U.S. SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                   FORM 10-KSB

                   Annual Report Under Section 13 or 15(d) of
                       the Securities Exchange Act of 1934
   For the fiscal year ended December 29, 1996 Commission file number 0-15885

                           NATIONAL DATACOMPUTER, INC.
                 (Name of Small Business Issuer in its charter)

             DELAWARE                                         04-2942832
   (State or other jurisdiction                             (IRS employer
 of incorporation or organization)                        identification No.)

         900 MIDDLESEX TURNPIKE, BLDG. 5, BILLERICA, MASSACHUSETTS 01821
               (Address of principal executive offices) (Zip Code)

                                 (508) 663-7677
                (Issuer's telephone number, including area code)

       SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
         SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:


                               Title of each class
                               -------------------
                     COMMON STOCK, $.08 PAR VALUE PER SHARE



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

                                    Yes  X    No
                                        ---       ---

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the best of the  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.

         The registrant had revenues of  approximately  $5,032,000 in the fiscal
year ended  December 29, 1996.  The  aggregate  market value of the voting stock
held by  non-affiliates  of the  registrant on March 21, 1997 was  approximately
$6,416,600.  As of March 21, 1997,  1,252,028  shares of Common Stock,  $.08 par
value per share, of the registrant were outstanding. Unless otherwise indicated,
all per share data and information in this Form 10-KSB relating to the number of
shares of Common Stock  reflect a 1:100 reverse stock split that was effected on
October 14,  1994,  and a 1:4 reverse  stock split that was effected on December
19, 1996.






                                     PART I


         THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS  FORWARD-LOOKING  STATEMENTS
AS DEFINED IN THE PRIVATE  SECURITIES  LITIGATION  REFORM ACT OF 1995.  FOR THIS
PURPOSE,  ANY STATEMENTS  CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL
FACT MAY BE  DEEMED  TO BE  FORWARD-LOOKING  STATEMENTS.  WITHOUT  LIMITING  THE
FOREGOING, THE WORDS "BELIEVES",  "ANTICIPATES", "PLANS", "EXPECTS", AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING  STATEMENTS.  THE IMPORTANT
FACTORS  DISCUSSED IN ITEM 6 "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF  OPERATIONS"  AMONG  OTHERS,  COULD CAUSE ACTUAL FUTURE
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY FORWARD-LOOKING  STATEMENTS
MADE HEREIN AND PRESENTED ELSEWHERE BY MANAGEMENT FROM TIME TO TIME.


ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL

         The  mission of  National  Datacomputer,  Inc.  (the  "Company")  is to
provide  solutions to workplace  problems through the use of mobile  information
systems.  The Company  designs,  manufactures,  sells and services  computerized
systems  used to  automate  the  collection,  processing  and  communication  of
information related to product sales,  distribution,  and inventory control. The
Company's   products  and  services   include   data   communication   networks,
application-specific  software, hand-held computers and related peripherals, and
associated  training and support  services.  The Company's  products  facilitate
rapid and accurate data collection, data processing and two-way communication of
information with a customer's host information system.

         The Company invests in technologies  that support its systems  solution
approach,  such as application software and network  communication  systems. The
Company believes that its future success depends on superior marketing,  service
and  solutions.  The  Company's  goal is to be the leading  supplier in selected
market  sectors.  The  key  elements  of the  Company's  strategy  include:  (i)
performing  effective market research to assess and identify market sectors that
represent viable business opportunities; (ii) providing system communications to
a customer's host information system in addition to data collection software and
hardware;  (iii) updating hardware and software solutions to remain current with
customers' needs as well as existing  technology;  and (iv) maintaining superior
software to run the Company's  hardware and network  communications  in selected
market segments.

INDUSTRY BACKGROUND

         In the 1970s, the application of microprocessor-powered equipment began
to find applications where portable,  battery-powered units were required. These
units found their  largest  applications  in the retail  industry  for  entering
re-order  information into the  distribution  systems to supply retail stores. A
number  of other  data  collection  applications  also  began to  appear  in the
inventory service industry.

         The  state of the art in  microprocessors  at the time was  units  with
small  memories  and  programs  written  in  proprietary  or  machine  languages
contained in firmware.  The applications were, by necessity,  simple compared to
other  applications of computers in business and industry.  As the need for more
flexible and  sophisticated  programs grew, the use of units requiring  firmware
became less and less desirable.  This situation existed until the mid-1980s when
personal




computers  blossomed  and the  computer  industry  shifted to  low-powered  CMOS
electronics  (generally  categorized  as  semiconductors  requiring  small power
drain). At that point, the opportunity to create software systems with the level
of  flexibility  and  sophistication  available  in other parts of the  software
industry presented itself and the hand-held personal computer was introduced.

         Management  believes that the future of hand-held computers is governed
by the software or solutions  industry,  and the opportunity to design computers
for  "people  who don't  work at a desk" has  opened up large new  markets.  The
application of this software technology to industries involving  distribution of
products on routes is a good  example of this  opportunity  as the  distribution
process can be highly automated capturing every transaction as well as supplying
additional information for management controls not previously possible.

PRODUCTS

         The  Company  designs,  manufactures,   markets  and  services  rugged,
hand-held  computers,  data collection devices and associated  peripherals.  The
Company  believes  that its  customers  require  products  that  allow  flexible
tailored software solutions in a cost-effective and timely manner.

         In March 1993, the Company was selected by Anheuser-Busch,  Inc. as one
of its two  qualified  suppliers  of  hand-held  computers  for its  network  of
approximately  1,150 beer and snack  wholesalers.  Since  then,  the Company has
derived  net  sales  of   approximately   $3  million   from   distributors   of
Anheuser-Busch.  Management  anticipates  that  the  numbers  of  Anheuser-Busch
distributors purchasing its hand-held computers will continue to increase in the
near future.

HARDWARE

         The  Company's   hand-held   computers   ("Datacomputers")   include  a
microprocessor, keyboard, LCD displays and full alphabetic and numeric character
sets.  Application  programs for the Datacomputer can be written on conventional
desk-top computers with commonly-used programming languages and then executed on
the Datacomputer.  Application  programs and data in Datacomputers are stored in
random  access  memory  ("RAM")  and can be  readily  changed  by  communicating
revisions or new  programs to the  Datacomputer  through its  industry  standard
serial port.  Datacomputers  can receive data through bar-code  readers,  cables
from other computers  (including other  Datacomputers)  and over telephone lines
through a modem. The Company's  Datacomputer product line includes two models of
the Datacomputer,  bar-code readers,  printers,  communication devices, carrying
cases, cables and add-on memory boards.

         DATACOMPUTER MODEL 3X

         The  Datacomputer  Model  3X (the "DC  3X") is a  hand-held  "Intel(TM)
based"  computer  designed for use by people whose jobs involve entry and access
to a computer  as they  stand or move  about.  The DC 3X  contains  an  industry
standard  bar-code port that allows quick and  convenient  scanning of bar-codes
for accurate inventory  management and supports fixed beam pencil wands, CCD and
laser light beam readers for a multitude of scanning  applications.  The Company
estimates that  approximately  44% of its 1996 total revenue was attributable to
the sale of the DC 3X. The DC 3X serves as the  platform for the majority of the
Company's future business development strategy.

         The DC 3X is  designed to be highly  reliable,  tolerant to human error
and easy to use. The DC 3X is shock  resistant,  water tight and operates over a
wide temperature range. In addition, the DC 3X's full-sized,  numeric key pad is
designed for fast and accurate data entry,  even while a


                                       2


user is wearing gloves. The Company also offers optional accessories, such as an
internal modem that allows communications over telephone lines.

         The  Company  offers the DC 3X in two  different  sales  packages.  The
Pre-Sales System (the "PSS") includes a DC 3X, software and various  peripherals
for sale to customers  who sell their  products on routes and who book the sales
orders through a dedicated sales force. The Driver-Sales System (the "DSS") is a
packaged system that includes a DC 3X, one of several  portable or truck-mounted
printers,  peripherals and software. The DSS is used by customers who sell their
products  through  delivery  drivers.  The Company believes that the application
software  included in the PSS and DSS packages  described  above  permits a high
degree of customization for a variety of customer applications.

         The PSS is typically  purchased by distributors who sell products prior
to actual shipment.  Due to the fact that the salesman is not required to create
and print out a delivery slip for any customer,  there is no need for a printer.
The PSS allows the salesman to access all of the  distributor's  information  on
the customer's  account as well as to input the customer's  next delivery order.
The DSS, on the other hand, is typically  purchased by  distributors  who do not
sell products prior to actual shipment. Accordingly, a salesperson arriving at a
stop  performs an  inventory  check,  determines  how much  inventory  should be
delivered and prints out the delivery slip for the customer.

INDUSTRIAL APPLICATIONS

         The DC 3X has many industrial applications,  where portability,  access
speed, ruggedness and small size are essential. Examples of two applications for
the DC 3X are set forth below:

              DELIVERY ROUTES.  At the end of each day, a driver parks his truck
and goes into the office  where he connects  his DC 3X to a host  computer.  The
host computer  extracts and processes the information  entered into the DC 3X by
the driver  during his  route.  After  processing  the data,  the host  computer
downloads  the  delivery  schedule  and  inventory  for the  driver's  next day,
including account information about each customer. During the day, at each route
stop, the driver takes the customer's inventory, calculates what new stock needs
to be added and prints out a delivery slip for each customer.  At the end of the
day, a complete report of the driver's  deliveries can be printed.  According to
many  of  the  Company's  customers,   the  implementation  of  the  DC  3X  has
significantly improved driver efficiency.

              INSPECTION SYSTEMS. Using a DC 3X, a railroad inspector checks the
condition of railroad cars in the railroad yard. The DC 3X prompts the inspector
by  requesting  that he  respond  to a number of  pre-determined  questions.  By
selecting  specific answers to each question,  the inspector  reports a detailed
condition of each railroad car. After  completing his  inspection,  the DC 3X is
connected to the railroad's repair center where the list of repairs and parts is
reviewed  and  processed  by  repairmen.  The  implementation  of  the DC 3X has
improved the  effectiveness and efficiency of railroad car inspection and repair
by reducing human error and  accelerating  data collection and analysis.  DC 3Xs
are  presently  in use at  the  Burlington  Northern,  Union  Pacific,  Illinois
Central, and Atchison, Topeka and Santa Fe Railroads.

         DATACOMPUTER MODEL 2X

         The  Datacomputer  Model 2X (the "DC 2X") is an advanced version of the
DC Model  2.5  described  below.  It has not been  introduced  to the  Inventory
Services marketplace, except to two companies. The Company believes that broader
distribution  of the DC 2X will begin by the end of 1997,  although no assurance
of broader distribution can be given. The DC 2X provides all the features of the
DC 2.5,  but, is also  faster,  has more memory and  provides for a PC Card slot
option.



                                       3


         The third largest inventory service company in the United States is one
of the Company's  customers of the DC 2X, and formerly a customer of the DC 2.5.
The  Company  estimates  that  approximately  9% of its 1996 total  revenue  was
attributable to the sale of the DC 2X.

         DATACOMPUTER MODEL 2.5

         The  Datacomputer  Model  2.5 (the "DC  2.5") is a  hand-held  computer
designed  primarily for use by inventory  auditors who enter voluminous  numeric
data, mostly by touch keying.  The Company offers utility software that includes
a modem,  printer,  bar code wand and scanner  interfaces,  screen and  keyboard
routines,  calculator functions and database functions. Due to the wide range of
optional features,  the user is able to control the creation,  updating and cost
of the DC 2.5's software.

         The DC 2.5 is marketed  primarily to inventory services  companies.  An
inventory  service company is an organization that contracts with businesses who
maintain large  inventories,  such as department or retail  stores.  The Company
estimates that  approximately  19% of its 1996 total revenue was attributable to
the sale of the DC 2.5.

         ICAL MODEL 100R

         The  ICAL  Model  100R  (the  "ICAL  100R")  is  designed  and used for
inventory taking for financial and control purposes. The ICAL 100R allows a user
to divide a store's  inventory  into a maximum of 128 separate  departments  and
keep a running total in each department.  The ICAL 100R is a recent version of a
hand-held product sold by the Company to the inventory audit market for the last
16 years. The Company estimates that  approximately 7% of its 1996 total revenue
was attributable to the sale of the ICAL 100R.

         The  primary   customers  for  the  ICAL  100R  are  inventory  service
companies,  which perform inventory taking for retailers and other  institutions
on a contract basis, and retailers, primarily convenience store chains or others
selling large quantities of relatively low priced items.

         Revenues generated by the ICAL 100R are almost exclusively from current
customers  of the Company who wish to  continue to use their  installed  base of
ICAL devices.  The Company  intends to continue to support the ICAL product line
to protect its  customers'  investments,  but  believes  the  current  trends of
increasing   processing   power  in  and  decreasing  cost  of  small  computers
competitive  with the  Datacomputer  will make the ICAL line less  attractive to
users in the future. As a consequence,  the Company expects that ICAL sales will
diminish in the future, although no assurance can be given.

MARKETS

         The Company currently focuses on the route accounting system market for
hand-held  computers  and  believes it is well  positioned  in this  industry to
become a leading provider.  Route accounting  involves  concurrent order taking,
product delivery and inventory  tracking.  Salespeople  enter customer orders in
hand-held computers and use the Company's portable printers to generate invoices
that are left with the  customers'  orders at their  locations.  At the end of a
route delivery day,  information stored in hand-held computers is transferred to
the host information  system and instructional  and control  information for the
next day's delivery routes is transferred back to the hand-held computer.




                                       4


MARKETING AND DISTRIBUTION

         The  Company  has  separate  marketing  efforts  for  its  Datacomputer
products and its ICAL 100.  Management  believes that the Datacomputer  products
have a wide variety of  applications  that have not yet been fully  exploited by
the Company or potential users of the Datacomputer.

         Recognizing  the need to focus the  Company's  limited  resources,  the
Company has applied its business  strategy for Datacomputers to a limited number
of selected  markets.  The Company is currently  focused in market sectors where
businesses  distribute  their products on routes.  The Company believes that the
route sales and service market is attractive because (i) customer  acceptance of
hand-held computers has been established in several sectors; (ii) customers have
realized a substantial  return on their investment in hand-held  computers;  and
(iii) the  Company  enjoys a  competitive  advantage  in this  market due to its
software and related  services.  To date, the Company believes it has gained one
of the leading  positions in the office coffee service  market  sector,  and has
penetrated the beer distribution, bakery, snacks and dairy market sectors.

         The ICAL 100 is sold principally to repeat customers who already have a
sizable  investment  in their use of and  applications  for ICAL  products.  The
Company devotes  relatively few resources to generate  additional  sales of ICAL
units above those demanded by past customers.

         The Company  primarily  sells and  distributes its systems and products
through a direct sales force that concentrates on systems sales.

   DIRECT SALES FORCE

         The Company believes that the most optimum method for the marketing and
sale of its products is gained through direct sales.  Therefore,  direct selling
is the Company's  primary  strategy in the route sales and service  market.  The
Company believes that the key elements to successful direct selling include: (i)
maintaining a well-qualified direct sales staff that is experienced in marketing
and  selling   solutions  to  medium  and  large   accounts;   (ii)   performing
well-executed  software  solutions;  (iii) offering excellent service;  and (iv)
maintaining good customer references.

SERVICE AND SUPPORT

         The  Company  believes  that  superior  service  is a vital part of its
competitive  strategy and therefore  emphasizes the quality of both hardware and
software  service.  The  importance  of  customer  service has  continued  to be
emphasized  through  the  addition of new  management  personnel.  The  Customer
Service  department  manages  all  installations,  preparations,  and  follow-up
support with each customer.

         The Company  typically offers  industry-standard  90 day warranties and
offers several flexible service  arrangements and maintenance  contracts to meet
customer  needs.  In addition to  technical  support of installed  systems,  the
Company provides  pre-installation  site surveys,  installation  services,  user
training, technical training,  application software support and host information
system interface assistance.

SOURCES OF SUPPLY

         The Company believes there is more than one supplier for all of its raw
materials and maintains  inventories  and close working  relationships  with its
suppliers to ensure timely and reliable  delivery.  Although the Company has not
experienced  major  interruptions  in  production  due  to  a  shortage  of  raw
materials,  prolonged supply shortages would materially and adversely affect the
Company's manufacturing operations, business and financial performance.



                                       5


COMPETITION

         The market for the Company's products is highly competitive and rapidly
changing.  The Company's  competitors  include Norand,  Symbol  Technologies and
Telxon, all of which have greater financial,  marketing and technical  resources
than the Company.  In addition,  larger  corporations could enter into the route
sales and service segment of the hand-held computer market. The Company competes
on the basis of product features, software, quality, service and price.

EMPLOYEES

         As of December 29, 1996,  the Company had 65  full-time  employees.  Of
these  employees,  11 were  engaged in sales and  marketing,  15 in service  and
customer support, 18 in hardware and software  development,  13 in manufacturing
and 8 in administration and finance. The Company's employees are not represented
by a labor union.  Management believes that the Company's  relationship with its
employees is good.

ITEM 2.       DESCRIPTION OF PROPERTY

         The  Company   maintains  its  principal   offices  and   manufacturing
operations in a leased 19,000 square foot facility in Billerica,  Massachusetts.
The Company's  lease expires on September 30, 1997. The annual base rent for the
Company's  leased  facilities  is  approximately  $123,300.  The  lease  further
provides  that the Company will pay to its landlord as  additional  rent its pro
rata share of certain  operational and maintenance  costs at the facility during
the term of the lease. The Company believes that its facilities are adequate for
its current needs and that additional space, if required,  would be available at
competitive rates.


ITEM 3.  LEGAL PROCEEDINGS.

         The  Company  is  not  presently   involved  in  any  material  pending
litigation.


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

         The Company submitted five matters to a vote of stockholders on October
4, 1996, in a Special  Meeting of  Stockholders.  The Special Meeting was called
for a vote on the following matters:

         (1)  To elect three (3) members of the Board of Directors.

         (2)  To  authorize  the  Board  of  Directors  to  execute,   at  their
discretion, an amendment to the Company's Certificate of Incorporation to effect
a reverse stock split.

         (3)  To  approve  an  amendment  to  the   Company's   Certificate   of
Incorporation to increase the number of authorized shares of Common Stock.

         (4) To approve  the  Company's  1995 Stock  Option  Plan,  under  which
125,000 shares of Common Stock have been reserved for issuance.

         (5) To ratify the  selection  of Price  Waterhouse  LLP as  independent
auditors of the Company for the fiscal ending December 29, 1996.

         For the purpose of counting  votes at the Special  Meeting,  holders of
shares of Common Stock and holders of shares of Series B  Convertible  Preferred
Stock  (the  "Preferred  Stock")  were  treated  as one  class.  Each  holder of
Preferred  Stock was  entitled  to a number  of votes per share  equal to 166.67
shares of Common Stock.



                                       6


         (1) The  resolution to elect Dr. Malcolm M. Bibby was adopted by a vote
of 1,379,707 shares in favor and 3,503 shares withheld;  the resolution to elect
William R. Smart was adopted by a vote of 1,379,498  shares  voting in favor and
3,712 shares withheld; and the resolution to elect John P. Ward was adopted by a
vote of 1,379,689 shares voting in favor and 3,521 shares withheld.

         (2) The  amendment to the Company's  Certificate  of  Incorporation  to
effect a reverse  stock split was approved by a vote of 1,219,726  shares voting
in favor, 162,525 shares voting against, and 959 shares abstaining.

         (3) The  amendment to the Company's  Certificate  of  Incorporation  to
increase  the  number of  authorized  shares of stock from  2,500,000  shares of
Common Stock to 5,000,000  shares of Common Stock and 50,000 shares of Preferred
Stock, of which 20 shares have been designated as Series A Convertible Preferred
Stock, and 4,200 shares were designated as Series B Convertible Preferred Stock,
was approved by a vote of 1,349,770 shares voting in favor, 31,818 shares voting
against and 1,622 shares abstaining.

         (4) The  Company's  1995 Stock  Option  Plan was  approved by a vote of
939,871  shares  voting in favor,  153,722  shares voting  against,1,813  shares
abstaining and 287,804 broker non-votes.

         (5) The  ratification  of the selection of Price  Waterhouse LLP as the
Company's  independent  accountants  for the current fiscal year ending December
29, 1996 was adopted by a vote of 1,380,420 shares voting in favor, 1,899 shares
voting against and 891 shares abstaining.


                                     PART II


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

         During the year ended December 29, 1996, the Company's Common Stock was
traded on the NASD  Electronic  Bulletin  Board  under  the  symbol  "NDCP."  On
December  29,  1996,  the last sale price for the Common  Stock as  reported  by
National Quotations Bureau, Incorporated ("NQBI") was $4.00 per share.

         On March 7, 1997, the Company's  Common Stock commenced  trading on the
NASDAQ SmallCap Market Quotation System ("NASDAQ") under the symbol "IDCP".

         For the periods indicated below, the table sets forth the range of high
and low sale prices for the Common Stock as reported by NQBI.

                                                           HIGH          LOW
                                                           ----          ---
                                         1995

         First Fiscal Quarter                             $20.00        $18.00
         Second Fiscal Quarter                             21.24          6.00
         Third Fiscal Quarter                              12.00          9.00
         Fourth Fiscal Quarter                             10.48          3.25



                                       7



                                         1996

         First Fiscal Quarter                             $11.00         $4.00
         Second Fiscal Quarter                             20.00         10.00
         Third Fiscal Quarter                              13.75         11.00
         Fourth Fiscal Quarter                             11.25          4.00


                                         1997

         First Fiscal Quarter (through March 21, 1997)(1)  $6.13         $3.00


         (1) Based on information  provided by NQBI for the period from December
29, 1996 through March 6, 1997 and information provided by NASDAQ for the period
March 7, 1997 through March 21, 1997.

         As of December 29, 1996, there were 2,456 stockholders of record of the
Company's Common Stock.

DIVIDENDS

         Since  inception,  the Company has not paid any dividends on its Common
Stock and  management  does not  anticipate  the payment of any dividends to its
stockholders  in the  foreseeable  future.  The  Company  currently  intends  to
reinvest earnings, if any, in the development and expansion of its business. The
declaration  of  dividends in the future will be at the election of the Board of
Directors and will depend upon the earnings,  capital requirements and financial
position  of the  Company,  general  economic  conditions  and  other  pertinent
factors. The Company's outstanding Preferred Stock also requires that holders of
Preferred  Stock be  entitled  to  receive  dividends  prior to the  payment  of
dividends on the Company's Common Stock.

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

         The following  discussion  and analysis  should be read in  conjunction
with the financial statements and notes thereto appearing elsewhere herein.

RESULTS OF OPERATIONS

         Year Ended December 29, 1996 Compared with Year Ended December 31, 1995

         Revenues  decreased  approximately  17% to approximately  $5,032,000 in
1996 from  approximately  $6,065,000  in 1995.  The  decrease  in  revenues  was
primarily  due to a decrease in sales of units of the  Company's  Datacomputers,
which  decreased  approximately  38% in 1996  from  1995.  The  decrease  is due
primarily to the Company's management changes, and to the expansion and training
of a new sales team located throughout the United States.

         Sales of the Company's ICAL 100 showed a decrease of approximately  15%
in 1996 from 1995.  Revenues  generated  by the ICAL 100 are almost  exclusively
from current  customers who wish to continue to use their installed base of ICAL
devices. The Company intends to support the ICAL product line, but believes that
current trends of increasing  processing  power in and decreasing costs of small
portable  computers such as the Company's  Datacomputers will make the ICAL line
less attractive to users in the future.  As a result,  the Company expects sales
of the ICAL 100 to decrease in the future although no assurance can be given.



                                       8


         Service and other  revenues  increased to  approximately  $1,029,000 in
1996 from approximately  $876,000 in 1995, an increase of approximately 17%. The
Company  expects that service and other  revenues will continue to rise over the
next  several  years as the  Company's  installed  base of  hand-held  computers
continues to expand, although no assurance of such a result can be given.

         Cost of sales and services decreased approximately 11% to $2,446,000 in
1996 from approximately  $2,736,000 in 1995. As a percentage of sales,  however,
cost  of  sales  and  services  increased  approximately  to  49% in  1996  from
approximately  45% in 1995.  This  increase is primarily due to the expansion of
the Quality Control and Repair Department. The direct material variable costs of
the product line decreased by 2%.

         Research and development expenses increased to approximately $1,303,000
in 1996 from approximately  $1,245,000 in 1995, an increase of approximately 5%,
primarily due to continued  investments in product development.  As a percentage
of sales,  research and development  expenses increased  approximately to 26% in
1996 from  approximately  21% in 1995.  Although no assurance can be given,  the
Company  expects to maintain  research  and  development  spending  necessary to
enhance current products and to develop future products.

         Selling, general and administrative expenses increased to approximately
$3,334,000  in 1996  from  approximately  $3,252,000  in 1995,  an  increase  of
approximately 3%. As a percentage of sales, selling,  general and administrative
expenses  increased to approximately 66% in 1996 from approximately 54% in 1995.
The increase is primarily due to increased expenses associated with the creation
of new positions in the Company's  sales and marketing  staff to focus on market
research and lead generation,  as well a decrease in sales. The Company has also
invested in sales  literature and direct mailing to increase its exposure in its
target markets.  During 1996 the Company also incurred  expenses to relocate two
of its executive officers.

         The Company's  operating loss was  approximately  $2,051,000 in 1996 as
compared to a loss from  operations of  approximately  $1,168,000  in 1995.  The
increased loss was primarily attributable to the decrease in the Company's sales
and the increase in the expenses discussed above.

         The  Company  had  interest  income  in 1996 of  approximately  $34,000
compared to approximately $1,000 in 1995. The increase was primarily a result of
investment of the net proceeds from the private placements.

         Interest  expense  was  approximately  $26,000 in 1996 as  compared  to
approximately  $72,000 in 1995. This decrease resulted from the repayment of the
Company's working capital line of credit.


LIQUIDITY AND CAPITAL RESOURCES

         During 1996, the Company successfully  completed the private placement,
under Regulation S, for 3,000 and 1,200 shares of Series B Convertible Preferred
Stock. The Company  received net proceeds of  approximately  $3,685,200 from the
private placements.

         The cash  balance  at the end of 1996 was  approximately  $722,300,  an
increase of approximately $721,800 over the cash balance of $470 at December 30,
1995. Cash flow from operating  activities in 1996 was  approximately a negative
$2,592,500  primarily  due to  operating  losses  and  payment  of  liabilities.
Approximately  $440,000  of cash was  used in  financing  activities  in 1996 to
retire the Company's borrowing under the working capital line of credit.



                                       9


         In March 1997, the Company  completed an equity  financing (see Note 11
of the Notes to the Financial  Statements).  The Company does not anticipate any
additional equity financing in 1997.

NEW ACCOUNTING PRONOUNCEMENT

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement of Financial Accounting Standards No. 128, ("SFAS 128"), "Earnings per
Share",  effective for fiscal years ending after  December 15, 1997.  Management
has not yet  determined  the  impact of  adoption  of SFAS 128 on the  Company's
reported  results of  operations.  The future  adoption of SFAS 128 will have no
effect on the Company's financial position or cash flows.

ITEM 7.  FINANCIAL STATEMENTS

         See Item 13 below and the Index  therein for a listing of the financial
statements and supplementary data filed as part of this report.


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

         Not applicable.

                                    PART III

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

         Each  Director  of the  Company is elected for a period of one year and
holds office  until his  successor is elected and  qualified.  Vacancies  may be
filled by a majority vote of Directors  then  remaining in office.  Officers are
elected by and serve at the discretion of the Board of Directors.  The following
table  sets forth the year each  Director  was  elected a Director  and the age,
positions and offices  currently held by each Director.  For  information  about
ownership of the Company's  voting  securities by each  Director,  see "Security
Ownership of Certain Beneficial Owners and Management."


                                  YEAR DIRECTOR
                                  FIRST BECAME
NAME                      AGE       DIRECTOR              POSITION
----                      ---       --------              --------

Dr. Malcolm M. Bibby       56        1996              Chairman of the Board and
                                                       President

William R. Smart           76        1989              Director

John P. Ward               69        1967              Director


         Section 16(a) ("Section 16(a)") of the Securities Exchange Act of 1934,
as amended, requires executive officers, Directors, and persons who beneficially
own more than ten percent  (10%) of the  Company's  Common Stock to file initial
reports of  ownership  on Form 3 and reports of changes in  ownership  on Form 4
with the  Securities  and  Exchange  Commission  (the  "SEC")  and any  national
securities exchange on which the Company's securities are registered.  Executive
officers,  Directors  and greater than ten percent (10%)  beneficial  owners are
required by SEC  regulations  to furnish the Company  with copies of all Section
16(a) forms they file.

         Based  solely  on a review of copies  of such  forms  furnished  to the
Company and written  representations from executive officers and Directors,  the
Company  believes  that all Section  16(a)  filings  applicable to its executive
officers,  Directors and ten percent (10%) beneficial  owners were complied with
during the fiscal year ended December 29, 1996.



                                       10



BUSINESS EXPERIENCE AND BACKGROUNDS OF THE DIRECTORS

         The  background  of  each  of the  Company's  current  Directors  is as
follows:

         DR. MALCOLM M. BIBBY has served as a Director of the Corporation  since
January  1996  and was  elected  Chairman  of the  Board  in July  1996.  He was
President of LXE Inc.  ("LXEI"),  a  diversified  wireless  data  communications
products  company,  from 1983 to December 1994.  During this period LXE's annual
revenues grew from approximately $600,000 to approximately $63,000,000. Prior to
LXE , Dr. Bibby was an Executive Assistant to the President at Ciba Vision Care,
a Vice  President of Product  Development at  Wesley-Jessen,  Inc. and a Project
Manager/Group  Leader for hardware and software  development at Monsanto Co. Dr.
Bibby  holds  a  Bachelor  of  Science  degree  and a Ph.D.  both in  Electrical
Engineering  from  the  University  of  Liverpool  and  an  Master  of  Business
Administration from the University of Chicago.

         WILLIAM R. SMART has served as a Director of the Company since December
1989.  He  spent  32  years  with  the  General   Electric   Company  where  his
responsibilities  included  distribution  and marketing  management  and general
management as a Division  Vice  President.  He spent nine years with  Honeywell,
Inc.  where he served as Vice  President  in charge of European  operations  and
Senior  Vice  President  of  Honeywell  Information  Systems,   responsible  for
international operations as well as for the corporate staff. Mr. Smart currently
serves as a Senior Vice President of the Cambridge Strategic Management Group, a
privately-held  management  consultant  company.  Mr.  Smart holds a Bachelor of
Science degree in Electrical Engineering from Princeton University. Mr. Smart is
also the non-executive Chairman of 1st Carolina Corporation (the "Corporation").
The  Corporation  filed a Chapter 7  bankruptcy  petition  in the United  States
Bankruptcy  Court for the  District  of South  Carolina on August 16, 1994 (Case
Number 94-73884).

         JOHN P. WARD has served as a Director of the Company since its founding
in 1967. Since February 1996, Mr. Ward has served as the Chief Executive Officer
of Midas Vision Systems,  Inc., a privately held company specializing in machine
vision systems for automatic optical inspections. From 1990 to 1996 Mr. Ward was
the Chief Executive  Officer and Director of Vanzetti  Vision  Systems,  Inc., a
privately-held  company  specializing  in  infrared  systems.  Mr. Ward was Vice
President of Engineering,  co-founder and Clerk of the Company from its founding
until December 1986.  From 1953 to 1968 Mr. Ward was a Design Section Manager at
the Raytheon Company.  Mr. Ward holds a Bachelor of Science degree in Electrical
Engineering  from the  Massachusetts  Institute  of  Technology  and a Master of
Science degree in Electrical Engineering from Northeastern University.

EXECUTIVE OFFICERS

         The executive officers of the Company, their ages and positions held in
the Company are as follows:


NAME                       AGE                        POSITION
----                       ---                        --------

Dr. Malcolm M. Bibby       56           President, Chairman of the Board and CEO
Richard C. Calcaterra      57           Vice President of Sales
Gerald S. Eilberg          63           Vice President of Finance and
                                         Administration, Chief Financial Officer
Arthur Laramee             58           Vice President of Marketing
Joseph C. Pinto            50           Vice President of Manufacturing
Larry F. Yeager            47           Vice President of Research and
                                         Development



                                       11


BUSINESS EXPERIENCE AND BACKGROUNDS OF THE EXECUTIVE OFFICERS

         The  following is a brief summary of the  background of each  executive
officer of the Company  other than Dr.  Malcolm M. Bibby,  whose  background  is
summarized above.


         RICHARD C.  CALCATERRA  joined the  Company in  September  1996 as Vice
President of Sales. Mr. Calcaterra has over twenty six years of  sales/marketing
and management  experience.  During the past six years, he was President and CEO
of IMG, a company that developed and marketed software utilizing RF and wireless
technologies.  Prior to IMG, Mr.  Calcaterra was Vice President of Marketing for
Telxon Corporation,  responsible for worldwide  marketing,  Channel and Vertical
industry  sales and  marketing,  and product  planning and  development.  Before
joining  Telxon Corp.,  he was Vice  President of Sales for Norand  Corporation,
responsible for the Retail division  covering North America.  Mr. Calcaterra was
Director of Sales for Route  Accounting  in the Central USA when he first joined
Norand.  Mr.  Calcaterra  also spent  thirteen  years at  Honeywell  Inc.,  with
increasing levels of responsibility including Branch Management.  Mr. Calcaterra
holds a Bachelor  of Science  degree in  Business  Administration  from  Chaffey
College.

         GERALD  S.  EILBERG  joined  the  Company  in  September  1988  as Vice
President  of Finance  and  Administration  and Chief  Financial  Officer.  From
October 1986 to August 1988,  Mr.  Eilberg  served as a financial  consultant to
small private and public  companies.  From September 1982 to September  1986, he
was President of Direct Marketing Inc. Previous  positions included Division and
Corporate  Controller  positions with large public  companies.  Mr. Eilberg is a
graduate  of the  Boston  University  School  of  Management  and  the  Columbia
University Graduate School of Business.

         ARTHUR  LARAMEE  joined the Company in July 1987 as a Program  Manager.
Since that time he has held various  positions in the  Company,  including  Vice
President of Customer Services and Director of Business Development. Mr. Laramee
was appointed  Vice President of Marketing in September of 1996. Mr. Laramee has
over 30 years of experience in marketing, sales, software development,  customer
service and executive management in the computer industry.  Prior to joining the
Company,  Mr. Laramee served as a Corporate Program Manager at Digital Equipment
Corporation, including Office Automation Manager for Bell Systems Business. From
1985 to June 1987,  Mr.  Laramee served as Vice President of Sales and Marketing
at Voicemail International and Converse Technology. Mr. Laramee holds a Bachelor
of  Science  degree in  physics  from  Boston  College  and a Masters  degree in
Business Administration from the University of New Hampshire.

         JOSEPH C. PINTO joined the Company in March 1984 as Materials  Manager,
advanced into the position of  Manufacturing  Manager in September  1986 and was
appointed Vice President of  Manufacturing in January 1988. Prior to joining the
Company,  Mr. Pinto had been Production  Control Manager at BLH  Electronics,  a
manufacturer of process control systems,  since January, 1979. Mr. Pinto holds a
Bachelor of Science degree in Industrial Technology from Northeastern University
and a Master of Science  degree in Systems  Management  from Western New England
College.

         LARRY  F.  YEAGER  has  served  as  Vice   President  of  Research  and
Development  since  joining  the Company in December  1985.  Prior to that,  Mr.
Yeager  was  Vice  President  of  Software   Development   at  the   Saddlebrook
Corporation,  a turnkey  systems  company.  During  eight  years at  Saddlebrook
Corporation, Mr. Yeager developed various software products, including Pro-Forma
Modeling, System M, Client Controllable software products and numerous financial
applications  programs.  Prior to joining Saddlebrook,  Mr. Yeager worked at the
State Street Bank and Trust Company of Boston,  Massachusetts  where he held the
positions of Manager of Capital Planning and Manager of Management Sciences. Mr.
Yeager  holds a Bachelor  of Science  degree  from



                                       12


Massachusetts  Institute of Technology's Sloan School of Management as well as a
Masters degree in Business Administration from Northeastern University.


         None of the  Company's  executive  officers or Directors are related to
any other executive officer or Director.



ITEM 10. EXECUTIVE COMPENSATION.

EXECUTIVE OFFICERS'  COMPENSATION

The following  table sets forth the  compensation  paid to Dr. Malcolm M. Bibby,
the  Company's  President  and  Mr.  Norman  Mackinnon,   the  Company's  former
President,  during the fiscal years ended December 29, 1996,  December 31, 1995,
and December 31,1994 ("Fiscal 1996, 1995 and 1994", respectively) along with the
other current executive  officers of the Company,  who earned total compensation
in excess of $100,000 during Fiscal 1996.


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                              (E)
                                                                                              ---
                                                       ANNUAL COMPENSATION           LONG TERM COMPENSATION
                                                       -------------------                   AWARDS
           (A)                        (B)                (C)          (D)           -------------------------
           ---                        ---                ---          ---             SECURITIES UNDERLYING
 NAME AND PRINCIPAL POSITION         YEAR              SALARY        BONUS          OPTIONS/SARS (#)(1)(2)(3)
 ---------------------------         ----              ------        -----          -------------------------
<S>                                  <C>             <C>              <C>                      <C>
Dr. Malcolm M. Bibby (3)(7)          1996            $ 72,051         $0                       118,750
  President, CEO and Chairman        1995                   0         $0                             0
   of the Board                      1994                   0         $0                             0

Norman Mackinnon (1)(2)(4)(5)(6)     1996            $133,715         $0                             0
  Former Chairman of the Board,      1995             160,185         $0                             0
  President and CEO                  1994             128,829         $0                         8,429

Gerald S. Eilberg (1)(2)(3)(4)       1996            $102,106         $0                         5,000
 Vice President of Finance and       1995             102,106         $0                             0
  Administration and CFO             1994              85,612         $0                           557

Larry F. Yeager (1)(2)(3)(4)         1996            $100,522         $0                         5,000
 Vice President of Research          1995             100,522         $0                             0
  and Development                    1994              97,112         $0                         3,022
</TABLE>

(1)      On March 1, 1994, the Board of Directors approved the issuance of stock
         options to  purchase  shares of Common  Stock at an  exercise  price of
         $4.00 per share to all  employees  of the Company who had  vacation pay
         accrued as of December  31, 1993  ("Vacation  Options").  The  Vacation
         Options, effective as of December 31, 1993, were issued to employees of
         the Company at the rate of one share per $4.00 of accrued vacation pay.
         Under this  arrangement,  Messrs.  Mackinnon,  Eilberg  and Yeager were
         issued options to purchase 8,429, 557 and 3,022 shares of Common Stock,
         respectively.  In March  1994,  8,429,  557 and 3,022  shares of Common
         Stock  were   issued  to  Messrs.   Mackinnon,   Eilberg   and  Yeager,
         respectively,  in exchange for promissory  notes tendered in accordance
         with the Company's 1994 cashless stock option exercise program.

(2)      The options that were granted on March 30, 1994,  are  exercisable at a
         share  price of $4.00  and vest  completely  10 years  from the date of
         their grant. Vesting of these options accelerates prior to December



                                       13


         31, 1999, as follows: (i) 50% vested if net income before taxes exceeds
         $1,000,000 or 100% if net income before taxes exceeds $2,000,000.

(3)      In November  1996,  non-qualified  stock  options to purchase  118,750,
         5,000,  and 5,000 shares of Common Stock at an exercise  price of $5.00
         were granted to Messrs.  Bibby,  Eilberg and Yeager  respectively.  The
         options granted to Messers. Eilberg and Yeager vest 40% in 1996 and 60%
         in 1997.  The options  granted to Dr. Bibby have the following  vesting
         periods:  (i) 6,000  options  were fully  vested upon grant (ii) 16,250
         vested fully in 1996,  another  23,750 vest in 1997 (iii) The remaining
         72,750 vest fully in ten years, but contain the following  acceleration
         clauses:  (a) 2,750  will vest 50% if net income  before  taxes for the
         five year period ended December 31, 1999 exceeds $1,000,000 and 100% if
         net income for the five year period exceeds $2,000,000; (b) 25,000 will
         vest if net income  before  taxes  exceeds  $750,000  and sales  exceed
         $8,500,000  in any 4 consecutive  quarters  prior to December 31, 1997;
         (c) up to 45,000 options will vest if sales during any four consecutive
         quarters exceed  $8,500,000 and the following amounts net income before
         taxes are exceeded:

               Net income before taxes                 Options that vest

                    1,000,000                                5,000
                    1,250,000                               10,000
                    1,500,000                               15,000
                    1,750,000                               20,000
                    2,000,000                               27,500
                    2,250,000                               35,000
                    2,500,000                               45,000


(4)      During 1996, the Company paid-off the outstanding  working capital line
         of credit.  As a result,  the bank returned the certificates of deposit
         to Mr. Mackinnon.

(5)      Mr.  Mackinnon  received  an annual car  allowance  from the Company of
         approximately $1,675 during Fiscal 1994.

(6)      On April 26, 1996, Mr. Mackinnon resigned as President and CEO. On July
         25,  1996,  Mr.  Mackinnon  resigned  as Chairman of the Board and as a
         Director.

(7)      Dr. Bibby commenced employment with the Company in April 1996.


                      OPTION/SAR GRANTS IN FISCAL YEAR 1996
                               (INDIVIDUAL GRANTS)


<TABLE>
<CAPTION>
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
                                                     PERCENT OF
                                                        TOTAL
                               NUMBER OF              OPTIONS/
                              SECURITIES                SAR'S
                              UNDERLYING             GRANTED TO
                               OPTIONS/               EMPLOYEES             EXERCISE OR
                                 SAR'S                IN FISCAL              BASE PRICE             EXPIRATION
         NAME                   GRANTED                 YEAR                   ($/SH)                  DATE
          (a)                     (b)                    (c)                    (d)                     (e)
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
<S>                              <C>                     <C>                   <C>                   <C>
   Malcolm M. Bibby              5,250                   2%                    $4.00                 Feb. 2006
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
   Malcolm M. Bibby              6,000                   2%                    $5.00                 Mar 2006
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
   Malcolm M. Bibby             42,000                   14%                   $5.00                April 2006
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
   Malcolm M. Bibby             65,500                   22%                   $5.00                 Nov. 2006
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
   Gerald S. Eilberg             5,000                   2%                    $5.00                 July 2006
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
     Larry Yeager                5,000                   2%                    $5.00                 July 2006
------------------------ ---------------------- ---------------------- ----------------------- ----------------------
</TABLE>


                                       14




                 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996
                            AND FY-END OPTION VALUES
<TABLE>
<CAPTION>

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

                                                                                       NUMBER OF
                                                                                      UNEXERCISED
                                                                                      SECURITIES
                                                                                      UNDERLYING            VALUE OF
                                                                                       OPTIONS/            UNEXERCISED
                                                                                         SARS             IN-THE-MONEY
                                                                                       AT FY-END             OPTIONS
                                          SHARES ACQUIRED           VALUE            EXERCISABLE/         EXERCISABLE/
                                            ON EXERCISE           REALIZED           UNEXERCISABLE        UNEXERCISABLE
                 NAME                           (#)                  ($)                  (#)                ($)(1)
                 (a)                            (b)                  (c)

--------------------------------------- -------------------- -------------------- -------------------- --------------------
<S>                                              <C>                 <C>             <C>                       <C>
Malcolm M. Bibby                                 0                   $0              22,250/96,500             $0
   President, CEO
--------------------------------------- -------------------- -------------------- -------------------- --------------------
Norman Mackinnon                                 0                   $0                  15/0                  $0
   Former President
--------------------------------------- -------------------- -------------------- -------------------- --------------------
Gerald S. Eilberg                                0                   $0                15/18,059               $0
   Vice President Finance & Admin.
    and CFO
--------------------------------------- -------------------- -------------------- -------------------- --------------------
Larry F. Yeager                                  0                   $0                15/16,848               $0
    Vice President of Research &
     Development
--------------------------------------- -------------------- -------------------- -------------------- --------------------

</TABLE>

                                       15


(1)      In-the-Money options, are those options for which the fair market value
         of the  underlying  shares of Common Stock is greater than the exercise
         price of the option. As of December 29, 1996, Messrs. Bibby, Mackinnon,
         Eilberg and Yeager had exercisable  options to purchase 22,250, 15, 15,
         and 15 shares of Common Stock,  respectively,  at share exercise prices
         of $4.00 to $5.00. See "Security Ownership of Certain Beneficial Owners
         and  Management".  The fair market value of the Company's  Common Stock
         underlying  the  options as of December  29,  1996 was $4.00  (National
         Quotation Bureau closing bid price on December 29, 1996).

COMPENSATION OF DIRECTORS

         During Fiscal 1996, the Company's  Directors received an aggregate cash
compensation of $13,500 for their services as Directors.  Messrs. Ward and Smart
received  $5,500  respectively.  Dr.. Bibby received $2,500 as a Director before
becoming  President  on April 26, 1996.  As  President,  Dr.  Bibby  receives no
compensation for being a Director.


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

         The  following  table sets forth,  as of  December  29,  1996,  certain
information  concerning stock ownership of the Company by (i) each person who is
known by the  Company to own  beneficially  5% or more of the  Company's  voting
securities,  (ii) each of the Company's  Directors,  and (iii) all Directors and
officers as a group. Except as otherwise  indicated,  the stockholders listed in
the table have sole  voting and  investment  powers  with  respect to the shares
indicated.  For  purposes  of this  table,  the  Common  Stock and the  Series B
Convertible Preferred Stock (the "Preferred Stock") are treated as one class. As
of  December  29,  1996,  the  Company  had  1,251,925  shares of  Common  Stock
outstanding and 2,456 stockholders of record. In addition, the Company had 4,200
shares of Preferred Stock outstanding.  Each share of Preferred Stock, which has
a face value of $1,000,  is  convertible  into Common  Stock at a variable  rate
based upon

                                       15

the stock price of the Company's Common Stock, not to exceed $6.00 per share nor
be lower than $4.00 per share. Based upon the closing bid price of the Company's
Common  Stock on  December  29,  1996,  each share of  Preferred  Stock would be
convertible  into 250 shares of Common Stock.  Each holder of Preferred Stock is
entitled  to the number of votes  equal to the number of shares of Common  Stock
into which such Preferred Stock is convertible.  The Company has no other voting
securities.
<TABLE>
<CAPTION>

                                                        Number of Shares            Percentage of Class(2)
Name and Address of Beneficial Owner(1)                 Beneficially Owned          ----------------------
---------------------------------------                 ------------------
<S>                                                         <C>                              <C>
Dr. Malcolm M. Bibby(3)..........................              49,800                        2.1%
William R. Smart.................................               2,500                           *
John P. Ward(4)..................................              28,868                        1.3%
Gerald S. Eilberg(5).............................               8,031                           *
Larry F. Yeager(6)..............................               13.429                           *
RBB Bank AG(7)..................................            1,053,558                        45.8%
   Burgring 16
   8010 Graz, Austria
Firstmark Corp.................................               118,692                         5.2%
   One Financial Place
   222 Kennedy Memorial Drive
   Waterville, Maine 04901
All Directors and Officers as a Group
  (8 persons) (3)(4)(5)(6)(8)..................               113,575                         4.9%

</TABLE>

* Less than 1%.

(1)    The address for all of the named entities other than Firstmark Corp., and
       RBB Bank is c/o National  Datacomputer,  Inc.,  900  Middlesex  Turnpike,
       Bldg. 5, Billerica, Massachusetts 01821.

(2)    Pursuant to the rules of the Securities and Exchange  Commission,  shares
       of Common Stock that an individual or group has a right to acquire within
       60 days  pursuant to the exercise of options or warrants are deemed to be
       outstanding for the purpose of computing the percentage ownership of such
       individual or group, but are not deemed to be outstanding for the purpose
       of computing  the  percentage  ownership of any other person shown in the
       table.  This table  reflects the  ownership of all shares of Common Stock
       and the Series B Convertible Preferred Stock voting as a single class.

(3)    Includes an aggregate of 22,250 shares of Common Stock underlying  vested
       options to purchase Common Stock.

(4)    Includes  10,137  shares  held by Mr.  Ward's  wife for  which  Mr.  Ward
       disclaims beneficial ownership.

(5)    Includes 15 shares of Common Stock underlying  vested options to purchase
       Common Stock.

(6)    Includes 15 shares of Common Stock underlying  vested options to purchase
       Common Stock.

(7)    Includes an aggregate of 1,050,000  shares of Common Stock  issuable upon
       conversion of 4,200 shares of Series B Convertible Preferred Stock.

(8)     Includes an aggregate of 22,280 shares of Common Stock underlying vested
        options to  purchase  Common  Stock  held by three of the  Corporation's
        officers.

                                       16


ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       In 1996,  the Company  retired the  outstanding  working  capital line of
credit  with  Fleet  bank.  As a  result,  Fleet  bank  returned  to Mr.  Norman
Mackinnon, the Company former President, CEO and Chairman,  certain certificates
of deposit that were held as collateral for the line of credit.


ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.

         (A)(1)   FINANCIAL STATEMENTS.

     The  financial  statements  required to be filed by Item 7 herewith  are as
follows:

<TABLE>
<CAPTION>
                                                                     PAGE
                                                                     ----
<S>                                                                   <C>
Report of Independent Accountants                                     F-1
Balance Sheets as of December 29, 1996 and
   December 30, 1995                                                  F-2
Statements of Operations for the years ended
   December 29, 1996, December 30, 1995,
   and  December 31,1994                                              F-3
Statements of Stockholders'  Equity (Deficit) for the years
   ended December 29, 1996, December 30, 1995
   and December 31, 1994                                              F-4
Statements of Cash Flows for the years ended
   December 29, 1996, December 30, 1995
   and December 31, 1994                                              F-5
Notes to Financial Statements                                         F-6

</TABLE>

         (A)(2)   EXHIBITS.

                  (1)      The following exhibits are filed herewith:

Exhibit
  No.                                       Title
  ---                                       -----

3a                Certificate of Amendment of Certificate of Incorporation filed
                  by the  Company  with the  Secretary  of State of  Delaware on
                  December 18, 1996 to increase  the total number of  authorized
                  shares of Common  Stock of the Company from to  10,000,000  to
                  20,000,000 shares.

3b                Certificate of Amendment of Certificate of Incorporation filed
                  by the  Company  with the  Secretary  of State of  Delaware on
                  December  18, 1996 to effect a 1:4 reverse  stock split in the
                  issued and outstanding shares of Common Stock of the Company.

11                Statement Re: Computation of Per Share Earnings.

27                Financial Data Schedule.

                  (2) The following  exhibits to the Company's Current Report on
Form 8-K/A were filed with the Securities  and Exchange  Commission on September
18, 1996 and are incorporated by reference herein:

Exhibit
  No.                                       Title
  ---                                       -----

4c                Form of Regulation S Offshore Subscription Agreement.

                  (3) The following  exhibits to the Company's Current Report on
Form 8-K were filed with the Securities and Exchange Commission on September 16,
1996 and are incorporated by reference herein:

Exhibit
  No.                                       Title
  ---                                       -----

4a                Statement of  Designation  of Series B  Convertible  Preferred
                  Stock  filed by the  Company  with the  Secretary  of State of
                  Delaware on April 25, 1996.






4b                Statement of Designation  of Increase of Shares  Designated as
                  Series B Convertible Preferred Stock filed by the Company with
                  Secretary of State of Delaware on June 27, 1996.

                  (4) The following  exhibits to the Company's  Annual Report on
Form  10-KSB for the fiscal  year ended  December  31,  1995 were filed with the
Securities  and Exchange  Commission on April 12, 1996 and are  incorporated  by
reference herein:

Exhibit
  No.                                       Title
  ---                                       -----

10                1995 Stock Option Plan.

                  (5) The following  exhibits were filed with the Securities and
Exchange  Commission on August 30, 1994 in connection with the Company's Special
Meeting of Stockholders and are incorporated by reference herein:

Exhibit
  No.                                       Title
  ---                                       -----

10                1994 Stock Option Plan.

                  (6)  The  following  exhibits  to the  Company's  Registration
Statement on Form S-1 (No.  33-13557) as filed with the  Securities and Exchange
Commission  on April 17,  1987 and  declared  effective  on June 3, 1987 and are
incorporated by reference herein:

3.02              By-laws of the Company.


         (B)      REPORTS ON FORM 8-K.

         During  the last  quarter of the period  covered  by this  report,  the
Company filed two reports on Form 8-K.

                  (1) The Company filed an Item 5 report of Other Events on Form
8-K on September 16, 1996 in connection with two completed private placements of
the Company. No financial statements were filed therewith.

                  (2) The Company  amended its September 16, 1996 report on Form
8-K by filing a Form  8-K/A on  September  18,  1996 to  include  an  additional
exhibit. No financial statements were filed therewith.

         (a)(2)   EXHIBITS.

         (i)      The following exhibits are filed herewith:

Exhibit
 No.                       Title
-------                    -----

3a                Certificate of Amendment of Certificate of Incorporation filed
                  by the  Company  with the  Secretary  of State of  Delaware on
                  December 18, 1996 to increase  the total number of  authorized
                  shares of  Common  Stock of the  Company  from  10,000,000  to
                  20,000,000 shares.

3b                Certificate of Amendment of Certificate of Incorporation filed
                  by the  Company  with the  Secretary  of State of  Delaware on
                  December  18, 1996 to effect a 1:4 reverse  stock split in the
                  issued and outstanding shares of Common Stock of the Company.

3c                Certificate of Incorporation of the Company, as amended.

4                 Specimen  Certificate  of  Common  Stock,  $.08 par  value per
                  share, of the Company.

11                Statement Re: Computation of Per Share Earnings.

27                Financial Data Schedule


                                       17
         .
SIGNATURES

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

                                                     NATIONAL DATACOMPUTER, INC.


Date:  March 28, 1997               By:/s/Malcolm M. Bibby
                                       -------------------
                                       Malcolm M. Bibby
                                       President

         In  accordance  with the  Securities  Exchange Act of 1934, as amended,
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>

Name                                  Capacity                                                           Date
----                                  --------                                                           ----
<S>                                  <C>                                                         <C>
/s/Malcolm M. Bibby                  Chairman of the Board, President and                        March 28, 1997
-------------------                  Principal Executive Officer
Malcolm M. Bibby

/s/ William R. Smart                 Director                                                    March 28, 1997
--------------------
William R. Smart

/s/ John P. Ward                     Director                                                    March 28, 1997
----------------
John P. Ward

/s/Gerald S. Eilberg                 Chief Financial Officer                                     March 28, 1997
--------------------                 (Principal financial and
Gerald S. Eilberg                    accounting officer)


</TABLE>



                                     18




                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of National Datacomputer, Inc.

In our opinion,  the  accompanying  balance sheet and the related  statements of
operations,  of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of National Datacomputer,  Inc.
at December 29, 1996 and December  30, 1995,  and the results of its  operations
and its cash flows for each of the three years in the period ended  December 29,
1996,  in  conformity  with  generally  accepted  accounting  principles.  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 of these financial  statements in accordance
with  generally  accepted  auditing  standards  which  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,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.

PRICE WATERHOUSE LLP

Boston, Massachusetts
March 14, 1997


                                      F-1


NATIONAL DATACOMPUTER, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Unaudited
                                                                                                                     Pro Forma
                                                                              December 29,        December 30,      December 29,
                                                                               1996                1995                1996
                                                                                                                     (Note 11)
<S>                                                                      <C>                  <C>                 <C>
Assets
Current Assets:
    Cash and cash equivalents                                            $      722,285       $         470       $   2,196,868
    Accounts receivable, net of allowance for doubtful accounts
       of $98,174 and $89,445 at December 29, 1996 and December
       30, 1995, respectively                                                   621,037           1,198,894             621,037
    Inventories                                                               1,479,153           1,292,336           1,479,153
    Other current assets                                                        153,741              17,132             153,741
                                                                         ---------------      --------------      --------------

       Total current assets                                                   2,976,216           2,508,832           4,450,799

Property and equipment, net                                                     234,530             145,853             234,530
                                                                         ---------------      --------------      --------------

                                                                         $    3,210,746       $   2,654,685       $   4,685,329
                                                                         ===============      ==============      ==============

Liabilities and stockholders' equity (deficit)
Current Liabilities:
    Current obligations under capital lease                              $       21,424       $       6,572       $      21,424
    Accounts payable                                                            125,454             333,991             125,454
    Accrued payroll and related taxes                                           171,104             287,736             171,104
    Accrued professional fees                                                    48,732             275,013              48,732
    Accrued rent and utilities                                                   54,429             125,984              54,429
    Accrued expenses - other                                                    274,423             418,100             274,423
    Accrued interest on preferred stock (Note 7)                                 84,000              -                   84,000
    Deferred revenues, current portion                                          678,625             608,571             678,625
    Deferred compensation                                                        45,742              55,059              45,742
                                                                         ---------------      --------------      --------------

       Total current liabilities                                              1,503,933           2,111,026           1,503,933

Long-term debt                                                                  -                   440,000              -
Convertible debt                                                                -                    -                  250,000
Obligation under capital lease                                                  114,828               2,970             114,828
Deferred revenues                                                                75,143             267,540              75,143
                                                                         ---------------      --------------      --------------

                                                                              1,693,904           2,821,536           1,943,904
                                                                         ---------------      --------------      --------------

Commitments (Note 8)

Stockholders' equity (deficit)

    Preferred stock, Series A convertible,  $0.001 par value; 20
       shares  authorized;  0 shares issued and  outstanding  at
       December 29, 1996 and December 30, 1995                                  -                    -                   -
    Preferred  stock,  Series B  convertible  $0.001  par value;
       4,200 shares  authorized;  4,200 and 0 shares  issued and
       outstanding  at December  29, 1996 and December 30, 1995,
       respectively (liquidating preference of $4,200,000)                    3,685,206              -                3,685,206
    Preferred stock,  Series C convertible $0.001 par value; 900
       shares  authorized;  0 shares issued and  outstanding  at
       December 29, 1996 and  December 30, 1995,  and 900 issued
       and outstanding  (pro forma)  (liquidating  preference of
       $900,000)                                                                -                    -                  881,583
    Preferred stock,  Series D convertible $0.001 par value; 350
       shares  authorized;  0 shares issued and  outstanding  at
       December 29, 1996 and  December 30, 1995,  and 350 issued
       and outstanding  (pro forma)  (liquidating  preference of
       $350,000)                                                                -                    -                  343,000
    Common stock, $0.08 par value;  5,000,000 shares authorized;
       1,251,925 and 1,169,436  shares issued and outstanding at
       December 29, 1996 and December 30, 1995, respectively                    100,154              93,555             100,154
    Capital in excess of par value                                            9,755,957           9,438,978           9,755,957
    Accumulated deficit                                                     (11,548,437)         (9,297,847)        (11,548,437)
    Unamortized stock compensation                                             (124,769)             -                 (124,769)
    Notes receivable - employees                                               (351,269)           (351,269)           (351,269)
    Preferred stock subscription receivable                                     -                   (50,268)             -
                                                                         ---------------      --------------      --------------

       Total stockholders' equity (deficit)                                   1,516,842            (166,851)          2,741,425
                                                                         ---------------      --------------      --------------

                                                                         $    3,210,746       $   2,654,685       $   4,685,329
                                                                         ===============      ==============      ==============

</TABLE>

                   The accompanying notes are an integral part
                          of these financial statements

                                       F2




NATIONAL DATACOMPUTER, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                                     Year Ended


                                                               December 29,             December 30,             December 31,
                                                                   1996                     1995                     1994

<S>                                                       <C>                       <C>                      <C>
Revenues
       Net product revenue                                $         4,003,376       $        5,189,426       $        5,805,600
       Service and other revenue                                    1,028,638                  875,631                  723,376
                                                          --------------------      -------------------      -------------------

                                                                    5,032,014                6,065,057                6,528,976

Cost of sales and services                                          2,445,911                2,736,010                2,724,769
                                                          --------------------      -------------------      -------------------

                                                                    2,586,103                3,329,047                3,804,207
                                                          --------------------      -------------------      -------------------

Operating expenses:
       Research and development                                     1,302,678                1,245,310                  957,878
       Selling, general and administrative                          3,333,966                3,251,970                2,362,253
                                                          --------------------      -------------------      -------------------

                                                                    4,636,644                4,497,280                3,320,131
                                                          --------------------      -------------------      -------------------

Income (loss) from operations                                      (2,050,541)              (1,168,233)                 484,076

Other income (expense):
       Interest and other income                                       33,865                      827                      704
       Interest expense                                               (25,914)                 (72,343)                 (60,105)
                                                          --------------------      -------------------      -------------------

Net  income (loss)                                        $        (2,042,590)      $       (1,239,749)      $          424,675
                                                          ====================      ===================      ===================

Calculation of net income (loss) per common
       share and dilutive share equivalent:

Net income (loss)                                         $        (2,042,590)      $       (1,239,749)      $          424,675

Preferred stock preferences (Notes 2 and 7)                        (5,408,000)                     -                        -
                                                          --------------------      -------------------      -------------------

Net income (loss) attributable to
       common stockholders                                $        (7,450,590)      $       (1,239,749)      $          424,675


Net income (loss) common per share
and dilutive share equivalent                             $             (6.17)      $            (1.43)      $             0.59
                                                          ====================      ===================      ===================

Weighted average shares and dilutive
       share equivalents outstanding                                1,207,442                  869,835                  725,870
                                                          ====================      ===================      ===================




</TABLE>
                   The accompanying notes are an integral part
                          of these financial statements

                                       F3





NATIONAL DATACOMPUTER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------


                              Preferred Stock Series A  Preferred Stock Series B              Common Stock
                              ----------------------------------------------------------------------------------------
                                                                                                           Capital in
                                          Net Issuance              Net Issuance                  Par        Excess
                               Shares       Price        Shares       Price         Shares       Value    of par value)

<S>                                 <C>      <C>         <C>     <C>               <C>       <C>         <C>
Balance at December 31, 1993        -  $           -         -   $           -       410,509 $    32,841 $  6,850,412

Net income

Exercise of common stock options                                                      87,817       7,025      344,244

Issuance of preferred stock         15        759,591
                              ---------  -------------  ---------  -------------  -----------  ----------  -----------

Balance at December 31, 1994        15        759,591        -               -       498,326      39,866    7,194,656

Net loss

Conversion of preferred stock      (15)      (759,591)                               206,250      16,500      743,091

Issuance of common stock                                                             464,860      37,189    1,501,231
                              ---------  -------------  ---------  -------------  -----------  ----------  -----------

Balance at December 30, 1995        -              -         -               -     1,169,436      93,555    9,438,978

Net loss

Issuance of preferred stock                                4,200      3,685,206

Interest on preferred stock (Note 7)

Issuance of common stock                                                              33,969       2,717       40,900

Issuance of common stock under
     consulting agreement                                                             31,192       2,495      153,466

Amortization of stock compensation

Issuance of common stock
     in satisfaction of accrued interest                                              17,328       1,387      122,613

Stock subscription receivable paid
                              ---------  -------------  ---------  -------------  -----------  ----------  -----------

Balance at December 29, 1996     -       $    -            4,200   $  3,685,206    1,251,925   $ 100,154   $9,755,957
                              =========  =============  =========  =============  ===========  ==========  ===========
</TABLE>


NATIONAL DATACOMPUTER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)(CONTINUED)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------


                                                           Preferred
                                  Notes       Unamortized    Stock                        Total
                                receivable      Stock     subscription Accumulated     stockholders'
                                employees    Compensation  receivable    deficit     equity (deficit)

<S>                           <C>          <C>           <C>         <C>            <C>
Balance at December 31, 1993      $     -      $      -      $    -     $(8,482,773)  $(1,599,520)

Net income                                                                  424,675      424,675

Exercise of common stock
options                           (351,269)                                               -

Issuance of preferred stock                                  (50,268)                    709,323
                                -----------  ------------  ----------  -------------  -----------

Balance at December 31, 1994      (351,269)           -      (50,268)    (8,058,098)    (465,522)

Net loss                                                                 (1,239,749)  (1,239,749)

Conversion of preferred stock                                                                 -

Issuance of common stock                                                               1,538,420
                                -----------  ------------  ----------  -------------  -----------

Balance at December 30, 1995      (351,269)           -      (50,268)    (9,297,847)    (166,851)

Net loss                                                                 (2,042,590)  (2,042,590)

Issuance of preferred stock                                                            3,685,206

Interest on preferred stock (Note 7)                                       (208,000)    (208,000)

Issuance of common stock                                                                  43,617

Issuance of common stock under
     consulting agreement                       (155,961)                                     -

Amortization of stock compensation                31,192                                  31,192

Issuance of common stock
     in satisfaction of accrued interest                                                 124,000

Stock subscription receivable paid                            50,268                      50,268
------------------------------  -----------  ------------  ----------  -------------  -----------

Balance at December 29, 1996    $ (351,269)  $  (124,769)  $   -       $(11,548,437)  $1,516,842
                                ===========  ============  ==========  =============  ===========
</TABLE>


                   The accompanying notes are an integral part
                          of these financial statements

                                       F4




NATIONAL DATACOMPUTER, INC.
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------

                                                                                     Year Ended


                                                                        December 29,        December 30,       December 31,
                                                                           1996                1995               1994

<S>                                                                    <C>               <C>                <C>
Cash flows from operating activities:
    Net income (loss)                                                  $  (2,042,590)    $   (1,239,749)    $      424,675
    Adjustments to reconcile net income (loss) to net
       cash used for operating activities:
       Depreciation and amortization                                          83,973             83,324             73,162
       Amortization of stock compensation                                     31,192            -                  -
       Gain on sale of property and equipment                                 (1,780)           -                  -
       Changes in assets and liabilities:
          (Increase) decrease in accounts receivable                         577,857            (40,834)          (949,412)
          Increase in inventories                                           (206,229)          (197,168)          (424,248)
          (Increase) decrease in other current assets                       (136,609)           (15,117)               545
          Decrease in accounts payable                                      (208,537)          (321,268)           (20,351)
          (Decrease) increase in accrued expenses
             and deferred compensation                                      (567,462)          (129,774)           263,548
          (Decrease) increase in deferred revenues                          (122,343)           219,800             94,159
                                                                       --------------      -------------      -------------

    Net cash used for operating activities                                (2,592,528)        (1,640,786)          (537,922)
                                                                       --------------      -------------      -------------

Cash flows from investing activities:
    Purchases of property and equipment                                      (14,295)           (35,476)           (80,842)
    Proceeds from sale of property and equipment                               5,650            -                  -
                                                                       --------------      -------------      -------------

    Net cash used for investing activities                                    (8,645)           (35,476)           (80,842)
                                                                       --------------      -------------      -------------

Cash flows from financing activities:
    Proceeds from issuance of  preferred stock, net of issuance costs      3,685,206            -                  709,323
    Proceeds from preferred stock subscription receivable                     50,268            -
    Repayment of borrowings                                                 (440,000)           -                  -
    Payments of obligations under capital lease                              (16,103)            (9,984)           (24,712)
    Proceeds from issuance of common stock,
       net of issuance costs                                                  43,617          1,538,420            -
                                                                       --------------      -------------      -------------

    Net cash provided by financing activities                              3,322,988          1,528,436            684,611
                                                                       --------------      -------------      -------------

Net increase (decrease) in cash and cash equivalents                         721,815           (147,826)            65,847
Cash and cash equivalents at beginning of year                                   470            148,296             82,449
                                                                       --------------      -------------      -------------

Cash and cash equivalents  at end of year                            $       722,285     $          470     $      148,296
                                                                       ==============      =============      =============


Supplemental Cash Flow Information:
    Cash paid for interest                                           $        33,613     $       68,041     $       54,054
    Non-cash investing and financing activities:
       Stock subscription receivable in connection with
          Series A preferred offering                                        -                  -                   50,268
       Notes receivable on exercise of common stock options                  -                  -                  351,269
       Accrued Interest on Series B preferred stock charged to
          Accumulated deficit                                                 84,000            -                  -
       Purchase of property and equipment  under capital lease               142,813            -                   14,850
       Demo equipment previously included in inventory
          reclassified to fixed assets                                        19,412             17,779             52,586
       Conversion of preferred stock into the Company's
          common stock                                                       -                  759,591            -
       Common stock issued in satisfaction of interest on Series B
          preferred stock                                                    124,000            -                  -

</TABLE>

                   The accompanying notes are an integral part
                          of these financial statements


                                       F5


--------------------------------------------------------------------------------
NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

 1.   ORGANIZATION

      National   Datacomputer,   Inc.   (the   "Company")   designs,   develops,
      manufactures,  markets and  services a line of hand-held  battery  powered
      microprocessor-based data collection products and computers and associated
      peripherals for use in mobile operations.

 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      CASH AND CASH EQUIVALENTS
      The Company considers all highly liquid debt instruments purchased with an
      original maturity date of three months or less to be cash equivalents. The
      Company   invests  its  excess  cash  in  US  Treasury   securities,   and
      accordingly,  these  instruments  are subject to minimal credit and market
      risk. The investments  are classified as held to maturity,  and all mature
      within  ninety days of December  29,  1996.  These  investments  have been
      recorded at amortized cost, which approximates their fair market value. No
      realized or unrealized gains or losses have been recognized.

      REVENUE RECOGNITION
      The Company  recognizes  revenue for  products  upon  shipment.  Estimated
      installation,  training  and  warranty  costs are  accrued  at the time of
      shipment.  Service  revenue is  recognized  ratably  over the  contractual
      periods.

      CONCENTRATION OF CREDIT RISK
      The  Company  sells  its  products  to  customers  in  diverse  industries
      nationwide, particularly delivery based services such as bakeries and beer
      distributors.  The Company  performs  on-going  credit  evaluations of its
      customers,  provides credit on an unsecured basis, and maintains  reserves
      for potential  credit  losses.  Such losses,  in the  aggregate,  have not
      exceeded management's  expectations.  Management does not believe that the
      Company is subject to any unusual  credit  risk  beyond the normal  credit
      risk attendant to operating its business.

      INVENTORIES
      Inventories are stated at the lower of cost or market.  Cost is determined
      using the first-in, first-out (FIFO) method.

      PROPERTY AND EQUIPMENT
      Property  and  equipment  are  recorded at cost and  depreciated  over the
      estimated  useful  lives  of  the  assets  principally  using  accelerated
      methods.  Leasehold  improvements  are  amortized  over the shorter of the
      useful lives or the remaining terms of the related leases. Maintenance and
      repair costs are expensed as incurred.  Upon  retirement or sale, the cost
      of the asset  disposed of and the  related  accumulated  depreciation  are
      removed from the accounts  and any  resulting  gain or loss is included in
      income.


                                      F-6


NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      INCOME TAXES
      The  Company  utilizes  the asset and  liability  method  as  required  by
      Statement  of  Financial   Accounting  Standards  No.  109  ("SFAS  109"),
      "Accounting for Income Taxes".  This standard  requires the recognition of
      deferred taxes for the difference between the financial  statement and tax
      bases of assets and liabilities, utilizing current tax rates. Deferred tax
      assets,  net  of  valuation  allowances,  are  recognized  for  deductible
      temporary   differences  and  operating  loss  and  credit  carryforwards.
      Deferred tax expense  (benefit)  represents the change in the net deferred
      tax asset or liability balance.

      EARNINGS PER SHARE
      Earnings  (loss) per share is  determined  by dividing net income  (loss),
      after deducting  certain amounts  associated with the Company's  preferred
      stock, by the weighted average number of common shares and dilutive common
      share equivalents outstanding during the year.

      Interest payable to preferred stockholders,  the fair value of inducements
      to convert  preferred stock into common stock, and any discounts  implicit
      in the  conversion  terms upon  issuance of  preferred  stock (Note 7) are
      deducted  from (added to) net income (loss) to determine the amount of net
      income (loss) available for common stockholders.

      Common  share  equivalents  consist of common  stock which may be issuable
      upon exercise of outstanding stock options and warrants and the conversion
      of preferred stock (Notes 7 and 9). In 1996 and 1995, the assumed exercise
      of stock  options and  warrants  and the assumed  conversion  of preferred
      stock is anti-dilutive, and accordingly, has not been reflected.

      STOCK COMPENSATION
      The Company's  employee stock option plans are accounted for in accordance
      with  Accounting  Principles  Board Opinion No. 25,  "Accounting for Stock
      Issued to  Employees",  ("APB 25"). In January 1996,  the Company  adopted
      Statement  of  Financial  Accounting  Standards  No.  123,  ("SFAS  123"),
      "Accounting  for Stock Based  Compensation"  for  disclosure  purpose only
      (Note 7).

      RESEARCH AND DEVELOPMENT AND COMPUTER SOFTWARE DEVELOPMENT COSTS
      Research and development  costs,  other than software  development  costs,
      have been  charged to  operations  as  incurred.  Statement  of  Financial
      Accounting  Standards  No.  86,  "Accounting  for the  Costs  of  Computer
      Software  to  be  Sold,  Leased  or  Otherwise  Marketed",   requires  the
      capitalization  of certain computer  software  development  costs incurred
      after technological  feasibility is established.  No software  development
      costs have been  capitalized  at December  29, 1996 or December  31, 1995,
      based upon management's estimates of realizability.


                                      F-7


NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      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 amount of assets and liabilities and
      disclosure  of  contingencies  at December 29, 1996 and December 30, 1995,
      and the  reported  results of  operations  during  the three  years in the
      period ended  December 29, 1996.  Actual  results  could differ from those
      estimates.

      NEW ACCOUNTING PRONOUNCEMENT
      In  February  1997,  the  Financial   Accounting  Standards  Board  issued
      Statement  of  Financial  Accounting  Standards  No.  128,  ("SFAS  128"),
      "Earnings per Share", effective for fiscal years ending after December 15,
      1997. Management has not yet determined the impact of adoption of SFAS 128
      on the Company's  reported  results of operations.  The future adoption of
      SFAS 128 will have no effect on the Company's  financial  position or cash
      flows.

      RECLASSIFICATIONS
      Certain  prior year  amounts  have been  reclassified  to conform with the
      current year presentation.

 3.   INVENTORIES

      Inventories consist of the following:

<TABLE>
<CAPTION>
                                                               DECEMBER 29,            DECEMBER 30,
                                                                   1996                    1995
                                                           ---------------------    --------------------

<S>                                                            <C>                     <C>
      Raw materials                                            $  351,860              $   279,885
      Work-in-process                                             592,741                  535,316
      Finished goods                                              534,552                  477,135
                                                           ---------------------    --------------------
                                 Total                         $1,479,153              $1,292,336
                                                           =====================    ====================
</TABLE>


                                      F-8



NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS


4.    PROPERTY AND EQUIPMENT

      Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                ESTIMATED
                                                               USEFUL LIVES     DECEMBER 29,              DECEMBER 31,
                                                                (IN YEARS)         1996                      1995
                                                                             ------------------        ------------------
      <S>                                                        <C>             <C>                       <C>
      Production and engineering equipment                         3-5           $ 746,921                 $ 680,437
      Furniture, fixtures and office equipment                      5              622,112                   514,196
      Vehicles                                                      5                -                        11,994
      Leasehold improvements                                     Life of            23,021                    23,021
                                                                  lease
                                                                             ------------------        ------------------
                                                                                 1,392,054                 1,229,648
      Less - accumulated depreciation and amortization                           1,157,524                 1,083,795
                                                                             ------------------        ------------------
                               Total                                             $ 234,530                 $ 145,853
                                                                             ==================        ==================
</TABLE>

      Depreciation and  amortization  expense relating to property and equipment
      was  $83,973,  $83,324 and $73,162 for the years ended  December 29, 1996,
      December 30, 1995 and December 31, 1994, respectively.

      At December 29, 1996, office and engineering equipment under capital lease
      totaled  $142,813.  Related  accumulated  amortization  of equipment under
      capital lease totaled $28,563 at December 29, 1996. There was no equipment
      under capital lease at December 30, 1995.

 5.   LONG-TERM DEBT

      On May 2, 1990,  the Company  entered into an agreement  with a bank for a
      150-day  secured  time note  authorizing  advances of up to  $250,000  and
      bearing  interest at the prime rate plus 1% (9.5% at December  31,  1995).
      The note was 100% collateralized by certificates of deposit provided by an
      officer/stockholder (Note 9) and all the assets of the Company.

      Prior to 1992 and during 1994, the note was amended to extend the maturity
      date to June 1, 1994 and to June 30, 1995, respectively.  During 1995, the
      Company entered into an agreement which extended the maturity date of this
      facility  until June 30, 1997. On February 6, 1992 and March 4, 1994,  the
      authorized  borrowing  amount was  increased  to  $450,000  and  $500,000,
      respectively.   All   increases  in  the   borrowed   amounts  were  fully
      collateralized    by   certificates    of   deposit    provided   by   the
      officer/stockholder.  At December 30, 1995, $440,000 was outstanding under
      this line of credit. In April 1996, the Company repaid the line of



                                      F-9


NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      credit. As a result of this payment, the bank returned the certificates of
      deposit, and terminated the officer/stockholder's obligation to personally
      guarantee the line of credit.

 6.   INCOME TAXES

      Deferred tax assets are  comprised  of the  following at December 29, 1996
and December 30, 1995:

<TABLE>
<CAPTION>
                                                                            DECEMBER 29,            DECEMBER 30,
                                                                                1996                    1995
      <S>                                                                    <C>                     <C>
      Net operating loss carryforwards                                       $3,746,000              $2,823,000
      Business tax credit carryforwards                                         286,000                 286,000
      Bad debt reserve                                                           39,000                  36,000
      Inventory obsolescence and uniform capitalization                          27,000                   9,000
      Depreciation                                                                5,000                    -
      Accrued expenses                                                           30,000                 118,000
                                                                            -----------             -----------
      Gross deferred tax asset                                                4,133,000               3,272,000
      Deferred tax asset valuation allowance                                 (4,133,000)             (3,272,000)
                                                                            -----------             -----------
                                                                            $         -             $         -
                                                                            ===========             ===========
</TABLE>

      The Company's  effective tax rate differs from the statutory U.S.  federal
      tax rate as follows:

<TABLE>
<CAPTION>
                                                                                     YEAR ENDED

                                                                DECEMBER 29,     DECEMBER 30,      DECEMBER 31,
                                                                    1996             1995              1994
       <S>                                                        <C>               <C>              <C>
       Statutory federal rate                                     (34.0%)           (34.0%)           34.0%
       State taxes                                                ( 6.0%)           ( 6.0%)            6.0%
       Non-deductible expenses                                      0.1%              3.2%             7.7%
       Other                                                       (2.3%)              -                -
       Valuation allowance on deferred tax assets                  42.2%             36.8%           (47.7%)
                                                              ----------------- ---------------- -----------------

                                                                    0.0%              0.0%             0.0%
                                                              ================= ================ =================
</TABLE>

      The Company has generated  taxable  losses from  operations in each of the
      past two years and has no taxable income available to offset the carryback
      of net operating  losses.  In addition,  although  management's  operating
      plans  anticipate  taxable  income  in future  periods,  such  plans  make
      significant  assumptions  which cannot be  reasonably  assured,  including
      continued  development and market acceptance of new products and expansion
      of the  Company's  customer  base.  Based upon the weight of all available
      evidence, the Company has provided a full valuation allowance for deferred
      tax  assets  since  the  realization  of  these  future  benefits  is  not
      sufficiently  assured  (defined as a likelihood of slightly more than 50%)
      as of December


                                      F-10


NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      29, 1996. As the Company achieves profitability, these deferred tax assets
      would be available to offset  future income tax  liabilities  and expense.
      For the year ended  December  31,  1994,  $408,000 of net  operating  loss
      carryforwards were utilized to offset taxes otherwise payable.

      At December 29, 1996,  the Company has net  operating  loss and tax credit
      carryforwards  for  federal  tax  purposes of  $10,417,000  and  $286,000,
      respectively,  which  expire  in  various  years  through  2011 and  2004,
      respectively.  The Company has state net operating loss  carryforwards for
      tax purposes of $3,410,000, which expire in various years through 2001.

      Any significant  change in ownership,  as defined in the Internal  Revenue
      Code,  may  result  in an  annual  limitation  on the  amount  of the  net
      operating loss and credit carryforwards which could be utilized.

7.    STOCKHOLDERS' EQUITY

      STOCK OPTIONS
      On December 31, 1986 and January 18, 1989, the Board of Directors approved
      the 1986 Stock  Option  Plan ("the 1986  Plan") and the 1989 Stock  Option
      Plan ("the 1989 Plan"),  respectively.  The plans provide for the granting
      of incentive stock options and  non-qualified  stock options to employees,
      officers,  directors  and  consultants.  The exercise  price for incentive
      stock  options  granted may not be less than 100% of the fair market value
      per  share of the  common  stock on the date  granted  (110%  for  options
      granted to holders of more than 10% of the voting  stock of the  Company).
      The  exercise  price per share for  non-qualified  options may not be less
      than the  lesser of 50% of the fair  market  value per share of the common
      stock on the date of grant or the book value per share of common  stock as
      of the end of the fiscal year immediately preceding the date of grant. The
      term of options  granted  under the Plans  cannot  exceed ten years  (five
      years for options  granted to holders of more than 10% of the voting stock
      of the Company).  On January 3, 1991,  the Board of Directors  approved an
      increase in the aggregate number of shares which may be issued pursuant to
      the 1989 Plan from 25,000 to 62,000.

      On October 14, 1994,  the  shareholders  of the Company  approved the 1994
      Stock  Option Plan which  provides  for the  issuance of  incentive  stock
      options to  employees.  The exercise  price for  incentive  stock  options
      granted  may not be less than 100% of the fair  market  value per share of
      the common stock on the date granted (110% for options  granted to holders
      of more than 10% of the voting stock of the Company).  A maximum of 87,500
      shares  of  common  stock of the  Company  is  reserved  for  issuance  in
      accordance with the term of the 1994 Plan.

      On October 10,  1995,  the Board of  Directors  authorized  the 1995 Stock
      Option Plan which provides for the issuance of incentive  stock options to
      employees.  The term of the Plan are substantially similar to those of the
      1994 Stock Option Plan. A maximum of 125,000 shares of common stock of the
      Company is reserved for issuance in  accordance  with the term of the 1995
      Plan.



                                      F-11


NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      As of December 29, 1996,  an aggregate of 71,324 shares of common stock of
      the Company are reserved for issuance in  accordance  with the term of the
      Plans.  Outstanding  options are written  generally  with five to ten year
      vesting periods,  some with acceleration if certain  profitability  levels
      are reached, and are fully exercisable by 2006.

      Activity under the 1986, 1989, 1994 and 1995 Stock Option Plans during the
      years ended December 29, 1996, December 30, 1995 and December 31, 1994 are
      summarized as follows:


<TABLE>
<CAPTION>
                                          December 29, 1996            December 30, 1995          December 31, 1994
                                                      Weighted                    Weighted                    Weighted
                                                                                   Average                    Average
                                       Number of      Average                     Exercise     Number of      Exercise
                                        Options       Exercise      Number of       Price       Options        Price
                                                       Price         Options
                                       ---------      --------     ------------- ------------ ------------- -------------
<S>                                    <C>            <C>             <C>          <C>         <C>            <C>
Outstanding at beginning of year        123,521       $  4.19         107,375      $  4.42       112,100       $ 5.51
Granted                                 292,650          4.94          33,110         4.00        91,400         4.02
Exercised                                  -               -            -               -        (87,825)        5.02
Canceled                               (127,199)         4.49         (16,964)        5.26        (8,300)        8.52
                                     --------------   -------      -------------   -------    -------------   -------

Outstanding at end of year              288,972       $  4.82         123,521      $  4.19       107,375       $ 4.42
                                     ==============   =======      =============   =======    =============   =======

Exercisable at end of year               54,248       $  4.64          24,370      $  4.75        10,192       $ 7.29
                                     ==============   =======      =============   =======    =============   =======

Weighted average fair value of
options granted during the period                     $  4.94                      $  4.00
                                                      =======                      =======
</TABLE>

      The following table summarizes information about stock options outstanding
at December 29, 1996:

<TABLE>
<CAPTION>
                                                                                                                Weighted
                                                  Weighted average         Weighted                         average exercise
                                                      remaining             average          Number of          price of
                                    Number        contractual life,        exercise           options           options
      Range of exercise price    Outstanding          in years              price           exercisable       exercisable
------------------------------- --------------- ---------------------- ----------------- ------------------ -----------------
      <S>                          <C>                   <C>                  <C>              <C>                <C>
      $ 4.00                         62,422              7.44                 $  4.00          27,642             $  4.00
      $ 5.00 - $5.24                222,260              9.85                    5.00          23,500                5.00
      $ 6.00 - $6.40                  3,652              5.60                    6.38           2,531                6.39
      $ 8.00                            380              4.62                    8.00             317                8.00
      $20.00                            258              3.32                   20.00             258               20.00
                                  ---------              ----                 -------          ------             -------
               Total               288,972               9.26                 $  4.82          54,248             $  4.64
                                  =========              ====                 =======          ======             =======
</TABLE>

                                      F-12





NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      The Company did not  recognize any  compensation  expense under APB No. 25
      during the years ending December 29, 1996,  December 30, 1995 and December
      31, 1994.

      Fair Value Disclosures

      As  discussed in Note 2, the Company has elected to adopt SFAS 123 through
      disclosure only. Had compensation cost for the Company's option plans been
      determined  based on the fair value of the options at the grant dates,  as
      prescribed  in SFAS  123,  for  options  granted  in 1996  and  1995,  the
      Company's net loss and net loss per share would have been as follows:


                                            Year ended           Year ended
                                           December 29,         December 30,
                                               1996                 1995

      Net Loss:
           As reported                      $2,042,590           $1,239,749
           Pro forma                        $2,262,187           $1,260,038

      Net Loss per share:
           As reported                        $6.17                $1.43
           Pro forma                          $6.35                $1.45


      The fair value of each option  grant under SFAS 123 was  estimated  on the
      date of grant  using  the  Black-Scholes  option  pricing  model  with the
      following assumptions used for grants in 1996 and 1995, respectively:

            I.   Dividend yield of 0% for both periods.

            II.  Expected volatility of 250% and 395%.

            III. Risk free interest  rates of 6.93% for options  granted  during
                 the year ended December 29, 1996 and 5.81% - 6.87% for the year
                 ended December 30, 1995; and

            IV.  Weighted  average  expected  option  term of 10 years  for both
                 periods.

      The above pro forma  disclosures  reflect  options granted during 1995 and
      1996 only.  Because additional options grants are expected to be made each
      year, the above pro forma  disclosures are not necessarily  representative
      of the pro forma effects on reported net income (loss) for future years.



                                      F-13


NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      COMMON STOCK
      During  1996 and 1995,  the  Company  issued a total of 8,333 and  464,860
      shares  of  common  stock,  $.08  par  value,  respectively,   in  private
      offerings.  The proceeds from the offerings  were $43,617 and  $1,538,420,
      respectively, net of expenses associated with the offerings.

      In January 1996,  the Company  entered into an agreement with a consulting
      firm,  whereby the Company would  compensate  the firm for their  services
      through the issuance of 31,192 shares of the Company's common stock,  $.08
      par value. The value of these shares at the time of issuance was estimated
      by management to be  approximately  $156,000,  which is being amortized to
      expense over the five year term of the agreement.  Unamortized amounts are
      presented  as a  reduction  of  stockholders'  equity in the  accompanying
      balance sheet.

      On October 4, 1996,  the Board of  Directors  approved  an increase in the
      number of authorized shares of Common Stock to 5,000,000 shares.

      SERIES A CONVERTIBLE PREFERRED STOCK
      On March 1, 1994,  the Board of Directors  approved the  designation of 20
      shares of its  unissued  preferred  stock,  $.001 par value to be known as
      Series A Convertible Preferred Stock. During 1994, 15 shares were sold for
      net proceeds of  $759,591.  Each share of Series A  Convertible  Preferred
      Stock was  convertible  at any time by the holder  into  13,750  shares of
      common stock.  Each share of Series A Convertible  Preferred Stock had the
      same number of common stock votes as its conversion  rights provided.  The
      Series A Convertible  Preferred Stock had preference over the Common Stock
      with respect to the payment of dividends and in the distribution of assets
      in the event of liquidation. The amount of the dividends for each share of
      Series A  Convertible  Preferred  Stock was equal to the amount of the per
      share dividend of common stock declared multiplied by the number of common
      stock  shares  into which the  Series A  Convertible  Preferred  Stock was
      convertible.

      Upon  liquidation of the Company,  the holders of Series A Preferred Stock
      had preference over common stockholders in liquidating distributions which
      equaled the stated value of such shares of Series A Convertible  Preferred
      Stock, plus all dividends which had been accrued and were unpaid.

      In  addition  to  the  dividend  preference,   the  holders  of  Series  A
      Convertible  Preferred  Stock were entitled to receive  dividends equal to
      7.5% per annum of the  original  price paid by the  stockholders  from the
      date of the original purchase through January 31, 1995. All such dividends
      were waived by the preferred  shareholders in  consideration of having the
      Company  register  their shares of common stock upon  conversion  of their
      preferred shares.  Subsequently,  when the shares were not registered, the
      Company   also  issued   warrants  to  purchase   Common  Stock  to  these
      shareholders (see "Issuance of Warrants" section of this Note).


                                      F-14

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      During  1995,  all  15  outstanding  shares  of  the  Company's  Series  A
      Convertible  Preferred  Stock were  converted  into 206,250  shares of the
      Company's common stock.

      SERIES B CONVERTIBLE PREFERRED STOCK
      On April 19, 1996,  the Board of Directors  approved  the  designation  of
      3,000 shares of the Company's  unissued  preferred stock, $.001 par value,
      as Series B Convertible  Preferred  Stock.  On June 23, 1996, the Board of
      Directors  approved  the  designation  of an  additional  1,200  shares of
      preferred  Stock as Series B  Convertible  Preferred  Stock.  During 1996,
      4,200 shares were sold for net proceeds of approximately $3,685,200.  Each
      share of the Series B Convertible  Preferred  Stock has the same number of
      common stock votes as its conversion rights provide.

      Each share of the Series B Convertible  Preferred  Stock is convertible at
      any time (subject to certain lock-up restrictions that expire over various
      periods through November 1997) at the option of the holders into shares of
      common stock pursuant to a ratio based upon the quoted market price of the
      Company's  common  stock.  The Series B Convertible  Preferred  Stock will
      convert into a number of shares of common  stock  computed by dividing the
      stated value of  preferred  stock to be converted by the average bid price
      for the Company's  common stock for the five days prior to the conversion,
      discounting the average bid price by forty percent.  However,  in no event
      will the  conversion  price exceed $6.00 or be lower than $4.00 per share.
      If shares of Series B Convertible  Preferred  Stock are converted prior to
      March 31, 1997, and the conversion  price would have been below $4.00, the
      Company will issue  warrants to the Series B  shareholders.  The number of
      additional warrants will be based upon the Company's operating results for
      the one year  period  ended  March 31,  1997,  up to a maximum  of 500,000
      warrants.  The  warrants  will have an exercise  price of $4.00 per share,
      will be immediately exercisable and will expire in March 2000.

      The minimum  conversion  price of $4.00 will be eliminated if, at any time
      prior to March 31, 1999, the Company's  stockholders'  equity, as reported
      in any annual  report  filed on Form 10-KSB,  or quarterly  report on Form
      10-QSB,  is below  $1,000,000.  The Company can require  conversion on the
      above terms at any time after  March 31,  1999.  The Company has  reserved
      1,050,000  shares of common  stock for  issuance  upon  conversion  of the
      Series B Convertible Preferred Stock.

      The estimated  discount of $5,200,000  implicit in the conversion terms at
      the dates of issuance of the Series B Convertible  Preferred Stock,  based
      upon the quoted bid price for the  Company's  common stock on those dates,
      has been included in the  computation of net income (loss) per share (Note
      2).

      In addition,  the Series B Convertible Preferred Stock has preference over
      the common  stock  with  respect to the  payment of  dividends  and in the
      distribution  of  assets in the event of  liquidation.  The  amount of the
      dividend for each share of Series B Convertible  Preferred Stock, when and
      if declared by the Company's Board of Directors, is equal to the amount of



                                      F-15


NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      the per share dividend of common stock  declared  multiplied by the number
      of shares of common  stock into which the Series B  Convertible  Preferred
      Stock is then convertible.

      In  addition  to  the  dividend  preference,   the  holders  of  Series  B
      Convertible  Preferred Stock shall receive  interest equal to 8% per annum
      of the stated value of such Series B  Convertible  Preferred  Stock.  Such
      interest will accrue from the Original Issuance Date, and shall be payable
      in cash or common stock, at the Company's  option,  on a quarterly  basis,
      commencing  with the  fiscal  quarter  ended  June 30,  1996.  Payment  of
      interest  due  with  respect  to those  shares  of  Series  B  Convertible
      Preferred  Stock that remain issued and  outstanding at the end of each of
      the Company's fiscal quarter shall be made within 15 days after the filing
      with the  Securities  and Exchange  Commission of the  applicable  report.
      During the year ended December 29, 1996, the Company incurred  interest in
      the amount of $208,000, which has been recorded as a charge to accumulated
      deficit.  Of this  amount,  $84,000  remains  unpaid,  and is  included in
      accrued interest at December 29, 1996.

      Upon  liquidation of the Company,  the holders of Series B Preferred Stock
      have   preference  over  common   stockholders   to  receive   liquidating
      distributions  which  equal the  stated  value of such  shares of Series B
      Convertible  Preferred  Stock,  plus all dividends which have been accrued
      and are unpaid.

      In the event that the price of the Company's  common stock, as reported by
      the NASDAQ  SmallCap  Market or the  National  Association  of  Securities
      Dealers Electronic  Bulletin Board, equals or exceeds $20.00 per share for
      a  period  of  twenty   consecutive   trading  days,   after  the  lock-up
      restrictions  expire,  the  Company  may redeem  the Series B  Convertible
      Preferred Stock at a price of $1,000 per share.

      REVERSE STOCK SPLIT
      On October 4, 1996, the stockholders approved a 1:4 reverse stock split of
      the Company's common stock ("the Reverse Split"). Accordingly, all shares,
      per share amounts,  conversion ratios,  stock option and warrant data have
      been restated to retroactively reflect the reverse split.

      ISSUANCE OF WARRANTS
      On January 17, 1996, the Company issued warrants to purchase 90,000 shares
      of the  Company's  common  stock at $5.24 per  share to all of the  former
      holders of the  Company's  Series A  Convertible  Preferred  Stock.  These
      warrants are exercisable  immediately and expire after three years.  These
      warrants were issued in  consideration  of the  conversion of the Series A
      Convertible  Preferred  Stock.  The  fair  value  of  these  warrants  was
      estimated by management  and determined to be materially  consistent  with
      the amount of  dividends  waived by the  holders  of Series A  Convertible
      Preferred Stock.

      In July 1996,  the  Company  also  issued  warrants to purchase a total of
      7,500  shares  of the  Company's  common  stock at $6.00  per share to two
      unrelated parties.  These warrants are exercisable  immediately and expire
      after three years. The value of these warrants at the time



                                      F-16


NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      of issuance has been  estimated by  management  and  determined  not to be
      material to the Company's financial position and results of operations.

      CASHLESS OPTION EXERCISE PROGRAM
      On March 1, 1994, the Board of Directors approved the 1994 cashless option
      exercise  program for all  employees.  The  program  allows  employees  to
      purchase   shares  of  common  stock,   payable  with  both  recourse  and
      non-recourse  long  term  promissory  notes  receivable.  Under  the above
      program, employees purchased a total of 87,817 shares of common stock at a
      price of $4.00 per share. The notes receivable, plus accrued interest, are
      due in March  2004,  and are  presented  as a reduction  of  stockholders'
      equity in the accompanying balance sheets.

      NON-PLAN OPTIONS
      On March 1, 1994, the Company  granted an option to purchase 12,500 shares
      of the Company's  common stock at $4.00 per share to a non-employee  which
      was not pursuant to any of the Company's  stock option  plans.  The option
      was excercisable after March 1, 1995.

 8.   COMMITMENTS

      The Company leases its office facilities under an operating lease expiring
      September 30, 1997.  The lease contains an option for renewal and requires
      the payment of taxes and other  operating  costs.  At December  29,  1996,
      future  minimum  rental  payments  under  the  operating  lease  amount to
      $129,969, all payable during 1997. Rent expense totaled $167,080, $157,840
      and $119,395  during the years ended December 29, 1996,  December 30, 1995
      and December 31, 1994, respectively.

      The Company also leases certain equipment under capital leases expiring at
      various dates through the year 2000.  Future  minimum lease payments under
      non-cancelable capital leases, with initial remaining terms of one year or
      more, consist of the following at December 29, 1996:

                 Year ending:
                      1997                                    $ 54,822
                      1998                                      50,866
                      1999                                      43,804
                      2000                                      25,049
                                                           -------------

                 Total minimum lease payments                  174,541
                 Less: amount representing interest             38,289
                                                           =============
                 Present value                                $136,252
                                                           =============

 9.   RELATED PARTY TRANSACTIONS AND STOCK WARRANTS

      The Company  entered into an  agreement  with a bank for a time note (Note
      5),  which  was fully  secured  by  certificates  of  deposit  owned by an
      officer/stockholder. At December 30,



                                      F-17



      NATIONAL DACOMPUTER, INC.
      NOTES TO FINANCIAL STATEMENTS


      1995,  the  total  collateral  provided  by  the  officer/stockholder  was
      $440,000. In consideration of this guarantee of indebtedness,  the Company
      issued 110,000 stock purchase  warrants to the  officer/stockholder.  Each
      warrant represents the right to purchase one share of the Company's common
      stock at $4.00 per share. The warrants became  excercisable after December
      31, 1993.

      In April 1996, the Company paid-off the note to the bank. As a result, the
      bank returned the certificates of deposit to the officer/stockholder.

 10.  FINANCIAL INSTRUMENTS

      The Company  enters into  various  types of financial  instruments  in the
      normal course of business.  Fair values are estimated based on assumptions
      concerning  the  amount  and  timing of  estimated  future  cash flows and
      assumed  discount  rates  reflecting  varying  degrees of perceived  risk.
      Accordingly,  the fair  values  may not  represent  actual  values  of the
      financial instruments that could have been realized as of year end or that
      will be realized in the future.

      Fair values for cash and cash equivalents,  accounts receivable,  accounts
      payable and accrued expenses approximate their carrying values at December
      29, 1996 and December 30, 1995.

 11.  SUBSEQUENT EVENTS

      In March  1997,  the  Company  designated  and sold 900 and 350  shares of
      Series C and Series D Convertible Preferred Stock,  respectively,  for net
      proceeds of $881,583 and $343,000, respectively. The Series C and Series D
      Convertible Preferred Stock have voting, dividend preference,  liquidating
      preference,  mandatory  conversion and Company redemption terms similar to
      those of the Company's existing Series B Convertible Preferred Stock (Note
      7). The Series C and Series D Convertible  Preferred Stock are convertible
      into  shares  of common  stock at a price of $3.20  and  $2.74 per  share,
      respectively.  Holders of the Series C and Series D Convertible  Preferred
      Stock are also  entitled to receive  interest at a rate of 6% per annum on
      the stated value of the preferred stock.

      At the  same  time,  the  Company  also  issued  $250,000  of  Convertible
      Promissory  Notes  to the same  investors  as the  Series  C and  Series D
      Convertible Preferred Stockholders.  These notes bear interest at the rate
      of 6% annum,  mature in March 1998 and are convertible  into shares of the
      Company's common stock at a price of $2.74 per share.

      The unaudited pro forma balance sheet  reflects the financial  position of
      the Company at December  29, 1996 as if the above  transactions  had taken
      place on that date.




                                  F-18