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, 1997

[_]         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. [_]


<PAGE>


            The issuer's  revenues  for the fiscal year ended  December 31, 1997
were $3,592,577.

            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 23, 1998, was  approximately
$9,200,000.

         As of March 23,  1998,  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             12,065,624 shares, $0.01 par value
         Class B Common Stock             none

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

            The following documents are incorporated by reference herein: None.


<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.  Since 1996 the Company has enhanced the
TelePad 3 to remain within the competitive range with respect to technology, but
more emphasis is being placed on applying the Company's knowledge of field force
automation  by  offering  integrated  solutions  to  potential  customers.  Such
solutions include reselling hardware from  manufacturers  other than the Company
where appropriate and offering software, systems integration, and services.



                                       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.




                                       4
<PAGE>



Company 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 was powered by IBM's Blue Lightning microprocessor (based on
Intel's 486 microprocessor technology) running at 66 Mhz until 1997 when the 486
microprocessor  was  replaced  by a Cyrix  586  microprocessor.  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. See "--  Manufacturing  and Supply." and  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

         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.  In 1997,  the  Company
replaced   the  Blue   Lightning   microprocessor   with  a   586-class   32-bit
microprocessor upgrade for the TelePad 3.



                                       5
<PAGE>



SERVICES

         The  Company  offers  a  range  of  consulting,   systems  integration,
programming  and  customer  support  services  focused  primarily 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
1,510 units were built by Sanmina from June 1996 through December 1997.



                                       7
<PAGE>



         Assembly and Testing

         The Company  has  historically  purchased  standard  configurations  of
TelePad 3 computers form its contract manufacturers. In 1997, the Company placed
more emphasis on offering customers non-standard  configurations.  This resulted
in a mismatch with the standard configurations being purchased under outstanding
purchase orders with Sanmina, the Company's contract  manufacturer.  In order to
improve the match between configurations  purchased and configurations requested
by customers  and to minimize the results of  forecasting  errors caused by long
lead times of  component  parts,  the Company is shifting  the assembly and test
functions from Sanmina to its Herndon facilities. This transition is expected to
provide more  flexibility  and to increase cost  effectiveness  in producing the
specific  configurations  requested by customers and to minimize  costs incurred
when forecasted production runs do not match changing customer requirements.

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.



                                       8
<PAGE>



         The Company has a limited  number of R&D  employees.  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."

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. The Company also employs  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 1997,  three customers  accounted for  approximately  52% of the
Company's total revenues.  Three customers  accounted for  approximately  53% of
total revenue during 1996.

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.



                                       9
<PAGE>



         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.

EMPLOYEES

         At March 14, 1998,  the Company had a total of 29 full-time  employees,
consisting of 3 engineers,  6 employees in the consulting  practice,  10 finance
and administrative personnel, 6 employees in customer and technical support, and
4 sales and marketing personnel. From time to time the Company employs part time
employees  and had two  part-time  employees 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 a material adverse effect on the Company.


                                       10
<PAGE>


         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  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 29,  1998 the  Company  executed a letter of intent with L&E
Mobile Computer  Mounts,  Inc.  ("L&E")  pursuant to which the Company agreed in
principle to acquire all of L&E's  outstanding  capital stock on or before March
31,  1998 for a purchase  price of $2 million,  plus an earn-out  based on L&E's
post-closing  performance and an aggregate $1 million additional investment over
the next three years.  The consummation of the transaction is subject to several
conditions,  including the execution of  definitive  agreements  and the Company
obtaining   the   requisite   financing.   L&E  is  a  hardware   integrator  of
vehicle-mounted  communications  equipment,  with a significant  presence in the
public  utility  sector.  There  can be no  assurance  that  the  conditions  to
consummation of the transaction will be satisfied.




                                       11
<PAGE>



ITEM 2.    DESCRIPTION OF PROPERTY.

PROPERTIES

         The Company's  offices are located at 380 Herndon Parkway,  Suite 1900,
Herndon,  Virginia 20170. The Company leases, until June 30, 1999, approximately
19,155 square feet of office space on a single floor of an office building.  The
lease  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.  The rent will 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.





                                       12
<PAGE>



                                     PART II


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

           As of March 23, 1998,  the Company had  approximately  100 holders of
record and  approximately  2,000 beneficial  holders of its Class A Common Stock
and no 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.

           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 January,  1996
through March 28, 1996,  and by Nasdaq from March 29, 1996 through  December 31,
1996 and are  indicated  below.  Such  prices  are  interdealer  prices  without
markups,  markdowns or  commissions,  and may not necessarily  represent  actual
transactions.

                                      1997                         1996
                                   Sales Price               High        Low
            Quarter Ended       High         Low              Ask        Bid

            March 31            $  5.125    $  1.625         $  5.000   $  0.750
            June 30             $  2.750    $  1.000         $  5.000   $  3.188
            September 30        $  2.063    $  1.000         $  5.250   $  4.031
            December 31         $  1.375    $  0.313         $  5.375   $  4.000

           On February  27,  1998,  the Company was notified by The Nasdaq Stock
Market,  Inc.  that the market  price for Class A Common Stock does not meet the
quantitative  maintenance  requirements for minimum bid price and the Company is
therefore  subject to being  delisted  from the NASDAQ  SmallCap  Market if this
situation is not remedied by May 28,  1998,  which time may be extended  through
the review process.

           On  February  24,  1998,   the  directors  of  the  Company   adopted
resolutions  proposing  to  recommend  to the  Company's  stockholders  that the
stockholders   authorize   an  Amendment  to  the   Company's   Certificate   of
Incorporation  to effect a 1 for 10 reverse stock split of the Company's  issued
shares of Common Stock (the "Reverse Split"). If the Reverse Split is authorized
by the  stockholders at the annual meeting of  stockholders  scheduled on May 4,
1998,  management  expects that the share price of the Company's  Class A Common
Stock will trade above the one dollar  maintenance price level,  however,  there
can be no  assurance as to the  approval of the Reverse  Split by the  Company's
stockholders  or, if the  Reverse  Split is  approved,  the effect on the market
price of the Class A Common Stock.

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



                                       13
<PAGE>



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

RESULTS OF OPERATIONS

         TelePad products revenue increased  approximately 66% in the year ended
December 31, 1997 over 1996,  primarily  as a result of an  increased  volume of
TelePad 3 computer  sales.  Although  the Company has  developed  and  currently
offers the TelePad 3 computer with a 586  microprocessor,  with  characteristics
such as  ruggedness  and  flexibility  that make it well suited for its intended
market,   customer  perceptions  relative  to  the  486  microprocessor  in  the
predecessor  TelePad 3 versus Pentium based laptops and the respective  relative
pricing have had a negative affect on sales.

         The Company  continues  to enhance  the TelePad 3 to remain  within the
competitive range with respect to technology,  but more emphasis is being placed
on applying the Company's  knowledge of field force automation by offering total
integrated  solutions to potential  customers.  Such solutions include reselling
hardware from  manufacturers  other than the  Company's  and offering  software,
systems integration, and services.

         The gross margins from TelePad products sold in 1997 and 1996 continued
to be constrained by the  relatively  high cost of parts  purchased by the prior
manufacturer, but not used earlier due to financial and technical delays, and by
competitive pricing pressure.  The cost of TelePad products includes a charge of
$805,000 to  recognize  an erosion in  inventory  value  caused by this  pricing
pressure and product  obsolescence caused by the rapid introduction of more cost
effective  technology.  The cost of TelePad  products  also includes a charge of
$156,000 to  recognize  the cost of  replacing  TelePad 3 batteries in inventory
that have failed to meet product  specifications and $37,000 to write off excess
486  microprocessors  resulting  from  the  shift  to  the  586  microprocessor.
Commensurate  with the write  down of  inventory,  a  reserve  of  $654,000  was
established in 1997 to recognize the loss of inventory  value and obsolete parts
for which the Company has purchase obligations outstanding with Sanmina.

         The cost of TelePad  products sold in 1996 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.

         Revenue from service  contracts  increased  10% in 1997 over 1996.  The
increase  in  service  contract  revenue in 1997 is  primarily  the result of an
increase in  consulting  services to the  wireless  communications  market.  The
Company's  stated  objective  is to shift its business  strategy  from a primary
concentration  on TelePad  computer  hardware  to a strategy of  broadening  the
services  offered to include the  delivery of total  integrated  solutions.  The
primary target market is workforce administration and field service dispatch and
the solutions include mobile client hardware, software, systems integration, and
other services.

         Research and development  expenses  declined $573,000 in 1997 from 1996
expenditures of $1,516,000.  This 38% decrease in R&D spending was due primarily
to a shift  from  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 to the  development  of the 586  microprocessor  and  work on
TelePad 3 modules in 1997.



                                       14
<PAGE>



         Selling,  general and  administrative  expenses in 1997 were $4,407,000
compared to $4,352,000 for the same period in 1996.  Although aggregate selling,
general and  administrative  expenses  were  approximately  the same in 1997 and
1996,  there  was more  emphasis  on sales in 1997,  but the  increased  selling
expenses were generally offset by lower administrative expenses.

         Interest   income   declined  by  $232,000   from  1996  as  short-term
investments were reduced.

         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 (as defined  below).  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 in April 1996.

         The Company is monitoring and considering possible  implications of the
year 2000 problem,  but to date has not encountered any issues that would have a
material adverse effect on the operations or financial condition of the Company.

LIQUIDITY AND CAPITAL RESOURCES

         In the  year  ended  December  31,  1997,  net cash  used in  operating
activities  was  $3,575,000,  primarily  due to the net loss  incurred  in 1997.
Accounts  receivable  increased  by $787,000 in the current  period based on the
combination  of increased  sales and extended  payment terms on one  significant
sale. Inventory  reductions,  due primarily to sales in the period,  contributed
$1,479,000 to cash.  Advance payments to Sanmina in the current period increased
$1,286,000,  primarily  as a result of advance  payments  made to the  Company's
contract manufacturer (Sanmina) against open purchase orders for inventory.  The
advance  payments  were made  because the  original  TelePad 3 product  delivery
schedule  was  significantly  delayed  by  the  586  microprocessor  development
schedule.  The advance  payments  were funded by a  $2,000,000  letter of credit
previously issued to Sanmina to facilitate production.  The remaining balance on
the letter of credit was returned to cash at its expiration.

         In September  1997,  the Company  purchased  20% of the common stock of
Intellibit  Corporation,  a Virginia corporation,  for $200,000 in cash, with an
option  to  increase  the  investment  to 80%  subject  to  certain  conditions.
Intellibit   Corporation  is  a  privately  held  developer  of  digital  signal
processing products.

         At December  31,  1997,  the Company had  approximately  $1,900,000  in
outstanding  purchase orders issued to Sanmina.  The outstanding purchase orders
consist  primarily of kits of TelePad 3 computers  which will be  assembled  and
tested at the Company's facility in Herndon, Virginia.  Approximately $1,286,000
of the  $1,900,000  commitment  will be funded  from  advance  payments  made to
Sanmina in 1997.  Because the specific  configurations of the TelePad 3 computer
included in this outstanding  commitment are nearing the end of a product cycle,
the  Company  reserved  $654,000  in 1997 to  recognize  the loss of  value  and
obsolete parts on the outstanding purchase orders.



                                       15
<PAGE>



         On January 29,  1998 the  Company  executed a letter of intent with L&E
Mobile Computer  Mounts,  Inc.  ("L&E")  pursuant to which the Company agreed in
principle to acquire all of L&E's  outstanding  capital stock on or before March
31,  1998 for a purchase  price of $2 million,  plus an earn-out  based on L&E's
post-closing  performance and an aggregate $1 million additional investment over
the next three years.  The consummation of the transaction is subject to several
conditions,  including the execution of  definitive  agreements  and the Company
obtaining   the   requisite   financing.   L&E  is  a  hardware   integrator  of
vehicle-mounted  communications  equipment,  with a significant  presence in the
public utility sector. The Company is seeking additional financing to consummate
this transaction,  but there can be no assurance as to the availability or terms
of any required additional financing.

         The  Company  believes  its  existing  capital  resources,   consisting
primarily of cash, short-term investments and funds from operations will provide
sufficient  capital for at least the next 12 months.  This  belief is  dependent
upon the TelePad 3 computer  being  competitive  in the market and the Company's
ability to sell the existing  TelePad 3 inventory and inventory  resulting  from
purchase  commitments,  failure of which could have a material adverse effect on
the financial condition of the Company. In the event that the Company's internal
estimates  relating to its  anticipated  expenditures  and funds from operations
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 at 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,  possible
delisting of securities by Nasdaq, the risk of low-priced stock, 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.



                                       16
<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        51    Chairman of the Board of Directors and
                               Chief Executive Officer
Ronald C. Oklewicz       51    President, Chief Operating Officer, and Director
John P. Diesel           71    Director
Sydney H. Dankman        80    Director
Alan B. Salisbury        61    Director
E. Donald Shapiro        66    Director
John M. Toups            72    Director
Robert D. Russell        58    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 July 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 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.



                                       17
<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,  Thermatrix,
Inc., Halifax Corporation and Government Technology Services, Inc.

         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 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, 1997 were timely made,
except for certain reports filed by Messrs. Dankman, Shapiro and Toups.



                                       18
<PAGE>




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, 1997 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, 1997.

                           SUMMARY COMPENSATION TABLE

                                                              Long-term
                                                             Compensation
                                    Annual Compensation         Awards
                               ----------------------------  ------------
                                               Other Annual
                                      Salary   Compensation   Options
  Name and Principal Position  Year    ($)          ($)         (#)
  ---------------------------  ----  --------  ------------  ------------


  Donald W. Barrett (1)        1997  $250,000       $ 0      125,000(3)
    Chief Executive Officer    1996  $177,083       $ 0      400,000(4)



  Ronald C. Oklewicz (2)       1997  $150,000       $ 0       60,000(5)
    President and Chief        1996  $150,000     $35,000
    Operating Officer          1995  $123,885       $ 0      200,000(6)



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

(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 .

(3)  Represents  options  to  purchase  shares  of  Class A  Common  Stock at an
     exercise price of $0.376 per share (the average of the closing  highest and
     lowest sales  prices of the Common  Stock on the date of grant),  with such
     options becoming exercisable on December 2, 2003.

(4)  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  200,000 of
     such options  being  currently  exercisable  and 200,000  options  becoming
     exercisable on December 31, 1998.



                                       19
<PAGE>



(5)  Represents  options  to  purchase  shares  of  Class A  Common  Stock at an
     exercise price of $0.376 per share (the average of the closing  highest and
     lowest sales  prices of the Common  Stock on the date of grant),  with such
     options becoming exercisable on December 2, 2003.

(6)  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 Last Fiscal Year

         Shown below is  information  concerning  stock option grants of Class A
Common Stock  awarded to the Named  Officers  during the  Company's  1997 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 1997     ($/sh) (2)
------------------  ------------------  --------------------  -----------   ----------
<S>                     <C>                    <C>              <C>         <C>   <C>
Donald W. Barrett       125,000                33.9%            $0.376      12/02/07
Ronald C. Oklewicz       60,000                16.3%            $0.376      12/02/07
</TABLE>

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

(1)  The options are incentive 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.

         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 1997 and the number and
value of unexercised options at December 31, 1997:

<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 1997
                                                Unexercisable        Exercisable/
                                                                   Unexercisable (1)
------------------  -----------  --------  ----------------------  -----------------
<S>                     <C>         <C>        <C>     <C>             <C>
Donald W. Barrett       0           0          200,000/325,000         $0/$7,750
Ronald C. Oklewicz      0           0          380,000/60,000        $9,720/$3,720
</TABLE>

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

                                       20
<PAGE>



(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, 1997, of $0.438 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. Mr. Barrett's salary has been reduced
by $22,500  commencing  January 1, 1998 in consideration  for an award of 45,000
shares of Class A Common  Stock.  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.

         The Company has entered  into an  employment  agreement  with Ronald C.
Oklewicz,  dated as of January 1, 1998,  for a term ending  December  31,  1998.
Pursuant to the agreement,  Mr. Oklewicz serves as President and Chief Operating
Officer of the Company at a salary of $130,000 per annum. The agreement provides
that Mr.  Oklewicz is entitled to receive  40,000 shares of Class A Common Stock
in 1998 and a bonus 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,
the exercise period of 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),  was extended  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  until the
expiration   of  the  term  of  the   agreement.   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.



                                       21
<PAGE>



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

           The  following  table  sets  forth,  as of March  19,  1998,  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:

    Name and Address of                           Amount and      Percent of
   Beneficial Stockholder                         Nature of      Outstanding
                                                  Beneficial   Shares Owned (2)
                                                  Ownership
                                                    (1)(2)
---------------------------------------------   ------------   ----------------

Donald W. Barrett                                 245,000(3)         2.1%
380 Herndon Parkway Herndon, VA  20170
Sydney H. Dankman                                 225,148(4)         1.9%
380 Herndon Parkway Herndon, VA  20170
Ronald C. Oklewicz                                451,219(5)         3.8%
380 Herndon Parkway Herndon, VA  20170
John M. Toups                                     129,445(6)         1.1%
380 Herndon Parkway Herndon, VA  20170
John P. Diesel                                    262,862(7)         2.2%
380 Herndon Parkway Herndon, VA  20170
E. Donald Shapiro                                 105,000(8)          *
57 Worth Street
New York, NY 10013
Alan B. Salisbury                                 105,000(9)          *
380 Herndon Parkway Herndon, VA  20170
All current officers and directors as a group   1,542,007(10)       11.5%
 (8 persons)

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

*    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.


                                       22
<PAGE>



(2)  A person is deemed to be the  beneficial  owner of  securities  that can be
     acquired  by such  person  within  60 days  from  March  19,  1998 upon the
     exercise  of  options  or  warrants.  Each  beneficial  owner's  percentage
     ownership is  determined by assuming that options or warrants that are held
     by such  person ( but not  those  held by any other  person)  and which are
     exercisable within 60 days from March 19, 1998 have been exercised.  Unless
     otherwise  noted,  the Company believes that all persons named in the table
     have sole voting and investment  power with respect to all shares of Common
     Stock beneficially owned by them.

(3)  Includes  200,000  shares of Class A Common  Stock  underlying  immediately
     exercisable options.  Does not include 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.

(4)  Includes  94,862  shares  of Class A Common  Stock  underlying  immediately
     exercisable stock options and Class C Warrants.

(5)  Includes  380,000  shares of Class A Common  Stock  underlying  immediately
     exercisable  stock  options.  Also includes  3,438 shares of Class A Common
     Stock underlying immediately exercisable Class C Warrants and 17,781 shares
     of Class A Common Stock jointly owned by Mr. Oklewicz and his spouse.

(6)  Includes  84,445  shares  of Class A Common  Stock  underlying  immediately
     exercisable options.

(7)  Includes  64,445  shares  of Class A Common  Stock  underlying  immediately
     exercisable  options.  Also includes 150,917 shares of Class A Common Stock
     underlying  immediately  exercisable  Class A, Class B and Class C Warrants
     jointly owned by Mr. Diesel and his spouse.

(8)  Includes  60,000  shares  of Class A Common  Stock  underlying  immediately
     exercisable options.

(9)  Includes  60,000  shares  of Class A Common  Stock  underlying  immediately
     exercisable options.

(10) Includes  1,116,440 shares of Class A Common Stock  underlying  immediately
     exercisable stock options and Class A, Class B and Class C Warrants.


ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         None.



                                       23

<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)).

  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



                                       24
<PAGE>



              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.)

  10.14       1994 Employee Stock Purchase Plan.  (Incorporated herein
              by reference to

                                       25
<PAGE>


              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)).

  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)).

                                       26
<PAGE>



  23.1*       Consent of Ernst & Young LLP, independent auditors.

  27.1*       Financial Data Schedule

-----------------------------------------------
*             Filed herewith


                                       27
<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  30, 1998                     /S/ DONALD W. BARRETT
                                             ---------------------
                                             Donald W. Barrett
                                             Chairman and Chief Executive
                                             Officer



Date:    March  30, 1998                     /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 25, 1998                           /S/ SYDNEY H. DANKMAN
                                                  ---------------------------
                                                  Sydney H. Dankman, Director


Date:    March 26, 1998                           /S/ JOHN P. DIESEL
                                                  ---------------------------
                                                  John P. Diesel, Director


Date:    March 30, 1998                           /s/ RONALD C. OKLEWICZ
                                                  ---------------------------
                                                  Ronald C. Oklewicz, Director


Date:    March 30, 1998                           /s/ ALAN B. SALISBURY
                                                  ---------------------------
                                                  Alan B. Salisbury, Director


Date:    March     , 1998
                                                  ---------------------------
                                                  E. Donald Shapiro, Director


Date:    March 25, 1998                           /S/ JOHN M. TOUPS
                                                  ---------------------------
                                                  John M. Toups, Director


<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,  1997  and  1996,  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, 1997 and 1996,  and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.

As discussed in Note 8 to the  financial  statements,  the  Company's  recurring
losses from operations and negative operating cash flows raise substantial doubt
about its ability to continue as a going concern. Management's plans as to these
matters are also  described in Note 8. The  financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.


                                                           /s/ Ernst & Young LLP

Vienna, Virginia
March 6, 1998

                                      F-2
<PAGE>



                               TELEPAD CORPORATION

                                 BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                           1997            1996
                                                                       ------------    ------------
<S>                                                                    <C>             <C>
ASSETS
Current assets:
     Cash and cash equivalents                                         $  1,588,790    $  1,418,770
     Short-term investments                                                    --         4,078,679

     Restricted cash (Note 1)                                                  --         2,000,000

     Accounts receivable, less allowance of $88,000
        at December 31, 1997 and $107,000 at December 31, 1996            1,419,231         668,922
     Inventory                                                            1,174,507       3,474,782
     Advance to Sanmina (Note 1)                                          1,286,284            --
     Other current assets                                                   184,133         243,988
                                                                       ------------    ------------
Total current assets                                                      5,652,945      11,885,141
Furniture and equipment:
     Office furniture and equipment                                         203,140         197,932
     Computer equipment                                                     668,378         880,656
                                                                       ------------    ------------
                                                                            871,518       1,078,588
     Less accumulated depreciation                                         (489,895)       (505,639)
                                                                       ------------    ------------
     Net furniture and equipment                                            381,623         572,949
Investment in Intellibit (Note 1)                                           200,000            --
Deposits and other assets                                                    23,591          27,689
                                                                       ============    ============
Total assets                                                           $  6,258,159    $ 12,485,779
                                                                       ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued expenses                             $  2,309,680    $  1,991,805
     Deferred revenue                                                        13,601          34,643
                                                                       ------------    ------------
Total current liabilities                                                 2,323,281       2,026,448

Commitments

Stockholders' equity:
     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,
             11,755,624 and 11,558,905 shares issued and outstanding
             at December 31,1997 and 1996, respectively                     117,556         115,589
          Class B common stock, 593,063 shares designated,
             no shares and 150,000 shares issued and outstanding
             at December 31,1997 and 1996, respectively                        --             1,500
     Additional paid-in capital                                          39,283,613      39,250,820
     Accumulated deficit                                                (35,466,291)    (28,908,578)
                                                                       ------------    ------------
Total stockholders' equity                                                3,934,878      10,459,331
                                                                       ------------    ------------
Total liabilities and stockholders' equity                             $  6,258,159    $ 12,485,779
                                                                       ============    ============
</TABLE>

See accompanying notes

                                      F-3
<PAGE>

                               TELEPAD CORPORATION

                            STATEMENTS OF OPERATIONS


                                               YEARS ENDED DECEMBER 31,
                                                 1997            1996
                                             ------------    ------------


Revenues:
    TelePad products                         $  3,348,398    $  2,017,811
    Service contracts                             244,179         222,293
                                             ------------    ------------
Total revenues                                  3,592,577       2,240,104

Costs and expenses:
    Cost of goods sold - Telepad products       4,282,929       2,128,342
    Cost of goods sold - service contracts        162,327         101,698
    Loss on inventory purchase commitment         654,468            --
    Costs related to manufacturing startup           --           317,607
    Research and development                      942,793       1,515,933
    Selling, general and administrative         4,406,679       4,351,510
                                             ------------    ------------
Total costs and expenses                       10,449,196       8,415,090
                                             ------------    ------------

Loss from operations                           (6,856,619)     (6,174,986)

Interest income                                   310,442         542,447
Interest expense                                     (214)       (253,197)
Amortization of debt issue costs                     --          (118,302)
Other expenses
                                                  (11,322)        (85,644)
                                             ------------    ------------

Net loss                                     $ (6,557,713)   $ (6,089,682)
                                             ============    ============

Net loss per share                           $      (0.56)   $      (0.62)
                                             ============    ============

Weighted average shares outstanding            11,745,551       9,856,500
                                             ============    ============

See accompanying notes


                                      F-4

<PAGE>



                               TELEPAD CORPORATION

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                     Class A                      Class B
                                  Common Stock                 Common Stock             Additional                       Total
                          -------------------------------------------------------        Paid-In       Accumulated    Stockholders'
                            Shares         Amount          Shares         Amount         Capital        Deficit      Equity(Deficit)
                          ----------------------------------------------------------------------------------------------------------
<S>                        <C>         <C>                 <C>        <C>             <C>            <C>             <C>
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


Exercise of stock options       --             --           37,500             375             125           --               500

Conversion of Class B
     common stock            187,500          1,875       (187,500)         (1,875)           --             --              --

Exercise of common stock
     warrants                  9,219             92           --              --            32,668           --            32,760
Net loss                        --             --             --              --              --       (6,557,713)     (6,557,713)


                          -------------------------------------------------------------------------------------------------------
Balance at December 31,
 1997                     11,755,624   $    117,556           --              --      $ 39,283,613   $(35,466,291)   $  3,934,878
                          =======================================================================================================
</TABLE>



See accompanying notes

                                      F-5
<PAGE>



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

                                                        YEARS ENDED DECEMBER 31,
                                                          1997            1996
                                                      ------------    ------------
<S>                                                   <C>             <C>
OPERATING ACTIVITIES
Net loss                                              $ (6,557,713)   $ (6,089,682)
Adjustments to reconcile net loss to net cash
  used in operating activities:
     Depreciation and amortization                         225,703         217,801
     Amortization of debt discount                            --           118,302
     Provision for loss on accounts receivable              36,478           7,169
     Provision for loss of inventory value                 821,245            --
     Loss on inventory purchase commitment                 654,468            --
     Changes in assets and liabilities:
        Restricted cash                                  2,000,000      (2,000,000)
        Accounts receivable                               (786,787)       (203,367)
        Inventory                                        1,479,030      (3,071,049)
        Advance to Sanmina                              (1,286,284)           --
        Other current assets                                59,855        (147,742)
        Deposits and other assets                            4,098          (6,628)
        Accounts payable and accrued expenses             (203,763)       (829,936)
        Deferred revenue                                   (21,042)         16,925
                                                      ------------    ------------
Net cash used in operating activities                   (3,574,712)    (11,988,207)

INVESTING ACTIVITIES
Purchase of furniture and equipment                       (167,207)       (433,160)
Investment in Intellibit Corporation                      (200,000)           --
Purchase of short-term investments                            --       (14,878,679)
Sales of short-term investments                          4,078,679      10,800,000
                                                      ------------    ------------
Net cash provided by (used in) investing activities      3,711,472      (4,511,839)

FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock             33,260      20,660,868
Proceeds from notes payable
                                                              --           750,000
Repayment of notes payable                                    --        (4,750,000)
                                                      ------------    ------------
Net cash provided by financing activities                   33,260      16,660,868

                                                      ------------    ------------
Net increase in cash and cash equivalents                  170,020         160,822
Cash and cash equivalents, beginning of year             1,418,770       1,257,948
                                                      ============    ============
Cash and cash equivalents, end of year                $  1,588,790    $  1,418,770
                                                      ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Actual cash payments for interest                     $        214    $    418,685
                                                      ============    ============
</TABLE>

See accompanying notes

                                      F-6

<PAGE>


                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1997


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.

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.  The
business  strategy is dependent upon the TelePad 3 computer being competitive in
the market and the  Company's  ability to sell the existing  TelePad 3 inventory
and inventory  resulting  from purchase  commitments.  The Company  continues to
enhance the TelePad 3 to remain  within the  competitive  range with  respect to
technology,  but more  emphasis  is  being  placed  on  applying  the  Company's
knowledge of field force  automation by offering total  integrated  solutions to
potential   customers.   Such   solutions   include   reselling   hardware  from
manufacturers   other  than  the  Company's  and  offering   software,   systems
integration and 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 52% and 53% of total revenue for the
years ended December 31, 1997 and 1996, 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  were stated at cost,  which as of December 31, 1996
approximated  market  value,  and were  invested in a  short-term,  fixed income
securities fund.

                                      F-7
<PAGE>



                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Restricted Cash and Advance to Sanmina

In order to secure credit for production of the TelePad 3 computer,  the Company
provided a letter of credit to Sanmina in the amount of $2,000,000.  This letter
of credit was secured by $2,000,000,  which was invested in an  interest-bearing
account  and was  pledged  as  security.  In June 1997 the  letter of credit was
amended to allow Sanmina to draw upon the letter of credit as an advance payment
against future invoicing of finished and semifinished product. Sanmina agreed to
return the letter of credit to the Company for  cancellation  upon completion of
the advance  payments.  The Company  advanced  $1,652,784 to Sanmina in July and
September and the letter of credit  expired  September 30, 1997. On December 31,
1997 the advance to Sanmina was reduced by $366,500  upon  receipt of  inventory
from  Sanmina,  leaving  a  balance  on the  advance  of  $1,286,284,  which  is
unsecured.

         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 or
write-offs  as  inventory  is  identified  as being  obsolete,  slow-moving,  or
unsaleable.

         Investment in Intellibit

In September  1997, the Company  purchased 20% of the common stock of Intellibit
Corporation,  a Virginia  corporation,  for $200,000 in cash,  with an option to
increase the  investment  to 80% subject to certain  conditions.  The Company is
accounting for this investment using the cost method.  Intellibit Corporation is
a privately held developer of digital signal processing products.

         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

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128,  "Earnings  per Share" which  established  new  standards for computing and
presenting net income per share  information.  As required,  the Company adopted
the  provisions  of  Statement  128 in its  1997  financial  statements  and has
restated all prior year net loss per share information. Basic net loss per share
was  determined  by dividing net loss by the weighted  average  number of common
shares  outstanding during each year. Diluted net loss per share excludes common
equivalent  shares,  unexercised  stock options and warrants as the  computation
would not be dilutive.  A  reconciliation  of the net loss  available for common
shareholders  and number of shares used in computing  basic and diluted net loss
per share is in Note 7.

                                      F-8
<PAGE>



                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Debt Issue Costs

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

         Stock-Based Compensation

During 1996, the Company adopted Statement of Financial Accounting Standards No.
123,  "Accounting for Stock-Based  Compensation"  ("SFAS No. 123"). 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 did not impact the
financial position or results of operations of the Company.

         Recently Issued Accounting Standards

In June 1997, FASB issued Statement No. 130,  "Reporting  Comprehensive  Income"
which is  effective  for fiscal years  beginning  after  December 15, 1997.  The
Statement  establishes  standards  for  reporting  and display of  comprehensive
income and its  components  in  financial  statements.  The  Company  will adopt
Statement  No. 130 in the first  quarter of 1998 and will provide the  financial
statement  disclosures as required by the Statement.  The application of the new
rules will not have an impact on the Company's  financial position or results of
operations.

In June 1997, FASB issued Statement No. 131,  "Disclosures  about Segments of an
Enterprise  and  Related  Information"  which  is  effective  for  fiscal  years
beginning  after  December  15,  1997.  The  Statement  changes  the way  public
companies  report segment  information in annual  financial  statements and also
requires  those  companies to report  selected  segment  information  in interim
financial statements to shareholders.  The Statement also established  standards
for related disclosures about products and services, geographic areas, and major
customers.  The  Company  will  adopt  Statement  No. 131 in 1998  resulting  in
additional segment disclosures as required by the Statement.  The application of
the new rules will not have an impact on the  Company's  financial  position  or
results of operations.

2.  FINANCING ARRANGEMENTS

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.


                                       F-9

<PAGE>


                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



2.  FINANCING ARRANGEMENTS (CONTINUED)

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

         PREFERRED STOCK

The Company's  certificate  of  incorporation  provides for 5,000,000  shares of
preferred stock,  $.01 par value that 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.

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.

                                      F-10

<PAGE>


                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


3.  STOCKHOLDERS' EQUITY (CONTINUED)

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

At December 31, 1997, 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, 1997, no shares had been purchased under the SPP.


                                      F-11
<PAGE>




                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


3.  STOCKHOLDERS' EQUITY (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:

                                           1997                     1996

                                              Weighted-                Weighted-
                                               Average                 Average
                                              Exercise                 Exercise
                                     Shares     Price         Shares     Price
                                   ---------------------------------------------

Outstanding at beginning of year   1,755,516    $3.99       1,245,638    $3.58

Options granted                      369,000    $0.48         956,000    $4.46

Options exercised                    (37,500)   $0.01        (134,005)   $0.35

Options canceled or expired         (174,375)   $5.16        (312,117)   $5.39

                                  ----------               ----------
Outstanding at end of year         1,912,641    $3.28       1,755,516    $3.99
                                  ==========               ==========

Options exercisable at year end      828,389    $3.79         797,458    $2.82

The options  outstanding at December 31, 1997 range in price from $.33 per share
to $7.88 per share and have a weighted average remaining contractual life of 4.1
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 1997 and 1996 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 1997 and 1996 would have been  approximately $7.2
million,  or $.62 per share, and $6.7 million and $.68 per share,  respectively.
The fair value of the options granted during 1997 and 1996 are estimated as $.28
and $1.30 per share, respectively,  on the date of grant using the Black-Scholes
option-pricing  model  with  the  following  assumptions:   dividend  yield  0%,
volatility  of 122.8% for 1997 and 37.9% for 1996,  risk-free  interest  rate of
5.58% for 1997 and 6.12% for 1996, and expected life of 3 years.

                                      F-12
<PAGE>


                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



3.  STOCKHOLDERS' EQUITY (CONTINUED)

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

                                                     1997               1996
                                                 -----------        -----------

        Outstanding at beginning of year          30,263,568          7,291,730
        Issued                                          --           23,000,000
        Exercised                                     (9,219)           (28,162)
                                                 ===========        ===========
        Outstanding at end of year                30,254,349         30,263,568
                                                 ===========        ===========

All warrants outstanding as of December 31, 1997, are at exercise prices ranging
from $3.50 to $6.81 per share.

4.  INCOME TAXES

There was no provision  for income  taxes for the years ended  December 31, 1997
and 1996 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:

                                                       1997            1996
                                                   ------------    ------------

Deferred tax liabilities:
  Depreciation and amortization                    $     29,000    $     37,000

Deferred tax assets:
  Compensation expenses related to options              322,000         322,000
  Net operating loss carryforward                    11,909,000       9,105,000
  Inventory valuation                                   687,000          72,000
  Other                                                  94,000         121,000
                                                   ------------    ------------
Total deferred tax assets                            13,012,000       9,620,000
                                                   ------------    ------------

Net deferred tax assets before valuation allowance   12,983,000       9,583,000
Valuation allowance                                 (12,983,000)     (9,583,000)
                                                   ============    ============
Net deferred tax assets                            $       --      $       --
                                                   ============    ============

                                      F-13
<PAGE>



                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



4.  INCOME TAXES (CONTINUED)

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

                                                           1997        1996
                                                       -----------  ---------

   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, 1997, the Company has available approximately $31,340,000 in net
operating  loss and tax  credit  carryforwards  which  expire at  varying  dates
through  2012.  These  carryforwards  may be  significantly  limited  under  the
Internal  Revenue  Code as a result  of  ownership  changes  experienced  by the
Company.

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, 1997,
the Company had approximately  $1,900,000 in outstanding  purchase orders issued
to  Sanmina.  Because  the  specific  configurations  of the  TelePad 3 computer
included in this outstanding  commitment are nearing the end of a product cycle,
the  Company  reserved  $654,000  in 1997 to  recognize  the loss of  value  and
obsolete  parts.  The outstanding  purchase orders consist  primarily of kits of
TelePad 3 computers which will be assembled and tested at the Company's facility
in Herndon, Virginia.

The Company  leases  office  space in Herndon,  Virginia  under a  noncancelable
operating lease which contains a renewal option. Total rent expense was $159,000
and  $135,000  for the years ended  December  31,  1997 and 1996,  respectively.
Future minimum lease payments under the  non-cancelable  operating  lease are as
follows:

                      1998               $    170,231
                      1999                     86,373
                                         ------------
                     Total               $    256,604
                                         ============

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,  1997 and  1996,  the  Company  did not make any
contributions to the Plan.

                                      F-14
<PAGE>



                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



7.  NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted net loss per
share :

                                                 YEAR ENDED DECEMBER 31,
                                                --------------------------
                                                    1997           1996
                                                -----------    -----------

         Net loss per share                     $(6,557,713)   $(6,089,682)
                                                ===========    ===========

         Weighted average shares:
           Basic net loss per share -
             weighted average shares             11,745,551      9,856,500
           Effect of dilutive securities:
             Stock options                             --             --
             Warrants                                  --             --
           Diluted net loss per share -
                                                ===========    ===========
             adjusted weighted average shares    11,745,551      9,856,500
                                                ===========    ===========

         Basic net loss per share               $     (0.56)   $     (0.62)
                                                ===========    ===========
         Diluted net loss per share             $     (0.56)   $     (0.62)
                                                ===========    ===========


Options to purchase  approximately  1.9 million shares and 1.8 million shares of
common stock with exercise  prices ranging between $.33 and $7.88 per share were
outstanding  during 1997 and 1996,  respectively,  but were not  included in the
computation  of  diluted  net  loss  per  share  because  the  effect  would  be
antidilutive.  Warrants to purchase  approximately 30.3 million shares of common
stock  with  exercise  prices  ranging  between  $3.50 and $6.81 per share  were
outstanding  during 1997 and 1996 but were not  included in the  computation  of
diluted net loss per share because the effect would be antidilutive.

8.  MANAGEMENT PLANS

The accompanying  financial  statements have been prepared on the basis that the
Company will continue as a going  concern.  The Company has incurred  cumulative
losses to date of approximately  $35,466,000,  including $6,558,000 for the year
ended December 31, 1997. The continued  existence of the Company is dependent on
the ability of the Company to generate  revenues  sufficient to cover  operating
expenses and on obtaining additional  financing,  the outcome of which cannot be
determined at this time.  On February 27, 1998,  the Company was notified by The
Nasdaq Stock  Market,  Inc.  that the market price for Class A common stock does
not meet the quantitative maintenance requirements for minimum bid price and the
Company is therefore  subject to being delisted from the NASDAQ  SmallCap Market
if this  situation is not  remedied by May 28, 1998,  which time may be extended
through the review process.  These conditions raise  substantial doubt about the
Company's ability to raise additional capital.

                                      F-15

<PAGE>


                              TELEPAD CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



8.  MANAGEMENT PLANS (CONTINUED)

On February 24, 1998, the directors of the Company adopted resolutions proposing
to recommend to  stockholders  that  stockholders  authorize an Amendment to the
Company's  Certificate of Incorporation to effect a 1 for 10 reverse stock split
of the Company's  issued shares of common stock (the  "Reverse  Split").  If the
Reverse  Split  is  authorized  by   stockholders   at  the  annual  meeting  of
stockholders  scheduled on May 4, 1998,  management expects that the share price
of the  Company's  Class  A  common  stock  will  trade  above  the  one  dollar
maintenance price level,  however,  there can be no assurance as to the approval
of the Reverse Split by stockholders  or, if the Reverse Split is approved,  the
effect on the market price of the Class A common stock.

In the event that the Company is unable to generate revenues sufficient to cover
operating expenses or obtain additional financing,  the Company may be unable to
satisfy  most of the  current  liabilities  and would be unable to  sustain  its
operations at the current level  thereafter.  The Company would then be required
to radically  reduce its operations and may be required to seek protection under
the United States  Bankruptcy Code. The financial  statements do not include any
adjustments that might result from this uncertainty.