<PAGE>
                                       
                                FORM 10-KSB/A1
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

/X/  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     For the fiscal year ended December 31, 1997
     OR

/ /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
     OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to____________.

Commission File Number 0-16335
                                       
                        OZO DIVERSIFIED AUTOMATION, INC.
          (Name of Small Business Issuer as Specified in its Charter)

            Colorado                                      84-0922701
     (State or other juris-                             (IRS Employer
      diction of incorpora-                          Identification No.)
      tion or organization)            
                            7450 East Jewell Avenue
                                    Suite A
                             Denver, Colorado 80231
                    (Address of Principal Executive Offices)

Issuer's telephone number, including area code:  (303) 368-0401

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

                          $0.10 Par Value Common Stock
                                (Title of Class)

Indicate by check mark whether the Issuer (1) has filed all reports required 
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 
during the preceding 12 months and, (2) has been subject to such filing 
requirements for the past 90 days.   YES /X/   NO / /

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

Revenues for fiscal year ended December 31, 1997 were $2,715,991.

The aggregate market value of the Registrant's voting stock held as of March 2,
1998 by nonaffiliates of the Registrant was $402,081.

<PAGE>

As of March 2, 1998, Registrant had 478,164 shares of its $0.10 par value 
common stock outstanding.
                                       
                                  Total Pages    36
                                              -----
                              Exhibit Index at Page 17

<PAGE>

                                    PART I


ITEM 1.  BUSINESS.

  (a)  BUSINESS DEVELOPMENT.   OZO Diversified Automation, Inc. ("OZO" or the 
"Company") was incorporated as a Colorado Corporation on October 13, 1983.  
Since its formation, the Company has been engaged in the design and 
manufacture of robotic workstations for the electronics industry.  The 
initial products offered by OZO included small scale CNC (Computer 
Numerically Controlled) drilling machines used in the fabrication of 
prototype printed circuit boards.  As of the late 1980's, the Company 
diversified its product line to include routing and depaneling workstations, 
which continues to be the primary focus of the Company today.  OZO 
workstations are found in various segments of the electronics industry, 
including electronics assembly companies (i.e., medium and large OEMs), 
printed circuit board fabricators (i.e., Contract Manufacturers), product 
design and prototype shops, and test fixture fabricators.  For the fiscal 
year ended December 31, 1997, the Company had net sales of $2,715,991, 
compared to $2,166,763 for the fiscal year ended December 31, 1996.

This Form 10-KSB/A1 is an amendment to the Form 10-KSB for the year ended 
December 31, 1997, originally filed by OZO in March 1998.  There have been 
material changes in OZO's business and financial condition since the date of 
filing the original Form 10-KSB which are not described herein, but which 
have been described in other filings made by OZO under the Securities Exchange 
Act of 1934, as amended which were filed subsequently to the original Form 
10-KSB. These include updated information to all of the information set forth 
herein including (without limitation) financial statements (Item 7), the 
management's discussion and analysis (Item 6), and the description of the 
Company's business (Item 1).  These subsequently-filed documents include the 
Company's quarterly reports on Form 10-QSB for the quarters ended March 31, 
1998, June 30, 1998, and September 30, 1998, as well as the Company's current 
reports on Form 8-K reporting events of December 15, 1998, and November 4, 
1998, all of which are incorporated by reference herein as necessary to 
update the information contained herein.

As noted throughout this report, the future performance of the Company and 
its business is dependent upon numerous factors, and there can be no 
assurance that the Company will be able to conduct its operations as 
contemplated herein.  Except for historical information contained in the 
report, the statements made herein are forward-looking statements that are 
made pursuant to the safe harbor provisions of the Private Securities 
Litigation Reform Act of 1995.  Forward-looking statements involve known and 
unknown risks and uncertainties, which may cause the Company's actual results 
in future periods to differ materially from forecasted results.  These risks 
and uncertainties include, among other things, product demand and acceptance, 
market competition, limited access to working capital, and numerous risks 
inherent in the Company's international operations. Many of these risks are 
described herein, and it is important that each person reviewing this report 
understand the significant risks attendant to the operations of the Company 
and its related industry.

  (b) BUSINESS OF ISSUER.  OZO manufactures and markets robotic workstations 
that are used by the electronics industry for the depaneling, routing, and 
drilling of printed circuit boards.  In addition to furnishing the base 
workstations, the Company also provides sophisticated motion control software 
that is used to operate the machines for specific applications.  In terms of 
its primary business, OZO's hardware and software products enable electronics 
assembly companies to rout or depanel printed 

<PAGE>

circuit boards from panels that are produced on surface mount assembly lines. 
Although the depaneling market niche accounted for most of the Company's 
revenues in 1997, OZO continues to experience demand for its small scale 
drilling machines.  The demand for small scale drilling equipment is based on 
OZO's strong reputation among product designers and circuit board 
prototypers, as well as among the bare board shops and test fixture houses 
that are prevalent in the industry today.

  (1)  PRODUCTS   The Company's products are defined by a two-tier offering 
of equipment and accessories.  The upper tier (or premium line) which, 
represents OZO's core business, is comprised of the Company's high-end 
servomotor systems.  These include the Model 18HS standalone router, and the 
Model 16SI fully automated inline system.  The lower tier offering is 
comprised of the Company's stepper motor systems, which include the Model 18 
and Model 24 multipurpose machines.  On a limited basis, the Company also 
supplies a dual-spindle drilling platform (Model 2-24), as well as a large 
format multiuse machine (Model 32), both of which are dedicated to a very 
narrow market segment. The Model 2-24 and Model 32 machines are available 
only on a special order basis.

For marketing purposes, the Company's lower tier products, namely the Model 
18 and Model 24 workstations, are distributed under the PanelMASTER, 
FixtureMASTER, EtchMASTER, and LabMASTER product designations.  The premium 
depaneling systems, specifically the Model 18HS and Model 16SI, are marketed 
under the trade names PanelMASTER 18HS and PanelROUTER 16SI, respectively.  
The Company's products are packaged with various accessories which customize 
the equipment for specific market applications.  In all cases, OZO's 
workstations include (as a minimum) the base machine, a custom fixture 
assembly, the associated spindles, a computer controller, and the system 
software.  Other accessories, such as machine vision, electrostatic discharge 
control systems, bar code readers, and spare parts, are sold separately 
(either with the machine or on an after-market basis).

Currently the majority of the Company's revenue comes from the sale of its 
premium line of depaneling equipment.  The PanelMASTER 18HS represents a 
self-contained standalone depaneling router that has gained acceptance in the 
OEM market, as well as within the Contract Manufacturing sector.  The 
PanelROUTER 16SI represents a customized solution to automated inline 
depaneling, and is used extensively by large OEMs for the post assembly 
routing of printed circuit boards.  The Company's lower tier machines, the 
Models 18 and 24, are also sold for depaneling applications.  These systems 
are typically sold to price sensitive customers, where precision is required 
but speed and throughput are not important factors.

One of the Company's core competencies is its ability to design, build, and 
service its own high precision spindle assemblies.  OZO produces router 
spindles for its own line of depaneling systems, as well as drilling spindles 
and mechanical etch heads.  The Company also offers spindles for sale on a 
relabel basis.  Demand for the Company's spindle products has increased 
dramatically over the past twenty-four (24) months.

          MANUFACTURING AND ASSEMBLY OF PRODUCTS

          The Company continues to fabricate most of its custom components at 
its in-house machine shop.  In addition, the Company contracts with sheet 
metal suppliers, paint and anodize specialists, independent machine shops, 
and electronic manufacturers for various parts and services.  In terms of 
mainstream materials, off-the-shelf components are purchased from various 
industrial suppliers.  Final 

<PAGE>

assembly, testing and inspection of the finished systems are done by the 
Company's employees at its production facility in Denver, Colorado. During 
the course of 1997, the Company initiated an aggressive plan aimed at 
enhancing the overall functionality of its Manufacturing Group, which is 
comprised of its Purchasing, Engineering, and Production Departments.  The 
effort resulted in substantial improvements being made in several key areas. 
Those improvements include:  more efficient order handling, reduced lead 
times on purchased materials, dramatically reduced lead times on saleable 
products (new systems, as well as parts), more favorable terms with suppliers 
and service providers, and a dramatic increase in spare parts inventory (to 
support the growing worldwide demand for spare parts).  The improvements 
within the manufacturing group made a significant contribution to the 
Company's ability to produce and ship quality products on time in 1997.   
Additionally, the Company has successfully managed its supplier base to 
ensure that it is not dependent on one or a few major suppliers for any 
critical components.

     (2)  DISTRIBUTION.  The Company utilizes in-house sales engineers for 
direct sales in the United States, Canada, and Mexico, as well as numerous 
manufacturer representatives throughout North America. Internationally, the 
Company continues to expand its market presence, and currently has strong 
distributor relationships in Australia, Brazil, Egypt, Hong Kong and the 
Peoples Republic of China, India, Israel, Malaysia, New Zealand, Pakistan, 
the Philippines, Singapore, South Korea, Taiwan, Turkey, the United Arab 
Emirates, and the United Kingdom.  The Company has a policy of supporting its 
international distributor base, providing regular service, training visits, 
individualized sales literature, and support for trade shows held within 
their respective territories.

     (3)  STATUS OF PRODUCT.  In 1997 the Company continued the expansion of 
its premium line of routing equipment, namely the PanelROUTER 16SI and the 
PanelMASTER 18HS. During the year, both machines continued to gain acceptance 
in the marketplace, with sales of thirteen (13) PanelMASTER 18HS units and 
six (6) PanelROUTER 16SI systems being completed by year end.  Additionally, 
three more Model 18HS's and one Model 16SI were sold and shipped in the first 
quarter of 1998.  While sales of the premium routing equipment were slightly 
below plan for 1997, the Company anticipates that the projected growth of the 
electronics industry will sustain a strong demand for these products through 
1998 and beyond.  Management is confident that the depaneling technology 
represented by these machines will remain an important aspect of the 
manufacture of printed circuit boards and related electronic subsystems.  The 
depaneling market niche continued to be the Company's most important United 
States business segment in 1997, and in 1998 it will remain a significant 
part of the Company's overall sales strategy.

          While the Company remains focused on sales of its premium 
depaneling equipment to facilitate its strategic growth initiatives, the 
demand for its traditional drilling and routing machines also remains strong. 
The Company continues to sell its lower tier systems to test fixture 
fabricators and small printed circuit board facilities in the United States.  
Internationally, test fixture fabricators, small printed circuit board 
facilities, and prototype operations are a consistent market for the 
Company's Model 18, Model 24, and Model 2-24 products.  In terms of the Model 
18 and Model 24 machines in particular, the Company has also enjoyed a 
healthy retrofit and rebuild market for pre-owned systems.  Many of the 
Company's earlier generation machines have returned to the factory for 
electronics upgrades and other miscellaneous refurbishment projects.

          The Company's proprietary software is in full compliance with the 
Year 2000 transition requirements.  Management believes that all of the 
Company's proprietary software currently in release will be unaffected by the 
millennium date change.

<PAGE>

          (4)  COMPETITION.  Within the electronics industry the Company 
competes in four distinct segments of the capital equipment market. The four 
areas are: depaneling equipment, low-to-medium volume bare board drilling and 
routing equipment, test fixture drilling and routing equipment, and 
prototyping equipment.  The Company has identified two primary U.S. 
competitors, and numerous second tier competitors, who manufacture depaneling 
equipment. Internationally, there are at least three foreign competitors 
whose primary business is the manufacture of depaneling routers.  In many 
cases, the competitors identified are operating divisions of companies larger 
than OZO and produce revenues from various products.  The Company believes 
that it competes favorably in the depaneling equipment market.  The Company 
believes that its ability to continue to compete will depend upon how well it 
can produce competitively priced full-featured equipment for the standalone 
depaneling equipment market and upon its ability to produce customized 
solutions for the in-line depaneling equipment market.  The Company estimates 
that there are at least twenty competitors worldwide who manufacture drilling 
equipment for the electronics industry.  The Company believes that it 
competes favorably only in the low-to-medium volume drilling equipment 
market, and in the test fixture drilling application market.  The Company's 
drilling equipment customers are predominantly small businesses, who prefer 
the Company's products to more expensive alternatives.  The Company has 
identified one U.S. competitor and two foreign competitors that manufacture 
printed circuit board prototyping equipment.  The Company believes that it 
competes favorably in this market for customers seeking full function 
equipment, but cannot compete with single-function, lower-cost, prototyping 
equipment.

               While other competitors supplying products necessary for the 
development, production, and depaneling of printed circuit boards exist or 
may enter the market, the Company anticipates that its broad range of 
products will continue to find acceptance.  Presently, however, the Company's 
relatively small size may give competitors with established reputations, and 
greater marketing capability and financial resources, an advantage in the 
marketplace.

          (5)  RAW MATERIALS.  The Company procures parts and raw materials 
from a broad base of suppliers, and does not rely on one or a few major 
vendors for critical components.  Most materials purchased by the Company are 
off-the-shelf items.

          (6)  CUSTOMER DEPENDENCE.  The Company is not dependent on one or a 
few major customers.

          (7)  PATENTS, TRADEMARKS AND LICENSES.  The Company has not sought 
patent protection for the hardware it has developed and presently considers 
certain aspects thereof to be proprietary to the Company protected by its 
trade secrets.  The Company has made only a limited search of existing 
patents to determine the extent to which such proprietary protection may have 
been available or whether the Company's products infringe on patents held by 
others. A claim against the Company for possible infringement of a patent was 
made in 1994, and the Company has executed a License Agreement with the 
unaffiliated claimant.  Royalties were paid in 1997 under this License 
Agreement.  The Company is unaware of any other claims or proprietary rights 
of others on which the Company's products may be deemed to infringe.  As 
additional developments of the Company's products and proprietary information 
occur, the Company intends to pursue the appropriate protection.  Should 
products of the Company be deemed to infringe on patents held by others, the 
Company would be subject to the risk of litigation, expense of licensing 
rights to use such proprietary technology, or other adverse results.


<PAGE>

               Copyright protection for the Company's proprietary software, 
which is a key component of the operation of the Company's workstation 
systems, has been acquired by the Company.  Specifically, copyright 
protection for the Company's proprietary stepper motor software was acquired 
on May 26, 1988. Copyright protection for the Company's servomotor software 
was acquired by the Company on October 27, 1994.

          (8)  GOVERNMENT APPROVAL.  The Company is not subject to any 
government approval for its products.

          (9)  GOVERNMENT REGULATION.  The Company has no knowledge of 
impending government regulation on its business.

          (10) RESEARCH AND DEVELOPMENT.  Research and development expenses 
for the fiscal years ending December 31, 1997, and December 31, 1996, were 
approximately $154,414 and $159,570 respectively.  Ongoing projects in 1998 
include automation enhancements for the PanelMASTER 18HS and PanelROUTER 
16SI, aesthetic and ergonomic improvements to the PanelROUTER 16SI, software 
upgrades for all products, continued spindle optimization and redesign 
programs, and miscellaneous development of new products, accessories, and 
services. The Company does not receive funding from other parties to conduct 
research and development, except in specific cases where U.S. government NSF 
or ARPA grants may be awarded.  The Company received no grants in 1996 or 
1997.

          (11) ENVIRONMENTAL REGULATION.  Since its inception, the Company 
has not made any material capital expenditures for environmental control 
facilities and the Company does not expect to make any such expenditures 
during the current or forthcoming fiscal year.  The Company believes that it 
is in full compliance with all federal, state, and local environmental 
regulations.

          (12) EMPLOYEES.  As of December 31, 1997, the Company had 18 
full-time employees and one part-time employee.

ITEM 2.  PROPERTIES

          Effective March 1, 1997, the Company expanded its corporate 
headquarters in Denver, Colorado by acquiring 3,400 square feet of additional 
manufacturing space.  The expansion was made as part of the Company's overall 
re-engineering effort, which included a redesign of the production area to 
improve efficiencies and allow for multiple machines to be assembled 
concurrently.  At the same time, the Company exited approximately 400 square 
feet of non-contiguous storage space.  As of March 1, 1997, the Company's 
combined office and production space totaled approximately 9,040 square feet. 
 The monthly lease obligation increased from $3,050 per month prior to the 
expansion, to $4,168 per month as of March 1, 1997.  As of this date, the 
Company's lease obligation on all space was extended for three years, through 
February 28, 2000.

ITEM 3.  LEGAL PROCEEDINGS


<PAGE>

          There are no pending legal proceedings to which the Company is a 
party or of which any of its property is the subject as of the date of this 
report and there were no such proceedings during the fiscal year ended 
December 31, 1997.


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

          No matter was submitted during the fourth quarter of the fiscal year
1997 to a vote of the Company's security holders.


<PAGE>

                                   PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)  MARKET INFORMATION.

          The Company's common stock is quoted on the OTC (Over-The-Counter) 
Bulletin Board.  The following table shows the range of high and low closing 
bid quotations of the common stock as traded in the OTC market during the 
last two fiscal years.

                     Common Stock

<TABLE>
<CAPTION>

------------------------------------------------------------
          FISCAL PERIOD           HIGH BID ($)  LOW BID ($)
------------------------------------------------------------
              1996
------------------------------------------------------------
<S>                                    <C>         <C>
 First Quarter                            1.00         1.00
------------------------------------------------------------
 Second Quarter                           1.50         1.00
------------------------------------------------------------
 Third Quarter                            1.25         0.75
------------------------------------------------------------
 Fourth Quarter                           0.75         0.50
------------------------------------------------------------

------------------------------------------------------------
              1997
------------------------------------------------------------
 First Quarter                            0.50         0.50
------------------------------------------------------------
 Second Quarter                           0.75         0.50
------------------------------------------------------------
 Third Quarter                            0.75         0.75
------------------------------------------------------------
 Fourth Quarter                           0.75         0.75
------------------------------------------------------------

</TABLE>

          The above quotations were reported by market makers in the stock 
and by the National Quotation Bureau, LLC.  The quotations represent prices 
between dealers and do not include retail markups, markdowns, or commissions, 
and do not necessarily represent prices at which actual transactions were or 
could have been effected.

     (b)  HOLDERS.

          As of December 31, 1997, the Company had approximately 700 holders 
of record of its $0.10 par value common stock.

     (c)  DIVIDENDS.

          The Company has not declared cash dividends on its common stock 
since its inception, and the Company does not anticipate paying any dividends 
in the foreseeable future.  There are no contractual restrictions on the 
Company's ability to pay dividends.



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


YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

RESULTS OF OPERATIONS

For the fiscal year ended December 31, 1997, sales of the Company's products 
increased to $2,715,991, a 25.3% gain over sales of $2,166,763 recorded in 
1996. The increase in revenues was primarily a result of growing demand for 
the Company's premium depaneling equipment, the PanelMASTER 18HS and 
PanelROUTER 16SI workstations, as well as continued demand for the Company's 
lower tier multipurpose workstations.  Introduced in 1995 and 1994 
respectively, the PanelMASTER 18HS and PanelROUTER 16SI have gained broad 
acceptance in the electronics industry, where the demand for custom 
depaneling equipment continues to grow.  For the fiscal year ended December 
31, 1997, the Company had sold thirteen (13) PanelMASTER HS standalone units 
and six (6) in-line PanelROUTER SI systems.  Over the past eighteen months 
the Company has noted a favorable shift in its product mix toward the larger, 
faster servomotor-based depaneling systems.

While sales for fiscal year 1997 increased 25.3% over the prior period, the 
cost of goods sold increased only 13.4% to $1,490,352, from $1,314,209 in 
1996. Management attributes the favorable trend in cost of goods sold to 
numerous cost containment and scrap reduction initiatives that were 
introduced early in 1997. As a result, the gross profit margin increased 
substantially to 45.1% of total revenues in 1997, compared to 39.3% of total 
revenues in 1996.

In terms of the foreign and domestic breakdown of sales, the Company 
experienced growth within North America during 1997, but a reduction in 
revenues abroad. Domestic sales as of December 31, 1997, were approximately 
$1,901,000, a 108% increase compared to $914,725 for the same period in 1996. 
International revenues decreased by 57.5% in 1997, accounting for only 
$401,688 in sales versus $945,000 in 1996.  Parts and service revenue 
accounted for the remaining sales of approximately $413,000, or 15.2% of 
total revenues in 1997.  Parts and service recorded sales of $305,167 in 
1996, or 14.1% of total revenues. Although international sales are an 
integral part of the Company's strategic sales objective, the Company has 
become more selective on the type and amount of foreign business it accepts.  
Management deems this change in policy appropriate, especially in light of 
the dramatic downturn in the Asian and Pacific Rim markets, which occurred in 
the second half of 1997.  For the year ended December 31, 1997, the Company 
recorded an increase in its allowance for bad debt in the amount of $61,605, 
to reserve for the recovery of delinquent accounts primarily in South Korea 
and Taiwan.  Management is actively pursuing the collection of these 
accounts.  International sales on new equipment accounted for only 14.8% of 
revenues in 1997, compared to 49.2% in 1996. 

As in past years, there are many factors that impair the Company's ability to 
reasonably predict the future sales potential of foreign markets.  Exchange 
rate variations, policies of local governments regarding import duties or 
trade restrictions on U.S. produced equipment, and fluctuations of local 
economies, may affect the Company's ability to sustain revenues 
internationally. Similarly, these same uncertainties limit the predictability 
of sales projections in foreign markets.  Nevertheless, the 


<PAGE>

Company remains dependent upon both the Domestic and International sectors 
for maintaining its revenue base from year-to-year.

Results of operations improved dramatically with the Company recording net 
income of $122,854 for the fiscal year ended December 31, 1997, compared to a 
net loss of $80,832 in fiscal 1996.  The improvement in earnings may be 
attributed to a number of factors including:  an industry-wide acceptance of 
routing as a viable and cost effective means for depaneling printed circuit 
boards, an increased market recognition of OZO resulting from an aggressive 
marketing campaign which promoted the Company and its products, effective 
cost controls and productivity enhancements initiated by the Company in 
fourth quarter of 1996 (and continuing throughout 1997), and the realization 
of numerous re-engineering benefits within OZO's administrative groups. 

In the area of operating expenses, general and administrative costs increased 
modestly to $255,964 in 1997, compared to $231,127 for the same period in 
1996. As a percentage of sales, however, the general and administrative costs 
decreased from 10.7% of total revenues in 1996, to 9.4% in 1997.  The Company 
continues to focus on expense control as a requisite to sustaining 
profitability in 1998..

Marketing and sales costs also increased during the reporting period, up 
13.0% to $562,020 in 1997 versus $497,575 as recorded in 1996.  On a 
percentage basis, marketing and sales costs declined to 20.7% of total sales 
in 1997, compared to 23.0% of total sales in 1996.  The slight improvement 
can be attributed to the mix of commission payments associated with products 
being sold by geographical region (i.e., commission rates for international 
distributors are different than those for manufacturer's representatives who 
sell, but do not service, equipment in the United States).  The Company 
believes it will always be subject to higher SG&A costs (as a percentage of 
revenue) because of its practice of going to market through distributors and 
manufacturer's representatives.

Research and Development costs decreased slightly in 1997 to $154,414, down 
3.2% from $159,570 in 1996.  The research and development activities in 1997 
focused primarily on redesigning the PanelMASTER 18HS, as well as various 
performance enhancements on inline fixturing and automation related to the 
PanelROUTER 16SI. Other R&D projects included software improvements to the 
Company's premium line of depaneling routers, electronics upgrades on all 
machines, and design enhancements to OZO's proprietary line of router 
spindles.

In summary, the improvement in expense control in 1997 occurred in all three 
major operating expense categories: general and administrative expense, 
marketing expense, and research and development expense.  Table 1 below 
illustrates the breakdown of the major expense categories as a percentage of 
net sales.

<PAGE>

                                       TABLE 1
<TABLE>
<CAPTION>
                                    1997         %        1996         %
                                    ----         -        ----         -
 <S>                             <C>            <C>    <C>             <C>
 Net Sales                       $2,715,991     100.0  $2,166,763      100.0
 Cost of Sales                    1,490,352      54.9   1,314,209       60.7
                                 ----------     -----  ----------      -----
 Gross Profit                    $1,225,639      45.1    $852,554       39.3

 G&A Expense                       $255,964       9.4    $231,127       10.7
 Marketing                          562,020      20.7     497,575       23.0
 R&D Expense                        154,414       5.7     159,570        7.4
                                 ----------     -----  ----------      -----
 Total                             $972,398      35.8     888,272       41.0

 Provision for Bad Debt             $79,109       2.9          --         --
 Loss on Disposition of Assets        6,336       0.2          --         --
                                 ----------     -----  ----------      -----
 Earnings before Interest          $167,796       6.2    ($35,718)      (1.6)
 Interest Expense                   $44,942       1.7     $45,114        2.1
                                 ----------     -----  ----------      -----
 Net Income (Loss)                 $122,854       4.5    ($80,832)      (3.7)
                                 ----------     -----  ----------      -----
                                 ----------     -----  ----------      -----
</TABLE>

In 1998 the Company will continue to expand sales of its premium line of
depaneling routers, while still supporting its original line of small-scale
multipurpose machines.  The Company will focus on growth opportunities in the
U.S. and North America, as well as in selected markets overseas.  In first
quarter 1998, the Company secured CE Compliance for its PanelMASTER 18HS
standalone router, allowing the product to be reintroduced into the European
market.  The first CE compliant machine shipped to a customer in Dublin, Ireland
in late February 1998.  Responding to specific needs in the marketplace, as well
as the requests of many of its customers, the Company will introduce new
products and accessories aimed at addressing a multitude of new applications. 
In the opinion of Management, the strength of the electronics market, combined
with the internal improvements OZO has made during 1997, will enable the Company
to meet its objectives for sales and profitability in 1998.      

LIQUIDITY AND CAPITAL RESOURCES

For short-term cash and credit requirements, the Company continues to use the
credit revolver established in July 1995 through its local bank.  The revolving
line of credit has a maximum available limit of $30,000, and matures on July 13,
2000.  As of January 1998, the Company had reached a tentative agreement with
its local bank to expand the credit revolver to approximately $50,000.  The
agreement was contingent on a review by the bank of the Company's 10-KSB report
for 1997, and the Company's continued profitability through the first quarter of
1998.   

Also, as disclosed in Item 12 of Form 10-KSB, throughout 1997 the President and
Chief Executive Officer made a series of loans to the Company to provide short
term working capital for projects and to stabilize cash flow.  The outstanding
loan balance at the end of 1997 was zero, and the loans had been repaid in full.
Refer to Note 12 of the Financial Statements (Related Party Transactions), and
Item 12 herein, for additional details of this loan.

<PAGE>

Prior to 1997, the Company had completed the retirement of three significant 
debt obligations (all in the fourth quarter of 1996).  In addition to 
retiring a $100,000 loan from an investment group, the Company also retired a 
$50,000 short-term loan from its local bank, as well as a $45,000 loan from a 
customer. As of December 31, 1997, the Company's primary debt obligation was 
a $240,000 note due December 30, 1998 (see Note 5 of the Financial 
Statements).  The Company will continue its efforts to remediate, 
consolidate, and retire its debt obligations throughout 1998 and into the 
next fiscal year.

Total Current Assets decreased slightly by 2.1%, or $13,627 in 1997.  The 
accounts receivable balance remained almost unchanged at $255,414 as of 
December 31, 1997, compared to $257,775 as of December 31, 1996. This is 
despite the Company's decision to increase its allowance for doubtful 
accounts by $61,605 to reflect the uncertainty of overdue payments from 
customers, primarily in South Korea and Taiwan.  As stated above, Management 
continues to pursue payment on these and other delinquent accounts.

Inventories decreased by $29,927 to $358,498 as of December 31, 1997, a 
decrease of 7.7% from December 31, 1996.  The change in inventory is 
primarily a result of the year-end shop floor production schedule and the 
timing of sales orders. Management does not believe the inventory comparison 
necessarily reflects any material change in the operating performance of the 
Company.

Total Current Liabilities increased $91,826 or 14.9% in 1997 to $709,138.  
The increase in current liabilities is driven primarily by the maturity 
schedule of the Company's $240,000 in long-term debt which became current as 
of December 31, 1997.  Repayment of the entire $240,000 is due on December 
30, 1998.  Total current debt as of December 31, 1997 (including the 
aforementioned current portion of long-term debt and the current portion of 
capitalized lease obligations), was $280,036, and increase of $245,429 from 
$34,607 as of December 31, 1996.  Management is in the process of securing a 
refinancing package for the Company's debt, and expects to have the issue 
resolved well in advance of the December 30, 1998 due date.  As an 
alternative, Management is also contemplating repaying a portion of the 
$240,000 debt from cash from operations it expects to generate in 1998.

Excluding the current portion of long-term debt, $240,000, Total Current 
Liabilities would have decreased $148,174 during 1997.  This reduction was 
due in part because Management took a proactive stance to reduce current 
liabilities, specifically the elimination of the note payable to an officer 
($84,500 as of December 31, 1996), and Customer Deposits, ($45,000 as of 
December 31, 1996).  Other current liabilities, including Accounts Payable 
were virtually unchanged between December 31, 1996, and December 31, 1997, 
despite an increase in sales of 25.3%. 

The Company made significant progress in 1997 with the expanded sales and
marketing of its premium products, the PanelMASTER 18HS and the PanelROUTER
16SI.  During the course of the 1997, the Company sold thirteen (13) PanelMASTER
18HS's and six (6) PanelROUTER 16SI's.  Three more Model 18HS's and one more
Model 16SI will be shipped in the first quarter of 1998.  Management believes
that the market acceptance phase for these products has progressed
satisfactorily, and the prospects for receiving additional orders for the
premium depaneling equipment is favorable at this time.  In addition to this
positive forecast, Management also believes that various re-engineering
activities undertaken by the Company throughout 1997 have resulted in dramatic
improvements in the Company's competitiveness.  These re-engineering activities
include: reductions in cycle times for

<PAGE>

equipment fabrication, substantial equipment upgrades within the 
Manufacturing Group; new rapid response procurement and inventory procedures; 
enhanced quality defect reduction programs; improved performance enhancement 
projects for mechanical assemblies, electronics, and software; and cost 
containment and waste reduction projects throughout all levels of production. 
In addition, significant re-engineering projects have also been implemented 
within the administrative functions.  As a result of these tactical and 
strategic initiatives, the favorable forecast for 1998, and a strong backlog 
through the second quarter of 1998, Management believes that the Company can 
continue as a going concern.

Looking forward, the Company intends to fund its current operations from a 
combination of cash generated from operations, existing lines of credit, 
potential new lines of credit, equity financing, or refinancing of existing 
debt.  These sources of capital are expected to fund the Company's current 
operations through December 31, 1998 and beyond.  Unless the Company 
continues to be profitable, or develops additional equity or debt sources of 
financing, there would be a materially adverse effect on the financial 
condition, operations and business prospects of the Company.  The Company has 
no arrangements in place for such equity or debt financing and no assurance 
can be given that such financing will be available at all or on terms 
acceptable to the Company.  Any additional equity or debt financing may 
involve substantial dilution to the interests of the Company's shareholders 
as well as warrantholders.  If the Company is unable to obtain sufficient 
funds to satisfy its cash requirements, it will be forced to curtail 
operations, dispose of assets or seek extended payment terms from its 
vendors.  There can be no assurances that the Company would be able to 
continue to reduce expenses or successfully complete other steps necessary to 
continue as a going concern. Such events would materially and adversely 
affect the value of the Company's equity securities.

BACKLOG

As of March 27, 1998, the Company's backlog of orders was approximately
$307,000, compared to $693,000 as of March 28, 1997.  Throughout the second half
of 1997, the Company's backlog at any given time was typically lower than in
previous reporting periods, primarily due to the reduction in cycle times for
producing and shipping finished materials. 

ITEM 7.  FINANCIAL STATEMENTS

          See Financial Statements on pages F-1 through F-18.

ITEM 8.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

          None.
<PAGE>

                                      PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

          (a)  IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
NAME AND POSITION
IN THE COMPANY                      AGE           DIRECTOR SINCE
------------------------------      ---           --------------
<S>                                 <C>           <C>
Alvin L. Katz                        68           October 1996
(Chairman of the Board
since October 1996, Director)

David J. Wolenski                    36           September 1996
(President since
September 1996, Director)

David W. Orthman                     47           February 1992
(Secretary-Treasurer,
Director)

Scott E. Salpeter                    39           October 1996
(Director)

Brantley J. Halstead                 40           Officer since February 1998
(Chief Financial Officer)
</TABLE>
<PAGE>

          The present term of office of each director will expire at the next 
annual meeting of shareholders.  The executive officers of the Company are 
elected annually at the first meeting of the Company's Board of Directors 
held after each Annual Meeting of Shareholders.  Each executive officer holds 
office until his successor is duly elected and qualified or until his 
resignation or until he shall be removed in the manner provided by the 
Company's Bylaws.

          See Item 12 for a description of understandings pursuant to which 
individuals were selected as a director of the Company.

          BUSINESS EXPERIENCE.  The following is a brief account of the 
business experience during the past five years of each director and executive 
officer:

<TABLE>
<CAPTION>
NAME OF DIRECTOR         PRINCIPAL OCCUPATION DURING THE LAST FIVE YEARS
----------------         -----------------------------------------------
<C>                      <S>
Alvin L. Katz            Chairman of the Board since October 1996; Currently
                         serving on the Board of Directors of Amtech Systems,
                         Inc., a public company engaged in the manufacture of
                         capital equipment in the computer chip manufacturing
                         business; Blimpie International, a publicly held fast
                         food franchise; Nastech Pharmaceutical Company, Inc., a
                         public company engaged in the development of
                         pharmaceuticals; BCT, a public company engaged in the
                         franchising of printing plants; and Mikron Instruments,
                         Inc., a public company engaged in the manufacture of
                         infrared parts and equipment. Also, from 1991 until the
                         company sold in September 1992, Chief Executive Officer
                         of Odessa Engineering Corp., a company engaged in the
                         manufacture of pollution monitoring equipment; and,
                         since 1981, an adjunct professor of business management
                         at Florida Atlantic University.

David J. Wolenski        President and Chief Executive Officer since September
                         1996; Previously with Johns Manville Corporation, a
                         public company engaged in the manufacture of fiberglass
                         insulations and related building materials, from July
                         1983 through July 1996; Manufacturing manager at Johns
                         Manville's Corona, California facility, September 1994
                         through July 1996; Manager of Quality Assurance for
                         Johns Manville's Performance Materials Division, March
                         1991 through September 1994.

David W. Orthman         Director of Research and Development since April 1,
                         1992; Director of Special Projects from June 6, 1990 to
                         March 31, 1992; Vice President of the Company from
                         January 1989 to June 1990; Chairman of the Board of
                         Directors of the Company from March 1988 to December
                         1988; President of the Company from October 1983 to
                         March 1988; Mr. Orthman developed the Model 18 and
                         related products and technology, as well as the Models
                         24, 2-20 and 2-24; also developed the PanelMASTER 18HS
                         and PanelROUTER 16SI high speed depaneling systems and
                         related products and technology.
</TABLE>
<PAGE>

<TABLE>
<C>                      <S>
Scott E. Salpeter        Senior Associate of Catalyst Financial, an affiliate of
                         Barber and Bronson Incorporated, since September 1996;
                         From 1993 until August 1996, Chief Financial Officer,
                         Treasurer,Vice President, and a Director of ECOS Group,
                         Inc. (formerly Evans Environmental Corp.), a public
                         company engaged in environmental consulting and
                         laboratory services; From 1988 through 1992, Chief
                         Financial Officer of Alco International Group, Inc., a
                         public company engaged in marine transportation. Mr.
                         Salpeter was an officer of Nova Distributing Co., Inc.,
                         a private company within two years of Nova's June 1992
                         petition filing for relief under federal bankruptcy
                         laws. Such proceeding was converted to a liquidation
                         proceeding under Chapter 7 of the Bankruptcy Code in
                         March 1993.

Brantley J. Halstead     Chief Financial Officer since February 1998; Corporate
                         Controller from September 1997 through January 1998;
                         independent Management Consultant from May 1993 to May
                         1995, and April 1996 through August 19897; Senior
                         Manager with Price Bednar Consulting LLC from June 1995
                         through March 1996; Management Consultant with Deloitte
                         & Touche from May 1988 through May 1993.  The focus of
                         Mr. Halstead's management consulting efforts included
                         the use of information technology to facilitate
                         business process re-engineering.
</TABLE>

DIRECTORSHIPS

Except as described above, no director of the Company is a director of any other
Company with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, or subject to the requirements of
Section 15(d) of such Act, or any company registered as an investment company
under the Investment Company Act of 1940, as amended.

          (b)  IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES

               N/A

          (c)  FAMILY RELATIONSHIPS

               As of December 31, 1997, there were no family relationships
between any director, executive officer, or person nominated or chosen by the
Company to become a director or executive officer.

          (d)  INVOLVEMENT IN LEGAL PROCEEDINGS

               N/A

          (e)  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

               Based solely on its review of the copies of the reports it
received from persons required to file, the Company believes that during the
1997 fiscal year and subsequently, all filing requirements applicable to its
officers, directors, and greater than ten-percent shareholders were in
compliance, with

<PAGE>

one exception involving late filings of Form 3's.  Specifically the Form 3's 
for directors David J. Wolenski and Alvin L. Katz, who joined the Board in 
September 1996 and October 1996, respectively, were filed in March 1998.

ITEM 10.  EXECUTIVE COMPENSATION

          SUMMARY COMPENSATION TABLE.

          The following table shows information regarding compensation paid to
the chief executive officers of the Registrant for the three years ending
December 31, 1997.

<TABLE>
<CAPTION>
                                       ANNUAL COMPENSATION              LONG TERM  COMPENSATION
                              -------------------------------------     -----------------------
NAME AND                                               OTHER ANNUAL       RESTRICTED STOCK
PRIN. POSITION      YEAR      SALARY($)      BONUS     COMPENSATION       AWARDS($)       OTHER
--------------      ----      ---------      -----     ------------     -----------------------
<S>                 <C>       <C>            <C>       <C>                <C>             <C>
David J. Wolenski
CEO                 1997      48,000           0            0              18,750         None
CEO(1)              1996      26,300           0            0              None           None
CEO(2)              1996      13,000           0            0              5000           None

Marjorie Zimdars-Orthman
CEO                 1995      39,500           0            0              None           None
</TABLE>

Note 1:  Marjorie Zimdars-Orthman was CEO through September 22, 1996; the salary
is prorated accordingly.

Note 2: David J. Wolenski became CEO on September 23, 1996; the salary shown is
for the balance of the year.

OTHER PLANS.

     There are no other bonus, profit sharing, pension, retirement, stock
option, stock purchase, or other remuneration or incentive plans in effect.

LONG TERM INCENTIVE PLAN.

     The Company has no long-term incentive plans.

COMPENSATION  OF DIRECTORS.

     As of December 31, 1997, and for the year then ended, cash compensation was
not being paid to members of the Board of Directors for their services as
directors, except for their salaries as reported above under executive officer
compensation.  On June 24, 1997, the Board granted stock options to its
directors in lieu of cash compensation, as described in Note 6 of the Financial
Statements.  In summary, the Board granted 25,000 options each to Alvin L. Katz
and Scott E. Salpeter, and 35,000 options each to David W. Orthman and David J.
Wolenski.  All of the aforementioned options are

<PAGE>

immediately vested as of the date of grant, and will expire in five years on 
June 24, 2002.  The exercise price is $1.125 per share for the duration of 
the five-year option term. 

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.

     As of December 31, 1997, the Company had no formalized employment contracts
with any executive officer.  The Company has no compensation plan or arrangement
with respect to any executive officer which plan or arrangement results or will
result from the resignation, retirement or any other termination of such
individual's employment with the Company.  The Company has no plan or
arrangement with respect to any such persons which will result from a change in
control of the Company or a change in the individual's responsibilities
following a change in control.  The Company does have an agreement with the
President and CEO whereby 20,000 shares of common stock were awarded in December
1997 as non-cash compensation.  The stock award was based on performance, and
approved by the compensation committee of the Board of Directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          SECURITY OWNERSHIP OF MANAGEMENT.

          The following table sets forth, as of December 31, 1997, the number of
shares of the Company's Common Stock beneficially owned by owner's of more than
five percent of the Company's outstanding Common Stock who are known to the
Company and the Directors of the Company, individually, and the Officers and
Directors of the Company as a group, and the percentage of ownership of the
outstanding Common Stock represented by such shares.

<TABLE>
<CAPTION>
                                                                       AMOUNT AND
                                                                  NATURE OF BENEFICIAL    PERCENT
NAME OF BENEFICIAL OWNER                POSITION WITH COMPANY          OWNERSHIP          OF CLASS
------------------------                ---------------------          ---------          --------
<S>                                     <C>                      <C>                      <C>
David W. Orthman                        Director, Director of         129,710 (1)           25.3%
7450 E. Jewell Ave., #A                 Research & Development
Denver, Colorado 80231

David J. Wolenski                       Director, President,           60,000 (2)           11.7%
7450 E. Jewell Ave., #A                 Chief Executive Officer
Denver, Colorado 80231

Scott E. Salpeter                       Director                       25,000 (3)            5.0%
201 S. Biscayne Blvd. #2950
Miami, Florida 33131

Alvin L. Katz                           Director, Chairman             61,250 (4)            7.4%
201 S. Biscayne Blvd. #2950
Miami, Florida 33131

<PAGE>

All Officers and Directors
as a Group (4 Persons)                                                275,960               44.0%

Steven N. Bronson                       None                          111,650 (5)           22.0%
201 S. Biscayne Blvd. #2950
Miami, Florida 33131

James S. Cassel                         None                           28,750 (6)            5.7%
201 S. Biscayne Blvd. #2950
Miami, Florida 33131
</TABLE>

Note (1): Of the 129,710 shares beneficially owned by David W. Orthman, 79,090
shares are jointly held with his wife Marjorie A. Zimdars-Orthman, another
10,000 shares are held by Marjorie A. Zimdars-Orthman, and 5,620 shares are held
by David W. Orthman; also, 35,000 shares are in the form of options, in the name
of David W. Orthman, exercisable at $1.125 per share through June 24, 2002.

Note (2): Of the 60,000 shares beneficially owned by David J. Wolenski, 25,000
shares are in the form of common stock obtained as part of executive
compensation, and 35,000 shares are in the form of options, exercisable at
$1.125 per share through June 24, 2002.

Note (3): Of the 25,000 shares beneficially owned by Scott E. Salpeter, all are
in the form of options exercisable at $1.125 per share through June 24, 2002. 

Note (4): Of the 61,250 shares beneficially owned by Alvin L. Katz, 5,000 shares
are in the name of his wife, Lenore Katz; 2,500 shares are held in general
partnership (the partnership consists of 5,000 shares of common stock, with
Alvin L. Katz maintaining a 1% ownership interest and Lenore Katz maintaining a
49% ownership interest in said partnership); 25,000 shares are in the form of
warrants, in the name of Lenore Katz, exercisable at $1.00 per share through
April 1, 2001; 3,750 shares are in the form of warrants, also in the name of
Lenore Katz, exercisable at $0.75 per share through October 10, 2001; and 25,000
shares are in the form of options, in the name of Alvin L. Katz, exercisable at
$1.125 per share through June 24, 2002.  Not included in this calculation are
8,772 shares due upon conversion of debentures, December 30, 1998.

Note (5): Of the 111,650 shares beneficially owned by Steven N. Bronson, 82,900
are in the form of common stock obtained through various transactions and
previous exercise of warrants; 25,000 shares are in the form of warrants,
exercisable at $1.00 per share through April 1, 2001, and 3,750 shares are in
the form of warrants, exercisable at $0.75 per share through October 10, 2001. 
Not included in this calculation are 8,772 shares due upon conversion of
debentures, December 30, 1998.

Note (6): All of the 28,750 shares beneficially owned by James S. Cassel are in
the form of warrants, 25,000 of which are exercisable at $1.00 per share through
April 1, 2001, and 3,750 of which are exercisable at $0.75 per share through
October 10, 2001.

<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          TRANSACTIONS WITH MANAGEMENT AND OTHERS AND CERTAIN BUSINESS
RELATIONSHIPS.

Throughout the course of 1997, the President and Chief Executive Officer made a
series of loans to the Company in an effort to provide short-term working
capital for projects and to stabilize cash flow.   The secured loans were made
to the Company at a financing rate that was comparable to that which could have
been obtained through outside sources.  This action was undertaken with the
approval and concurrence of the Board of Directors.  As a result of these
transactions, a total of $304,000 was loaned to the Company during the fiscal
year 1997.  As of December 31, 1997, the outstanding loan balance was paid down
to zero.

ITEM 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

          (a)  FINANCIAL STATEMENTS:

     Independent Auditors' Report
          Balance Sheet--As of December 31, 1997
          Statements of Operations--Years Ended December 31, 1997, and 1996
          Statements of Stockholders' Equity--Years Ended December 31, 1996, and
            1997
          Statements of Cash Flows for the Years Ended December 31, 1997, and
            1996
          Notes to Financial Statements

          (b)   8-K REPORTS:

          No 8-K reports were filed in the fourth quarter of 1997.

          (c)   EXHIBITS:

          3.1   Articles of Incorporation incorporated by reference to
Registration Statement No. 33-13074-D as Exhibit 3.1.

          3.2   Amended Bylaws adopted June 1, 1987, incorporated by reference
to Annual Report on Form 10-K for the fiscal year ended December 31, 1987 as
Exhibit 3.2.

          3.4   Articles of Amendment to Restated Articles of Incorporation
dated March 7, 1991.  Incorporated by reference to Annual Report on Form 10-K
for fiscal year ended December 31, 1990 as Exhibit 3.4.

          10.1  OEM Purchase Agreement dated January 15, 1990, between the
Company and Ariel Electronics, Inc. incorporated by reference to Annual Report
on Form 10-K for the fiscal year ended December 31, 1989 as Exhibit 10.16.
<PAGE>

          10.2  Form of Convertible Promissory Note, 12/30/93 Private Placement
incorporated by reference to Annual Report on Form 10-KSB for  the fiscal year
ended December 31, 1993 as Exhibit 10.2.

          10.3  Form of Non-Convertible Promissory Note, 12/30/93 Private
Placement incorporated by reference to Annual Report on  Form 10-KSB for the
fiscal year ended December 31, 1993 as Exhibit 10.3.

          10.4  Form of Note Purchaser Warrant Agreement and Warrant, 12/30/93
Private Placement incorporated by reference to Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1993 as Exhibit 10.4.

          10.5  Form of Promissory Note, 4/1/96, filed with initial filing.

          10.6  Form of Security Agreement, 4/1/96, filed with initial filing.

          10.7  Form of Common Stock Purchase Warrant, 4/1/96, filed with 
initial filing.

          10.8  Form of Promissory Note, 7/1/96, filed with initial filing.

          10.9  Form of 4/1/96 Promissory Note Extension, 10/17/96, filed
with initial filing.

          10.10 Form of Common Stock Purchase Warrant, 10/10/96, filed with 
initial filing.

<PAGE>
                          OZO DIVERSIFIED AUTOMATION, INC.
                           INDEX TO FINANCIAL STATEMENTS
                                          
<TABLE>
<CAPTION>
                                                                   PAGE
 <S>                                                         <C>
 Independent Auditor's Report                                      F - 2

 Balance Sheet
   December 31, 1997                                          F - 3 -- F - 4

 Statements of Operations
   Years Ended December 31, 1997 and 1996                          F - 5

 Statements of Stockholders' Equity
   Years Ended December 31, 1996 and 1997                          F - 6

 Statements of Cash Flows
   Years Ended December 31, 1997 and 1996                     F - 7 -- F - 8

 Notes to Financial Statements                                F - 9 -- F - 18
</TABLE>

                                     F-1
<PAGE>

                          OZO DIVERSIFIED AUTOMATION, INC.
                            INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Stockholders
OZO DIVERSIFIED AUTOMATION, INC.

We have audited the accompanying balance sheet of OZO Diversified Automation,
Inc. as of December 31, 1997 and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1997.  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 OZO Diversified Automation,
Inc. as of December 31, 1997 and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 2, the Company
is experiencing difficulty in generating sufficient cash flow to meet its debt
obligations and sustain its operations.  These factors raise substantial doubt
about the Company's ability to continue as a going concern.  Management's plans
in regard to these matters are described in Note 2.  The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

                                          
                                Wheeler Wasoff, P.C.



Denver, Colorado
March 18, 1998

                                     F-2
<PAGE>

                          OZO DIVERSIFIED AUTOMATION, INC.
                                   BALANCE SHEET
                                 DECEMBER 31, 1997

                                       ASSETS
<TABLE>
<S>                                                          <C>
CURRENT ASSETS
     Cash                                                  $     7,526
     Accounts receivable, (net of allowance for doubtful
        accounts of $68,105)                                   255,414
     Inventories  (Note 3)                                     358,498
     Prepaid expenses                                           25,631
                                                           -----------

        Total Current Assets                                   647,069
                                                           -----------

PROPERTY AND EQUIPMENT, at cost  (Note 5)
     Manufacturing                                             149,703
     Furniture and fixtures                                    169,747
     Assets under capitalized leases                           204,814
     Vehicle                                                    10,820
     Leasehold improvements                                      5,010
                                                           -----------

                                                               540,094

     Less accumulated depreciation and amortization            362,271
                                                           -----------

                                                               177,823
                                                           -----------
OTHER ASSETS
     Deferred financing costs, net                               8,126
     Other                                                       2,859
                                                           -----------

                                                                10,985
                                                           -----------

                                                           $   835,877
                                                           -----------
                                                           -----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                     F-3
<PAGE>

                          OZO DIVERSIFIED AUTOMATION, INC.
                             BALANCE SHEET (CONTINUED)
                                 DECEMBER 31, 1997
                                          
                        LIABILITIES AND STOCKHOLDER' EQUITY
                                          
<TABLE>
<S>                                                        <C>
CURRENT LIABILITIES
     Note payable - bank                                   $    27,415
     Accounts payable  (Note 1)                                244,139
     Commissions payable                                        60,345
     Due to shareholder                                         20,750
     Accrued expenses                                           76,453
     Current portion of long term debt and
        capitalized lease obligations (Note 5)                 280,036
                                                           -----------

        Total Current Liabilities                              709,138
                                                           -----------

LONG TERM DEBT AND CAPITALIZED LEASE 
     OBLIGATIONS  (Note 5)                                     126,731
                                                           -----------

COMMITMENTS  (Note 7)

STOCKHOLDERS' EQUITY  (Note 6)
     Preferred stock - $.10 par value 
        Authorized - 1,000,000 shares
        Issued - none                                               --
     Common stock - $.10 par value 
        Authorized - 5,000,000 shares
        Issued and outstanding - 478,164 shares                 47,816
     Capital in excess of par value                          1,193,004
     Accumulated deficit                                    (1,240,812)
                                                           -----------

                                                                     8
                                                           -----------

                                                           $   835,877
                                                           -----------
                                                           -----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                     F-4
<PAGE>
                          OZO DIVERSIFIED AUTOMATION, INC.
                              STATEMENTS OF OPERATIONS
                       YEARS ENDED DECEMBER 31, 1997 AND 1996
                                          
                                          
<TABLE>
<CAPTION>
                                                              1997           1996
<S>                                                         <C>            <C>
NET SALES                                                   $2,715,991     $2,166,763
COST OF SALES                                                1,490,352      1,314,209
                                                            ----------     ----------

GROSS PROFIT                                                 1,225,639        852,554
                                                            ----------     ----------

OPERATING EXPENSES                                                    
     General and administrative                                255,964        231,127
     Marketing and sales                                       562,020        497,575
     Research and development                                  154,414        159,570
     Provision for bad debts                                    79,109             --
                                                            ----------     ----------

                                                             1,051,507        888,272
                                                            ----------     ----------

OTHER (EXPENSE) ITEMS
     Interest expense                                          (44,942)       (45,114)
     Loss on disposition of assets                              (6,336)            --
                                                            ----------     ----------

                                                               (51,278)       (45,114)
                                                            ----------     ----------

INCOME (LOSS) BEFORE INCOME TAX                                122,854        (80,832)

INCOME TAX EXPENSE                                             (70,000)            --

TAX BENEFIT OF NET OPERATING
     LOSS CARRY FORWARD                                         70,000             --
                                                            ----------     ----------

NET INCOME (LOSS)                                           $  122,854     $  (80,832)
                                                            ----------     ----------
                                                            ----------     ----------

INCOME (LOSS) PER COMMON SHARE -                                      
     BASIC AND DILUTED                                      $      .27     $     (.18)
                                                            ----------     ----------
                                                            ----------     ----------
</TABLE>

      The accompanying notes are an integral part of the financial statements.

                                       F-5
<PAGE>

                          OZO DIVERSIFIED AUTOMATION, INC.
                         STATEMENTS OF STOCKHOLDERS' EQUITY
                       YEARS ENDED DECEMBER 31, 1996 AND 1997
                                          
<TABLE>
<CAPTION>

                                                          COMMON STOCK               CAPITAL IN                            TOTAL
                                                          ------------               EXCESS OF          ACCUMULATED    STOCKHOLDERS'
                                                     SHARES          AMOUNT          PAR VALUE            DEFICIT         EQUITY
<S>                                                  <C>             <C>             <C>              <C>             <C>

 BALANCE, JANUARY 1, 1996                            452,664          $45,266         $1,169,804      $(1,282,834)     $ (67,764)
 Issuance of common stock to officer and               
   employee                                            5,500              550              6,450               --          7,000

 Net (Loss)                                               --               --                --           (80,832)       (80,832)
                                                     -------          -------        ----------       -----------      ---------

 BALANCE, DECEMBER 31, 1996                          458,164           45,816         1,176,254        (1,363,666)      (141,596)

 Issuance of common stock to officer                  20,000            2,000            16,750                --         18,750


 Net Income                                               --               --                --           122,854        122,854
                                                     -------          -------        ----------       -----------      ---------
                                                                             
 BALANCE, DECEMBER 31, 1997                          478,164          $47,816        $1,193,004       $(1,240,812)     $       8
                                                     -------          -------        ----------       -----------      ---------
                                                     -------          -------        ----------       -----------      ---------
</TABLE>

The accompanying notes are an integral part of the financial statements.

                                       F-6
<PAGE>

                         OZO DIVERISIFIED AUTOMATION, INC.
                              STATEMENTS OF CASH FLOWS
                       YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                                 1997           1996
<S>                                                                         <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income (loss)                                                      $ 122,854      $ (80,832)
     Adjustments to reconcile net income (loss)
       to net cash provided (used) by operating activities                           
     Depreciation and amortization                                             54,734         38,863
     Stock issuance for services  (Note 6)                                     18,750          7,000
     Provision for bad debts                                                   61,605              -
     Loss on disposition of assets                                              6,336              -
     Other                                                                     (2,859)        (4,522)
     Changes in assets and liabilities 
         (Increase) in accounts receivable                                    (59,244)       (72,293)
         Decrease in inventories                                               29,927        117,972
         (Increase) decrease in prepaids                                      (14,246)         3,759
         (Decrease) increase in accounts payable and 
           accrued expenses                                                   (23,517)        60,542
         (Decrease) in deferred income and customer deposits                  (45,000)      (113,118)
                                                                            ---------      ---------
     Net cash provided (used) by operating activities                         149,340        (42,629)
                                                                            ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES
     Purchase of property and equipment                                       (20,425)       (12,485)
                                                                            ---------      ---------

     Net cash (used) by investing activities                                  (20,425)       (12,485)
                                                                            ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES
     Payments of long-term debt and capital lease obligations                 (39,415)       (29,937)
     Proceeds from short-term borrowings                                      210,000        375,500
     Payment of short-term borrowings                                        (210,585)      (375,000)
     Proceeds from officer loan                                               304,000        168,800
     Payment of officer loan                                                 (388,500)       (84,300)
                                                                            ---------      ---------
     
     Net cash (used) provided by financing activities                        (124,500)        55,063
                                                                            ---------      ---------

NET INCREASE (DECREASE) IN CASH                                                 4,415            (51)

CASH, BEGINNING OF YEAR                                                         3,111          3,162
                                                                            ---------      ---------

CASH, END OF YEAR                                                           $   7,526      $   3,111
                                                                            ---------      ---------
                                                                            ---------      ---------
</TABLE>

     The accompanying notes are an integral part of the financial statements.

                                       F-7
<PAGE>

                          OZO DIVERISIFIED AUTOMATION, INC.
                        STATEMENTS OF CASH FLOWS (CONTINUED)
                       YEARS ENDED DECEMBER 31, 1997 AND 1996

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The Company paid cash for interest on long-term debt of $44,382 and $41,568
during the years ended December 31, 1997 and 1996, respectively.

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

In 1997 and 1996, the Company acquired equipment by entering into lease
obligations of $24,188 and $180,626, respectively.

In 1997 the Company issued 20,000 shares of common stock, valued at $18,750, to
an officer and in 1996 issued 5,500 shares of common stock, valued at $7,000, to
an officer and employee of the Company.  See Note 6 for additional details.


     The accompanying notes are an integral part of the financial statements.

                                       F-8
<PAGE>
                            OZO DIVERSIFIED AUTOMATION, INC.
                             NOTES TO FINANCIAL STATEMENTS

NOTE 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          ORGANIZATION
          
          OZO Diversified Automation, Inc. (the Company) was incorporated under
          the laws of the State of Colorado on October 13, 1983.  The Company is
          engaged in the design, manufacture, and marketing of computer
          controlled manufacturing and machining equipment predominately to
          entities in North America and the Pacific Rim.
          
          INVENTORIES
          
          Inventories are stated at the lower of cost or market, with cost
          determined on a first-in, first-out basis.
          
          REVENUE RECOGNITION
          
          Revenue is recognized from sales of machines when they are shipped to
          customers or title transfers, and from services when performed. 
          Unearned income on service contracts, if any, is amortized by the
          straight-line method over the term of the contract.
          
          WARRANTY COSTS
          
          The Company provides a warranty on products sold for a period of one
          year from the date of sale.  Estimated warranty costs are charged to
          cost of sales at the time of sale.
          
          PROPERTY AND EQUIPMENT
          
          Property and equipment is stated at cost.  Depreciation and
          amortization of assets under capital lease is provided by use of the
          straight-line method over the estimated useful lives of the related
          assets of three to five years.
          
          Expenditures for replacements, renewals and betterments are
          capitalized.  Maintenance and repairs are charged to operations as
          incurred.
          
          Depreciation expense and amortization of assets under capital lease
          was $46,606 and $30,737 for the years ended December 31, 1997 and
          1996, respectively.
          
          RESEARCH AND DEVELOPMENT
          
          Expenditures for the research and development of new products are
          charged to operations as they are incurred.
          
                                     F-9
<PAGE>
                                      
                          OZO DIVERSIFIED AUTOMATION, INC.
                           NOTES TO FINANCIAL STATEMENTS

NOTE 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
          
          DEFERRED FINANCING COSTS

          Deferred financing costs include fees and costs incurred in
          conjunction with the Company's sale of 9% convertible notes (Note 5). 
          These fees and costs are being amortized over the term of the
          respective loans on a basis which approximates the interest method. 
          Accumulated amortization of deferred financing costs was $32,508 at
          December 31, 1997.  Unamortized deferred financing fees are
          written-off when debt is retired before the maturity date.

          INCOME TAXES
          
          The Company has adopted the provisions of Statement of Financial
          Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". 
          SFAS No. 109 requires recognition of deferred tax liabilities and
          assets for the expected future tax consequences of events that have
          been included in the financial statements or tax returns.  Under this
          method, the deferred tax liabilities and assets are determined based
          on the difference between the financial statement and tax basis of
          assets and liabilities using enacted tax rates in effect for the year
          in which the differences are expected to reverse.
          
          INCOME (LOSS) PER SHARE
          
          For 1996, loss per common share is computed based on the weighted
          average number of common shares outstanding of 454,497 shares.
          Convertible equity instruments, such as stock options, warrants and
          convertible debt, are not considered in the calculation of net loss
          per share for 1996 as their inclusion would be antidilutive.

          In February 1997 SFAS No. 128, "Earnings Per Share", was issued
          effective for periods ending after December 15, 1997.  There is no
          impact on the Company's 1996 financial statements from adoption of
          SFAS No. 128.  The Company has adopted the provisions of SFAS No. 128
          effective for the year ending December 31, 1997.  The weighted average
          number of common shares outstanding at December 31, 1997 was 458,218
          shares.  At December 31, 1997, 245,000 exercisable stock options  and
          warrants were excluded from the computation of diluted EPS because
          their exercise prices were greater than the average market price of
          common shares.
          
          CASH EQUIVALENTS
          
          For purposes of reporting cash flows, the Company considers as cash
          equivalents all highly liquid investments with a maturity of three
          months or less at the time of purchase.  At December 31, 1997 there
          were no cash equivalents.
          
          
                                     F-10
<PAGE>
                                      
                          OZO DIVERSIFIED AUTOMATION, INC.
                           NOTES TO FINANCIAL STATEMENTS

NOTE 1 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
          
          USE OF ESTIMATES
          
          The preparation of financial statements in conformity with generally
          accepted accounting principles requires management to make estimates
          and assumptions that affect the reported amounts of assets and
          liabilities and disclosure of contingent assets and liabilities at the
          date of the financial statements and reported amounts of revenues and
          expenses during the reporting period.  Actual results could differ
          from those estimates.
          
          ACCOUNTS PAYABLE

          Accounts payable at December 31, 1997 include a bank overdraft of
          $71,193.

          SHARE BASED COMPENSATION

          In October 1995 SFAS No. 123, "Accounting for Stock-Based
          Compensation" was issued.  This new standard defines a fair value
          based method of accounting for an employee stock option or similar
          equity instrument.  This statement gives entities a choice of
          recognizing related compensation expense by adopting the new fair
          value method or to continue to measure compensation using the
          intrinsic value approach under Accounting Principles Board (APB)
          Opinion No. 25.  The Company has elected to utilize APB No. 25 for
          measurement; and will, pursuant to SFAS No. 123, disclose
          supplementally the pro forma effects on net income and earnings per
          share of using the new measurement criteria.

          NEW TECHNICAL PRONOUNCEMENTS

          In February 1997 SFAS No. 129, "Disclosure of Information about
          Capital Structure" was issued effective for periods ending after
          December 15, 1997.  The Company has adopted the disclosure provisions
          of SFAS No. 129 effective with the fiscal year ended December 31,
          1997.

          In June 1997 SFAS No. 130, "Reporting Comprehensive Income" was issued
          effective for fiscal years beginning after December 31, 1997, with
          earlier application permitted.  The Company has elected to adopt SFAS
          No. 130 effective with the fiscal year ended December 31, 1998. 
          Adoption of SFAS No. 130 is not expected to have a material impact on
          the Company's financial statements.

          In June 1997 SFAS No. 131, "Disclosure about Segments of an Enterprise
          and Related Information" was issued effective for fiscal years
          beginning after December 31, 1997, with earlier application permitted.
          The Company has elected to adopt SFAS No. 131 effective with the
          fiscal year ended December 31, 1998.  Adoption of SFAS No. 131 is not
          expected to have a material impact on the Company's financial
          statements.

                                     F-11
<PAGE>
                                      
                          OZO DIVERSIFIED AUTOMATION, INC.
                           NOTES TO FINANCIAL STATEMENTS

NOTE 2 -  BASIS OF ACCOUNTING

          The accompanying financial statements have been prepared on the basis
          of accounting principles applicable to a going concern which
          contemplates the realization of assets and extinguishment of
          liabilities in the normal course of business.  As shown in the
          accompanying financial statements, the Company has accumulated a
          deficit of $1,240,812 through December 31, 1997, as compared to
          $1,363,666 through December 31, 1996, and at December 31, 1997 current
          liabilities exceeded current assets by $62,069.  Included in current
          liabilities at December 31, 1997 are $240,000 of notes the Company is
          obligated to retire by December 30, 1998 (See Note 5).  These factors
          indicate that the Company may be unable to continue in existence.  The
          Company's financial statements do not include any adjustments related
          to the carrying value of assets or the amount and classification of
          liabilities that might be necessary should the Company be unable to
          continue in existence.  The Company's ability to establish itself as a
          going concern is dependent on its ability to meet its financing and
          cash requirements to retire debt and to continue achieving profitable
          operations.  
          
          Management is continuing its programs of cost control and containment;
          installing new production and budgetary controls in all aspects of
          operations; expanding its marketing efforts, especially on new
          products, and pursuing additional financing from outside sources to
          retire existing debt and sustain operations.  In addition, management
          is attempting to continue to generate cash from operations. 
          Management believes that these actions presently being taken to revise
          the Company's operating and financial requirements provide the
          opportunity to continue as a going concern.
          
          Management believes that various re-engineering activities undertaken
          by the Company throughout 1997 have enhanced the Company's
          competitiveness.  These re-engineering activities include:  reductions
          in cycle times for equipment fabrication, substantial manufacturing
          equipment upgrades; new rapid response procurement and inventory
          procedures; enhanced quality control programs; improved performance
          enhancement projects for mechanical assemblies, electronics, and
          software; and cost containment and waste reduction projects throughout
          all levels of production.  Significant re-engineering projects have
          also been implemented within the administrative functions.
          
          The Company continues to focus on the depaneling application market
          with its premium routing equipment, the 18HS PanelMASTER and the 16SI
          PanelROUTER.  Both of these strategic product groups are continuously
          analyzed for improvements and incorporating requirements defined by
          its customers.
          
          In 1998, the Company intends to attend the major electronic assembly
          industry trade shows.  In addition, marketing efforts will be
          increased in the European Union, and Central and South America. 
          Management has also reemphasized customer service, and is continuing
          production process improvements in an effort to preserve operating
          margins.
          

                                     F-12
<PAGE>
                                      
                          OZO DIVERSIFIED AUTOMATION, INC.
                           NOTES TO FINANCIAL STATEMENTS

NOTE 2 -  BASIS OF ACCOUNTING (CONTINUED)
          
          The Company intends to fund its current and future operations from a
          combination of cash generated from operations, existing lines of
          credit, potential new lines of credit, equity financing, or
          refinancing of existing debt.  Unless the Company continues to be
          profitable, or develops additional equity or debt sources of
          financing, there would be a materially adverse effect on the financial
          condition, operations and business prospects of the Company.  The
          Company has no arrangements in place for such equity or debt financing
          and no assurance can be given that such financing will be available at
          all or on terms acceptable to the Company.  Any additional equity or
          debt financing may involve substantial dilution to the interests of
          the Company's shareholders as well as warrant holders.  If the Company
          is unable to obtain sufficient funds to satisfy its cash requirements,
          it will be forced to curtail operations, dispose of assets or seek
          extended payment terms from its vendors.  There can be no assurances
          that the Company would be able to continue to reduce expenses or
          successfully complete other steps necessary to continue as a going
          concern.  Such events would materially and adversely affect the value
          of the Company's equity securities.
          
          There are many factors that impair the Company's ability to reasonably
          predict the future sales potential of foreign markets.  Exchange rate
          variations, policies of local governments regarding import duties or
          trade restrictions of U.S. produced equipment, and fluctuations of
          local economies, may affect the Company's ability to sustain revenues
          internationally.  Similarly, these same uncertainties limit the
          predictability of sales projections in foreign markets.  Nevertheless,
          the Company remains dependent upon both the Domestic and International
          sectors for maintaining its revenue base from year-to-year.

NOTE 3 -  INVENTORIES

          Inventories at December 31, 1997 consist of the following:

<TABLE>
          <S>                                     <C>
          Raw materials                           $358,498
          Work in process and components                 -
          Finished goods                                 -
                                                  --------

                                                  $358,498
                                                  --------
                                                  --------
</TABLE>

NOTE 4 -  NOTE PAYABLE - BANK

          Note payable - bank consists of the balance due on a revolving line of
          credit from a commercial bank.  The note matures in July 2000, and is
          repayable monthly at the rate of a 2% principal reduction and interest
          thereon.  Interest on the note is 2% above the prime interest rate. 
          The note is secured by substantially all assets of the Company
          including receivables, inventory and equipment and is personally
          guaranteed by certain present and/or former officers/directors of the
          Company.  At December 31, 1997, the Company has $2,585 available to be
          drawn upon under the line of credit.

                                     F-13
<PAGE>

                       OZO DIVERSIFIED AUTOMATION, INC.
                        NOTES TO FINANCIAL STATEMENTS

NOTE 5 - LONG TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS

         Long term debt and capitalized lease obligations consist of the
         following at December 31, 1997:

<TABLE>
         <S>                                                             <C>
         9% unsecured convertible notes, due December 30, 1998,
            interest payable quarterly                                   $120,000
         9% unsecured non-convertible notes, due December 30, 1998,
            interest payable quarterly                                    120,000
         Capitalized lease obligations with interest at 10.1% to 18.29%,
            repayable in monthly installments of an aggregate $4,723;
            collateralized by the underlying equipment                    166,767
                                                                         --------
                                                                          406,767

         Less current portion                                             280,036
                                                                         --------

                                                                         $126,731
                                                                         --------
                                                                         --------
</TABLE>

         As of December 31, 1997, the scheduled maturities of notes payable and
         capitalized lease obligations are as follows:

<TABLE>
               <S>                                  <C>
               1998                                 $280,036
               1999                                   44,895
               2000                                   48,627
               2001                                   33,209
                                                    --------
                                                    $406,767
                                                    --------
                                                    --------
</TABLE>

         Future minimum payments on capitalized leases are as follows:

<TABLE>
         <S>                                       <C>
         Year ending December 31,

         1998                                      $  56,669
         1999                                         56,669
         2000                                         54,919
         2001                                         34,623
                                                   ---------
                                                     202,880

         Less amount representing interest            36,113
                                                   ---------

         Present value of net minimum lease 
           payments including current maturity     $ 166,767
                                                   ---------
                                                   ---------
</TABLE>

         The 9% notes represent gross proceeds from a private placement of
         $240,000 of units completed in December 1993.  In conjunction with the
         offering, warrants to purchase


                                     F-14
<PAGE>

                       OZO DIVERSIFIED AUTOMATION, INC.
                        NOTES TO FINANCIAL STATEMENTS

NOTE 5 - LONG TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)

          110,000 shares of common stock at $2.00 per share were issued.  In
          1994, warrants were exercised at a reduced price of $1.00 per share
          for 100,000 shares.  At December 31, 1997 10,000 warrants, exercisable
          at $2.00 per share through December 30, 1998, are outstanding.  The
          convertible notes are convertible into shares of the Company's common
          stock at $1.14 per share through December 30, 1998.

NOTE 6 -  STOCKHOLDERS' EQUITY

          COMMON STOCK

          In December 1997 the Board of Directors authorized the issuance of
          20,000 shares of common stock to an officer, valued at $18,750 ($.9375
          per share).  In 1996 the Company issued 5,000 shares of its common
          stock to its President, valued at $6,250 ($1.25 per share); and 500
          shares to an employee, valued at $750 ($1.50 per share).

          WARRANTS

          At December 31, 1997 the Company had warrants outstanding to purchase
          shares of the Company's common stock as follows:

          -    10,000 shares at $2.00 per share expiring December 30, 1998;
               issued in conjunction with 9% notes.

          -    100,000 shares at $1.00 per share, expiring April 1, 2001; issued
               in 1996 in conjunction with short-term borrowings.

          -    15,000 shares at $.75 per share, expiring October 1, 2001; issued
               in conjunction with granting an extension on the due date of
               short-term borrowings.

          The weighted average exercise price of warrants outstanding at
          December 31, 1997 was $1.05 per share.


          OPTIONS

          The status of outstanding options granted by the Company is as
          follows:

<TABLE>
<CAPTION>
                                                   NUMBER                WEIGHTED              WEIGHTED
                                                     OF                   AVERAGE               AVERAGE
                                                   SHARES             EXERCISE PRICE          FAIR VALUE
 <S>                                              <C>                 <C>                     <C>
 Options Outstanding - January 1, 1997                 --                    --                    --

 Granted in 1997                                  120,000                 $1.13                  $.51
                                                  -------                 -----                  ----
                                                                          -----                  ----
 Options Outstanding - December 31, 1997          120,000                 $1.13
                                                  -------                 -----
                                                  -------                 -----
</TABLE>


                                     F-15
<PAGE>
                       OZO DIVERSIFIED AUTOMATION, INC.
                         NOTES TO FINANCIAL STATEMENTS


NOTE 6 -  STOCKHOLDERS' EQUITY (CONTINUED)

     The Company has adopted the disclosure-only provisions of SFAS No. 123. 
     Had compensation cost for stock options issued been determined based on the
     fair value at the grant date consistent with the provisions of SFAS No.
     123, the Company's net income and income per share for 1997 would have been
     decreased to the pro forma amounts indicated below:

<TABLE>
     <S>                                                             <C>
     Net income applicable to common stockholders - as reported      $122,854
                                                                     --------
     Net income applicable to common stockholders - pro forma        $ 61,285
                                                                     --------
     Income per share - as reported                                  $    .27
                                                                     --------
     Income per share - pro forma                                    $    .13
                                                                     --------
</TABLE>

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes option-pricing model with the following weighted-average
     assumptions used for grants:  dividend yield of 0%; expected volatility of
     43%; discount rate of 5.50%; and expected lives of 5 years.  No options
     were exercised or forfeited during 1997.

     At December 31, 1997 the number of options exercisable was 120,000, the
     weighted average exercise price of these options was $1.13, the weighted
     average contractual life of the options was 5 years and the exercise price
     was $1.13 per share.
     
     In February 1998 the Board of Directors granted to an officer options to
     purchase 25,000 shares of the Company's common stock at an exercise price
     of $1.25 per share for a period of 5 years.

NOTE 7 -  COMMITMENTS

     The Company has entered into a non-cancelable lease for office and
     production facilities.  Minimum payments due under this lease are as
     follows:

<TABLE>
     <S>                                   <C>
     Year ending December 31,

       1998                                $50,618
       1999                                 51,457
       2000                                  8,600
</TABLE>

     Rent expense was $46,234 and $38,340 for the years ended December 31, 1997
     and 1996, respectively.

NOTE 8 -  SEGMENT INFORMATION

     Foreign sales represent export sales, and were approximately 18% and 47% of
     net sales revenue for the years ended December 31, 1997 and 1996,
     respectively.


                                     F-16
<PAGE>

                       OZO DIVERSIFIED AUTOMATION, INC.
                        NOTES TO FINANCIAL STATEMENTS


NOTE 8 - SEGMENT INFORMATION (CONTINUED)

     Export sales of systems, by geographic region, are as follows:

<TABLE>
<CAPTION>
                                                 1997           1996
       <S>                                     <C>            <C>
       Pacific Rim                             $240,271       $535,000
       Asia                                     161,417        140,000
       South America                                  -        155,000
       Europe                                         -        115,000
                                               --------       --------

                                               $401,688       $945,000
                                               --------       --------
                                               --------       --------
</TABLE>

     Sales by two distributors in the Pacific Rim represented 13% and 8% of
     total Company sales for 1996.

NOTE 9 -  INCOME TAXES

     At December 31, 1997, the Company has net operating loss carryforwards
     totaling approximately $962,000 that may be offset against future taxable
     income through 2011 and research and development credits of approximately
     $60,000 through 2012.

     The Company has fully reserved the tax benefits of these operating losses
     and credits because the likelihood of realization of the tax benefits
     cannot be determined.  These carryforwards and credits are subject to
     review by the Internal Revenue Service.  The $245,000 tax benefit of
     the loss carryforward and tax credits has been offset by a valuation
     allowance of the same amount.  The tax benefit of the loss carry forward
     was reduced by $70,000 in 1997.
     
     Temporary differences between the time of reporting certain items for
     financial and tax reporting purposes, primarily from using different
     methods of reporting depreciation costs and warranty and vacation accruals,
     are not considered significant by management of the Company.

     There is no current or deferred tax expense for the years ended December
     31, 1997 and 1996.  The Company, in 1997, utilized net operating loss
     carryforwards to offset taxable income, and, in 1996 had no taxable income.
     The benefits of timing differences have not previously been recorded.


                                      F-17
<PAGE>

                       OZO DIVERSIFIED AUTOMATION, INC.
                        NOTES TO FINANCIAL STATEMENTS


NOTE 9 - INCOME TAXES (CONTINUED)

     A reconciliation between the statutory federal income tax rate (34%) and
     the effective rate of income tax expense for 1997 is as follows:

<TABLE>
        <S>                                                                <C>
        Statutory federal income tax rate                                   31%
        Increase (decrease) in taxes resulting from: 
        State tax, net of federal benefit                                    3
        Utilization of net operating loss carryforwards                    (34)
                                                                           ---
        Effective Rate                                                      --%
                                                                           ---
                                                                           ---
</TABLE>

NOTE 10 - CONCENTRATIONS AND OTHER RISKS

     FAIR VALUE

     The carrying amount reported in the balance sheets for cash, accounts
     receivable, accounts payable and accrued liabilities approximates fair
     value because of the immediate or short-term maturity of these financial
     instruments.

     CONCENTRATION OF CREDIT RISK

     Financial instruments which potentially subject the Company to
     concentrations of credit risk consist principally of trade accounts
     receivable.  Credit risk with respect to these receivables is generally
     diversified due to the number of entities comprising the Company's customer
     base and their dispersion across many different industries and geographical
     locations.

     NATURE OF BUSINESS
     
     The Company's business has been comprised of domestic and foreign export
     sales.  In 1997 foreign export sales accounted for 18% of the Company's
     total sales, as compared to 47% for 1996.  This decrease in foreign export
     sales has largely been due to the changing economic conditions in the
     Pacific Rim and Asia.  At December 31, 1997 the Company has accounts
     receivable due from its distributors in Taiwan and Korea of an aggregate
     $63,475, which has been 100% reserved for collectibility as of that date.
                                          
NOTE 11 - RELATED PARTY TRANSACTIONS

     During 1996 the President of the Company loaned the Company an aggregate
     $168,800 under a line of credit note, secured by inventory and trade
     accounts receivable, due November 16, 1996 with interest at prime plus
     2.5%.  At December 31, 1996, $84,500 was outstanding under the loan
     agreement.  In 1997 the President made additional advances to the Company
     of an aggregate $304,000 and was repaid $388,500 and interest of $4,611.
     At December 31, 1997 and 1996 the former President of the Company had
     accrued wages and advances due of $20,750 and $54,545, respectively.

                                     F-18
<PAGE>

                                     SIGNATURES



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

      Dated:  January 6, 1999

                         OZO DIVERSIFIED AUTOMATION, INC.,
                         a Colorado corporation

                         By:   /s/ David J. Wolenski
                            --------------------------------
                                   David J. Wolenski
                                   President and CEO

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
Date                       Name and Title                         Signature
<S>                      <C>                                <C>

January 6, 1999          David J. Wolenski                  /s/ David J. Wolenski
                         Principal Executive Officer        ------------------------
                         Principal Financial Officer
                         Director

January 6, 1999          David W. Orthman                   /s/ David W. Orthman
                         Secretary-Treasurer                ------------------------
                         Director

January 6, 1999          Alvin L. Katz                      /s/ Alvin L. Katz
                         Chairman of the Board              ------------------------
                         Director

January 6, 1999          Scott E. Salpeter                  /s/ Scott E. Salpeter
                         Director                           ------------------------

January 6, 1999          Brantley J. Halstead               /s/ Brantley J. Halstead
                         Principal Accounting Officer       ------------------------
                         Chief Financial Officer

</TABLE>