,886
                                                                   ------------
                                                                   ------------

           Total operating expenses ............      4,736,421       3,659,583
                                                   ------------    ------------

           Operating loss ......................     (3,537,445)     (2,914,245)

Other income (expense)
    Interest expense (Note P) ..................     (1,100,717)       (612,143)
    Gain on sale of division (Note C) ..........           --           611,912
    Other income (expense) net .................        (39,361)         69,393
                                                   ------------    ------------

                                                     (1,140,078)         69,162
                                                   ------------    ------------

           Loss before income taxes ............     (4,677,523)     (2,845,083)

Income tax expense (benefit) (Note L) ..........        767,860      (1,109,600)
                                                   ------------    ------------

           NET LOSS ............................   $ (5,445,383)   $ (1,735,483)
                                                   ============    ============


Loss per common share (Note O)
    Basic ......................................   $      (1.24)   $      (0.54)
    Diluted ....................................          (1.24)          (0.54)

Weighted-average common and dilutive
   common equivalent shares outstanding
      Basic ....................................      4,397,490       3,213,089
    Diluted ....................................      4,397,490       3,213,089



        The accompanying notes are an integral part of these statements.

                                      F-5
<TABLE>
<CAPTION>
<PAGE>
                                                       Pen Interconnect, Inc.

                                                  STATEMENT OF STOCKHOLDERS' EQUITY

                                               Years ended September 30, 1998 and 1997


                                                                                            Retained
                                                                                            earnings
                                                   Common Stock            Additional       (accumu-
                                            --------------------------
                                               Number                        paid-in          lated
                                             of shares       Amount          capital         deficit)          Total
                                            ------------   -----------   --------------   --------------  ---------------
                                            ------------   -----------   --------------                   ---------------

<S>                                           <C>         <C>            <C>               <C>            <C>          
Balances at October 1, 1996 ................  3,033,407   $     30,334   $   7,431,669     $    106,628   $   7,568,631

Common stock issued in acquisition
 (Note C)...................................     150,000          1,500         223,500                -         225,000

Contingent common stock issued in
   acquisition (Note C)......................     55,568            556          82,796                -          83,352

Common stock issued in payment of notes
   payable..................................     88,888            889         103,111                -         104,000

Common stock issued upon exercise of
   warrants (Note M)........................    745,000          7,450         892,050                -         899,500

Net loss....................................          -              -               -       (1,735,483)     (1,735,483)
                                            ------------   -----------   --------------   --------------- ---------------

Balances at September 30, 1997............    4,072,863         40,729       8,733,126       (1,628,855)      7,145,000

Common stock issued as
   compensation...........................       10,833            108          28,953                -          29,061

Common stock issued upon
 conversion of subordinated
 debentures (Note P)......................      689,332          6,893         993,107                -       1,000,000

Common stock issued upon exercise of
   warrants (Note M).......................     245,000          2,450         487,549                -         489,999

Favorable conversion feature of
   subordinated debentures (Note P)........           -              -         639,623                -         639,623

Common stock issued as interest on
   subordinated debentures (Note P)........         409              4           7,664                -           7,668

Net loss...................................           -              -               -       (5,445,383)     (5,445,383)
                                             ============   ===========   ==============   ==============  ===============

Balances at September 30, 1998.............   5,018,437   $     50,184  $   10,890,022   $   (7,074,238) $    3,865,968
                                            ============   ===========   ==============   ==============  ===============


                                   The accompanying notes are an integral part of this statement.
                                                                F-8
</TABLE>
<PAGE>
                             Pen Interconnect, Inc.

                            STATEMENTS OF CASH FLOWS

                            Year ended September 30,


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

Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
   Net loss .................................   $   (5,445,383) $ (1,735,483)
   Adjustments to reconcile net loss to net
     cash used in operating activities
       Depreciation and amortization ........         675,753      454,886
       Amortization of favorable conversion feature
          on subordinated debentures charged to
          interest expense ..................         541,052         --
       Allowance for bad debts ..............         (28,482)    (118,339)
       Allowance for obsolete inventory .....         634,497       16,641
       Deferred income taxes ................         766,991   (1,068,227)
       Loss on disposal of property and equipment      (2,779)        --
       Asset impairment charges .............         570,765         --
       Stock issued in payment of compensation         29,061         --
       Stock issued in payment of interest ..           7,668         --
       Gain on sale of division .............            --       (611,912)
       Changes in assets and liabilities
           Trade accounts receivable ........      (1,269,432)   1,624,593
           Inventories ......................        (958,795)   1,187,444
           Prepaid expenses and other current asset  (168,165)      62,929
           Other assets .....................          30,760     (240,362)
           Accounts payable .................         873,449     (793,139)
           Accrued liabilities ..............         (91,467)    (722,971)
           Income taxes .....................            --        228,341
                                                   ----------     ----------

              Total adjustments .............       1,610,876       19,884
                                                  ----------       ----------

              Net cash used in
                operating activities ........      (3,834,507)     (1,715,599)
                                                  ----------       ----------
  
Cash flows from investing activities
   Purchase of property and equipment .......        (449,814)    (243,097)
   Issuance of notes receivable .............            --        (49,730)
   Collection on notes receivable ...........          24,866        5,616
   Proceeds from sale of investments ........         395,690         --
                                                   ----------      ----------

              Net cash used in
                investing activities ........        (29,258)     (287,211)
                                                  ----------      ----------
<PAGE>
                                   (Continued)

                             Pen Interconnect, Inc.

                      STATEMENTS OF CASH FLOWS - CONTINUED

                            Year ended September 30,


                                                           1998            1997
                                                   --------------  -------------
    Cash flows from financing activities
       Proceeds from notes payable .................         --         902,469
       Principal payments on notes payable .........     (641,505)     (144,244)
       Principal payments on bridge loans ..........     (100,000)         --
       Proceeds from issuance of subordinated 
        debentures.................................     2,500,000          --
       Net change in line of credit ................    1,826,671    (2,732,174)
       Proceeds from long-term obligations .........      500,000     1,000,000
       Principal payments on long-term obligations .     (260,474)     (128,390)
       Principal payments on capital leases ........      (65,297)         --
       Proceeds from sale of division ..............         --       2,000,000
       Exercise of warrants ........................      489,999       899,500
       Stock issued in acquisition of assets .......         --         308,352
                                                      -----------   -----------

                  Net cash provided by
                    financing activities ...........    4,249,394     2,105,513
                                                      -----------   -----------
                                                      -----------   -----------

                  Net increase in cash
                    and cash equivalents ...........      385,629       102,703

Cash and cash equivalents at beginning of year .....      272,148       169,445
                                                      ===========   ===========

Cash and cash equivalents at end of year ...........  $   657,777   $   272,148
                                                      ===========   ===========


Supplemental disclosures of cash flow information
    Cash paid during the year for
       Interest ....................................  $   605,627   $   627,522
       Income taxes ................................          869           800


Noncash investing and financing activities

Favorable conversion feature of subordinated debentures

As discussed in Note P - Subordinated Debentures, the Company recognized charges
related  to the  favorable  conversion  feature of the  subordinated  debentures
issued during fiscal 1998. The favorable  conversion feature was recognized as a
deferred  charge against the  subordinated  debenture  balance with an offset to
additional paid-in capital. The deferred charge is being amortized over a period
corresponding  to the time  restrictions  on conversion of the  debentures  into
stock.  The  amortization of the favorable  conversion  feature is recognized as
interest expense. At September 30, 1998, recognition of the favorable conversion
feature and  subsequent  amortization  has  resulted  in a $541,052  increase in
interest expense, a $98,571 decrease in subordinated debentures,  and a $639,623
increase in additional paid-in capital.

                                      F-11
<PAGE>
                                   (Continued)

                             Pen Interconnect, Inc.

                      STATEMENTS OF CASH FLOWS - CONTINUED

                     Years ended September 30, 1998 and 1997


Noncash investing and financing activities - continued

Conversion of subordinated debentures and notes payable

During fiscal 1998,  convertible  debentures  in the amount of  $1,000,000  were
converted into 689,332 shares of common stock.

During  fiscal  1997,  88,888  shares of common  stock were issued in payment of
notes.

Notes receivable and investments

During  fiscal  1998,  the  Company  received  stock in another  company  with a
guaranteed value of $1,024,000 as satisfaction for $900,000 of notes receivable,
$84,000 of accrued interest, and $40,000 of accounts receivable.

Acquisition of PowerStream Technology, Inc.

Effective April 1, 1997, the Company  acquired  substantially  all of the assets
and assumed certain liabilities of PowerStream Technology, Inc., in exchange for
150,000  shares of the Company's  common stock,  valued at $1.50 per share (Note
C). Assets acquired and liabilities assumed in conjunction with this acquisition
were as follows:

Accounts receivable, net ......................................       $  20,432
       Inventories, net .......................................           5,900
       Prepaid expenses and other current assets ..............             603
       Furniture and equipment ................................          53,325
       Account payable ........................................        (169,315)
       Accrued liabilities ....................................        (402,861)
       Long-term obligations ..................................         (32,198)
                                                                      ---------
       Liabilities assumed, net ...............................        (524,114)
       Plus stock issued (150,000 shares
       @ $1.50 per share) .....................................         225,000
                                                                      =========
       Excess purchase price over net assets
        acquired allocated to goodwill
                                                                      $ 749,114
                                                                      =========
                                      F-12
<PAGE>

                                   (Continued)


                             Pen Interconnect, Inc.

                      STATEMENTS OF CASH FLOWS - CONTINUED

                     Years ended September 30, 1998 and 1997


Noncash investing and financing activities - continued

Sale of Division

On  November  1, 1996,  the  Company  sold  substantially  all of the assets and
liabilities of its San Jose Division (Note C). Assets and liabilities  sold were
as follows:
Accounts receivable, net ......................                     $   680,420
Inventories ...................................                       1,644,336
Prepaid expenses ..............................                          34,177
Other assets ..................................                          26,099
Property and equipment ........................                         638,373
Accounts payable ..............................                        (277,429)
Accrued liabilities ...........................                         (35,373)
Capital leases ................................                         (22,515)
                                                                       ---------
Assets sold, net ..............................                       2,688,088
Less noncash consideration received
    Notes .....................................      $   900,000
    Stock .....................................          400,000       1,300,000
Cash received .................................                        2,000,000
                                                                      =========

Gain on sale of division ......................                     $   611,912
                                                                       =========

Pro forma data. The following unaudited pro forma summary represents the results
of operations as if the disposition of the San Jose Division had occurred at the
beginning of the period presented, and does not purport to be indicative of what
would have occurred had the  transaction  actually  occurred on that date, or of
results  which  may  occur in the  future.  The pro forma  weighted  shares  are
reported as if outstanding at the beginning of the period.


                                                                Fiscal year
                                                                   ended
                                                            September 30, 1997
                                                              (in thousands
                                                             except per share
                                                                 amount)
                                                            -------------------
Net sales                                                       $ 17,955
Operating income (loss)                                           (2,931)
Net loss                                                          (2,347)
Loss per share - basic                                             (0.73)
Weighted shares outstanding                                        3,213



        The accompanying notes are an integral part of these statements.

                                      F-11
<PAGE>
                             Pen Interconnect, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                           September 30, 1998 and 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

       1.   Business activity

       Pen  Interconnect,  Inc. (the Company) was  incorporated on September 30,
       1985,  in the  State  of Utah.  The  Company  is a total  interconnection
       solution provider offering internal and external custom cable and harness
       interconnections,  mobile satellite equipment,  electronic  manufacturing
       services  industry  (EMSI)  manufacturing  (circuit  board  assembly) and
       custom design and manufacturing of battery  chargers,  power supplies and
       uniterrupted   power   supply  (UPS)   systems  for  original   equipment
       manufacturers ("OEMs") in the computer, peripherals,  telecommunications,
       instrumentation,  medical and testing equipment industries. The Company's
       products  connect  electronic  equipment,  such as computers,  to various
       external devices (such as video screens, printers,  external disk drives,
       modems,  telephone jacks, peripheral interfaces and networks) and connect
       devices to one  another  within the  equipment  (such as power  supplies,
       computer hard drives and PC cards).  Most of the Company's  sales consist
       of  custom  cable   interconnections  and  printed  circuit  boards.  The
       Company's  customers  include  OEMs of  computers  including  mainframes,
       desktops,  notebooks,  pens and  palmtops,  as well as,  OEMs of computer
       peripheral equipment such as modems, memory cards, LAN adapters, cellular
       phones,   faxes  and   printers.   Other   customers   include   OEMs  of
       telecommunications, instrumentation and testing equipment.

       2.   Inventories

       Inventories  consist primarily of cable,  components,  and boards and are
       valued at the lower of cost or market (first-in,  first-out basis). Costs
       include materials, labor, and overhead.

       3.   Property and equipment

       Property and equipment are recorded at cost.  Expenditures  for additions
       and major  improvements  are  capitalized.  Expenditures  for repairs and
       maintenance  and minor  improvements  are charged to expense as incurred.
       Gains or losses from  retirements  and  disposals  are  recorded as other
       income or expense.

       Property and equipment are depreciated over their estimated useful lives.
       Leasehold  improvements  and assets  financed  under  capital  leases are
       amortized over their estimated useful lives or the lease term,  whichever
       is  shorter.   Depreciation   and   amortization   are  calculated  using
       straight-line and accelerated methods over the following estimated useful
       lives:

                                                                 Years
                                                             -------------
                   Production equipment                         5-10
                   Furniture and fixtures                          7
                   Transportation equipment                     5-10
                   Leasehold improvements                        7-10



<PAGE>


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

       4.   Goodwill and other intangibles

       The Company  capitalized as goodwill,  the excess  acquisition costs over
       the fair  value of net  assets  acquired,  in  connection  with  business
       acquisitions,  which costs are being amortized on a straight-line  method
       over 15 years.  The carrying  value of goodwill is reviewed  periodically
       based on the  undiscounted  cash flows of the entities  acquired over the
       remaining  amortization period. Should this review indicate that goodwill
       is impaired, the Company's carrying value of the goodwill will be reduced
       by the estimated shortfall of undiscounted cash flows.

       5.   Income taxes

       The Company utilizes the liability method of accounting for income taxes.
       Under the  liability  method,  deferred  tax assets and  liabilities  are
       determined based on differences between financial reporting and tax bases
       of assets and  liabilities  and are measured  using the enacted tax rates
       and laws that will be in effect  when the  differences  are  expected  to
       reverse.  An allowance against deferred tax assets is recorded when it is
       more likely than not that such tax benefits will not be realized.

       6.   Revenue recognition

       Revenue is recognized when products are shipped.

       7.   Cash and cash equivalents

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

       8.   Warranties

       The Company's standard warranty is one year on parts and labor.  Warranty
       costs are accrued and expensed when revenue is recognized  based upon the
       Company's  experience with such costs. Returns have been insignificant to
       date.

       9.   Research and development

       Research and development costs are expensed as incurred.


<PAGE>


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

       10.  Earnings (loss) per common share

       The  Company  has  adopted  the  provisions  of  Statement  of  Financial
       Accounting  Standards No. 128  "Earnings Per Share" (SFAS No. 128).  SFAS
       No. 128 established  new standards for computing and presenting  earnings
       per share  (EPS).  SFAS No. 128 requires  the  presentation  of basic and
       diluted  EPS.  Basic  EPS are  calculated  by  dividing  earnings  (loss)
       available to common stockholders by the weighted-average number of common
       shares  outstanding  during  each  period.   Diluted  EPS  are  similarly
       calculated,  except  that the  weighted-average  number of common  shares
       outstanding includes common shares that may be issued subject to existing
       rights  with  dilutive  potential.  The EPS for prior  periods  have been
       restated as required by SFAS No. 128.

       11.  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,  liabilities,
       revenues and expenses during the reporting period.  Estimates also affect
       the  disclosure of contingent  assets and  liabilities at the date of the
       financial  statements.  Actual results could differ from those estimates.
       Such  estimates  of  significant   accounting   sensitivity  include  the
       allowance for doubtful accounts and the allowance for inventory overstock
       or  obsolescence,  and the  estimated  useful lives of goodwill and other
       intangibles.

       On an ongoing basis, management reviews such estimates, and if necessary,
       makes  changes to them.  The effect of changes in estimates are reflected
       in the  financial  statements  in the  period of the  change.  Management
       believes the estimates used in determining  carrying  values of assets as
       of the  respective  balance sheet dates were  reasonable at the dates the
       estimates were made.  During 1998  adjustments to certain  estimates were
       recognized.

       12.  Accounting standards not yet adopted

       Comprehensive income

       In June 1997, the FASB issued Statement of Financial Accounting Standards
       No. 130 (SFAS No. 130),  "Reporting  Comprehensive  Income." SFAS No. 130
       requires  entities  presenting a complete set of financial  statements to
       include  details of  comprehensive  income  that  arise in the  reporting
       period.  Comprehensive  income  consists of net  earnings or loss for the
       current period and other comprehensive income, which consists of revenue,
       expenses,  gains, and losses, that bypass the statement of operations and
       are  reported  directly  in  a  separate   component  of  equity.   Other
       comprehensive  income  includes,  for  example  foreign  currency  items,
       minimum pension liability adjustments, and unrealized gains and losses of
       certain investment  securities.  SFAS No. 130 requires that components of
       comprehensive  income  be  reported  in a  financial  statement  that  is
       displayed with the same  prominence as other financial  statements.  This
       statement is  effective  for fiscal years  beginning  after  December 15,
       1997,  and  requires  restatement  of prior period  financial  statements
       presented  for  comparative  purposes.  Adoption  of SFAS No.  130 is not
       expected to have a material effect on the Company's financial statements.


<PAGE>


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

       12.  Accounting standards not yet adopted - continued

       Disclosure of segments

       Also in June 1997,  the FASB issued  Statement  of  Financial  Accounting
       Standards  No. 131 (SFAS No.  131),  "Disclosures  about  Segments of the
       Enterprise and Related Information." This statement requires an entity to
       report  financial  and  descriptive  information  about their  reportable
       operating segments.  An operating segment is a component of an entity for
       which  financial  information  is developed and evaluated by the entity's
       chief  operating  decision  maker  to  assess  performance  and  to  make
       decisions  about  resource  allocation.  Entities  are required to report
       segment profit or loss,  certain  specific  revenue and expense items and
       segment  assets  based  on  financial  information  used  internally  for
       evaluating  performance  and  allocating  resources.  This  statement  is
       effective  for fiscal  years  beginning  after  December  15,  1997,  and
       requires  restatement of prior period financial  statements presented for
       comparative purposes. Adoption of SFAS No. 131 will not have an effect on
       the  Company's  financial  position  or results of  operations,  but will
       result in  disclosures  about the  Company's  products  and  services not
       previously required.

       13.  Fair value of financial instruments

       SFAS No. 107,  "Disclosure  About Fair Value of  Financial  Instruments,"
       requires  certain  disclosures  regarding  the fair  value  of  financial
       instruments.  Cash and cash equivalents,  accounts  receivable,  accounts
       payable and accrued liabilities are reflected in the financial statements
       at fair value because of the  short-term  maturity of these  instruments.
       Because  of  the  unique  aspects  of  the  subordinated  debentures  and
       long-term debt fair values cannot readily be determined.

       14.  Stock options

       The Company has elected to follow Accounting Principles Board Opinion No.
       25,  "Accounting  for Stock  Issued to  Employees"  (APB 25) and  related
       interpretations  in accounting for its employee stock options rather than
       adopting the alternative  fair value  accounting  provided for under FASB
       No. 123 "Accounting for Stock-Based  Compensation"  (SFAS No. 123). Under
       APB 25,  because the exercise  price of the Company's  options  equals or
       exceeds the market price of the  underlying  shares on the date of grant,
       the Company does not recognize any compensation expense.

       15.  Reclassifications

       Certain reclassifications have been made to the 1997 financial statements
       to conform with the 1998 presentation.

<PAGE>


NOTE B - FINANCIAL RESULTS AND LIQUIDITY

       The  Company  has  incurred  net losses of  $5,445,383,  $1,735,483,  and
       $709,010 in 1998, 1997, and 1996, respectively.  In addition, the Company
       has a working  capital  deficit of  $1,714,606  as of September 30, 1998.
       These factors,  among others, raise substantial doubt about the Company's
       ability to continue as a going concern.

       Although net sales of the Cable division had been declining over the last
       few years,  the Company  believed that these  declines  would  stabilize.
       However,  the Company's  1998 results  produced  weaker than  anticipated
       results,  including  disappointing  sales  performance  for the Cable and
       MOTO-SAT  divisions.  The  Company's  operations  continued  to  generate
       operating  losses  and to use rather  than  provide  cash flow.  This has
       caused the Company to be in violation  of certain of its debt  covenants.
       The Company has issued  debentures  and  increased  other  borrowings  to
       provide working capital to help meet current  obligations.  However,  the
       Company still currently does not generate enough cash to fund operations,
       and   opportunities   to  supplement   cash  from  capital   markets  are
       diminishing.

       The Company has formulated  plans to satisfy its cash flow  requirements.
       Management's plans include the following:

           1.  Taking  advantage  of  opportunities  to divest  of  unprofitable
               divisions.
           2.  Pursuing  possibilities  to obtain new and more profitable  sales
               contracts.
           3.  Negotiating  acquisition  and/or merger  opportunities with other
               companies.
           4.  Aggressively reducing corporate overhead costs.
           5.  Renegotiating its credit facility with its primary lender.

       In  connection  with their  plans,  the Company and its major lender have
       agreed to restructure its loan  agreement,  including the loan covenants.
       In addition, management has secured new contracts for the PowerStream and
       InCirT divisions.

       Management has also negotiated with various individuals and companies for
       the  sale of the  MOTO-SAT  and  Cable  divisions.  Management  has  also
       actively  negotiated mergers and/or  acquisitions with other companies to
       help bring additional financing resources,  new and more profitable sales
       contracts, and additional profitable sales from existing contracts to the
       Company. (Note R)

       There can be no  assurance  that the Company  will be  successful  in its
       attempt to consummate any of the above strategic alternatives.

<PAGE>


NOTE C - ACQUISITIONS/DISPOSITIONS

       PowerStream Technology

       Effective April 1, 1997, the Company  acquired  substantially  all of the
       assets,   and  assumed  certain   liabilities  and  the  operations,   of
       PowerStream Technology, Inc. ("PowerStream") by issuing 150,000 shares of
       common  stock  valued at $1.50 per share.  PowerStream  is a research and
       development  company  specializing in power recharging  devices and power
       supply  products.  In  addition,  the  Company  entered  into a five year
       Employment  Agreement with the President of PowerStream  who, the Company
       believes,  is an expert in the area of power recharging devices and power
       supply  products.  This  transaction was accounted for using the purchase
       method of accounting.  Accordingly,  the purchased assets and liabilities
       have been recorded at their fair value at the date of acquisition and the
       excess  purchase price over fair value of net tangible assets acquired of
       $749,114 is being  amortized over 15 years.  The results of operations of
       the acquired  business  have been  included in the  financial  statements
       since the effective date of acquisition.

       Sale of San Jose Division

       Effective November 1, 1996, the Company sold substantially all of the net
       assets used by the San Jose Division  ("Division") to Touche Electronics,
       Inc.  ("Touche"),  a subsidiary of TMCI Electronics,  Inc. ("TMCI").  The
       sale price for the net assets of the Division was $3,300,000;  consisting
       of $2,000,000 in cash, $900,000 in promissory notes, and 53,669 shares of
       TMCI common stock with an agreed upon  guaranteed  value of $400,000.  In
       addition,  the  Company  had the  right  to  receive  up to  $700,000  in
       contingent  earnouts for a potential total sale price of $4,000,000.  The
       Company   originally   purchased   the   Division  in  March  1995,   for
       approximately  $2,100,000.  As part of the  transaction,  Touche and TMCI
       also assumed  certain  liabilities  associated with the operations of the
       Division.

       In February  1997,  TMCI filed a notice of demand for  rescission  of the
       purchase  and sale of the  Division.  The  Company  filed a  counterclaim
       against  TMCI in May  1997,  alleging  that  TMCI  had  defaulted  in its
       obligations  under the promissory  notes. The disputes were  subsequently
       submitted to  arbitration  in August 1997. In December  1997, the Company
       and TMCI entered into a Settlement and Release Agreement (the "Settlement
       Agreement"),  releasing each other of any and all  respective  claims the
       parties  may  have had  against  each  other.  The  Settlement  Agreement
       provided,  in part,  that TMCI issue to the  Company,  137,390  shares of
       TMCI's common stock (the  "Settlement  Stock").  The Settlement  Stock is
       guaranteed to have a minimum value of $7.4532 per share. In the event the
       Settlement  Stock is sold at less than that amount,  TMCI is obligated to
       pay to the  Company  the  difference  between  the  sales  price  and the
       guaranteed  value.  During 1998,  the Company  sold shares of  settlement
       stock at a price below the minimum value. TMCI reimbursed the Company for
       the  difference  between the sales  price and the  guaranteed  value.  At
       September  30,  1998,  TMCI stock had a quoted  market price of $2.25 per
       share.  Based upon the market  price of TMCI stock and  consideration  of
       realizability  of the  guaranteed  minimum value per share,  the carrying
       value of the  investment  was  reduced by  approximately  $300,000  as of
       September 30, 1998.

<PAGE>

NOTE C - ACQUISITIONS/DISPOSITIONS - CONTINUED

       Sale of San Jose Division - continued

       In  addition,  the  Company  entered  into  a  long-term  building  lease
       agreement  several months prior to the sale of the San Jose Division with
       the intention of relocating  the  operations.  This lease was not sold as
       part of the above sale and required fees of $227,226 for  abandonment  of
       the lease.  Abandoned  lease fees of $16,000 and $211,226 were recognized
       in fiscal years 1998 and 1997, respectively.


NOTE D - MAJOR CUSTOMERS AND CREDIT CONCENTRATION

       Financial  instruments,  which potentially  subject the Company to credit
       risk, consist primarily of trade accounts  receivable.  The Company sells
       to customers in the computer,  computer  peripheral,  telecommunications,
       instrumentation,  and medical and testing  equipment  industries  located
       throughout the United States.  Sales have  historically been concentrated
       with several large original equipment  manufacturers  (OEMs) on a turnkey
       basis.  To  reduce  credit  risk  the  Company  performs  ongoing  credit
       evaluations of its customers'  financial condition and generally does not
       require collateral.  The majority of its trade receivables are unsecured.
       Allowances  are maintained  for potential  credit  losses.  The resulting
       losses have been insignificant to date and have been within  management's
       expectations.

       Revenue from shipments to the largest  customers  (representing  over ten
       percent of sales in fiscal  1998) were 59 percent and 24 percent of sales
       (15 percent, 14 percent and 12 percent of sales in fiscal 1997).

       At September 30, 1998,  the Company had accounts  receivable due from the
       above largest  customers  representing  approximately 75 percent of trade
       receivables (50 percent at September 30, 1997).  Remaining trade accounts
       receivable  at  September  30,  1998,  were due from a  variety  of other
       customers under normal credit terms.


NOTE E - NOTES RECEIVABLE

       Notes receivable consist of the following:
                                                         1998            1997
                                                    -------------   ------------

10% note  receivable from a company,
    due in monthly  payments of $1,500
   including interest, collateralized by
   inventory, accounts receivable,
   machinery, and equipment                                $33,377       $35,775

10% note  receivable from a company,
    due in monthly  payments of $1,297
   including interest, collateralized by
   inventory, accounts receivable,
   machinery, and equipment                                  6,287         8,124

12%   notes  receivable  from two  companies,
     due in  monthly payments aggregating
     $1,000 including interest                                --           5,882


<PAGE>
<TABLE>
<CAPTION>


NOTE E - NOTES RECEIVABLE - CONTINUED

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

<S>                                                                           <C>              <C>
         Note receivable  from a company at prime plus .5% (9% at September  30,
            1998), due in monthly payments of $10,417 including interest, with a
            balloon payment on October 31, 1999,  secured by security  agreement
            and the personal guaranty of the owner and principal  stockholder of
            the company. This note was exchanged for shares of stock
            during 1998 (Note C)                                                         -         500,000

         Note receivable  from a company at prime plus .5% (9% at September  30,
            1998),  due in  monthly  payments  of  $16,667  including  interest,
            secured by security agreement and the personal guaranty of the owner
            and principal  stockholder  of the company.  This note was exchanged
            for shares of
            stock during 1998 (Note C)                                                   -         400,000

         10% note receivable from officers/stockholders,
            due in monthly payments of $1,500 including interest                         -          14,749
                                                                              -------------   ------------
                                                                                    39,664         964,530
         Less current maturities                                                    35,675         357,006
                                                                              -------------   ------------
                                                                              =============   ============
                                                                             $       3,989   $     607,524
                                                                              =============   ============



NOTE F - INVENTORIES

       Inventories consist of the following:
                                                                                   1998            1997
                                                                              -------------    -------------
         Raw material                                                        $   3,070,958    $   2,714,763
         Work-in-process                                                         1,391,664          736,928
         Finished goods                                                             35,572           87,708
                                                                              -------------    -------------
                                                                                 4,498,194        3,539,399
         Less allowance for obsolete inventory                                    (818,025)        (183,528)
                                                                              -------------    -------------
                                                                              =============    =============
                                                                             $   3,680,169    $   3,355,871
                                                                              =============    =============
</TABLE>
<PAGE>
<TABLE>


NOTE G - NOTES PAYABLE

       Notes  payable at  September  30, 1997,  consisted  of trade  payables to
       vendors  converted to notes totaling  $641,505,  payable in  semi-monthly
       amounts of  approximately  $147,000,  with  interest  at 9.5  percent per
       annum. The notes were paid in full during fiscal 1998.


NOTE H - BRIDGE LOAN

       At September 30, 1997,  the Company had one note payable to an individual
       for $100,000 with interest at 8 percent per annum, which was due and paid
       in full in November 1997.


NOTE I - CREDIT FACILITY

       On  September  4,  1997,  the  Company  completed  a four year  financing
       agreement  with  a bank  for  $6,300,000.  The  agreement  consists  of a
       $5,000,000  revolving  credit line and two term loans for $800,000 ("Loan
       A") and $500,000 ("Loan B"),  respectively.  The revolving credit loan is
       at prime  plus  1.75  percent  (10  percent  at  September  1998)  and is
       collateralized by accounts receivable and inventory. Loan A is at a fixed
       rate of 10.16 percent and is  collateralized  by machinery and equipment.
       Loan B is at a fixed  rate of  10.32  percent  and is  collateralized  by
       machinery and equipment of the Company and personal guarantees of certain
       officers  of the  Company.  This  agreement  requires  that  the  Company
       maintain  certain  financial  ratios,  meet  specific  minimum  levels of
       earnings   and  net   worth;   restricts   employee   advances,   capital
       expenditures,  compensation,  and additional indebtedness;  and restricts
       the payment of dividends.  This new line of credit  replaced the previous
       $6,000,000  revolving line of credit. The Company has borrowed $4,064,361
       under  the new line of  credit  at  September  30,  1998  ($2,237,690  at
       September 30, 1997).

       At times,  including  at  September  30,  1998,  the  Company has been in
       violation  of  certain  of the  covenants  of this  credit  facility.  At
       September 30, 1998, the Company has notified the lender of the violations
       and is negotiating  modifications  to the loan agreement with the lender.
       As of September 30, 1998,  the Company has not received a waiver from the
       lender and all  obligations  under this  credit  facility  are payable on
       demand of the lender and are  classified  as current  liabilities  in the
       balance sheet.


NOTE J - LONG-TERM OBLIGATIONS

       Long-term obligations consist of the following:

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

         Note  to an  individual  with  interest  imputed  at 10%  per
<S>                                                                          <C>             <C>          
            annum, payable in monthly payments of $2,500                     $      80,104   $     100,604


<PAGE>


NOTE J - LONG-TERM OBLIGATIONS - CONTINUED

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

         10.16%  note  to  a  financial  institution,   payable  in  48  monthly
            installments  of $16,667 plus interest,  maturing on August 1, 2001,
            collateralized by substantially all of
            the Company's property and equipment (Note I)                          599,996         800,000

         10.32%  note  to  a  financial  institution,   payable  in  48  monthly
            installments  of $10,417 plus interest,  maturing on August 1, 2002,
            collateralized  by substantially  all of the Company's  property and
            equipment and personal
            guarantees of certain officers of the Company (Note I)                 489,583               -

         11.25% note to a financial institution, payable in monthly installments
            of $375, including interest, collateralized by personal residence of
            the president of the PowerStream
            Division                                                                 3,100          31,653

         Noninterest-bearing  note  to  a  parts  vendor,  payable  in
            monthly installments of $1,000, past due                                11,720          12,720
                                                                              -------------   ------------
                                                                                 1,184,503         944,977
         Less current maturities                                                 1,132,538         263,255
                                                                              -------------   ------------
                                                                              =============   ============

                                                                             $      51,965   $     681,722
                                                                              =============   ============

       Maturities of long-term obligations are as follows:

         Year ending September 30,
             1999                                                            $   1,132,538
             2000                                                                   25,972
             2001                                                                   25,993
             Thereafter                                                                  -
                                                                              =============

                                                                             $   1,184,503
                                                                              =============
</TABLE>

<PAGE>
<TABLE>


NOTE K - LEASES

       1.   Operating leases

       The Company  conducts a portion of its  operations  in leased  facilities
       under noncancelable  operating leases expiring through 2003. In addition,
       the  Company  leases  equipment  under  noncancelable   operating  leases
       expiring  through  2000.  The minimum  future  rental  commitments  under
       operating leases are as follows:

         Year ending September 30,                             Facilities       Equipment        Total
                                                              -------------  ---------------  -------------
<S>          <C>                                             <C>            <C>              <C>         
             1999                                            $     367,083  $      191,410   $    558,493
             2000                                                  367,083          47,380        414,463
             2001                                                  349,933               -        349,933
             2002                                                  337,683               -        337,683
             2003                                                  337,683               -        337,683
             Thereafter                                                  -               -              -
                                                              =============  ===============  =============

                                                             $   1,759,465  $      238,790   $  1,998,255
                                                              =============  ===============  =============


       The  leases  generally   provide  that  property  taxes,   insurance  and
       maintenance  expenses are obligations of the Company. It is expected that
       in the normal  course of business,  operating  leases that expire will be
       renewed or replaced by leases on other properties. Rental expense for all
       operating  leases was $565,490 and $570,486 for the years ended September
       30, 1998 and 1997, respectively.

       2.   Capital leases

       Maturities of capital lease obligations are as follows:

          Year ending September 30,
              1999                                                     $      76,165
              2000                                                            23,916
              Thereafter                                                           -
                                                                        -------------

          Total minimum lease payments                                       100,081

          Less amount representing interest                                    8,127
                                                                        -------------

          Present value of net minimum lease payments                         91,954

          Less current portion                                                69,621
                                                                        -------------
                                                                        =============

                                                                       $      22,333
                                                                        =============
</TABLE>

       Included in property and equipment is $295,637 of equipment under capital
       leases at September 30, 1998.  The related  accumulated  amortization  is
       $203,683.

<PAGE>
<TABLE>
<CAPTION>
NOTE L - INCOME TAXES (BENEFIT)

       Income tax expense (benefit) consists of the following:
                                                                           1998            1997
                                                                      -------------   --------------
          Current
<S>                                                                  <C>             <C>           
              Federal                                                $     (36,106)  $     (36,067)
              State                                                         20,748          (5,306)
                                                                      -------------   --------------

                                                                           (15,358)        (41,373)
          Deferred
              Federal                                                      387,584        (931,233)
              State                                                        229,010        (136,994)
                                                                      -------------   --------------

                                                                           616,594      (1,068,227)
                                                                      -------------   --------------

                                                                     $     601,236   $  (1,109,600)
                                                                      =============   ==============

Reconciliation of income taxes (benefit)  computed at the federal statutory rate
of 34 percent is as follows:

                                                                           1998            1997
                                                                      -------------   -------------
          Federal income taxes at statutory rate                     $     635,999   $    (967,300)
          State income taxes, net of federal tax benefit                   (34,763)       (142,300)
                                                                      =============   =============

          Income taxes                                               $     601,236   $  (1,109,600)
                                                                      =============   =============

       Deferred tax assets and liabilities consist of the following:
                                                                           1998            1997
                                                                      -------------   -------------
          Deferred tax assets (liabilities)
              Accumulated depreciation                               $    (171,852)  $    (165,755)
              Net operating loss                                         3,183,720       1,392,658
              Reserve for inventory obsolescence                           316,731          71,576
              Allowance for doubtful accounts                              138,411          53,453
              Reserve for warranties                                             -          10,182
              Write off of goodwill                                         37,833               -
              Impairment of investment                                     117,454               -
              Amortization of intangibles                                   (2,910)              -
              Reserve for vacation                                          12,785           6,113
                                                                      -------------   -------------
                 Deferred tax asset                                      3,632,172       1,368,227
              Valuation allowance                                       (3,030,936)              -
                                                                      =============   =============

          Net deferred tax asset                                     $     601,236   $   1,368,227
                                                                      =============   =============
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


NOTE L - INCOME TAXES (BENEFIT) - (CONTINUED)

       The Company has  sustained  net  operating  losses in each of the periods
       presented.  Deferred tax assets or income tax benefits  were  recorded in
       both  1998 and  1997  for net  deductible  temporary  differences  or net
       operating  loss  carryforwards.  The  likelihood  of  realization  of the
       related tax benefits cannot be fully established.  A valuation  allowance
       has been recorded in 1998 to reduce the 1997 net deferred tax asset.  The
       decrease in the  valuation  allowance  was  $601,236 and $0 for the years
       ended September 30, 1998 and 1997, respectively.

       As  of  September  30,  1998,   the  Company  had  net   operating   loss
       carryforwards  for tax  reporting  purposes of  approximately  $7,737,000
       expiring in various years through 2019.

NOTE M - STOCK OPTION PLAN

       The Company has a Stock Option Plan (the Plan). The Plan provides for the
       granting of both Incentive Stock Options (ISOs) or  NonQualified  Options
       (NQOs) to purchase  shares of common stock.  ISOs are granted at not less
       than market value on the date of grant whereas NQOs may be granted at not
       less than 85  percent of market  value on the date of the grant.  Options
       may be granted under the Plan to all officers,  directors,  and employees
       of the  Company.  In addition,  NQOs may be granted to other  parties who
       perform services for the Company.

       The Company also issues warrants in conjunction with various transactions
       with third parties.

       The   Company   accounts   for  the  Plan   under  APB  25  and   related
       interpretations.  Accordingly,  since all options  granted under the Plan
       were  granted  at or in excess of fair  market  value of the stock on the
       date of the grant,  no  compensation  costs have been  recognized  in the
       accompanying financial statements for options granted under the Plan. Had
       compensation cost for the Plan been determined based on the fair value of
       the options at the grant dates for awards under the Plan  consistent with
       the method prescribed by FAS No. 123, the Company's net loss and loss per
       common share would have been increased to the pro forma amounts indicated
       below:

          Fiscal Year ended September 30,                             1998               1997
          -------------------------------
                                                                ----------------   ---------------
          Net loss
<S>                                                            <C>                <C>             
              As reported                                      $    (5,445,383)   $    (1,735,483)
              Pro forma                                             (6,112,600)        (3,185,595)

          Loss per common share
              As reported - basic                              $         (1.24)   $         (0.54)
              Pro forma - basic                                          (1.39)             (0.99)
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


NOTE M - STOCK OPTION PLAN - CONTINUED

       The fair value of these options and warrants was estimated at the date of
       grant using the  Black-Scholes  option-pricing  model with the  following
       weighted-average  assumptions for 1998 and 1997,  respectively:  expected
       volatility of 79.07 and 68.08  percent;  risk-free  interest rate of 5.26
       and 6.35  percent;  and  expected  life equal to the actual life for both
       periods. The weighted-average  fair value of options and warrants granted
       was $0.83 for both 1998 and 1997.

       The  following  is a summary of the  activity  relating  to  options  and
warrants through September 30, 1998:

                                                                                            Weighted-average
                                                             Warrants and                      exercise
                                                             stock options    Exercise          price
                                                                                price
                                                              ------------  --------------   -------------
<S>                                                            <C>            <C>                  <C>   
                Outstanding at October 1, 1996                 3,105,000      $ 6.00-6.50          $ 6.46
                   Granted                                     3,668,000        1.38-3.00            1.87
                   Canceled                                     (154,000)            6.00            6.00
                   Exercised                                    (550,000)       1.75-2.00            1.88
                                                             ------------
                Outstanding at September 30, 1997              6,069,000        1.38-6.50            4.18
                   Granted                                     2,305,000        1.45-6.00            1.83
                   Canceled                                      (59,000)       1.38-6.00            1.83
                   Exercised                                    (245,000)            2.00            2.00
                                                             ------------
                Outstanding at September 30, 1998              8,070,000        1.38-6.50            3.55
                                                             ============

                Exercisable at September 30, 1998              7,745,800      $ 1.38-6.50          $ 3.60
                                                             ============


       The  following  table   summarizes   information   concerning   currently
outstanding options and warrants:


                        Options and Warrants Outstanding:

                                                    Weighted-Average
                   Range of                       Remaining Contractual
                Exercise Prices     Number             Life (Years)        Weighted-Average
                                  Outstanding                               Exercise Price
                                  -----------                               --------------
<S>               <C>              <C>                  <C>                  <C>   
                  $  1.38-1.45       1,895,500            4.35                 $ 1.42
                     2.00-2.75       3,195,000            5.55                   2.12
                          3.00          32,500            3.64                   3.00
                     6.00-6.50       2,947,000            2.17                   6.48
                                     ---------
                                     8,070,000

</TABLE>

<PAGE>
<TABLE>
<CAPTION>


NOTE M - STOCK OPTION PLAN - CONTINUED

       The  following  table   summarizes   information   concerning   currently
exercisable options and warrants:

                        Options and Warrants Exercisable:

                                                     Weighted-Average
                   Range of                       Remaining Contractual
                Exercise Prices     Number             Life (Years)        Weighted-Average
                                  Exercisable                               Exercise Price
                                  -----------                               --------------
<S>               <C>                <C>                  <C>                  <C>   
                  $  1.38-1.45       1,707,500            4.45                 $ 1.42
                     2.00-2.75       3,143,000            5.56                   2.12
                          3.00           6,500            3.64                   3.00
                     6.00-6.50       2,888,800            2.17                   6.49
                                     ---------
                                     7,745,800
</TABLE>


NOTE N - COMMITMENTS AND CONTINGENCIES

       1.   Employment agreements

       The Company has entered  into  agreements  with eight key  employees  and
       officers  which  provide  for  annual  salaries  and  incentive  bonuses.
       Incentive  bonuses are calculated as a percentage of gross profits and/or
       sales of the Company.

       Annual salaries under these employment agreements,  in the aggregate, are
as follows:

         Year ending September 30,
             1999                                             $    548,000
             2000                                                  515,000
             2001                                                  485,000
             2002                                                  295,000
             2003                                                  170,000
             Thereafter                                              -
                                                                  ============
                                                                 $  2,013,000
                                                                 ============

       2.   Litigation

       From time to time the Company is engaged in various  lawsuits or disputes
       as plaintiff or defendant  arising in the normal  course of business.  In
       the opinion of  management,  based upon advice of counsel,  the  ultimate
       outcome of these matters will not have a material impact on the Company's
       financial position or results of operations.

<PAGE>


NOTE O - EARNINGS (LOSS) PER SHARE

       In  February  1997,  the  Financial  Accounting  Standards  Board  issued
       Statement of Financial  Accounting Standard No. 128, "Earnings per Share"
       (SFAS No. 128).  SFAS No. 128 is effective for financial  statements  for
       periods ending after December 15, 1997, and requires  companies to report
       both "basic" and "diluted" earnings per share. "Basic" earnings per share
       do not include the  addition of common  stock  equivalents  to the shares
       outstanding.  "Diluted" earnings per share require the addition of common
       stock equivalents to the shares  outstanding.  Average shares outstanding
       is the  denominator  used in  "basic"  earnings  per share  calculations.
       Accordingly,  "basic"  earnings  per share will be higher than  "diluted"
       earnings per share. This statement replaces  Accounting  Principles Board
       ("APB") Opinion No. 15, "Earnings per Share." The effect of adopting SFAS
       No. 128 did not materially  effect the Company's  earnings per share. The
       following  data show the amounts  used in computing  earnings  (loss) per
       common  share,  including  the  weighted-average  number  of  shares  and
       dilutive potential common shares.

                                                       Year ended September 30,
                                                   ----------------------------
                                                         1998            1997
                                                    ==============   ===========

Loss applicable to common stock ................    $(5,445,383)    $(1,735,483)
                                                    ===========     ===========

Common shares outstanding during the
   entire period ...............................      4,072,863       3,033,407

Weighted-average common shares issued
   during the period ...........................        324,627         179,682
                                                    -----------     -----------

Weighted-average number of common
   shares used in basic EPS ....................      4,397,490       3,213,089

Dilutive effect of stock options
   and warrants ................................           --              --
                                                    ===========     ===========

Weighted-average number of common
   shares and dilutive potential common
   stock used in diluted EPS ...................      4,397,490       3,213,089
                                                    ===========     ===========


       For the years ended  September 30, 1998 and 1997,  all of the options and
       warrants that were outstanding, as described in Note M, were not included
       in the  computation  of  diluted  EPS  because  to do so would  have been
       anti-dilutive.

<PAGE>


NOTE P - SUBORDINATED DEBENTURES

       On June 16,  1998,  the Board of  Directors  of the Company  approved the
       issuance of up to $1,000,000 of three percent convertible debentures (the
       "Debentures")  with a maximum  term of 24  months.  The  Debentures  will
       mature,  unless earlier  converted by the holders,  into shares of common
       stock of the  Company.  The  Company  has  agreed to file a  registration
       statement with the United States Securities and Exchange  Commission with
       respect to the common stock of the Company into which the  Debentures may
       be converted.

       The Debentures are  convertible by the holders thereof into the number of
       shares of common stock equal to the face amount of the  Debentures  being
       converted divided by the lesser of (i) eighty percent (80 percent) of the
       closing bid price of the Company's common stock as reported on the NASDAQ
       Small Cap market on the day of conversion,  or (ii) $2.75. The Debentures
       may be converted in three equal installments  beginning on the earlier of
       (i) the 75th day of their issuance,  and continuing through the 135th day
       of their  issuance,  or (ii) the day following the effective  date of the
       Registration Statement, through the 60th day following the effective date
       of the Registration Statement. The Company may cause the Debentures to be
       converted  into shares of common stock after the 110th day  following the
       effective  date of the  Registration  Statement,  if the common stock has
       traded at or above $5.50 per share for 20 consecutive days.

       As of September 30, 1998,  the Company had issued all $1,000,000 of these
       convertible Debentures and none have been converted.

       On October 22, 1997,  the Board of Directors of the Company  approved the
       issuance of up to $1,500,000 of 3 percent  convertible  Debentures with a
       maximum term of 24 months.  The  Debentures  will mature,  unless earlier
       converted by the holders, into shares of common stock of the Company. The
       Company  has  agreed to file a  registration  statement  with the  United
       States  Securities  and  Exchange  Commission  with respect to the common
       stock of the Company into which the Debentures may be converted.

       As of September 30, 1998,  the Company had issued all $1,500,000 of these
       convertible  Debentures  and  $1,000,000  had been  converted  to 689,332
       shares of common stock.

       Because  of the  favorable  conversion  feature  of the  Debentures,  the
       Company  has  recognized  interest  expense  relating  to the price below
       market at which the  Debentures  can be converted  into common  shares of
       stock.  The interest is initially set up as a deferred charge against the
       subordinated  debenture  balance  with an  offset to  additional  paid-in
       capital.  The deferred interest is amortized over a period  corresponding
       to time  restrictions  as to when the  Debentures  can be converted  into
       stock. The resulting  charge to interest expense  increases the effective
       interest rate of the Debentures.  Deferred  interest  expense of $250,032
       was recorded on the  $1,000,000 in  Debentures  relative to the favorable
       conversion feature and is being amortized over four months and charged to
       interest  expense.  As of September  30,  1998,  $151,461 of the $250,032
       deferred charge had been amortized. This interest along with the stated 3
       percent interest rate in the Debentures  results in an inherent  interest
       rate of 31 percent.
<PAGE>


NOTE P - SUBORDINATED DEBENTURES - CONTINUED

       In connection  with the  $1,500,000 in Debentures,  the Company  recorded
       $389,591  of  deferred   interest   expense  related  to  the  beneficial
       conversion  feature.  The entire  deferred  charge has been amortized and
       charged to interest  expense at September  30, 1998.  This  interest when
       added to the stated 3 percent  interest rate of the Debenture  results in
       an inherent  interest rate of 28 percent over the Debentures  life of two
       years.


NOTE Q - GOODWILL AND INTANGIBLES

       Goodwill and intangibles  consist  primarily of goodwill  acquired in the
       purchase of the InCirT, MOTO-SAT, and PowerStream divisions.  Intangibles
       other than goodwill consist of product  development  costs. The long-term
       value of the product development costs is connected to the application of
       technologies  to  viable  products  which  management   believes  can  be
       successfully  marketed by the Company.  On an ongoing  basis,  management
       reviews the valuation and amortization of intangible  assets to determine
       possible  impairment by comparing the carrying value to the  undiscounted
       estimated   future  cash  flows  of  the  related  assets  and  necessary
       adjustments,  if any, are recorded.  During 1998, the carrying  values of
       goodwill  and  intangibles  were  adjusted  in the amount of  $267,414 to
       better reflect  management's  current expectations for the realizablility
       of these assets.  The  adjustments  relate to goodwill and intangibles of
       the MOTO-SAT  division.  Management  believes current and projected sales
       levels of its  existing  and planned  products  will support the carrying
       costs of assets, as adjusted.

       The following is a summary of goodwill and intangible assets:


          Fiscal Year ended September 30,                1998            1997
          -------------------------------
                                                     ------------   ------------
              Goodwill                              $  2,287,894   $  2,393,685
              Other intangibles                           71,150        221,285
                                                    ------------   ------------
                                                       2,359,044      2,614,970
              Less accumulated amortization             (327,359)      (327,824)
                                                     ============   ============
                                                     $  2,031,685   $  2,287,146
                                                     ============   ============


NOTE R - SUBSEQUENT EVENTS

       In December,  1998, the Company  entered into a letter of intent with the
       Company's  CEO  for  the  sale  of  the  MotoSat  division.  The  Company
       anticipates the sale will be completed in January 1999. The proposed sale
       provides  for  the  acquisition  of  substantially  all  of  the  assets,
       assumption of all  liabilities  and the  operations of the division.  The
       proposed sale will not generate cash proceeds to the Company. The Company
       expects to recognize a gain of approximately $20,000 on the sale.
<PAGE>


NOTE R - SUBSEQUENT EVENTS - CONTINUED

       Subsequent to year-end,  the Company negotiated a contract with a company
       for the sale of the Cable division. The sale is subject to the completion
       of due diligence and the execution of a definitive agreement. The Company
       anticipates completion of the sale in January 1999. Based on terms of the
       contract  agreed to during  November  and  December,  1998,  the  Company
       expects to receive  cash  proceeds  of  approximately  $1,075,000  and to
       recognize a loss upon completion of the sale of approximately $1,000,000.

       On December  21,  1998,  the Company  entered  into an  agreement  with a
       laminating  company  whereby a proposed  newly formed  subsidiary  of the
       Company will merge into the laminating company and the laminating company
       will become a wholly-owned subsidiary of the Company. Stockholders of the
       laminating  company will receive shares of common stock of the Company in
       exchange for their shares.  The parties have  commenced  preparation of a
       Registration  Statement  on Form S-4.  The  merger is subject to Form S-4
       becoming  effective and approval of the  stockholders  of the  respective
       companies.

       In December 1998, the Company signed a letter of intent with a company to
       negotiate a possible  merger.  The letter of intent serves as a basis for
       the parties to negotiate formal, definitive agreements, memorializing all
       the terms of the merger.

       The Company has an  investment  in the  publicly  traded stock of another
       company  (Note C).  The  stock  was  received  in  satisfaction  of notes
       receivable  and has a guaranteed  minimum value of $7.4532 per share.  At
       September 30, 1998, the market value of the stock was approximately $2.25
       per  share.  At  January  1999,  the  quoted  market  value of the  stock
       decreased to approximately $0.66 per share.

<PAGE>
<PAGE>
--------------------------------------------------------------------------------
              ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------

     Not applicable.

--------------------------------------------------------------------------------
                                    PART III


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

     The  information  required is set forth  under the  captions  "Election  of
Directors,  Directors and Executive  Officers;  Compliance with Section 16(a) of
Securities Exchange Act of 1934" in the Company's  definitive proxy statement to
be filed pursuant to Regulation 14A and is incorporated herein by reference.

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

                         ITEM 10. EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------

     The information  required is set forth under the caption  "Compensation  of
Executive  Officers" in the  Company's  definitive  proxy  statement to be filed
pursuant to Regulation 14A and is incorporated herein by reference.


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

     The information required is set forth under the caption "Security Ownership
of Certain  Beneficial Owners and Management" in the Company's  definitive proxy
statement to be filed pursuant to Regulation 14A and is  incorporated  herein by
reference.

--------------------------------------------------------------------------------
             ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

     The  information  required  is set forth  under the  caption  "Election  of
Directors - Certain  Relationships  and Related  Transaction"  in the  Company's
definitive  proxy  statement  to be  filed  pursuant  to  Regulation  14A and is
incorporated herein by reference.
<PAGE>
--------------------------------------------------------------------------------

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




(a) Reports on Form 8-K.

     No reports on Form 8-K were filed by the  Company  during the three  months
ended September 30, 1998.


 (b)      INDEX OF EXHIBITS

Exhibit No.                    Description

         1.     Form  of  Underwriter's  Warrant  Agreement  including  Form  of
                Underwriter's   Warrant,   incorporated   by  reference  to  the
                Company's  Registration  Statement  filed on Form SB-2, SEC File
                No. 33-96444.

         3.     Articles of incorporation and By-laws, incorporated by reference
                to the Company's  Registration Statement filed on Form SB-2, SEC
                File No. 33-96444.

         10.1   Asset Purchase  Agreement for the purchase of InCirT  Technology
                from the  Cerplex  Group,  Inc.  See  Exhibit  to Report on Form
                10-QSB dated June 30, 1996.

         10.2   Employment Agreement between James S. Pendleton and the Company.
                See Exhibit to Report on Form 10-QSB dated June 30, 1996.

         10.3   Employment  Agreement  between  Wayne R. Wright and the Company.
                See Exhibit to Report on Form 10-QSB dated June 30, 1996.

         10.4   Employment  Agreement  between  Robert D.  Deforest  Sr. and the
                Company. See Exhibit to Report 10-QSB dated June 30, 1996.

         10.5   Employment  Agreement  between  Lewis  Carl  Rasmussen  and  the
                Company.  See  Exhibit to Report on Form  10-QSB  dated June 30,
                1996.


<PAGE>


INDEX OF EXHIBITS - CONTINUED

Exhibit No.                            Description

         10.6   Employment Agreement between Alan L. Weaver and the Company. See
                Exhibit to Report on Form 10-QSB dated June 30, 1996.

         10.7   Loan and  Security  Agreement  dated  February  29, 1996 between
                National  Bank of  Canada  and the  Company.  See  10-KSB  dated
                September 30, 1996.

         10.8   Form  of  Warrant   between  the   Registrant   and  JW  Charles
                Securities,  Inc., BMC Bach  International  Ltd.,  Gordon Mundy,
                Louis  Centofanti  and  Heracles   Holdings,   See  Registration
                Statement filed on Form S-3, SEC File No. 333-60451

         10.9   Asset   Purchase   Agreement   dated  March  22,  1995   between
                Registratant,  Insulectro, Quality Interconnect Systems, Quintec
                Interconnect  Systems,  Quintec  Industries and QIS Electronics.
                See  Registration  Statement  filed on Form  SB-2,  SEC File No.
                33-96444.

         10.10  Real Estate Lease dated June 2, 1993 between  Registrant and The
                Equitable Life Insurance  Society.  See  Registration  Statement
                filed on Form SB-2, SEC File No. 33-96444.

         10.11  Form of 1995 Stock Option Plan. See Registration Statement filed
                on Form SB-2, SEC File No. 33-96444.

         10.12  Asset Purchase Agreement dated November 12, 1996 for the sale of
                the  San  Jose  Division  between  Touche  Electronics,  Inc.  a
                subsidiary  of  TMCI  Electronics,  Inc.  and the  Company.  See
                Exhibit to Report on Form 10-QSB dated December 31, 1996.

         10.13  Loan and Security Agreement between FINOVA and the Company.  See
                Exhibit to Report on Form 10-KSB, dated September 30, 1997.

         10.14  Employment  Agreement  between Stephen J. Fryer and the Company.
                See Exhibit to Report on Form 10-KSB, dated September 30, 1997.

         10.15  Employment  Agreement between Daniele Reni and the Company.  See
                Exhibit to Report on Form 10-KSB, dated September 30, 1997.

         10.16  Agreement and Plan of Reorganization  through  Acquisition dated
                April 1,  1997  between  PowerStream  Technology,  Inc.  and the
                Company.  See Exhibit to Report on Form 10-KSB,  dated September
                30, 1997.

         10.17  Finder's   Agreement  between  the  Registrant  and  JW  Charles
                Securities, Inc., dated June 2, 1998. See Registration Statement
                filed on Form S-3, SEC File No. 333-60451

         11.    Statement re: computation of per share earnings.  See Exhibit to
                Report on Form 10-KSB, dated September 30, 1998.

         23.1.  Consent of Grant Thornton LLP. This filing page ___.

         27.    Financial Data Schedule

<PAGE>


                                   Signatures

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


      Date:   January 13, 1999                     PEN INTERCONNECT, INC.



                                                  By:/s/Stephen Fryer
                                                  -------------------
                                                  Stephen Fryer
                                                  President and Director

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



    Date:  January 13, 1999                                By:/s/James Pendleton
    -----  ----------------                                ---------------------
                                                           James Pendleton
                                                           CEO and Director


    Date:  January 13, 1999                               By:/s/Stephen Fryer
    -----  ----------------                               -------------------
                                                          Stephen Fryer
                                                          President and Director


    Date:  January 13, 1999                              By:/s/Robert Albrecht
    -----  ----------------                              ---------------------
                                                              Robert Albrecht
                                            CFO and Principal Accounting Officer


    Date:  January 13, 1999                               By:/s/Wayne R. Wright
    -----  ----------------                               ---------------------
                                                              Wayne R. Wright
                                                              Director



    Date:  January 13, 1999                              By:/s/Milton Haber
    -----  ----------------                              -------------------
                                                            Milton Haber
                                                            Director

   Date:  January 13, 1999                              By:/s/C. Reed Brown
    -----  ----------------                              -------------------
                                                            C. Reed Brown
                                                            Director