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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
         OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended June 26, 1998

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934
                  For the Transaction period from____to____

                         Commission File Number 1-12873
                                 ASD GROUP, INC.
              (Exact name of small business issuer in its charter)

             Delaware                                     14-1483460
 (State or other jurisdiction of               (IRS Employer Identification No.)
  incorporation or organization)

                 1 INDUSTRY STREET, POUGHKEEPSIE, NEW YORK 12603
          (Address of principal executive offices, including Zip Code)

                                 (914) 452-3000
              (Registrant's telephone number, including area code)

      Securities registered pursuant to Section 12(b) of the Exchange Act:
                          Common Stock, $.01 par value
      Securities registered pursuant to Section 12(g) of the Exchange Act:
                          Common Stock, $.01 par value

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

         Yes      [X]               No      [ ]

         Check if there is no disclosure of delinquent filers pursuant 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 any
amendment to this Form 10-KSB.

State issuer's revenues for its most recent fiscal year:   $14,298,745

The aggregate market value of the issuer's Common Stock, $.01 par value, held by
non-affiliates on October 6, 1998, was approximately $869,069.

As of October 6, 1998 there were 1,979,934 shares of the issuer's Common Stock,
$.01 par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE

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<PAGE>




                                 ASD GROUP, INC.
                                      INDEX

                                Table of Contents
                                     Part I

Item 1.   Description of Business ............................................ 1
Item 2.   Description of Property ............................................11
Item 3.   Legal Proceedings...................................................12
Item 4.   Submission of Matters to a Vote of Security Holders.................12

                               Part II

Item 5.   Market for Common Equity and Related Stockholder Matters............12
Item 6.   Management's Discussion and Analysis or Plan of Operation...........13
Item 7.   Financial Statements................................................19
Item 8.   Changes In and Disagreements with Accountants on Accounting and 
          Financial Disclosure................................................19

                              Part III

Item 9.   Directors, Executive Officers, Promoters and Control Persons; 
          Compliance with Section 16(a) of the Exchange Act...................20
Item 10.  Executive Compensation..............................................23
Item 11.  Security Ownership of Certain Beneficial Owners and Management......25
Item 12.  Certain Relationships and Related Transactions......................25
Item 13.  Exhibits and Reports on Form 8-K....................................27



<PAGE>

                           FORWARD LOOKING STATEMENTS

         ASD Group, Inc. (the "Company") cautions readers that certain important
factors may affect the Company's actual results and could cause such results to
differ materially from any forward-looking statements that may be deemed to have
been made in this Form 10-KSB or that are otherwise made by or on behalf of the
Company. For this purpose, any statements contained in the Form 10-KSB that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "expect," "believe," "anticipate," "intend," "could," "estimate," or
"continue" or the negative other variations thereof or comparable terminology
are intended to identify forward-looking statements. Factors that may affect the
Company's results include, but are not limited to, the Company's limited history
of profitability, its dependence on a limited number of customers and key
personnel, its possible need for additional financing and its dependence on
certain industries. The Company is also subject to other risks detailed herein
or detailed from time to time in the Company's filings with the Securities and
Exchange Commission.

                                     PART-I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         The Company provides comprehensive contract manufacturing and
engineering services to original equipment manufacturers ("OEMs.") The Company
specializes in the fabrication, assembly and testing of complex industrial
products and non-invasive medical equipment. The Company manufactures complete
systems, as well as assemblies, including printed circuit boards, cable and wire
harnesses and other electro-mechanical assemblies. The Company complements its
basic manufacturing services by providing its customers with a broad range of
sophisticated product engineering and design services. Products manufactured by
the Company range from automated test and production systems to less complex
products such as sign plotting devices. Representative customers of the Company
include ENI Technologies (a division of Astec America, Inc.), General Electric,
Gerber Scientific Products, International Business Machines Corporation ("IBM"),
U.S. Surgical, Motorola Corporation and the United States Postal Service.

         Downsizing by American industry, combined with rapid change, strong
competition and increasingly shorter product life cycles in various industries,
have made it considerably less attractive for OEMs to manufacture in-house,
particularly low unit volume products or short cycle electronic products. As a
result, many OEMs have adopted and are becoming increasingly reliant upon
manufacturing outsourcing strategies and on contract manufacturers to satisfy
their mainstream manufacturing requirements. Management of the Company believes
that this trend will continue. According to reports by Technology Forecasters,
Inc., growth in this industry is forecasted at 26% per year through 1999.

         The Company believes that its ability to produce high quality products
and deliver them on a timely basis, combined with sophisticated engineering and
manufacturing capabilities will result in an expansion of its relationships with
existing customers and the addition of new 


                                       1
<PAGE>

customers. In addition, the Company's proprietary Production Operation
Management ("POM") manufacturing software is an integral part of the Company's
services as it assists the Company in controlling its manufacturing operations
from estimating to shipping to billing. The POM manufacturing software is a real
time system, which allows the Company to track specific projects as they move
through the production cycle and to make adjustments as necessary in order to
control costs and achieve higher levels of quality control and efficiencies.

         Notwithstanding what management believes to be a positive climate for
contract manufacturers in the United States generally, the Company's sales were
and continue to be adversely effected by the situation in the Asian markets. The
Company has experienced a reduction in orders from several customers,
principally those effected by the Asian market. These cancellations resulted in
the Company regarding an inventory write-off. On June 26, 1998, the Company
entered into a definitive agreement with a group of investors for a $1,900,000
capital infusion and agreements with its primary lenders to restructure the
Company's debt. As a result of the capital infustion and debt restructuring, the
Company recorded a $1,717,000 tax expense resulting from a one-time write-off of
the previously established deferred tax asset which would not be utilized. See
"Item 6. Management's Discussion and Analysis or Plan of Operation - Liquidity
and Capital Resources."

         While management has taken significant steps to improve the Company's
financial condition, the Company's immediate cash requirements are significant.
Management is currently attempting to obtain additional financing and intends to
raise additional funds within the next 12 months through equity and/or debt
financings. 

         The Company was incorporated in New York in May 1965 under the name
Dutchess Design & Development, Inc. In July 1996, the Company was reincorporated
in Delaware under its present name. The Company maintains its executive offices
at 1 Industry Street, Poughkeepsie, New York 12603 and its telephone number is
(914) 452-3000.

INDUSTRY OVERVIEW

         OEMs originally utilized contract manufacturing sources primarily to
reduce labor costs in the production of electronic assemblies and to provide for
additional manufacturing capacity in times of peak demand. These early contract
manufacturers typically were employed on a consignment basis in which the OEM
provided the circuit and production designs, procured all components and
performed the final product listing.

         During the early 1980's, the commercialization of the personal computer
began to fuel substantial growth in the electronics and other industries and,
with it, the growth of contract manufacturers. Despite rapid growth in the
electronics industry, the market soon became characterized by intense price
competition and demands for more frequent product introductions. In an effort to
survive and meet the requirements of the marketplace, OEMs were forced to
restructure and focus their resources on core strategic strengths, such as
product development, software design and marketing, and to outsource capital
intensive manufacturing operations to specialists. As contract manufacturers
began to perform more turnkey services, the relationship between OEMs and
contract manufacturers became more strategic in nature, with the two now linked
in a close relationship to deliver cost-effective, high quality products quickly
to the marketplace.


                                       2
<PAGE>

         OEMs utilize contract manufacturers for the following reasons:

         REDUCE TIME TO MARKET. Due to intense competitive pressures in the
electronics, industrial products and medical equipment industries, OEMs are
faced with increasingly shorter product life-cycles and therefore have a growing
need to reduce the time required to bring a product to market. OEMs can
generally reduce their time to market by using the established manufacturing
expertise and infrastructure of contract manufacturers.

         REDUCE CAPITAL INVESTMENT. As electronics, industrial products and
medical equipment have become more technologically advanced, the manufacturing
process has become increasingly automated requiring a greater level of
investment in capital equipment. Contract manufacturers enable OEMs to gain
access to advanced manufacturing facilities, thereby reducing the OEMs' overall
capital equipment requirements.

         FOCUS RESOURCES. Because the electronics, industrial products and
medical equipment industries are experiencing greater levels of competition and
more rapid technological change, many OEMs are increasingly seeking to focus
their resources on activities and technologies in which they add the greatest
value. By offering comprehensive design, assembly and turnkey manufacturing
services, contract manufacturers allow OEMs to focus on core technologies and
activities such as product development, marketing and distribution.

         ACCESS LEADING MANUFACTURING TECHNOLOGY. Products and manufacturing
technology have become increasingly sophisticated and complex, making it
difficult for OEMs to maintain the necessary technological expertise in process
development and control. OEMs are motivated to work with a contract manufacturer
in order to gain access to the contract manufacturer's process expertise and
manufacturing know-how.

         IMPROVE INVENTORY MANAGEMENT AND PURCHASING POWER. OEMs are faced with
increasing difficulties in planning, procuring and managing their inventories
efficiently due to frequent design changes, short product life-cycles, large
investments in electronic components, component price fluctuations and the need
to achieve economies of scale in materials procurement. OEMs can generally
reduce production costs by using the procurement capabilities of the contract
manufacturer. By utilizing a contract manufacturer's expertise in inventory
management, OEMs can generally better manage inventory costs and increase their
return on assets.

BUSINESS STRATEGY

         The Company focuses on servicing OEMs who produce complex, high dollar
value industrial products where high quality manufacturing is extremely
important. Management of the Company believes that profits for such products
tend to generate higher gross profit margins. The Company's objective is to
create revenues and improve profitability by utilizing its POM manufacturing
software and sophisticated manufacturing, engineering and design services to
offer customers comprehensive manufacturing solutions. The Company intends to
realize its objective by implementing the following strategies:


                                       3
<PAGE>

         INCREASE SALES FROM EXISTING CUSTOMERS AND ADD NEW CUSTOMERS. The
Company plans to expand existing relationships and seek new customers in the
markets it currently serves and in additional markets. The Company plans to
increase the amount of sales to existing customers by devoting more time to
these customers through an increased sales force and by offering improved and
expanded services such as faster metal cutting machining centers, faster sheet
metal punching equipment, expanded painting facilities and more rapid and less
expensive testing procedures and equipment. While the Company has an on-going
quality improvement program, the Company will intensify its efforts in educating
its employees on the Company's quality requirements and in measuring its
employees' conformance to these requirements. Additionally, the Company will
improve on its monthly quality assurance technical audits in conformance with
the international quality process specification and have an outside-certified
auditor audit the quality management system every six months. The Company also
intends to increase the frequency of its customer satisfaction surveys from
quarterly to monthly. The Company is also planning to publish a newsletter
quarterly to be mailed to customers. The Company plans to diversify its customer
base by increasing its marketing efforts. The Company intends to do this by
attending more trade shows, expanding the number of advertisements in trade
journals, expanding the number of sales personnel, expanding the number of
customers who receive direct mailings, and providing new sales literature,
conducting interactive electronic presentations and enhancing its presentation
on the Internet World Wide Web. The Company's objective is to obtain multiple
customers in the markets it currently serves and in additional markets.

         INCREASE PROFITS BY REDUCING COSTS. The Company plans to reduce costs
by enhancing the POM manufacturing software to augment its real time
productivity and quality measurement system using bar codes and adding a feature
to the POM manufacturing software which will allow each customer a window into
the POM manufacturing software to monitor via the Internet the status of
purchase orders relating to their jobs. Management of the Company believes that
the utilization of bar codes will reduce the labor costs associated with the
present manual entry method of reporting. Although customers will not have the
ability to modify existing jobs or place new orders through the Internet,
management believes that allowing customers to access information themselves
will also enable the Company to reduce overhead.

         FACILITATE GROWTH OF THE COMPANY THROUGH ACQUISITIONS. The contract
manufacturing industry is now going through consolidation. The Company may
acquire other contract manufacturers if management determines that such
acquisitions will enable the Company to improve net sales and profits. These
acquisitions may allow the Company to expand to other regions of the country and
possibly abroad. Management of the Company believes that the Company's
proprietary POM manufacturing software will enable the Company to realize
greater efficiencies with respect to any such acquisitions. The Company has no
current commitment or understanding with, and has not entered into any
negotiations with, any acquisition candidates.

POM MANUFACTURING SOFTWARE

         The Company's proprietary POM manufacturing software is integral to the
Company's operations. The POM manufacturing software tracks all of the Company's
operations. As a result, the POM manufacturing software assists the Company in
controlling costs and achieving higher levels of quality control and
efficiencies.


                                       4
<PAGE>

         Specifically, after an order is placed, the POM manufacturing software
allows the Company's industrial engineers and estimators to create a
hierarchical data base of the components of a customer's product in order to
estimate the total cost of the product and to produce a priced bill of materials
("BOM") which includes purchased items and labor broken down into sequenced
tasks. Thereafter, the POM manufacturing software automatically produces printed
requests for quotations to the appropriate supplier. As a result, the Company
can provide the customer with a printed BOM broken down by each assembly and
fabricated part which breakdown includes price of labor, raw materials and
purchased components.

         When the Company releases the product for manufacturing, the software
provides the Company's purchasing department with electronic purchase
requisitions automatically generated from the BOM. Once the purchasing
department negotiates final prices and selects the suppliers, the POM
manufacturing software automatically prints and sends purchase orders to the
suppliers and automatically prints lists of raw materials and components
("Kits") for each work center so that the Company's materials management
department can supply these items to the manufacturing department when
scheduled. The POM manufacturing software provides the purchasing department
lists of purchased items that must be expedited in order to satisfy the delivery
dates. If necessary, the POM manufacturing software will also provide the
purchasing department printed amendments to purchase orders to change the
quantity and delivery dates of Kits that have had delivery dates or quantities
to be manufactured which are altered by the Company's production management
department in response to customer demand. The POM manufacturing software
automatically prints bar-coded work orders listing sequenced labor tasks to be
performed for each work center in response to a production lot defined by the
Kit. As purchased items are received and entered into the POM manufacturing
software, the POM manufacturing software updates the appropriate Kit, updates
work-in-process values and electronically compares quantities to the POM
purchase orders. As labor is expended on each work order and recorded each day,
the POM manufacturing software updates the work-in-process values and compares
the actual labor hours per task to the estimated labor hours and then produces
reports to management of estimated compared to actual results to date for each
job showing purchasing efficiency and labor efficiency compared to the
estimating standard.

         If requested, for a specified job, the POM manufacturing software can
produce a detailed report showing each purchase order received, each invoice
sent to the customer, each labor transaction and each receiving transaction. On
demand from production administration as verified by its shipping department,
the POM manufacturing software prints an invoice for services rendered or
product shipped. When an invoice is printed, the POM manufacturing software
updates the accounts receivable in the financial system and deducts the dollar
amount of parts and labor from the work-in-process in labor and dollars in
purchased part for each active job, prints a statement for each customer showing
the invoices that are projected to become due through the next week, prints
projected accounts receivable collections by customer by week, prints a rating
letter to each supplier informing the supplier of its quality rating based on
comparison of purchase order quantity and delivery date requirements compared to
receiving transactions, and prints the productivity performance measurement of
each employee involved in this process.

         There are numerous advantages to the Company and its customers through
utilization of the POM manufacturing software. First, the priced bill of
materials sent to the customer insures 


                                       5
<PAGE>

customer confidence in the Company as the customer realizes the Company
understands the customer's product and the customer can evaluate the Company's
pricing strategy in detail. In addition, because POM manufacturing software
automatically produces requests for quotations, purchase requisitions and
purchase orders, overhead costs are reduced. Since the POM manufacturing
software provides timely comparison of actual costs to estimated costs as each
job progresses, the Company's production management team is more likely to spot
inefficiencies early in the production cycle and then take corrective action
thereby maximizing profit. Moreover, because POM manufacturing software
evaluates, on a daily basis, the productivity levels of all direct employees,
management believes that greater productivity is achieved. Finally, because the
POM manufacturing software is used to provide weekly statements to its
customers, management believes that accounts receivable collection is faster
thereby enhancing cash flow.

         The Company is developing upgrades for its POM manufacturing software
on an ongoing basis. Most recently, the Company enhanced the features of the POM
manufacturing software to allow management to parcel a large job into small
production runs called Kits. The POM manufacturing software tracks the status of
each Kit and allows management to modify each Kit in the same way as it is able
to modify the entire job. Any modifications to Kits are sent to the Company's
purchasing agents, expediters and suppliers.

         The Company is currently in the process of having the POM manufacturing
software upgraded to provide for the use of bar code tracking, which will
enhance the Company's ability to provide real time productivity analysis of each
direct worker and to provide the status of each order being processed in the
plant. The Company also plans to upgrade the POM manufacturing software to add a
feature which will allow each customer a window into the POM manufacturing
software to monitor via the Internet the status of each purchase order relating
to such customer's job and a cost breakdown of each of the customer's products
including a cost breakdown of each sub-assembly. As a result, the Company's
customers will have immediate access to information regarding each purchase
order relating to such customer's job. Management of the Company believes that
none of the Company's competitors have similar capabilities.


                                       6
<PAGE>



INDUSTRIES AND PRODUCTS

         The following table lists the industries in which the Company expects
to continue to conduct significant business during fiscal year ended June 25,
1999 ("Fiscal 1999") and the products for which the Company expects to provide
manufacturing services (based on net sales for the fiscal year ended June 26,
1998 ("Fiscal 1998")).

<TABLE>
<CAPTION>
INDUSTRY                           SPECIFIC PRODUCT OR PRODUCT COMPONENT
--------                           -------------------------------------

<S>                                <C>    
Computer...........................Chassis,  frames,  panels,  wire harness and cables,  jumpers,  test  equipment,
                                   process equipment
Information Processing.............Test equipment for copiers
Instrumentation....................Printed circuit cards for laser measurement instruments
Medical............................Power components for medical equipment; automated process equipment
Semiconductor......................Coating equipment; power components for semiconductor equipment; test equipment
Sign-Making........................Sub-systems for plotters
Transportation.....................Airport control components
Other..............................Parcel drop system,  control  systems for power  distribution;  printed  circuit
                                   boards for elevator control systems
</TABLE>

SERVICES

         The Company provides comprehensive contract manufacturing and
engineering services to OEMs. Such services include:

         PRODUCT ENGINEERING AND DESIGN SERVICES. The Company assists its
customers in designing or evaluating designs of products. The Company designs or
evaluates designs for ease and quality of manufacture and, when appropriate,
recommends changes to reduce manufacturing costs or lead times or to increase
the quality of finished assemblies. The Company supports its customers with
sophisticated product engineering and design services using computer aided
design equipment with computer aided machinery software. Product engineering and
design include electrical design, electronic circuit design, mechanism design,
electro-mechanical design, printed circuit board design and software
engineering. The Company also assists its customers with overall product
redesign with the objective of reducing manufacturing costs. The goal of the
Company's engineering and product design services is to create a more stable
volume of turnkey manufacturing and an elevated level of strategic partnering
with principal customers.

         MANUFACTURING. The Company custom manufactures complete systems,
printed circuit board assemblies, cable and wire harnesses and other
electro-mechanical assemblies. Manufacturing services offered by the Company
include sourcing and procurement of raw materials and parts, precision metal
fabrication, welding, precision machine parts, painting, silk screening,
assembly and testing. In order to achieve high levels of performance in its
manufacturing operations, the Company combines advanced manufacturing
technology, such as computer-aided manufacturing and testing, with
state-of-the-art manufacturing techniques.


                                       7
<PAGE>

         In implementing its manufacturing approach, the Company emphasizes
timely delivery and accurate and up-to-date documentation for each product. The
Company develops an appropriate production process and complete set of
manufacturing process instructions, inspection plans and a quality assurance
plan for each product. An analysis of each customer's materials specification is
performed to identify component suppliers. The Company then plans and executes
purchase orders, receives, inspects and warehouses components, expedites
critical components and delivers a complete set of components to the production
floor for assembly. The Company uses its POM manufacturing software to monitor
and control all aspects of the manufacturing process, including material
resource planning, shop floor control, work-in-process tracking, statistical
process control and activity based product costing.

         Responsiveness to customers, particularly as to engineering changes
once manufacturing has commenced, is an important component of the Company's
manufacturing approach. Many products manufactured by the Company are in the
early stages of their product life cycle and therefore may have ongoing design
or engineering changes. Upon receiving an engineering change notice, the Company
identifies the impact of such changes in the production process, current
inventory and open purchase orders. To support continuous production flow while
minimizing excess and obsolete inventory costs for the customer, the Company
restructures bills of material and expedites orders for new components, as
authorized. The Company also identifies and implements changes to manufacturing
instructions and test plans. In order to assure prompt customer service, the
Company assigns each project a product manager, quality assurance engineer,
product engineer, test engineer and customer service representative. The Company
maintains regular contact with its customers to assure adequate information
exchange, document control and activities coordination necessary to support a
high level of quality and on-time delivery.

         SYSTEM ASSEMBLY. The Company's assembly activities range from assembly
of higher level sub-systems and systems to printed circuit board assembly and
assembly of complex electro-mechanical components. The Company specializes in
printed circuit board assembly, cable and wire harness assembly and
electro-mechanical assembly, all utilizing specialized tools and techniques.

         QUALITY ASSURANCE. The Company's quality assurance procedures are an
integral part of providing customers with turnkey manufacturing solutions. The
Company provides computer-aided in-circuit and functional testing, which
contributes significantly to the Company's ability to deliver high quality
products on a consistent basis. The Company has developed specific strategies
and routines to test printed circuit boards and other assemblies. In-circuit
tests verify that all components have been properly inserted and that electrical
circuits are complete. Functional tests determine if the assembly is performing
to customer specifications. The Company either designs and procures test
fixtures and develops its own test software or utilizes the customer's existing
test fixtures and test software. In addition, the Company provides environmental
stress tests of the printed circuit board or system assemblies, when required by
its customers.

         The Company's quality management system has been certified under ISO
9002, an international quality standard. The Company is in the process of being
certified by Underwriters 


                                       8
<PAGE>

Laboratories ("UL") as a UL approved panel manufacturer. The Company's cable and
wire harnesses and assemblies are manufactured to Underwriters Laboratories and
Canadian Standards Association specifications. The Company's printed circuit
board manufacturing process has been certified by BBAC (a British communications
equipment manufacturing quality specification).

CUSTOMERS, SALES AND MARKETING

         The Company serves a wide variety of markets, including the computer,
computer peripherals, telecommunications, postal equipment, semiconductor,
environmental, test equipment, process equipment, industrial equipment and other
industries. Representative customers of the Company include ENI Technologies (a
division of Astec America, Inc.), General Electric, Gerber Scientific Products,
International Business Machines Corporation ("IBM"), U.S. Surgical, Motorola
Corporation and the United States Postal Service. A majority of the Company's
customers are located in the Northeast.

         For Fiscal 1998 the Company's five largest customers accounted for
approximately 67.1% of net sales. Sales to ENI Technologies, Spectran
Corporation, Olin Microelectronics, IBM, and Noisecom accounted for
approximately 22.4%, 17.6%, 13.0%, 8.0%, and 6.1%, respectively, of the
Company's net sales during Fiscal 1998. For the fiscal year ended June 27, 1997
("Fiscal 1997"), the Company's five largest customers accounted for
approximately 66% of net sales. Sales to ENI Technologies, Gerber Scientific
Products, Lockheed Martin Corporation, International Business Machines and S&K
Products International, Inc. ("S&K") accounted for approximately 22%, 13%, 11%,
10% and 10%, respectively, of the Company's net sales during Fiscal 1997.
Accordingly, in addition to expanding existing relationships, the Company is
pursuing a strategy of diversifying its customer base. Currently, the Company
contacts potential customers through participation at contract manufacturing
shows, strategically placed advertisements, and direct mail campaigns which are
then followed by telephone sales and visits from the Company's sales
representatives. The Company also advertises over the Internet at its own
website (asdgroup.com). The Company is expanding its marketing efforts by
attending more trade shows, increasing the number of advertisements in trade
journals, increasing the number of sales personnel, increasing the number of
customers who receive direct mailings, and providing new sales literature and
interactive electronic presentations. The Company's objective is to obtain
multiple customers in the markets it currently serves and in additional markets.

COMPETITION

         The Company operates in a highly competitive environment and competes
against numerous domestic and foreign manufacturers. The Company's competitors
include SCI Systems, Inc., Solectron Corporation, Jabil Circuit, Inc., Avex
Electronics Inc. (a privately-held company), Plexus Corp., DOVatron
International, Inc., IEC Electronics Corp., Sanmina Corporation and Benchmark
Electronics, Inc. In addition, the Company may encounter competition in the
future from other large electronic manufacturers that are selling, or may begin
to sell, contract manufacturing services. The Company may also face competition
from the manufacturing operations of its current and prospective customers which
the Company believes continually evaluate the merits of manufacturing products
internally versus the merits of contract manufacturing.


                                       9
<PAGE>

         The Company believes that the primary basis of competition in its
targeted markets are time to market, capability, price, manufacturing quality,
advanced manufacturing technology and reliable delivery. Management believes
that it generally competes favorably with respect to each of these factors. To
remain competitive, the Company must continue to provide technologically
advanced manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis, and compete
favorably on the basis of price. There can be no assurance that the Company can
compete effectively with respect to these factors in the future.

BACKLOG

         The Company's backlog at June 26, 1998 was approximately $3,300,000.
Backlog consists of firm purchase orders and commitments, which are to be filled
within the next 12 months. However, since orders and commitments may be
rescheduled or canceled, management of the Company believes that backlog is an
inconclusive indicator of future financial performance.

         The level and timing of orders placed by the Company's customers may
vary due to the customers' attempts to balance their inventory, changes in
customers' manufacturing strategies and variations in demand for the customers'
products resulting from, among other things, product life cycles, competitive
conditions or general economic conditions. The Company's revenues are derived
from customers who commit to firm purchase orders that provide for production
requirements ranging from one year to one month in advance. The Company does not
assess any additional fee or charge interest in connection with the financing of
any customer orders other than what is included in its firm price. The Company's
inability to forecast the level of customer orders with certainty makes it
difficult to schedule production and maximize utilization of manufacturing
capacity.

SUPPLIERS

         The Company procures components from a broad group of suppliers,
determined on an assembly-by-assembly basis. Some of the products and assemblies
manufactured by the Company require one or more components that may be available
from only a single source. Some of these components are allocated in response to
supply shortages. The Company attempts to ensure the continuity of supply of
these components. In cases where unanticipated customer demand or supply
shortages occur, the Company attempts to arrange for alternative sources of
supply, where available, or defers planned production to meet the anticipated
availability of the critical components. In some cases, supply shortages could
substantially curtail production of all assemblies using a particular component.
While the Company has not experienced material shortages in the recent past,
such shortages could produce significant short-term interruptions of the
Company's future operations. Some of the Company's material suppliers are Arrow
Electronics, Avnet Group, Chapin & Bangs, Future Electronics, and Yard Metals.
The Company currently has access to number of alternative suppliers if any such
suppliers were to cease or materially decrease their business dealings with the
Company.


                                       10
<PAGE>

         The Company does not maintain a large inventory of materials and does
not place orders for materials unless required in response to a specific
customer purchase order. If the Company does have any aged or obsolete
inventory, it is written-off or reserved immediately.

INTELLECTUAL PROPERTY RIGHTS

         The Company regards its manufacturing processes, proprietary software
and circuit designs as proprietary trade secrets and confidential information.
To maintain the trade secrecy of its proprietary software, the Company relies
largely upon a combination of trade secret laws, copyright laws, internal
security systems and confidentiality procedures. Third parties may attempt to
exercise alleged rights in any of the copyrights or other intellectual property
rights established by the Company, and the Company's failure or inability to
establish appropriate copyrights or to adequately protect any of its
intellectual property rights, may have a material adverse affect on the Company.

GOVERNMENT REGULATION

         The Company's operations are subject to certain federal, state and
local regulatory requirements relating to environmental, waste management,
health and safety matters. Management believes that the Company's business is
operated in compliance with applicable regulations promulgated by the
Occupational Safety and Health Administration and the Environmental Protection
Agency and corresponding state agencies which, respectively, pertain to health
and safety in the work-place and the use, discharge and storage of chemicals
employed in the manufacturing process. Current costs of compliance are not
material to the Company. However, new or modified requirements, not presently
anticipated, could be adopted creating additional expenses for the Company.

EMPLOYEES

         As of September 21, 1998, the Company employed 118 full time employees.
The Company employs 44 people in finance, sales and administration; 67 people in
manufacturing operations and 7 people in various engineering functions.
Currently none of the Company's employees are members of a union. Management
considers its relationships with its employees to be good.

ITEM 2.  DESCRIPTION OF PROPERTY

                                                                                
                                                                                
         The Company's principal operations are conducted in Poughkeepsie, New
York, in an approximately 75,000 square foot plant situated on a 5.5-acre parcel
of land. In addition, the Company owns a second 65,000 square foot plant in
Poughkeepsie. These facilities are mortgaged in the amount of $2,751,000 as of
June 26, 1998. During Fiscal 1999 the Company intends to refurbish and commence
using this second plant, which is situated on a 4.9-acre parcel of land and
which is currently inactive, and can be used for future expansion. The Company
also owns approximately 55.76 acres of vacant land in Poughkeepsie. Management
of the Company believes that the Company's facilities are sufficient for its
current and reasonably anticipated operations.


                                       11
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

         The Company is involved in pending and threatened legal actions and
proceedings arising in the ordinary course of its business. In the opinion of
management, the outcome of such legal actions and proceedings will not have a
material adverse effect on the Company.

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

         None.

                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

         Since May 14, 1997 the Company's common stock, $.01 par value ("Common
Stock"), has been traded under the symbols "ASDG" on the Nasdaq SmallCap Market.
The following table sets forth the high and low sale prices as furnished by The
Nasdaq Stock Market, Inc. for the calendar quarter indicated:

<TABLE>
<CAPTION>
1997                                                                                 HIGH               LOW
----                                                                                 ----               ---
<S>                                                                                <C>               <C>     
Quarter ended June 27, 1997 (commencing May 14, 1997)...........................   $   5.75          $   4.80
Quarter ended September 26, 1997................................................   $   6.125         $   4.00
Quarter ended December 26, 1997.................................................   $   5.125         $   2.3125

1998
----

Quarter ended March 27, 1998....................................................   $   3.625         $   1.25
Quarter ended June 26, 1998.....................................................   $   1.875         $    .3125
</TABLE>

         These bid prices are inter-dealer prices without retail markup,
markdown or commission, and may not represent actual transactions.

HOLDERS

         As of October 5, 1998 there were approximately 13 holders of record of
the Common Stock. The Company believes that the Common Stock is held by in
excess of 350 beneficial holders.

DIVIDEND POLICY

         The Board of Directors does not currently contemplate the payment of
cash dividends. Any decisions as to the payment of cash dividends on the Common
Stock will depend on the 


                                       12
<PAGE>

Company's ability to generate earnings, its need for capital, its overall
financial condition and such other factors, as the Board of Directors deems
relevant.

RECENT SALES OF UNREGISTERED SECURITIES

         On June 26, 1998, the Company entered into a definitive agreement with
an investor group (the "Investors") for the sale of 392,017 shares of Common
Stock, 329,999 shares of Series A Convertible Preferred Stock ("Series A
Stock"), 330,779 shares of Series B Convertible Preferred Stock ("Series B
Stock") and five-year warrants to purchase an additional 4,000,000 shares at an
exercise price of $.75 per share. The purchase price paid by the Investors was
$1,900,000 in aggregate. In connection with this transaction, the Company did
not pay underwriting discounts or commissions.

         These shares were all issued without registration under the Securities
Act of 1933, as amended (the "Securities Act"), by reason of the exemption from
registration afforded by the provisions of Section 4(2) thereof, as transactions
by an issuer not involving a public offering. Each recipient of shares delivered
appropriate investment representations to the Company with respect thereto and
consented to the imposition of restrictive legends upon the certificates
evidencing the shares.

         The Series A Stock and Series B Stock will automatically convert upon
stockholder approval into Common Stock at the rate of 10 shares of Common Stock
for each share of Preferred Stock (subject to adjustment under certain
circumstances). Upon and assuming conversion of the Preferred Stock, the
Investors will own 7,000,000 shares of Common Stock.

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

         The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and the notes thereto
included in Part II, Item 7 of this report.

RESULTS OF OPERATIONS

         FISCAL 1998 AS COMPARED TO FISCAL 1997

         For Fiscal 1998, the Company's net sales decreased by $1,572,000 or
9.9% to $14,299,000 from $15,871,000 for Fiscal 1997. The decrease in sales was
due to a recent slowdown experienced by several large customers, principally
those effected by the Asian market, which resulted in the reduction of orders
placed with the Company. Additionally, the lack of capital in the fourth quarter
adversely affected the Company's ability to obtain and fund new orders as well
as existing orders.

         Costs of goods sold for Fiscal 1998 increased by $1,902,000 or 15.7% to
$13,989,000 from $12,087,000 for Fiscal 1997. The increase in cost of goods sold
is primarily the result of an inventory adjustment of $2,100,000 as a result of
two large customers reducing orders. Gross profit as a percentage of net sales
decreased by 21.6% from 23.8% for Fiscal 1997 to 2.2% for 


                                       13
<PAGE>

Fiscal 1998 primarily as a result of the inventory adjustments and reserves as
well as a decrease in orders.

         Selling, general and administrative expenses increased for Fiscal 1998
by $957,000 or 26.1% to $4,617,000 from $3,660,000 for Fiscal 1997. The increase
in selling, general and administrative expenses is primarily the result of
increased resources expended in selling and marketing, an increase in the
allowance for doubtful accounts, and professional and public company related
fees and other expenditures not incurred in Fiscal 1997.

         Interest expense decreased for Fiscal 1998 by $303,000 or 19.8% to
$1,231,000 from $1,534,000 for Fiscal 1997. The decrease in interest expense
reflects a net reduction in debt as a result of a portion of the proceeds of the
initial public offering being used to repay debt.

         Other income decreased for Fiscal 1998 by $47,000 or 69.1% to $21,000
from $68,000 for Fiscal 1997. The decrease in other income was primarily due to
vendor refunds in Fiscal 1997 related to the prior year.

         Financial restructuring costs of $124,400 were incurred in Fiscal 1998
as a result of restructuring agreements entered into with the Company's three
primary lenders. No such costs were incurred during Fiscal 1997.

         During Fiscal 1998, the Company reduced its Fiscal 1997 net deferred
tax asset by $1,717,532. The total valuation allowance at June 26, 1998 of
$652,941 reduces the net deferred tax asset to zero. This reduction was made in
light of the significant loss recognized by the Company in Fiscal 1998 and the
limitations on the usage of the existing net operating loss carryforwards
resulting from the capital infusion by the Investors.

         An extraordinary gain from the financial restructuring was realized in
Fiscal 1998 as a result of a settlement with the Noteholders who accepted
$220,000 in cash and shares of convertible Preferred Stock and warrants in
exchange for $1,210,000 in principal and interest owed. The difference between
the amount owed to Noteholders and fair value of settlement was recorded as an
extraordinary gain.

LIQUIDITY AND CAPITAL RESOURCES

         GENERALLY

         The Company incurred a loss of $6,693,000 for Fiscal 1998. Sales
for this period were relatively flat compared to the previous year due to
significant cancellations in the third and fourth quarters of Fiscal 1998 by
customers affected by problems in Asia. These cancellations resulted in the
Company recording an inventory write-off of approximately $2,100,000,
substantially reducing the gross profit for Fiscal 1998 as compared to Fiscal
1997. Although the Company was reorganized in June, 1998, with a $1,900,000
capital infusion and debt restructuring, the Company recorded a $1,717,000 tax
benefit expense. This resulted from a one-time write-off of the previously
established deferred tax asset which would not be utilized.

         RESTRUCTURING

         As previously disclosed, the Company's sales had been adversely
affected by a reduction in orders by several customers, principally those
effected by the Asian market. As a result, the Company was not in compliance
with the covenants governing certain of the debt agreements and announced it was
seeking additional financing. On June 26, 1998, the Company entered into a
definitive agreement with the Investors for a $1,900,000 capital infusion and
agreements with its primary lenders to restructure the Company's debt (the
"Restructuring").

         The Investors purchased 392,017 shares of Common Stock (the "Shares"),
329,999 shares of Series A Stock, 330,799 shares of Series B Stock and five year
warrants to purchase an 


                                       14
<PAGE>

additional 4,000,000 shares of Common Stock at an excise price of $.75 per
share. The purchase price paid by the Investors was $1,900,000 in the aggregate.

         Upon receipt of stockholder approval of the Restructuring and an
amendment to the Company's certificate of incorporation the (the "Capital
Amendment") the Series A Stock and Series B Stock will convert into Common Stock
at the rate of 10 shares of Common Stock for each share of Preferred Stock
(subject to adjustment under certain circumstances). Upon and assuming
conversion of the Preferred Stock, the Investors will own 7,000,000 shares of
Common Stock and warrants to purchase an additional 4,000,000 shares of Common
Stock. If stockholder approval of the Restructuring and the Capital Amendment is
not obtained by June 26, 1999, the Investors will have the option, for a period
of 90 days thereafter, to require the Company to repurchase the shares of Series
A Stock and Series B Stock purchased by them at a price equivalent to the
purchase price plus 12% per annum (prorated over the period such shares are
outstanding).

         Holders of the Series A Stock and Series B Stock will be entitled to
receive dividends, when, as and if declared by the Company's Board of Directors,
at a rate of 6% and 4% per annum, respectively. Holders of the Series A Stock
and Series B Stock have no voting rights. The Series A Stock and Series B Stock
each has a liquidation preference of $10.00 per share.

         The Company's agreement with PNC Bank, with respect to the revolving
line of credit with PNC Business Credit, provides that PNC Bank will keep the
Company's existing credit facility in place at least through June 2000, with a
one-year extension, provided that certain conditions are met and no events of
default occur. PNC Bank also agreed not to charge a default rate of interest
during the period in which the Company was not in compliance with the covenants
of the loan agreement. In consideration for the foregoing, PNC Bank received
warrants to purchase 100,000 shares of the Company's Common Stock exercisable at
$1.75 per share.

         Bankers Trust Company was paid $250,000 at the closing in exchange for
agreeing to defer the balance of the outstanding principal amount owed Bankers
Trust until nine months from closing. The Company is not required to make
payments of principal and interest to Bankers Trust during this period, although
the amounts owed will continue to accrue interest. On March 26, 1999, Bankers
Trust will either (i) be paid $1,500,000 in satisfaction of all amounts due, or
(ii) in exchange for a payment of $100,000, grant the Company another extension
to September 26, 1999, at which time the Company will be required to pay Bankers
Trust $1,500,000 in satisfaction for all amounts due. If Bankers Trust is not
paid in full by such time, the total outstanding indebtedness reverts back to
approximately $2,751,000, the current amount owed, plus any accrued but unpaid
interest.

         A group of private noteholders (a "Noteholder Group") agreed to convert
$880,000 of debt into Series C Convertible Preferred Stock ("Series C Stock").
The Series C Stock will be convertible, upon receipt of stockholder approval,
into 734,610 shares of Common Stock. In addition, the Noteholder Group exchanged
their existing warrants to purchase 534,783 shares of Common Stock at an
exercise price $2.73 per share for warrants to purchase 418,711 shares of Common
Stock at an exercise price of $1.50 per share. The financing would have
triggered anti-dilution provisions in the existing warrants thereby reducing the
exercise price.


                                       15
<PAGE>

         In addition to the foregoing, holders of outstanding warrants to
purchase an aggregate of 123,750 shares of Common Stock at $2.69 per share
agreed to exchange these warrants for new warrants for the purchase of 400,000
shares of Common Stock at $1.50 per share. The financing would have triggered
anti-dilution provisions of the outstanding warrants resulting in such warrants
representing the right to purchase at least 478,198 shares at an exercise price
of $.77 per share.

         The conversion of the Series A Stock, the Series B Stock and the Series
C Stock (collectively, the "Convertible Preferred Stock") and the exercise of
the newly issued warrants are subject to approval by the stockholders of the
Company of the Restructuring and the Capital Amendment. The Company has agreed
to prepare and file, as soon a practicable after the closing, a proxy statement
with respect to a meeting of stockholders to approve the terms of the
Restucturing and such Capital Amendment.

         The Company agreed to file with the U.S. Securities and Exchange
Commission (the "Commission") a registration statement registering the resale of
the Shares, the Convertible Preferred Stock, the Common Stock into which the
Convertible Preferred Stock is convertible, and the shares of Common Stock
issuable upon the exercise of the Warrants (collectively, the "Registrable
Securities") within 30 days of the date of the meeting of stockholders and to
use its best efforts to cause such registration statement to become effective as
soon as practicable. If the Company has not filed such registration statement by
March 31, 1999, the holders of the Registrable Securities may, by written notice
to the Company, demand the registration of the resale of the Registrable
Securities. Upon the written request of the holders of the Registrable
Securities, the Company must use its best efforts to effect the registration
under the Securities Act of the Registrable Securities which it has been so
requested to register. The Company also agreed to grant the holders of the
Registrable Securities piggyback registration rights with respect to the
Registrable Securities.

         With respect to this transaction, management received a fairness
opinion from H. J. Meyers & Co., Inc. ("H. J. Meyers"), the underwriter of the
Company's initial public offering. In exchange therefor, the Company paid H. J.
Meyers a $25,000 fee and agreed to an amendment to the 94,500 underwriters'
warrants currently held by H. J. Meyers to lower the exercise price from $8.3375
per share to $1.50 per share. In addition, H. J. Meyers received 10,000 shares
of the Company's Common Stock.

         Catalyst Financial Corp., an investment banking firm ("Catalyst"),
advised the Investors with respect to the transaction. The Investors were party
to a financial advisory agreement with Catalyst in connection with the financing
for the Company, the obligations of which were assumed by the Company. Pursuant
thereto, the Company was to pay Catalyst approximately $118,000 (of which
$103,000 has been paid and $15,000 is owing) and issued to Catalyst's designees
warrants to purchase shares of Common Stock at an exercise price of $.35 per
share. In addition, the Company has entered into a two-year advisory agreement
with Catalyst pursuant to which Catalyst is paid $5,000 per month. Catalyst also
has a right of first refusal with respect to future financing and a right to
receive a finders' fee under certain circumstances.


                                       16
<PAGE>

         The Company's existing management was retained. However, the employment
contracts of Gary D. Horne and Stanley F. Zuk, its Chairman and former
President, respectively, were amended so that, among other things, such officers
reduced their salaries by 50% until the Company becomes profitable. The term of
the employment agreements was also changed from three years to one year.

         STATEMENTS OF CASH FLOW

         Net cash used in operations was $1,093,000 for Fiscal 1998 as compared
to $1,071,000 used in operations for Fiscal 1997. The increase in cash used in
operations was primarily the result of a net loss offset by decreases in
accounts receivable, inventory and deferred income taxes. The inventory
reduction was primarily the result of a write-off of inventory which resulted
from two large customers reducing orders as well as the establishment of
inventory reserves. Accounts receivable decreased as a result of lower sales at
year-end. Net cash provided by financing activities during Fiscal 1998 was
$96,000. This was primarily from borrowings on life insurance policies offset by
financing costs. Working capital decreased to a deficiency of $127,000 at June
26, 1998 from a positive working capital of $4,767,000 at June 27, 1997.

         LIQUIDITY

         Notwithstanding the significant steps taken by management to
restructure the Company's debt, the Company's immediate cash requirements are
significant. No assurance can be given that the Company will be able to
successfully realize cash flow from operations or that such cash flow will be
sufficient. Management believes that the Company's existing and anticipated
capital resources will not enable it to fund its planned operations through
Fiscal 1999. Management is currently attempting to obtain additional financing
and intends to raise additional funds within the next 12 months through equity
and/or debt financings. The Investors have committed to the Company to fund the
Company's working capital requirements through Fiscal 1999.

         The Company's line of credit with PNC Bank places restrictions on the
Company's ability to obtain financing either through the offering of equity or
incurrence of additional debt. No assurances can be given that additional funds
will be available to the Company on acceptable terms, if at all. Additional
financings may result in dilution to existing stockholders.

         In addition, the Company's annual and quarterly operating results may
be affected by a number of factors, including the Company's ability to manage
inventories, shortages of components or labor, the degree of automation used in
the assembly process, fluctuations in material costs and the mix of material
costs versus labor. Manufacturing and overhead costs are also significant
factors affecting the annual and quarterly operating results of the Company.
Other factors include price competition, the ability to pass on excess costs to
customers, the timing of expenditures in anticipation of increased sales and
customer product delivery requirements. Any one of these factors, or a
combination thereof, could adversely affect the Company. The Company's primary
pricing method is a fixed price, however, any costs in excess of original
quotation or resulting from customer changes are typically passed on to the
customer.


                                       17
<PAGE>

         In order to help with the negative operating cash flows, management of
the Company plans a reduction of inventory and a reduction of costs combined
with reduced spending in direct labor related areas and parts purchased for
inventory. Also impacting the growth in inventory was a shift in scheduled
shipments for a major customer. Once normal scheduling resumes, the Company
intends to liquidate the excess inventory related to this customer. To
accomplish a reduction of inventory, management of the Company has enhanced the
features of the POM manufacturing software to allow management to parcel a large
job into small production runs called Kits. The POM manufacturing software
tracks the status of each Kit and allows management to modify each Kit in the
same manner, as it is able to modify the entire job. Any modifications to Kits
are sent to the Company's purchasing agents, expediters and suppliers. In
addition, the Company's policies with its suppliers have been modified to
require that purchase orders are not to be considered firm until 10 days within
the date the materials are required to be delivered to the Company. The Company
plans to achieve a labor cost reduction through improved efficiencies expected
to result from improvements to the POM manufacturing software and new equipment
to be purchased or leased.

         The Company anticipates that it will incur capital expenditures of
approximately $250,000 during Fiscal 1999. Such expenditures will be primarily
for facility upgrades including a clean room and computer upgrades for Year 2000
compliance. The Company intends to finance these capital expenditures through
the funds raised or existing and anticipated capital resources.

NET OPERATING LOSS CARRYFORWARDS

         As of June 26, 1998, the Company had a net operating loss ("NOL") for
federal income tax purposes of approximately $1,731,000 which begins to expire
in 2006. The Restructuring resulted in a "change of control" for federal income
tax purposes and limited the Company's ability to utilize such NOL. Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires
that deferred tax assets be reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some portion or
all of such assets will not be realized. The Company monitors the realizability
of such assets and establishes a valuation allowance for all amounts that will
not be realized. As of June 26, 1998, the total valuation allowance was
$652,941, which reduced the net deferred tax asset to zero.

YEAR 2000 READINESS

         The Year 2000 issue refers to a condition in computer software where a
two-digit field rather than a four-digit field is used to distinguish a calendar
year. Unless corrected, date-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in system failures
or miscalculations causing disruptions to various activities and operations.
Such an uncorrected condition could significantly interfere with the conduct of
the Company's business, could result in disruption of its operations and could
subject it to potentially significant legal liabilities.

         The Company has conducted an assessment of the Year 2000 issue and the
potential effect it will have on the Company and its business. The Company has
also prepared a formal plan for dealing with the Year 2000 issue. The Company is
in the process of updating much of 


                                       18
<PAGE>

its existing software for Year 2000 compliance by modifying existing internally
developed software. The Company intends to hire outside consultants and acquire
new and upgraded third party software packages to replace those currently used
by the Company which cannot be modified.

         While the Company believes it has made substantial progress in
resolving any Year 2000 issues, sufficient testing to date has not been
completed to fully validate readiness. Additional testing is planned during
Fiscal 1999 to reasonably ensure Year 2000 readiness. The Company is planning to
complete all necessary Year 2000 upgrades of its systems in Fiscal 1999.

         The possibility exists that the Company could inadvertently fail to
correct a Year 2000 problem. The Company believes the impact of such an
occurrence would be minor, as substantial Year 2000 compliant equipment
additions and upgrades have occurred in recent years. If such resolution does
not occur, the Company believes it will be able to conduct its business,
possibly at a reduced volume, using its already Year 2000 compliant server, and
personal computer software until resolution occurs.

         The Company may also be affected by third-party suppliers or customers
who have not modified their systems to adequately address the Year 2000 issue.
While it has not already done so, the Company intends to survey its major
customers and suppliers regarding their progress on resolving Year 2000 issues.
It is contemplated that this survey will take place during the third and fourth
quarters of Fiscal 1999.

         To date, Year 2000 readiness has cost the Company an estimated $30,000
(including upgrades to existing systems) and will cost approximately $100,000 in
the aggregate to complete.

ITEM 7.  FINANCIAL STATEMENTS

         The response to this item is incorporated by reference to pages F1-F16
herein.

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

         None.



                                       19
<PAGE>

                                    PART III

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

DIRECTORS AND EXECUTIVE OFFICERS

         The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME                                     AGE      POSITIONS
----                                     ---      ---------
<S>                                      <C>      <C>                                                           
Gary D. Horne**.....................     62       Chairman of the Board, Chief Executive Officer and Director
Peter C. Zachariou..................     37       President and Director
Robert W. Lichtman..................     69       Chief Operating Officer
Thomas H. Lenagh* **................     73       Director
Mark Karasick.......................     49       Director
Jay H. Solomont.....................     42       Director
Jan M. Winston* **..................     62       Director
Kevin E. Homon......................     43       Controller and Secretary
</TABLE>

*     Member of Audit Committee.
**   Member of Compensation Committee

         GARY D. HORNE is a co-founder of the Company and has served as Chief
Executive Officer since the inception of the Company in 1965. Prior to joining
the Company, Mr. Horne worked from 1956 through 1957, serving IBM as a design
draftsman and then worked from 1957 through 1960 for Graphics Techniques, Inc.,
an IBM design engineering contractor, as a design engineer. From 1960 to 1965,
Mr. Horne worked for International Design, Inc., an IBM design engineering
contractor, as branch manager.

         PETER C. ZACHARIOU became the President and a director of the Company
in June 1998. Since June 23, 1995 Mr. Zachariou has also held various positions
with JR Consulting, Inc., a company with a class of securities traded on the
Nasdaq OTC Electronic Bulletin Board(R); most recently Mr. Zachariou serves as
the Chairman of the Board, President and Treasurer. For at least the preceding
five years, Mr. Zachariou has been a private investor.

         ROBERT W. LICHTMAN has been Chief Operating Officer of the Company
since June 1998. Prior to that, Mr. Lichtman was a Senior Vice President of
Getzler & Co., Inc., a management consulting firm, for over five years.

         THOMAS H. LENAGH has been a director of the Company since August 1997.
Mr. Lenagh was the Chairman and Chief Executive Officer of Greiner Engineering
from 1984 to 1986. He also served as the Chairman of the Executive Committee of
SCI Systems, Inc., from 1985 to 1994. Mr. Lenagh, an independent financial
advisor since 1984, has also served in financial management positions of the
Aspen Institute and Ford Foundation as well as on the Board of several
corporations.


                                       20
<PAGE>

         MARK KARASICK became a director of the Company in June 1998. Mr.
Karasick has been a private investor and syndicator, primarily in the real
estate area, for at least the past five years. Mr. Karasick was initially
involved ten years ago as a developer in Orange and Dutchess counties in New
York. When the market declined, Mr. Karasick represented a number of individuals
and entities on working out their troubled loans with their lenders and in
managing their properties on an interim basis. During the past four years, Mr.
Karasick has entered the real estate market as a principal and syndicator
acquiring properties or mortgages, primarily office buildings in midtown
Manhattan.

         JAY SOLOMONT became a director of the Company in June 1998. Mr.
Solomont has been a private investor for at least the past five years. Prior to
that, Mr. Solomont held various executive and general management positions with
A/D/S group, one of the premier nursing home companies in the northeast region
of the United States, until this company was sold to the multi-care group for
approximately US $100,000,000. Mr. Solomont, along with his brothers, continues
to own a group of assisted living facilities. Mr. Solomont's private investments
include, but are not limited to, part ownership of a decorative art factory in
the United States, ownership of several real estate properties in the United
States and, along with his partners, ownership of the exclusive rights to
develop IMAX Theaters in Israel.

         JAN M. WINSTON has been a director of the Company since August 1997.
Mr. Winston was employed by IBM Corporation from 1963 to 1997. He has held
executive and general management positions in computer development, marketing
and finance. He has extensive experience in developing and marketing
minicomputers, personal computers and software and frequently represented IBM in
external negotiations. Mr. Winston was one of six senior managers who launched
IBM's personal computer activity in the early 1980's. Most recently he led IBM
activities in the development and sales of speech recognition systems.

         KEVIN E. HOMON has been the Controller of the Company since July 1997
and the Secretary of the Company since July 1998. Prior to joining the Company,
Mr. Homon was Controller of York Hunter, Inc., a large construction management
firm, from 1986 to 1997.

         Directors of the Company hold their offices until the next annual
meeting of the Company's stockholders and until their successors have been duly
elected and qualified or their earlier resignation, removal from office or
death. The Company has established audit and compensation committees, each
consisting of a majority of non-employee directors.

         Officers of the Company serve at the pleasure of the Board of Directors
and until the first meeting of the Board of Directors following the next annual
meeting of the Company's stockholders and until their successors have been
chosen and qualified.

         The Company's compensation to non-employee directors consists of a fee
of $4,000 per year of the Board of Directors and to provide non-employee
directors with annual grants of stock options under the 1996 Plan to purchase
7,500 shares of Common Stock that will be vested at the end of each full year of
service.


                                       21
<PAGE>

INDEMNIFICATION AGREEMENTS

         The Company has entered into or will enter into an indemnification
agreement with each of its directors and executive officers. Each
indemnification agreement provides or will provide that the Company will
indemnify such person against certain liabilities (including settlements) and
expenses actually and by him in connection with any threatened or pending legal
action, proceeding or investigation (other than actions brought by or in the
right of the Company) to which he is, or is threatened to be, made a party by
reason of his status as a director, officer or agent of the Company, provided
that such director or executive officer acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal proceedings, had no reasonable cause to
believe his or her conduct was unlawful. With respect to any action brought by
or in the right of the Company, a director or executive officer will also be
indemnified, to the extent not prohibited by applicable law, against expenses
and amounts paid in settlement, and certain liabilities if so determined by a
court of competent jurisdiction, actually and reasonably incurred by him in
connection with such action if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers, directors and
holders of more than 10% of the Company's Common Stock, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Such persons are required to furnish the Company with copies of all Section
16(a) forms they file.

         Based solely on its review of the copies of such forms received by it
or oral or written representations from certain reporting persons that no Forms
5 were required for those persons, the Company believes that, with respect to
Fiscal 1998, its executive officers, directors and greater than 10% beneficial
owners complied with all such filing requirements, with three exceptions. Mark
Karasick became a director of the Company in June 1998. Kevin Homon became an
officer of the Company in July 1998. Robert Lichtman became an officer of the
Company in June 1998. The Form 3's for each of these individuals were not filed
timely.



                                       22
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table provides information with respect to the
compensation paid or accrued by the Company and all its subsidiaries to the
Company's Chief Executive Officer, Vice President of Manufacturing and
Engineering and President (collectively, the "Named Executive Officers") in all
their capacities for Fiscal 1998, 1997 and 1996. No other executive officer of
the Company received salary and bonus compensation in Fiscal 1998, 1997 and 1996
in excess of $100,000.

<TABLE>
<CAPTION>
                                                            SUMMARY COMPENSATION TABLE
                                                            --------------------------

                                                                                                       LONG TERM
                                                  ANNUAL COMPENSATION                             COMPENSATION AWARDS
                                                  -------------------                             -------------------

                                                                                OTHER ANNUAL       SHARES UNDERLYING
NAME AND PRINCIPAL POSITION                  YEAR     SALARY      BONUS        COMPENSATION(1)        OPTIONS(#)
---------------------------                  ----     ------      -----        ---------------        ----------
<S>                                          <C>     <C>            <C>              <C>                   <C>
Gary D. Horne,                               1998    $132,534       $0               $0                    0
Chairman and Chief Executive Officer         1997    $139,150       $0               $0                    0
                                             1996    $143,520       $0               $0                    0

Stanley F. Zuk,                              1998    $119,380       $0               $0                    0
Vice President of Manufacturing              1997    $138,400       $0               $0                    0
Engineering (2)                              1996    $135,320       $0               $0                    0

Peter C. Zachariou,                          1998       $0          $0               $0                    0
President  (3)
</TABLE>
----------
(1)  The table does not include amounts for personal benefits extended to Mr.
     Horne, Mr. Zuk, or Mr. Zachariou by the Company, such as health or life
     insurance. The Company believes that the incremental cost of such benefits
     to Mr. Horne, Mr. Zuk, or Mr. Zachariou during Fiscal 1998 through Fiscal
     1996 did not exceed the lesser of $50,000 or 10% of his total annual salary
     and bonuses.
(2)  Mr. Zuk resigned from his position as President and Chief Operating Officer
     effective June 26, 1998. Mr. Zuk continues to be employed by the Company in
     his capacity of Vice President of Manufacturing Engineering.
(3) Mr. Zachariou was appointed President of the Company on June 26, 1998.

EXECUTIVE EMPLOYMENT AGREEMENTS

         Effective June 26, 1998, the Company amended the employment agreements
with each of Gary D. Horne and Stanley F. Zuk. The employment agreements provide
for annual salaries initially set at $80,000 for Mr. Horne and $70,000 for Mr.
Zuk, and which shall be automatically increased to full salary of $160,000 and
$140,000 for Messrs. Horne and Zuk, respectively, when the Company posts three
consecutive profitable months. The agreements are for one-year terms with
options to renew for three additional one-year terms. The agreements also
provide for annual cost-of-living adjustments.

         Effective June 29, 1998, the Company entered into a one-year agreement
with Getzler & Co., Inc. ("Getzler"), pursuant to which Getzler would provide
the services of Robert Lichtman and otherwise assist management with the
Company's operations. Getzler is to be paid $200,000 per annum, payable monthly
in advance on the first day of every month and 150,000 shares of the Company's
Common Stock. In addition, Getzler agreed to purchase 100,00 shares of the
Company's Common Stock for $.358 per share.


                                       23
<PAGE>

         In addition, on July 24, 1998, the Company agreed to compensate Mr.
Zachariou for his services as President of the Company. Although no formal
written agreement exists, the Board of Directors agreed that Mr. Zachariou would
be paid $7,000 per month while serving as President of the Company.

         The Company has obtained key man insurance in the amount of $1,000,000
on the lives of each of Messrs. Horne and Zuk.

OPTION GRANTS IN LAST FISCAL YEAR

         There were no grants of stock options made during the fiscal year ended
June 26, 1998 to the Company's Named Executive Officers.

STOCK OPTIONS HELD AT END OF FISCAL 1998

         No stock options are currently held by the Company's Named Executive
Officers as of June 26, 1998. No options were exercised by the Named Executive
Officers during Fiscal 1998.

STOCK OPTION PLAN

         The Company's Board of Directors, or a committee thereof, administers
and interprets the 1996 Plan and is authorized to grant options thereunder to
all eligible employees of the Company, including directors and executive
officers (whether current or former employees) of the Company, as well as
consultants and independent contractors. The 1996 Plan provides for the granting
of both "incentive stock options" (as defined in Section 422 of the Internal
Revenue Code of 1986, as amended) and nonstatutory stock options. Incentive
stock options may only be granted, however, to employees. Options can be granted
under the 1996 Plan on such terms and at such prices as determined by the Board,
or a committee thereof, except that the per share exercise price of incentive
stock options granted under the 1996 Plan will not be less than the fair market
value of the Common Stock on the date of grant and, in the case of an incentive
stock option granted to a 10% stockholder, the per share exercise price will not
be less than 110% of such fair market value as defined in the 1996 Plan. In any
case, the exercise price of any stock option granted under the 1996 Plan will
not be less than 85% of the fair market value of the Common Stock on the date of
grant.

         Options granted under the 1996 Plan that would otherwise qualify as
incentive stock options will not be treated as incentive stock options to the
extent that the aggregate fair market value of the shares covered by the
incentive stock options which are exercisable for the first time by any
individual during any calendar year exceeds $100,000.

         Options granted under the 1996 Plan will be exercisable after the
period or periods specified in the option agreement. Options granted under the
1996 Plan are not exercisable after the expiration of ten years from the date of
grant and are not transferable other than by will or by the laws of descent and
distribution. Adjustments in the number of shares subject to options granted
under the 1996 Plan can be made by the Board of Directors or the appropriate
committee in the event of a stock dividend or recapitalization resulting in a
stock split-up, combination or exchange of shares. Under the 1996 Plan, options
may become immediately exercisable in the 


                                       24
<PAGE>

event of change in control. The 1996 Plan also authorizes the Company to make
loans to optionees to enable them to exercise their options.

         As of June 26, 1998, the Company has granted options under the 1996
Plan to purchase 50,000 shares of Common Stock to four persons, including
options to purchase 5,000 shares of Common Stock to Gregory Horne, options to
purchase 15,000 shares of Common Stock to Ken Kreuser (subsequently cancelled in
Fiscal 1999), options to purchase 15,000 shares of Common Stock to Thomas H.
Lenagh, and options to purchase 15,000 shares of Common Stock to Jan M. Winston.
Such options will expire ten years from the date of grant. No options were
exercisable at June 26, 1998.

ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information regarding beneficial
ownership of the Common Stock as of the date hereof, by (i) each person who owns
beneficially more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors and executive officers, and (iii) all directors and Named
Executive Officers as a group.

<TABLE>
<CAPTION>
                                                                                         PERCENT
NAME AND ADDRESS                                           NUMBER OF SHARES            BENEFICIALLY
OF BENEFICIAL OWNER (1)                               BENEFICIALLY OWNED (2)(3)           OWNED
-----------------------                               -------------------------           -----
<S>                                                            <C>                        <C>  
Peter C. Zachariou...................................          392,017                    18.8%
Gary D. Horne (4)....................................          197,407                     9.5%
Robert W. Lichtman...................................             0                         0%
Stanley F. Zuk.......................................          109,322                     5.3%
Thomas H. Lenagh.....................................             0                         0%
Jan M. Winston.......................................             0                         0%
Jay Solomont.........................................             0                         0%
Mark Karasick........................................             0                         0%
All directors and named executive officers
as a group (7 persons)...............................          604,424                    28.9%
</TABLE>
----------
*     Less than 1%

(1)      The business address of all directors and executive officers of the
         Company is c/o the Company, 1 Industry Street, Poughkeepsie, New York
         12603.

(2)      The Company believes that all persons named in the table have sole
         voting and investment power with respect to all shares of Common Stock
         beneficially owned by them.

(3)      For purposes of calculating beneficial ownership and voting power,
         shares of Common Stock underlying options, warrants and other rights to
         acquire Common Stock exercisable within 60 days are included.

(4)      Represents shares of Common Stock held by Gary D. Horne and Martha L.
         Horne, his wife, but does not include shares of Common Stock
         beneficially owned by Gregory Horne, his son, and Marion L. Horne
         Turcot, his daughter, for which Mr. Horne disclaims beneficial
         ownership.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ADVANCES FROM STOCKHOLDER

         In order to assist the Company with meeting its working capital needs,
Gary D. Horne has periodically advanced funds to the Company. Such advances,
including interest at the rate of 8% per annum, aggregated $754,137 at June 26,
1998. A portion of this indebtedness is 


                                       25
<PAGE>

evidenced by an Amended and Restated Promissory Note dated as of November 28,
1997, in the amount of $658,557. This Amended and Restated Promissory Note bears
interest at the rate of 9 1/2% per annum and provides that interest shall be
payable monthly commencing January 1, 1998. The principal sum plus all accrued
interest shall be payable monthly commencing January 1, 2001, with the entire
principal balance due January 1, 2003. The remainder of this indebtedness is
evidenced by a Promissory Note dated as of June 26, 1998, in the amount of
$82,000. This Promissory Note accrues interest at the rate of 8%. Principal and
interest payments of $10,000 shall be payable monthly commencing July 15, 1998
and until the month after the Company has three consecutive quarters of
profitability. The Company is in default with respect to these
payments.

DEFERRED COMPENSATION AGREEMENTS

         In January 1993, the Company entered into Deferred Compensation
Agreements with John Halik and James Yesian, two co-founders and former
employees of the Company. Pursuant to the Deferred Compensation Agreements, the
Company agreed to pay $450,000 in deferred compensation over a 15-year period.

TRANSACTIONS WITH NETCOMP, INC.

         The Company purchases computers, computer supplies and services from
Netcomp, which operates the ComputerLand franchise in Poughkeepsie, New York.
Netcomp is owned by Gary D. Horne and Stanley F. Zuk. Purchases from Netcomp
aggregated approximately $134,000 and $135,000 during Fiscal 1998 and Fiscal
1997, respectively.

APPROVAL OF AFFILIATED TRANSACTIONS

         All transactions between the Company and its directors, executive
officers and principle stockholders will be on terms no less favorable than
could be obtained from unaffiliated third parties and have been and will be
approved by a majority of the independent outside directors of the Company.


                                       26
<PAGE>



ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

   EXHIBIT NO.     DESCRIPTION
   -----------     -----------

         3.1      Certificate of Incorporation. (1)
         3.2      Bylaws.(1)
         4.1      Specimen Certificate of Common Stock. (1)
         4.2      Form of Representative's Warrant Agreement including Form
                  Representative's Warrants.(1)
         4.3      Intentionally omitted. 4.4 Form of Special Warrant to Purchase
                  Common Stock of Registrant.(1)
         4.5      Form of 10% Original Issue Discount Promissory Note Issued to
                  BlueStone Investors.(1)
         4.6      Form of Warrant Certificate Issued to BlueStone Investors.(1)
         10.1     1996 Stock Option Plan.(1)
         10.2     Restated Line of Credit Loan and Security Agreement dated as
                  of December 28, 1995 between Automatic Systems Developers,
                  Inc.; High Technology Computers, Inc. and Poughkeepsie Savings
                  Bank, FSB.(1)(2)
         10.3     Second Amended Modification, Extension, Spreader and
                  Assumption Agreement dated as of December 28, 1995 between
                  Automatic Systems Developers, Inc. and Poughkeepsie Savings
                  Bank, FSB.(1)
         10.4     Second Amended Modification, Extension, Spreader and
                  Assumption Agreement dated as of December 28, 1995 between the
                  Registrant; Automatic Systems Developers, Inc. and
                  Poughkeepsie Savings Bank, FSB.(1)
         10.5     Option Agreement dated as of May 31, 1996 by and among
                  Banker's Trust Company and the Registrant.(1)
         10.6     Amendment to December 29, 1995 Purchase Agreement.(1)
         10.7     Employment Agreement between the Registrant and Gary D.
                  Horne.(1)(2)
         10.8     Employment Agreement between the Registrant and Stanley F.
                  Zuk.(1)(2)
         10.9     Form of Financial Advisory and Consulting Agreement between
                  the Registrant and the Representative.(1) 
         10.10    Amendment dated April 2, 1997 to Option Agreement dated as of
                  May 31, 1996 by and among Bankers Trust Company and the
                  Registrant.(1)
         10.11    Form of Indemnification Agreement dated May 12, 1997 between
                  the Registrant and its executive officers and directors.(2)
         10.12    Securities Purchase Agreement dated as of June 26, 1998 by and
                  among the Registrant, the parties listed on Schedule 1 to the
                  Agreement and Gary D. Horne.(3)
         10.13    Agreement dated as of June 26, 1998 by and among Automatic
                  Systems Developers, Inc.; High Technology Computers, Inc.; the
                  Registrant; the financial institutions which are now or
                  hereafter become a party to the Credit Agreement; and PNC
                  Bank, National Association.(3)
         10.14    Option and Forbearance Agreement dated as of June 26, 1998 by
                  and among Bankers Trust Company; Automatic Systems Developers,
                  Inc. and the Registrant.(3)
         10.15    Form of Agreement with holders of: (i) 10% senior promissory
                  note due June 19, 1998 and/or (ii) warrants to purchase Common
                  Stock.(3)


                                       27
<PAGE>

   EXHIBIT NO.     DESCRIPTION
   -----------     -----------

         10.16    Form of Letter Agreement with holders of warrants to purchase
                  an aggregate of 122,750 shares of the Registrant Common
                  Stock.(3)
         10.17    Amendment to Employment Agreement between the Registrant and
                  Gary D. Horne.
         10.18    Amendment to Employment Agreement between the Registrant and
                  Stanley F. Zuk.
         21.1     List of Subsidiaries of the Registrant.(1)
         27.1     Financial Data Schedule.
----------
(1)      Incorporated by reference to the exhibit of the same number filed with
         the Company's Registration Statement on Form SB-2 (File No. 333-7731).
(2)      Incorporated by reference to the exhibits filed with the Company's
         Annual Report on Form 10-KSB for the year ended June 27, 1997.
(3)      Incorporated by reference to the exhibits filed with the Company's
         Current Report on Form 8-K filed July 9, 1998

         (b)      Reports on Form 8-K- The Company filed a Current Report on
                  Form 8-K on July 9, 1998.




                                       28
<PAGE>



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

Date:  October 8, 1998              ASD GROUP, INC.

                                    By:   /s/ GARY D. HORNE
                                       -----------------------------------------
                                          Gary D. Horne, Chairman of the Board 
                                          and Chief Executive Officer

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

<TABLE>
<CAPTION>
               SIGNATURE                             TITLE                                         DATE
               ---------                             -----                                         ----

<S>                                          <C>                                              <C>    
/s/ PETER C. ZACHARIOU                       President and Director                           October 8, 1998
---------------------------------------
Peter C. Zachariou

/s/ GARY D. HORNE                            
---------------------------------------      Chairman of the Board and Chief                  October 8, 1998
Gary D. Horne                                Executive Officer (Principle
                                             Executive Officer)

/s/ KEVIN HOMON                              
---------------------------------------      Controller (Principle Financial and              October 8, 1998
Kevin Homon                                  Accounting Officer)

                                             
---------------------------------------      Director                                                        
Thomas H. Lenagh

/s/ JAN M. WINSTON                           
---------------------------------------      Director                                         October 8, 1998
Jan M. Winston

                                             
---------------------------------------      Director                                         
Jay Solomont

/s/ MARK KARASICK                            
---------------------------------------      Director                                         October 8, 1998
Mark Karasick
</TABLE>



                                       29
<PAGE>



                                 ASD GROUP, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S>                                                                                            <C>
Independent Auditors' Report...................................................................F-2

Consolidated Balance Sheet as of June 26, 1998.................................................F-3

Consolidated Statements of Operations for the Years Ended June 26, 1998 and June
27, 1997.......................................................................................F-4

Consolidated  Statements of  Stockholders'  Deficiency  for the Years Ended June
26, 1998 and June 27, 1997.....................................................................F-5

Consolidated Statements of Cash Flows for the Years Ended June 26, 1998
and June 27, 1997..............................................................................F-6

Notes to Consolidated Financial Statements.....................................................F-7-F-16
</TABLE>



                                      F-1
<PAGE>


                          INDEPENDENT AUDITORS' REPORT

Board of Directors
ASD Group, Inc.
Poughkeepsie, New York

         We have audited the accompanying consolidated balance sheet of ASD
Group, Inc. and subsidiaries as of June 26, 1998, and the related consolidated
statements of operations, stockholders' deficiency, and cash flows for each of
the two years in the period ended June 26, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of ASD Group, Inc. and
subsidiaries as of June 26, 1998, and the results of their operations and their
cash flows for each of the two years in the period ended June 26, 1998 in
conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Stamford, Connecticut
October 5, 1998



                                      F-2
<PAGE>


                        ASD GROUP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                  JUNE 26, 1998
                                                                                  -------------
<S>                                                                                  <C>        
Current assets:
  Cash..................................................................             $     4,904
  Accounts receivable, less allowance for doubtful accounts of
    $341,000............................................................                 897,681
  Inventory, less reserve of  $345,826..................................               3,042,897
  Prepaid expenses and other current assets.............................                 159,636
  Capital contribution receivable.......................................               1,900,000
                                                                                     -----------
         Total current assets...........................................               6,005,118
Property, plant and equipment, net......................................               4,576,889
Other assets............................................................                 205,969
                                                                                     -----------
Total assets............................................................             $10,787,976
                                                                                     ===========

                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:

  Current portion of long-term debt.....................................             $ 3,832,238
  Accounts payable......................................................               1,451,897
  Accrued expenses......................................................                 847,721
                                                                                     -----------
         Total current liabilities......................................               6,131,856
Long-term debt..........................................................               4,433,493
Deferred compensation...................................................                 320,672
                                                                                     -----------
         Total liabilities..............................................              10,886,021
                                                                                     -----------
Commitments and contingencies (See Notes)
Stockholders' deficiency:
   Preferred stock, $.01 par value, 1,000,000 shares authorized, 734,259
     convertible shares issued and outstanding..........................               1,909,000
   Common stock, $.01 par value, 10,000,000 shares authorized,
     1,979,934 shares issued and outstanding............................                  19,799
  Paid-in capital.......................................................               4,370,872
  Deficit...............................................................              (6,397,716)
                                                                                     -----------
         Total stockholders' deficiency.................................                 (98,045)
Total liabilities and stockholders' deficiency..........................             $10,787,976
                                                                                     ===========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-3
<PAGE>




                        ASD GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                         YEARS ENDED
                                                                           -----------------------------------------
                                                                                 JUNE 26,          JUNE 27,
                                                                                   1998              1997
                                                                                 --------          --------

<S>                                                                          <C>                  <C>         
       Net sales...............................................              $ 14,298,745         $ 15,870,988
       Cost of goods sold......................................                13,988,630           12,086,796
                                                                             ------------         ------------
          Gross profit.........................................                   310,115            3,784,192
                                                                             ------------         ------------

   Operating expenses:
       Sales and marketing.....................................                   311,981              186,888
       General and administrative..............................                 4,304,791            3,472,614
                                                                             ------------         ------------
          Total operating expenses.............................                 4,616,772            3,659,502
                                                                             ------------         ------------

          (Loss) income from operations........................                (4,306,657)              124,690
       Other income............................................                    20,901               68,195
       Interest expense........................................                (1,230,882)          (1,534,366)
       Financial restructuring costs...........................                  (124,000)                   -
                                                                             ------------         ------------

            Loss before income taxes and extraordinary gain....                (5,640,638)          (1,341,481)

       Income tax (expense) benefit............................                (1,717,532)              564,584
                                                                             ------------         ------------

             Loss before extraordinary gain....................                (7,358,170)            (776,897)

       Extraordinary gain from financial restructuring.........                   665,500                    -
                                                                             ------------         ------------

             NET LOSS..........................................              $ (6,692,670)        $   (776,897)
                                                                             ============         ============
       Net loss per basic and diluted common share:

       Loss before extraordinary gain..........................              $      (4.66)        $      (1.03)
       Extraordinary gain                                                             .42                    -
                                                                             ------------         ------------
       Net loss................................................              $      (4.24)        $      (1.03)
                                                                             ============         ============ 
       Weighted average common shares outstanding..............                 1,579,018              751,041
                                                                             ============         ============ 
</TABLE>

                 See notes to consolidated financial statements


                                      F-4
<PAGE>

                        ASD GROUP, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY

<TABLE>
<CAPTION>
                                        PREFERRED STOCK            COMMON STOCK                         RETAINED
                                        ---------------            ------------           PAID-IN       EARNINGS
                                      SHARES       AMOUNT       SHARES       AMOUNT       CAPITAL       (DEFICIT)           TOTAL
                                      ------       ------       ------       ------       -------       ---------           -----  
<S>                                  <C>       <C>           <C>            <C>        <C>             <C>               <C>        
Balance, July 1, 1996.........             -   $        -      632,917      $ 6,329    $        -      $ 1,071,851       $1,078,180

Net loss......................             -            -            -            -             -         (776,897)        (776,897)

Issuance of IPO shares........             -            -      945,000        9,450     3,879,892                -        3,889,342

Fair value of warrants issued              -            -            -            -       327,000                -          327,000
                                     -------   ----------   ----------      -------    ----------      -----------       ----------

Balance, June 27,1997.........             -            -    1,577,917       15,779     4,206,892          294,954        4,517,625

Net loss......................             -            -            -            -             -       (6,692,670)      (6,692,670)

Financial restructuring
(Note 4)......................       734,259    1,909,000      402,017        4,020       163,980                -        2,077,000
                                     -------   ----------   ----------      -------    ----------      -----------       ----------

Balance, June 26,1998.........       734,259   $1,909,000    1,979,934      $19,799    $4,370,872      $(6,397,716)      $  (98,045)
                                     =======   ==========    =========      =======    ==========      ===========       ========== 
</TABLE>

                 See notes to consolidated financial statements.


                                      F-5
<PAGE>



                        ASD GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                 YEARS ENDED
                                                                                   ---------------------------------------
                                                                                          JUNE 26,          JUNE 27,
                                                                                            1998              1997
                                                                                            ----              ----
<S>                                                                                     <C>             <C>          
          Operating activities:
            Net loss.............................................................       $ (6,692,670)   $    (776,897)
            Adjustments to reconcile net loss to net
                cash used in operating activities:
                  Depreciation and amortization..................................            771,431          699,350
                  Provision for doubtful accounts................................            178,000           10,000
                  Deferred compensation..........................................             34,747           32,171
                  Interest accrued-stockholder advances..........................             57,289           50,259
                  Deferred income taxes..........................................          1,717,532         (564,584)
                  Extraordinary gain from financial restructuring................           (665,500)               -
                  Inventory reserve..............................................            345,826                -
                  Changes in assets and liabilities:
                      Accounts receivable........................................          1,099,721          551,761
                      Inventory..................................................          1,669,171          896,677
                      Prepaid expenses and other current assets..................             42,788         (127,417)
                      Other assets...............................................            150,569           68,580
                      Accounts payable...........................................            216,215       (1,457,770)
                      Accrued expenses...........................................              5,297         (359,804)
                      Deferred revenues..........................................                  -          (69,666)
                      Payments of deferred compensation..........................            (23,360)         (23,971)
                                                                                        ------------    ------------- 

                           Net cash used in operating activities.................         (1,092,944)      (1,071,311)
                                                                                        ------------    ------------- 

          Investing activities:
            Capital expenditures ................................................            (97,378)         (97,693)
                                                                                        ------------    ------------- 

          Financing activities:
            Net proceeds from IPO................................................                  -        3,889,342
            Borrowings...........................................................          7,135,741        1,250,000
            Payments of long-term debt...........................................         (7,114,282)      (3,169,626)
            Financing costs......................................................           (229,058)        (160,433)
            Loans - life insurance policies......................................            303,635                -
                                                                                        ------------    ------------- 
                Net cash provided by financing activities........................             96,036        1,809,283
                                                                                        ------------    ------------- 
          Net (decrease) increase in cash........................................         (1,094,286)         640,279
          Cash, beginning of year................................................          1,099,190          458,911
                                                                                        ------------    ------------- 
          Cash, end of year......................................................       $      4,904    $   1,099,190
                                                                                        ============    =============

          Supplemental disclosures:
           Cash paid during the year for:
                Income taxes.....................................................       $      3,571    $       6,484
                                                                                        ============    =============
                Interest.........................................................       $    927,924    $   1,132,354
                                                                                        ============    =============
           Capital contribution receivable.......................................       $  1,900,000    $           - 
                                                                                        ============    =============
           Debt converted upon financial restructuring...........................       $    880,000    $           -
                                                                                        ============    =============
           Capital leases entered into...........................................       $    267,520    $           -
                                                                                        ============    =============
</TABLE>

                 See notes to consolidated financial statements


                                      F-6
<PAGE>



                        ASD GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       BUSINESS DESCRIPTION

         ASD Group, Inc. ("ASD") and its wholly-owned subsidiaries ( the
"Company") is a provider of contract manufacturing and engineering services to
domestic original equipment manufacturers. The Company provides a wide range of
services including product engineering and design, procurement, precision
fabrication of sheet metal and machined parts, printed circuit board assembly,
electro-mechanical assembly and functional testing.

2.       SIGNIFICANT ACCOUNTING POLICIES

         PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the consolidated accounts of ASD Group, Inc. and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated.

         REVENUE RECOGNITION--Sales are recorded as products are shipped or when
services are rendered.

         FINANCING COSTS--During the years ended June 26, 1998 and June 27,
1997, the Company incurred $229,058 and $160,433, respectively, in connection
with debt financings (see Note 6). These costs have been capitalized in other
assets and are being amortized over the terms of the financings. Amortization of
financing costs and the write-off of other long-term assets for the years ended
June 26, 1998 and June 27, 1997 were $422,296 and $203,948, respectively.

         PROPERTY, PLANT, AND EQUIPMENT--Property, plant and equipment are
stated at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets which range from 5 to 40 years. The net
realizable value of the idle property approximates its carrying value.

         INVENTORY--Inventory, consisting of work-in-progress and raw materials
of approximately $2,737,000 and $306,000, respectively, is stated at the lower
of cost (first-in, first-out method) or market. Inventory that becomes obsolete
because of customer required changes is written-off or reserved at the time the
job is completed or when an engineering change is implemented.

         INCOME TAXES--Deferred income taxes are provided for the temporary
differences between the financial reporting and tax basis of the Company's
assets and liabilities using presently enacted tax rates.

         CONCENTRATION OF CREDIT RISK--Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
trade receivables. The Company performs ongoing credit evaluations of its
customers' financial conditions and generally does not require collateral.
Additionally, the Company maintains insurance for bad debts for certain rated
customers. The insurance policy assures a minimum recovery of 80% of the maximum
established by the insurer per customer insured.


                                      F-7
<PAGE>



Customers that accounted for 10% or more of the Company's net sales are as
follows:

                                                              YEARS ENDED
                                                          ------------------
                                                          JUNE 26,  JUNE 27,
         CUSTOMER                                          1998       1997
         --------                                          ----       ----

         ENI Technologies....................               22%        22%
         Spectran Corporation................               18          -
         Olin Microelectronics...............               13          -
         International Business Machines.....                -         10
         S & K Products International, Inc...                -         10
         Lockheed Martin Corporation.........                -         11
         Gerber Scientific Products..........                -         13
                                                           ----      -----   
                                                            53%        66%
                                                           ----      -----

         MANAGEMENT ESTIMATES--The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.

         ADOPTION OF STATEMENT OF ACCOUNTING STANDARD NO. 123--In 1997, the
Company adopted Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 123 encourages, but does not
require companies to record at fair value compensation cost for stock-based
compensation plans. The Company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.

         ADOPTION OF STATEMENT OF ACCOUNTING STANDARD NO. 128--In 1998, the
Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings Per Share". SFAS 128 replaces the presentation of primary
earnings per share with a presentation of basic earnings per share. It also
requires dual presentation of basic and diluted earnings per share on the face
of the income statement. Diluted earnings per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding and
dilutive common equivalent shares (common stock options and warrants)
outstanding.

         DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying
value of the Company's credit facilities approximates fair value and is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities.

         OTHER ASSETS - Included in other assets at June 26, 1998 is $5,391 cash
surrender value of life insurance policies, net of outstanding loans in Fiscal
1998 of $303,635.


                                      F-8
<PAGE>

3.  PUBLIC OFFERING OF COMMON STOCK AND RECAPITALIZATION

         In May 1997, the Company completed an initial public offering of
945,000 shares of common stock at $5.75 per share ( the "Offering"). Prior to
the Offering, there was no public market for the Company's common stock. The net
proceeds of the Offering, after deducting applicable issuance costs and
expenses, were $3,889,342.

         In connection with the Offering, the Company (a) increased its
authorized common stock to 10,000,000 shares, (b) effected a split of its common
stock, resulting in 632,917 shares outstanding, and (c) authorized 1,000,000
shares of new $.01 par value preferred stock. Designations, rights and
preference of the preferred stock will be determined by the Board of Directors.

4.       FINANCIAL RESTRUCTURING

         On June 26, 1998, the Company entered into an agreement with an
investor group (the "Investors") for a $1,900,000 capital infusion and entered
into agreements with its primary lenders to restructure the Company's debt.

         The Investors purchased $1,900,000 of equity consisting of 392,017
unregistered shares of common stock, 329,999 shares of Series A Convertible
Preferred Stock ("Series A Stock"), 330,799 shares of Series B Convertible
Preferred Stock ("Series B Stock"), and five year warrants to purchase 4,000,000
shares of common stock at an exercise price of $.75 per share. The Series A
Stock and Series B Stock will automatically convert, upon stockholder approval
of the restructuring and an amendment to the Company's certificate of
incorporation, into common stock at the rate of 10 shares of common stock for
each share of preferred stock. Upon conversion of the Series A Stock and Series
B Stock, the Investors will own 7,000,000 shares of common stock. Holders of the
Series A Stock and Series B Stock will be entitled to receive dividends, when,
as and if declared by the Company's Board of Directors, at a rate of 6% and 4%
per annum, respectively. Holders of the Series A Stock and Series B Stock have
no voting rights. The Series A Stock and Series B Stock each has a liquidation
preference of $10.00 per share.

         As part of the financial restructuring, the Company reached agreements
with its three primary lenders; PNC Bank ("PNC"), Bankers Trust Company ("BT"),
and a group of private noteholders (the "Noteholders") to restructure its debt
as follows:

1. PNC agreed to maintain the Company's existing line of credit through June
2000 (see Note 6), with a one year extension, provided certain conditions are
met and no events of default occur. In consideration for the above, PNC received
five year warrants to purchase 100,000 shares of common stock at $1.75 per
share. The line of credit places restrictions on the Company's ability to obtain
financing either through the offering of equity or by incurring additional debt.

2. BT was paid $250,000 to defer the outstanding principal amount owed to BT for
nine months until March 1999. The Company will not make principal and interest
payments to BT during this period, although the amounts owed will continue to
accrue interest. In nine months, 


                                      F-9
<PAGE>

BT will either (i) be paid $1,500,000 in satisfaction of all amounts due, or
(ii) in exchange for a payment of $100,000, grant the Company another extension
to 15 months until September 1999 at which time the Company will be required to
pay $1,550,000 in satisfaction for all amounts due. If BT is not paid in full by
such time, the total outstanding indebtedness reverts back to approximately
$2,751,000, the amount owed at June 26, 1998, plus any accrued but unpaid
interest. The 100,000 warrants previously issued to BT (see Note 6) were
canceled.

3. In settlement of $1,210,000 principal and interest owed to the Noteholders,
the Company:

         a.       Paid $110,000,
         b.       Agreed to pay an additional $110,000 in June 1999,
         c.       Issued 73,461 shares of Series C Convertible Preferred Stock
                  on the same terms as the Series B Stock,
         d.       Exchanged outstanding warrants to purchase 534,783 shares of
                  common stock at $2.73 per share for five-year warrants to
                  purchase 418,711 shares of common stock at $1.50 per share.

         The difference between the amount owed to the Noteholders and the fair
value of the settlement is recorded as an extraordinary gain.

         In addition, holders of outstanding warrants to purchase 123,750 shares
of common stock at $2.69 per share have agreed to exchange these warrants for
five-year warrants for the purchase of 400,000 shares of common stock at $1.50
per share.

         With respect to this restructuring, the Company obtained a fairness
opinion from the underwriter of the Company's initial public offering (the
"Underwriter"). In exchange, the Company paid a $25,000 fee and amended the
warrants to purchase 94,500 shares of common stock currently held by the
Underwriter to lower the exercise price from $8.3375 per share to $1.50 per
share. In addition, the Underwriter received 10,000 shares of common stock.

         The Company paid an investment banking firm that advised the Investors
$118,000 and issued five year warrants to purchase 141,360 shares of common
stock at $.35 per share.

         The above financial restructuring was fully funded by September 22,
1998 and has been given effect to in the accompanying consolidated financial
statements. All securities issued by the Company have been recorded at fair
value.


                                      F-10
<PAGE>

         The effect of the financial restructuring on the consolidated financial
statements for the year ended June 26, 1998 is as follows:

<TABLE>
<CAPTION>
                                                                                       
                          PREFERRED STOCK            COMMON STOCK                       FINANCIAL
                          ---------------            ------------           PAID-IN    RESTRUCTURING  EXTRAORDINARY
                         SHARES     AMOUNT       SHARES         AMOUNT       CAPITAL       COSTS       GAIN (LOSS)
                         ------     ------       ------         ------       -------       -----       -----------
<S>                     <C>      <C>             <C>            <C>         <C>          <C>           <C>       
Investors               660,798  $1,718,000      392,017        $ 3,920     $178,080     $      -       $       -  
Noteholders              73,461     191,000            -              -        7,000            -         792,000
BT                            -           -            -              -            -            -               -
Warrantholders                -           -            -              -        1,900        1,900               -
PNC                           -           -            -              -          500       29,000               -
Underwriter                   -           -       10,000            100        3,000       28,100               -
Investment Banker             -           -            -              -        8,500            -        (126,500)
Expenses                      -           -            -              -      (35,000)      65,000               -
                        -------  ----------      -------        -------     --------     --------      ---------- 
                        734,259  $1,909,000      402,017        $ 4,020     $163,980     $124,000      $  665,500
                        =======  ==========      =======        =======     ========     ========      ==========
</TABLE>

5.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consists of the following:

                                                             JUNE 26,
                                                               1998
                                                             --------

                                                                   

             Land........................................  $   563,937 
             Buildings...................................    1,633,327
             Leasehold improvements......................      896,091
             Machinery and equipment.....................    3,103,139
             Automobiles.................................       47,955
                                                           ----------- 
                                                             6,244,449
             Less: accumulated depreciation..............    3,066,411
                                                           ----------- 
                                                             3,178,038
                                                           ----------- 
             Idle property:
               Land and building.........................    1,923,865
               Less: accumulated depreciation............      525,014
                                                           ----------- 
                                                             1,398,851
               Property, plant and equipment, net........  $ 4,576,889
                                                           ===========

         Machinery and equipment includes property under capital leases of
$267,520. Amortization of assets under capital leases in Fiscal 1998 was $24,077
and is included in depreciation and amortization expense. Depreciation and
amortization of property, plant and equipment was $349,135 and $273,382 during
the years ended June 26, 1998 and June 27, 1997, respectively.

         Idle property represents facilities that are temporarily not being used
in the Company's operations. The Company intends to use these facilities
commencing in Fiscal 1999.


                                      F-11
<PAGE>

6.       LONG-TERM DEBT

         Long term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                         JUNE 26,
                                                                                           1998
                                                                                           ----
<S>                                                                                  <C>         
         Notes Payable-Noteholders......................................             $    220,000
         Revolving Line of Credit-PNC...................................                4,252,609
         Note Payable-Bankers Trust Company, interest at prime 
           Plus 1.5%, due March 17, 1999, secured by second lien on
           Certain property.............................................                2,751,132
         Notes Payable-Stockholder, plus accrued interest at 8% or 9.5%,
           Payable in installments through January 1, 2003, in default..                  754,137
         Other, including capital leases of $235,394....................                  287,853
                                                                                     ------------
                                                                                        8,265,731
         Less: current portion..........................................                3,832,238
                                                                                     ------------
                                                                                     $  4,433,493
                                                                                     ============
</TABLE>

         On December 19, 1997, the Company completed a refinancing of its
indebtedness and secured a new credit facility with an increased borrowing limit
to $8,750,000 with PNC Bank ("PNC"). In connection with the refinancing, the
Company issued five year warrants to Bankers Trust Company to purchase 100,000
shares of common stock at $4.50 per share. The fair value of the warrants did
not have a significant effect on the consolidated financial statements (see Note
4). The Company restructured it indebtedness with PNC on June 26, 1998
permitting borrowings up to $4,500,000 at prime plus .5% which expires on June
25, 2000 (the "Line of Credit") with a one year extension option. The Line of
Credit is secured by a first lien on accounts receivable, inventory, and
machinery and equipment. The amount available for borrowing under the Line of
Credit is determined pursuant to a formula based upon eligible accounts
receivable, inventory, and machinery and equipment. Included in the formula is
an overadvance of $900,000 which will remain in place until February 26, 1999.
Thereafter, $600,000 of the overadvance will be eliminated on a straight line
amortized basis in 12 equal monthly installments and the remaining balance is
payable on June 25, 2000. As of June 26, 1998, based on the availability
formula, the Company did not have any additional availability for borrowings.

         The Line of Credit agreement contains certain restrictive covenants
with respect to among others, capital expenditures, mergers and acquisitions,
dividends, and additional indebtedness. In addition, the agreement requires that
the Company satisfy certain financial covenants. As a result of the Company's
results of operations for Fiscal 1998, the Company failed to satisfy certain
financial covenants. However, the bank provided the Company a waiver of the
existing and future financial covenant defaults.


                                      F-12
<PAGE>

         Annual principal payments, as adjusted for the amended maturities are
as follows:

                    12 MONTHS ENDING
                          JUNE
                    ----------------
         
                           1999  ..............................    $3,832,238
                           2000  ..............................     4,316,121
                           2001  ..............................        47,394
                           2002  ..............................        48,162
                           2003  ..............................        21,816
                                                                   ----------
                                                                   $8,265,731
                                                                   ==========
         
         The prime rate at June 26, 1998 was 8.5 %.

7.       DEFERRED COMPENSATION

         The Company has a deferred compensation agreement with two former
employees. The agreement requires the payment of $450,000 over a 15 year period.
The obligations have been recorded at their net present value using a discount
rate of 8%.

8.       STOCKHOLDERS' EQUITY

         In June 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"). The 1996 Plan provides for the issuance of a maximum of 60,000 shares of
common stock pursuant to the future grant to employees and others of incentive
stock options and nonstatutory stock options. In connection with the Offering,
the Company granted options to purchase 30,000 shares of common stock at $5.75
per share. The stock options vest in three annual installments commencing one
year from the date of grant and will expire ten years from the date of grant.

         In August 1997, the Company granted 15,000 options at $5.75 per share.
In June 1998, the Company canceled all existing options which were issued at
$5.75 per share and granted 50,000 options at $ .50 per share. No options are
exercisable at June 26, 1998.

         The following table sets forth the activity of the 1996 Plan for the
years ended June 26, 1998 and June 27, 1997:


<TABLE>
<CAPTION>
                                                         NUMBER OF      WEIGHTED AVERAGE
                                                          OPTIONS         EXERCISE PRICE
                                                          -------         --------------
<S>                                                        <C>                <C>      
             Outstanding at July 1, 1996                        -             $       -
                     Granted                               30,000                  5.75
                                                          -------
             Outstanding at June 27, 1997                  30,000                  5.75
                     Granted                               65,000                  1.71
                     Canceled                             (45,000)                 5.75
                                                          ------- 
             Outstanding at June 26 1998                   50,000             $     .50
                                                          -------
</TABLE>

         The Company has determined that the proforma effect of the common stock
options on compensation expense as required by SFAS No. 123 was less than $.01
per share.


                                      F-13
<PAGE>

9.       INCOME TAXES

         The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                                       YEARS ENDED
                                                              ------------------------------
         
                                                                 JUNE 26,         JUNE 27,
                                                                   1998              1997         
                                                                 --------         --------
<S>                                                           <C>               <C>       
        Deferred:
            Federal...............................              1,310,391        (456,103)
            State.................................                407,141        (108,481)
                                                              -----------       --------- 
                                                              $ 1,717,532       $(564,584)
                                                              ===========       ========= 
</TABLE>

         A reconciliation of the income tax provision (benefit) to the amount
computed using the Federal statutory rate as follows:

<TABLE>
<CAPTION>
                                                                       YEARS ENDED
                                                              ------------------------------
         
                                                                 JUNE 26,         JUNE 27,
                                                                   1998              1997         
                                                                 --------         --------
<S>                                                             <C>              <C>        
        Income tax at statutory rate.........................   $(1,691,547)     $  456,103)
        State income taxes and other (net of
            Federal benefit).................................       402,606        (108,481)
        Limitation on use of Federal NOL.....................     2,581,865               -
        Increase in valuation allowance......................       424,608               -
                                                                -----------      ---------- 
                                                                $ 1,717,532      $ (564,584)
                                                                ===========      ==========
</TABLE>




                                      F-14
<PAGE>


         The net deferred tax asset consists of the following:

         
<TABLE>
<CAPTION>
                                                                 JUNE 26,         JUNE 27,
                                                                   1998              1997         
                                                                 --------         --------
<S>                                                              <C>           <C>        
            Net operating loss carryforwards..............       $588,416      $ 2,050,197
            Capital loss carryforwards....................        228,333          228,333
            Allowance for doubtful accounts...............        143,220           68,499
            Inventory.....................................        145,247                -
            Deferred compensation.........................        134,682          129,899
            Accrued interest..............................         94,700           76,595
            Other.........................................        (36,312)          63,830
            Depreciation..................................       (645,345)        (671,488)
                                                                 --------      -----------
                                                                  652,941        1,945,865
            Valuation allowance...........................       (652,941)        (228,333)
                                                                 --------      -----------
                                                                 $      -      $ 1,717,532
                                                                 =======       ===========
</TABLE>

         Deferred taxes result from temporary differences in the recognition of
revenues and expenses for income tax and financial statement purposes. Deferred
tax assets at June 27, 1997 was reduced by a valuation allowance relating to the
utilization of a capital loss carryforward which management believes more than
likely will not be realized. As a result of the financial restructuring (see
Note 4), annual utilization of the Federal net operating loss carryforwards will
be limited. As of June 26, 1998, the Company has Federal net operating loss
carryforwards, after limitation, of approximately $1,731,000 which begin to
expire in 2006. The Company wrote down the deferred tax asset to the maximum
realizable value of $652,941. In addition, the Company also increased the
valuation allowance by $424,608 to $652,941. Realization of the deferred tax
asset is dependent upon sufficient future taxable income during the period that
temporary differences and carryforwards are expected to be available to reduce
taxable income.

10.      RELATED PARTY TRANSACTIONS

         The Company purchases computers, computer supplies and services from
Netcomp, Inc., a company owned by certain stockholders of the Company. Purchases
during the years ended June 26, 1998 and June 27, 1997 were approximately
$134,000 and $135,000, respectively.

11.      PENSION PLAN

         The Company has a defined contribution plan covering all full time
employees who have worked at least 1,000 hours during the plan year, who have
one year of service, and are age twenty-one or older. The Plan is subject to
provisions of the Employee Retirement Income Security Act of 1974. There was no
pension expense attributed to this plan for the years ended June 26, 1998 and
June 27, 1997.

12.      COMMITMENTS AND CONTINGENCIES

         Effective June 29, 1998, the Company entered into a one year agreement
with a management company to provide management assistance to the Company. The
management company will be paid $200,000 per year and receive 150,000 shares of
the Company's common stock. In addition, the management company agreed to
purchase 100,000 shares of the Company's common stock at $.358 per share.


                                      F-15
<PAGE>

         The Company is a defendant in various lawsuits which arose in the
normal course of business. In the opinion of management, none of the cases are
expected to have a material effect on the consolidated financial statements of
the Company.

13.      ADOPTION OF SFAS 131

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which will be effective for the
Company beginning in Fiscal 1999. SFAS No. 131 redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company has not yet
completed its analysis of which operating segments, if any, it will be required
to disclose as a result of this statement.

14.      MANAGEMENT'S PLANS

         Notwithstanding the significant steps taken by management to
restructure the Company's debt, the Company's immediate cash requirements are
significant. No assurance can be given that the Company will be able to
successfully realize cash flow from operations or that such cash flow will be
sufficient. Management believes that the Company's existing and anticipated
capital resources will not enable it to fund its planned operations through
Fiscal 1999. Management is currently attempting to obtain additional financing
and intends to raise additional funds within the next 12 months through equity
and/or debt financings. The Investors have committed to the Company to fund the
Company's working capital requirements through Fiscal 1999.

15.      FOURTH QUARTER ADJUSTMENTS

         During the fourth quarter of fiscal 1998, the Company recorded the
following expense adjustments: 

           Inventory reserves and write-off                        $ 2,152,754
           Deferred tax asset write-off and valuation allowance    $ 2,221,455



                                      F-16
<PAGE>




                                INDEX TO EXHIBITS

EXHIBIT NO.                           DESCRIPTION
-----------                           -----------

10.17           Amendment to Employment Agreement between the Registrant and
                Gary D. Horne

10.18           Amendment to Employment Agreement between the Registrant and
                Stanley F. Zuk

27.1            Financial Data Schedule