SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ----------------------

                                   FORM 10-KSB

[X]  Annual report under Section 13 or 15(d) of the  Securities  Exchange Act of
     1934 (Fee required)

For the fiscal year ended December 31, 1996
[]   Transition report under Section 13 or 15(d) of the Securities  Exchange Act
     of 1934 (No fee required)

For the transition period from _______ to _________

                         Commission file number 0-21934

                               TELEPAD CORPORATION
                 (Name of Small Business Issuer in Its charter)

Delaware                                                              52-1680936
--------                                                              ----------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

380 Herndon Parkway, Suite 1900, Herndon, Virginia                         20170
--------------------------------------------------                         -----
(Address of principal executive offices)                              (Zip Code)

Issuer's telephone number, including area code:                   (703) 834-9000
                                                                  --------------

Securities registered under Section 12(b) of the Exchange Act:  NONE

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

Class A Common  Stock,  $0.01 par value  ("Common  Stock"),  Class A  Redeemable
Warrants ("Class A Warrants"), Class B Redeemable Warrants ("Class B Warrants"),
Class C Redeemable Warrants ("Class C Warrants") and Class D Redeemable Warrants
                             ("Class D Warrants").
                                (Title of Class)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days.
Yes X    No
   ----    ------

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

     The  issuer's  revenues  for the fiscal year ended  December  31, 1996 were
$2,240,104.


<PAGE>



           The  aggregate  market  value  of the  Class A Common  Stock  held by
non-affiliates  of the registrant,  based upon the closing price of the issuer's
Class A Common Stock as reported by Nasdaq on March 17, 1997, was  approximately
$30,760,000.

           As of March 17,  1997,  the  latest  practicable  date for which such
information is available, there were issued and outstanding the following number
of shares of each of the registrant's classes of Common Stock:

           Class of Common Stock          Shares Outstanding
           ---------------------          ------------------

           Class A Common Stock           11,568,124 shares, $0.01 par value
           Class B Common Stock                150,000 shares, $0.01 par value

Documents Incorporated by Reference
-----------------------------------

           The following documents are incorporated by reference herein:  None.



                                       -2-

<PAGE>



                                     PART I

Item 1.      Description of Business.

                                    BUSINESS

General

           The Company  designs,  develops  and  markets  mobile  computing  and
communications  systems  for  customers  whose work forces  include  substantial
numbers of mobile field workers in remote locations ("field force workers"). The
Company's  approach is to provide hardware and software products that support an
enterprise's field force workers,  connect the field force workers to their home
office,  and direct information to the home office staff and back to the workers
in the field. Through this approach, the Company believes that its customers can
significantly  enhance  profitability  and customer  service by  providing  more
effective tools and communications to their field force workers.

Field Force Solutions Strategy

           The  Company's  value  proposition  is that  its  customers  can gain
significant  competitive  advantages through automation of that portion of their
work  forces  which  operate  "in  the  field"  outside  a  traditional   office
environment.  To that end, the Company  endeavors to provide  total "Field Force
Solutions"  comprised of purpose-built  computer hardware and software linked to
the enterprise through wireless  communications.  Recognizing the need to tailor
such  solutions  to  each  individual  customer,   the  Company's  "Field  Force
Solutions" strategy incorporates consulting and systems integration services.

           To  implement  its "Field  Force  Solutions"  strategy,  the  Company
developed the TelePad line of computers and  peripherals  specifically  designed
for the unique requirements of field force workers. It also offers its customers
the services of its staff of professional management consultants, engineers, and
application  programmers.  Furthermore,  it  supports  the  integration  of  its
products with third-party  hardware products,  software  products,  and wireless
services.   Accordingly,   a  "Field  Force   Solution"   may  be  comprised  of
off-the-shelf  products  combined  with  custom-built  or tailored  products and
services.

           As  the  "Field  Force  Solutions"  strategy   necessarily   requires
expertise in the customers'  business,  the Company  focuses on a limited set of
industries.  Currently, these are utilities,  cable television,  transportation,
public safety, and military equipment maintenance.

           From 1993 (the time of the Company's initial public offering) through
1996, the Company devoted most of its resources to developing and  manufacturing
its  TelePad  line of computer  hardware.  The  Company  also  developed a small
in-house capability for software  programming and systems  integration  support,
but relied  primarily on  subcontractors  and  value-added  resellers to deliver
those services to its customers.  In the future, the Company intends to shift an
increasing  portion of its  resources to providing  such  services  with its own
staff.

                                       -3-

<PAGE>




Products

           The Company's  principal  products are the TelePad mobile  computers.
The  Company's  original  product,  the TelePad SL, was  introduced  in 1993 and
produced  through 1996  (although in very limited  quantities  after 1995).  The
Company's current product is the TelePad 3 which entered production in 1995. The
Company also makes various  accessories  and peripheral  devices for the TelePad
computers.

           Both   the   TelePad   SL  and  the   TelePad   3  are   tablet-style
battery-powered   portable   computers  which  use  pen  input  and  handwriting
recognition  as a primary user  interface.  Both can also be used on the desktop
with the addition of accessory  keyboards.  They differ  primarily in processing
power, storage capacity and ability to support peripheral devices.

           The Company  contracts with third-party  manufacturers for production
of its  products.  Both  the  TelePad  SL and  TelePad  3 were  manufactured  by
International Business Machines Corporation ("IBM") until early 1996 after which
Sanmina  Corporation  ("Sanmina")  began  manufacturing  the  TelePad 3. See "--
Manufacturing and Supply."

           TelePad SL

           The first  generation  TelePad,  the TelePad SL, has pen and keyboard
interfaces but no sound  capability.  It uses Intel's  386-based  microprocessor
technology and is equipped with eight megabytes of random access memory ("RAM"),
a wireless digitizer (for pen input), a low-cost hard drive (170-340 megabytes),
a PCMCIA (Personal Computer Manufacturers Card Interface Association) card slot,
and a  data/facsimile  modem.  It includes  "ports" for  connecting  an external
floppy drive,  an external  video  monitor,  or devices using  industry-standard
serial or parallel interfaces.

           Optional  accessories for the TelePad SL include a stand-alone floppy
disk  drive,   a  math  co-  processor  that  permits  more  rapid  handling  of
mathematical functions and calculations,  network and communications upgrades, a
keyboard  that can be used in addition to on-screen  pen input,  and a mount for
installing  the  TelePad SL in a vehicle.  The  TelePad SL works with most major
operating systems, including IBM's OS/2 and Microsoft's DOS, Windows and Pen for
Windows systems.

           Production  of the  TelePad  SL began in  1993.  Although  the 386 SL
microprocessor  employed in the TelePad SL was largely  superseded after 1994 by
faster, more powerful  microprocessors,  the Company continued to find customers
for the  TelePad SL based on its unique  ergonomic  design and its ability to be
mounted  in a  vehicle.  Approximately  1,500  TelePad  SLs were  sold from 1993
through 1996.

           TelePad SLs were  designed by the  Company and  manufactured  under a
contract with IBM. When production  ended, the Company purchased IBM's remaining
inventory of TelePad SL parts. See "-- Manufacturing and Supply." The Company is
using the parts inventory to build TelePad SLs in its own facility (primarily to
fill special  orders from previous  purchasers of the TelePad SL) and to service
units built by IBM.

           The  Company  believes  that the  TelePad  SL design  would be highly
competitive in the future if it could be built with a more powerful  motherboard
and sold at a competitive price. Company

                                       -4-

<PAGE>



management believes that such an upgrade may be achievable with minimal research
and  development  costs if an  appropriate  motherboard  can be purchased from a
third-party. Accordingly, it is investigating possible sources for such a board.
However, no decision has yet been reached on a future version of the TelePad SL.

           TelePad 3

           The Company began production of its second product, the TelePad 3, in
1995. The TelePad 3 is powered by IBM's Blue Lightning  microprocessor (based on
Intel's  486  microprocessor  technology)  running  at 66  MHz.  It  includes  a
microphone  and speaker as well as a pen  interface,  a detachable  keyboard,  a
dual-scan  color  display and up to 36 MB of internal  RAM.  The TelePad 3 works
with most major operating  systems,  including  IBM's OS/2 and Microsoft's  DOS,
Windows 95, Windows, Windows for Pen, and SCO UNIX systems.

           A unique design  feature of the TelePad 3 facilitates  its adaptation
to a variety of peripheral  hardware  devices.  The back of the tablet has three
docking  bays that can  accept any device  which can be  packaged  in one of the
Company's three "modular" form factors and connected with an industry-  standard
connector.  The Company currently makes a variety of such devices including hard
disk drives in various  sizes,  adapters  for PCMCIA  cards,  which  incorporate
memory and  communications  capabilities in a standard format linking peripheral
devices such as facsimile modems, local area networks,  or memory storage to the
pen computer, and a floppy disk drive.

           In response to specific customer requests and opportunities  pursuant
to the Company's  "Field Force  Solutions"  strategy,  the Company has adapted a
number of devices to the modular  form factor of the TelePad 3. These  include a
full-size CD-ROM module, a Global  Positioning  System ("GPS") module, a variety
of  wireless  LAN and other  communications  modules.  The  Company  has created
conceptual  designs  for  additional  modules,  but has  adopted a policy of not
funding engineering  development until customers express firm intent to purchase
such products.

           The  Company  contracted  with IBM for  substantial  portions  of the
electrical design of the TelePad 3. The design belongs to the Company,  although
it is obligated to pay IBM a royalty of $15 per TelePad 3 computer  manufactured
by a third party with a non-IBM microprocessor card for certain  IBM-proprietary
design elements incorporated in the TelePad 3.

           Production of the TelePad 3 commenced at IBM at the end of June 1995.
After a series of disputes regarding  manufacturing quality and business issues,
the Company and IBM agreed in December  1995 that the Company would seek another
contract  manufacturer  and that IBM would  support  the  transition  to the new
manufacturer.  The Company then  contracted  with Sanmina  which began TelePad 3
production in June 1996.  Approximately  1,500 TelePad 3s were  manufactured  in
1995 and 1996;  approximately  400 units by IBM and 1,100 units by Sanmina.  See
"-- Manufacturing and Supply."

           IBM has  informed  the Company  that it no longer  produces  the Blue
Lightning  microprocessor,  which is a proprietary IBM product available only on
microprocessor  cards  manufactured by IBM.  However,  IBM agreed to continue to
manufacture  such  electronic  card  assemblies for the TelePad 3 until June 30,
1997,  subject to certain minimum order  restrictions.  The Company has designed
and is  currently  testing a  586-class  32-bit  microprocessor  upgrade for the
TelePad 3. This 586-class 32-bit

                                       -5-

<PAGE>



microprocessor  is  intended  to  replace  the  Blue  Lightning  microprocessor.
Although the Company  expects to begin producing the new  microprocessor  before
the  supply of IBM Blue  Lightning  microprocessors  is  exhausted,  there is no
guarantee  that the  redesign  will be  available  for  production  prior to the
exhaustion of the supply of IBM-built processor cards.

Services

           The  Company  offers  a range  of  consulting,  systems  integration,
programming and customer support services focused on field force automation. The
consulting  group analyzes  requirements,  develops  system  architectures,  and
provides a variety of project  planning  and  management  services.  The systems
integration  ("SI") group implements  systems combining  various  manufacturers'
hardware, software, and wired and wireless communications.  SI also collaborates
with the Company's hardware engineers on special purpose devices custom-designed
for individual customers.

           The Company has a limited number of consulting and SI employees,  and
supplements  its own staff with  subcontractors  and  temporary  employees.  The
Company has adopted a policy of not hiring permanent full-time  consulting or SI
employees until justified by contracts with customers.

Manufacturing and Supply

           The Company does not operate its own  manufacturing  facility for the
TelePad computers or any other hardware products. Instead, the Company contracts
with outside  manufacturers.  IBM was the Company's sole manufacturer of TelePad
products from 1993 through late 1995.  Sanmina is currently  the Company's  sole
manufacturer of finished products.

           The components of the TelePad computers,  such as the plastic casing,
are supplied by various outside sources. In most instances, these suppliers were
selected by TelePad  although the actual  purchasing of  components  for TelePad
production  is done by Sanmina.  The Company  believes that both the Company and
Sanmina  have good  relationships  with  current  suppliers.  While the  Company
believes  that  alternative   sources  of  supply  generally  are  available  at
competitive  prices,  certain of the components  are highly  technical in nature
and, with respect to such components  there can be no assurance that the Company
would be able to locate,  on a timely  basis or at all,  alternative  sources of
supply.

           The Company's software  applications packages are written or modified
specifically to address each customer's  needs.  Types of software  developed by
the Company include checklist generators and editors, checklist managers, report
generators and transaction  processing systems. The Company has adopted a policy
of not funding  software  development  until  customers  express  firm intent to
purchase such software.

           The Company has licensed certain Microsoft Corporation  ("Microsoft")
products  permitting the Company, in exchange for paying associated license fees
to  Microsoft  or by  purchasing  the  products  from  an  authorized  Microsoft
distributor,  to install such products on computers produced by the Company. The
Company purchases DOS, Windows,  Windows 95 and Windows 95 Pen Services software
from an  authorized  distributor.  The Company also has entered into a licensing
agreement  with IBM to license and install  IBM's OS/2  operating  system on the
TelePad  computers.  There is no minimum royalty required under the Microsoft or
IBM license agreements.

                                       -6-

<PAGE>




           IBM

           IBM was the Company's sole contract  manufacturer  for the TelePad SL
(produced  from 1993 through  1995) and for the first 400 units of the TelePad 3
(in  1995).  Throughout  its  relationship  with IBM,  the  Company  experienced
manufacturing defects which caused interruptions in production while the defects
were  corrected.  The  Company  and IBM also had a number  of  disagreements  on
business issues. These problems caused the Company and IBM to agree to end their
manufacturing relationship in 1996.

           From 1993  through  1996,  the Company and IBM entered  into  various
contractual   arrangements  regarding  design  and  production  of  the  TelePad
computers. The original IBM Agreement provided for production of the TelePad SL.
In March 1994,  the Company and IBM amended the IBM  Agreement to include  IBM's
services for the electrical and physical design,  development and testing of the
internal circuitry and software for the TelePad 3. In June 1994, the Company and
IBM  further   amended  the  agreement  to   incorporate   IBM's   services  for
manufacturing the TelePad 3.

           The IBM  Agreement  was  further  modified by the parties in February
1995 to resolve certain disputed issues. Under the February 1995 amendment,  the
Company  agreed to release  IBM,  its agents,  directors,  officers,  employees,
representatives, successors and assigns from all rights, claims demands, actions
and liabilities  (collectively,  "Claims") the Company ever had, has or may have
against IBM arising out of or resulting  from the IBM  Agreement.  IBM agreed to
accept the return of approximately  $943,000 of inventory components  previously
invoiced  to the  Company in  December  1994 and to reduce the  product  royalty
payment due to IBM for each TelePad 3 manufactured  by a third party with a non-
IBM microprocessor to $15.00 per unit.

           On  January  25,  1996,  IBM and the  Company  entered  into  the IBM
Resolution  Agreement to facilitate  transition of TelePad 3 manufacturing  to a
new manufacturer, to address certain design issues relating to the TelePad 3, to
reschedule  payments due IBM and to provide for  purchase,  by the  Company,  of
IBM's remaining inventory of TelePad SL components. The IBM Resolution Agreement
also settled all previously  disputed  financial  matters  remaining between the
companies.

           Sanmina

           The  Company  moved  production  of the  TelePad  3 to  Sanmina  in a
two-stage  process  during the first half of 1996.  The Company  entered  into a
Letter of Intent with Sanmina and, as of the date hereof, has negotiated but not
signed  a  definitive   agreement  with  Sanmina.   The  Company   believes  its
relationship  with Sanmina is good and that the unresolved  contract  issues are
administrative  in nature and will be resolved in the near future.  There can be
no  assurance,  however,  as to when,  if ever,  the  Company  will  enter  into
acceptable  contractual  arrangements with Sanmina. The Company is not currently
in discussion with any alternative manufacturer.

           TelePad 3 production commenced at Sanmina in June 1996. Approximately
1,100 units were built by Sanmina from June through December 1996.

                                       -7-

<PAGE>




Distribution, Warranty and Service

           The  Company  distributes  its  products  directly to  customers  and
through resellers.

           The Company warrants that each TelePad computer  (excluding  software
obtained from and  warranted by third  parties) is free from defects in material
and  workmanship  for one year from the date of  delivery  and  acceptance.  The
Company also offers  selected  customers  extended  warranties for an additional
charge. The Company handles all warranty claims of its customers,  and relies on
its warranty from Sanmina to protect it from defects in manufacturing.

           The Company's  policy is to establish  warranty  reserves  based upon
sales volume and experience to date. Warranty expense is recognized as incurred.

Research and Development

           The Company's  research and development  ("R&D")  activities  involve
engineering  design  and  production  support  for two  types of  products:  (1)
existing products; and, (2) future products.

           Existing products require  continuing R&D support as a consequence of
the rapid evolution of computer  technology.  For example,  the manufacturers of
components used in the TelePad computers  frequently upgrade their components or
embedded software ("firmware"). Many upgrades require other modifications in the
production  design.  Changes which may effect radio frequency  emissions require
re-certification   for   compliance   with  United  States  and  European  Union
regulations. Accordingly, the Company must devote a portion of its R&D resources
to its existing products.

           R&D for future products is subject to available financial  resources.
To the  extent  permitted  and  based on the  anticipated  profitability  of new
products,  the Company  intends to maintain an active R&D  program.  The Company
intends when  possible to minimize R&D cost and risk by  purchasing or licensing
existing  designs or design  elements rather than creating  completely  original
designs.  Completion of any design for production is dependent upon  development
of the market for these products  which would make  production  profitable.  See
"Products."  There can be no assurance  that the Company will be  successful  in
developing any new products or upgrades to its TelePad products.

           The Company has a limited  number of R&D employees  working under the
direction of its Chief Technology  Officer.  It contracts with other engineering
firms and consultants to support R&D activities which are beyond the capacity of
its in-house  staff.  The Company intends to employ  additional  engineering and
customer support  personnel as its financial  condition permits and its business
requires. See " Management's  Discussion and Analysis of Financial Condition and
Results of Operations."

                                       -8-

<PAGE>




Sales and Marketing

           The Company's sales and marketing  activities currently are conducted
internationally by four sales  representatives,  each covering a defined segment
of the market,  under the  direction of a vice  president of sales.  The Company
also  anticipates  that it will employ  commissioned  sales agents to market its
products.  Additionally,  the  Company  expects  to  add  additional  sales  and
marketing  personnel  as the  Company's  financial  condition  permits  and  its
business requires.

           The Company  believes that the immediate market for its products lies
with large  corporations  and public  entities  that are  heavily  dependent  on
information  resources and that utilize dispersed and highly mobile  workforces.
Specifically,   the  Company  has  focused  on  utilities,   cable   television,
transportation, public safety, and military equipment maintenance as the markets
presenting the greatest  opportunity  for the Company at present.  The Company's
strategy is to reach the customers in these markets  through its own sales force
supplemented by the sales activities of value added resellers ("VARs").

           The Company's public relations efforts focus on its targeted markets.
The Company is seeking exposure through support of its value-added  resellers at
shows and conventions at which such resellers exhibit. In addition,  the Company
expects  to  engage  in  selective  advertising  of its  products  and  to  seek
additional  exposure through targeted  technical  journals and popular computing
media.

           During 1996, three customers  accounted for  approximately 53% of the
Company's total revenues.  One customer accounted for approximately 12% of total
revenue during 1995.

Patents and Proprietary Rights

           The Company  holds four  patents  with  respect to the  multi-purpose
handle and adjustable,  locking handle mechanism used on the TelePad  computers.
These patents provide  expanded  coverage over the handle and the four positions
the computer can have, as well as the push button release  mechanism used in the
TelePad SL. In addition, the Company's patent application for the industrial and
mechanical design of the portable  electronic platform which is the basis of the
TelePad 3 has been  allowed  and the  patent  should be issued in the  immediate
future.

           The Company has received a Notice of Allowance  from the U.S.  Patent
and Trademark  Office for its trademark  application  relating to the use of the
name "TelePad"  with respect to certain  communications  and computer  equipment
described in the application, and intends to file an application to register its
new logo.

           Other than as described above, the Company currently does not have or
intend to seek  patents  relating to its  products,  because it does not believe
that the technology it employs is patentable.

           It is the Company's practice to protect its proprietary materials and
processes by relying on trade secret laws and non-disclosure and confidentiality
agreements. There can be no assurance that confidentiality or trade secrets will
be maintained or that others will not independently  develop or obtain access to
such materials or processes.

                                       -9-

<PAGE>




Employees

           At March 14, 1997, the Company had a total of 30 full-time employees,
consisting of 5 engineers,  3 employees in the consulting  practice,  12 finance
and administrative personnel, 5 employees in customer and technical support, and
5 sales and marketing personnel. From time to time the Company employs part time
employees,  however there are none as of the date of this report. No employee is
currently represented by a labor union. The Company has never experienced a work
stoppage or interruption  due to a labor dispute.  Management  believes that its
relations with its employees are good.

Government Regulation

           The TelePad 3 and the TelePad SL are subject to government regulation
of  electromagnetic  emissions  that are  conducted  from the devices over power
lines,  when the devices are operated from AC wiring,  and radiated  through the
air. In particular,  the  regulations of the Federal  Communications  Commission
("FCC")  require  products  of this  kind to have  been  approved  by the FCC as
meeting the Class B digital device  requirements under Parts 2 and 15 of the FCC
rules  before the products may be marketed  (i.e.,  imported,  sold or leased or
advertised  for sale or lease).  These  regulations  are  designed  to  minimize
interference with certain other electronic products and communications services.

           FCC   approvals   (a  form  of  equipment   authorization   known  as
"certification")  are  granted  only  after the  products  have  passed  various
electromagnetic  compatibility tests and an application submitted to the FCC has
been  granted.  The FCC approves  equipment of the kind  produced by the Company
only on the condition that operation of the equipment not cause  interference to
licensed radio  communications  and that the equipment accept  interference from
licensed  radio  facilities,  even if the  interference  results in  undesirable
operation of the equipment.  Modems that the Company sells for the connection of
the  TelePad SL and the  TelePad 3 to the  public  switched  telephone  line are
subject to  certification  under the FCC Rules in the same manner and subject to
an additional  approval  requirement of "registration"  under Part 68 of the FCC
Rules governing certain telephone equipment.

           Although   the   TelePad  3  and   TelePad  SL  have   received   FCC
certification,  the devices must  continue to comply with  federal  regulations.
Changes in the design of the products generally will require the Company to have
the products reexamined as to continued  compliance.  Depending on the nature of
the  change,  the  products  may be  subject to the  receipt of new or  modified
approvals before the changed products may be marketed.  Generally speaking, such
recertification  focuses on the  modification  and is not as  time-consuming  or
expensive as the original certification processes.

           The Company also must ensure that the TelePad 3 and TelePad SL comply
with the OSHA regulations  requiring  electrical equipment to have been approved
for safety by a nationally  recognized testing laboratory.  Safety approvals for
the TelePad SL and the TelePad 3 have been  obtained.  Changes in either  device
may require  retesting and further  approvals,  which could result in delay that
could have an adverse material effect on the Company.

           To  the  extent  that  the  Company  desires  to  sell  its  products
internationally,  it also will be  required to comply  with the  regulations  of
other  nations  as to  electrical  emissions  and  safety,  some of which may be
expected to be more stringent than those imposed by the FCC or under regulations
adopted by OSHA.  In  particular,  the TelePad 3 currently is certified for sale
within the European Union (the "EU"), whose

                                      -10-

<PAGE>



standards  are more  stringent,  in order to permit export to members of the EU,
including the United Kingdom.

           To  the  extent  that  the  Company  sells   products,   directly  or
indirectly,  to the  United  States  Government,  the  Company's  contracts  and
subcontracts  will be subject to  termination,  reduction or modification at the
Government's convenience.

           Failure to comply with FCC, OSHA and other  governmental  regulations
would have a material  adverse effect on the Company.  The delay associated with
obtaining any future  approvals may also have a material  adverse  effect on the
Company.

Competition

           The computing  industry is characterized  by intense  competition and
rapidly  changing  technology  and is  becoming  increasingly  competitive.  The
Company believes that it distinguishes itself in this competitive environment by
offering  unique  products  combined  with  consulting  and systems  integration
services  specifically  focused on mobile workers. See "-- Field Force Solutions
Strategy." However,  numerous other companies,  including companies with greater
resources  and  experience  than the  Company,  also are  engaged in  developing
products and services  which could be  competitive  with those  developed by the
Company.  Therefore,  there can be no assurance that the strategy of the Company
will succeed.

           The Company's  competitors or future competitors  include,  or can be
expected to include,  IBM,  Fujitsu Limited,  Toshiba Corp.,  NEC  Technologies,
Inc., Zenith Data Systems Corp., Symbol,  Telxon,  Motorola,  Samsung, Ricoh and
others. In addition,  the Company expects that other competitors will emerge and
competing  products will be  introduced in the near future.  No assurance can be
given that the Company will be able to successfully  compete against current and
future  competitors  or  products  or that  competitive  pressures  faced by the
Company will not adversely affect its financial performance.

Stock Purchase Agreement

           On January  27,  1997,  the Company , entered  into a Stock  Purchase
Agreement (the "Stock Purchase  Agreement")  with TelePad  Acquisition,  Inc., a
Delaware corporation and wholly owned subsidiary of the Company ("Acquisition"),
Federal Computer Corporation,  a Virginia corporation ("Federal Computer"),  and
Hartland Group, LLC, a Virginia limited liability company (the "LLC"),  pursuant
to which  Acquisition  agreed to acquire from the LLC all of Federal  Computer's
outstanding capital stock (the "Shares"). The purchase price is (i) $10 million,
subject to a post-closing  net worth  adjustment,  consisting of $5.3 million in
cash at closing and a six-month,  $4.7 million  note,  bearing  interest at 8.5%
(the "Note"), secured by an irrevocable $4.7 million letter of credit, plus (ii)
a future payment (the "Additional  Consideration"),  based on Federal Computer's
future  performance  or a present value  formula,  secured by an  irrevocable $5
million  letter of  credit.  The  Company  would also be  required  to invest in
Federal  Computer $5 million at closing and an  additional  $5 million 12 months
after closing (the "Investment Obligation"). The foregoing obligations will also
be  secured by a pledge of all of the  capital  stock of  Federal  Computer  and
Acquisition.  The consummation of the Stock Purchase Agreement is subject to the
satisfaction  of certain  conditions,  including  that the Company obtain equity
financing of at least $15 million and within 10 days thereof, but in no event

                                      -11-

<PAGE>



later than August 1, 1997, elect to purchase the Shares.  If the purchase is not
consummated by August 1, 1997, the Stock Purchase Agreement may be terminated by
any party.

           Federal  Computer is a privately  held  systems  integration  company
headquartered  in Falls  Church,  Virginia.  It was founded in 1982 to serve the
information  technology  needs of the  federal  government.  For the year  ended
October 31, 1996,  Federal  Computer's  annual revenues were  approximately  $27
million with a net income before taxes of  approximately  $2.4 million.  Federal
Computer is  currently  owned by the LLC and  managed by the LLC's six  members,
each of whom is subject to an employment  agreement with Federal  Computer.  The
Stock Purchase Agreement  contemplates that Federal Computer will continue to be
managed by these six  individuals  for periods  ranging from two and one-half to
three years after the closing.

           Under the terms of the Stock Purchase  Agreement,  Federal Computer's
board of directors (the "Federal Computer Board") will consist of four designees
of the LLC and two  designees of the Company,  subject to the  Company's  right,
through Acquisition as Federal Computer's sole stockholder,  to reconstitute the
Federal   Computer  Board  at  any  time.  If  the  Federal  Computer  Board  is
reconstituted  such that  designees  of the LLC no longer  comprise  a  majority
thereof  (other than as a result of the death or  resignation  of such designees
where the LLC  elects not to fill the  vacancies  created  thereby),  and if the
Additional  Consideration  payment obligation has not otherwise accrued, the LLC
may elect to trigger  such  obligation  and  accelerate  the Note if not already
paid. In such event, (i) the amount of the Additional  Consideration  will equal
the amount which, if invested on the date such obligation accrued with an annual
return of 8.5  percent  compounded  monthly,  would  equal $16 million as of the
third anniversary of the closing date, and (ii) certain negative  covenants with
respect to the  operation  of  Federal  Computer  would  become  applicable.  In
addition, if the employment of William Hummel, Federal Computer's President,  is
terminated  without  cause  or due to  (a) a  change  in  his  duties  or  title
materially inconsistent with his position and status with Federal Computer as of
the closing  date or (b) a reduction  in the base salary or benefits to which he
is entitled under his employment agreement,  and if the Additional Consideration
obligation  has not  otherwise  accrued,  the  LLC  may  elect  to  trigger  the
Additional  Consideration  payment  obligation  (and  accelerate the Note if not
already  paid) in an amount  which,  if  invested  on the date  such  obligation
accrued  with an  annual  return of 8.5%  compounded  monthly,  would  equal $16
million as of the third  anniversary  of the  closing  date.  If the  Additional
Consideration  payment  obligation  accrues  and is  paid  under  either  of the
foregoing scenarios, any uninvested portion of the Investment Obligation will no
longer be required.

           The  Additional  Consideration  payment  obligation  would  otherwise
become  payable on the earliest to occur of (a) the  consummation  of an Initial
Public Offering (as defined in the Stock Purchase Agreement);  (b) the effective
date of a Transfer of Control (as defined in the Stock Purchase  Agreement);  or
(c) the third  anniversary  of the closing date (subject to the LLC's ability to
extend such date in two, one-year increments).  If the Additional  Consideration
obligation  accrues as a result of any of the events in clauses  (a), (b) or (c)
of the previous sentence,  the amount of the payment will be determined pursuant
to certain  valuation  formulas set forth in Section 1.02 of the Stock  Purchase
Agreement.

           Upon the occurrence of either of the events  described in clauses (b)
or (c) of the first  sentence of the  previous  paragraph,  the LLC may elect to
purchase  the Shares from  Acquisition  for the amount  (the "Offer  Amount") by
which Federal Computer's Value (as defined in the Stock

                                      -12-

<PAGE>



Purchase Agreement) exceeds the Additional Consideration.  If the LLC so elects,
Acquisition  may offer  (the  "Counterproposal")  to pay the LLC an amount  (the
"Counterproposal  Amount") in excess of the Additional  Consideration that would
have been payable to the LLC absent such election (the "Original  Amount").  The
LLC may then accept the  Counterproposal  or elect to purchase  the Shares for a
price which  exceeds the Offer  Amount by an amount in excess of the  difference
between the Counterproposal Amount and the Original Amount. The LLC's failure to
timely respond to the Counterproposal  will be deemed an acceptance thereof. See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."


Item 2.      Description of Property.

Properties

           Since April 1, 1995,  the Company's  offices have been located at 380
Herndon Parkway, Suite 1900, Herndon, Virginia 20170. Under the amended terms of
its lease,  the Company will lease for four years and three  months,  until June
30, 1999,  approximately 19,155 square feet of office space on a single floor of
an office  building.  The lease  arrangement  provides  for a monthly  rental of
$13,231,  plus  designated  operating  expenses,  and  provides the Company with
certain  concessions  regarding rent abatement and tenant build-out  allowances.
Since April 1, 1995,  the rent has increased and will continue to increase on an
annual basis for the duration of the lease. The Company has installed  leasehold
improvements  for  purposes  of  demonstrating  its  products  and  strategy  to
customers and  prospective  customers.  The Company  believes that, in the event
additional  space is required and cannot be leased on acceptable  terms from its
current  lessor,  suitable  alternative  facilities  exist in the local  area at
comparable rental rates.


Item 3.      Legal Proceedings.

             The Company is not currently involved in any legal proceedings, but
has from time to time in the past been involved in routine litigation incidental
to its business.


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.



                                     PART II


Item 5.      Market For Common Equity and Related Stockholder Matters.

             As of March 20, 1997, the Company had  approximately 118 holders of
record of its Class A Common  Stock and one holder of its Class B Common  Stock.
The Company's  Class A Common Stock trades on the Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol: TPADA.


                                      -13-

<PAGE>



             On July 15, 1993, the Company's Registration Statement on Form SB-2
filed under the Securities Act of 1993 became effective and the Company became a
"reporting  company"  subject to the periodic  reporting and other  requirements
under the Securities Exchange Act of 1934. From July 16, 1993 until June 7, 1995
the Company's Class A Common Stock was traded on The Nasdaq SmallCap Market. The
Company's  Class A Common Stock resumed trading on The Nasdaq SmallCap Market on
March 29, 1996. The high ask and low bid prices for the Class A Common Stock are
as reported by the National Quotation Bureau,  Inc. for the period since June 7,
1995 and up to March 28,  1996,  and by Nasdaq for the period from July 16, 1993
to June 7, 1995 and from March 29,  1996 are  indicated  below.  Such prices are
interdealer  prices  without  markups,  markdowns  or  commissions,  and may not
necessarily represent actual transactions.

             1995                   High Ask            Low Bid
             ----                   --------            -------

             First Quarter          $7.000              $4.750
             Second Quarter         $5.875              $1.750
             Third Quarter          $5.000              $2.000
             Fourth Quarter         $3.500              $1.500

             1996                   High Ask            Low Bid
             ----                   --------            -------

             First Quarter          $5.000              $0.750
             Second Quarter         $5.000              $3.188
             Third Quarter          $5.250              $4.031
             Fourth Quarter         $5.375              $4.000

             The Company  has never paid a cash  dividend on its shares and does
not presently anticipate doing so in the foreseeable future.


Item 6.      Management's Discussion and Analysis or Plan of Operation.


Results of Operations

           Revenue in the year ended December 31, 1996 declined by approximately
14% from the  same  period  in 1995,  primarily  as a result  of lower  sales of
professional  service  contracts.  Sales of TelePad computers were approximately
equivalent to the volume achieved in 1995 even though  production of the TelePad
was  interrupted  in  November  1995 and only  restarted  in June  1996 at a new
manufacturer  (Sanmina).  The  hiatus  in  production  caused  by a move  in the
production  facilities  had a  negative  impact  on sales due to a loss of sales
momentum and a nearly complete  turnover in the sales force.  Sales were further
affected by delays related to an increased attention to quality issues that were
introduced  by  production  at a new facility  with  components  from  different
sources.  In addition,  the Company  embarked on a  concentrated  effort to make
engineering  changes to the  TelePad 3 that were  designed  to  enhance  product
performance and manufacturing  yields.  These engineering  changes also extended
the quality  control  process and delayed  product  availability.  Early Sanmina
production units have, or are being, replaced with units which incorporate these
engineering changes.


                                      -14-

<PAGE>



           The  cost  of  TelePad  products  sold in 1996  exceeded  revenue  by
approximately  5%. Product gross margins were constrained by the relatively high
cost of parts purchased by the prior  manufacturer,  but not used earlier due to
financial and technical  delays.  In addition,  cost of products sold includes a
$47,000 charge to expense accessories for the TelePad 3 which were made obsolete
by design  modifications.  Cost of  products  sold  also  includes  $23,000  for
warranty costs to incorporate  recent  engineering  changes into TelePad 3 units
built in prior periods and approximately  $94,000 for costs related to replacing
batteries that failed to meet product standards after a component change.

           Costs in 1996  include a charge of $318,000  directly  related to the
shift in manufacturers and restarting production in a new facility.

           Research and development  expenses for 1996 were $1,516,000  compared
to  $1,417,000  in 1995.  This 7% increase in R&D spending was due  primarily to
design and development work to enhance the TelePad 3 and non-recurring  expenses
associated with the start up of a new manufacturing facility in 1996 as compared
with expenditures for the initial design of the TelePad 3 for the same period in
1995.

           Selling,  general and administrative expenses in 1996 were $4,352,000
compared to $3,673,000  for the same period in 1995. The $679,000 (18%) increase
was primarily the result of increases in selling expenses in response to the new
supply of TelePad 3 units and the addition of new space and  personnel to expand
the Company's capabilities.

           Interest income  increased by $509,000 in 1996 due to interest earned
on investment of the proceeds of the Unit Offering.

           Interest  expense of $253,000 and amortization of debt issue costs of
$118,000  in 1996  relate to the  $4,000,000  in bridge  notes and the  $750,000
Promissory  Note.  These  notes were  retired  with the  proceeds  from the Unit
Offering.

           The weighted average number of shares outstanding increased primarily
as a result of 6,555,000 shares sold in the Unit Offering.

Liquidity and Capital Resources

           The Company has incurred  cumulative  losses to date of approximately
$28,909,000,  including  $6,090,000  for the year ended  December 31, 1996.  The
Company has funded its working capital  requirements  substantially from the net
cash proceeds  from its IPO in July 1993,  from private  placement  offerings of
equity securities and from a public offering of equity securities in 1996.

           Net cash used in  operating  activities  in 1996 was  $11,988,000  as
compared to $5,017,000 in the comparable  period in 1995.  Net losses  accounted
for  $6,090,000 of net cash used in operating  activities in 1996 and $5,970,000
in 1995. In order to secure credit for production of the TelePad 3 computer, the
Company has provided a letter of credit to Sanmina in the amount of  $2,000,000.
This  letter  of  credit is  secured  by  $2,000,000,  which is  invested  in an
interest-bearing  account  and is  pledged  as  security  and is  carried on the
balance sheet as restricted cash.  Inventory  increased by $3,071,000 in 1996 as
production of TelePad 3 computers exceeded sales and by the purchase of

                                      -15-

<PAGE>



$300,000 in TelePad SL parts from IBM. The  Company's  arrangement  with Sanmina
provides  for  ordering   product  four  months  in  advance  of  production  to
accommodate long lead items. At December 31, 1996, the Company had approximately
$3,500,000  in  outstanding  purchase  orders  issued to Sanmina.  This includes
TelePad 3 computers based on a 586 microprocessor,  which is being developed and
tested and is expected to be available for  production in the second  quarter of
1997. The $1,070,000 reduction in inventory which occurred in the same period in
1995 was  primarily  the result of selling an  inventory of parts back to IBM as
part of a settlement with IBM.

           On January 27,  1997,  the  Company,  entered  into a Stock  Purchase
Agreement  with  TelePad   Acquisition,   Inc.,  a  Delaware   corporation   and
wholly-owned subsidiary of the Company,  Federal Computer, and the LLC, pursuant
to which TelePad Acquisition,  Inc. agreed to acquire from LLC all of the Shares
of Federal Computer. The consummation of the Stock Purchase Agreement is subject
to the  satisfaction  of certain  conditions,  including that the Company obtain
equity  financing of at least $15 million and within 10 days thereof,  but in no
event later than  August 1, 1997,  elect to  purchase  the  Shares.  The Company
intends to seek additional  financing to consumate this  transaction,  but there
can be no assurance as to the  availability or terms of any required  additional
financing. See "Stock Purchase Agreement."

           On April 3, 1996, the Company  completed a public  offering of 20,000
units (the  "Units").  Each Unit consisted of 285 shares of Class A Common Stock
and 1,000 Class D Warrants  and was sold for $1,000 per Unit,  pursuant to which
the Company raised  $20,000,000 (the "Unit  Offering").  The net proceeds to the
Company from the Unit Offering  amounted to $17,779,000.  On April 25, 1996, the
underwriter  exercised the over-allotment option to purchase an additional 3,000
Units pursuant to which the Company raised an additional $3,000,000. The Company
received net  proceeds of  $2,736,000  from the  exercise of the  over-allotment
option.

           On February  15,  1996,  the Company  issued a  promissory  note (the
"Promissory  Note")  to  an  individual  investor  (the  "Investor"),   who  had
previously  provided his personal  guaranty of the Company's  obligations to IBM
for the  production  of 400 TelePad 3  computers,  pursuant to which the Company
received  net proceeds of $607,500 of which  approximately  $414,000 was paid to
IBM. The remaining net proceeds were used by the Company as working capital. The
Company  allocated a portion of net  proceeds of the Unit  Offering to repay the
Promissory  Note and accrued  interest.  The rate of interest on the  Promissory
Note was 20%,  one half of which was paid upon the  making of the loan  together
with a $67,500  loan  origination  fee,  which  amounts were  deducted  from the
principal  and retained by the Investor.  The remaining  portion of the interest
was due upon repayment of the loan amount by the Company.  The conditions of the
agreement  required that a portion of the proceeds from the  Promissory  Note be
used to satisfy  existing  obligations  to IBM and that IBM release the guaranty
previously  provided by the Investor,  which  release was obtained,  and for the
transfer  of  approximately  $414,000  to IBM  by the  Investor  to  reduce  the
Company's outstanding obligations to IBM.

           Prior to the completion of the Unit Offering,  the Company funded its
working capital  requirements  substantially from the net cash proceeds from its
IPO in July 1993 and from private placement offerings of equity securities.  The
1993 IPO produced net  proceeds of  approximately  $7.5  million.  In 1994,  the
Company  obtained net proceeds of  approximately  $4.4 million through a private
placement of units consisting of 12,500 shares of Class A Common Stock and 6,250
Class C warrants.  In 1995, the Company  obtained net proceeds of  approximately
$2.1 million through a second private  placement of units  consisting of Class A
Common  Stock and Class C  warrants.  The unit  price  reflected  the  Company's
judgment,  in consultation  with its placement  agent, of the highest price that
could  successfully  be obtained,  which price  reflected a discount from market
value because the units sold were unregistered securities.

           The Company  concluded  engineering  development on the TelePad 3 and
commenced production in June 1995. Prior to the start of production, the Company
and IBM renegotiated their manufacturing agreement to resolve various issues and
provide for  manufacturing  the TelePad 3, with  payment for  finished  products
guaranteed by a $1.5 million letter of credit  obtained on behalf of the Company
by a private  investor (the  "Investor").  The Company entered into an agreement
with an individual investor

                                      -16-

<PAGE>



under which the investor guaranteed IBM's security interest in the production of
400 completed TelePad 3 computers. The guarantee,  which is no longer in effect,
was  backed  by a $1.5  million  irrevocable  letter  of  credit  provided  by a
commercial bank. As part of the consideration for the Investor's guarantee,  the
Company issued the Investor 50,000 shares of the Company's Class A Common Stock.
The Company valued this  transaction at $312,000,  which  represented the market
value of the shares at the date of the transaction.

           In September 1995, the Company  completed the sale of $4.0 million in
principal  amount of Bridge  Notes  and  2,000,000  1995  Bridge  Warrants.  Net
proceeds to the Company  totaled  approximately  $3.4 million,  after payment of
commissions  and an expense  allowance  in the total  amount of  $574,000 to the
placement  agent and other expenses of the private  placement.  The Bridge Notes
were repaid by the Company upon the closing of the Unit Offering.

           The Company  believes  its  existing  capital  resources,  consisting
primarily of cash,  short-term  investments  and restricted  cash and funds from
operations will provide  sufficient  capital for at least the next 12 months. In
the event that the  Company's  internal  estimates  relating to its  anticipated
expenditures  prove  materially  inaccurate,  the  Company  may be  required  to
reallocate funds among its planned  activities and curtail or eliminate  certain
expenditures.  In any  event,  the  Company  anticipates  that  it  may  require
substantial additional financing after such time. The Company has no established
banking  relationships  and no  available  line of  credit  or other  source  of
liquidity.  The Company may seek to leverage  its working  capital  requirements
through borrowings,  collaborative arrangements and strategic alliances,  volume
discounts  for mass  purchases  of TelePad  computers  and other  products,  and
additional public offerings. There can be no assurance as to the availability or
terms of any required additional financing, when and if needed.

Special Note Regarding Forward Looking Statements

           A number of statements  contained in this report are  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve  risks and  uncertainties  that could cause actual  results to
differ materially from those expressed or implied in the applicable  statements.
Such  statements  include,  but are not  limited  to,  demand for the  Company's
products and market  acceptance  risks, the effect of economic  conditions,  the
impact   of   competitive    products   and   pricing,    product   development,
commercialization   and   technological   difficulties,   capacity   and  supply
constraints or difficulties,  the results of financing efforts,  and other risks
detailed in the Company's Securities and Exchange Commission filings.

Item 7.              Financial Statements.

           The required financial  statements are included in a separate section
following the signature page as an addendum to this Form 10-KSB.


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

           None.



                                      -17-

<PAGE>



                                    PART III


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

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


             Name             Age       Positions with the Company
----------------------      --------    ----------------------------------------
Donald W. Barrett             50        Chairman of the Board of Directors and
                                          Chief Executive Officer
Ronald C. Oklewicz            50        President, Chief Operating Officer, and
                                          Director
John P. Diesel                70        Director
Sydney H. Dankman             79        Director
Alan B. Salisbury             60        Director
E. Donald Shapiro             65        Director
John M. Toups                 71        Director
Joseph J. Elkins              52        Vice President
Robert D. Russell             57        Vice President, Secretary, Treasurer and
                                           Chief Financial Officer

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

           Donald W. Barrett became Chief  Executive  Officer of the Company and
Chairman of its Board of Directors on April 16,  1996.  From 1991 through  March
1996, Mr. Barrett was president and chief executive officer of Ideas, Inc. which
owned  and  operated  a family of  telecommunications  and  information  systems
companies.  Mr. Barrett was president of the Government  Systems Group of Contel
Federal  Systems,  Inc.,  a  network  integrator,  from  1987  through  1991 and
president  of the Custom  Products  Group of Burroughs  Corporation,  a computer
manufacturer,  from 1984  through  1987.  Prior to that time,  Mr.  Barrett held
various  marketing and technical  positions with GTE and General  Dynamics.  Mr.
Barrett is currently a director of Objective Communications, Inc.

           Ronald C. Oklewicz has been President,  Chief Executive Officer and a
Director of the Company  since August  1992.  Mr.  Oklewicz was Chief  Executive
Officer from August 1992 until April 16, 1996.  From  November 1991 until August
1992, Mr. Oklewicz served as a consultant to the Company. Mr. Oklewicz served in
an executive capacity at Wollongong Group, a software  communications firm, from
1990 through 1991. Mr.  Oklewicz  served in various  positions at Apple Computer
from 1986  through  1990,  including  serving as general  manager of the Federal
System  Division.  Mr.  Oklewicz also spent 13 years with Xerox  Corporation  in
various sales and marketing positions.

           John P.  Diesel has been a  Director  of the  Company  since June 27,
1995.  Mr.  Diesel was Chairman of the Board of  Directors  from July 1995 until
April 16, 1996.  Mr.  Diesel,  who has been retired since 1991, was formerly the
president  of Tenneco  Inc.  from 1979 until 1991.  Mr.  Diesel  currently  is a
director of Aluminum Corporation of America and Brunswick Corporation.


                                      -18-

<PAGE>



           Sydney H. Dankman has been a Director of the Company since June 1990.
Mr.  Dankman,  who has been retired for a period in excess of five years,  is an
investor in early development technology ventures.

           Alan B. Salisbury has been a Director of the Company since July 1996.
Mr.   Salisbury  has  been  a  director  and  the  president  of  Learning  Tree
International Inc. since April 1993 and has been a director of Sybase,  Inc. and
Template  Software.  Mr.  Salisbury served as Executive Vice President and chief
Operating Officer of Microelectronics & Computer Technology Corporation from May
1991 to April 1993.

           E. Donald Shapiro has been the Joseph Solomon Distinguished Professor
of Law at New York Law  School  since  1983  where he  served  as both  Dean and
Professor  of Law from 1973 to 1983.  He is  Supernumerary  Fellow of St.  Cross
College at Oxford  University,  England  and  Visiting  Distinguished  Professor
Bar-Ilan  University,  Tel-Aviv,  Israel.  Mr. Shapiro received a J.D. degree at
Harvard  Law  School and has been  conferred  honorary  degrees  by both  Oxford
University  and New York Law  School.  He  currently  serves  on the  Boards  of
Directors for several public companies  including Loral Space and Communications
Corporation,  Eyecare Products PLC, Kranzco Realty Trust, Premier Laser Systems,
Cafe USA, United Industrial Corporation, Vasomedical, Inc., Vion, Inc., and Bank
Leumi  Trust  Company.   Mr.   Shapiro  is  a  Fellow,   Institute  of  Judicial
Administration,  NY, and American Academy of Forensic Sciences and a life member
of the  American  Law  Institute.  He is  author  or  co-author  of more than 50
publications  including  books  and  journal  articles  dealing  with  Medicine,
Forensic Science and the law.

           John M. Toups has been a Director  of the  Company  since April 1995.
Mr.  Toups,  who has been  retired  since  1987,  was the  president  and  chief
executive  officer of Planning  Research  Corporation  from 1978 until 1987. Mr.
Toups currently serves on the board of NVR Inc, CACI  International  and Halifax
Corporation. NVR, Inc. is the successor to NVR L.P.

           Joseph J. Elkins has been Vice  President of the Company since August
1993,  Secretary of the Company from July 1994 to September  1996, and was Chief
Operating Officer from April 1995 to April 1996. In addition,  Mr. Elkins served
as a director from September 1994 until July 1995 and as Chief Financial Officer
of the Company from August 1993 until April 1995.  Prior to joining the Company,
Mr. Elkins was president of two information  management  firms,  Blyth Software,
Inc. and Elkins and Company,  following a 23-year  tenure at KPMG Peat  Marwick,
where he  oversaw  development  of that  firm's  financial  management  software
products. Mr. Elkins is a certified public accountant.

           Robert  D.  Russell  has been  Vice  President,  Treasurer  and Chief
Financial  Officer of the Company  since May 1995 and  Secretary  of the Company
since  September  1996.  Prior to joining  the  Company,  Mr.  Russell  was Vice
President,  Finance  and  Administration,  Secretary  and  Treasurer  of  Falcon
Microsystems,  Inc.  from 1986 until  1994 and an  independent  consultant  from
August 1994 until May 1995.

Section 16(a) Beneficial Ownership Reporting Compliance

           Section  16(a) of the  Securities  Exchange Act of 1934,  as amended,
(The "Exchange Act") requires the Company's executive officer and directors, and
persons who  beneficially  own more than 10% of the Company's  Common Stock,  to
file initial reports of ownership and reports of changes of

                                      -19-

<PAGE>



ownership  with the  Securities  and Exchange  Commission  and furnish copies of
those  reports  to the  Company.  Based  solely on a review of the copies of the
reports  furnished to the Company to date,  or written  representations  that no
reports were  required,  the Company  believes  that all reports  required to be
filed by such persons with respect to the Company's  fiscal year ending December
31, 1996 were  timely  made,  except for certain  reports to be filed by Messrs.
Diesel, Toups, Oklewicz and Elkins.

Item 10.             Executive Compensation.

           Summary Compensation Table

           The following sets forth the compensation  paid by the Company during
the three fiscal years ended  December 31, 1996 to its Chief  Executive  Officer
and Chief Operating Officers (the "Named Officers").  No other executive officer
of the Company  received  compensation in excess of $100,000 for the fiscal year
ended December 31, 1996.

                           Summary Compensation Table

<TABLE>
<CAPTION>

Name and Principal Position                                     Annual Compensation                         Long-term
                                                                                                           Compensation
                                                                                                              Awards
                                             ----------------------------------------------------------------------------

                                                Year            Salary              Other Annual            Options
                                                                  ($)               Compensation              (#)
                                                                                        ($)
-------------------------------------------- ------------   ----------------   ------------------------   ---------------


<S>                                             <C>             <C>                    <C>                <C>
Donald W. Barrett(1)
  Chief Executive Officer                       1996            $177,083               $    0             400,000(3)



Ronald C. Oklewicz(2)
  President and Chief Operating Officer         1996            $150,000               $35,000
                                                1995            $123,885               $     0            200,000(4)
                                                1994            $120,000               $ 5,376            30,000



Joseph J. Elkins
  Vice President                                1996            $110,000               $20,000
                                                1995            $103,750               $     0            40,000
                                                1994            $ 85,000               $ 3,117            20,000



Robert D. Russell
   Vice President, Secretary & Treasurer        1966            $ 85,000               $21,228
                                                1995            $ 52,853               $     0            20,000

</TABLE>


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

(1)        Mr. Barrett became the Company's Chief Executive Officer on April 16,
           1996.

(2)        Mr. Oklewicz was the Company's Chief Executive Officer from August 5,
           1992 until April 16, 1996 .


                                      -20-

<PAGE>



(3)        Represents  options to purchase  shares of Class A Common Stock at an
           exercise  price of $3.8125 per share (the  average of the closing bid
           and asked  prices of the  Common  Stock on the date of  grant),  with
           100,000 of such  options  being  currently  exercisable  and  100,000
           options becoming exercisable on December 31, 1997 and 200,000 options
           becoming exercisable on December 31, 1998.

(4)        Represents  options to purchase  shares of Class A Common Stock at an
           exercise price of $1.75 per share (the average of the closing bid and
           asked prices of the Common Stock on the date of grant).

           Option Grants in Fiscal 1996

           Shown below is information  concerning stock option grants of Class A
Common Stock  awarded to the Named  Officers  during the  Company's  1996 fiscal
year.


     Individual Grants
<TABLE>
<CAPTION>

           Name                  Number of Shares            % of Total Options           Exercise or          Expiration
                                Underlying Options          Granted to Employees           Base Price             Date
                                   Granted (1)                 in Fiscal 1996              ($/sh) (2)
-------------------------   --------------------------   ---------------------------   ------------------     -------------

<S>                                   <C>                           <C>                      <C>                 <C>
Donald W. Barrett                     400,000                       79.0%                    $3.8125             4/09/06

</TABLE>

------------------------
(1)        The options are nonqualified stock options.

(2)        The exercise price is equal to the fair market value of the shares of
           Class A Common Stock on the date of grant of the option.


                                      -21-

<PAGE>




           Aggregated  Option  Exercises In Last Fiscal Year And Fiscal Year-End
           Option Values

           The  following  table  sets  forth,  for the  Named  Officers  of the
Company,  information  regarding  aggregate exercises of options in 1996 and the
number and value of unexercised options at December 31, 1996:

<TABLE>
<CAPTION>
           Name                  Number of         Value             Number of Shares                    Value of
                                   Shares         Realized        Underlying Unexercised                Unexercised
                                 Acquired on                         Options at End of                 In-the-Money
                                  Exercise                              Fiscal Year                  Options at End of
                                                                       Exercisable/                     Fiscal 1996
                                                                       Unexercisable                   Exercisable/
                                                                                                     Unexercisable(1)
---------------------------   ----------------   ----------   -------------------------------  -----------------------------

<S>                                  <C>             <C>              <C>                            <C>
Donald W. Barrett                    0               0                100,000/300,000                $56,250/$168,750
Ronald C. Oklewicz                   0               0                   380,000/0                      $770,925/$0
Joseph J. Elkins                     0               0                 46,667/33,333                       $0/$0
Robert D. Russell                    0               0                 6,667/13,333                        $0/$0

</TABLE>

------------------
(1)        Based upon the difference  between the exercise prices of the options
           and the closing price of the Class A Common Stock, as reported on the
           The Nasdaq SmallCap Market on December 31, 1996, of $4.375 per share.

           Employment    Contracts   and    Termination    of   Employment   and
           Change-in-Control Arrangements

           The Company has entered into an employment  agreement  with Donald W.
Barrett,  dated as of April 10, 1996.  The  employment  is "at-will"  and may be
terminated  by  either  party  at any  time,  subject  only to the  terms of the
employment agreement and the By-Laws of the Company.  Pursuant to the agreement,
Mr. Barrett serves as Chairman of the Board and Chief  Executive  Officer of the
Company at a salary of  $250,000  per annum.  The  agreement  provides  that Mr.
Barrett is  entitled to receive  specified  bonuses in the  aggregate  amount of
$220,000 upon the  occurrence of specified  events and  achievement of specified
sales and  financial  milestones by the Company,  as well as other  supplemental
benefits at the  discretion of the Board of Directors.  In addition,  options to
purchase  396,500 shares of Class A Common Stock  pursuant to Company's  Amended
and  Restated  1993 Stock  Option Plan as amended  (the  "SOP"),  and options to
purchase  3,500  shares of Class A Common  Stock under the 1996 Stock  Incentive
Plan, all at an exercise price of $3.8125 per share, were granted to Mr. Barrett
pursuant to such agreement. 100,000 of such options are immediately exercisable,
100,000  options  become  exercisable  on December 31, 1997, and 200,000 of such
options  shall  become  exercisable  on December  31,  1998,  subject to certain
acceleration provisions,  including the occurrence of a change in control of the
Company or the termination of Mr. Barrett other than for cause or disability (as
such terms are defined in Mr.  Barrett's  employment  agreement).  The agreement
also  provides  that if Mr.  Barrett  is  terminated  other  than  for  cause or
disability,  the Company will pay to Mr. Barrett his  compensation for 12 months
following  such  termination.  During the term of employment and for a period of
one year after such employment has terminated,  the agreement  provides that Mr.
Barrett will not solicit the Company's employees.

                                      -22-

<PAGE>



           The Company has entered into an employment  agreement  with Ronald C.
Oklewicz,  dated as of November 15, 1995,  for a term ending  December 31, 1997.
Pursuant to the agreement,  Mr. Oklewicz serves as President and Chief Executive
Officer of the Company at a salary of $150,000 per annum. The agreement provides
that Mr.  Oklewicz  is entitled to receive  specified  bonuses in the  aggregate
amount of $150,000 upon the  occurrence of specified  events and  achievement of
specified  sales  and  financial  milestones  by the  Company,  as well as other
supplemental benefits at the discretion of the Board of Directors.  In addition,
options  to  purchase  200,000  shares  of the  Company's  Class A Common  Stock
pursuant  to the SOP,  (with an  exercise  price of $1.75  per  share  which are
currently  exercisable),  were granted to Mr. Oklewicz  pursuant to the terms of
such  agreement.  The agreement also provides that if Mr. Oklewicz is terminated
other than for cause (as defined  therein) or dies,  the Company will pay to Mr.
Oklewicz  (or his  spouse  or  estate  if he dies)  his  compensation  and other
benefits  for  12  months  following  termination.   The  agreement  contains  a
confidentiality  provision and provides  that during the term of employment  and
for a period of one year after such employment has terminated, Mr. Oklewicz will
not interfere with the Company's customers or solicit the Company's employees.



                                      -23-

<PAGE>




Item 11.     Security Ownership of Certain Beneficial Owners
             and Management.

             The  following  table sets  forth,  as of March 19,  1997,  certain
information as to the  beneficial  ownership of Class A Common Stock and Class B
Common  Stock  of each of the  Company's  directors  and  each of the  executive
officers shown above,  all executive  officers and directors as a group, and all
persons  known by the  Company  to be the  beneficial  owner of more  than  five
percent of the Company's Class A Common Stock and Class B Common Stock:

<TABLE>
<CAPTION>

               Name and Address of                      Amount and          Percent of     Percent of    Percent of
             Beneficial Stockholder                      Nature of          Class A (2)      Class B      Voting (2)
                                                        Beneficial
                                                        Ownership
                                                          (1)(2)
-------------------------------------------------  --------------------   --------------   ----------  ---------------



<S>                                                     <C>                   <C>              <C>          <C>
Donald W. Barrett                                       100,000(3)              *              0%             *
380 Herndon Parkway Herndon, VA  20170

Sydney H. Dankman                                       155,077(4)            1.33%            0%           1.25%
380 Herndon Parkway Herndon, VA  20170
Ronald C. Oklewicz                                      401,219(5)            3.36%            0%           3.16%
380 Herndon Parkway Herndon, VA  20170
Joseph J. Elkins                                         67,267(6)              *              0%             *
380 Herndon Parkway Herndon, VA  20170
Robert D. Russell                                        13,333(7)              *              0%             *
380 Herndon Parkway Herndon, VA  20170
John M. Toups                                            45,555(8)              *              0%             *
380 Herndon Parkway Herndon, VA  20170
John P. Diesel                                           83,159(9)              *              0%             *
380 Herndon Parkway Herndon, VA  20170
E. Donald Shapiro                                       30,000(10)              *              0%             *
57 Worth Street
New York, NY 10013
Alan B. Salisbury                                       30,000(11)              *              0%             *
380 Herndon Parkway Herndon, VA  20170
Scott J. Dankman                                     187,500(12)(13)            0%            100%          7.42%
6040 Lands End Lane
Alexandria, VA 22315
All current officers and directors as a group (11        932,277              7.68%            0%           7.11%
persons)(14)

</TABLE>

   -----------------------
   *       Indicates less than one percent.

(1)  Except as otherwise  indicated,  each of the parties listed has sole voting
     and investment  power with respect to all shares of Common Stock indicated.
     Beneficial  ownership is calculated in accordance  with Rule 13d-3(d) under
     the Exchange Act. The Company has two classes of Common Stock  outstanding,
     being  Class A and Class B Common  Stock,  with all  outstanding  shares of
     Class B Common Stock being owned by Scott J. Dankman.


                                      -24-

<PAGE>



(2)  As  adjusted  to  reflect  the  exercise  of  all  outstanding  immediately
     exercisable  Class A, Class B, Class C and Class D Warrants and all Class B
     Warrants issuable upon exercise of outstanding  Class A Warrants.  Does not
     reflect  issuance of 3,926,147 shares of Class A Common Stock issuable upon
     exercise of  outstanding  Unit Purchase  Options,  except as indicated with
     respect to listed holders.

(3)  Does not reflect 300,000 shares of Class A Common Stock underlying  options
     which shall vest and become  exercisable as follows:  100,000 options which
     shall vest and become  exercisable on December 31, 1997 and 200,000 options
     which shall vest and become  exercisable  on December 31,  1998;  provided,
     however,  that in the  event of a change  in  control  (as  defined  in Mr.
     Barrett's  employment  agreement) of the Company, the non-vested portion of
     the options  shall  automatically  accelerate to the date of such change in
     control.  Options to acquire  396,500  shares of Class A Common  Stock have
     been granted to Mr.  Barrett under the Company's  Amended and Restated 1993
     Stock Option  Plan.  The Company has also  granted Mr.  Barrett  additional
     options  to acquire  3,500  shares of Class A Common  Stock  under the 1996
     Plan.

(4)  Includes  69,791  shares  of Class A Common  Stock  underlying  immediately
     exercisable stock options and Class C Warrants.

(5)  Includes (i) 383,438 shares of Class A Common Stock underlying  immediately
     exercisable stock options and Class C Warrants acquired in the 1994 Private
     Placement,  and (ii) 17,781 shares of Class A Common Stock jointly owned by
     Mr.  Oklewicz  and his spouse,  who share power to vote and dispose of such
     shares.

(6)  Consists  of  (i)  66,667  shares  of  Class  A  Common  Stock   underlying
     immediately exercisable options and (ii) 600 shares of Class A Common Stock
     jointly  owned by Mr.  Elkins and his  spouse,  who share power to vote and
     dispose of such shares.

(7)  Consists of 13,333  shares of Class A Common Stock  underlying  immediately
     exercisable options.

(8)  Consists of 45,555  shares of Class A Common Stock  underlying  immediately
     exercisable options.

(9)  Includes  49,409  shares  of Class A Common  Stock  underlying  immediately
     exercisable Class C Warrants.

(10) Consists of 30,000  shares of Class A Common Stock  underlying  immediately
     exercisable options.

(11) Consists of 30,000  shares of Class A Common Stock  underlying  immediately
     exercisable options.

(12) Includes  37,500  shares  of Class B Common  Stock  underlying  immediately
     exercisable stock options.  Mr. Dankman has granted a voting proxy covering
     all of his shares of Class B Common  Stock to the  directors of the Company
     who are not also employees. Therefore, such directors may be deemed to have
     power to vote such shares.

(13) Each share owned by Mr.  Scott  Dankman is Class B Common  Stock,  which is
     identical  in all  respects  to the  Class A Common  Stock of the  Company,
     except that on every matter for which each share of Class A Common Stock is
     entitled  to one vote,  each share of Class B Common  Stock is  entitled to
     five votes.

(14) Includes all of the shares of Class A Common Stock that have been listed as
     being  included in notes (3),  (4),  (5), (6), (7), (8), (9), (10) and (11)
     above. Does not include the voting power attributable to the 150,000 shares
     of Class B Common Stock  currently held by Mr. Scott  Dankman,  as to which
     Mr.  Dankman has granted a voting proxy to the directors of the Company who
     are not also  employees.  Including such shares the Company's  officers and
     directors have 9.53% of the voting power of the Company's Common Stock.


                                      -25-

<PAGE>





Item 12.     Certain Relationships and Related Transactions.

           None.



                                      -26-

<PAGE>




Item 13.     Exhibits, List and Reports on Form 8-K.

           (a)        Exhibits:  The  following  exhibits are filed  herewith or
                      incorporated by reference: .



    Exhibit           Document
      No.
    ------

           3.1        Second  Restated   Certificate  of  Incorporation  of  the
                      Company.  (Incorporated herein by reference to Exhibit 3.1
                      to the  Registrant's  Registration  Statement on Form SB-2
                      (File No. 33-61328)).
           3.2        Amendment to Second Restated  Certificate of Incorporation
                      of the  Company.  (Incorporated  herein  by  reference  to
                      Exhibit 3.2 to the Registrant's  Registration Statement on
                      Form SB-2 (File No. 33-61328)).
           3.3        Amendment to Second Restated  Certificate of Incorporation
                      of the Company.
           3.4        Form of By-laws of the  Company.  (Incorporated  herein by
                      reference to Exhibit 3.3 to the Registrant's  Registration
                      Statement on Form SB-2 (File No. 33-61328)).
           4.1        Form of Warrant Agreement  (including forms of Class A and
                      Class B  Warrant  Certificates).  (Incorporated  herein by
                      reference to Exhibit 4.1 to the Registrant's  Registration
                      Statement on Form SB-2 (File No. 33-61328)).
           4.2        Form of  Specimen  of  Class A Common  Stock  Certificate.
                      (Incorporated  herein by  reference  to Exhibit 4.2 to the
                      Registrant's Registration Statement on Form SB-2 (File No.
                      33-61328)).
           4.3        Form of  Specimen  of  Class B Common  Stock  Certificate.
                      (Incorporated  herein by  reference  to Exhibit 4.3 to the
                      Registrant's Registration Statement on Form SB-2 (File No.
                      33-61328)).
           4.4        Form of Warrant Agreement  (including form Class C Warrant
                      Certificate)  from 1994 Private  Placement.  (Incorporated
                      herein by reference to Exhibit  10.17 to the  Registrant's
                      Annual  Report on Form 10-KSB for the year ended  December
                      31, 1994.)
           4.5        Form of Warrant Agreement  (including form Class C Warrant
                      Certificate)  from 1995 Private  Placement.  (Incorporated
                      herein by reference to Exhibit  10.24 to the  Registrant's
                      Annual  Report on Form 10-KSB for the year ended  December
                      31, 1994.)
           4.6        Form of  Warrant  Agreement  (including  form  of  Class D
                      Warrant  Certificate) from Bridge Offering.  (Incorporated
                      herein by  reference  to Exhibit  4.6 to the  Registrant's
                      Registration Statement on Form SB-2 (File No. 33-90278)).
           4.7        Form of  Warrant  Agreement  (including  Form  of  Class D
                      Warrant). (Incorporated herein by reference to Exhibit 4.8
                      to the  Registrant's  Registration  Statement on Form SB-2
                      (File No. 33-90278)).
           4.8        Form of Stock  Option  Agreement  (Incorporated  herein by
                      reference to Exhibit 4.7 to the Registrant's  Registration
                      Statement on Form S-3 (File No. 333-17013)).


                                      -27-

<PAGE>




           4.9        Form of Stock Option  Agreement for use in connection with
                      the  1992  Stock  Option  Plan  (Incorporated   herein  by
                      reference to Exhibit 4.8 to the Registrant's  Registration
                      Statement on Form S-3 (File No. 333-17013)).
           4.10       Warrant to Purchase  Shares of Class A Common Stock issued
                      to Morris Sedaka on May 30, 1993  (Incorporated  herein by
                      reference to Exhibit 4.9 to the Registrant's  Registration
                      Statement on Form S-3 (File No. 333-17013)).
           10.1       Stock  Option Plan.  (Incorporated  herein by reference to
                      Exhibit 10.1 to the Registrant's Registration Statement on
                      Form SB-2 (File No. 33-61328)).
           10.2       Employment  Agreement  between  the  Company and Ronald C.
                      Oklewicz.  (Incorporated  herein by  reference  to Exhibit
                      10.3 to the  Registrant's  Registration  Statement on Form
                      SB-2 (File No. 333-00012)).
           10.3       Employment  Agreement  between the Company and L.  Charles
                      Ennis.  (Incorporated  herein by reference to Exhibit 10.4
                      to the  Registrant's  Registration  Statement on Form SB-2
                      (File No. 33-61328)).
           10.4       Sales Agreement  between  International  Business Machines
                      Corporation  and  the  Company  dated  January  27,  1993.
                      (Incorporated  herein by  reference to Exhibit 10.6 to the
                      Registrant's Registration Statement on Form SB-2 (File No.
                      33- 61328)).
           10.5       Technology  Partner Product  Agreement between GTE Vantage
                      Solutions  and  the  Company.   (Incorporated   herein  by
                      reference to Exhibit 10.7 to the Registrant's Registration
                      Statement on Form SB-2 (File No. 33-61328)).
           10.6       Agreement  for Repair  and  Inventory  Management  Service
                      between the Company and Logistics Management Incorporated.
                      (Incorporated  herein by  reference to Exhibit 10.8 to the
                      Registrant's Registration Statement on Form SB-2 (File No.
                      33-61328)).
           10.7       Form  of  Non-Disclosure  and  Non-Interference  Agreement
                      between  the  Company  and  its  employees.  (Incorporated
                      herein by reference to Exhibit  10.10 to the  Registrant's
                      Registration Statement on Form SB-2 (File No. 33-61328)).
           10.8       Letter  Agreement  between the Company and the Underwriter
                      regarding  future  financing  transactions.  (Incorporated
                      herein by reference to Exhibit  10.12 to the  Registrant's
                      Registration Statement on Form SB-2 (File No. 33-61328)).
           10.9       Employment Agreement,  dated as of August 1, 1993, between
                      the Company and Joseph J. Elkins.  (Incorporated herein by
                      reference  to  Exhibit  10.14 to the  Registrant's  Annual
                      Report on Form  10-KSB  for the year  ended  December  31,
                      1993.)
           10.10      Amendment  to the Sales  Agreement  between  International
                      Business  Machines   Corporation  and  the  Company,   and
                      Supplements   to   same,    dated   February   28,   1994.
                      (Incorporated  herein by reference to Exhibit 10.13 to the
                      Registrant's  Annual  Report on Form  10-KSB  for the year
                      ended December 31, 1993.)
           10.11      Agency Agreement with D.H. Blair Investment  Banking Corp.
                      dated  June  10,   1994  from  1994   Private   Placement.
                      (Incorporated  herein by reference to Exhibit 10.18 to the
                      Registrant's  Annual  Report on Form  10-KSB  for the year
                      ended December 31, 1994.)
           10.12      Merger  and   Acquisition   Agreement   with  D.H.   Blair
                      Investment  Banking  Corp.  dated June 21,  1994 from 1994
                      Private  Placement.  (Incorporated  herein by reference to
                      Exhibit  10.19 to the  Registrant's Annual  Report on Form
                      10-KSB for the year ended December 31, 1994.)
           10.13      Amended and  Restated  Stock  Option  Plan.  (Incorporated
                      herein by reference to Exhibit  10.20 to the  Registrant's
                      Annual  Report on Form 10-KSB for the year ended  December
                      31, 1994.)


                                      -28-

<PAGE>




           10.14      1994 Employee Stock Purchase Plan. (Incorporated herein by
                      reference  to  Exhibit  10.21 to the  Registrant's  Annual
                      Report on Form  10-KSB  for the year  ended  December  31,
                      1994.)
           10.15      Non-Employee  Director  Stock Option  Plan.  (Incorporated
                      herein by reference to Exhibit  10.22 to the  Registrant's
                      Annual  Report on Form 10-KSB for the year ended  December
                      31, 1994.)
           10.16      Investment  Agreement  and Various  Exhibits  from Private
                      Placement    Transaction    completed   in   March   1995.
                      (Incorporated  herein by reference to Exhibit 10.23 to the
                      Registrant's  Annual  Report on Form  10-KSB  for the year
                      ended December 31, 1994.)
           10.17      Draft Agency Agreement with D.H. Blair Investment  Banking
                      Corp. from 1995 Private Placement. (Incorporated herein by
                      reference  to  Exhibit  10.25 to the  Registrant's  Annual
                      Report on Form  10-KSB  for the year  ended  December  31,
                      1994.)
           10.18      Draft Merger and  Acquisition  Agreement  with D.H.  Blair
                      Investment  Banking  Corp.  from 1995  Private  Placement.
                      (Incorporated  herein by reference to Exhibit 10.26 to the
                      Registrant's  Annual  Report on Form  10-KSB  for the year
                      ended December 31, 1994.)
           10.19      Amendment  to the Sales  Agreement  between  International
                      Business Machines  Corporation and the Company  referenced
                      in 10.6 above,  and Supplements to same,  dated as of June
                      3,  1994.  (Incorporated  herein by  reference  to Exhibit
                      10.27 to the Registrant's Annual Report on Form 10-KSB for
                      the year ended December 31, 1994.)
           10.20      Amendment  to the Sales  Agreement  between  International
                      Business Machines  Corporation and the Company  referenced
                      in 10.6  above,  and  Supplements  to  same,  dated  as of
                      February 23, 1995 and  February  27,  1995.  (Incorporated
                      herein by reference to Exhibit  10.28 to the  Registrant's
                      Annual  Report on Form 10-KSB for the year ended  December
                      31, 1994.).
           10.21      Agency  Agreement  with  D.H.  Blair  Investment   Banking
                      Corporation dated July 11, 1995.  (Incorporated  herein by
                      reference   to   Exhibit   10.28   to   the   Registrant's
                      Registration Statement on Form SB-2 (File No. 33-90378)).
           10.22      Document  relating to Private  Placement to the Consultant
                      in  March,  1995.  (Incorporated  herein by  reference  to
                      Exhibit 10.29 to the Registrant's  Registration  Statement
                      on Form SB-2 (File No. 33-90378)).
           10.23      Agreement between the Company and an Insurance Company for
                      consulting and development services.  (Incorporated herein
                      by  reference  to  Exhibit   10.30  to  the   Registrant's
                      Registration Statement on Form SB-2 (File No. 33-90378)).
           10.24      Agreement  between the  Company and IBM dated  January 25,
                      1996,  providing for  resolution  of certain  disputes and
                      other  matters.   (Incorporated  herein  by  reference  to
                      Exhibit 10.31 to the Registrant's  Registration  Statement
                      on Form SB-2 (File No. 333-00012)).
           10.25      Security  Agreement  between  the  Company  and a  certain
                      Lender dated  February 16, 1996.  (Incorporated  herein by
                      reference   to   Exhibit   10.32   to   the   Registrant's
                      Registration Statement on Form SB-2 (File No. 333-00012)).


                                      -29-

<PAGE>




           10.26      Letter  dated  March  19,  1996,  from IBM to the  Company
                      granting  extension  to April 1,  1996,  with  respect  to
                      certain  credit  requirements.   (Incorporated  herein  by
                      reference   to   Exhibit   10.33   to   the   Registrant's
                      Registration Statement on Form SB-2 (File No. 333-00012)).
           99.1       Stock Purchase Agreement with TelePad Acquisition, Inc., a
                      Delaware  corporation  and wholly owned  subsidiary of the
                      Company and Federal Computer Corporation dated January 21,
                      1997.



                                      -30-

<PAGE>


                                   SIGNATURES

           Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange  Act of 1934,  the  registrant  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                    TELEPAD CORPORATION


Date:      March   , 1997       /s/ Donald W. Barrett
                                ---------------------
                                Donald W. Barrett
                                Chairman and Chief Executive Officer



Date:      March   , 1997       /s/ Robert D. Russell
                                ---------------------
                                Robert D. Russell
                                Vice President and Chief Financial Officer
                                Principal Financial and Accounting Officer


           Pursuant to the  requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934,  this report has been signed by the  following  persons on
behalf of the registrant and in the capacities and on the dates indicated.


Date:      March   , 1997       /s/ Sydney H. Dankman
                                ---------------------
                                Sydney H. Dankman, Director


Date:      March   , 1997       /s/ John P. Diesel
                                ------------------
                                John P. Diesel, Director


Date:      March   , 1997       /s/ Ronald C. Oklewicz
                                ----------------------
                                Ronald C. Oklewicz, Director


Date:      March   , 1997       /s/ Alan B. Salisbury
                                ---------------------
                                Alan B. Salisbury, Director

Date:      March   , 1997       /s/ E. Donald Shapiro
                                ---------------------
                                E. Donald Shapiro, Director


Date:      March   , 1997       /s/ John M. Toups
                                -----------------
                                John M. Toups, Director



                                      -31-

<PAGE>






                               TELEPAD CORPORATION


                          INDEX TO FINANCIAL STATEMENTS




Report of Ernst & Young LLP, Independent Auditors ........................   F-2
Balance Sheets ...........................................................   F-3
Statements of Operations .................................................   F-4
Statements of Stockholders' Equity (Deficit) .............................   F-5
Statements of Cash Flows .................................................   F-6
Notes to Financial Statements ............................................   F-7
















                                            F-1




<PAGE>




                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


The Board of Directors
TelePad Corporation

We have audited the  accompanying  balance  sheets of TelePad  Corporation as of
December  31,  1996  and  1995,  and  the  related   statements  of  operations,
stockholders'  equity (deficit),  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
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of TelePad Corporation at December
31, 1996 and 1995,  and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.


/s/ ERNST & YOUNG LLP

Vienna, Virginia
March 7, 1997





                                       F-2


<PAGE>

                               TELEPAD CORPORATION
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,

                                                                                 1996            1995
                                                                             ------------    ------------
<S>                                                                          <C>             <C>
ASSETS
Current assets:
     Cash and cash equivalents                                               $  1,418,770    $  1,257,948
     Short-term investments                                                     4,078,679            --
     Restricted cash (Note 1)                                                   2,000,000            --
     Accounts receivable, less allowance of $107,000
        at December 31, 1996 and $100,000 at December 31, 1995                    668,922         472,724
     Inventory, less allowance of $14,000 at December 31, 1996
        and $80,000 at December 31, 1995                                        3,474,782         403,733
     Other current assets                                                         243,988          96,246
                                                                             ------------    ------------
Total current assets                                                           11,885,141       2,230,651
                                                                             ------------    ------------
Furniture and equipment:
     Office furniture and equipment                                               197,932         117,520
     Computer equipment                                                           880,656         527,908
                                                                             ------------    ------------
                                                                                1,078,588         645,428
Less accumulated depreciation                                                    (505,639)       (287,838)
                                                                             ------------    ------------

Net furniture and equipment                                                       572,949         357,590
Deposits and other assets                                                          27,689          21,061
                                                                             ------------    ------------

Total assets                                                                 $ 12,485,779    $  2,609,302
                                                                             ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:

     Accounts payable and accrued expenses                                   $  1,991,805    $  2,821,741
     Notes payable (Note 2)                                                          --         3,881,698
     Deferred revenue                                                              34,643          17,718
                                                                             ------------    ------------
Total current liabilities                                                       2,026,448       6,721,157

Stockholders' equity (deficit):

     Preferred stock, $.01 par value;  5,000,000 shares  authorized;  none
      issued
     Common stock, $.01 par value; 95,000,000 shares authorized:
          Class A common stock,  94,406,937 shares designated, 11,558,905
             and 4,436,175 shares issued and outstanding at December
             31, 1996 and 1995, respectively                                      115,589          44,361
          Class B common stock, 593,063 shares designated,
             150,000 and 555,563 shares issued and outstanding
             at December 31, 1996 and 1995, respectively                            1,500           5,556
     Additional paid-in capital                                                39,250,820      18,657,124
     Accumulated deficit                                                      (28,908,578)    (22,818,896)
                                                                             ------------    ------------
Total stockholders' equity (deficit)                                           10,459,331      (4,111,855)
                                                                             ------------    ------------
Total liabilities and stockholders' equity (deficit)                         $ 12,485,779    $  2,609,302
                                                                             ============    ============
</TABLE>
      See accompanying notes


                                      F-3

<PAGE>

                               TELEPAD CORPORATION

                            STATEMENTS OF OPERATIONS




                                                       YEARS ENDED DECEMBER 31,

                                                        1996           1995
                                                    -----------     -----------

Revenues:
    TelePad products                                $ 2,017,811     $ 2,034,066
    Service contracts                                   222,293         559,528
                                                    -----------     -----------
Total revenues                                        2,240,104       2,593,594

Costs and expenses:
    Cost of goods sold - Telepad products             2,128,342       1,988,045
    Cost of goods sold - service contracts              101,698         320,142
    Loss on inventory purchase commitment                  --           176,500
    Costs related to manufacturing startup              317,607            --
    Research and development                          1,515,933       1,417,404
    Selling, general and administrative               4,351,510       3,672,722
                                                    -----------     -----------
Total costs and expenses                              8,415,090       7,574,813
                                                    -----------     -----------

Loss from operations                                 (6,174,986)     (4,981,219)

Interest income                                         542,447          32,601
Interest expense                                       (253,197)       (447,200)
Amortization of debt issue costs                       (118,302)       (573,995)
Other expenses                                          (85,644)           --
                                                    -----------     -----------
Net loss                                            $(6,089,682)    $(5,969,813)
                                                    ===========     ===========

Net loss per share                                  $     (0.62)    $     (1.24)
                                                    ===========     ===========

Weighted average shares outstanding                   9,856,500       4,814,782
                                                    ===========     ===========

          See accompanying notes



                                      F-4
<PAGE>

                               TELEPAD CORPORATION

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                     YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
                                           Class A                  Class B           Additional    Accumulated       Total
                                         Common Stock             Common Stock         Paid-In        Deficit      Stockholders'
                                      Shares        Amount      Shares      Amount     Capital                   Equity (Deficit)
                              --------------------------------------------------------------------------------------------------
<S>                                  <C>         <C>            <C>       <C>        <C>            <C>            <C>
Balance at December 31, 1994         3,706,450   $   37,064     555,563   $ 5,556    $15,803,474    $(16,849,083)  $ (1,002,989)

Issuance of common stock and
  warrants, net                        643,750        6,437          --        --      2,113,382              --      2,119,819
Issuance of common stock
  for services                          54,000          540          --        --        331,208              --        331,748
Issuance of common stock warrants
  in connection with notes payable         --           --           --        --        400,000              --        400,000
Exercise of stock options               31,975          320          --        --          9,060              --          9,380
Net loss                                                                                              (5,969,813)    (5,969,813)
                              --------------------------------------------------------------------------------------------------
Balance at December 31, 1995         4,436,175   $   44,361     555,563   $ 5,556    $18,657,124    $(22,818,896)  $ (4,111,855)

Issuance of common stock and
  warrants, net                      6,555,000       65,550          --        --     20,449,921              --     20,515,471
Conversion of Class B common
  stock                                405,563        4,056    (405,563)   (4,056)           --               --             --
Exercise of common stock warrants       28,162          282          --        --         98,218              --         98,500
Exercise of stock options              134,005        1,340          --        --         45,557              --         46,897
Net loss                                    --           --          --        --            --       (6,089,682)    (6,089,682)
                              --------------------------------------------------------------------------------------------------
Balance at December 31, 1996        11,558,905    $ 115,589     150,000   $ 1,500    $39,250,820    $(28,908,578)  $ 10,459,331
                              ==================================================================================================
</TABLE>


See accompanying notes



                                       F-5

<PAGE>

                               TELEPAD CORPORATION
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                    YEARS ENDED DECEMBER 31,

                                                                     1996            1995
                                                                 ------------    ------------
<S>                                                              <C>             <C>
OPERATING ACTIVITIES

Net loss                                                         $ (6,089,682)   $ (5,969,813)


Adjustments to reconcile net loss to net cash
  used in operating activities:
     Depreciation and amortization                                    217,801         164,128
     Amortization of debt discount                                    118,302         281,698
     Provision for loss on accounts receivable                          7,169          91,000
     Inventory allowance                                                 --            80,000
     Loss on disposal of property and equipment                          --            12,584
     Loss on inventory purchase commitment                               --           176,500
     Common stock issued in lieu of cash for consulting
       and employment services                                           --           331,748
     Changes in assets and liabilities:
        Restricted cash                                            (2,000,000)           --
        Accounts receivable                                          (203,367)      3,139,432
        Inventory                                                  (3,071,049)      1,069,521
        Other current assets                                         (147,742)          6,437
        Deposits and other assets                                      (6,628)        (19,228)
        Accounts payable and accrued expenses                        (829,936)     (4,398,429)
        Deferred revenue                                               16,925          17,718
                                                                 ------------    ------------
Net cash used in operating activities                             (11,988,207)     (5,016,704)


INVESTING ACTIVITIES

Purchase of furniture and equipment                                  (433,160)       (233,207)

Purchase of short-term investments                                (14,878,679)           --

Sales of short-term investments                                    10,800,000            --
                                                                 ------------    ------------
Net cash used in investing activities                              (4,511,839)       (233,207)

FINANCING ACTIVITIES

Net cash proceeds from issuance of common stock                    20,660,868       2,129,199

Proceeds from warrants issued in connection with notes payable           --           400,000

Proceeds from notes payable                                           750,000       3,600,000

Repayment of notes payable                                         (4,750,000)           --
                                                                 ------------    ------------
Net cash provided by financing activities                          16,660,868       6,129,199
                                                                 ------------    ------------


Net increase in cash                                                  160,822         879,288

Cash and cash equivalents, beginning of period                      1,257,948         378,660
                                                                 ------------    ------------

Cash and cash equivalents, end of period                         $  1,418,770    $  1,257,948
                                                                 ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Actual cash payments for interest                                $    418,685    $    206,985
                                                                 ============    ============
</TABLE>

See accompanying notes


                                       F-6

<PAGE>


                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

     Organization

TelePad  Corporation (the Company)  markets  hardware and software  products and
solutions to assist private  businesses and  governmental  entities in managing,
communicating and processing  information.  The Company's principal products are
portable, notebook-sized, pen-based computers and related customized software.

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

The  Company  purchases  all of its  TelePad  3  computers,  currently  its only
product, from a single manufacturer,  Sanmina Corporation ("Sanmina").  Although
management believes that alternative  sources of supply are available,  a change
in  manufacturers  could cause further delays in production and adversely affect
demand for the TelePad product and the Company's operating results.

While in the second half of 1996, the Company  experienced an increase in demand
for its principal  products,  the Company has not generated  sufficient revenues
from  sales to cover  operating  expenses.  Success  of the  Company's  business
strategy is dependent  upon growth in the  Company's  revenue from its TelePad 3
product and related services.

     Revenue Recognition

Product sales are recognized when products are shipped to customers.  Revenue on
service and  development  contracts is  recognized as the services are performed
and as contract objectives are achieved.

Three  customers  accounted  for  approximately  53% of  total  revenue  and one
customer  accounted for  approximately  12% of total revenue for the years ended
December 31, 1996 and 1995, respectively.

     Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.

     Short-term Investments

The  short-term  investments  are stated at cost,  which as of December 31, 1996
approximates  market  value,  and are  invested in a  short-term,  fixed  income
securities fund.


                                       F-7

<PAGE>




                              TELEPAD CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     Restricted Cash

In order to secure credit for production of the TelePad 3 computer,  the Company
has  provided a letter of credit to Sanmina  in the amount of  $2,000,000.  This
letter  of  credit  is  secured  by   $2,000,000,   which  is   invested  in  an
interest-bearing account and is pledged as security.

     Inventory

Inventory  is stated at the  lower of cost or  market  as  determined  on a FIFO
(first-in,  first-out)  basis.  The Company  provides for inventory  reserves as
inventory is identified as being obsolete, slow-moving, or unsaleable.

     Furniture and Equipment

Office furniture and equipment and computer equipment,  including  demonstration
units, are recorded at cost and depreciated using the straight-line  method over
estimated useful lives ranging from three to seven years.

     Warranty

The Company provides, by a current charge to operations,  an amount it estimates
will be required to cover future  warranty  obligations for products sold during
the year.  The accrued  liability for warranty  costs is included in the caption
"Accounts payable and accrued expenses" in the accompanying balance sheets.

     Net Loss Per Share

Net loss per share is  calculated  using the weighted  average  number of common
shares  outstanding  during the period,  with shares of Class A common stock and
Class B common stock treated as a single class for purposes of the  calculation.
Shares  issuable  upon the  exercise  of stock  options and  warrants  have been
excluded from the  computation  because the effect of their  inclusion  would be
antidilutive.

     Debt Issue Costs

The costs  related to the  issuance  of notes  payable are  expensed  during the
period of borrowing.

     Stock-Based Compensation

In October 1995, the Financial  Accounting  Standards Board issued SFAS No. 123,
"Accounting for Stock- Based Compensation", which is effective for the Company's
December 31, 1996 financial statements.  SFAS No. 123 allows companies to either
account for stock-based compensation under the new provisions of SFAS No. 123 or
under  the  provisions  of APB 25,  but  requires  pro forma  disclosure  in the
footnotes to the financial  statements as if the measurement  provisions of SFAS
No. 123 had been adopted.  The Company  intends to continue  accounting  for its
stock-based  compensation  in accordance with the provisions of APB 25. As such,
the adoption of SFAS No. 123 will not impact the  financial  position or results
of operations of the Company.



                                       F-8

<PAGE>




                              TELEPAD CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


2.   NOTES PAYABLE

On February 15, 1996, the Company and an individual investor, who had previously
provided his personal  guaranty of the Company's  obligations  to  International
Business  Machines  Corporation  ("IBM")  for the  production  of 400  TelePad 3
computers,  entered into an agreement whereby the individual investor loaned the
Company  $750,000  evidenced by a promissory  note which had a term of one year,
but included the right to require  early  retirement  of the  obligation  at the
final closing of the secondary  public  offering.  The  promissory  note carried
interest  at  the  rate  of  20%  and  contained  a  loan   origination  fee  of
approximately  $68,000.  The promissory note was secured by all of the Company's
assets.  The conditions of the agreement required that a portion of the proceeds
from  the  note be used to  satisfy  existing  obligations  to IBM and  that IBM
release the guaranty. The Company received net proceeds,  after disbursements to
IBM and  prepayment of one-half of the annual  interest due under the promissory
note, of  approximately  $193,000.  On May 1, 1996, the Company paid $825,000 to
the  individual  investor to retire the promissory  note.  The $825,000  payment
included  the  principal  amount  of  $750,000  and  $75,000  in  interest.  The
respective security interest has been released.

During 1995, the Company was provided with bridge  financing of $4,000,000  less
direct  expenses of $573,995,  through the sale of 80 bridge units.  Each bridge
unit  consisted  of a $50,000  promissory  note and 25,000  common  stock bridge
warrants.  The  promissory  notes bore interest at the rate of 10% per annum and
were due upon the  earlier of July 26,  1996,  or the  closing of the  Company's
secondary  public  offering  (See Note 3). On April 25,  1996 the  Company  paid
$4,268,685 to repay the $4,000,000  principal amount of the promissory notes and
accrued interest in the amount of $268,685.

Each common  stock bridge  warrant  entitled the holder to purchase one share of
the  Company's  Class A common  stock at an  exercise  price of $2.50 per share,
subject  to  adjustment.  The  warrants  expire on July 26,  2000.  The  Company
allocated  $400,000 of the total notes payable  proceeds to the warrants issued.
The $400,000  allocated to the warrants was amortized to interest  expense using
the effective  interest  method over the period the related debt was expected to
be outstanding. Upon completion of the public offering, each common stock bridge
warrant automatically  converted into one Class D warrant with the same terms as
those issued in the offering.

3.   STOCKHOLDERS' EQUITY (DEFICIT)

          PREFERRED STOCK

The Company's  certificate  of  incorporation  provides for 5,000,000  shares of
preferred stock, $.01 par value are authorized for future issuance,  with rights
and preferences to be determined by the Board of Directors.


          COMMON STOCK

On April 3, 1996, the Company  completed a public  offering of 20,000 units (the
"Units").  Each Unit  consisted  of 285 shares of Class A common stock and 1,000
Class D warrants and was sold for $1,000 per Unit, pursuant to which the Company
raised  $20,000,000.  The net  proceeds  to the Company  from the Unit  offering
amounted  to  approximately  $17,779,000.  On April 25,  1996,  the  underwriter
exercised  the  over-allotment  option to  purchase  an  additional  3,000 Units
pursuant  to which the  Company  raised an  additional  $3,000,000.  The Company
received  net  proceeds of  approximately  $2,736,000  from the  exercise of the
over-allotment option.



                                       F-9


<PAGE>



                              TELEPAD CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3.   STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

During 1995, the Company  completed a private placement of 51.5 units. Each unit
consisted  of 12,500  Class A common  shares and 6,738.5  Class C warrants.  The
Company  received  proceeds  of  approximately  $2,120,000,  net of  $455,000 in
expenses  directly  related to the offering.  Each Class C warrant  entitles the
holder to purchase,  within five years from the closing date, one share of Class
A common  stock at $4.00 per  share,  subject  to  adjustment.  The  shares  and
warrants sold in this private placement have demand  registration rights and the
issuance of such  shares and  warrants  had a dilutive  effect on the holders of
Class A warrants  and Class B warrants.  The  placement  agent in this  offering
received a unit purchase option entitling it to purchase 15.45 units on the same
general terms and conditions as the participants in the private placement.

During 1995, the Company  amended its certificate of  incorporation  to increase
authorized common stock to 95,000,000 shares, of which 94,406,937 are designated
as Class A common stock and the remaining 593,063 as Class B common stock. Class
B common  stock is  substantially  identical to Class A common stock except that
holders  of Class B common  stock  have  five  votes  per  share on each  matter
considered by the stockholders. The Class B shares are each convertible into one
share of Class A common stock.

In March 1995,  the Company issued 54,000 shares of Class A common stock in lieu
of cash as compensation for services. The aggregate market value of these shares
totaled  approximately  $332,000 on the dates of issuance  and is  reflected  in
these  financial  statements  as a charge  against  earnings and as additions to
common stock and additional paid-in capital. Two transactions were involved.  In
the first,  the Company  entered into an agreement  with an individual  investor
under which the investor guaranteed IBM's security interest in the production of
400  completed  TelePad 3 computers.  The guarantee was backed by a $1.5 million
irrevocable letter of credit provided by a commercial bank (See Note 2). As part
of the  consideration  for the  investor's  guarantee,  the  Company  issued the
investor 50,000 shares of the Company's Class A common stock. The Company valued
this first  transaction  at $311,748,  which  represents the market value of the
shares at the date of the transaction.  In the second  transaction,  the Company
issued 4,000 shares of the Company's Class A common stock as  consideration  for
financial consulting services provided  by  an  investment  banker.  The Company



                                      F-10


<PAGE>


                              TELEPAD CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3.   STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

valued this second transaction at $20,000,  which represents the market value of
the shares at the date of the transaction.

At December 31, 1996, the Company had reserved 42,636,765 shares of common stock
for issuance  upon exercise of stock  options and purchase  warrants.  Shares of
unrestricted  common stock issued for other than cash have been assigned amounts
equivalent  to the fair market value of the shares  issued.  Compensatory  stock
options issued have been assigned  compensation  values based upon the excess of
the fair value of the common stock  underlying such options,  at the grant date,
over the exercise price of the shares.

          STOCK OPTIONS AND WARRANTS

The Non-Qualified Incentive Stock Option Plan (the "NQ Plan") was adopted by the
Board of Directors and approved by the stockholders  during 1992. The purpose of
the NQ Plan is to  compensate  various  key  executives  and key  employees  for
services  rendered  to or on behalf of the  Company.  No further  options may be
issued under the NQ Plan.

The Company established an additional stock option plan in April 1993 (the "1993
Plan")  providing for the grant of options to purchase  shares of Class A common
stock to key employees and others at terms determined by the Board of Directors.
An amendment to the 1993 Plan,  approved  during 1994,  increased  the number of
options available under this plan from 150,000 to 975,000. In February 1995, the
Board of Directors canceled 600,000 of the options available for grant under the
1993 Plan. In June 1995,  stockholders  of the Company  approved an amendment to
the 1993 Plan which  increased the number of options  available  under this plan
from 375,000 to 975,000.

During 1994,  two new plans were adopted by the Board of Directors  and approved
by  the  stockholders.   The  Employee  Stock  Purchase  Plan  (the  "SPP")  was
established  to provide  eligible  employees a means to purchase  Class A common
stock through payroll deductions,  subject to certain limitations.  In addition,
the 1994  Non-Employee  Director Stock Option Plan (the "NESOP") was established
to  maintain  the  Company's  ability to attract  and  retain  the  services  of
experienced  and highly  qualified  directors.  Pursuant to the NESOP,  eligible
directors  will  annually be granted an option,  subject to vesting over a three
year period, to purchase 6,667 shares of Class A common stock.

A total of 250,000 shares of Class A common stock may be purchased under the SPP
and 175,000  shares may be available for purchase  under the NESOP.  At December
31, 1996, no shares had been purchased under the SPP.


                                      F-11

<PAGE>


                              TELEPAD CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3.   STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

The Company  established an additional  stock option plan in September 1996 (the
"1996 Plan")  providing  for the grant of options to purchase  shares of Class A
common  stock to key  employees  (including  directors  and officers who are key
employees)  and to  consultants  and  directors  who are not  employees at terms
determined by the Board of Directors.  The aggregate number of shares of Class A
common  stock for which  options  may be  granted  under the 1996 Plan shall not
exceed 1,200,000.

From time to time, the Company has also granted  options or warrants to purchase
common  stock  outside  the  above  noted  plans  to  investors,  employees  and
consultants some of which were in consideration for services performed.

The following table  summarizes all option activity for the years ended December
31:

<TABLE>
<CAPTION>
                                            1996                      1995

                                     Shares     Weighted-       Shares     Weighted-
                                                 Average                    Average
                                              Exercise Price             Exercise Price
                                 -----------------------------------------------
<S>                                 <C>          <C>          <C>          <C>
Outstanding at beginning of year    1,245,638    $ 3.58       1,027,404    $ 3.98

Options granted                       956,000    $ 4.46         326,001    $ 2.65

Options exercised                    (134,005)   $ 0.35         (31,975)   $ 0.33

Options canceled or expired          (312,117)   $ 5.39         (75,792)   $ 6.38
                                   ----------                ----------
Outstanding at end of year          1,755,516    $ 3.99       1,245,638    $ 3.58
                                   ==========                ==========

Options exercisable at year end       797,458    $ 2.82         776,857    $ 2.70

</TABLE>


                                      F-12

<PAGE>



                              TELEPAD CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3.   STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

The options  outstanding at December 31, 1996 range in price from $.33 per share
to $7.88 per share and have a weighted average remaining contractual life of 5.6
years.

The Company  applies APB 25 in accounting for its stock option  incentive  plans
and, accordingly, recognizes compensation expense for the difference between the
fair value of the  underlying  common stock and the grant price of the option at
the date of grant.  The  effect of  applying  SFAS No.  123 on 1996 and 1995 pro
forma net loss as stated above is not necessarily  representative of the effects
on reported net income or loss for future years due to, among other things,  (1)
the vesting  period of the stock  options  and (2) the fair value of  additional
stock options in future years.  Had  compensation  cost for the Company's  stock
option  plans  been  determined  based upon the fair value at the grant date for
awards under the plans consistent with the methodology prescribed under SFAS No.
123, the Company's net loss in 1996 and 1995 would have been  approximately $6.7
million, or $.68 per share, and $6.1 million and $1.26 per share,  respectively.
The fair value of the  options  granted  during 1996 and 1995 are  estimated  as
$1.30  and  $1.82  per  share,  respectively,  on the  date of grant  using  the
Black-Scholes  option-pricing  model with the  following  assumptions:  dividend
yield 0%, volatility of 37.9% for 1996 and 105.6% for 1995,  risk-free  interest
rate of 6.12% for 1996 and 5.93% for 1995, and expected life of 3 years.

The  following  table  summarizes  all  Class A,  Class B,  Class C, and Class D
warrant activity for the years ended December 31:


                                          1996                 1995
                                      -------------------------------

Outstanding at beginning of year       7,291,730            4,944,688
Issued                                23,000,000            2,347,042
Exercised                                (28,162)                 --
Outstanding at end of year            30,263,568            7,291,730
                                      ===============================

All warrants  outstanding  as of December 31,  1996,  are at exercise  prices of
$3.50 to $6.81 per share.


                                      F-13




<PAGE>


                              TELEPAD CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


4.   INCOME TAXES

There was no provision  for income  taxes for the years ended  December 31, 1996
and 1995 as a result of the Company's net loss for the years then ended.

Components of the net deferred tax asset at December 31, are as follows:


                                                          1996           1995
                                                     --------------------------

Deferred tax liabilities:
  Depreciation and amortization                      $    37,000    $    14,000

Deferred tax assets:
  Compensation expenses related to options               322,000        518,000
  Net operating loss carryforward                      9,105,000      7,558,000
  Other                                                  193,000        179,000
                                                     --------------------------
Total deferred tax assets                              9,620,000      8,255,000
                                                     --------------------------

Net deferred tax assets before valuation allowance     9,583,000      8,241,000
Valuation allowance                                   (9,583,000)    (8,241,000)
                                                     ==========================
Net deferred tax assets                              $      --      $      --
                                                     ==========================

The effective income tax rate varied from the federal statutory tax rate for the
years ended December 31 as follows:


                                                               1996       1995
                                                            -------------------

Statutory rate:                                                34.0%      34.0%
  State income taxes - net of federal income tax
                              benefit                           4.0        4.0
 Valuation allowance on net deferred tax benefits             (38.0)     (38.0)
Tax rate                                                         --%        --%
                                                            ===================

At December 31, 1996, the Company has available approximately $23,961,000 in net
operating  loss and tax  credit  carryforwards  which  expire at  varying  dates
through  2011.  These  carryforwards  may be  significantly  limited  under  the
Internal  Revenue  Code as a result  of  ownership  changes  experienced  by the
Company.


                                      F-14

<PAGE>


                              TELEPAD CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


5.   COMMITMENTS

The Company's arrangement with Sanmina provides for ordering product four months
in advance of production to accommodate  long lead items.  At December 31, 1996,
the Company had approximately  $3,500,000 in outstanding  purchase orders issued
to Sanmina.  This includes  TelePad 3 computers  based on a 586  microprocessor,
which  is being  developed  and  tested  and is  expected  to be  available  for
production in the second quarter of 1997.

The Company  leases  office  space in Herndon,  Virginia  under a  noncancelable
operating lease which contains a renewal option. Total rent expense was $135,000
and  $127,000  for the years ended  December  31,  1996 and 1995,  respectively.
Future minimum lease payments under the  non-cancelable  operating  lease are as
follows:


                       1997                  $    165,273
                       1998                       170,231
                       1999                        86,373
                                            -------------
                      Total                  $    421,877
                                            =============

The Company has entered  into  employment  agreements  with two of its  officers
providing  base salaries of $150,000 to $250,000.  The base salaries are subject
to increase upon approval by the Board of Directors.

6.   EMPLOYEE BENEFIT PLAN

During 1994, the Company established a defined contribution retirement plan (the
"Plan")  covering all  employees who have at least six months of service and are
21 years of age or older.  Employees  may elect to contribute up to 15% of their
annual  compensation  subject to limits  detailed in the Internal  Revenue Code.
Each year the Company may make a discretionary  contribution to the Plan. During
the years  ended  December  31,  1996 and  1995,  the  Company  did not make any
contributions to the Plan.

7.   SUBSEQUENT EVENTS

On January 27, 1997, the Company,  entered into a Stock Purchase  Agreement (the
"Stock  Purchase  Agreement")  with  TelePad   Acquisition,   Inc.,  a  Delaware
corporation and wholly-owned subsidiary of the Company ("Acquisition"),  Federal
Computer Corporation,  a Virginia corporation ("Federal Computer"), and Hartland
Group, LLC, a Virginia limited liability company (the "LLC"),  pursuant to which
Acquisition  agreed  to  acquire  from LLC all  Federal  Computer's  outstanding
capital stock (the "Shares").  The purchase price is (i) $10 million, subject to
a  post-closing  net worth  adjustment,  consisting  of $5.3  million in cash at
closing  and a  six-month,  $4.7  million  note,  bearing  interest at 8.5% (the
"Note"),  secured by an irrevocable  $4.7 million letter of credit,  plus (ii) a
future payment (the  "Additional  Consideration"),  based on Federal  Computer's
future  performance  or a present value  formula,  secured by an  irrevocable $5
million  letter of  credit.  The  Company  would also be  required  to invest in
Federal  Computer $5 million at closing and an  additional  $5 million 12 months
after closing (the "Investment Obligation").  The foregoing obligation will also
be  secured by a pledge of all of the  capital  stock of  Federal  Computer  and
Acquisition.  The consummation of the Stock Purchase Agreement is subject to the
satisfaction  of certain  conditions,  including  that the Company obtain equity
financing  of at least $15 million and within 10 days  thereof,  but in no event
later than August 1, 1997, elect to purchase the Shares.  If the purchase is not
consummated by August 1, 1997, the Stock Purchase Agreement may be terminated by
any party.


                                      F-15