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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K


FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. (Mark One)

     /X/  Annual report pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934 [Fee Required] for the fiscal year ended December
          31, 1996.

     / /  Transitional report pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934 [No Fee Required] for the transition period from
          ___________ to ____________.

                         COMMISSION FILE NUMBER: 2-31438

                         NUKO INFORMATION SYSTEMS, INC.
             (Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S>                                                                     <C>
DELAWARE                                                                           16-0962874
(State of other jurisdiction of incorporation or organization)          (I.R.S. Employer Identification Number)

2391 QUME DRIVE, SAN JOSE, CALIFORNIA                                                  95131
(Address of principal executive offices)                                             (Zip Code)
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Registrant's telephone number, including area code: (408) 526-0288
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.001 PAR VALUE
                                (Title of Class)

Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes /X/  No / /

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

Based on the closing sales price for the Registrant's Common Stock on The Nasdaq
Stock Market's National Market System on March 21, 1997, the aggregate market
value of the voting stock held by non-affiliates of the Registrant was
approximately $55,302,962.

As of February 28, 1997, 10,489,534 shares of the Registrant's Common Stock were
outstanding.

                            Exhibit Index on page 33

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                       DOCUMENTS INCORPORATED BY REFERENCE

        Portions of Registrant's definitive Proxy Statement for its forthcoming
Annual Meeting of Stockholders are incorporated herein by reference into Part
III of this Report.

                           FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a new "safe harbor" for these types of statements. To the
extent statements in this Annual Report involve, without limitation, product
development and introduction plans, the Company's expectations for growth,
estimates of future revenue, expenses, profit, cash flow, balance sheet items,
sell-through or backlog, forecasts of demand or market trends for the Company's
various product categories and for the industries in which the Company operates
or any other guidance on future periods, these statements are forward-looking
and involve matters which are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those expressed in or
implied by such forward-looking statements. These risks and uncertainties
include product development or production difficulties or delays due to supply
constraints, technical problems or other factors; technological changes; the
effect of global, national and regional economic conditions; the impact of
competitive products and pricing; changes in demand; increases in component
prices or other costs; and a number of other risks including those identified by
the Company under the caption "Risk Factors" in Item 1 and elsewhere in this
report, and other risks identified from time to time in the Company's filings
with the Securities and Exchange Commission, press releases and other
communications. The Company assumes no obligation to update forward-looking
statements.

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

        The Company designs, markets and sells one-way and two-way video
networking products that form essential building blocks in the development of
broadband (high capacity) video networks. The Company's standards compliant
products allow its customers to compress and decompress digital video and to
transmit signals over many types of networks using different interfaces and
protocols. The Company's digital compression and decompression products are sold
under the tradenames Highlander and RAVE and its network solutions are sold
under the tradename Intelligent Broadband Services Network ("IBSN"). The Company
markets its products and network solutions for enterprise-wide private networks
and public networks offered by carriers such as telephone companies, cable
companies, satellite companies and microwave communication companies.

        The Company's products are comprised of codecs and multiplexors, which
enable video compression and decompression and network interfacing. Such
products enable a user to digitize analog signals and to encode, compress,
transmit, receive, decompress, decode and display multimedia data streams,
allowing the rapid and cost-effective communication of data from the point of
origin to remote locations.

        The Company's Highlander products serve the one-way broadcast television
market and markets for corporate broadcasting and remote surveillance
applications. The Company has targeted its RAVE products at two-way video
conferencing, telemedicine, distance learning, remote arraignment and
post-


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production video editing. The Company sells its Highlander and RAVE products
separately and in combination as part of its IBSN integrated platform. The
Company intends to provide its IBSN customers with Highlander and RAVE products,
other standards compliant products, video network consulting services and
software to integrate the various pieces of the network, creating a turnkey
video network solution.

INDUSTRY BACKGROUND

        The rapid development of video networking technology has created many
new commercial and residential markets for digital video services. Business and
residential end-user demand for new and better telecommunications services has
grown as telcos and information service providers increase their offerings of
video applications. Commercial markets for digital video products include video
teleconferencing, distance learning, telemedicine, remote arraignment and
post-production video editing. Residential markets have developed for broadcast
digital video, Internet access and interactive applications such as home
shopping.

        Commercial Applications

        Teleconferencing. The largest of the new commercial markets for digital
video is teleconferencing. Companies may communicate and share business
presentations through the use of video conference calls. The availability of
high resolution teleconferencing systems offers the promise of reduced travel
costs and improved training programs. Dramatic decreases in transmission costs,
the increased availability of switched digital services for both domestic and
international networks, improvements in picture quality from improved
compression technology and the adoption of worldwide standards have spurred
demand for video conferencing products.

        Distance Learning. Digital video networking has been used by schools and
continuing education providers to deliver lectures in real time to students at
remote locations. The development of two-way communication systems permits
student-teacher interaction.

        Telemedicine. Digital video networking increasingly is being used by
medical professionals to diagnose and treat patients. Declining reimbursement
for radiological interpretations and increased specialization of radiologists
have placed pressure on radiologists to increase their numbers of
interpretations and compete for business over larger geographic areas. Such
pressures have resulted in a need to develop equipment and systems capable of
transmitting medical images rapidly to and from remote locations. The use of
digital video reduces health care providers' dependence on film and paper,
minimizes the risk of loss of the master image and reduces the overall costs of
providing efficient radiology services. An Arthur D. Little study estimates that
telemedicine can save the health care industry up to $36 billion annually.

        Remote Arraignment. The high cost of transporting suspects from jails to
the courthouse may be reduced by using high-resolution video conferencing to
enable people in the courtroom to view prisoners in rooms at the jail facility.
Court systems already have begun to use digital video for remote arraignments.

        Post-production. Motion picture companies use digital video networks to
transfer video from remote locations to centralized post-production editing
facilities. The time sensitivity and expense of motion picture projects often
make real-time production editing over video networks a necessary and
cost-effective alternative to transporting movie reels to various locations for
post-production editing.


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        Residential Applications

        Broadband networks also offer numerous applications for residential use.
The development of two-way networks capable of handling large amounts of video,
audio and other data simultaneously allow service providers to offer telephone
service, Internet access, broadcast digital video and other interactive
applications such as home shopping over the same infrastructure.

        Competition for Telecommunications Markets

        Telcos and cable companies increasingly are competing with each other
and with other video providers, such as Direct Broadcast Satellite ("DBS") and
Multichannel Multipoint Distribution Systems ("MMDS") companies, to supply
bandwidth for the transmission of video signals. Such competition has been
prompted by the development of technologies which permit telcos, cable companies
and other providers to provide new services through their existing
infrastructures. The enactment of the Telecommunications Act of 1996 (the
"Telecommunications Act") has further fueled such competition by reducing
barriers to entry to the telecommunications market and has eliminated many
restrictions on the provision of a wide range of telecommunications services by
telcos and other service providers. While cable companies and alternative access
providers are now permitted to supply phone service to customers, telcos are
exploring means of providing video to their customers. Cable companies have
begun testing cable modems, which permit a customer to effect two-way data
transmission over the customer's existing cable connection, and telcos have
sought to develop methods for providing broadcast video and Internet access
through existing phone lines. Meanwhile, alternative access providers have begun
to deploy fiber and wireless systems for high volume data transmission to
business centers and other high density metropolitan areas. In an effort to
maintain market share in the face of such deployments, telcos have accelerated
their efforts to upgrade their networks and increase their telecommunications
service offerings.

        Networks

        Digital video may be transmitted through many types of networks, from
telecommunications networks, which may be wired or wireless, to private
networks, which usually are wired. Wired networks include fiber optic to the
curb ("FTTC"), hybrid fiber coax ("HFC") and Asymmetric Digital Subscriber Line
("ASDL") transmissions over twisted-pair copper wiring. Wireless networks
include Direct Broadcast Satellite ("DBS") networks and Multichannel Multipoint
Distribution Systems ("MMDS") networks.

        In order to distribute compressed MPEG-2 streams over terrestrial or
non-terrestrial wide area networks, a company must interleave or "multiplex"
multiple channels of audio, video and data streams into streams meeting MPEG-2
standards and adapt them to the network over which it will be transmitted.
Different network interfaces and protocols such as IP, ATM/SONET, DS3, IFMP and
RSVP are used at different points in video networks depending on what type of
network function is being performed.


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NUKO SOLUTION

        While service providers and end users generally expect video networks to
communicate and interoperate in the same manner as existing data networks, the
various types of applications, networks, interfaces and protocols have made this
objective difficult to achieve. However, the Company offers a number of products
and services to meet the growing demand for flexible and interoperable video
networking products and services. The Company's standards compliant products
allow its customers to compress and decompress digital video and to transmit
signals over many types of networks using different interfaces and protocols.
The Company has targeted its Highlander products at the one-way cable television
broadcast market and markets for corporate broadcasting and remote surveillance
applications. The Company has targeted its RAVE products at two-way video
conferencing, telemedicine, interactive distance learning, remote arraignment
and post-production video editing. The Company's IBSN platform provides an
integrated end to end solution with interoperability between NUKO products,
products from NUKO's strategic alliances and standards based products from other
vendors.

STRATEGY

        The Company's objective is to become a leading supplier of commercial
and residential video networking products and services. The Company's strategy
includes the following principal elements.

        Maximize Flexibility Through Software Configuration. The Company's
strategy is to focus on the development of software to provide customized
"end-to-end" solutions to meet each of its customer's unique needs. The Company
believes that its focus on software solutions offers its customers the
interoperability, flexibility, customizability and rapid product migration that
they will require with respect to their video networks. The Company believes
that this focus on software customization differentiates the Company from other
video network companies which focus primarily on their hardware products. The
Company believes that growth in the video networking industry will be dependent
on the Company's ability to meet customers' specific software requirements in
implementing and developing a variety of interoperable private and public video
network systems encompassing different geographic areas with varied and
potentially large numbers of end-users and subscribers.

        Develop Strategic Alliances. The Company's strategy is to develop
various strategic alliances with established telecommunications equipment and
service providers, Internet equipment and service providers and original
equipment manufacturers of networking products and consumer electronics. The
Company believes entering into strategic alliances with these larger and more
established companies will provide faster market penetration of its video
networking products. These companies are competing among themselves and against
cable television companies and other telecommunications companies to offer
expanded video networking services and products to both commercial and
residential customers. The Company believes that these strategic alliances will
allow it to more rapidly expand its customer base as these video networks are
deployed. The Company has currently entered into strategic alliances with among
others Northern Telecom ("Nortel"), Pacific Bell, Alcatel, Telus, Cisco,
Samsung, Daewoo, BroadBand Technologies and Korea Network Corporation. The
Company intends to aggressively pursue additional alliances with other major
companies in this area as opportunities become available. The Company's most
significant current alliance with Nortel has already provided the Company
numerous customer opportunities and other strategic partners.

        Rapidly Deploy and Commercialize Products. The Company's strategy is to
use its current technology leadership position and strategic alliances to
immediately begin offering its video networking products and services to the
commercial markets for teleconferencing, distance learning, telemedicine,


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remote arraignment and post-production video editing. In addition, the Company
believes that its video networking products are also suitable for the
potentially vast video networks which are being developed for residential
consumers to provide telephone service, Internet access, on-demand video
entertainment and interactive home shopping. The Company believes that
implementation of video networking infrastructure will require significant
expenditures as these markets develop.

        Develop International Market Presence. The Company's strategy is to
focus on international as well as domestic market opportunities. The
international networking markets are not only potentially much larger than the
U.S. markets but are generally much less developed and less regulated than U.S.
markets. As a result, international customers must spend more capital on
establishing initial infrastructure, but with less investment in such initial
infrastructure and fewer regulatory constraints, international customers usually
are willing to bypass earlier technologies and begin developing the most
advanced technology. For example, the Company has recently entered into a
strategic alliance with Samsung which is currently deploying, with Korea
Telecom, FTTC video networking technology to South Korean residential and
commercial customers.

        Provide Products Which Comply With Open Industry Standards and Necessary
Regulatory Certifications. The Company's strategy is to configure its software
products to be interoperable with well-established and emerging "open" video
network technologies, including MPEG-2, DS3, ATM/SONET and OC3. Also, the
Company seeks to have its products interface with all network software protocols
including RSVP, IFMP, Phased Slot Allocation, IP and ATM. The Company chooses
its strategic partners with the objective of providing open system architecture
which promotes and develops these emerging industry standards. The Company
believes that interoperability among all video network and network equipment
will become an absolute requirement for all customers and end-users in the same
manner as interoperability is now required among current Internet and data
network users. In addition, the Company has devoted substantial resources to
achieving regulatory certifications required by telcos before they will deploy
certain products. The Company believes that these regulatory compliance
certifications, which are often time-consuming and costly, can serve as a future
barrier to entry for new competitors.

PRODUCTS

        The Company's Highlander and RAVE products perform compression,
decompression and multiplexing functions. The Company also manufactures and
sells network access products and an integrated network solution sold under the
tradename Intelligent Broadband Service Network ("IBSN"). The Company's products
may be sold separately or in different combinations as required by a customer's
needs.


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        Highlander

        The Company designs and markets codecs under the Highlander tradename.
The term "codec" is used to describe a compression/decompression system which
encodes and compresses digital signals prior to broadcast and decodes and
decompresses them for viewing or other use after reception. The Company's
Highlander products (i) digitally encode, (ii) compress, (iii) transmit, (iv)
decompress and (v) decode data, thereby minimizing the time required to transmit
video and audio data to remote locations. Highlander products also have the
ability to combine or "multiplex" multiple channels of data into a single
transmission signal on a high-capacity line, such as a fiber-optic cable, then
uncombine the signal into multiple channels after reception of the transmission.
Because they comply with the MPEG-1 and MPEG-2 international standards for data
compression, Highlander codecs not only can compress data at ratios ranging from
1:10 up to 1:200 (depending on content), they also are compatible with all other
equipment that meets MPEG design standards.

        Single Channel MPEG-2 Encoders. The Company's VF-1000 single channel
encoders provide MPEG-2 real time encoding capability with bit rates ranging
from 1.5Mb/s to 15Mb/s. The single channel encoder takes data, audio or video
input in PAL or NTSC analog format or digital format and compresses the input
signal into a MPEG-2 stream. The single channel product can be deployed by
itself or in combination with other single channel units through a "rack and
stack" solution to provide multiple channel capabilities. The VF-1000 product
can be managed by any standards based Simple Network Management Protocol
("SNMP") network manager or by NUKO's network management products. Various
parameters can be configured in each Highlander system, such as bit rate,
compression mode and selection of input, to accommodate various applications and
to optimize bandwidth utilization on the network. The VF-1000 single channel
product can be connected to the wide area network through the Company's
multiplexor products.

        Multichannel MPEG-2 Encoders. The Company's VF-9000 multichannel
encoders offer the same MPEG-2 real time encoding capabilities as the VF-1000
single channel encoders, while supporting up to nine channels per chassis. The
Company currently is developing a multichannel encoder that will support up to
twenty channels per chassis, which would provide the industry's most compact
multichannel encoder. The VF-9000 encoders include a SPARC controller and each
channel can be configured to have complete redundancy and hot-swap capabilities.

        Audio/Video/Data Router. The Company's audio/video/data router is a key
component of its integrated multichannel encoding solution, which provides
source input redundancy. The audio/video/data router is a cross matrix switch
that supports up to nine inputs and outputs of audio, video or data signals. The
router connects to the Company's VF-9000 multichannel encoders or to a rack and
stack configuration of single channel encoders and provides auto-switching of
the input signal to the backup channel configured in the VF-9000 or the rack and
stack configuration.

        Single Channel Decoder and Monitoring Decoder. The Company has developed
a single channel decoder which may be used for real time decoding of MPEG-2
transport streams into analog signals. It also can be used as a monitoring
decoder to monitor the signal quality of the MPEG-2 encoder. The monitoring
decoder typically is configured as a stand alone decoder and is a key component
in the integrated Highlander solution.

        Multichannel Decoder. The Company's multichannel decoder, also known as
an Integrated Receiver Decoder ("IRD"), may be used at locations such as a cable
television head-ends, distance learning


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classrooms or multiple dwelling units to receive multiple channels of encoded
MPEG-2 transport streams from terrestrial ATM or DS3 networks or wireless
satellite or MMDS networks. At the receiving site, the channels are decoded in
real time into analog signals for display or for local distribution over an
analog network. Also, in commercial applications, local channels can be added at
the head-end for redistribution of the desired MPEG-2 streams over the local
network.

        Highlander Cabinet and Integrated Encoding Solution. The Company offers
an integrated MPEG-2 encoding solution in a 19" Highlander cabinet which
contains five sections: (i) an audio/video/data router for input signal
redundancy; (ii) a fully redundant encoder section that provides MPEG-2 encoder
redundancy with hot-swap capabilities; (iii) a multiplexor section that provides
access to a terrestrial network (such as ATM or DS3) or to a wireless network
(such as DBS or MMDS); (iv) a completely redundant power supply section; and (v)
a monitoring decoder to monitor the quality of the compressed video signal prior
to transmission over the video network. The entire integrated encoding solution
can be managed from any standards based SNMP network manager on the network or
the Company's network management products.

        Highlander Management Solution. The Company has developed a Highlander
Management Solution to provide configuration, performance, fault and application
management capabilities, including redundancy and backup configuration. The
Highlander Management Solution is based on the SNMP open standard. The Company
has designed an extensive Management Information Base ("MIB"), which is a
dictionary of manageable objects that can be integrated with any network manager
selected by the customer. The Company has made the MIB available to integration
partners and customers. Each of the Highlander devices, such as codecs and
multiplexors, have an agent module that provides the management capability for
the device.

        RAVE Product Line

        The Company has targeted the RAVE product line for two-way communication
applications, such as interactive distance learning, telemedicine, remote
arraignment, broadband conferencing, and Inter/Intranetworking applications. One
such RAVE product is the Company's Broadband Conferencing System ("BCS"). BCS is
a high quality turnkey conferencing system for audio, video and data, which
provides high bandwidth broadband conferencing solutions. The Company believes
BCS will first be used for video conferencing and data transfer among multiple
participants at different sites. Typical bit rates for BCS range from 3 Mb/s to
20 Mb/s, permitting MPEG-2 transmission over DS3 and ATM networks. BCS is based
on open standards and is compatible with products from other vendors, which
makes BCS attractive to service providers. The Company expects that future
versions of BCS will provide LAN to LAN communication, an important application
for commercial networks such as corporate enterprise networks. The BCS product
accommodates conference scheduling, room controls, device management and data
transfer based on TCP/IP protocols. The integrated solution also includes video
servers and permits Internet access.

        Access Products

        The Company's access products provide application level and network
connectivity (access) between an end node and a wide area network for both
terrestrial and non-terrestrial networks. The Company's ATM Multiplexor, for
example, converts multiple MPEG-2 streams into ATM packets for transmission on
an ATM network. It can support up to eighteen MPEG channels with variable bit
rates ranging from 3 to 40 Mb/s per input channel. The ATM Multiplexor also can
support several line interfaces to the wide area network, including interfaces
based on DS3 (45Mb/s) or OC3 (155Mb/s)


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standards in North America and E3/STM1 in Asia and Europe. The ATM Multiplexor
product line permits intelligent video routing based on IP, IFMP, and RSVP
protocols for routing multimedia traffic from LANs to WANs and is fully
compatible with ATM UNI 3.0 and 3.1 specifications. The Multiplexor has a
controller and a network management agent that supports SNMP and can be managed
from the Highlander Management System.

        IBSN Integrated Solution

         The Company's Intelligent Broadcast Services Network ("IBSN") is a
platform that provides end to end solutions for broadband video networking. The
Company intends to position IBSN as a turnkey video network solution. The
Company will provide its IBSN customers with Highlander and RAVE products, other
standards compliant products, video network consulting services and software to
integrate the various pieces of the network. The IBSN solution's integration of
various hardware and software components offers content origination, content
transmission and content reception capabilities in a single end to end network
solution.

SALES AND MARKETING

        In selling and marketing its products, the Company relies on its
in-house sales and marketing personnel, the sales and marketing resources of
many of its strategic partners and agents the Company engages as necessary. The
Company believes that its relationships with its strategic partners, many of
which have established themselves in digital networking markets, help make its
products more visible and attractive to customers. The Company's products are
complex, requiring the Company's sales people and those of its strategic
partners to have a high degree of technical sophistication in order to market
the products effectively.

        The Company's direct sales efforts are focused on telcos, cable TV
companies and DBS companies, as well as private network users such as
corporations, governments and the military. The Company's also relies on telcos,
cable TV companies and systems integrators to provide the Company's products to
end users as parts of networking packages assembled by such companies. In
addition, the Company has established a number of OEM relationships, such as its
relationship with Nortel for the manufacture and sale of two-way codecs. See "--
Risk Factors -- Dependence on Certain Customers."

CUSTOMERS

        During the fiscal year ended December 31, 1996, sales by the Company to
its largest customer, Nortel, accounted for 44.6% of the Company's consolidated
revenues. The loss of Nortel as a customer would have a material adverse effect
on the Company. The Company also made significant sales of its products in
fiscal 1996 to Southwestern Bell Telephone, Daewoo and Samsung. The Company
expects to continue to make sales to Daewoo and Samsung, but it has completed
its contract with Southwestern Bell.

COMPETITION

        The markets in which the Company competes are intensely competitive and
are characterized by declining average selling prices and rapid technological
change. The Company believes that the principal factors of competition in its
markets are product definition, product design, system cost, functionality,
time-to-market, reliability and reputation. The Company competes with major
domestic and international companies, most of which have substantially greater
financial and other resources than the Company with


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which to pursue engineering, manufacturing, marketing and distribution of their
products. Some of these companies own proprietary video compression technology
competitive with the Company's standards-based systems. The Company may also
face increased competition in the future from new entrants into its markets. In
particular, as the markets for the Company's products develop, competition from
large companies may increase significantly. The ability of the Company to
compete successfully in the rapidly evolving markets for high performance
audio/video compression technology depends on factors both within and outside of
its control, including success in designing and subcontracting the manufacture
of new products that implement new technologies, adequate sources of raw
materials, protection of the Company's products by effective utilization of
intellectual property laws, product quality, reliability, price and the
efficiency of production, the pace at which customers incorporate the Company's
products into their products, success of competitors' products and general
economic conditions. There can be no assurance that the Company will be able to
compete successfully in the future.

        In its compression and networking business, the Company competes with
vertically integrated system suppliers including General Instrument, Scientific
Atlanta and Philips, as well as more specialized suppliers including the DMV
division of News Corp., C-Cube Microsystems, Inc.'s DiviCom subsidiary, ADC,
FutureTel, ABL, Wegener and Optivision. In particular, the Company's RAVE
products compete with products with MPEG-2 and ATM capabilities developed by MPR
Teltech and the Atrium product line from AG Communications Systems.

        In addition to direct competition from other suppliers, the Company also
competes with producers of low cost analog (uncompressed) and digital
(proprietary) technologies.

RESEARCH AND DEVELOPMENT

        The Company believes its success will depend in large part on its
ability to enhance existing products and continue developing new products
incorporating emerging digital video networking technologies. The Company has
devoted a substantial portion of the investment capital it has received since
inception to research and development. The Company expended approximately
$6,700,000 and $1,300,000 on Company-sponsored research and development during
the fiscal year ended December 31, 1996 and the eight-month fiscal period ended
December 31, 1995, respectively. Although the Company did not engage in any
customer-sponsored research and development activities during the fiscal years
ended April 30, 1995 or 1994, in the fiscal period ended December 31, 1995 and
the fiscal year ended December 31, 1996, the Company performed research and
development under contract of Nortel.

        The Company develops most of its products in-house and currently has a
research and development staff which includes over 20 engineers. The Company
augments its own research and development efforts through strategic
relationships it has developed with NUKO Information Systems (India) Private
Limited ("NUKO India") and Tata Unysis. The Company owns 48% of NUKO India,
which performs certain development activities on behalf of the Company. During
the periods ending December 31, 1996, December 31, 1995 (eight months) and April
30, 1995, the Company advanced approximately $96,000, $82,000 and $48,000,
respectively, to NUKO India. In the fiscal year ended December 31, 1996, Tata
Unysis provided the services of two engineers for six months and one engineer
for six months. The Company paid Tata Unysis approximately $117,000 for the
research and development work performed by the engineers.

        The Company is committed to continuing the development of its core
technologies and anticipates that it will devote a significant portion of
revenues to ongoing research and development, particularly with respect to
software development. The Company is currently developing the next generation of
Highlander


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products, which are anticipated to support form factor reduction, ATM
and DS3 networks with enhanced network management capabilities and better
integration of features for carrier companies.

INTELLECTUAL PROPERTY

        Although the Company has sought patent protection for certain of its
technology, the Company relies primarily on know-how and trade secrets to
protect its intellectual property. The first patent application filed by the
Company relates to technology that enables customers to use unused portions of
the spectrum.

        The Company attempts to protect its trade secrets and other proprietary
information through agreements with its customers, suppliers, employees and
consultants, and through other security measures. Each of the Company's
employees is required to sign a nondisclosure and noncompetition agreement.
Although the Company intends to protect its rights vigorously, there can be no
assurance that these measures will be successful. In addition, the laws of
certain countries in which products incorporating the Company's technology may
be developed, manufactured or sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. There is also no assurance that any particular aspect of the Company's
technology or products will not be found to infringe the claims of existing
patents, although, to date, the Company has not received any claims that its
products infringe on the proprietary rights of third parties.

        While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the telecommunications industry, its
technical expertise and ability to introduce new products on a timely basis will
be more important in maintaining its competitive position than protection of its
existing intellectual property and that patent, trade secret and copyright
protections are important but must be supported by other factors such as the
expanding knowledge, ability and experience of the Company's personnel, new
technology and products and product enhancements.

MANUFACTURING

        The Company subcontracts the manufacture of its products to other
companies that have ISO 9000 certified manufacturing facilities and that produce
chip sets having the high-speed processors needed in video compression. Digital
compression chip-sets typically command higher prices than the analog-based
chip-sets used in conventional analog codecs. The Company believes that the
digital video compression market is currently in an embryonic stage and that
advancements in digital video compression technology will result in smaller form
factors and lower prices for these chip-sets.

        The Company has formalized contractual relationships with its most
significant vendors, which the Company believes are of significant size and
scope as to minimize risk from both the manufacturers' process capability as
well as procurement capabilities; however, any possible delays in the
manufacture and delivery of product could result in a need to find alternative
manufacturing resources. Should it be required to find alternative sources of
manufacturing, the Company believes it could do so, but there could be
significant delays in production that could have a necessary adverse impact on
the Company's results of operations. Of the product lines which the Company
offers for sale, certain products are based upon the existing technologies
available, which in some cases are single sourced. Although there is no current
shortage for these components, there is no guarantee of future availability for
these parts.


                                       11
<PAGE>   12
        Most of the materials and supplies purchased by the Company are standard
electronic components, including transistors, integrated circuits, resistors,
capacitors and circuit boards manufactured by multiple suppliers. Currently, the
Company purchases only one component, its video-compression RISC processors,
from a single qualified source. In the event of a failure of the current sole
source supplier, a material delay in shipments could result. The Company is
seeking to qualify additional video compression vendors; however, there is no
assurance that the Company will be able to locate additional sources of supply
in a timely manner.

GOVERNMENT REGULATION

        The telecommunications industry, including most of the Company's
customers, is subject to regulation by federal and state agencies, including the
Federal Communications Commission ("FCC") and various state public utility and
service commissions. While such regulation does not necessarily affect the
Company directly, the effects of such regulations on the Company's customers
may, in turn, adversely affect the Company's business and results of operations.
For example, FCC regulatory policies affecting the availability of telco
services and other terms on which telcos conduct their business may impede the
Company's plans for deployment of its technology.

        In February 1996, the Telecommunications Act was enacted. A primary
factor in passage of the Telecommunications Act was the desire to deregulate and
foster competition in the telecommunications markets. While the Company believes
deregulation and increased competition, in general, will be favorable to its
operations and business plan, the effect of the Telecommunications Act on the
telecommunications industry is unclear. The Company's strategy depends, in part,
on the RBOCs and other leading telcos remaining in a dominant position as
consumers of digital compression and networking products from the Company or its
OEMs. If the product market for digital compression and networking equipment or
other such products becomes more fragmented as a result of deregulation, then
the Company could experience a material adverse effect on its business,
financial condition or results of operations.

        In addition, the Company's business and operating results may also be
adversely affected by the imposition of certain tariffs, duties and other import
restrictions on components that the Company or its OEM customers obtains from
non-domestic suppliers or by the imposition of export restrictions on products
sold internationally and incorporating the Company's technology.
Internationally, governments of the United Kingdom, Canada, Australia and
numerous other countries actively promote and create competition in the
telecommunications industry. Changes in current or future laws or regulations,
in the U.S. or elsewhere, could materially and adversely affect the Company's
business, financial condition or results of operations.

EMPLOYEES

        As of December 31, 1996, the Company had 96 full-time employees. Of this
total, 28 were engaged in research and development, 30 in marketing and sales,
26 in manufacturing and 12 in administration and finance. In addition, there are
10 engineers supporting the Company's efforts through an associated firm by the
name of NUKO Information Systems (India) Private Ltd. located in Bangalore,
India.

RECENT DEVELOPMENTS

        On January 7, 1997, the Company consummated its reincorporation from New
York to Delaware by effecting the merger of the Company, formerly a New York
corporation ("NUKO New York"), into its


                                       12
<PAGE>   13
wholly owned Delaware subsidiary ("NUKO Delaware"). The reincorporation was
previously approved by the Company's board of directors and by its shareholders
at a special meeting held on December 11, 1996. On the effective date of the
merger, each share of NUKO New York Common Stock and each share of Series A
Convertible Preferred Stock, par value $.001 per share ("Convertible Preferred
Stock"), of NUKO New York issued and outstanding immediately prior thereto were
converted into and exchanged for one fully paid and nonassessable share of
common stock, $.001 par value, and one fully paid and nonassessable share of
Convertible Preferred Stock, $.001 par value, of NUKO Delaware, respectively. In
addition, NUKO Delaware assumed the obligations of NUKO New York under the
option plans and all other employee benefit plans of NUKO New York. Each
outstanding and unexercised option, warrant or other right to purchase NUKO New
York Common Stock became an option, warrant or right to purchase NUKO Delaware
Common Stock, respectively. See "Item 4. Submission of Matters to a Vote of
Security Holders."

RISK FACTORS

        In addition to the other information contained in this Annual Report,
the following risk factors should be carefully considered in evaluating the
Company.

        HISTORY OF LOSSES. Since its decision to enter the video networking
market, the Company has operated at a loss because the Company's revenues have
been insufficient to support the comparatively substantial expenses incurred by
the Company, primarily for research and development. The Company recorded net
losses of approximately $700,000 in fiscal 1994, $1,700,000 in fiscal 1995,
$2,000,000 for the eight months ended December 31, 1995 and $14,700,000 in
fiscal 1996. The Company's accumulated deficit at December 31, 1996 is
approximately $19,100,000. The Company expects to continue to incur substantial
losses in future periods. There can be no assurance that the Company's products
will be widely accepted in the marketplace or to the extent sales are made, that
the volume, pricing and timing will be sufficient to permit the Company to
achieve profitability in the future. As of December 31, 1996, the Company has
net operating loss carry forwards of approximately $16,000,000 and $4,500,000
available to offset future federal and state taxable income, respectively, which
losses expire at various dates from 1997 to 2011. The utilization of these
losses is contingent upon the Company's ability to generate taxable income in
the future. Management does not believe, based upon available evidence, that it
is more likely than not that the Company will be able to realize the deferred
tax assets.

        INDISPENSABLE NEED FOR CAPITAL/REPORT OF INDEPENDENT ACCOUNTANTS
REGARDING ABILITY TO CONTINUE AS A GOING CONCERN. Primarily because of the
Company's history of operating losses, there is substantial doubt about the
Company's ability to continue as a going concern unless the Company is able to
obtain additional equity financing. The Company anticipates that without
additional financing it would likely run out of cash to fund its operations
during the second fiscal quarter of 1997. The Company currently does not have
any arrangements to obtain other sources of financing. If the Company were
unable to secure such financing, the Company would at a minimum be forced to
revise its 1997 Operating Plan. The report of independent accountants on the
Company's financial statements included herein includes an explanatory paragraph
to this effect. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and the
Financial Statements.

        ADDITIONAL CAPITAL REQUIREMENT. At closings held on December 16, 1996
and February 28, 1997, the Company issued to a single institutional investor
(the "Investor") an aggregate of 10,000 shares of the Company's Series A
Convertible Preferred Stock ("Convertible Preferred Stock") for an aggregate
purchase price of $10,000,000 (the "Private Placement"). Although the Company
believes that its existing cash resources and the proceeds of the Private
Placement will provide adequate funding for its capital


                                       13
<PAGE>   14
requirements through the first quarter of 1997, the Company expects it will need
additional funds to support its operating plan at some time during the first
half of 1997. The Company's capital requirements will depend on many factors,
including the progress of its research and development efforts, its timely
receipt of revenue from sales of its products to large customers, the need to
devote resources to manufacturing operations, and the demand for the Company's
products. Additional future financing may occur through the sale of unregistered
Common Stock or convertible securities in exempt offerings or through the public
offering of registered stock or convertible debt. Pursuant to the Securities
Purchase Agreement dated as of December 13, 1996 between the Company and the
Investor, however, the Company may not, without the prior written consent of the
Investor, negotiate or contract with any party to obtain any additional equity
financing (including debt financing with an equity component) until June 28,
1997 unless such financing is by way of a firm commitment underwriting, the
issuance of securities in connection with a merger, consolidation or sale of
assets or the issuance of securities in connection with a strategic investment
or joint venture. The Investor will also have a right of first refusal during
the 240 days beginning June 28, 1997 to purchase securities on the same terms
offered by potential investors during such period, subject to the same
exceptions applicable during the period ending June 28, 1997. There can be no
assurance that new financing will be available when needed by the Company or
that the terms, if available, will be satisfactory to the Company. If adequate
funds are not available, the Company may be required to delay, scale back or
eliminate one or more of its research and development or manufacturing programs
or to obtain funds through arrangements that may require the Company to
relinquish rights to certain of its technologies or potential products or other
assets that the Company would not otherwise relinquish. The inability of the
Company to raise needed funds would have a material adverse effect on the
Company's business, financial condition and results of operations.

        SHORT OPERATING HISTORY. The Company's operations are subject to all of
the risks inherent in a new business enterprise, including the absence of a
substantial operating history and the expense of new product development.
Various problems, expenses, complications and delays may be encountered in
connection with the development of the Company's products and business. Future
growth beyond present capacity will require significant expenditures for
expansion, marketing, research and development. These expenses must be paid out
of future equity or debt financings or out of generated revenues and Company
profits. The availability of funds from any of these sources cannot be assured.

        The Company was incorporated in the State of New York in 1968 under the
name Yondata Corporation and, in October 1992, changed its name to Growers
Express Corporation. In May 1994, Growers Express Corporation merged with NUKO
Technologies, Inc., a California corporation, and following the merger, Growers
Express changed its name to NUKO Information Systems, Inc. and commenced
operations through NUKO Technologies, Inc., which survived the merger as the
Company's wholly owned subsidiary. In January 1997, the Company effected a
reincorporation from New York to Delaware by merging itself into its
wholly-owned Delaware subsidiary. From 1970 to 1994, the Company had no
operations and no revenues. The Company's management, which had no affiliation
with Growers Express prior to the merger with NUKO Technologies in May 1994, has
almost no knowledge of the Company's activities between its incorporation in
1968 and the merger, and very few corporate records relating to the period
between 1970 and 1994 are available. As a result, while management believes that
there are no material liabilities relating to the predecessor company, there can
be no assurance that there are no potential liabilities relating to such period
or that the Company always conducted its corporate activities during this period
in accordance with the New York Business Corporations Law.

        EARLY STAGE OF PRODUCT DEVELOPMENT. Since early 1994, the Company has
been primarily engaged in research and development of its technologies, product
design and establishment of strategic alliances on which the Company expects to
depend for manufacturing, sales and distribution of its potential


                                       14
<PAGE>   15
products. The Company has only recently begun to generate significant revenues
from the commercialization of products. The Company has to date sold its initial
products only in limited quantities, primarily for use in development,
demonstration and testing of prototypes. Certain contracts may relate to new
technologies that may not have been previously deployed on a large-scale
commercial basis. The Company's products are based on technologies that have not
been widely deployed, and there can be no assurance that the Company will be
able successfully to market its initial products to generate the increased
revenues necessary to sustain full scale commercial production or that the
Company's products will be well received when introduced into the marketplace on
a full commercial scale. The Company's products also must interoperate
effectively among a wide variety of different equipment, different protocols and
different transmission speeds. While the Company believes its products
interoperate effectively among the principal configurations of equipment,
protocols and transmission speeds that are currently commercially deployed,
there can be no assurances that the Company's products will continue to
interoperate effectively among other configurations of equipment, protocols and
transmissions which may be developed or utilized in the future. Moreover,
management of the Company has limited experience with the distribution of
technologically complex products in commercial quantities and there can be no
assurance that the Company will be able to make necessary adaptations to
successfully move from the research and development stage to full commercial
production and distribution.

        COMPETITION. The segments of the telecommunications industry in which
the Company competes are intensely competitive and are characterized by
declining average selling prices and rapid technological change. The Company
competes with major domestic and international companies, virtually all of which
have substantially greater financial, technical, production and marketing
resources than the Company with which to pursue engineering, manufacturing,
sales, marketing and distribution of their products. For example, in its
compression and networking business, the Company competes with vertically
integrated system suppliers including General Instrument Corporation,
Scientific-Atlanta, Inc. and Philips, as well as more specialized suppliers
including the DMV division of News Corp., C-Cube Microsystems' DiviCom Inc.
subsidiary, and the TV/COM subsidiary of Hyundai. In addition, some of the
Company's customers are actual or potential competitors of the Company,
competing against the Company with its own products. The Company believes that
the principal criteria for competition in its market include cost
competitiveness, flexibility, revenue generation capability, compatibility with
existing networks and upgradeability, as well as customer support. There is no
assurance that the Company will be able to compete successfully with these other
companies on these factors or otherwise. See "-- Competition."

        MANAGEMENT OF GROWTH. During 1996, the Company began to experience
significant growth which the Company expects will continue at a rapid pace for
the foreseeable future. Such growth has placed, and will continue to place,
significant strain on the Company's limited personnel and other resources. The
Company's ability to manage any further growth, should it occur, will require it
to implement and continually expand operational and financial systems, recruit
additional employees and train and manage both current and new employees. There
can be no assurance that the Company will be able to find qualified personnel to
fill needed positions or be able to successfully manage a broader organization.
The failure of the Company to effectively expand or manage these functions
consistent with any growth that may occur could have a material adverse effect
on the Company's business and results of operations.

        DEPENDENCE ON CUSTOMER CAPITAL SPENDING REQUIREMENTS AND PURCHASING
TRENDS. The Company's business is directly impacted by capital spending
requirements and funding of the Regional Bell Operating Companies ("RBOCs") and
other major customers in the telecommunications industry. The capital budgets of
these customers or potential customers is beyond the control of the Company and
can be affected by numerous factors completely unrelated to the performance,
quality and price of the Company's products. Should the Company's customers or
potential customers suffer budgeting cutbacks affecting their


                                       15
<PAGE>   16
capital purchasing plans, the Company's results of operations could be adversely
affected. In addition, in recent years, the purchasing behavior of the Company's
customers has increasingly been characterized by the use of large contracts with
few suppliers. This trend is expected to intensify and will contribute to the
variability of the Company's results. Such larger purchase contracts typically
involve longer negotiating cycles, require dedication of substantial amounts of
working capital and other resources and, in general, require investments that
may substantially precede recognition of associated revenues. Moreover, in
return for larger, longer-term purchase agreements, customers often demand more
stringent acceptance criteria, which may also cause revenue recognition delays.
For example, if customers ask the Company to price its products based on
estimates of such customers' future requirements, and such customers fail to
take delivery of an amount comparable to the estimated amount on which the
Company bases its prices, the Company may recognize lower margins on product
revenue.

        RELIANCE ON TELCOS. Before purchasing products such as those of the
Company, telephone companies ("telcos") subject such products to lengthy
approval processes, which can take several years or more for complex products
based on new technologies. The Company expects to be required to submit each
successive generation of its products as well as new products to its telco
customers for approval. The length of the approval process will depend upon a
number of factors, including the complexity of the product involved, development
priorities of telcos, telcos' budgets and regulatory issues affecting telcos.
Moreover, the need for regulatory approval from the Federal Communications
Commission (the "FCC") for certain new telco services prior to their
implementation may delay the approval process. Any such delay would have a
material adverse effect on the Company's business, financial condition and
results of operations.

        Historically, telcos have been cautious in implementing new
technologies. Telcos' deployment of the Company's compression and networking
technologies may be prevented or delayed by a number of factors, including
telcos' lengthy product approval and purchase processes; cost; regulatory
barriers that may prevent or restrict telcos from providing interactive
multimedia services; the lack of demand for Internet access and other
interactive multimedia services; the lack of sufficient programming content for
interactive multimedia services; the availability of alternative technologies;
and telcos' policies that favor the use of such alternative technologies. In
addition, telcos are generally reluctant to deploy new technologies available
only from a single source, especially when the supplier is as small as the
Company, and often require alternative sources before deploying a new
technology. This reluctance may put the Company at a competitive disadvantage
relative to some of its competitors. Even if telcos adopt policies favoring
full-scale implementation of the Company's compression and networking
technologies, there can be no assurance that sales of the Company's products
will become significant or that the Company will be able successfully to
introduce its products on a timely basis or to sell those products in material
quantities. The failure of telcos to deploy the Company's technologies would
have a material adverse effect on the Company's business, financial condition
and results of operations. Even if demand for the Company's products is high,
telcos may have sufficient bargaining power to demand low prices and other terms
and conditions which may have a material adverse effect on the Company's
business, financial condition and results of operations.

        DEPENDENCE ON SUPPLIERS. The Company purchases certain of the chips and
chip sets needed in its products from single source suppliers. The Company is
dependent upon such suppliers to deliver parts and components as needed for the
manufacture of the Company's products, but there can be no assurance that such
suppliers will continue to be able to serve the Company's needs. While there are
alternative sources of supply for each of the components outsourced by the
Company, the Company would incur delays if required to switch to another
supplier. Any disruption of the Company's relationships with any of


                                       16
<PAGE>   17
its key single source suppliers or manufacturers or other limitations on the
availability of these products provided by such suppliers could have an adverse
effect on the Company's business and operating results.

        PRICING PRESSURES. The markets into which the Company sells or will sell
its products are characterized by extreme price competition, and the Company
expects the average selling prices of its products will decrease over the life
of each product. In order to partially offset declines in the selling price of
its products, the Company will need to reduce the cost of its products by
implementing cost reduction design changes, obtaining cost reductions as and if
volumes increase and successfully managing manufacturing and subcontracting
relationships. Since the Company does not operate its own manufacturing
facilities and must make binding commitments to purchase products, it may not be
able to reduce its costs as rapidly as companies that operate their own
manufacturing facilities. The failure of the Company to design and introduce
lower cost versions of its products in a timely manner or to successfully manage
its manufacturing relationships would have a material adverse effect on its
business and results of operations.

        DEPENDENCE ON SUBCONTRACTORS. The Company's reliance on subcontractors
to manufacture and assemble certain products involves significant risks,
including reduced control over delivery schedules, quality assurance,
manufacturing yields and cost, the potential lack of adequate capacity and
potential misappropriation of its intellectual property. Although the Company
has not experienced material disruptions in supply to date, there can be no
assurance that manufacturing or assembly problems will not occur in the future
or that any such disruptions will not have a material adverse effect upon the
Company's results of operations. Further, there can be no assurance that
suppliers who have committed to provide product will do so, or that the Company
will meet all conditions imposed by such suppliers. Failure to obtain an
adequate supply of products on a timely basis would delay product delivery to
the Company's customers, which would have a material adverse effect on the
Company's business and results of operations. In addition, the Company's
business could also be materially and adversely affected if the operations of
any supplier are interrupted for a substantial period of time, or if the Company
is required, as a result of capacity constraints in its industry or otherwise,
to increase the proportion of goods purchased from higher cost suppliers in
order to obtain adequate product volumes.

        DEPENDENCE ON CERTAIN CUSTOMERS. The Company has derived a substantial
amount of its revenues from contracts with a limited number of customers. During
the fourth quarter of 1996, Nortel accounted for approximately 60% of the
Company's revenues. Although the Company expects that Nortel will represent a
significantly smaller portion of revenues in future periods, it is anticipated
that it will continue to be an important revenue source for the foreseeable
future. Nortel's contract does not require any minimum purchases. The loss of
Nortel as a customer would have a material adverse effect on the Company's
business and results of operations. During 1996 approximately 25% of the
Company's revenues were derived from contracts with Southwestern Bell, all of
which have been completed. While the Company is continuing to seek additional
opportunities with Southwestern Bell, there can be no assurances that any
additional revenues will be derived from contracts or arrangements with
Southwestern Bell.

        FLUCTUATIONS IN QUARTERLY RESULTS; LACK OF BACKLOG. The Company has
experienced, and expects to continue to experience, significant fluctuations in
its quarterly results of operations. Factors that have contributed or may
contribute to future fluctuations in the Company's quarterly results of
operations include the size and timing of customer orders and subsequent
shipments, customer order deferrals in anticipation of new products, timing of
product introductions or enhancements by the Company or its competitors, market
acceptance of new products, technological changes in the telecommunications
industry, competitive pricing pressures, accuracy of customer forecasts of
end-user demand, changes in the


                                       17
<PAGE>   18
Company's operating expenses, personnel changes, changes in the mix of product
sales and contract and consulting fees, quality control of products sold,
disruption in sources of supply, regulatory changes, capital spending, delays of
payments by customers and general economic conditions. The timing and volume of
customer orders are difficult to forecast. The Company does not have a material
backlog of orders for its products.

        The Company intends to continue to make significant ongoing research and
development expenditures for new products and technologies, which may have a
material adverse effect on the Company's quarterly results of operations. The
Company's expense levels are based in part on expectations of future revenues
and are relatively fixed in the short term. The Company intends to increase
operating expenditures as the Company expands its operations to develop and
market its compression and networking products. Consequently, a shortfall in
quarterly revenues due to a lack of sales of the Company's products or otherwise
would adversely impact the Company's business, financial condition and results
of operations in a given quarter due to the Company's inability to adjust
expenses or inventory to match revenues for that quarter. In addition, there can
be no assurance that, as the Company increases sales of its products, warranty
returns will not become significant or that warranty returns, if significant,
will not have a material adverse effect on the Company's business, financial
condition and results of operations.

        GOVERNMENT REGULATION. Although the extensive regulation of telcos by
Federal, state and foreign regulatory agencies, including the FCC and various
state public utility and service commissions, does not directly affect the
Company, the effects of such regulation on the Company's customers may have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, FCC regulatory policies affecting the
availability of telco services, and other terms on which telcos conduct their
business, may impede the Company's penetration of certain markets. Although the
Telecommunications Act of 1996 eliminated or modified many FCC restrictions on
telcos' ability to provide interactive multimedia services, the remaining or any
future restrictions may have a material adverse effect on telcos' demand for the
Company's products. Cable operators, which may become another market for the
Company's products, are also subject to extensive governmental regulations that
may discourage them from deploying the Company's compression and networking
technology. In addition, rates for telecommunications services are generally
governed by tariffs of licensed carriers that are subject to regulatory
approval. These tariffs could have a material adverse effect on the demand for
the Company's products. The imposition of certain tariffs, duties and other
import restrictions on components which the Company intends to obtain from
non-domestic suppliers, the imposition of export restrictions on products which
the Company intends to sell internationally or other changes in laws or
regulations in the United States or elsewhere could also have a material adverse
effect on the Company's business, financial condition and results of operations.
See "-- Government Regulation."

        POTENTIAL PRODUCT LIABILITIES. One or more of the Company's products may
contain undetected component, hardware, software or mechanical defects or
failures when first introduced or may develop defects or failures after
commencement of commercial production or shipments. Any such defects or failures
could cause loss of goodwill, if any, with distributors and with customers,
prevent or delay market acceptance of the Company's products, result in
cancellations or rescheduling of orders or shipments or product recalls or
returns and expose the Company to claims from customers. The Company also could
incur unexpected and significant costs, including product redesign costs and
costs associated with customer support. The Company expects to sell its products
with a limited warranty against defects in materials and workmanship. If any of
the Company's products are found within the warranty period to contain such
defects, the Company could be required to repair or replace the defective
products or refund the purchase price. The occurrence of any such defect or
failure could have a material adverse effect on the Company's


                                       18
<PAGE>   19
business, financial condition and results of operations. The Company does not
maintain insurance to protect against claims associated with the use of its
products and there can be no assurance that the Company will be able to satisfy
claims that may be asserted against the Company.

        INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. The Company attempts to
protect its technology through a combination of patents, copyright and trade
secret laws, confidentiality procedures and licensing arrangements. While the
Company currently has no patents, the Company has applied for certain patents
and intends to continue to seek patents on its technology, when appropriate.
There can be no assurance that patents will issue from any of the pending
applications or that any claims allowed from pending patents will be
sufficiently broad to protect the Company's technology. While the Company
intends to protect its intellectual property rights vigorously, there can be no
assurance that any patents issued to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. The Company will endeavor to keep the
results of its research and development program proprietary, but may not be able
to prevent others from using some or all of such information or technology with
or without compensation. The Company's ultimate success will depend to some
extent on its ability to avoid infringement of patent or other proprietary
rights of others. The Company is not aware that it is infringing any such
rights, nor is it aware of proprietary rights of others for which it will be
required to obtain a license in order to market its initial products. However,
there is no assurance that the Company is not infringing proprietary rights of
others or that it will be able to obtain any technology licenses it may require
in the future. See "-- Intellectual Property."

        DEPENDENCE ON EMERGING MARKETS. The markets into which the Company is
targeting its products are newly developing. The potential size of the market
opportunities and the timing of their development is uncertain. In addition, the
emergence of markets for certain digital video applications will be affected by
a variety of factors beyond the Company's control. In particular, certain
sectors of the communications market will require the development and deployment
of an extensive and costly communications infrastructure. There can be no
assurance that the communications providers will make the necessary investment
in such infrastructure or that the creation of this infrastructure will occur in
a timely manner. In addition, the deployment of such infrastructure will be
subject to governmental regulatory policies, taxes and tariffs. The development
of such markets could be delayed or otherwise adversely affected by new
governmental regulations or changes in taxes or tariffs, or by the failure of
government agencies to adopt changes to existing regulations necessary to permit
new technologies to enter the market.

        POSSIBLE TECHNOLOGICAL ADVANCES. The market for the Company's initial
products is expected to be characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions. The
Company's future success will depend in part upon its ability to successfully
bring to market and then enhance its existing products and to introduce new
products and features to meet changing customer requirements and emerging
industry standards. There can be no assurance that the Company will successfully
complete the development of its future products or that the Company's initial or
future products will achieve market acceptance. Any delay or failure of these
products to achieve market acceptance would adversely affect the Company's
business. In addition, there can be no assurance that products or technologies
developed by others will not render the Company's initial or future products or
technologies non-competitive or obsolete.

        ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS. Certain provisions
of the Company's Amended and Restated Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals, could delay or prevent a
change in control of the Company and could make removal of management more
difficult. Such provisions could diminish the opportunities for a stockholder to
participate in tender offers, including tender offers that are priced above the
then current market value of


                                       19
<PAGE>   20
the Common Stock. Additionally, the Board of Directors of the Company, without
further shareholder approval, may issue up to 4,990,000 shares of Preferred
Stock, in one or more series, with such terms as the Board of Directors may
determine, including rights such as voting, dividend and conversion rights which
could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred Stock may be issued quickly with terms which delay or
prevent the change in control of the Company or make removal of management more
difficult. Also, the issuance of Preferred Stock may have the effect of
decreasing the market price of the Common Stock.

        DEPENDENCE ON KEY PERSONNEL. The ability of the Company to build and
maintain its competitive technological position will depend, in large part, on
the continued service of its key technical and management personnel and on its
ability to attract and retain highly-skilled technical, marketing and management
personnel. Competition for such personnel is intense and there is no assurance
that qualified people will be available when required. The Company does not
currently have employment agreements with any of its key employees other than
John H. Gorman, the Company's Vice President--Finance, Chief Financial Officer,
Treasurer and Secretary. The Company does not have, and is not contemplating
securing, key man life insurance on any of its executive officers or other key
personnel. There can be no assurance that any of these individuals or any other
key employee will not voluntarily terminate his or her employment with the
Company. The loss of certain key employees, particularly the Company's President
and Chief Executive Officer, Pratap Kesav Kondamoori, would have a material
adverse effect on the business of the Company. In addition, there can be no
assurance that the Company will be able to enforce noncompetition agreements
against employees who have executed such agreements.

        CONTROL BY OFFICERS AND DIRECTORS. As of March 21, 1997, the officers
and directors of the Company control, directly or indirectly, approximately
32.0% of the voting power of the Company's voting stock, including options and
warrants immediately exercisable or exercisable within 60 days. Although
management does not control a majority of the outstanding voting stock, it holds
a sufficient amount to make it more difficult for an independent third party to
effect a change in control of the Company than would be the case if the stock
ownership were less concentrated among members of management.

        STOCK MARKET VOLATILITY; VOLATILITY OF THE COMPANY'S COMMON STOCK. There
have been periods of extreme volatility in the stock market that, in many cases,
were unrelated to the operating performance of, or announcements concerning, the
issuers of the affected securities. General market price declines or volatility
in the future could adversely affect the price of the Common Stock. There can be
no assurance that the Common Stock will maintain its current market price.
Short-term trading strategies of certain investors can have a significant effect
on the price of specific securities. The price of the Company's Common Stock, in
particular, has been extremely volatile.

        ABSENCE OF DIVIDENDS. The Company does not expect to declare or pay any
cash or stock dividends in the foreseeable future, but instead intends to retain
all earnings, if any, to invest in the Company's operations. The payment of
future dividends is within the discretion of the Board of Directors and will
depend upon the Company's future earnings, if any, its capital requirements,
financial condition and other relevant factors.

        CONVERTIBLE SECURITIES, WARRANTS AND OPTIONS; POTENTIAL DILUTION AND
ADVERSE IMPACT ON ADDITIONAL FINANCING. As of March 21, 1997, the Company had
outstanding options and warrants to purchase an aggregate of 3,164,760 shares of
Common Stock at a weighted average exercise price of $5.25 per share. The
Company also is obligated to issue additional Warrants to acquire 750,751 shares
of Common Stock and 1,501,502 shares of Common Stock upon conversion of the
Convertible Preferred Stock (subject to certain limitations contained in the
Certificate of Designation for the Series A Convertible


                                       20
<PAGE>   21
Preferred Stock and the Stock Purchase Warrant issued to the investor) based on
a conversion price of the Convertible Preferred Stock at the time of such
conversion of $6.66 (90% of the average closing bid price over the ten trading
days prior to March 21, 1997). Pursuant to the terms of the Convertible
Preferred Stock, the minimum number of shares available for resale is 937,500
(including shares underlying Warrants), based on a fixed maximum conversion
price of $16.00 per share. Subject to such minimum number, the exact number of
shares of Common Stock issuable upon conversion of Convertible Preferred Stock
and exercise of Warrants issued pursuant to such conversion cannot be estimated
with certainty because such issuances of Common Stock will vary inversely with
the market price of the Common Stock at the time of such conversion. The number
of warrants and shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock is also subject to various adjustments to prevent
dilution resulting from stock splits, stock dividends or similar transactions.
To the extent that such options and warrants are exercised or shares of
Convertible Preferred Stock are converted (and the Warrants issuable upon such
conversion are exercised), substantial dilution of the interests of the
Company's shareholders is likely to result and the market price of the Common
Stock may be materially adversely affected. In the case of the Convertible
Preferred Stock, such dilution will be greater if the future market price of the
Common Stock decreases. For the life of such warrants, options and convertible
securities the holders will have the opportunity to profit from a rise in the
price of the underlying securities. The existence of such warrants, options and
convertible securities is likely to affect materially and adversely the terms on
which the Company can obtain additional financing, and the holders of warrants
and options can be expected to exercise them at a time when the Company would
otherwise, in all likelihood, be able to obtain additional capital by an
offering of its unissued capital stock on terms more favorable to the Company
than those provided by such warrants, options and convertible securities.

        SHARES ELIGIBLE FOR FUTURE SALE. Future sales of Common Stock by
existing shareholders under Rule 144 of the Act, pursuant to an effective
registration statement or otherwise could have an adverse effect on the price of
the Common Stock. As of March 21, 1997, there were more than 9,350,000 shares of
Common Stock eligible for sale in the public market, subject to compliance with
Rule 144. In May 1996, the Commission declared effective a registration
statement covering the resale of approximately 5,000,000 shares of such shares,
a portion of which has not been publicly resold as of the date hereof, but could
be so resold at any time. In February 1997, the Commission declared effective a
registration statement covering the shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock and the Warrants issuable upon
such conversion. The Company has registered 1,500,000 shares for issuance under
its 1995 Stock Option Plan. In addition, the Company intends to register up to
2,700,000 shares for issuance under its 1996 Stock Option Plan and 1996 Director
Stock Option Plan. The possibility that substantial amounts of Common Stock may
be sold in the public market may adversely affect the prevailing market price
for the Common Stock and could impair the Company's ability to raise additional
capital through the sale of equity securities.

ITEM 2. PROPERTIES

        The Company currently occupies a total of approximately 29,000 square
feet of space in two facilities located in San Jose, California. The Company
subleases approximately 12,000 square feet in a building located at 2235 Qume
Drive, San Jose, California to house its engineering operations. In addition,
the Company leases approximately 40,000 square feet located at 2391-2395 Qume
Drive, San Jose, California. The Company's headquarters and manufacturing
operations are located at 2391 Qume Drive. The Company subleases the
approximately 20,000 square feet located at 2393-2395 Qume Drive to third
parties not affiliated with the Company. Under the terms of the 2391-2395 Qume
Drive lease, the Company has an option to purchase the building during the term
of the lease for $3,000,000. The Company believes that its existing facilities
are adequate to meet its current requirements and that suitable space will be
available as needed.


                                       21
<PAGE>   22
ITEM 3. LEGAL PROCEEDINGS

        On March 18, 1997, Manufacturers' Services Limited ("MSL") commenced
litigation against the Company in the United States District Court for the
Northern District of California. In its complaint, MSL alleges that the Company
breached certain express and implied contractual obligations to MSL by failing
to pay for products manufactured by MSL and for inventory MSL acquired on behalf
of the Company. The relief sought by MSL includes damages estimated at
approximately $3.2 million. The Company intends to vigorously defend against
MSL's claims in this lawsuit.

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

        On December 11, 1996 the Company held a Special Meeting of Shareholders
of NUKO Information Systems, Inc. Notice of the Special Meeting and a Proxy
Statement were submitted to Shareholders of record as of November 12, 1996. At
the Special Meeting, shareholders were asked to vote on the following proposals:

     1.   To approve a change in the Company's state of incorporation from New
          York to Delaware.

     2.   To approve the adoption of the 1996 Stock Option Plan (as amended and
          restated on November 7, 1996) and the reservation of 2,500,000 shares
          of Common Stock for issuance thereunder.

     3.   To approve the adoption of the 1996 Director Stock Option Plan (as
          amended and restated on November 7, 1996) and the reservation of
          200,000 shares of Common Stock for issuance thereunder.


At the meeting on December 11, 1996, the following results of shareholder votes
were recorded:

PROPOSITION 1

To approve a change in the Company's state of incorporation from New York to
Delaware:

<TABLE>
<S>                               <C>
               For                7,143,546
               Against               10,952
               Abstain                3,858
               No Vote            3,243,311
</TABLE>

PROPOSITION 2

To approve the adoption of the 1996 Stock Option Plan and the reservation of
2,500,000 shares of Common Stock for issuance thereunder.

<TABLE>
<S>                               <C>
               For                6,722,594
               Against              496,308
               Abstain               32,554
               No Vote            3,150,211
</TABLE>

PROPOSITION 3

To approve the adoption of the 1996 Director Stock Option Plan and the
reservation of 200,000 shares of Common Stock for issuance thereunder.


                                       22
<PAGE>   23
<TABLE>
<S>                               <C>
               For                6,940,948
               Against              386,416
               Abstain               26,448
               No Vote            3,047,855
</TABLE>


                                       23
<PAGE>   24
                                     PART II

ITEM 5.  MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

        The Company's Common Stock, $.001 par value, trades on The Nasdaq Stock
Market's National Market System ("Nasdaq") under the symbol "NUKO." As of
February 28, 1997 there were approximately 10,489,534 shares of Common Stock
outstanding held by approximately 1,383 holders of record.

        The Company's Common Stock traded on The Nasdaq Stock Market's
over-the-counter Electronic Bulletin Board under the Symbol "NUKO" from the
period of January 1, 1995 through May 27, 1996. The table below lists the range
of high and low bid prices for the Company's Common Stock, as reported on the
Electronic Bulletin Board for the year ended December 31, 1995 and the period
from January 1, 1996 through May 27, 1996.

<TABLE>
<CAPTION>
             FISCAL YEAR 1995                  HIGH                    LOW
             ----------------                  ----                    ---
<S>                                           <C>                    <C>
             First Quarter                         6                 2 1/2
             Second Quarter                    5 1/2                 2 3/8
             Third Quarter                     5 3/8                 3 1/8
             Fourth Quarter                   10 5/8                     5
</TABLE>

<TABLE>
<CAPTION>
             FISCAL YEAR 1996                   HIGH                   LOW
             ----------------                   ----                   ---
<S>                                           <C>                    <C>
             First Quarter                        10                 6 1/2
             Second Quarter                   17 1/2                 7 5/8
              (through May 27, 1996)
</TABLE>

        The above quotations represent prices between dealers and do not include
retail mark-up, mark-down or commissions and may not represent actual
transactions.

        The table below lists the range of high and low reported sales prices
per share as reported by Nasdaq.

<TABLE>
<CAPTION>
             FISCAL YEAR 1996                   HIGH                   LOW
             ----------------                   ----                   ---
<S>                                           <C>                   <C>
             Second Quarter                   17 3/8                11 3/4
               (beginning May 28, 1996)
             Third Quarter                    19 1/2                 6 1/8
             Fourth Quarter                   18 3/8                11
</TABLE>


                                       24
<PAGE>   25
        The Company has never paid cash dividends on its Common Stock. The
Company currently anticipates that it will retain all available funds for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future.

        On December 16, 1996, the Registrant issued to a single institutional
investor (the "Investor") pursuant to Rule 506 under the Securities Act of 1933,
as amended (the "Act"), 5,000 shares of Series A Convertible Preferred Stock,
$0.001 par value per share ("Convertible Preferred"), for an aggregate purchase
price of $5,000,000, upon the first closing under a Securities Purchase
Agreement, dated as of December 13, 1996, by and between the Registrant and the
Investor (the "Purchase Agreement"). The Investor is an "accredited investor"
within the meaning of Rule 501(a) under the Act. The Convertible Preferred,
together with a premium thereon accruing at the rate of 7% per annum, is
convertible into Common Stock at a conversion price equal to the lesser of (i)
$16 per share and (ii) a discount to the per share market price of the
Registrant's Common Stock (based on a ten day average thereof) on the conversion
date. The discount ranges from 0% currently to 15% beginning 90 days after the
first closing. For every two shares of Common Stock issued upon conversion of
the Convertible Preferred, the holder will receive one five-year warrant to
acquire a share of Common Stock at an exercisable price of $18 per share.


                                       25
<PAGE>   26
ITEM 6.      SELECTED FINANCIAL DATA

        The following selected financial data are derived from the Financial
Statements of the Company which have been audited by Coopers & Lybrand L.L.P.,
independent accountants, for the fiscal year ended December 31, 1996 and by
Grant Thornton LLP, independent certified public accountants, for the fiscal
period ended December 31, 1995 (an eight month period) and the fiscal year ended
April 30, 1995. This selected financial data should be read in conjunction with
the Financial Statements and notes thereto appearing elsewhere in this report.
All amounts except per share amounts are presented in thousands. No cash
dividends have been declared or paid in any of the years. Because the Company
changed its fiscal year-end from April 30 to December 31 in 1995, the financial
information below reflects a fiscal twelve month period ended December 31, 1996,
fiscal eight month period ended December 31, 1995 and a fiscal twelve month
period ended April 30, 1995. Financial information relating to the period prior
to the merger of Nuko Technologies, Inc. with Growers Express Corporation in May
1994 is not meaningful to the Company's current operations and is not provided.

<TABLE>
<CAPTION>
                                        YEAR ENDED          EIGHT MONTHS         YEAR ENDED
                                        DECEMBER 31,            ENDED             APRIL 30,
                                            1996             DECEMBER 31,           1995
                                                                1995
                                         --------             --------             -------
<S>                                      <C>                  <C>                  <C>
STATEMENT OF OPERATIONS DATA
Net Revenue                              $ 11,082             $    296             $    88

Gross Profit                                1,821                  207                  81
Expenses:
   Research and development                 6,700                1,269                 803
   Selling and administration              10,043                  792                 914
                                         --------             --------             -------
       Total expenses                      16,743                2,061               1,717
                                         --------             --------             -------

Operating loss                            (14,922)              (1,854)             (1,636)

Net loss                                 $(14,733)            $ (1,958)            $(1,743)
                                         --------             --------             -------
Average common shares
   Outstanding                              9,709                2,782               2,158
                                         --------             --------             -------

Loss per share                           ($  1.52)            ($  0.70)            ($ 0.81)
                                         --------             --------             -------
</TABLE>

<TABLE>
<CAPTION>
BALANCE SHEET DATA
                                                  December 31
                                                  -----------                     April 30,
                                           1996                 1995                1995
                                         --------             --------            --------
<S>                                      <C>                  <C>                  <C>
Cash and cash equivalents                $  2,270             $ 11,256             $    --
Total assets                               18,180               13,328                 143

Long term debt                                 39                  427                  --

Total stockholders' equity/(deficit)     $  7,487             $ 11,377             $(1,592)
                                         --------             --------             -------
</TABLE>


                                       26
<PAGE>   27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OVERVIEW

        The reader of the following discussion and analysis is advised that all
forward looking statements contained in this report are subject to certain risks
and uncertainties, which could cause actual results to differ materially from
those indicated by the forward looking statements.

        The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and the related notes thereto, which are
included elsewhere in the Company's current report on Form 10-K. Because in 1995
the Company changed its fiscal year-end from April 30 to December 31, the
discussions of financial information contained herein compare the fiscal year
ended December 31, 1996 to the eight-month fiscal period ended December 31,
1995. The discussion also includes a comparison of financial information from
the Company's eight-month fiscal period ended December 31, 1995 to the fiscal
year ended April 30, 1995.

RESULTS OF OPERATIONS

        Fiscal Year Ended December 31, 1996 Compared to Fiscal Period Ended
December 31, 1995 (an eight-month period)

        Sales for fiscal 1996 increased to $11.1 million compared with sales in
fiscal 1995 of $0.3 million. Sales for 1996 were primarily related to the
purchase of the Company's products by customers for evaluation and testing. A
number of these tests and evaluations have been successfully completed and the
Company expects commercial deployment to begin in 1997. However, there can be no
assurance that demand for the Company's products will continue at the rate
experienced in fiscal 1996 or that the Company's customers will choose to deploy
commercial quantities of the Company's products. Any significant decline in
demand for the Company's products would adversely impact financial results.

        Total orders booked in fiscal 1996 amounted to $13.3 million compared to
$0.3 million in fiscal 1995. The backlog of unfilled orders at December 31, 1996
was $2.3 million. The Company's order trend is characterized by short
customer-scheduled delivery cycles. As a result, a substantial portion of sales
in each fiscal quarter is derived from orders booked during the quarter.

        Gross margin in fiscal 1996 was $1.8 million compared to $0.2 million in
fiscal 1995. Gross margin in 1996 represented 16.4% of sales. The gross margin
in 1996 was adversely affected by lower product margin on the initial production
of the Company's products primarily because the Company's products have been
produced in low quantities. The Company expects that increases in sales volume
will result in improved margins. In addition, the Company experienced start-up
costs, including without limitation costs associated with selecting
sub-contractors.

        Research and development expenses for fiscal 1996 were $6.7 million
compared to $1.3 million for fiscal 1995. The increase in research and
development expenditures was primarily the result of the Company's retaining
additional personnel to engage in on-going development work. Research and


                                       27
<PAGE>   28
development represented 60% of sales in fiscal 1996. The Company anticipates
that spending on research and development will increase in fiscal 1997 as the
Company adds new features to existing products and modifies products so that it
can compete in both the commercial and residential marketplaces. In addition,
the Company expects to incur increased research and development expenses as it
steps up its development of the Company's next generation products.

        Sales, marketing and administrative expenses for fiscal 1996 were $10.0
million compared to $0.8 million for fiscal 1995. The increase in expense
emanated primarily from the Company's addition of personnel and infrastructures
necessary to support the Company's growth. Also contributing to the increase in
expenses was the Company's effort to make the marketplace aware of its products
by participating in numerous trade shows. The Company also recognized
compensation expense of $0.8 million representing the fair market value of stock
option awards to non-employees plus $0.3 million of compensation expense related
to the difference between the exercise price and fair market value of certain
options at the date of grant.

        The interest income (expense) category reflected net interest income
earned on cash, cash equivalents and short term investment balances during 1996
of $0.2 million compared to a net interest expense during fiscal 1995 of $0.1
million. The increase in interest income was principally the result of higher
cash balances during 1996.

        The Company recorded a net loss of $14.7 million or $1.52 per share for
fiscal year 1996 compared with a net loss of $2.0 million or $0.70 per share for
fiscal 1995. Net losses continue to reflect the Company's investment in research
and development, plus expenses to increase its marketing, sales, manufacturing,
and administrative resources to position the Company to deliver commercial
quantities of its products. While the Company anticipates that its customers
will begin to take delivery of commercial quantities of its products, the
Company expects to continue to incur losses in future periods.

        Fiscal Period Ended December 31, 1995 (an eight month period) Compared
to Fiscal Year Ended April 30, 1995

        In December 1995, the Company changed its fiscal year from April 30 to
December 31. Accordingly, financial and certain other information for the fiscal
year ended December 31, 1995 reflects eight months of operations compared to a
full year of operations for the fiscal year ended April 30, 1995. The following
discussion compares the financial information of the Company's eight month
fiscal period ended December 31, 1995 to the fiscal year ended April 30, 1995.

        Revenues for the December 1995 fiscal period was $296,330 compared to
$88,299 in the April 1995 fiscal period. Revenue for the December 1995 fiscal
period includes approximately $175,000 for products shipped for test and
evaluation plus approximately $120,000 for contract development fees. These
development fees were the result of the Company's execution of a Development and
OEM Purchase Agreement with Northern Telecom Limited ("Nortel"), pursuant to
which the Company agreed to develop customized products for Nortel's use and
exclusive distribution.

               The Company incurred operating costs and expenses of $2,150,308
in the December 1995 fiscal period compared to $1,724,050 for the April 1995
fiscal year.


                                       28
<PAGE>   29
        Cost of product sales increased both in dollar amount and as a
percentage of product sales from the April 1995 fiscal year to the December 1995
fiscal period. Cost of sales increased from $6,688 in the April 1995 fiscal year
to $89,296 in the December 1995 fiscal period. Cost of sales increased, as
expected, as the Company moved from field trials toward commercial production of
its products during the December 1995 fiscal period.

        The largest component of costs and expenses in the December 1995 fiscal
period was $1,268,515 of research and development expenses, which accounted for
approximately 59% of costs and expenses during such period and represents an
increase of approximately $470,000 over the amount expended on research and
development during the April 1995 fiscal year. The Company incurred research and
development expenses of $803,449 in the April 1995 fiscal year as it continued
the development of its Highlander video codec. A principal reason for the
substantial increase was the addition of engineering staff members during the
last several months of the December 1995 fiscal period.

        The Company incurred selling, general and administrative expenses of
$792,497 and $913,913 in the December 1995 fiscal period and the April 1995
fiscal year, respectively. The Company added a material number of additional
employees to its staff as it moved into commercial production, which had the
effect of increasing all categories of selling, general and administrative
expense.

        As a result of the foregoing, the Company's operating loss for the
December 1995 Fiscal Period totaled $1,853,978 compared to an operating loss of
$1,635,751 for the April 1995 fiscal year. The net loss for such periods was
$1,957,645 (December 1995 fiscal period) and $1,743,862 (April 1995 fiscal
year).

LIQUIDITY AND CAPITAL RESOURCES

        Over the past three fiscal periods, the Company has financed its
operations primarily through debt and equity financings. For the fiscal year
ended December 31, 1996, operating, investing and financing activities in the
aggregate provided/(used) cash of ($17,311,539), ($3,656,201) and $11,982,343,
respectively. At December 31, 1996, the Company had working capital of
approximately $4.1 million, representing a decrease of $7.0 million from the
Company's working capital at December 31, 1995. During fiscal 1996, the Company
used cash to fund an increase in inventories of $5.6 million and an increase in
accounts receivable of $6.7 million. Capital expenditures for both research and
development and manufacturing equipment used approximately $3.7 million of
working capital.

        In February, 1996, the Company received approximately $3.8 million from
a private placement of shares of its Common Stock. In addition, at closings held
on December 16, 1996 and February 28, 1997, the Company received aggregate net
proceeds of $9.6 million from issuances of a total of 10,000 shares of the
Company's Series A Convertible Preferred Stock to a single institutional
investor. See "Item 1. Business -- Risk Factors -- Additional Capital
Requirement."

        In October 1996, the Company obtained a $6.0 million line of credit with
Silicon Valley Bank. The line of credit expires on March 31, 1997. While the
Company currently is negotiating with Silicon Valley Bank to extend the line of
credit, there can be no assurance that the line will be extended. At March 31,
1996, the Company had borrowed $2.2 million under the Silicon Valley Bank Line
of Credit.

        The Company has no long term debt with the exception of a lease
agreement for the purpose of financing the acquisition of general furnishings,
computers and manufacturing equipment. The unpaid long


                                       29
<PAGE>   30
term balance of this obligation was approximately $0.3 million and $0.2 million
at December 31, 1996 and December 31, 1995, respectively.

        Management believes that in order to implement the Company's 1997
Operating Plan, the Company will need additional financing. The Company
currently does not have any arrangements to obtain additional sources of
financing. The Company intends to actively pursue additional debt or equity
financing from institutional or corporate investors or funding opportunities
from strategic partners. There can be no assurance that the Company will be able
to obtain such financing on acceptable terms or at all. In such event, the
Company would consider appropriate financing alternatives and revising its 1997
Operating Plan.

BACKLOG

        The Company's backlog includes sales orders received by the Company that
have a scheduled delivery date prior to December 31, 1997. The aggregate sales
price of orders received and included in backlog was approximately $2.3 million
at December 31, 1996. The Company believes the orders included in the backlog
are firm orders and will be shipped prior to December 31, 1997. However, some
orders may be canceled by the customer without penalty.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        See Index to Consolidated Financial Statements appearing in Item 14(a)
of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        None not previously reported.


                                       30
<PAGE>   31
                                    PART III

        As indicated in the following table, the information required to be
presented in Part III of this report is hereby incorporated by reference from
the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders to be prepared in accordance with Schedule 14A and filed with the
Securities and Exchange Commission within 120 days of the end of the fiscal year
covered by this report:

        MATERIAL IN PROXY STATEMENT FOR 1997 ANNUAL MEETING WHICH IS
        INCORPORATED HEREIN BY REFERENCE:

<TABLE>
<CAPTION>
Item No.   Item Caption                                     Proxy Statement Caption
<S>        <C>                                              <C>
10         Directors and Executive Officers of the          "Directors and Executive
           Registrant                                       Officers"
11         Executive Compensation                           "Executive Compensation"

12         Security Ownership of Certain Beneficial Owners  "Security Ownership
           and Management                                   Stockholders and Management"

13         Certain Relationships and Related Transactions   "Certain Transactions"
</TABLE>


                                       31
<PAGE>   32
                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)     Financial Statements

<TABLE>
<CAPTION>
                                                                                 Page
                                                                                 ----
<S>                                                                              <C>
        Report of Independent Accountants....................................... F-1

        Report of Independent Certified Public Accounts ........................ F-2

        Consolidated Balance Sheets as of December 31, 1996 and 1995 ........... F-3

        Consolidated Statements of Operations for the year ended December 31,
        1996, eight months ended December 31, 1995 and year ended April 30,
        1995.................................................................... F-4

        Consolidated Statement of Stockholders' Equity for the year ended
        December 31, 1996, eight months ended December 31, 1995 and year ended
        April 30, 1995.......................................................... F-5

        Consolidated Statements of Cash Flows for the year ended December 31,
        1996, eight months ended December 31, 1995 and year ended April 30,
        1995.................................................................... F-6

        Notes to Consolidated Financial Statements ............................. F-7

        Schedule II Valuation and Qualifying Accounts .......................... F-21

        Report of Independent Accountants for Schedule II ...................... F-22
</TABLE>

        Except as set forth in the preceeding table, all financial statement
schedules have been omitted because they are not applicable, or the required
information is included in the financial statements or notes thereto.

(b)     Reports on Form 8-K

        On December 20, 1996, the Company filed a Current Report on Form 8-K to
disclose the following pursuant to Item 5 thereof: On December 16, 1996, the
Company issued to a single institutional investor (the "Investor") 5,000 shares
of Series A Convertible Preferred Stock, $0.001 per value per share, for an
aggregate purchase price of $5,000,000, upon the first closing under a
Securities Purchase Agreement, dated as of December 13, 1996, by and between the
Company and the Investor.

        No other reports on Form 8-K were filed during the last quarter of the
period covered by this report.


                                       32
<PAGE>   33
(c)     Exhibits

<TABLE>
<CAPTION>
<S>      <C>
2.1(1)   Agreement and Plan of Reorganization, dated as of May 27, 1994 between
         Growers Express Incorporated and NUKO Technologies, Inc.

3.1(3)   Amended  and  Restated  Certificate  of  Incorporation  of  the
         Registrant

3.2(3)   Certificate of Designation containing the designations, preferences and
         rights of the Registrant's Series A Convertible Preferred Stock.

3.3      Bylaws of the Registrant

4.1(1)   Form of 10% senior notes due June 30, 1997

4.2(1)   Form of specimen Common Stock certificate

4.3(1)   Common Stock Purchase Warrants issued to Alidad Farmanfarma

4.4(1)   Common Stock Purchase Warrants issued to Marc Dumont

4.5(1)   Form of "A" Common Stock Purchase Warrants issued in connection with
         the senior notes (Exhibit 4.1 above)

4.6(1)   Form of "B" Common Stock Purchase Warrants issued in connection with
         the senior notes (Exhibit 4.1 above)

4.7(1)   Registration  Rights  Agreement  among  the  Registrant,  PIRCO
         Investment, S.A. and Nutley Investments, S.A. dated as of
         July 27, 1995.

4.8(4)   Securities Purchase Agreement, dated as of December 13, 1996, by and
         between the Registrant and RGC International Investors, LDC, including
         the Form of Stock Purchase Warrant attached as Exhibit B thereto.

4.9(4)   Registration Rights Agreement, dated as of December 13, 1996, by and
         between the Registrant and RGC International Investors, LDC.

4.10(3)  Stock Purchase Warrant dated February 28, 1997 issued by the Registrant
         to RGC International Investors, LDC.

4.11(3)  Warrant Share Registration Rights Agreement, dated as of February 28,
         1997, by and between the Registrant and RGC International Investors,
         LDC.

4.12(3)  Letter Agreement dated February 28, 1997 between the Registrant and RGC
         International Investors, LDC.

10.1(1)  Consulting Agreement between the Registrant and Alidad Farmanfarma,
         dated as of July 27, 1995

10.2(1)  Sublease  Agreement  dated as of June 13,  1994 by and  between
         Polymetrics, Inc. and the Registrant.

10.3(1)  1995 Stock Option Plan

10.4(2)  Development and OEM Purchase Agreement between the Registrant and
         Northern Telecom, Inc., dated as of December 12, 1995

10.5(2)  Agreement  between the Registrant and  Southwestern  Bell Video
         Services, Inc., dated December 12, 1995
</TABLE>


                                       33
<PAGE>   34
<TABLE>
<CAPTION>
<S>      <C>
10.6(5)  Source Code Purchase Agreement between Registrant and Digi
         International, Inc., dated March 26, 1996

10.7     Loan and Security Agreement dated as of October 28, 1996 by
         and between Silicon Valley Bank and the Registrant.

10.8     Lease dated as of July 29, 1996 by and  between  Fortune  Trade
         Associates and the Registrant.

10.9     1996 Stock  Option Plan (as amended  and  restated  November 7,
         1996)

10.10    1996  Director  Stock  Option  Plan (as  amended  and  restated
         November 7, 1996)

10.11    Loan Agreement  dated as of October 17, 1996 by and between the
         Registrant and John H. Gorman and Margaret E. Gorman

11.1     Statement regarding computation of per share loss

27.1     Financial Data Schedule

-----------
(1)     Incorporated by reference to Registrant's Annual Report on Form 10-KSB
        for the fiscal year ended April 30, 1995.

(2)     Incorporated  by reference  to  Registrant's  Registration  Statement on
        Form SB-2 and subsequent  amendments (File No. 33-01626),  filed with
        the Commission on February 26, 1996.

(3)     Incorporated by reference to Registrant's Current Report on Form 8-K
        filed with the Commission on March 5, 1997.

(4)     Incorporated by reference to Registrant's Current Report on Form 8-K
        filed with the Commission on December 20, 1996.

(5)     Incorporated by reference to Registrant's Annual Report on Form 10-KSB
        for the fiscal period ended December 31, 1995 (an eight month period).
</TABLE>


                                       34
<PAGE>   35
                         NUKO INFORMATION SYSTEMS, INC.

Signatures

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

Dated:  March 25, 1997      NUKO INFORMATION SYSTEMS, INC.

                            By:      /s/ John H. Gorman
                                  ----------------------------------------------
                            Title    Vice  President,  Chief  Financial Officer,
                                  ----------------------------------------------
                                     Secretary, Treasurer
                                  ------------------------

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of March 25, 1997.


<TABLE>
<CAPTION>
Signature                                    Title                                Date
---------                                    -----                                ----
<S>                                 <C>                                         <C>
/s/ Pratap Kesav Kondamoori         President, Director and Chairman            March 25, 1997
---------------------------------   of the Board (Principal Executive
Pratap Kesav Kondamoori             Officer)


/s/ John H.Gorman                   Vice President, Chief Financial Officer,      March 25, 1997
---------------------------------   Secretary and Treasurer (Principal
John H. Gorman                      Financial Officer and Principal
                                    Accounting Officer)

/s/ Ram Kedlaya                     Vice President, Strategic Planning          March 25, 1997
---------------------------------   and Director
Ram Kedlaya

/s/ Anders O. Field                 Director                                    March 25, 1997
---------------------------------
Anders O. Field

/s/ Marc Dumont                     Director                                    March 25, 1997
---------------------------------
Marc Dumont

/s/ Robert C. Marshall              Director                                    March 25, 1997
---------------------------------
Robert C. Marshall
</TABLE>


                                       35
<PAGE>   36
                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors of
NUKO Information Systems, Inc.:

We have audited the accompanying consolidated balance sheet of NUKO Information
Systems, Inc. and Subsidiary as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NUKO
Information Systems, Inc. and Subsidiary as of December 31, 1996 and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has sustained recurring losses from operations
which raises substantial doubt about their ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



San Jose, California                           COOPERS & LYBRAND L.L.P.
March 21, 1997


                                      F-1
<PAGE>   37
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
NUKO Information Systems, Inc.

We have audited the accompanying consolidated balance sheet of NUKO Information
Systems, Inc. and Subsidiary as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the eight months ended December 31, 1995 and for the year ended April
30, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NUKO Information
Systems, Inc. and Subsidiary as of December 31, 1995, the consolidated results
of their operations and their consolidated cash flows for the eight months ended
December 31, 1995 and for the year ended April 30, 1995, in conformity with
generally accepted accounting principles.



Grant Thornton LLP

San Jose, California
February 14, 1996


                                      F-2
<PAGE>   38
                        NUKO INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                                 CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                     ASSETS
                                                                          December 31,        December 31,
CURRENT ASSETS                                                                1996                1995
                                                                          ------------        ------------
<S>                                                                       <C>                 <C>
   Cash and cash equivalents                                              $  2,270,423        $ 11,255,820
   Restricted cash                                                             200,000                  --
   Accounts receivable                                                       6,864,479             120,000
   Receivables from officers                                                        --              27,931
   Share subscriptions receivable, including interest of $30,567                    --             341,967
   Inventories                                                               4,828,632             758,552
   Prepaid expenses                                                            564,729             110,762
                                                                          ------------        ------------
           Total current assets                                             14,728,263          12,615,032


Property and Equipment - Net                                                 3,445,868             459,497

Other Assets                                                                     6,127             253,340
                                                                          ------------        ------------
   Total Assets                                                           $ 18,180,258        $ 13,327,869
                                                                          ============        ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
   Accounts payable                                                       $  7,216,513        $  1,319,959
   Accrued liabilities                                                       1,052,553             108,719
   Line of credit                                                            2,160,255                  --
   Current portion of capital lease obligations                                225,105              95,273
                                                                          ------------        ------------
              Total current liabilities                                     10,654,426           1,523,951

   Senior Notes                                                                     --             325,000

   Capital Lease Obligations, less current portion                              39,128             101,686
                                                                          ------------        ------------
              Total liabilities                                             10,693,554           1,950,637
                                                                          ------------        ------------

Commitments and Contingencies (Note 14)

STOCKHOLDERS' EQUITY
   Preferred stock - $.001 par value; 5,000,000 shares authorized;
      Issued and outstanding:  5,000 shares in 1996 and nil in 1995                  5                  --
      (Liquidation value $5,015,342)
   Common stock - $.001 par value; 20,000,000 shares authorized;
      Issued and outstanding:  10,491,101 in 1996 and                           10,491               9,128
                                9,128,418 in 1995
   Additional paid-in capital                                               27,293,448          15,741,718
   Deferred Compensation Expense                                              (710,596)                 --
   Accumulated deficit                                                     (19,106,644)         (4,373,614)
                                                                          ------------        ------------
           Total stockholders' equity                                        7,486,704          11,377,232
                                                                          ------------        ------------
           Total liabilities and stockholders' equity                     $ 18,180,258        $ 13,327,869
                                                                          ============        ============
</TABLE>



                   The accompanying notes are an integral part
                   of these consolidated financial statements.


                                      F-3
<PAGE>   39
                        NUKO INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                            CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          Eight Months          Year
                                                      Year Ended             Ended             Ended
                                                      December 31,        December 31,        April 30,
                                                          1996                1995              1995
                                                      ------------        -----------        -----------
<S>                                                   <C>                 <C>                <C>
Net Revenues                                          $ 11,081,590        $   296,330        $    88,299
                                                      ------------        -----------        -----------

Costs and expenses
   Cost of revenues                                      9,260,470             89,296              6,688
   Research and development expenses                     6,699,575          1,268,515            803,449
   Selling, general and administrative expenses         10,042,919            792,497            913,913
                                                      ------------        -----------        -----------
                                                        26,002,964          2,150,308          1,724,050
                                                      ------------        -----------        -----------

           Operating loss                              (14,921,374)        (1,853,978)        (1,635,751)
                                                      ------------        -----------        -----------

Other income (expense)
   Interest expense                                        (94,016)           (84,467)           (65,780)
   Interest income                                         360,210             38,556                 --
   Equity in losses of unconsolidated affiliate            (95,964)           (82,259)           (48,346)
   Other, net                                               18,914             25,303              6,815
                                                      ------------        -----------        -----------
                                                           189,144           (102,867)          (107,311)
                                                      ------------        -----------        -----------

           Loss before income taxes                    (14,732,230)        (1,956,845)        (1,743,062)

Income tax expense                                            (800)              (800)              (800)
                                                      ------------        -----------        -----------

           Net Loss                                   $(14,733,030)       $(1,957,645)       $(1,743,862)
                                                      ============        ===========        ===========

Net loss per common share                             $      (1.52)       $     (0.70)       $     (0.81)
                                                      ============        ===========        ===========

Shares used in per share calculations                    9,709,221          2,782,381          2,158,141
                                                      ============        ===========        ===========
</TABLE>


                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                      F-4
<PAGE>   40
                  NUKO INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                        Preferred       Preferred            Common            Common             Additional
                                          Shares          Amount             Shares             Stock               Paid-In
                                                                                                Amount              Capital
                                          -----          --------          ----------          --------          -----------
<S>                                       <C>            <C>               <C>                 <C>               <C>
Balance, April 30, 1994                                                     4,749,441          $  4,749          $   323,708

Sales of common stock                                                         684,500               685              723,315

Shares issued for services                                                     69,795                69               28,318

Conversion of debt to equity                                                   37,737                38               54,962

Net loss                                                                           --                --                   --
                                          -----          --------          ----------          --------          -----------

Balance, April 30, 1995                                                     5,541,473             5,541            1,130,303

Sales of common stock, net of                                               3,049,833             3,050           13,403,757
offering costs of $119,693

Shares issued for services                                                     70,000                70              174,930

Conversion of debt and accrued                                                467,112               467            1,032,728
interest to equity, net of
unamortized debt issuance costs
of $47,250

Interest on share subscriptions                                                    --                --                  --

Reclassifications                                                                  --                --                  --

Net loss                                                                           --                --                  --
                                          -----          --------          ----------          --------          -----------

Balance, December 31, 1995                                                  9,128,418             9,128           15,741,718

Sales of preferred stock, net of          5,000          $      5                                                  4,799,995
offering cost of $200,000

Sales of common stock, net of                                                 822,500               823            3,833,930
offering cost of $267,148

Warrants exercised                                                            430,000               430              864,570

Stock options exercised                                                       110,183               110              268,549

Compensation expense                                                                                               1,784,686

Net loss
                                          -----          --------          ----------          --------          -----------
Balance, December 31, 1996                5,000          $      5          10,491,101          $ 10,491          $27,293,448
                                          =====          ========          ==========          ========          ===========
</TABLE>



<TABLE>
<CAPTION>

                                           Deferred           Share              Accumulated               Total
                                         Compensation      Subscriptions            Deficit
                                            Expense         Receivable
                                          ---------         -----------           ------------           ------------
<S>                                       <C>                 <C>                 <C>                    <C>
Balance, April 30, 1994                                       $(311,400)          $   (672,107)          $   (655,050)

Sales of common stock                                                --                     --                724,000

Shares issued for services                                           --                     --                 28,387

Conversion of debt to equity                                         --                     --                 55,000

Net loss                                                                            (1,743,862)            (1,743,862)
                                          ---------           ---------           ------------           ------------

Balance, April 30, 1995                                        (311,400)            (2,415,969)            (1,591,525)

Sales of common stock, net of                                        --                     --             13,406,807
offering costs of $119,693

Shares issued for services                                           --                     --                175,000

Conversion of debt and accrued                                       --                     --              1,033,195
interest to equity, net of
unamortized debt issuance costs
of $47,250

Interest on share subscriptions                                 (30,567)                    --                (30,567)

Reclassifications                                               341,967                     --                341,967

Net loss                                                             --             (1,957,645)            (1,957,645)
                                          ---------           ---------           ------------           ------------

Balance, December 31, 1995                                           --             (4,373,614)            11,377,232

Sales of preferred stock, net of                                                                            4,800,000
offering cost of $200,000

Sales of common stock, net of                                                                               3,834,753
offering cost of $267,148

Warrants exercised                                                                                            865,000

Stock options exercised                                                                                       268,659

Compensation expense                      $(710,596)                                                        1,074,090

Net loss                                                                           (14,733,030)           (14,733,030)
                                          ---------           ---------           ------------           ------------
Balance, December 31, 1996                $(710,596)          $                   $(19,106,644)          $  7,486,704
                                          =========           =========           ============           ============
</TABLE>



                  The accompanying notes are an integral part
                   of this consolidated financial statement.

                                      F-5
<PAGE>   41
                  NUKO INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                              Year             Eight Months           Year
                                                              Ended               Ended               Ended
                                                            December 31,        December 31,         April 30
                                                                1996               1995                1995
                                                            ------------        ------------        -----------
<S>                                                         <C>                 <C>                 <C>
Cash flows from operating activities:
   Net loss                                                 $(14,733,030)       $ (1,957,645)       $(1,743,862)
   Adjustments to reconcile net loss to net cash
      used in operating activities:
         Compensation expense                                  1,074,090
         Allowance for excess and obsolete inventory           1,534,584                  --                 --
         Shares issued for services                                   --             175,000             28,387
         Interest converted to equity                                 --              30,445                 --
         Depreciation and amortization                           676,010              73,216             23,460
         Changes in operating assets and liabilities:
           Accounts receivable                                (6,744,479)           (122,182)             1,680
           Restricted cash                                      (200,000)                 --                 --
           Interest on stock subscriptions                        30,567             (30,567)                --
           Inventories                                        (5,604,664)           (754,330)                --
           Prepaid expenses                                     (453,967)           (103,302)            (7,460)
           Other assets                                          268,964              (9,449)           (10,164)
           Accounts payable                                    5,896,551             479,684            261,338
           Accrued liabilities                                   943,835            (461,007)           488,977
                                                            ------------        ------------        -----------
              Net cash used in operating activities          (17,311,539)         (2,680,137)          (957,644)

Cash flows from investing activities:
   Purchases of property and equipment                        (3,656,201)           (451,264)           (50,234)
                                                            ------------        ------------        -----------

Cash flows from financing activities:
   Debt issuance costs                                                --             (55,500)                --
   Proceeds from issuance of senior notes                             --                  --            325,000
   Proceeds from borrowings                                    2,160,255           1,050,000             25,000
   Sale and leaseback under capital lease                        239,791                  --                 --
   Payments on capital lease obligations                        (172,516)            (14,458)                --
   Proceeds from exercise of common stock
        options and warrants                                     808,659                  --                 --
   Proceeds from share subscriptions                             311,400                  --                 --
   Repayments of borrowings                                           --                  --            (65,850)
   Proceeds from issuance of common stock                      3,834,754          13,406,807            724,000
   Proceeds from issuance of preferred stock                   4,800,000
                                                            ------------        ------------        -----------
           Net cash provided by financing activities          11,982,343          14,386,849          1,008,150
                                                            ------------        ------------        -----------

           NET INCREASE (DECREASE) IN CASH
           AND CASH EQUIVALENTS                               (8,985,397)         11,255,448                272

Cash and cash equivalents at beginning of year                11,255,820                 372                100
                                                            ------------        ------------        -----------

Cash and cash equivalents at end of year                    $  2,270,423        $ 11,255,820        $       372
                                                            ============        ============        ===========
</TABLE>

                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                     F-6
<PAGE>   42
                         NUKO INFORMATION SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF OPERATIONS

   ORGANIZATION. The Company was incorporated in the State of New York in 1968
   under the name Yondata Corporation and, in October 1992, changed its name to
   Growers Express Corporation. In May 1994, Growers Express Corporation merged
   with NUKO Technologies, Inc., a California corporation, and following the
   merger, Growers Express changed its name to NUKO Information Systems, Inc.
   and commenced operations through NUKO Technologies, Inc., which survived the
   merger as the Company's wholly owned subsidiary. For accounting purposes, the
   merger has been treated as a recapitalization of NUKO Technologies, Inc. In
   January 1997, the Company effected a reincorporation from New York to
   Delaware by merging itself into its wholly-owned Delaware subsidiary.

   NATURE OF OPERATIONS. The Company designs, markets and sells one-way and
   two-way video networking products that form essential building blocks in the
   development of broadband (high capacity) video networks. The Company's
   standards compliant products allow its customers to compress and decompress
   digital video and to transmit signals over many types of networks using
   different interfaces and protocols. The Company's digital compression and
   decompression products are sold under the tradenames Highlander and RAVE and
   its network solutions are sold under the tradename Intelligent Broadband
   Services Network ("IBSN"). The Company markets its products and network
   solutions for enterprise-wide private networks and public networks offered by
   carriers such as telephone companies, cable companies, satellite companies
   and microwave communication companies.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION. The accompanying financial statements have been
   prepared assuming that the Company will continue as a going concern. The
   Company has sustained recurring losses from operations. Management has
   developed a fiscal 1997 operating plan in which the Company has placed
   significant reliance on obtaining outside financing. Management is actively
   pursuing additional debt and equity financing from both institutional and
   corporate investors and funding opportunities from strategic corporate
   partners. In addition, the Company plans to increase revenues while
   controlling costs. Since there is no assurance that management will complete
   their plans, there is substantial doubt about the Company's ability to
   continue as a going concern. The financial statements do not include any
   adjustments that might result from the outcome of this uncertainty.

   USE OF ESTIMATES. In preparing financial statements in conformity with
   generally accepted accounting principles, management is required to make
   estimates and assumptions that affect the reported amounts of assets and
   liabilities and the disclosure of contingent assets and liabilities at the
   date of the financial statements, as well as revenues and expenses during the
   reporting period. Actual results could differ from those estimates.

   PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
   the accounts of NUKO Information Systems, Inc., and its wholly owned
   subsidiary. All significant intercompany accounts and transactions have been
   eliminated. The Company's investment in NUKO Information Systems (India)
   Private Limited is accounted for under the equity method of accounting.


                                      F-7
<PAGE>   43
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

   FISCAL YEAR END. Effective December 31, 1995, the Company changed its fiscal
   year-end from April 30 to December 31 to more closely correspond with the
   Company's business cycle.

   REVENUE RECOGNITION. Revenue under sales agreements are recognized when the
   product has been delivered, provided no significant obligation remains, and
   collection of the receivables is deemed probable. Provision for the estimated
   costs of insignificant obligations and warranty are recorded upon shipment.

   Revenue under development contracts is recognized using the percentage
   completion method, determined by completion of milestones identified in the
   development agreement.

   CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
   instruments purchased with a maturity of three months or less to be cash
   equivalents. The Company maintains its cash balances, which at times may
   exceed federally insured limits, in primarily two financial institutions. The
   Company has not experienced any losses in such accounts and believes it is
   not exposed to any significant credit risk on cash and cash equivalents.

   INVENTORIES. Inventories are stated at the lower of cost determined on a
   first-in, first-out method basis or market.

   PROPERTY AND EQUIPMENT. Property and equipment are stated at cost less
   accumulated depreciation. Property and equipment are depreciated on a
   straight-line basis over the estimated useful lives of the individual assets
   or for leasehold improvements over the term of the respective leases, if
   shorter. The estimated lives of major classes of depreciable assets are as
   follows:

<TABLE>
<S>                                                            <C>
              Computer hardware and software                   3 years
              Office furniture and other equipment             5 to 7 years
              Leasehold Improvements                           Term of lease or life of asset
</TABLE>

   RESEARCH AND DEVELOPMENT. Costs related to research, design and development
   of products are charged to research and development expenses as incurred.
   Under Statement of Financial Accounting Standards No. 86 (SFAS No. 86),
   software development costs are capitalized beginning when a product's
   technological feasibility has been established and ending when a product is
   available for general release to customers. To date, the establishment of
   technological feasibility of the Company's products and general product
   release are coincident. As a result, the Company has not capitalized any
   software development costs since such costs have not been significant.

   WARRANTY RESERVE. The Company has estimated and accrued costs related to
   warranties offered with its products. The stated warranty period varies from
   3 to 30 months.

   The Company does not have significant historical data with which to estimate
   warranty costs because the products were only introduced within the last
   year. Although the warranty reserve is considered adequate in the Company's
   best judgment, it is reasonably possible that in the near term that the cost
   of upgrade, modification and repair to systems in the field could exceed the
   estimated warranty reserve, and that additional expense could result.


                                      F-8
<PAGE>   44
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

   INCOME TAXES. Deferred income tax assets and liabilities are computed
   annually for differences between the financial statement and tax basis of
   assets and liabilities that will result in taxable or deductible amounts in
   the future based on enacted tax laws and rates applicable to the periods in
   which the differences are expected to affect taxable income. Valuation
   allowances are established when necessary to reduced deferred tax assets to
   the amount expected to be realized.

   NET LOSS PER SHARE. Net loss per share is computed by dividing net loss by
   the weighted average number of common shares outstanding.

   ADVERTISING COSTS. Advertising costs are charged to operations as they are
   incurred. Advertising expense for the year ended December 31, 1996, the eight
   month period ended December 30, 1995 and the year ended April 30, 1995 were
   $34,252, $11,214 and $11,048 respectively.

   RECLASSIFICATIONS. Certain amounts in the prior periods' financial statements
   have been reclassified to conform to the December 31, 1996 presentation. The
   reclassifications did not change previously reported net loss.

   FAIR VALUE OF FINANCIAL STATEMENTS. The carrying value of certain of the
   Company's financial instruments including cash and cash equivalents, accounts
   receivable, accounts payable and other accrued liabilities approximates fair
   value due to their short maturities. Based on borrowing rates currently
   available to the Company for loans with similar terms, the carrying value of
   its notes payable, capital lease obligations and borrowings under the
   Company's line of credit approximates fair value.

   LONG-LIVED ASSETS. Effective January 1, 1996, the Company adopted Financial
   Accounting Standards Board Statement No. 121 (SFAS 121), "Accounting for the
   Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
   which requires the Company to review for impairment of long-lived assets
   whenever events or changes in circumstances indicate that the carrying amount
   of an asset might not be recoverable. In certain situations, an impairment
   loss would be recognized. The adoption of SFAS 121 did not impact on the
   Company's financial condition or results of operations.

   RECENT ACCOUNTING PRONOUNCEMENTS. During February 1997, the Financial
   Accounting Standards Board issued Statement No. 128, "Earnings per Share",
   (SFAS 128) which specifies the computation, presentation and disclosure
   requirements for Earnings Per Share. SFAS 128 will become effective for the
   Company's 1997 fiscal year. The Company's management has not yet studied the
   implications of SFAS 128 but does not expect the adoption of SFAS 128 to have
   a material impact on the Company's financial condition or results of
   operations.


                                      F-9
<PAGE>   45
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


3. RISKS AND UNCERTAINTIES

   The Company sells its products primarily to end users with large customer
   service organizations and integrators in North America and Asia. The Company
   performs ongoing credit evaluations of its customer's financial condition and
   may require collateral from its customers. At December 31, 1996 two customers
   accounted for 57.2% and 29.5% of accounts receivable. At December 31, 1995,
   the trade accounts receivable comprised a balance due from one customer. The
   Company has not historically experienced any significant losses related to
   individual customers.

   Substantially all the Company's historical revenue have been to customers for
   evaluation testing and demonstration in field trials. The Company's products
   are based on technologies that have not been widely deployed and there can be
   no assurance that the Company will be able to market successfully its
   products to generate the increased revenue necessary to sustain full scale
   commercial production or that the Company's products will be well received by
   the marketplace on a full commercial scale.

   The Company is dependent upon certain key subcontractors and suppliers, and
   does not have long-term supply agreements. The failure of a subcontractor or
   supplier to deliver components in a reliable and timely manner in accordance
   with the Company's specifications could have a material adverse effect on the
   Company's business, financial condition and operating results in the near
   term.

   The Company's inventories include high-technology parts that may be
   specialized in nature or subject to rapid technological obsolescence. While
   the Company has considered technical obsolescence in estimating required
   reserves to reduce recorded amounts to market values, such estimates could
   change in the near future.

4. CONTRACT DEVELOPMENT

   The Company entered into a development agreement with one of its customers
   whereby the Company developed certain products to be purchased by the
   customer. Under the term of the Agreement, the Company received
   non-refundable payments totaling $610,000 payable in installments upon
   achieving certain milestones identified in the agreement. As of December 31,
   1996, the Company had achieved all milestones and recorded revenue of
   $490,000 in 1996 and $120,000 in 1995. Costs associated with the contract are
   reported as research and development expenses.

5. RESTRICTED CASH

     In January 1996, the Company agreed to place in escrow a sum of $200,000 to
    guarantee a purchase commitment with one of its suppliers. These funds are
    invested in a highly liquid, interest bearing money market account, and are
    carried at cost which approximates market.

6. LINE OF CREDIT

     At December 31, 1996, the Company had available a $6 million collateralized
    bank line of credit, which expires on March 31, 1997. The Company is
    currently negotiating with Silicon Valley Bank to extend the line of credit.
    Borrowing under the line of credit bears interest at the bank prime rate
    plus 0.75%. The agreement contains certain restrictive covenants regarding
    the Company's financial position. At December 31, 1996 the Company had
    borrowed $2.2 million under this agreement.


                                      F-10
<PAGE>   46
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7. BALANCE SHEET DETAIL

<TABLE>
<CAPTION>
                                                                 December 31
                                                            1996             1995
                                                        -----------        ---------
<S>                                                     <C>                <C>
Inventories
   Raw material                                         $ 1,445,748        $  28,552
   Work in process                                        1,253,617               --
   Finished goods                                         2,129,267          730,000
                                                        -----------        ---------
                                                        $ 4,828,632        $ 758,552
                                                        ===========        =========
Property and Equipment
   Leased assets                                        $   300,892        $ 211,417
   Computer hardware and software                         1,145,968          312,059
   Office furniture and other equipment                   1,734,901           23,203
   Leasehold improvements                                 1,032,151           11,033
                                                        -----------        ---------
                                                          4,213,912          557,712
   Less accumulated depreciation and amortization          (768,044)         (98,215)
                                                        -----------        ---------
                                                        $ 3,445,868        $ 459,497
                                                        ===========        =========
</TABLE>

8. ACCRUED LIABILITIES

<TABLE>
<CAPTION>
                                                                              December 31
                                                                         1996            1995
                                                                      ----------       --------
<S>                                                                   <C>              <C>
   Accrued liabilities consist of the following at December 31,
         Payroll and related accruals                                 $  267,859       $ 14,669
         Income taxes                                                     17,336          8,463
         Interest                                                             --         28,785
         Debt issuance cost payable                                           --         27,500
         Customer returns                                                     --         16,162
         Other                                                           767,358         13,140
                                                                      ----------       --------
                                                                      $1,052,553       $108,719
                                                                      ==========       ========
</TABLE>

9. INCOME TAXES

       Income tax expense consists of the following:

<TABLE>
<CAPTION>
                                           Eight Months
                        Year Ended            Ended              Year Ended
                       December 31          December 31,          April 30,
                           1996                1995                 1995
                          -----                -----                -----
<S>                     <C>                  <C>                  <C>
Current
    Federal               $  --                $  --                $  --
    State                  (800)                (800)                (800)
                          -----                -----                -----
                           (800)                (800)                (800)

Deferred
    Federal                  --                   --                   --
    State                    --                   --                   --
                          -----                -----                -----
                          $(800)               $(800)               $(800)
                          =====                =====                =====
</TABLE>


                                      F-11
<PAGE>   47

                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9. INCOME TAXES - CONTINUED

   Deferred tax assets consist of the following:

<TABLE>
<CAPTION>
                                                               1996                       1995
                                                           -----------                -----------
<S>                                                        <C>                        <C>
          Assets
            Research and development credits               $   246,599                $        --
            Accelerated depreciation                           418,831                         --
            Accrued liabilities                                912,992                     13,000
            Tax loss carry forwards                          5,790,342                  1,471,000
                                                           -----------                -----------
                Total deferred tax assets                    7,368,764                  1,484,000
          Valuation allowance                               (7,368,764)                (1,484,000)
                                                           -----------                -----------
                Net deferred tax asset                     $        --                $        --
                                                           ===========                ===========
</TABLE>

   As of December 31, 1996, management does not believe, based upon available
   evidence, that it is more likely than not that the Company will be able to
   realize the net deferred tax assets. The valuation allowance increased by
   $5,884,764, $598,000 and $637,000 for the year ended December 31, 1996, the
   eight months ended December 31, 1995 and the year ended April 30, 1995,
   respectively. The Company has available tax loss carry forwards which are
   limited in their use on an annual basis; however, complete utilization of the
   losses is expected should sufficient taxable income be generated. These
   losses which expire through 2011, amount to approximately $16,000,000 and
   $4,500,000, and are available to offset future federal and state taxable
   income, respectively.

   At December 31, 1996 the Company has federal and state research and
   development credits of approximately $141,988 and $104,611, respectively. The
   research and development credit expires in 2011 for federal purposes if not
   utilized.

   The Tax Reform Act of 1986 limits the use of net operating loss and tax
   credit carry forwards in certain situations where changes occur in the stock
   ownership of a company. If the Company should have an ownership change, as
   defined, utilization of the carry forwards could be restricted.

   The reconciliation of the income tax expense at the federal statutory income
   tax rate to the Company's income taxes is as follows:

<TABLE>
<CAPTION>
                                                                                Eight Months
                                                      Year Ended                   Ended                 Year Ended
                                                      December 31                December 31,             April 30,
                                                         1996                      1995                      1995
                                                      -----------                ---------                ---------
<S>                                                   <C>                        <C>                      <C>
          Expected tax benefit (at 34%)               $ 5,009,230                $ 665,000                $ 593,000
          Operating losses not utilized                (5,009,230)                (665,000)                (593,000)
          State taxes                                        (800)                    (800)                    (800)
                                                      -----------                ---------                ---------

                                                      $      (800)               $    (800)               $    (800)
                                                      ===========                =========                =========
</TABLE>

   The Company's tax rate differs from the federal tax rate because net
   operating losses have not been benefited.


                                      F-12
<PAGE>   48
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10.  SUPPLEMENTAL DISCLOSURE OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                Eight months
                                                                          Year ended               ended              Year ended
                                                                         December 31,           December 31,           April 30,
                                                                             1996                  1995                  1995
                                                                           --------               -------               -------
<S>                                                                        <C>                    <C>                   <C>
          Supplemental disclosure of cash flow information:
           Cash paid during the year for
             Interest                                                      $ 94,016               $76,143               $45,319
             Income Taxes                                                       800                   800                   800

          Supplemental disclosures of non-cash transactions:
           Cancellation of senior notes in exchange
           for warrants                                                     325,000                    --                    --
</TABLE>

11. LONG-TERM DEBT

   The Company issued $325,000 of senior notes (the "Senior Notes") in 1994. The
   senior notes were collateralized by "A" Warrants with annual interest at 10%.
   In June 1996 these senior notes were canceled by the exercise of the "A"
   Warrants in exchange for 130,000 shares of the Company's Common Stock. All
   interest owed on the senior notes was paid in 1996.

12. CAPITALIZED LEASES

   The Company leases items of equipment under capital leases at interest rates
   ranging from 7% to 16% expiring through 1999. Future minimum lease payments
   for the years ending December 31, are as follows:

<TABLE>
<S>           <C>                                              <C>
              1997                                             $ 239,159
              1998                                                29,083
              1999                                                 9,695
                                                               ---------
                                                                 277,937
              Less amount representing interest                  (13,704)
                                                               ---------
              Total capital lease obligation                     264,233
              Less current portion                              (225,105)
                                                               ---------
                                                               $  39,128
                                                               =========
</TABLE>

   During the year, the Company sold and leased back certain items of equipment
   under capital leases. No gain or loss was recognized on the transaction

   The cost basis of the assets held under capital lease is $300,892 and
   $211,417 at December 31, 1996 and 1995, respectively; accumulated
   amortization for these assets amounted to $132,820 and $15,661, respectively.


                                      F-13
<PAGE>   49
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13. STOCKHOLDERS' EQUITY

   PREFERRED STOCK. On December 16, 1996, the Company issued 5,000 shares of
   Series A Convertible Preferred Stock, $0.001 par value per share
   ("Convertible Preferred"), for an aggregate purchase price of $5,000,000,
   upon the first closing under a Securities Purchase Agreement, dated as of
   December 13, 1996.

   PREFERRED STOCK CONVERSION. Each share of Convertible Preferred is
   convertible at the option of the holder into the number of shares of common
   stock as defined by the stated value of the Convertible Preferred multiplied
   by 7% per annum, divided by the conversion price. The stated value of the
   Convertible Preferred is $1,000 per share and the conversion price is the
   lower of $16 or an average of the Company's share price in the ten (10)
   trading day period prior to conversion multiplied by a percentage ranging
   from 100% to 85% depending on when such shares are converted. In addition, at
   conversion, holders of Convertible Preferred will receive warrants to
   purchase 50% of the number of shares of common stock that they receive on
   conversion with an exercise price of $18. The warrant exercise price is
   subject to certain anti-dilution adjustments in the event of common stock,
   option or warrant issuance's at a discount to market price. All shares of
   Convertible Preferred automatically convert to common stock on December 15,
   2001, if not previously converted. Holders of Convertible Preferred do not
   have voting rights, except for certain protective provisions relating to
   changes in the rights of holders of Convertible Preferred. Shares of
   Convertible Preferred bear no dividends.

   LIQUIDATION. Holders of preferred stock have a liquidation preference of the
   stated value of preferred stock plus 7% per annum.

   REDEMPTION. Upon its filing a registration statement for an underwritten
   public offering, the Company shall have the right to redeem all or part of
   the outstanding shares of Convertible Preferred at the greater of 110% of the
   stated value plus 7% per annum or the value of the number of shares of common
   stock at which the Convertible Preferred can be converted, valued at the then
   closing price. The Company is also required to issue warrants to purchase
   shares of common stock equal to 100% of the redemption amount divided by the
   conversion price, at an exercise price of $18.


                                      F-14
<PAGE>   50
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13. STOCKHOLDERS EQUITY - CONTINUED

   STOCK WARRANTS. In 1996, the Company issued 65,000 Warrants to purchase
   common shares of the Company. These Warrants contained an exercise price that
   ranged from $5.00 to $8.50 per share. At December 31, 1996 all these Warrants
   remained outstanding.

   In 1995, the Company issued 78,400 Warrants to purchase common shares of the
   Company. These Warrants contained an exercise price that ranged from $2.30 to
   $8.50 per share. At December 31, 1996, 78,400 Warrants remained outstanding.

   In 1994, the Company issued 130,000 "A" Warrants and 130,000 "B" Warrants to
   purchase common shares of the Company. The "A" Warrants contained an exercise
   price of $2.50 per share and the "B" Warrants contained an exercise price of
   $10.00 per share. The "A" Warrants were exercised in June 1996 which canceled
   "Senior Debt" of $325,000. The "B" Warrants expire on June 30, 1999. At
   December 31, 1996 all "B" Warrants remain outstanding.

   In June 1995, the Company received $550,000 from the issuance of 8%
   convertible notes. These notes and all accrued interest were converted into
   286,112 common shares of the Company in December 1995. In connection with the
   notes, the Company granted warrants to purchase 333,400 shares of the
   Company's common shares at prices ranging from $1.80 to $2.30 per common
   share. These warrants have an expiration date of July 27, 2000. These
   Warrants were exercised during 1996. On December 31, 1996 there were no
   outstanding Warrants related to this transaction.

   Additionally, in October 1995, the Company issued $500,000 in 8% convertible
   notes payable. These notes and all accrued interest were converted into
   181,000 shares of common stock in December 1995. These Warrants were
   exercised during 1996. On December 31, 1996 there were no outstanding
   Warrants related to this transaction.

14. COMMITMENTS AND CONTINGENCIES

   The Company leases two facilities. One facility contains the Company's
   manufacturing, sales marketing and administration functions. It consists of
   40,000 square feet of which the Company sub-leases approximately 20,000
   square feet. The lease expires June 30, 2001. Under the terms of the lease,
   the Company has an option to purchase the building during the term of the
   lease for $3,000,000. The second facility contains the Company's research and
   development functions. It consists of 12,000 square feet. The lease expires
   in April 1999. Under the term of both leases, the Company is obligated to pay
   property taxes, insurance and maintenance. The Company also leases some of
   its equipment used in operations. Rent expense was approximately $180,774 for
   the twelve month period ended December 31, 1996; $98,837 for the eight month
   period ended December 31, 1995 and $119,984 for the twelve month period ended
   April 30, 1995.


                                      F-15
<PAGE>   51
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


14. COMMITMENTS AND CONTINGENCIES - CONTINUED

   Non-cancelable commitments under operating leases are as follows:

<TABLE>
<CAPTION>
      Year ending December 31,
      ------------------------
<S>           <C>                                              <C>
              1997                                             $ 435,600
              1998                                               435,600
              1999                                               345,200
              2000                                               300,000
              2001                                               150,000
                                                              ----------
                                                              $1,666,400
                                                              ==========
</TABLE>

   The Company is engaged in various legal proceedings in the normal course of
   business. While Management is unable to determine the outcome of these
   proceedings, Management does not consider that they will have a material
   impact on the Company's financial position or results of operations.

15. UNCONSOLIDATED AFFILIATE

   The Company owns 48% of NUKO Information Systems (India) Private Limited
   ("NUKO India"). NUKO India performs certain development on behalf of the
   Company. During the periods ended December 31, 1996, December 31, 1995 and
   April 30, 1995, the Company advanced $95,964, $82,259, and $48,346,
   respectively, to NUKO India. The carrying value of the Company's investment
   in NUKO India is zero at December 31, 1996 and at December 31, 1995.

16. STOCK OPTION PLANS

   The purpose of the Company's stock option plans is to attract and retain the
   best available personnel for positions of substantial responsibility with the
   Company, to provide additional incentive to the employees and consultants of
   the Company and to promote the success of the Company's business. The 1996
   Stock Option Plan (as amended and restated November 7, 1996) and the 1996
   Director Option Plan (as amended and restated November 7, 1996) were approved
   by the Board of Directors in November 1996 and the shareholders of the
   Company in December, 1996. The 1995 Stock Option Plan was approved by the
   Board of Directors in May 1995 and received shareholder approval in November,
   1995.

   Each Plan became effective upon adoption by the Board of Directors and shall
   continue in effect for a term of ten (10) years unless sooner terminated
   pursuant to terms of such Plan. Vesting periods vary but stock options
   generally vest and become exercisable over three or four years. At December
   31, 1996, 105 optionees held options for the purchase of Common Stock with
   expiration dates occurring between May 25, 2000 and December 17, 2001, with
   an average exercise price of $5.50.

   Options granted under the 1996 Stock Option Plan and the 1996 Directors
   Option Plan will be nonstatutory stock options. Options granted under the
   1995 Stock Option Plan may be either incentive stock options or nonstatutory
   stock options at the discretion of the Board of Directors. All options
   granted through December 31, 1996 under the 1995 Stock Option Plan have been
   nonstatutory options.


                                      F-16
<PAGE>   52
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


16. STOCK OPTION PLANS - CONTINUED

   The following table summarizes the Company's option activity during 1996 and
   1995:

<TABLE>
<CAPTION>

                                                                              Outstanding Options
                                                    -----------------------------------------------------------------------
                                    Available for     Number of           Price per           Aggregate           Weighted
                                        Grant          Options              Share             Exercise             Average
                                                                                                Price             Price per
                                                                                                                    Share
<S>                                <C>                <C>              <C>                   <C>                 <C>
Balances, April 30, 1994 and
 1995
Authorized                          1,400,000
Options granted                    (1,069,000)        1,069,000        $         2.375       $  2,538,875        $    2.375
                                    ---------------------------------------------------------------------------------------
Balances, December 31, 1995           331,000         1,069,000        $         2.375          2,538,875        $    2.375
Authorized                          2,700,000
Options granted                    (1,992,160)        1,992,160         $5.40 - $11.75         14,299,949        $    7.178
Options canceled                      187,717          (187,717)       $2.375 - $6.875           (906,350)       $    4.828
Options exercised                                      (110,183)        $2.375 - $5.40           (268,660)       $    2.438
                                    ---------------------------------------------------------------------------------------
Balances, December 31, 1996         1,226,557         2,763,260        $2.375 - $11.75       $ 15,663,814        $    5.669
</TABLE>


   NUKO recognized compensation expense of $792,800 representing the fair market
   value of stock option awards to non-employees in the year ended December 31,
   1996. NUKO has adopted the disclosure only provisions of SFAS No. 123.
   Accordingly, no compensation cost has been recognized for NUKO's stock option
   awards to employees, other than $281,290 relating to the difference between
   the exercise price and fair market value of options at the date of grant for
   certain option grants to employees in the year ended December 31, 1996. Had
   compensation cost been determined based on the fair value at the grant date
   for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123,
   NUKO's net loss and net loss per share for the year ended December 31, 1996
   and the eight month period ended December 31, 1995, respectively, would have
   been as follows:

<TABLE>
<CAPTION>
                                                       1996          1995
                                                       ----          ----

<S>                                                <C>           <C>
   Net loss - as reported                          $14,733,030   $1,957,645
   Net loss - pro forma                            $17,961,194   $2,973,668
   Net loss per share - as reported                  $1.51          $0.70
   Net loss per share - pro forma                    $1.85          $1.06
</TABLE>

   Such pro forma disclosures may not be representative of future compensation
   cost because options vest over several years and additional grants are made
   each year. The weighted average grant date fair value of options granted was
   $5.80 and $1.81 per option for the year ended December 31, 1996 and the eight
   month period ended December 31, 1995, respectively.

   The fair value of each option grant is estimated on the date of grant using
   the Black-Scholes valuation model with the following weighted average
   assumptions:

<TABLE>
<CAPTION>
                                                      1996          1995
                                                      ----          ----
<S>                                                 <C>           <C>
   Risk free interest rate                             5.9%          6.1%
   Volatility                                          110%          110%
   Expected life                                     4 years       4 years
   Expected dividends                                    -             -
</TABLE>


                                      F-17
<PAGE>   53
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


16. STOCK OPTION PLANS - CONTINUED

   The risk-free interest rate was calculated in accordance with the grant date
   and expected life. Volatility was calculated by an analysis of the Company's
   share price. The weighted average expected life was calculated based on the
   vesting period and the exercise behavior of the participants.

   There were 482,000 options exercisable at December 31, 1995 with a weighted
   average exercise price of $2.375.

   The options outstanding and currently exercisable by exercise price at
   December 31, 1996 are as follows:

<TABLE>
<CAPTION>
                                                                                                       Options Exercisable
                                                                                                -----------------------------------
       Exercise Price             Number               Weighted            Weighted                Number                Weighted
                               Outstanding             Average             Average              Exercisable              Average
                                                    Remaining Life     Exercise Price                                Exercise Price
       --------------          -----------          --------------     --------------           -----------          --------------
<S>                            <C>                         <C>             <C>                <C>                       <C>
          $ 2.375                 907,766                  3.40            $ 2.375                 797,874               $ 2.375
          $   5.4                  71,500                  4.57            $   5.4                  24,917               $   5.4
          $ 6.125                 144,750                  4.57            $ 6.125                  20,104               $ 6.125
          $   6.5                 331,000                  4.09            $   6.5                 174,694               $   6.5
          $ 6.875               1,069,034                  4.19            $ 6.875                 298,674               $ 6.875
          $ 8.875                  50,000                  4.64            $ 8.875                   5,556               $ 8.875
          $  9.25                  32,160                  4.47            $  9.25                   5,360               $  9.25
          $ 11.75                 157,050                  4.96            $ 11.75                       0               $ 11.75
          -------               ---------                  ----            -------               ---------               -------
                                2,763,260                  4.00            $  5.70               1,327,179               $  5.70
</TABLE>


                                      F-18
<PAGE>   54
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. EMPLOYEE BENEFIT PLAN

   The Company initiated a 401(k) plan during 1996 that allows eligible
   employees to contribute up to 20% of their compensation, up to a maximum
   contribution of $9,500 in 1996. Employee contributions and earning thereon
   vest immediately. The Company is not required to contribute to the 401(k)
   plan and made no voluntary contributions through December 31, 1996.

18. CHANGE IN FISCAL YEAR END

   In December 1995, the Company changed its fiscal year end to December 31. In
   accordance with Rule 13a-10 of the Securities Exchange Act of 1934, the
   following table provides unaudited information with respect to the eight
   months ended December 31, 1994.

<TABLE>
<CAPTION>
                                           (unaudited)
<S>                                        <C>
          Revenues                         $   100,740


          Costs and expenses                (1,069,128)
                                           -----------
          Operating loss                      (968,388)
          Other expense, net                   (32,712)
          Income taxes                            (533)
                                           -----------
          Net loss                         $(1,001,633)
                                           ===========
          Loss per share                   $     (0.50)
                                           ===========
</TABLE>


                                      F-19
<PAGE>   55
                         NUKO INFORMATION SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


18. CHANGE IN FISCAL YEAR END - CONTINUED

   The unaudited financial statements for the eight months ended December 31,
   1994, have been prepared on the same basis as the audited financial
   statements and in the opinion of management, include all adjustments,
   consisting of normal recurring adjustments necessary for a fair presentation
   of financial position and results of operations in accordance with generally
   accepted accounting principles.

19. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

   The Company currently operates in one industry segment, the video class of
   the networking industry, for financial reporting purposes. Summarized below
   are the Company's export sales, all of which are denominated in U.S. dollars.

<TABLE>
<CAPTION>
                      Year Ended        Eight Months Ended     Year Ended
                   December 31,1996     December 31, 1995    April 30, 1995
                   ----------------     -----------------    --------------
<S>                <C>                  <C>                  <C>
   Asia               $1,855,700                  -               -
</TABLE>

   Revenues from individual customers in excess of 10% of net sales were as
   follows:

<TABLE>
<CAPTION>
                      Year Ended              Eight Months Ended             Year Ended
                   December 31, 1996          December 31, 1995            April 30, 1995
  Customer       Percent       Amount       Percent        Amount       Percent       Amount
  --------       -------       ------       -------        ------       -------       ------
<S>              <C>          <C>           <C>            <C>          <C>           <C>
      A              45%      $4,939,507       40%         $120,000        --            --
      B              26%      $2,924,482        --               --        --            --
      C               --              --       42%         $125,000        --            --
      D               --              --       17%          $49,900        --            --
</TABLE>

20. SUBSEQUENT EVENTS

   In connection with a private placement of the Company's common shares,
   subsequent to December 31, 1996, the Company issued 5,000 shares of Series A
   Convertible Preferred Stock, $0.001 par value per share for an aggregate
   purchase price of $5,000,000, pursuant to the second closing under a
   Securities Purchase Agreement dated as of December 13, 1996.

   Subsequent to the end of the year the Company entered into a settlement
   agreement with one customer in which the customer agreed to settle an
   outstanding receivable of $2 million by a cash payment of $0.8 million and
   the agreement by NUKO to repurchase certain inventory for $1.2 million.
   Management considers that the realizable value of this inventory is in excess
   of the purchase price.


                                      F-20
<PAGE>   56
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                       Balance     Charges to     Deductions     Other (1)     Balance
                                      Beginning     Expenses                                End of Period
                                      of Period
<S>                                   <C>          <C>            <C>            <C>          <C>

Year ended December 31, 1996

Allowance for excess and
obsolete inventory                            -    $1,534,584              -             -    $1,534,584

Deferred tax valuation
allowance                             1,484,000     5,884,764              -             -     7,368,764

Eight months ended
December 31, 1995

Allowance for excess and
obsolete inventory                            -             -              -             -             -

Deferred tax valuation
allowance                               886,000       598,000              -             -     1,484,000

Year ended April 30, 1995

Allowance for excess and
obsolete inventory                            -             -              -             -             -

Deferred tax valuation
allowance                               249,000       637,000              -             -       886,000
</TABLE>

                                      F-21
<PAGE>   57
                       Report of Independent Accountants


To the Board of Directors of
NUKO Information Systems, Inc.:


Our report on the consolidated financial statements of NUKO Information
Systems, Inc. and Subsidiary is included on page F-1 of this Form 10-K. In
connection with our audit of such financial statements we have also audited the
related financial statement schedule as of December 31, 1996 and for the year
then ended which is included on page F-21 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material aspects, the information required to be
included therein.


San Jose, California                            COOPERS & LYBRAND L.L.P.

March 21, 1997


                                      F-22