<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                       ----------------------------------
                                   FORM 10-KSB
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

  For the Fiscal Year Ended:                    Commission File Number:
      December 31, 1997                               0-21092

                                   OCTUS, INC.
           (Name Of Small Business Issuer As Specified In Its Charter)

        California                                         33-0013439
-------------------------------                         ----------------
(State Or Other Jurisdiction Of                         (I.R.S. Employer
 Incorporation Or Organization)                          Identification No.)


                         4520 EXECUTIVE DRIVE, PLAZA ONE
                               SAN DIEGO, CA 92121
                    (Address Of Principal Executive Offices)
                Issuer's telephone number, including area code:
                                 (619) 824-1185

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

         Securities registered pursuant to Section 12(g) of the Act: Units
         consisting of one Share of Common Stock and one Warrant to purchase
         Common Stock (Title of Class)

        Indicate by check mark 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.

            (1)    YES    X     NO       (2)    YES     X    NO
                        ------      -----            -------    -------

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

Issuer's revenue for the most recent fiscal year:    $94,997.16

The aggregate market value of the voting stock held by nonaffiliates of the
Issuer: $1,089,650 as of March 25, 1997.

The number of shares outstanding of each of the Issuer's class of common stock,
as of the close of the period covered by this report:

        Class:                              Common Stock, No Par Value
        Outstanding at December 31, 1997:   4,222,922 shares
        Class:                              Series C Preferred
        Outstanding at December 31, 1997:   250,000 shares

Documents Incorporated by Reference:        None.


<PAGE>   2
                                     PART I



ITEM 1.  DESCRIPTION OF BUSINESS.

        INTRODUCTION

        OCTuS, Inc. (the "Company" or "OCTuS") was incorporated in October 1983
under the laws of the State of California. In December 1991, in connection with
its shift in focus from the laser printer to the computer-telephone integration
market, the Company's name was changed from Office Automation Systems, Inc. to
OCTuS, Inc. In January 1993, the Company completed an initial public offering of
2,000,000 units each consisting of one share of Common Stock and one Warrant to
purchase one share of Common Stock. The Company's Common Stock (OCTS), Warrants
(OCTSW) and Units (OCTSU) are currently traded on the OTC Bulletin Board.

        The core of the Company's technology from its inception until 1991 was
comprised of software for use in controllers for laser printers and related
imaging devices. The Company incorporated this technology into its own
LaserPro(R) laser printer products and also licensed the technology to third
parties. In 1991, because of low margins and competition, the Company shifted
its primary focus from laser printer controller technology to the development of
the OCTuS PTA product line.

        From 1991 to early 1995, the Company was engaged primarily in the design
and development of computer software and associated hardware products focused on
the integration of the personal computer and the telephone. During that time,
the Company has developed a software product called OCTuS PTA(TM) ("Personal
Telephone Assistant"), which incorporates a Microsoft Windows(TM) graphical user
interface ("GUI") and enables users to operate and integrate telecommunications,
facsimile transmission and receipt, telephone and personal voice mail from a
desktop or portable computer using the "point and click" of a hand-held mouse.
The Company shipped the first retail version of OCTuS PTA in December 1993.

        In March 1995, the Company engaged a third-party distributor, Cintech
Tele-Management Systems, Inc. ("Cintech") to exclusively manufacture, distribute
and sell the retail version of OCTuS PTA in North America. Upon execution of the
Cintech agreement in March 1995, the Company shifted its focus to a plan of
pursuing licensing of the components of OCTuS PTA to third parties for use in
their respective products. However, no such agreements have been entered into to
date and there can be no assurance that any such agreements will generate
sufficient revenue to sustain the Company's business operations. In March 1997,
Cintech elected not to renew its license to distribute OCTuS PTA. However,
Cintech has stated in its public releases that it intends to use the OCTuS
technology with Cintech proprietary products

        On September 5, 1995, the Company entered into a product development and
license agreement with Ascom Telecommunications Limited ("Ascom") of the United
Kingdom. The agreement provides Ascom with an exclusive license to manufacture
and sell to distributors, resellers and end users in Europe a special version of
OCTuS PTA which has been modified to operate through the personal computer's
serial port with Ascom's proprietary telephone. Said exclusivity shall continue
for so long as Ascom sells or otherwise pays OCTuS a specified minimum royalty
on a quarterly basis. The agreement provides that Ascom shall pay the Company a
total of $65,000 for the required modifications to the standard OCTuS PTA
product.

        Although the Company has received $65,000 from Ascom as payment for the
required modifications to the standard OCTuS PTA program, on March 10, 1998,
Ascom terminated the Company's contract. The loss of this contract, the
Company's only contract for the OCTuS PTA software, seriously impairs the
ability of the company to sustain operations, and forces the Company to seek
alternative business opportunities. As of this date, the Company is actively
seeking such alternative 


                                       2


<PAGE>   3
business opportunities, which may include outright sale of the OCTuS PTA
software rights, acquisition of other software products, or acquisition of some
other technology. Although the Company is seeking such opportunities, it is
unlikely that the Company will be able to consummate any such transaction, which
would generate sufficient revenues to sustain the Company's operations without
dramatically diluting the existing equity ownership of the Company's Common
stockholders.

        OVERVIEW OF THE COMPUTER-TELEPHONY INTEGRATION MARKET

        OCTuS PTA was one of the first products in the market that fully
integrates telephone communications with the personal computer. The public first
began to gain awareness of computer telephone integration ("CTI"), in 1993. Due
to lack of sufficient cash resources, the Company's ability to become a
recognized name in the CTI field has been limited.

        Market for the OCTuS PTA Product. OCTuS PTA is currently designed for
the Small-Office/Home Office ("SOHO") markets as well as individuals and
departments in larger organizations. It is suitable for anyone using analog
telephone lines and personal computers with an Intel 386 (or better)
microprocessor running Microsoft(R) Windows(TM) 3.1 and greater (including
Windows 95(TM)) and at least eight megabytes of memory. The Company believes
that a significant number of business telephone lines provided by the Regional
Bell Operating Companies ("RBOCs") are analog business lines that are compatible
with OCTuS PTA; in addition, many of these lines have advanced (Centrex(R))
features supported by OCTuS PTA.

        OCTuS PTA is compatible with computer systems which share resources on
Local Area Networks ("LANs"); however, it does not provide for a LAN-based,
shared-data structure. The Company does not plan to develop a LAN-based version
of OCTuS PTA due to lack of sufficient cash resources.

        OCTUS PTA

        OCTuS PTA Computer Telephone Integration. OCTuS PTA was one of the first
products to fully integrate telephone communications with the personal computer.
The product replaces some of the many traditional desktop tools frequently used
by managers and professionals, such as a name and address book; fax machine;
answering machine; advanced feature phone, and speed dialer with one integrated
system that operates with familiar "point and click" mouse commands. The product
is designed to work with Centrex(R) telephone service as well as standard
business/residential telephone lines, and other analog lines utilizing a Private
Branch Exchange ("PBX").

        OCTuS PTA, which is accessible from within any Microsoft Windows
application, permits users (who have installed the appropriate hardware devices
in their personal computer system) to use their hand-held mouse to visually
select icons on their computer screen (depending on the features provided by
their telephone service) to place and receive calls, transfer, forward and
pick-up calls, access OCTuS PTA voice mail, place conference calls, record
messages and notes, send and receive faxes (even while talking, if a separate
fax line version is available), review contact histories, and access an
integrated addressbook.

        The Company believes that one of the unique strengths of the product is
its incoming call processing capabilities. OCTuS PTA provides a "pop-up" message
with a button bar that allows the user to decide how to respond to the call. The
user may select from several options, including forwarding the call to OCTuS
PTA's voice mail, having OCTuS PTA play and/or take a message; putting the
caller on hold after OCTuS PTA plays a user-recorded message; going directly
into OCTuS PTA to review notes from earlier calls, or simply answering the call.
The call may be answered by lifting the handset or by clicking on the on-screen
"Answer" button in the pop-up message and using a speakerphone

        If Caller ID is available, OCTuS PTA can also display caller information
supplied by the user's telephone company. If the caller's name and number was
previously entered in the user's OCTuS PTA addressbook database, OCTuS PTA will
automatically display the contact history while the phone is still 


                                       3


<PAGE>   4
ringing. This "soft interrupt" is designed to improve worker productivity by
selectively allowing less important calls to be answered automatically and then
returned at a more convenient time.

        The Company accomplishes the physical connection between the personal
computer and the telephone in the current OCTuS PTA product by using a
proprietary external PC-telephone interface, the OCTuLINK(TM). The OCTuLINK
connects to the parallel port on the user's personal computer and contains jacks
for the connection with a sound card (required for full voice and messaging
capability). The OCTuLINK's "pass-through" design allows the user to connect a
printer to one end of the OCTuLINK, and print and do call control
simultaneously.

        In addition, OCTuS PTA has been enhanced to support TAPI, the telephony
application program interface developed by Microsoft and Intel. The TAPI version
of OCTuS PTA, was released in July 1995, and works with any TAPI-compliant,
third-party telephone interface.

        For added capability, the user may purchase the Personal Fax and
Personal Voice-Mail add-on modules, the retail versions of which are also sold
in North America by Cintech. The Personal Fax module works with standard
fax-modem cards and the personal Voice Mail module works with Sound
Blaster(TM)-compatible soundcards.

        STRATEGIC ALLIANCES AND MARKET RECEPTION

        The Company's initial marketing plan had focused on developing strategic
relationships with certain RBOC's to further developing its OCTuS PTA line of
products with a view to having its products distributed by the RBOCs. To that
end, the Company reached marketing agreements with Pacific Bell and Bell
Atlantic.

        However, in May 1995, Pacific Bell released the Company from all
remaining obligations to deliver OCTuS PTA units to its customers under its
product delivery agreement. In addition, none of the other foregoing agreements
have generated significant revenue to date and are not expected to provide
revenue at levels sufficient to sustain the operations of the Company. Although
several companies have expressed an interest in licensing the Company's
technology and the Company has actively pursued such leads, it is unlikely that
any such licensing arrangements, which would render sufficient revenues to
sustain the Company's operations, will be entered into.

        GENERAL DISTRIBUTION STRATEGY

        Retail Distribution of OCTuS PTA. In March 1995, the Company entered
into a distribution agreement with Cintech Tele-Management Systems ("Cintech")
of Cincinnati, Ohio whereby Cintech acquired the exclusive rights, upon payment
of a per unit royalty, to distribute the retail version of OCTuS PTA (with the
OCTuLINK) in North America. Under the agreement, the product would be
manufactured, sold and supported by Cintech through its direct sales force and
extensive reseller network in the United States and Canada. However, in March of
1997, Cintech elected not to renew its agreement. Currently, the Company has no
plans for nor resources to enable it to conduct retail distribution of the OCTuS
product in the United States or elsewhere.

        Distribution through OEM's. Following the execution of the Cintech
agreement, the Company began to focus its efforts on the licensing of OCTuS PTA
and the OCTuLINK to original equipment manufacturers ("OEMs") in the
telecommunications and computer industries for use in their respective products.
Several companies have expressed an interest in licensing part or all of the
product and the Company is actively pursuing further discussions with such
companies. However, it is unlikely that any such agreements will be executed, or
that they will generate revenues at levels sufficient to sustain the operations
of the Company.


                                       4


<PAGE>   5
        COMPETITION

        The desktop computer telephony market is a relatively recent development
and is highly competitive and rapidly changing. The Company expects competition
to become more intense as the market grows and matures.

        Companies with products similar to OCTuS PTA have developed different
market strategies and technological thrusts. The strategic points of
differentiation among competitive products are the type of telecommunications
and computer hardware on which the product operates, the ability of the product
to operate on a local area network ("LAN") as well as for single users, and
software features.

        In addition, some or all of these competitors have capital, name
recognition and financial, personnel, and other resources substantially greater
than those of the Company. The success of the Company's product in the
marketplace will depend upon the success of the third party licensees in
marketing the product, as well as how well the product's features,
price/performance, technology, and reliability compares with that of the
competition. It is unlikely that the Company, in light of its limited financial
resources, will be able to continue research and development to keep the product
competitive.


        EMPLOYEES

        The Company did not add to its workforce during the year ended December
31, 1997; as of March 31, 1998, the Company had one employee, President John C.
Belden, who is based at the Company's San Diego, California headquarters. In
1997, the Company also engaged three former employees as independent contractors
from time to time to provide it with assistance in various areas (including
research and development) on an "as needed" basis. See "Factors Which May Affect
Future Results" - "Restructuring of Operations."


ITEM 1a.  FACTORS WHICH MAY AFFECT FUTURE RESULTS.

        HISTORY OF OPERATING LOSSES

        For the calendar year ended December 31, 1997, the Company recorded a
loss of $219,101. For the calendar year ended December 31 1996, the Company
recorded a loss of $191,056.

        At December 31, 1997, the Company had no tangible assets, no working
capital, an accumulated deficit of $22,258,858 and a shareholders' deficit of
$360,382. With both the Cintech and the Ascom transactions terminated, and due
to the absence of a significant level of sales of the Company's products, either
as stand-alone retail units or incorporated into third party products, the
Company will continue to generate significant losses. It is unlikely that the
Company's existing operations will be successful or will be profitable in the
future.


        NEED FOR ADDITIONAL CAPITAL

        The Company's cash on hand as of March 31, 1998 was $1,100, which is
inadequate to meet the Company's budgeted operating requirements. Additional
cash resources are required to sustain the Company's operations unless adequate
revenues from sales and licensing of the Company's OCTuS PTA product line
develop, of which there can be no assurance. While operations to date are being
funded by loans from Advanced Technologies International, LTD, one of the
Company's principal shareholders, it 


                                       5


<PAGE>   6
should be noted that the Company has no commitment from any party to provide
additional capital and there is no assurance that such funding will be available
when needed or, if available, that its terms will be favorable or acceptable to
the Company. Should the Company be unable to obtain additional capital when and
as needed, it could be forced to cease business activities altogether. It is
unlikely that the Company will be able to raise additional capital without
dramatically diluting the existing equity ownership of the Company's Common
stockholders.


        RESTRUCTURING OF OPERATIONS

        The Company underwent substantial restructuring in 1994 and 1995,
primarily as a result of continued operating losses. This restructuring included
a substantial reduction in the Company's workforce from 46 employees (as of
March 31, 1994) to one employee (as of July 1, 1997) as well as relocation of
its headquarters to another facility with lower operating costs. In addition,
Ray M. Healy became the Company's President and Chief Executive Officer in
November 1994. However, Mr. Healy resigned as the Company's President and Chief
Executive Officer on May 31, 1995 in order to pursue other opportunities and Mr.
Belden was re-appointed to that position. Mr. Belden is the sole remaining
executive officer of the Company. Mr. Donald O. Aldridge, a director of the
Company since June 1995, was appointed Chairman of the Board of the Company in
October 1995. In June 1996, the Company sold to ATI 250,000 shares of Series C
Preferred Stock (which votes with the Company's Common Stock with each share of
Series C Preferred Stock having ten votes) for $151,000 and issued warrants to
purchase up to an additional 3,000,000 shares of the Company's Common Stock at
an exercise price according to the following schedule: $0.43 per share for the
first 1,000,000 shares, $0.50 per share for the second 1,000,000 shares, and
$0.75 per share for the final 1,000,000 shares.

        Although this restructuring effected a major reduction in the Company's
operating expenses, the Company's cash on hand continues to be insufficient to
meet its present operating expenses. Without a substantial increase in revenues,
which is unlikely, the Company will be required to cease its business operations
altogether.


        NEED FOR PRODUCT ACCEPTANCE

        The Company's ability to complete the development and testing of future
revisions and/or improvements to OCTuS PTA is uncertain due to lack of
sufficient financial resources. As such, there is no assurance that the
Company's testing and development schedules for such future versions will ever
be met. The Company's inability to complete such development and testing could
have a material adverse effect on the Company's financial condition and results
of operations, and could raise questions as to the Company's ability to continue
as a going concern.

        In addition, because the computer industry is characterized by rapid
technological change, there can be no assurance that the Company's products will
not be rendered obsolete as a result of technological developments before or
after their introduction. The Company's limited resources has impaired the
Company's ability to quickly introduce its new products, continually improve
such products and develop other products in order to compete effectively in this
industry. Accordingly, it is unlikely that the Company will be able to complete
the development of such new products or improvements on a timely basis, if at
all.

        MARKETING/DEPENDENCE ON OTHERS FOR DISTRIBUTION

        In order to generate significant revenues from OCTuS PTA, the Company
must successfully implement a program to license the product to companies in the
personal computer and telecommunications industry for incorporation into their
respective products. Due to the limited funds available to the Company, it is
unlikely that the Company will be able to succeed in such a program.


                                       6


<PAGE>   7
        DEPENDENCE ON THIRD PARTY SOFTWARE

        The Company's products are designed for use with Microsoft(R)
Windows(TM). Although the product functions with Windows 95, the Company will
likely have to revise its product for use with newer versions of that product as
well as for each different combination of computers and telephone systems. In
addition, since the Company's products operate in conjunction with these other
operating systems and applications, changes to such systems will require the
Company to adapt its products accordingly. The Company's ability to perform such
ongoing development has been impaired by its present financial condition and it
is unlikely that the Company will be capable of conducting any such
improvements, which could affect the Company's ability to continue as a going
concern. Further, the rapid pace of hardware platform advances and the inability
of the Company to update the OCTuS PTA software to meet such new hardware
standards significantly hinder the software's compatibility with new computers
sold today. It is therefore unlikely that the Company will be able to upgrade
the OCTuS PTA software to insure compatibility with today's and future computing
platforms.

        HIGHLY COMPETITIVE INDUSTRY

        The computer industry is highly competitive and rapidly changing. There
are other companies that are engaged in marketing and development of products
similar to certain of the Company's products that employ similar technologies
which directly compete or could compete with the remainder of the Company's
products. Many of these competitors have significantly greater financial,
technical, manufacturing, and marketing resources and greater name recognition
than the Company. The Company believes that due to the nonproprietary nature of
its products and the relatively low barriers to entry to its markets that,
unless it establishes a significant installed base before its competitors, the
Company will not have any sustainable long-term advantage over its competitors.
The Company believes that its ability to compete depends on elements both within
and outside its control, including the success and timing of new product
development by the Company and its competitors, product performance and price,
productivity enhancement, distribution and customer support. Given its limited
resources, it is unlikely that the Company will be able to compete successfully
with respect to these factors or others.

        FLUCTUATIONS IN OPERATING RESULTS

        The Company's operating results may vary significantly from period to
period depending on factors such as the timing of new product introductions by
the Company and its competitors, product mix, changes in distribution channels,
increased competition, changes in product demand resulting from seasonal
fluctuations in business activity, and changes in operating and material costs.
As a result of these and other factors, the Company could experience significant
fluctuations in results of operations in future periods.

        INTELLECTUAL PROPERTY

        The Company generally relies on confidentiality agreements with its
employees and consultants to protect its proprietary information. There is no
assurance that existing or future patents, copyrights, trademarks and
confidentiality agreements will afford protection from material infringement.
There is also no assurance that the Company's technologies and products will not
infringe upon patents or copyrights of others. Management of the Company
believes that because of the rapid pace of technological change in its industry,
patent and copyright protection is less significant than the ability of the
Company to develop and market new products.

        GENERAL ECONOMIC AND MARKET CONDITIONS

        Demand for the Company's products depends largely upon the overall
demand for computer and communications products. Demand for such products
fluctuates from time to time based on numerous 


                                       7


<PAGE>   8
factors, including capital spending levels and general economic conditions.
There is no assurance that there will not be a decline in overall demand for
computer and communications products as a result of general economic conditions
or otherwise, and any such decline could have a material adverse effect on the
Company's business.


        TRANSACTIONS WITH AFFILIATES

        The Company has been a party to certain transactions with related
persons and affiliates. The Company believes that all such transactions were in
its best interests and on terms no less favorable to the Company than could have
been obtained from unaffiliated third parties and each transaction was approved
by disinterested and independent members of the Board of Directors. However,
such agreements were not always reached as the result of arms-length
negotiations. In June 1996, the Company sold to Advanced Technologies
International, Ltd. ("ATI") 250,000 shares of Series C Preferred stock (which
votes with the Common Stock with each share of Series C Preferred Stock having
ten votes) for $151,000 and issued warrants to purchase up to an additional
3,000,000 shares of the Company's Common Stock at an initial exercise price of
$0.43 per share. The Company currently has been meeting its additional liquidity
needs through loans from ATI. The loan balance, $261,811 as of December 31,
1997, has been increasing at approximately $15,000 per month. The Company pays
10.0% simple interest on such loans and the loan is due within five (5) days of
the Company's receiving sufficient funds from the exercise of warrants by ATI.
The loans are month to month loans and the continued operations of the Company
are wholly dependent on such loans from ATI. There is no assurance that ATI will
continue to fund Company or that ATI will exercise its warrants to enable
Company to repay such loans to ATI. Should the Company be unable to obtain
additional revenues, which is unlikely, and/or raise additional capital, it
could be forced to cease business activities altogether.



        NOTES AND ADVANCES PAYABLE

        On December 1, 1995, Maroon Bells Capital Partners, Inc. (Note 4)
advanced $25,000 to the Company for working capital purposes. The note bears
interest at 8% and was due with accrued interest on November 30, 1997.
Additionally, the note may be converted at any time into shares of the Company's
Common Stock at the rate of $.25 per share. The note also contains certain
acceleration and anti-dilution clauses upon conversion. Maroon Bells was also
granted 25,000 warrants with a nominal fair market value, to purchase the
Company's Common Stock at a price per share of $.25. The warrants are for a
five-year period. The note was paid in full on March 3, 1998.

        The Company currently has been meeting its additional liquidity needs
through loans from ATI. The loan balance, $261,811 as of December 31, 1997, has
been increasing at approximately $15,000 per month. The Company pays 10.0%
simple interest on such loans and the loan is due within five (5) days of the
Company's receiving sufficient funds from the exercise of warrants by ATI. The
loans are month to month loans and the continued operations of the Company are
wholly dependent on such loans from ATI. There is no assurance that ATI will
continue to fund Company or that ATI will exercise its warrants to enable
Company to repay such loans to ATI.

        TRADING MARKET/DELISTING FROM NASDAQ SMALLCAP MARKET/VOLATILITY OF STOCK
PRICE

        In January 1993, the Company completed an initial public offering of
2,000,000 Units, each unit comprised of one share of Common Stock and one Common
Stock Purchase Warrant. These securities were quoted on the Nasdaq SmallCap
Market until February 1, 1995, at which time they were delisted due to the
Company's inability to meet that market's minimum capital and surplus
requirements. The securities now trade on the OTC Bulletin Board (commonly
referred to as the "pink sheets"), maintained by the 


                                       8


<PAGE>   9
National Quotation Bureau, Inc., which are generally considered to be less
efficient markets. While the Company intends to reapply for listing on the
Nasdaq SmallCap Market if conditions are favorable for it to do so, there can be
no assurance that the Company's securities will be accepted by the Nasdaq
SmallCap Market upon application by the Company for relisting.

        The market price of the Common Stock, Units, and Warrants, like that of
the securities of many other high technology companies, has been highly
volatile. Factors such as fluctuation in the Company's operating results,
announcements of technological innovations or new products by the Company or its
competitors, developments in the Company's strategic alliances with other
companies, and general market conditions may have a significant effect on the
market price of the Common Stock. See table in Part II, Item 5, "Market for
Common Equity and Related Stockholder Matters."


        SHARES ELIGIBLE FOR FUTURE SALE

        Sales of substantial amounts of the Common Stock in the public market
could have an adverse effect on the price of the publicly-traded Common Stock
could potentially adversely affect the Company's ability to raise additional
funds. At December 31, 1996, 189,799 stock options held by Mr. Belden at the
time of the January 1993 initial public offering, are subject to a lockup
agreement with RAS Securities Corp., the underwriter of the initial public
offering, whereby such persons have agreed not to sell, contract to sell, or
otherwise dispose of such shares of Common Stock, without the consent of RAS
Securities Corp., until the date the Company has $1.0 million or more in
earnings after taxes in any fiscal year as certified by the Company's
independent accountants.


        EFFECT OF CERTAIN ANTI-TAKEOVER CHARTER AND BYLAW PROVISIONS

        Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles") and Bylaws could have the effect of making it
more difficult for a third party to acquire, or could discourage a third party
from attempting to acquire, control of the Company. Such provisions may limit or
reduce the price that investors might be willing to pay for shares of the Common
Stock. Certain of such provisions allow the Company to issue preferred stock
with rights senior to those of the Common Stock and impose various procedural
and other requirements that could make it more difficult for shareholders to
effect certain corporate actions. The Articles also provide for a classified
board in the event the Company's shares are traded on a national securities
exchange or the Nasdaq National Market. A classified board could make it more
difficult for a third party to acquire control, or could discourage a third
party from attempting to acquire, control of the board.




ITEM 2.  DESCRIPTION OF PROPERTY.

        In October, 1996, the Company moved its offices to a 400 square foot
office suite in an area of northern San Diego known as the "Golden Triangle".
The new facility is approximately eight miles north of the Company's former site
in Kearny Mesa. The Company occupies this space on a month-to-month basis for
approximately $100 per month.

        The Company does not maintain any other leases for office space and owns
no real property.

ITEM 3.  LEGAL PROCEEDINGS.

        None.


                                       9


<PAGE>   10
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.


                                       10


<PAGE>   11
                                         PART II

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

        The Company's Common Stock, Units and Warrants were quoted on the Nasdaq
Small-Cap Market under the symbols OCTS, OCTSU and OCTSW, respectively, upon
completion of the Company's initial public offering on January 15, 1993 until
February 1, 1995. On February 1, 1995, the Company's securities were delisted
from the Nasdaq Small-Cap Market due to the Company's inability to meet that
market's minimum capital and surplus requirements. Since February 1, 1995, the
Company's securities have been traded on the OTC Bulletin Board (the "pink
sheets").

        Set forth below are the ranges of high and low bid prices for the Common
Stock as reported by Nasdaq since the commencement of trading on January 18,
1993 through March 31, 1998. Quotations reflect interdealer prices without
retail markup, markdown, or commissions and may not represent actual
transactions.


<TABLE>
<CAPTION>
                                                        COMMON STOCK
QUARTER ENDED                                               HIGH                               LOW
-------------                                               ----                               ---
<S>                                                     <C>                                 <C>

March 31, 1993(1)                                          5-5/8                              3-3/8

June 30, 1993(1)                                           6-1/2                              4-1/8

September 30, 1993(1)                                      7-3/4                              4-1/4

December 31, 1993(1)                                       9-1/2                              6-5/8

March 31. 1994(1)                                          8-3/4                              5-1/2

June 30, 1994(1)                                           6                                  2-3/8

September 30, 1994(1)                                     3-3/16                              1-1/4

December 31, 1994(1)                                       2-1/2                              1-3/8

March 31, 1995(2)                                            5/8                               7/16

June 30, 1995(2)                                             1/2                                1/8

September 30, 1995(2)                                      17/32                              15/32

December 31, 1995(2)                                        3/16                               3/32

March 31, 1996(2)                                           5/16                               5/32

June 30, 1996(3)                                             3/4                               3/16

September 30, 1996(3)                                       7/16                               3/16

December 31, 1996(3)                                        5/16                               3/16

March 31, 1997(3)                                            1/4                               1/16

June 30, 1997(4)                                           23/32                               1/16

September 30, 1997(4)                                        5/8                               9/32

December 31, 1997(4)                                         3/8                               9/16

March 31, 1998(4)                                            1/2                               5/32
</TABLE>



(1)     Monthly Statistical Reports, January 1993 through December 1994 prepared
        by the Nasdaq Stock Market.

(2)     Compuserve Stock Quotes, 1995

(3)     America Online Stock Quotes, 1996

(4)     PC-Quote.com Online Stock Quotes, 1997

        On March 31, 1998, the closing price of the Company's Common Stock on
the OTC Bulletin Board was $0.1562 per share.

        The Company has never declared or paid cash dividends on its Common
Stock and has no current intention to declare or pay any dividends on its Common
Stock in the foreseeable future. The Company intends to retain its earnings, if
any, for the development of its business. On January 15, 1998, public and
underwriter's 5-year warrants, issued pursuant to the Company's initial public
offering lapsed and expired.


                                       11


<PAGE>   12
        As of March 31, 1998, there were approximately 900 holders of the
Company's Common Stock, and one holder of the Company's Series C Preferred
Stock, the Company's only outstanding classes of securities.


                                       12


<PAGE>   13
ITEM    6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS.


        This information should be read in conjunction with the unaudited
financial statements and notes thereto which begin on page F-1 of this report
for the years ended December 31, 1997 and 1996, respectively.

OVERVIEW

        OCTuS was incorporated in 1983 to develop a low cost controller for
laser printers. By the end of 1985, the Company had developed a laser printer
controller with a proprietary page description language which it incorporated
into laser printers and marketed under the LaserPro(R) trademark. The Company
was also licensing its laser printer controller technology. This strategy
produced increasing sales and profits until mid-1989 when profits began to
decline primarily as a result of low margins and other competitive reasons
caused by the high cost of the necessary component parts in relation to the
competitive market price and the dominant market position of larger high-volume
competitors. Although there is no assurance, the Company does not expect the
foregoing factors to significantly affect the OCTuS PTA line of products because
software products do not rely so heavily on component parts supplied by other
manufacturers. While royalties from printer licensing agreements provided
working capital, the Company began to suffer operating losses in 1989, which
have continued through the present.

        In early 1991, the Company began shifting its emphasis from laser
printer controller products to the development of its new product line. Since
1991, the Company has made significant changes to its business, management and
operations. However, until September 1993, substantially all of the Company's
revenues were derived from business activities involving the Company's laser
printer technology and technology licensing agreements. In September 1993, the
Company sold substantially all of the assets and inventory of the laser printer
business to National Computer Systems, Inc. ("NCS"). Since that time, the
Company has not generated significant revenues from sales of its OCTuS PTA
product due to poor product sales and lack of broad market acceptance. As a
result, in 1994, the Company was required to significantly downsize its staff
and reduce its operating expenses, which continued into 1995. See Part I,
"Description of Business," "--Employees," and "--Factors Which May Affect Future
Results," "---Restructuring of Operations."

        In March 1995, the Company engaged a third-party distributor, Cintech
Tele-Management Systems, Inc. ("Cintech") to exclusively manufacture, distribute
and sell the retail version of OCTuS PTA in North America. Since that time, the
Company has focused its efforts on the licensing of its OCTuS PTA technology to
third parties for incorporation by such parties into their own respective
product lines. Although several companies have expressed interest in licensing
the Company's technology, no significant licensing arrangements have been
entered into to date, nor can there be any assurance that the revenue from any
such licensing agreements will be sufficient to sustain the Company's
operations. In such case, the Company will be required to curtail business
altogether. In March of 1997, Cintech elect not to renew its agreement with the
Company, thereby leaving the Company with no current means of distribution of
its products. See Part I, "Description of Business," "--OCTuS PTA", "--Strategic
Alliances and Market Reception," and "--General Distribution Strategy."

        The discussion and analysis set forth below covers the following
comparative periods: the calendar years ended December 31, 1997 and December 31,
1996; and the calendar years ended December 31, 1996 and December 31, 1995.


                                       13


<PAGE>   14
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

        The following table sets forth certain revenue and expense
classifications as a percentage of revenues:


<TABLE>
<CAPTION>
                                              FOR THE YEAR ENDED DECEMBER 31,
                                                  ----------------------
                                                   1997           1996
                                                  -------        -------
<S>                                           <C>                <C> 
Revenues:
   Royalties and technology income                  100.0%         100.0%
    Income from release
                                                  -------        -------
                                                    100.0%         100.0%
                                                  -------        -------

Operating expenses:
  Cost of sales                                      88.3%          --
  Selling, general and administrative               216.5%         498.8%
  Interest                                           26.2%          14.8%

                                                  -------        -------
                                                      331%         513.6%
                                                  -------        -------

Gain (Loss) before income taxes                    (231.1%)      (433.39%)
                                                  -------        -------
Income tax benefit                                                  20.6%
Net income (loss) before extraordinary item        (231.1%)      (412.79%)
Extraordinary item                                                  30.7%
Net income (loss)                                  (231.1%)      (382.11%)
                                                  -------        -------
</TABLE>


CALENDAR YEAR 1997 COMPARED TO CALENDAR YEAR 1996

        ROYALTY AND TECHNOLOGY INCOME. Royalty and technology income increased
$44,997.16, or 89.9%, from $50,000 for the fiscal year ending December 31, 1996
to $94,997.16 for the fiscal year ending December 31, 1997. Such amount for the
current fiscal year ended December 31, 1997 represents royalty income and
payments for modifications to the standard OCTuS PTA product received from Ascom
Telecommunications Limited of the United Kingdom ("Ascom").

        INTEREST INCOME. There was no interest income for the fiscal year ending
December 31, 1997, which represented no change, from the same period in 1996.

        COST OF SALES. There was an $83,887.66 cost of sales for the fiscal year
ending December 31, 1997, compared with no cost of sales for the fiscal year
ending December 31, 1995. Cost of sales as a percentage of net sales for the
fiscal year ending December 31, 1997 was 88.3% compared to 0.0% for the fiscal
year ending December 31, 1996. This increase is associated with the subcontract
fees paid to accomplish the modifications to the standard OCTuS PTA on behalf of
Ascom.

        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for calendar year 1997 increased $37,131, from $286,507
in the fiscal year ending December 31, 1996 to $249,376 in the fiscal year
ending December 31, 1997. The increase of 12.9%, reflects primarily a lack of
significant sales which resulted in the Company expending its limited cash
resources in order to fund operating expenses.

        RESEARCH AND DEVELOPMENT. There were no significant research and
development expenses for the fiscal years ending December 31, 1997 and 1996; as
such, these expenses were recorded as general and administrative expenses for
the fiscal year ending December 31, 1997 and 1996. Research and 


                                       14


<PAGE>   15
development expenses in the fiscal year ending December 31, 1995, were also
insignificant, but the research and development expenses in the fiscal year
ending December 31, 1994 were $2,347,000. The decrease reflects the Company's
curtailment of resources with respect to the development of its OCTuS PTA
product line as the product transitioned from development to marketing stage. In
addition, due to reduced capital resources, the Company eliminated or suspended
certain future projects and eliminated its research and development staff.

        NET LOSS/GAIN. The Company experienced a net loss of $219,101 for the
fiscal year ended December 31, 1997. This reflects an increase of $28,045 over
the loss of $191,056 for the fiscal year ended December 31, 1996.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

        The following table sets forth certain revenue and expense
classifications as a percentage of revenues:


<TABLE>
<CAPTION>
                                              FOR THE YEAR ENDED DECEMBER 31,
                                                  -----------------------
                                                    1996            1995
                                                  -------         -------
<S>                                           <C>                 <C> 
Revenue
   Net sales                                         --              21.2%
   Royalties and technology income                    100%           62.5%
   Income from release agreement                     --              16.1%
   Interest                                          --                .2%
                                                  -------         -------
                                                      100%            100%
                                                  -------         -------

Costs and expenses:
  Cost of sales                                     498.8%           12.8%%

  Selling, general and administrative                --              47.8%
  Research and development                           --              --
  Interest                                           14.8%             .2%

                                                  -------         -------
                                                    513.6%           60.8%
                                                  -------         -------

Gain (Loss) before income taxes                   (433.39%)          39.2%
                                                  -------         -------
Income tax benefit                                   20.6%            2.3%
Net income (loss) before extraordinary item       (412.79%)          41.5%
Extraordinary item                                   30.7%            3.3%
Net income (loss)                                 (382.11%)          44.8%
                                                  =======         =======
Cost of sales as a percent of net sales              --              60.3%
                                                  =======         =======
</TABLE>


CALENDAR YEAR 1996 COMPARED TO CALENDAR YEAR 1995

        NET SALES. Net sales for the year ending December 31, 1996 were $0,
representing a decrease of $317,000 or 100% from the $317,000 for the same
period in 1995. This lack of sales is primarily the result of the completion of
the Company's shift, begun in 1995, from selling its OCTuS PTA product through
retail channels to one of promoting its technology through licensing.

        ROYALTY AND TECHNOLOGY INCOME. Royalty and technology income decreased
$885,720, or 94.7%, from $935,000 for the fiscal year ending December 31, 1995
to $50,000 for the fiscal year ending December 31, 1996. The decrease in royalty
and technology income was due primarily to the inability of Cintech to sell
substantial amounts of the retail version of OCTuS PTA in North America in 1996
under its 


                                       15


<PAGE>   16
agreement with the Company. The large royalty income in 1995 reflects the
pro-rata recognition of a $3,000,000 gross lump sum prepayment from the
Company's then-licensee in September 1992. The Company amortized this payment up
through August 1995, when the original license agreement expired.

        INTEREST INCOME. Interest income for the fiscal year ending December 31,
1996 was $0, representing a decrease of $3,000 or 100% from the $3,000 received
for the comparable period for the fiscal year ending December 31, 1995. The
decrease resulted from the Company's use of cash on hand to fund operating
expenses in the fiscal year ending December 31, 1996 and lack of cash reserves
due to poor operating cash flow.

        COST OF SALES. Cost of sales for the fiscal year ending December 31,
1996 of $0, represents a decrease of $191,000 or 100%, from $191,000 for the
fiscal year ending December 31, 1995. The decrease relates primarily to lack of
product sales in the fiscal year ending December 31, 1996 as compared to the
fiscal year ending December 31, 1995. This lack of sales is primarily the result
of the completion of the Company's shift, begun in 1995, from selling its OCTuS
PTA product through retail channels to one of promoting its technology through
licensing.

        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for calendar year 1996 decreased $452,537 or 64.5%, in
the fiscal year ending December 31, 1995 to $249,000 in the fiscal year ending
December 31, 1996. This decrease reflects primarily a shift in expenses related
to significant restructuring and downsizing of the Company which took place
during the 1995 and earlier calendar years due to lack of significant sales
which resulted in the Company expending its limited cash resources in order to
fund operating expenses.

        RESEARCH AND DEVELOPMENT. There were no significant research and
development expenses for the fiscal year ending December 31, 1996; as such,
these expenses were recorded as general and administrative expenses for the
fiscal year ending December 31, 1996. This reflects no significant change from
the fiscal year ending December 31, 1995, where such expenses were also recorded
as general and administrative expenses due to their insignificant number.

        NET LOSS/GAIN. The Company experienced a net loss of $191,056 for the
fiscal year ended December 31, 1996. However, net gain for the fiscal year ended
December 31, 1995 was $670,000 It should be noted that the net gain recorded for
the fiscal year ended December 31, 1995 primarily reflects one-time receipts of
revenue by the Company in connection with its transition from a sales and
marketing company to a licensing organization as well as a reduction in expenses
associated with substantial reductions in force and other operating costs
necessitated by lack of significant product sales and resultant decreases in
available cash resources.


        LIMITATIONS ON NET OPERATING LOSS AND CREDIT CARRYFORWARDS

        As of December 31, 1997 the Company had significant tax credit and
research carryforwards for federal tax reporting purposes which expire through
2008. Additionally, the Company has federal and state net operating loss
carryforwards, expiring through 2008. Because of a substantial change in the
Company's ownership resulting from an initial public offering, an annual
limitation of approximately $600,000 has been placed on utilization of the loss
carryforwards generated prior to the Company's initial public offering.

        LIQUIDITY AND CAPITAL RESOURCES

        For the year ended December 31, 1997 the Company incurred a net loss of
$219,101. Cash on hand as of March 31, 1998 was $1,100. In March 1997, Cintech
elected not to renew its license to distribute OCTuS PTA. However, Cintech has
stated in its public releases that it intends to use the OCTuS technology with
other proprietary products. Management believes that without an influx of
significant new 


                                       16


<PAGE>   17
revenues from the licensing of the Company's products, the Company's cash on
hand and revenues from operations will not be sufficient to sustain its
operations through the rest of 1998. Although the Company has actively been
pursuing such licensing arrangements and new investment, there can be no
assurance that any licensing agreements and/or new investment will be entered
into by the Company, or that the terms of any such agreements will be on terms
favorable to the Company. In June 1996, the Company sold to Advanced
Technologies International, Ltd. ("ATI") 250,000 shares of Series C Preferred
stock (which votes with the Common Stock with each share of Series C Preferred
Stock having ten votes) for $151,000 and issued warrants to purchase up to an
additional 3,000,000 shares of the Company's Common Stock at an initial exercise
price of $0.43 per share. The Company currently has been meeting its additional
liquidity needs through loans from ATI. The loan balance, $261,811 as of
December 31, 1997, has been increasing at approximately $15,000 per month. The
Company pays 10.0% simple interest on such loans and the loan is due within five
(5) days of the Company's receiving sufficient funds from the exercise of
warrants by ATI. Although ATI has advanced funds, on a monthly basis, to the
Company to meet its current cash requirements, there is no commitment from ATI
to continue these advances. Should the Company be unable to obtain additional
revenues and/or raise additional capital, it could be forced to cease business
activities altogether. See Part I, Description of Business, "OCTuS PTA,"
"Strategic Alliances and Market Reception," and "General Distribution Strategy."

ITEM 7. FINANCIAL STATEMENTS.

        The full text of the Company's audited financial statements for the
fiscal year ended December 31, 1997 begins on page F-1 of this Report.

ITEM 8. ACCOUNTING AND FINANCIAL DISCLOSURE.

        On March 12, 1996, the Company's Board of Directors engaged Hollander,
Gilbert & Co. as the Company's principal accountant to audit its financial
statements. The firm of Hollander, Gilbert & Co. has continued to act as the
Company's principal accountant during the fiscal year ending December 31, 1997.


                                       17


<PAGE>   18
                                    PART III.

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

        Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act" in the Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before April 30, 1998 which information is incorporated herein.

ITEM 10. EXECUTIVE COMPENSATION.

        Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Executive Compensation" in the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission on or before April 30,
1998 which information is incorporated herein.

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

        Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 1998 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before April 30, 1998 which information is
incorporated herein.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 1998 which information is incorporated herein.

ITEM 13.       EXHIBITS AND REPORTS ON FORM 8-K

        (a) See Exhibit List and Exhibits, beginning on page __.


                                       18


<PAGE>   19
                                   OCTUS, INC.


                                   SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the
small business issuer has duly caused this report to be signed on its behalf by
the undersigned thereunto authorized.

                                       OCTUS, INC.


Date:   March, 28, 1998.                    /s/ John C. Belden
                                 --------------------------------------------
                                              John C. Belden
                                     President & CEO/Chief Financial Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of March 28, 1998.


<TABLE>
<CAPTION>
Signature                                      Title                               Date
---------                                      -----                               ----
<S>                                <C>                                          <C> 
/s/ John C. Belden                 President (Principal Executive Officer,      March 28, 1998
------------------                 Principal Financial & Accounting
John C. Belden                     Officer) Director
                                   

/s/ Donald O. Aldridge             Director and Chairman of the                 March 28, 1998
----------------------             Board
Donald O. Aldridge                 

/s/ Robert A. Freeman              Director                                     March 28, 1998
---------------------
Robert A. Freeman

/s/ Gilbert Holloway               Director                                     March 28, 1998
--------------------
Gilbert Holloway

/s/ Lucille Lansing                Director                                     March 28, 1998
--------------------
Lucille Lansing

/s/ Lawrence Taggart               Director                                     March 28, 1998
--------------------
Lawrence Taggart
</TABLE>


                                       19


<PAGE>   20
   EXHIBIT INDEX


<TABLE>
<CAPTION>
                                                                              SEQUENTIALLY
EXHIBIT                                                                          NUMBERED
NUMBER                   DESCRIPTION NUMBERED                                      PAGE
------                   --------------------                                      ----
<S>             <C>                                                           <C>
3.1             Amended and Restated Articles of Incorporation                     +

3.1.1           Certificate of Determination of Preferences of
                Series C Preferred Stock of OCTuS, Inc.                            ++

3.2             Amended Bylaws                                                     !

9               Irrevocable Proxy from Tokyo Electric Co., Ltd.
                (included in Exhibit 10.26.1)                                      *

10.3            Sample Warrant                                                     *

10.4            Amended and Restated 1987 Nonstatutory Stock                       +
                Option Plan

10.5            Form of Stock Option Agreement, Non-Qualified
                Options, 1987 Plan                                                 *

10.6            Amended and Restated 1988 Nonstatutory Stock                       *
                Option Plan

10.7            Form of Stock Option Agreement, Non-Qualified
                Options, 1988 Plan                                                 *

10.8            Amended and Restated 1992 Key Executive Stock                      *
                Purchase Plan

10.9            Lease dated April 7, 1995 by and between Mistek
                Investment Group and OCTuS, Inc. for 8352 Clairemont Mesa
                Blvd., San Diego, CA 92111

10.10           Standard Industrial Net Lease dated July 29, 1994 by
                and between Sorrento Corporate Center and OCTuS,
                Inc., for 9944 Barnes Canyon Road, Suite A, San Diego CA 92121     ++

10.11           Lease Surrender Agreement dated April 8, 1995
                (as amended May 31, 1995), by and between 
                Sorrento Corporate Center and OCTuS, Inc., for 9944 
                Barnes Canyon Road, Suite A, San Diego, CA
                92121                                                              +++

10.12           Employment Agreement dated June 1, 1992 by and
                between OCTuS, Inc. and John C. Belden, as amended May 14,
                1993 and February 16, 1995                                         #

10.16           Form of Indemnification Agreements entered into
                by and between OCTuS, Inc. and its officers and directors          *

10.17           401(k) Plan Document                                               *

10.18           Form of Unit Certificate                                           *

10.19           Directors 1993 Stock Option Plan                                   +
                Form of Stock Option Agreement, Non-Qualified
                Options, 1993 Directors Stock Option Plan                          **

10.20           Warrant, Caledonian European Securities Ltd.,
                dated July 15, 1993                                                **

10.21           Warrant, Neil Haverty, dated July 15, 1993                         **

10.22           Warrant, Maroon Bells Capital Partners, Inc.,
                dated July 15, 1993                                                **

10.23           Promissory Note of Nolan K. Bushnell, dated as
                of February 8, 1993, payable to OCTuS, Inc.                        **

10.24           Stock Pledge Agreement by Nolan K. Bushnell in
                favor of OCTuS, Inc., dated February 8, 1993, as amended           **
                October 7, 1993

10.25           Purchase and Sale Agreement dated September 14,
                1993 by and between OCTuS, Inc. and National Computer              **
                Systems, Inc.

10.26           Letter Agreement dated January 26, 1995 by and
                between OCTuS, Inc. and National Computer Systems, Inc.            #

10.27           Purchase and License Agreement dated March 7,
                1995 by and between Cintech Tele-Management Systems, Inc.
                and OCTuS, Inc., as amended May 16, 1995                           +++

10.28           Product Development and License Agreement dated
                September 5, 1995 by and between Ascom Telecommunications
                Limited and OCTuS, Inc.                                            !

10.29           Promissory Note dated December 1, 1995 from
                OCTuS, Inc. to Maroon Bells Capital Partners, Inc.                 &

10.30           Stock and Warrant Purchase Agreement dated June
                24, 1996 by and between OCTuS, Inc. and Advanced
                Technologies International, Ltd.                                   ++

10.31           Warrant to Purchase Common Stock from OCTuS,
                Inc. to Advanced Technologies International, Ltd. dated 
                June 24, 1996                                                      ++ 

10.32           Agreement dated as of August 8, 1996 relating to
                settlement 
</TABLE>


                                       20


<PAGE>   21
<TABLE>
<CAPTION>
                                                                              SEQUENTIALLY
EXHIBIT                                                                          NUMBERED
NUMBER                   DESCRIPTION NUMBERED                                      PAGE
------                   --------------------                                      ----
<S>             <C>                                                           <C>
                of claims among OCTuS parties and RAS/TAG parties.

11              Statements re: computation of (loss) earnings
                per share and shares used in per share calculation                 +++


16.1            Letter dated March 13, 1996 from Price
                Waterhouse to the
                Securities and Exchange Commission                                 ~


27.1            Financial Data Schedule
</TABLE>


*       Incorporated by reference from the Company's Form S-1, as amended,
        bearing the SEC registration number 33-51862, which was declared
        effective January 15, 1993.

**      Incorporated by reference from the Company's Annual Report on Form
        10-KSB for the calendar year ended December 31, 1993.

+       Incorporated by reference from the Company's Post-Effective Amendment
        No. 1 on Form S-3 to Form S-1, bearing the SEC registration number
        33-51862, which was declared effective January 6, 1995.

#       Incorporated by reference from the Company's Annual Report on Form
        10-KSB for the calendar year ended December 31, 1994 filed with the SEC
        April 17, 1995.

+++     Incorporated by reference from the Company's amended Annual Report on
        Form 10-KSB/A for the calendar year ended December 31, 1994 filed with
        the SEC July 6, 1995.

!       Incorporated by reference from the Company's Quarterly Report on Form
        10-QSB for the period ended September 30, 1995 filed with the SEC
        November 13, 1995.

~       Incorporated by reference from the Company's Form 8-K filed with the
        Securities and Exchange Commission on March 12, 1996.

&       Incorporated by reference to the Company's Annual Report on Form 10-KSB
        for the fiscal year ended December 31, 1996 as filed with the SEC on
        March 31, 1997.

++      Incorporated by reference from the Company's Quarterly Report on Form
        10-QSB for the period ended June 30, 1996 filed with the SEC on August
        12, 1996.


                                       21


<PAGE>   22
                          INDEX TO FINANCIAL STATEMENTS

                     YEARS ENDED DECEMBER 31, 1996 AND 1997


<TABLE>
<S>                                                                     <C>
Report of Independent Auditors                                           F-2

Balance Sheets as of December 31, 1996 and 1997                          F-3

Statements of Operations -               
   Years Ended December 31, 1996 and 1997                                F-4

Statement of Changes in Shareholders' Deficiency -  
   Years Ended December 31, 1996 and 1997                                F-5

Statements of Cash Flows -               
   Years Ended December 31, 1996 and 1997                                F-6

Notes to Financial Statements                                            F-7
</TABLE>


<PAGE>   23
                         REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and Shareholders 
OCTUS, INC.

We have audited the accompanying balance sheets of OCTuS, Inc. as of December
31, 1996 and 1997, and the related statements of operations, changes in
shareholders' deficiency and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OCTuS, Inc. as of December 31,
1996 and 1997, and the results of operations, shareholders' deficiency and cash
flows for the years then ended, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has a working capital deficit and a shareholders' deficiency of
$360,382 as of December 31, 1997. As discussed in Note 2 to the financial
statements, these conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.



                            HOLLANDER, GILBERT & CO.

Los Angeles, California
March 16, 1998


                                      F-2


<PAGE>   24
                                   OCTUS, INC.
                                 BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1997


<TABLE>
<CAPTION>
                                                            1996                1997
                                                        ------------        ------------
<S>                                                     <C>                 <C>
                        ASSETS
CURRENT ASSETS
   Cash                                                 $     12,902        $
                                                        ------------        ------------
       TOTAL CURRENT ASSETS                                   12,902

PROPERTY AND EQUIPMENT, Net (Note 3)                           5,226
                                                        ------------        ------------
                                                        $     18,128        $
                                                        ============        ============

         LIABILITIES AND SHAREHOLDERS' DEFICIENCY

CURRENT LIABILITIES
   Accounts payable                                     $     30,518        $     34,302
   Accrued liabilities                                        23,891              39,269
   Convertible note payable (Note 5)                          25,000              25,000
   Advances payable (Note 5)                                  70,000             261,811
   Unearned royalty                                           10,000
                                                        ------------        ------------
       TOTAL CURRENT LIABILITIES                             159,409             360,382
                                                        ------------        ------------


COMMITMENTS AND CONTINGENCIES (Note 10)

SHAREHOLDERS' DEFICIENCY (Notes 6 and 7)
   Preferred Stock - authorized 2,000,000
     Shares, issued and outstanding
     250,000 shares                                          151,000             151,000
   Common Stock - no par value;
     Authorized 20,000,000 shares in 1996 and
      100,000,000 shares in 1997, issued and
      outstanding 4,222,922 shares                        21,966,577          21,966,577
   Accumulated deficit                                   (22,258,858)        (22,477,959)
                                                        ------------        ------------

       TOTAL SHAREHOLDERS' DEFICIENCY                       (141,281)           (360,382)
                                                        ------------        ------------
                                                        $     18,128        $
                                                        ============        ============
</TABLE>


        The accompanying notes are an integral part of these statements.


                                      F-3


<PAGE>   25
                                   OCTUS, INC.
                            STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 1996 AND 1997


<TABLE>
<CAPTION>
                                                            1996               1997
                                                         -----------        -----------
<S>                                                      <C>                <C>        
 ROYALTIES AND TECHNOLOGY INCOME (Notes 1 and 4)         $    50,000        $    94,997
                                                         -----------        -----------



OPERATING EXPENSES
   Selling, general and administrative                       249,376            286,507
   Depreciation and amortization                               9,902              2,981
   Interest                                                    7,423             24,610
                                                         -----------        -----------
       TOTAL OPERATING EXPENSES                              266,697            314,098
                                                         -----------        -----------

LOSS BEFORE INCOME TAXES AND
   EXTRAORDINARY ITEM                                    (216,697)15           (219,101)
INCOME TAX BENEFIT (Note 9)                                   10,300
                                                         -----------        -----------
LOSS BEFORE EXTRAORDINARY ITEM                           (206,397)15           (219,101)

EXTRAORDINARY ITEM - Gain from forgiveness of
debt, Net of income taxes of $10,300 in 1996 (Note 11)        15,341
                                                         -----------        -----------

NET LOSS                                                 $  (191,056)       $  (219,101)
                                                         ===========        ===========

BASIC NET LOSS PER COMMON SHARE
   Net loss before extraordinary item                    $      (.05)       $      (.05)
   Extraordinary gain
   NET LOSS                                              $      (.05)       $      (.05)
                                                         ===========        ===========

WEIGHTED AVERAGE NUMBER OF
 COMMON SHARES OUTSTANDING                                 4,222,922          4,222,922
                                                         ===========        ===========
</TABLE>


        The accompanying notes are an integral part of these statements.


                                      F-4


<PAGE>   26
                                   OCTUS, INC.
                STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
                     YEARS ENDED DECEMBER 31, 1996 AND 1997


<TABLE>
<CAPTION>
                                  PREFERRED STOCK            COMMON STOCK        ACCUMULATED
                                 -------------------    ----------------------  
                                  SHARES     AMOUNT       SHARES     AMOUNT        DEFICIT             AMOUNT
                                 -------    --------    ---------  -----------   ------------        ---------
<S>                              <C>        <C>         <C>        <C>           <C>                 <C>       
BALANCE, DECEMBER 31, 1995                              4,222,922   21,966,577   $(22,067,802)       $(101,225)
Issuance of                    
preferred stock                  250,000     151,000                                                   151,000
Net loss                                                                             (191,056)        (191,056)
                                 -------    --------    ---------  -----------   ------------        ---------
                               
BALANCE, DECEMBER 31, 1996       250,000     151,000    4,222,922   21,966,577    (22,258,858)        (101,225)

Net loss                                                                             (219,101)        (219,101)
                                 -------    --------    ---------  -----------   ------------        ---------
BALANCE, DECEMBER 31, 1997       250,000    $151,000    4,222,922  $21,966,577   $(22,477,959)       $(360,382)
                                 =======    ========    =========  ===========   ============        =========
</TABLE>


        The accompanying notes are an integral part of these statements.


                                      F-5


<PAGE>   27
                                   OCTUS, INC.
                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1996 AND 1997


<TABLE>
<CAPTION>
                                                            1996             1997
                                                          ---------        ---------
<S>                                                       <C>              <C>       
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                               $(191,056)       $(219,101)
   Adjustments to reconcile net loss to
     net cash used by operating activities:
       Depreciation and amortization                          9,902            2,981
       Gain on disposal of property and
         equipment                                           (5,629)
       Gain from forgiveness of debt                        (25,641)
       Changes in operating assets and liabilities:
         Receivables                                         12,275
         Prepaid expenses and other                             752
         Accounts payable                                   (29,390)           5,666
         Accrued liabilities                                 12,326)          15,378
         Deferred revenue                                    10,000          (10,000)
                                                          ---------        ---------
          NET CASH USED BY OPERATING ACTIVITIES            (206,461)        (205,076)
                                                          ---------        ---------
CASH FLOWS FROM INVESTING ACTIVITIES
   Expenditures for property and equipment                   (3,368)
   Proceeds from disposition of fixed assets                  7,344            2,245
                                                          ---------        ---------
          NET CASH PROVIDED BY INVESTING ACTIVITIES           3,976            2,245
                                                          ---------        ---------
CASH FLOWS FROM FINANCING ACTIVITIES
   Payments of capital leases                                (4,156)          (1,882)
   Proceeds from borrowings                                  70,000          191,811
   Loans from officers                                       (4,050)
   Proceeds from issuance of preferred stock                151,000
                                                          ---------        ---------
       NET CASH PROVIDED BY FINANCING ACTIVITIES            212,794          189,929
                                                          ---------        ---------
NET INCREASE (DECREASE) IN CASH                              10,309          (12,902)
CASH AT BEGINNING OF YEAR                                     2,593           12,902
                                                          ---------        ---------
CASH AT END OF YEAR                                       $  12,902        $    --
                                                          =========        =========
OTHER CASH INFORMATION
   Interest paid                                          $   4,923        $   4,796
                                                          =========        =========
</TABLE>


        The accompanying notes are an integral part of these statements.


                                      F-6


<PAGE>   28
                                   OCTUS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1997


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Description of the Business - OCTuS Inc. (the "Company") was formed as a
        California corporation in 1983. From incorporation to 1991, the
        Company's principal business activities involved the design, development
        and distribution of controllers for non-impact printers and related
        laser printer products. In 1991, the Company became primarily engaged in
        the design, development, marketing and distribution of hardware and
        software products for use in the computer telephone integration (CTI)
        market. The Company's products are focused on the unification of the
        personal computer and the telephone in the office environment.

        In September 1993, the Company sold the assets and certain of the
        liabilities related to its printer products line to National Computer
        Services ("NCS") for approximately $900,000 and NCS assumed liabilities
        of approximately $200,000 for prepaid maintenance. NCS also agreed to
        pay OCTuS royalties for future sales of printer products for a five-year
        period only to the extent that cumulative royalties exceed $258,000. The
        Company recognized a loss on the sale of the printer products line of
        $225,000. In February 1995, the Company and NCS negotiated a buy-out of
        the royalty requirement in exchange for $160,000.

        In February 1995, the Company entered into a three-year agreement with
        Cintech Tele-Management Systems, Inc. ("Cintech") granting Cintech
        exclusive rights to distribute the retail version of OCTuS PTA in North
        America. In connection with the agreement, Cintech also purchased all of
        the Company's retail OCTuS PTA inventory and obtained the rights to
        manufacture additional units of the product.

        In the future, the Company hopes to license its products to outside
        parties for manufacturing and marketing.

        Use of Estimates - The preparation of financial statements in conformity
        with generally accepted accounting principles requires management to
        make estimates and assumptions that affect certain reported amounts and
        disclosures. Accordingly, actual results could differ from those
        estimates.

        Property and Equipment - Property and equipment are recorded at cost and
        depreciated over their estimated useful lives of two to five years using
        the straight-line method. Depreciation expense includes amortization of
        assets under capital lease arrangements.

        The Company reviews for impairment of long-lived assets, certain
        identifiable intangibles, and goodwill related to those assets whenever
        events or changes in circumstances indicate that the carrying amount of
        an asset may not be recoverable.

        Revenue Recognition - Revenue from product sales is recognized when
        goods are shipped and royalties are recognized as earned over the
        respective contract terms.

        Research and Development - Research and development costs are expensed
        in the period incurred.

        Net Loss Per Common Share - The FASB issued statement No. 128, "Earnings
        per Share", effective for the Company's fiscal year ended December 31,
        1997 and required restatement of the earnings per share ("EPS") data for
        the 1996 fiscal year to conform to the statement. The restatement had no
        effect on net loss per share for 1996. FASB No. 128 simplifies the
        computation of EPS by requiring companies with complex capital
        structures to report basic EPS instead of primary EPS, and replaces
        fully-diluted EPS with diluted EPS. Basic EPS is calculated by dividing
        net income (loss) by the weighted average number of common shares
        outstanding during the year. Diluted EPS is calculated by dividing net
        income by the number of common shares outstanding increased by
        exercisable or 


                                      F-7


<PAGE>   29
        convertible securities. Diluted EPS is the same as basic EPS in 1996 and
        1997 as a result of the loss from continuing operations.

        Stock-Based Compensation - The Company adopted only the disclosure
        requirements of SFAS No. 123 and continues the intrinsic value-based
        method. Nonetheless, due to the limited volume of trading in the
        Company's common stock, such disclosures are not determinable by the
        Company.

        Reclassifications - Certain 1996 balances have been reclassified to
        conform with the current year's presentation.


2.      DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

        Going Concern and Lack of Revenue and Liquidity - The Company incurred a
        net loss of $219,101 for the year ended December 31, 1997, and has an
        accumulated deficit of $22,477,959 at December 31, 1997. Due to the
        Company's increasing capital constraints, management has focused its
        effort on licensing the Company's core technology and curtailing further
        research and development. Management believes that the potential
        establishment of revenue-generating license agreements, combined with
        potential additional financing, would enable it to meet the liquidity
        requirements of the Company; however, at present the Company has no
        commitments for significant licensing agreements and does not believe
        its current licensing agreements are sufficient to provide for the
        continued viability and operations of the Company. Although the Company
        has been meeting its obligations through a month to month, $15,000
        monthly loan from ATI, there is no assurance that such loans will be
        available in the future. Furthermore, the Company has no other
        commitment from any party to provide additional capital and there is no
        assurance that such funding will be available when needed, or if
        available, that its terms will be favorable or acceptable to the
        Company. Should management be unable to enter into significant licensing
        agreements and obtain additional capital when and as needed, it could be
        forced to cease the Company's business activities altogether and
        liquidate the Company's net assets. Additionally, there is no assurance
        the Company will not require additional capital resources in the conduct
        of its planned business activities. In the absence of the establishment
        of significant revenue generating licensing agreements and general
        market acceptance of the Company's technology, there is no assurance
        that the Company will have the ability to continue as a going concern.
        Although ATI has advanced funds, on a monthly basis, to the Company to
        meet its current cash requirements, there is no commitment from ATI to
        continue these advances.

        On March 9, 1998, the Company received notice that its contract to
        develop computer telephony software for its only customer has been
        terminated. The loss of this contract for its OCTuS PTA software will
        further seriously impair the ability of the Company to sustain
        operations unless alternative business opportunities are developed.

3.      PROPERTY AND EQUIPMENT

        Property and equipment was comprised of the following at December 31,
        1996 and 1997:

<TABLE>
<CAPTION>
                                    1996     1997
                                   -------  -------
<S>                                <C>      <C>    
Computer equipment                 $16,290  $12,922
Furniture and fixtures              19,122   19,122
                                   -------  -------
                                    35,412   32,044
Less accumulated depreciation and  (30,186) (32,044)
                                   -------  -------
amortization                       $ 5,226  $     -
                                   =======  =======
</TABLE>

4.      RELATED PARTY BALANCES AND TRANSACTIONS

        During 1997, the Company paid $74,725 in engineering fees to Robert
        Freeman, a director of the Company.

        In January 1995, the Company engaged Maroon Bells Capital Partners, Inc.
        ("MBC"), a company managed by Theodore Swindells, a former director of
        OCTus, to perform certain merger and acquisition consulting services for
        OCTus. OCTus agreed to pay MBC a specified percentage of the cash value
        of any transaction resulting from MBC's services (see Note 5).


                                      F-8


<PAGE>   30
5.      NOTES AND ADVANCES PAYABLE

        On December 1, 1995, Maroon Bells Capital Partners, Inc. (Note 4)
        advanced $25,000 to the Company for working capital purposes. The note
        bears interest at 8% and was due with accrued interest on November 30,
        1997. Additionally, the note may be converted at any time into shares of
        the Company's Common Stock at the rate of $.25 per share. The note also
        contains certain acceleration and anti-dilution clauses upon conversion.
        Maroon Bells was also granted 25,000 warrants with a nominal fair market
        value, to purchase the Company's Common Stock at a price per share of
        $.25. The warrants are for a five-year period. The note was paid in full
        on March 3, 1998.

        During 1996 and 1997, the Company's Series C Preferred Stock holder
        advanced to the Company a total of $70,000 and $191,811, respectively,
        for working capital purposes. Such advances bear interest at 10% and are
        due and payable, with accrued interest, upon the Company receiving
        sufficient funds from the exercise of the common stock warrants held by
        the Series C Preferred Stock holder.


6.      SHAREHOLDERS' DEFICIENCY

        Common Stock - On January 15, 1993, the Company completed an offering of
        2,000,000 units at the initial public offering price of $6.00 per unit.
        Each unit consisted of one share of Common Stock, no par value, and one
        common stock purchase warrant.

        Each warrant entitles the registered holder to purchase one share of
        Common Stock from the Company until January 15, 1998. The holders of the
        warrants have certain anti-dilution protection upon the occurrence of
        certain events. Due to completion of a private offering of unregistered
        Common Stock in July 1994, the Company adjusted the exercise price of
        the warrants and the number of shares. Accordingly, the exercise price
        of one share of Common Stock purchased pursuant to each warrant
        decreased from $7.00 per share to $6.49 per share. In addition, the
        total number of warrants increased from 2,000,000 to 2,157,660. These
        warrants expired unexercised on January 15, 1998.

        The Company's Common Stock, units and warrants were delisted from the
        NASDAQ Small-Cap Market as of February 1, 1995 due to the Company's
        inability to meet that markets minimum capital and surplus requirements.
        Since that time, the Company's securities have been trading on the OTC
        Bulletin Board.

        In connection with the initial public offering described above, the
        Company sold to the underwriter, for a nominal consideration, five-year
        warrants to purchase Common Stock of the Company. The underwriter's
        warrants contain anti-dilution provisions providing for adjustment of
        the exercise price and the number and type of securities issuable upon
        exercise of the underwriter's warrants upon the occurrence of certain
        events. As of December 31, 1997, underwriter's warrants provide for the
        acquisition of 438,484 shares of the Company's Common Stock. The
        underwriter's warrants expired unexercised on January 15, 1998.

        During 1995 and 1996, the Company also issued warrants to purchase the
        Company's Common Stock to a consultant (Note 5) and to the purchaser of
        the Company's Series C Preferred Stock in connection with the
        transaction described below.

        On June 7, 1997, the Company increased the number of authorized shares
        of its Common Stock from 20,000,000 to 100,000,000.

        Preferred Stock - In July, 1996 the Company issued 250,000 of its Series
        C Preferred Stock and one five-year warrant to purchase up to 3,000,000
        shares of its Common Stock to one investor for a total investment of
        $151,000. With respect to the warrant, such shares may be exercised at a
        price of $0.43 par share. However, such exercise price is subject to
        adjustment from time to time as described in the warrant agreement. The
        Company has granted piggyback and demand registration rights to the
        investor with respect to the shares of Common Stock underlying 


                                      F-9


<PAGE>   31
        such warrant. The Company has further agreed to nominate two (2)
        individuals designated by such investor to the Company's Board of
        Directors.

        The Series C Preferred Stock, as established by the Company, consists of
        a total of 250,000 shares and is senior in preference and priority in
        all manners whatsoever with respect to the Company's Common Stock and
        any and all classes of the Company's Preferred Stock. The holder of the
        Series C Preferred Stock is entitled to receive cumulative dividends at
        the annual rate of $0.036 per share payable in cash when, as and if
        declared by the Company's Board of Directors out of any funds legally
        available therefor. Such dividends shall accrue on a cumulative basis on
        each share of Series C Preferred Stock from day, to day, whether or not
        declared or paid. Such shares of Series C Preferred Stock shall not be
        convertible into Common Stock of the Company or any other of the
        Company's securities. The holder of each share of Series C Preferred
        Stock shall be entitled to 10 votes per share, entitled to vote on all
        matters which come before the Company's shareholders for which a vote is
        taken or any written consent of the Company's shareholders is solicited,
        such votes to be counted together with all other shares of the Company's
        securities having general voting power and not separately as a class.
        The Company has the right to call and redeem all (but not less than all)
        of the outstanding shares of Series C Preferred Stock for an aggregate
        price equal $0.63 per share of Series C Preferred Stock, plus any and
        all then accrued but unpaid dividends, provided however, that the
        Company shall have no right to call or redeem any shares of Series C
        Preferred Stock prior to June 30, 1999 without the express prior written
        consent of the holder of 100% of the then outstanding shares of the
        Series C Preferred Stock, which consent may be withheld or denied in the
        sole and absolute discretion of the holder of the Series C Preferred
        Stock for any reason or no reason whatsoever.

        Cumulative dividends, unpaid on Series C Preferred Stock amounted to
        $13,685 at December 31, 1997.


7.      STOCK OPTION PLANS

        The Company has various stock option plans and has reserved a total of
        1,045,423 shares of common stock at December 31, 1997, for option grants
        to directors, officers, employees, consultants of the Company and any
        subsidiary or parent of the Company. Such options are generally granted
        at current values, vest over three to five years, and expire not more
        than five years from date of grant.

        On February 3, 1997, the Company granted non-qualified options to
        purchase 50,000 shares of its Common Stock to directors of the Company.
        These options are fully vested and executable at $.125 per share.

        Transactions under all stock option plans are summarized as follows:


<TABLE>
<CAPTION>
                                       NUMBER OF       OPTION PRICE
                                        SHARES          PER SHARE
                                       --------        -------------
<S>                                    <C>            <C>
Outstanding at December 31, 1995        392,862        $.13 - $ 6.38
   Options granted                      200,000               $  .25
   Options expired                     (128,063)       $.13 - $ 3.68
                                       --------        -------------
Outstanding at December 31, 1996        464,799        $.13 - $ 3.68
   Options granted                       50,000               $  .25
   Options expired                         --
                                       --------        -------------
Outstanding at December 31, 1997        514,799        $.25 - $ 3.68
                                       ========        =============
</TABLE>


        At December 31, 1997, options for 264,799 shares of Common Stock were
        exercisable under all option plans.

8.      EMPLOYEE BENEFIT PLAN

        The Company has an Internal Revenue Code Section 401(k) savings and
        retirement plan to provide employees with retirement benefits through a
        program of regular savings supplemented by Company contributions. The
        Company's funding policy is to make matching contributions in a range
        from 0% to 100% of employee contributions, pursuant to the plan, up to a
        maximum of 6% of a participant's gross earnings. For the years ended
        December 31, 1996 and 1997, the Company made matching contributions to
        the plan of $4,400 and $2,640, respectively.


                                      F-10


<PAGE>   32
9.      INCOME TAXES

        There was no current provision for Federal or state income taxes in 1996
        and 1997 due to taxable losses. Deferred tax assets at December 31, 1996
        and 1997 are comprised of the following:


<TABLE>
<S>                            <C>                <C>        
NOL carryforwards              $ 8,736,400        $ 8,836,200
Foreign and research             1,083,700            895,000
tax credits
Depreciation                         2,700              1,500
Other                                1,300              2,500
                               -----------        -----------
                                 9,824,100          9,735,200
Less valuation allowance        (9,824,100)        (9,735,200)
                               -----------        -----------
                               $        --        $        --
                               ===========        ===========
</TABLE>


        As of December 31, 1997, the Company has federal net operating loss
        carryforwards of approximately $23,235,000, available to reduce future
        federal taxable income which expire through 2012. The Company also has
        foreign tax credit and research credit carryforwards for federal tax
        reporting purposes totaling approximately $692,000, which expire through
        2008. Because of a substantial change in the Company's ownership
        resulting from the consummation of an initial public offering on January
        15, 1993, an annual limitation of approximately $243,600 has been placed
        on the amount of tax credit and net operating loss carryforwards
        generated prior to the public offering which can be utilized.

        In certain circumstances which are specified in Section 382 of the
        Internal Revenue Code, a 50% or more ownership change to any combination
        of significant shareholders (those owning 5% or more of the Company's
        outstanding stock) of the Company during any three-year period would
        result in a limitation on the Company's ability to utilize its net
        operating loss carryforward and realize the benefit of future tax
        deductions. The last application of Section 382 to the Company was in
        connection with its initial public offering of January 15, 1993.
        Subsequent significant changes in ownership could trigger additional
        limitations on the utilization of the Company's operating loss
        carryforwards.


10.     COMMITMENTS AND CONTINGENCIES

        Facilities - During 1995, the Company relocated its headquarters
        resulting in a substantial reduction in its monthly rent. The Company's
        current offices are occupied rent-free on the premises of an affiliate
        of the Company's Series C Preferred Stock holder. Rent expense was
        $3,473 for the year ended December 31, 1996.

        Employment Agreement - Effective July 17, 1996, the Board of Directors
        authorized and approved a two year Employment Agreement for its Chief
        Executive Officer, John Belden, at a monthly rate of $8,000. The
        Agreement provides that in the event the Company does not have
        sufficient funds to meet its payroll obligations, the Company is not
        obligated to pay Mr. Belden any balance due under this Agreement.
        Concurrently, the Board of Directors granted Mr. Belden an option to
        purchase 200,000 shares of the Company's Common Stock pursuant to the
        Company's 1988 Non-Statutory Stock Option Plan. The grant is at an
        option price of $.25 per share and vests at the rate of 50,000 shares
        per year over a four-year period.

11.     EXTRAORDINARY ITEM

        During 1996 payables were settled for less than their face amount
        resulting in an extraordinary gain of $15,341, net on income taxes of
        $10,300.





                                      F-11